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, 2006

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 Global Market), as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2006) was approximately $283,000,000.

There were 19,496,271 shares of common stock of the registrant outstanding as of February 16, 2007.

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 2007 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	13
ITEM 2.	Properties	13
ITEM 3.	Legal Proceedings	13
ITEM 4.	Submission of Matters to a Vote of Security Holders	13
PART II
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
ITEM 6.	Selected Financial Data	18
ITEM 7.	Management’s Discussion and Analysis of Financial Condition And Results of Operation	20
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
ITEM 8.	Financial Statements and Supplementary Data	37
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	38
ITEM 9A.	Controls and Procedures	38
ITEM 9B.	Other Information	42
PART III
ITEM 10.	Directors and Executive Officers of the Registrant	42
ITEM 11.	Executive Compensation	42
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	42
ITEM 13.	Certain Relationships and Related Transactions	42
ITEM 14.	Principal Accounting Fees and Services	42
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	43

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 Operation” 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, Inc. 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 discovery, bankruptcy administration and class action administration. Our clients include 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 proprietary technology and value-added services that comprehensively address their extensive business requirements.

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.

As a part of our strategic business plan, we have made several acquisitions and one disposition over the past five years. During 2006, we acquired the net assets of Gazes LLC to supplement our ability to provide claims preference services for corporate restructuring clients. During 2005, we acquired nMatrix, Inc. to enter the market for electronic discovery and Hilsoft, Inc. to enhance our capabilities in legal notification services. During 2004, we acquired Poorman-Douglas Corporation to enter the market for class action and mass tort administrative services and we completed the disposition of our infrastructure software business, which was held for sale as of December 31, 2003. During 2003, we acquired Bankruptcy Services LLC (BSI) to enter the market for corporate restructuring administrative services. During 2002, we acquired the Chapter 7 trustee business of CPT Group, Inc.

Our trademarks include TCMS®, CasePower®, CasePower 13™, Documatrix™, and eDatamatrix™.

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, as well as our code of ethics and other governance documents. The public may read and copy 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 and our document management segments provide products and services primarily to the legal and fiduciary services industries. Substantially all of our revenues are generated from services provided within the United States, and substantially all of our assets are located within the United States. 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, and other professional advisors, who use our services for the administration of legal proceedings, such as electronic discovery, bankruptcy administration and class action administration.

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Our case and document management segments provide our clients with a broad range of technology and service offerings to meet the unique needs and requirements of each matter. For example, a particular class action matter may require professional services, call center support and claims processing from our case management segment and a uniquely developed media campaign to provide notice to a class of unknown claimants and document custody services from our document management segment, while another class action matter may only require claims processing services from our case management segment and a simple class mailing notification to a class of known claimants from our document management segment. Not all cases have the same business requirements, and our expanded technology and service offerings allow clients to procure services from our broad range of case management and document management solutions.

Our case management and document management technology and service offerings provide solutions primarily for the electronic discovery, bankruptcy, and class action markets. These technology and service offerings can cross the various markets and customers we serve.

Each segment provides a distinct group of services and solutions to our customers. Both are critical to our business as many of our customers require both case management and document management solutions. By offering both groups of services, we can provide customers with end-to-end solutions. Our customers typically have a large amount of discrete information to organize and process. Case management solutions consist of services to facilitate the “back-office” administration of cases for the electronic discovery, bankruptcy, and class action markets. Document management solutions consist primarily of notification for bankruptcy and class action customers.

Electronic Discovery

The substantial increase of electronic documents in the business community has changed the dynamics of how attorneys support discovery in complex litigation matters. According to the 2006 Socha-Gelbmann Electronic Discovery Survey, the 2005 domestic commercial electronic discovery revenues were estimated at $1.3 billion, an approximate 56% increase from 2004. According to this same source, the market is expected to continue to grow at a substantial rate from 2006 to 2008, with expected increases of approximately 30% to 35% each year. Due to the increasing complexity of cases, the increasing volume of data that are maintained electronically, and the increasing volume of documents 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. As reported by the Administrative Office of the U.S. Courts for the government fiscal years ended September 30, 2004, 2005, and 2006, there were approximately 1.62 million, 1.78 million, and 1.11 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 2006, 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 2006, accounted for approximately 1% of all bankruptcy filings. Chapter 11 generally allows a company, often referred to as the debtor-in-possession, to continue

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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 2006, 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.

Class Action

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. The class action and mass tort marketplace is significant, with estimated annual tort claim costs of approximately $260 billion in 2004, 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 complex and the cases, including administration of any settlement, may last several years.

Products and Services

Case Management Segment

Case management support for client engagements may last several years and has a revenue profile that typically includes a recurring component. Our technology platform enables our case management segment to generate revenue through the efficient provision of the following services:

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

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

·Volume-based fees related to software and postcontract customer support to facilitate the efficient administration of Chapter 7 and Chapter 13 bankruptcy cases.

·Professional and other support services related to the administration of cases, including data conversion, claims processing, claims reconciliation, professional consulting services, and settlement administration.

·Call center support to process and respond to telephone inquiries related to creditor and class action claims.

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Document Management Segment

Document management revenue is generally non-recurring due to the 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, including media campaign and advertising management, in which we coordinate notification through various media outlets, such as print, radio and television, to potential parties of interest for a particular client engagement, and

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

Customers

Our clients for both case management and document management segments include law firms, corporate legal departments, bankruptcy trustees and other professional advisors. Frequently, law firms act as referral sources for our services, which are ultimately consumed and paid for by a corporate client involved in litigation requiring our electronic discovery services, a bankruptcy proceeding, a class action settlement or other complex litigation. We rely extensively on our network of law firm and in-house corporate counsel relationships and expend considerable resources to develop and extend those relationships.

For electronic 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 discovery process for complex litigation matters.

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 or collecting funds from the debtor, 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 revenue based primarily on the aggregate amount of trustee deposits maintained at the bank. Prior to April 1, 2004, we had an exclusive marketing arrangement with Bank of America for Chapter 7 trustee software and services. Since April 1, 2004, we have established new deposit relationships with additional financial institutions. During the year ended December 31, 2006, a substantial majority of our Chapter 7 trustee clients’ deposits were maintained at Bank of America. See note 9 of the notes to consolidated financial statements.

Our customers for class action and corporate restructuring are primarily large corporations that are administering the settlement or resolution of class action cases and debtor corporations or businesses that file a plan of reorganization. We sell our services directly to those customers; however, our relationships with other interested parties, including legal counsel, often provide access to these customers.

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Sales and Marketing

Our sales executives market our case management and document management products and services directly to prospective customers and referral law firms through on-site sales calls and through longstanding relationships. We focus on attracting and retaining customers by providing superior integrated technology solutions and by providing exceptional customer service. Our client support specialists are responsible for providing ongoing support services for existing customers. Additionally, we maintain a website that clients and potential clients may access to obtain additional information related to solutions we offer, various client relationship associates attend industry trade shows, and we 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., Kurtzman Carson Consultants LLC, 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. However, our bankruptcy trustee and corporate restructuring customers are subject to significant regulation under the United States Bankruptcy Code (the Bankruptcy Code), the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. Additionally, the Executive Office for United States Trustees, a division of the United States Department of Justice, oversees the federal bankruptcy system and establishes administrative rules governing our clients’ activities. Furthermore, class action and mass tort cases, as well as electronic discovery requirements related to litigation, 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 by Congress and signed into law 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. Based on the report “The Impact of the Class Action Fairness Act of 2005, Second Interim Report to the Judicial Conference Advisory Committee on Civil Rules,” issued by the Federal Judicial Center in September 2006, this legislation has resulted in an increase in filings in federal district courts and/or removals from state courts to 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. 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 by Congress and signed into law 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 restricting the period of time in which a debtor has the exclusive right to file and obtain acceptance of a plan of reorganization, accelerating the time frame within

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which a debtor must accept or reject executory contracts and unexpired leases, and potentially increasing certain priority claims. While the bankruptcy reform legislation had the effect of a significant increase in bankruptcy filings prior to the effective date of the law in fiscal 2005 and a corresponding significant drop in bankruptcy filings in fiscal 2006, this fluctuation in the number of filings did not appear to have any meaningful impact on our bankruptcy management business or revenues because (i) the fluctuation in filings appear to have been primarily in “no asset” Chapter 7 cases, and (ii) a slight shift of Chapter 7 cases to Chapter 13 cases, neither of which had a material impact on our bankruptcy revenues.

In April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure (“FRCP”) regarding the discovery in litigation of certain “electronically stored information” (“ESI”). These amendments became effective on December 1, 2006. Among other things, the FRCP amendments (i) require early attention by parties in litigation to meet and confer regarding discovery issues and to develop a discovery plan that identifies and addresses the parties’ ESI, (ii) expand the reach of federal court subpoenas to include ESI, (iii) allow for parties to object to production of ESI that is not reasonably accessible due to the undue burden or cost associated with such retrieval, and (iv) provide a “safe harbor” to parties unable to provide ESI lost or destroyed as a result of the routine, good-faith operation of an electronic information system. While these federal rules do not apply in state court proceedings, the civil procedure rules of many states have been closely modeled on these provisions. As a result of this new legislation, the electronic discovery market may experience an increase in volume and demand. However, these federal and state rules will continue to evolve and be subject to interpretation by courts. Therefore, we cannot predict the effect, if any, that this legislation will have on our business in future years.

Employees

As of December 31, 2006, 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.

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. If any of the following risks occurs, our business, financial condition, results of operations and prospects could be materially adversely affected.

We compete with other third party providers primarily on the basis of the technological features and capabilities of our products and services, and we could lose existing customers and fail to attract new business if we do not keep pace with technological changes.

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 future product and service enhancements. Our success depends 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.

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We have a limited number of clients and referral sources.

We rely on a limited number of referral sources that support new business engagements.  Our future financial performance will depend on our ability to retain existing customer accounts, to attract business from new customers, to maintain our existing referral relationships, and to develop new referral relationships.

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

We have included security features in our products that are intended to protect the privacy and integrity of data, including confidential client or consumer data. Security for our products is critical given the confidential nature of the information our software processes. Our software products and the systems on which the products are used may not be impervious to intentional break-ins (“hacking”) or other disruptive disclosures or problems, whether as a result of inadvertent third party action, employee action, malfeasance, or other. Hacking or other disruptive problems could result in the diversion of our 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 claims related to the unauthorized access to or release of confidential client or consumer data. Defending such liability claims could result in increased expenses for litigation and/or claim settlement and a significant diversion of our management’s attention.

Furthermore, we administer claims and provide professional services for third parties. Errors or fraud related to the processing or payment of these claims or errors related to the delivery of professional services 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 could result in lawsuits alleging damages. Defending such claims could result in increased expenses for litigation and/or claims settlement and a significant diversion of our management’s attention.

Interruptions or delays in service related to third-party facilities could impair the delivery of our service and harm our business.

We provide certain of our services through computer hardware that is located in third-party facilities. We do not control the operation of these facilities, and they are subject to damage or interruption from earthquakes, floods, fires, power loss, terrorist attacks, telecommunications failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of any of these events, a decision to close a facility without adequate notice, or other unanticipated problems at a facility could result in interruptions in certain of our services. 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 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 services are unreliable.

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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 either in our internal processing or 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 or claims settlement, or impaired market acceptance of our products.

We rely on third-party hardware and software, 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. Any errors or defects in third-party hardware or software could result in errors in our software products or a failure of our service which could harm our business.

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.

These bankruptcy deposit-based fees are the largest component of our Chapter 7 revenues.

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 extended 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 are transferred during the wind-down period.

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Chapter 7 revenues from Bank of America comprised 38%, 3% and 3% of our total revenue recognized for the years ended December 31, 2006, 2005, and 2004, respectively. As of December 31, 2005 and 2004, we had recorded on our consolidated balance sheets $59.7 million, and $35.2 million, respectively, of deferred revenue related to our arrangement with Bank of America. There was no deferred revenue related to our arrangement with Bank of America as of December 31, 2006.

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.

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 may depend 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 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.

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.

During the five years ended December 31, 2006, we acquired eight businesses at a combined cost of approximately $330 million in cash and stock. 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 business;

·conforming standards, processes, procedures and controls of the acquired business 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.

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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.

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. 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.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses and diversion of management time and attention from operational activities to compliance activities.

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 Global 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

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existence, at year-end, of material weaknesses related to our internal control over financial reporting. During 2006, we restated certain previously issued consolidated and condensed consolidated financial statements. Related to this restatement, we identified a material weakness, which was remediated prior to December 31, 2006, related to our 2005 consolidated financial statements. If we have material weaknesses in our internal control over financial reporting or a restatement in the future, the price of our common stock could be adversely affected.

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 past and may fluctuate in the future. 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:

·the initiation or termination of a large corporate restructuring, class action or electronic discovery engagement;

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

·fluctuations in bankruptcy trustees’ deposit balances;

·unanticipated expenses related to software maintenance or customer service; and

·unexpected legal or regulatory expenses.

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; and

·general market conditions and other economic factors.

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.

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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 it was purchased.

We presently do not intend to pay any cash dividends on our common stock. In addition, certain terms of our convertible notes restrict our payment of dividends while the subordinated convertible debt is outstanding, and certain provisions in our credit agreement may restrict our ability to pay dividends in the future. 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. 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 an 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 it was purchased.

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 partly fund acquisitions and to refinance debt. 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 in connection with our nMatrix acquisition. We may consider issuing additional common shares and using the proceeds to pay part or all of our 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.

In certain circumstances, we may be obligated to pay one of our shareholders the difference between $20.35 per share and any lower price at which that shareholder sells up to 1,228,501 shares of our common stock, which could adversely affect our liquidity or the market price of our common stock.

We issued to the former owner of nMatrix 1.2 million shares of our common stock as a part of the purchase price for the nMatrix business. We are required to maintain an effective registration statement for the resale of those shares by that shareholder until November 15, 2007. Our agreement with that shareholder includes a limited price protection provision, which provides that if the shareholder sells any of those shares pursuant to the registration statement at a per share price (before commissions and other transaction expenses) lower than $20.35, we will pay that selling shareholder an amount in cash equal to the number of shares sold by the shareholder multiplied by the difference between the $20.35 minus the sale price. The limited price protection will terminate permanently upon the earlier of termination of our obligation to maintain the effectiveness of the registration statement or, during the period of the effectiveness of the registration statement, after any 15 trading days (which need not be consecutive trading days) on which both of the following conditions are satisfied:  (1) the shareholder may lawfully sell shares under the registration statement, and (2) the closing price for our common stock has been equal to or greater than $20.35 per share. Payments under this provision would adversely affect our liquidity.

As a result of the imminent expiration of either the limited price protection, the shareholder may choose to sell all or substantially all the shares of our common stock then held by that shareholder subject to these agreements. Those sales could adversely affect the market price of our common stock at that time.

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Our articles of incorporation and Missouri law contain provisions that could be used by us 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. For example, our articles of incorporation include “blank check” preferred stock provisions, which permit our board of directors to issue one or more series of preferred stock without shareholder approval. In conjunction with the issuance of a series of preferred stock, the board is authorized to fix the rights of that series, including voting rights, liquidation preferences, conversion rights and redemption privileges. The board could issue a series of preferred stock to a friendly investor and use one or more of these features of the preferred stock to discourage or prevent a takeover of the company. Additionally, our articles of incorporation do not permit cumulative voting in the election of directors. Cumulative voting, if available, would enable minority shareholders to elect one or more representatives to the board in certain circumstances, which could be used by third parties to facilitate a takeover of our company that was opposed by our board or management.

In addition, the General and Business Corporation Law of Missouri, under which we are incorporated, provides that any merger involving the company must be approved by the holders of not less than two-thirds of the outstanding shares of capital stock entitled to vote on the merger. Presently, our only outstanding voting securities are our shares of common stock. Accordingly, shareholders with voting power over as little as one-third of our outstanding common stock could block a merger proposal, even if that merger proposal were supported by our board of directors or shareholders holding a majority of our then outstanding shares of common stock.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

Our corporate headquarters are located in a 49,000-square-foot facility in Kansas City, Kansas. This owned property serves as collateral under our credit facility. We also have significant corporate offices in New York City and in metropolitan Portland, Oregon, and maintain smaller offices in Chicago, Miami, Washington, D.C., Los Angeles, Philadelphia and London.

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 2006 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 Global Market. The following table shows the reported high and low sales prices for the common stock for the calendar quarters of 2006 and 2005 as reported by Nasdaq:

	2006				2005
	High		Low		High		Low
First Quarter	$	23.40	$	18.05	$	15.00	$	12.05
Second Quarter	19.13		14.82		16.97		12.90
Third Quarter	17.13		14.52		22.22		16.13
Fourth Quarter	17.60		14.31		22.44		17.21

Holders

As of February 21, 2007, there were approximately 100 owners of record of our common stock and approximately 5,800 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. Under the terms of our subordinated convertible debt agreement, we are restricted from payment of dividends while the subordinated convertible debt is outstanding. Thereafter, 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, and other factors deemed relevant by the board of directors. Various financial covenants in our credit agreement 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, 2006 (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		4,633,000		$	14.30		2,204,000
Equity compensation plans not approved by security holders		690,000		$	17.89		—
Total		5,323,000		$	14.76		2,204,000

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As of December 31, 2006, equity compensation plans approved by security holders consist of our 1995 Stock Option Plan and our 2004 Equity Incentive Plan, both as amended. 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, 2006, equity compensation plans not approved by security shareholders consist of stock options issued in conjunction with (i) our acquisitions of BSI, Poorman-Douglas, and nMatrix, and (ii) the recruitment of two new executive officers in 2006. 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. Similarly, the stock options granted to two new executive officers that we recruited in 2006 as part of a national search efforts were inducement stock options issued in conjunction with the negotiation of their employment letters. In accordance with the Nasdaq corporate governance rules, shareholder approval of each 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 option exercise prices 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. Additional information related to the equity compensation plans not approved by security holders is contained in note 12 of the notes to consolidated financial statements.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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Performance Graph

The following Performance Graphs and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such a filing.

The following graphs show the total shareholder return of an investment of $100 in cash for (i) Epiq’s common stock, (ii) the Nasdaq Stock Market Computer and Data Processing Services Index (the “Nasdaq Computer Index”), and (iii) the Standard & Poor’s 500 Index (the “S&P 500 Index”) for our last five fiscal years (December 31, 2001 through December 31, 2006) and for the period beginning on the date of our initial public offering through the end of the last fiscal year (February 4, 1997 through December 31, 2006).  All values assume reinvestment of the full amount of any dividends.  The Nasdaq Computer Index and the S&P 500 Index are calculated by Standard & Poor’s Institutional Market Services.

The five-year graph assumes that $100.00 was invested in our common stock on December 31, 2001, at the price of $19.35 per share, the closing sales price on that date.  The second graph assumes that $100.00 was invested in our common stock on February 4, 1997, the date of our initial public offering, at the price of $1.39 per share, the closing sales price on that date (after giving effect to the stock splits and stock dividends paid by Epiq).  The closing sales prices were used for each index on December 31, 2001 or February 4, 1997, as applicable, and all dividends were reinvested.  No cash dividends have been declared on our common stock.  Shareholder returns over the indicated period should not be considered indicative of future shareholder returns.

Five-Year Performance Graph
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG EPIQ SYSTEMS, INC.,
S&P 500 INDEX AND NASDAQ COMPUTER & DATA PROCESSING

ASSUMES $100 INVESTED ON DEC. 31, 2001
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2006

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Performance Graph Since Initial Public Offering
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG EPIQ SYSTEMS, INC.,
S&P 500 INDEX AND NASDAQ COMPUTER & DATA PROCESSING

ASSUMES $100 INVESTED ON FEB. 4, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2006

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ITEM 6.SELECTED FINANCIAL DATA

The following table presents selected historical financial data for the years ended December 31, 2006, 2005, 2004, 2003, and 2002.

	Years Ended December 31,
	2006			2005			2004			2003			2002
	(In Thousands, Except Per Share Data)
INCOME STATEMENT DATA:
Total revenue from continuing operations	$	224,170		$	106,330		$	98,368		$	59,780		$	36,256
Income (loss) from continuing operations	35,131			(3,842		)	(7,290		)	9,595			9,766
Income (loss) from discontinued operations	—			—			667			(5,818		)	(1,533		)
Net income (loss)	35,131			(3,842		)	(6,623		)	3,777			8,233
Income (loss) per share—Diluted
from continuing operations	$	1.58		$	(0.21	)	$	(0.41	)	$	0.53		$	0.64
from discontinued operations	$	—		$	—		$	0.04		$	(0.32	)	$	(0.10	)
Net income (loss) per share—Diluted	$	1.58		$	(0.21	)	$	(0.37	)	$	0.21		$	0.54
BALANCE SHEET DATA:
Working capital related to continuing operations	$	(45,864	)	$	(25,090	)	$	22,979		$	39,023		$	63,503
Total assets	382,220			418,471			244,317			143,186			108,037
Long-term debt	83,873			145,906			74,499			3,066			289
Stockholders’ equity	184,179			140,468			118,550			124,325			102,375

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 operations 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 operations since the date of acquisition.

In October 2003 we entered into a three-year arrangement related to our Chapter 7 bankruptcy trustee business that included various elements which had previously been provided on a standalone basis. As a result, for the final quarter of 2003 and for the years ended December 31, 2005 and 2004 we deferred substantially all of our Chapter 7 bankruptcy trustee revenue. The $59.7 million of revenue deferred during these periods related to this arrangement was recognized during the year ended December 31, 2006. The effect of this was to:  (i) reduce revenue recognized for the years ended December 31, 2005, 2004 and 2003 with a corresponding increase in revenue recognized for the year ended December 31, 2006; (ii) substantially decrease net income for the year ended December 31, 2003 and increase our net loss for the years ended December 31, 2005 and 2004, with a corresponding increase in net income for the year ended December 31, 2006; and (iii) substantially decrease our working capital as of December 31, 2005.

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

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purchase method of accounting with the operating results of Poorman-Douglas included in our statement of operations 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 operations 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 operations since the date of acquisition. See note 13 of the notes to consolidated financial statements.

On January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment. We elected to adopt SFAS No. 123R using the modified version of prospective application. Using this method, we recognized compensation costs related to share-based compensation beginning January 1, 2006. Compensation costs related to share-based compensation for periods ended on or before December 31, 2005 are reflected on a pro forma basis. See note 12 of the notes to the consolidated financial statements. As a result of our adoption of SFAS No. 123R, during the year ended December 31, 2006 we recognized approximately $5.4 million of expense related to share options issued prior to but unvested as of January 1, 2006 as well as expense related to share options issued subsequent to January 1, 2006.

During May 2006, we acquired the net assets of Gazes LLC and placed these assets in a newly formed subsidiary, Epiq Advisory Services. The acquisition was accounted for using the purchase method of accounting with the operating results of Epiq Advisory Services included in our statement of operations 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

This discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes to the consolidated financial statements included in this Form 10-K.

Management’s Overview

Epiq 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. 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 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, 2004, 2005, and 2006, the Administrative Office of the U.S. Courts reported approximately 1.62 million, 1.78 million, and 1.11 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 7, 2006, reported increases in both consumer and business debt outstanding as compared with the same period of the prior year.

For our Chapter 7 bankruptcy services, our end-user customers are professional bankruptcy trustees. 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 services to trustee customers at no direct charge, and our trustee customers 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 bankruptcy trustee case management software and related services and the bank provides the Chapter 7 bankruptcy trustee with deposit-related banking services. Our most significant marketing arrangement is with our primary depository institution, Bank of America. Under this arrangement, we primarily receive revenue based on the aggregate amount of trustee deposits and the number of Chapter 7 trustees which we refer to collectively as volume-based fees. These volume-based fees compensate us for the software license, hardware and postcontract customer support services that we provide to the Chapter 7 bankruptcy trustees.

Prior to October 2003, our primary depository institution engaged us to provide the trustees with software upgrades in the first and second quarter of each year. These software upgrades were documented in arrangements which were separate from our volume-based fee arrangement. Once the upgrade was delivered to the trustees and we had provided satisfactory evidence of the delivery, we would invoice the primary depository institution for the agreed upon amount and recognize revenue related to the software upgrade.

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In October 2003, we entered into a new arrangement (the 2003 Arrangement) with the primary depository institution. As a part of the 2003 Arrangement, we agreed to continue to perform each of our first and second quarter software upgrades through the term of the arrangement, and the primary depository institution agreed to compensate us for these upgrades on terms similar to our historical terms when we delivered the upgrades on a standalone basis. As the 2003 Arrangement included volume-based pricing related to our software license, hardware and postcontract customer support services, as well as pricing related to software upgrades and special projects, the 2003 Arrangement was considered a bundled arrangement. As the 2003 Arrangement involved the delivery of software, we accounted for this arrangement pursuant to Statement of Position 97-2, Software Revenue Recognition (SOP 97-2). For bundled arrangements, SOP 97-2 requires that for separate elements of the arrangement, such as software upgrades, we must be able to establish vendor specific objective evidence (VSOE) of fair value. VSOE is established based on the price charged when the same element is sold on a standalone basis. Although we historically sold software upgrades on a standalone basis, each software upgrade is considered a separate product and, therefore, we determined that the price of prior software upgrades cannot be used to establish the price of future software upgrades. As the primary financial institution was our only payee for software upgrades during the period of the 2003 Arrangement, we were unable to establish VSOE for the software upgrades. Under SOP 97-2, if VSOE cannot be established for software upgrades, then consideration received under the 2003 Arrangement, except for consideration related to the provision of hardware and hardware maintenance, must be deferred until all software upgrades have been delivered. Under the terms of the 2003 Arrangement, the final software upgrade was delivered in the second quarter of 2006. Although, during the period of the 2003 Arrangement, we continued to invoice, and the primary financial institution continued to pay, our volume-based fees related to software licenses and postcontract customer support as well as our semi-annual software upgrades, we did not recognize these amounts as revenue. Instead, these amounts were recorded as deferred revenue liability through the first quarter of 2006. Substantially all deferred revenue was recognized during the second quarter of 2006 when the final upgrade was delivered. The remaining amount of deferred revenue was recognized during the third quarter of 2006 when the 2003 Arrangement terminated. Throughout the period of the 2003 Arrangement, we continued to recognize revenue related to the hardware and hardware maintenance we provided to Chapter 7 trustees as this revenue is accounted for pursuant to Statement of Financial Accounting Standards No. 13 (SFAS 13), Accounting for Leases. This revenue is a relatively minor component of the 2003 Arrangement.

During February 2006, we entered into a new arrangement with our primary depository institution, which became effective October 1, 2006. As specified software upgrades and special projects are not contained in this contract, this arrangement does not require the deferral of revenue. As a result, the revenue is recognized as explained under “Critical Accounting Policies—Revenue recognition—Software Arrangements” below.

We have acquired a number of businesses during the past several years. 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 discovery. In May 2006, we acquired Epiq Advisory Services to expand our capabilities in claims preference services.

Critical Accounting Policies

We consider our accounting policies related to revenue recognition, share-based compensation, 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 clients pursuant to which we deliver various case management and document management services each month.

Significant sources of revenue include:

·Fees contingent upon the month-to-month delivery of case management services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, and conversion of data into an organized, searchable electronic database. The amount we earn varies based primarily on the size and complexity of the engagement;

·Hosting fees based on the amount of data stored;

·Deposit-based fees from financial institutions, primarily based on a percentage of total liquidated assets placed on deposit at that financial institution by our bankruptcy trustee clients, to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support (PCS) services,

·Legal noticing services to parties of interest in bankruptcy and class action matters, including media campaign and advertising management, in which we coordinate notification through various media outlets, such as print, radio and television, to potential parties of interest for a particular client engagement, and

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

Non-Software Arrangements

Case and document management services related to electronic discovery, corporate restructuring, and class action revenue, which are billed based on volume, are evaluated pursuant to Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple Deliverables. For each of these contractual arrangements, we have identified the following deliverables and/or services:

·Electronic Discovery

·Data processing

·Hosting

·Corporate Restructuring

·Consulting

·Claims management

·Printing and reproduction

·Mailing and noticing

·Document management

·Class Action

·Consulting

·Notice campaigns

·Toll free customer support

·Web site design/hosting

·Claims administration

·Distribution

Based on our evaluation of each element, we have determined that each element delivered has standalone value to our customers because we or other vendors sell such services separately from any other services/deliverables. We have also obtained objective and reliable evidence of the fair value of each

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element based either on the price we charge when we sell an element on a standalone basis or based on third-party evidence of fair value of such services. Lastly, our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting under EITF 00-21. We allocate revenue to the various units of accounting in our arrangements based on the fair value of each unit of accounting, which is generally consistent with the stated prices in our arrangements. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period in accordance with Staff Accounting Bulletin Topic 13, Revenue Recognition (SAB Topic 13). As the services are rendered, our fee becomes fixed and determinable, and collectibility is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.

Software Arrangements

For our Chapter 7 bankruptcy trustee arrangements, we provide our trustee clients with a software license, hardware lease, hardware maintenance, and postcontract customer support (PCS) services, all at no charge to the trustee. The trustees place their liquidated estate deposits with a financial institution with which we have an arrangement. We earn contingent monthly fees from the financial institutions based on the dollar level of average monthly deposits placed by the trustees with that financial institution, from the financial institution related to the software license, hardware lease, hardware maintenance, and PCS services. We account for the software license and PCS elements in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2). Since we have not established vendor specific objective evidence (VSOE) of the fair value of the software license, we do not recognize any revenue on delivery of the software. The software element is deferred and included with the remaining undelivered element, which is PCS. This revenue, when recognized, is included as a component of case management services revenue. Revenue related to PCS is entirely contingent on the placement of liquidated estate deposits by the trustee with the financial institution. Accordingly, except for the arrangement described in the following paragraph, we recognize this contingent usage based revenue consistent with the guidance provided by the American Institute of Certified Public Accountants’ Technical Practice Aid (TPA) 5100.76, Fair Value in Multiple-Element Arrangements That Include Contingent Usage-Based Fees and Software Revenue Recognition as the fee becomes fixed or determinable at the time actual usage occurs and collectibility is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we have also satisfied the other revenue recognition criteria contained in SOP 97-2, since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectibility is reasonably assured.

Effective October 1, 2003, we entered into an arrangement with our primary depository financial institution under which we delivered two specified upgrades annually with the last specified upgrade occurring in the second quarter of 2006. This arrangement included specific pricing for each software upgrade and certain special projects in addition to the contingent deposit-based pricing related to the software license, hardware, hardware maintenance, and PCS to each trustee client. Therefore, the software upgrades and special projects are part of a bundled arrangement. Each software upgrade is considered a separate and discrete product and, as we do not sell each software upgrade on a standalone basis, we were unable to establish VSOE of the fair value of the software upgrades. As a result, the licensed software, software upgrade, special projects and PCS are a combined unit of accounting. Revenue for this combined unit of accounting, when recognized, is included as a component of case management services revenue. Since we did not have VSOE of the fair value of each separate upgrade, we deferred recognition of substantially all revenue under this arrangement until the final upgrade was delivered. The ongoing costs related to this arrangement were recognized as expense when incurred. On delivery of the final upgrade during the second quarter of 2006, the only remaining undelivered element was PCS services. In accordance with SOP 97-2, on delivery of the final software upgrade, we recognized revenue previously deferred on a proportionate basis over the three year term of the contract. As the contract terminated

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September 30, 2006, during 2006 we recognized approximately $59.7 million of revenue which had been deferred as of December 31, 2005.

We also provide our trustee clients with certain hardware, such as desktop computers, monitors, and printers, and hardware maintenance. We retain ownership of all hardware provided and, based on guidance provided in EITF 01-8, Determining Whether an Arrangement Contains a Lease, we account for this hardware as a lease. As the hardware maintenance arrangement is an executory contract similar to an operating lease, we use guidance related to contingent rentals in operating lease arrangements for hardware maintenance as well as for the hardware lease. Since the payments under all of our arrangements are contingent upon the level of trustee deposits and the delivery of upgrades and other services, there remain important uncertainties regarding the amount of unreimbursable costs yet to be incurred by us, we account for the hardware lease as an operating lease in accordance with SFAS 13, Accounting for Leases. Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals under EITF Issue No. 98-9, Accounting for Contingent Rent and SAB Topic 13, which requires that we recognize rental income when the changes in the factor on which the contingent lease payment is based actually occur. This occurs at the end of each period as we achieved our target when deposits are held at the depository financial institution as, at that time, evidence of an arrangement exists, delivery has occurred, the amount has become fixed and determinable, and collection is reasonably assured. This revenue, which is less than ten percent of our total revenue, is included as a component of case management services revenue.

Reimbursements

Our case and document management businesses both have revenue related to the reimbursement of certain costs, primarily postage. Consistent with guidance provided by EITF No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, reimbursed postage and other reimbursable direct costs are recorded gross in the consolidated statement of operations as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs”.

Share-based compensation.   Effective January 1, 2006, we began accounting for share-based compensation under SFAS No. 123R, Share-Based Payment (SFAS 123R). 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. As a result of our adoption of SFAS No. 123R, during the year ended December 31, 2006 we recognized expense related to share options issued prior to but unvested as of January 1, 2006 as well as expense related to share options issued subsequent to January 1, 2006. For share options issued prior to but unvested as of January 1, 2006, compensation expense was based on the fair value of those share options as calculated using the Black-Scholes option valuation model at the date the share options were issued. Key assumptions for the Black-Scholes option valuation model include expected volatility, expected term of share options granted, the expected risk-free interest rate, and the expected dividend rate. For share options issued during the year ended December 31, 2006, the share options were also valued using the Black-Scholes option valuation models and with key assumptions related to expected volatility, expected term of share options granted, the expected risk-free interest rate, and the expected dividend rate. We estimate our expected volatility based on implied volatilities from traded share options on our stock and on our stock’s historical volatility. We have estimated the expected term of our share options based on the historical exercise pattern of groups of employees that have similar historical exercise behavior. The expected risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, we have not paid dividends and we do not anticipate paying dividends in the foreseeable future; accordingly, our expected dividend rate is zero. We recognize this expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Due to the numerous assumptions involved in calculating share-based compensation expense, the expense recognized in our consolidated financial statements may differ significantly from the value realized by employees on exercise of the share-based instruments. In accordance with the methodology prescribed by SFAS 123R, we do not adjust our recognized

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compensation expense to reflect these differences. Recognition of share-based compensation expense had, and will likely continue to have, a material affect on our direct costs and general and administrative line items within our consolidated statements of operations and also may have a material affect on our deferred income taxes and additional paid-in capital line items within our consolidated balance sheets. Adoption of SFAS No. 123R affects the classification within our consolidated statement of cash flows of certain tax benefits as certain tax benefits formerly classified as an operating cash flow are now classified as a financing cash flow. To date, the only share-based compensation we have issued is share options.

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 ranges from one to fourteen years. Goodwill is 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. We develop an estimate of the fair value of each reporting unit, using both a market approach and an income approach. If potential for impairment exists, the fair value of the reporting unit is subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. For each reporting unit, the fair value estimate for our 2006 annual assessment was consistent with the fair value estimate for our 2005 annual assessment.

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.

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 impairment charge. If goodwill on our consolidated 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 recognized goodwill totaled $260.6 million as of December 31, 2006.

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.

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 $43.8 million as of December 31, 2006.

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Results of Operations for the Year Ended December 31, 2006 Compared with the Year Ended December 31, 2005

To enhance comparability of the results for the year ended December 31, 2006 to the prior year, we separately identify the operating results of recently acquired entities, nMatrix, Hilsoft, and Epiq Advisory Services (collectively, the recently acquired entities), which were not included in our operating results for all or a substantial portion of the prior year.

Revenue

Total revenue from operations of $224.2 million for the year ended December 31, 2006 represents an approximate $117.9 million, or 111%, increase compared with $106.3 million of revenue for the prior year. Total revenue includes operating revenue from reimbursed direct costs, which are presented as a separate line item captioned “Operating revenue from reimbursed direct costs” on our consolidated statement of operations. While operating revenue from reimbursed direct costs may fluctuate significantly from period to period, these fluctuations have a minimal effect on our income (loss) from operations as we realize little or no margin from this revenue. Operating revenue before reimbursed direct costs, also presented as a separate line item on our consolidated statement of operations, increased $117.0 million, or approximately 142%, to $199.7 million for the year ended December 31, 2006 compared with $82.7 million for the same period in the prior year. This increase is primarily the result of an approximate $109.4 million increase in case management revenue combined with an approximate $7.6 million increase in document management revenue. All revenue is directly related to a segment and changes in revenue by segment are discussed below.

Operating Expenses

Direct cost of services increased approximately $18.1 million, or 60% to $48.3 million for the year ended December 31, 2006 compared with $30.2 million for the prior year. This increase is primarily attributable to an approximate $16.0 million increase in direct costs of services related to our recently acquired entities. Changes by segment are discussed below.

Direct cost of bundled software license, software upgrade and postcontract customer support services increased approximately $0.1 million, or approximately 3%, to $3.9 million for the year ended December 31, 2006 compared with $3.8 million for the prior year primarily as a result of increased compensation costs. Changes by segment are discussed below.

Reimbursed direct costs increased approximately $0.8 million, or approximately 3%, to $24.6 million for the year ended December 31, 2006 compared with $23.8 million for the prior year. This increase directly corresponds to the increase in operating revenue from reimbursed direct costs.

General and administrative expenses increased $23.0 million, or approximately 74%, to $54.1 million for the year ended December 31, 2006 compared with $31.1 million for the prior year. Approximately $12.7 million of this increase is attributable to our recently acquired entities. The remainder of the increase is primarily attributable to the combination of a $6.7 million increase in compensation expense, primarily related to the recognition of share-based compensation expense resulting from the adoption of SFAS 123R, and increases in administrative expenses to support the expansion of our business, including an approximate $2.1 million increase in travel and promotional expense. Changes by segment are discussed below.

Depreciation and software and leasehold amortization expenses increased $2.8 million, or approximately 39%, to $10.1 million for the year ended December 31, 2006 compared with $7.3 million for the prior year, primarily as a result of an approximate $2.2 million increase related to our recently acquired entities. The remainder of the increase is primarily the result of a $0.7 million increase in internally

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developed software amortization due to our continued investment in software development. Changes by segment are discussed below.

Amortization of intangibles increased approximately 72% to $11.6 million for the year ended December 31, 2006 compared with $6.8 million for the prior year, primarily related to an increase in identifiable intangible assets related to our recently acquired entities. All expense related to amortization of identifiable intangible assets is directly related to a segment and changes in identifiable intangible amortization expense by segment are discussed below.

Acquisition related expenses of $0.3 million for the year ended December 31, 2006 result from non-capitalized expenses for bonuses, legal, accounting and valuation services, and travel incurred in connection with potential and completed transactions compared to $3.0 million for the prior year.

Interest Expense

Interest expense increased $6.7 million, to $13.5 million for the year ended December 31, 2006 compared with $6.8 million of interest expense for the prior year. This increase primarily relates to an approximate $6.2 million increase in interest expense related to our credit facility, primarily as a result of an increase in borrowings to finance our November 2005 electronic discovery acquisition.

Effective Tax Rate

Our effective tax rate to record tax expense was 39.4% for the year ended December 31, 2006 compared with an effective rate to record the tax benefit related to our net loss of 38.4% for the prior year. The change in our 2006 effective tax rate compared to the prior year’s benefit is primarily the result of the effect of nondeductible expenses on pre-tax income in 2006 versus a pre-tax loss in 2005. Our tax rate is higher than the statutory federal rate of 35% primarily due to state taxes. Several of our subsidiaries operate in New York City and are subject to state and local tax rates which are higher than the tax rates assessed by other jurisdictions where we operate.  Deferred revenue recognized during 2006 was related primarily to lower tax rate jurisdictions leading to a lower effective tax rate than what we expect in the future.

Net Income (Loss)

We had net income of $35.1 million for the year ended December 31, 2006 compared with a net loss of $3.8 million for the prior year. This change is primarily the result of an $85.9 million increase in revenue from case management bundled software license, software upgrade and postcontract customer support services, partly offset by $22.8 million in tax expense for the year ended December 31, 2006 compared with a tax benefit of $2.4 million for the prior year, a $7.7 million increase in depreciation and software and intangible asset amortization expenses, a $6.7 million increase in interest expense, and a $5.4 million increase in share-based compensation expense. The increase in case management bundled revenue, as more fully explained under the “Case Management Segment” caption below, primarily related to the recognition during 2006 of revenue which was deferred beginning in October 2003. The change in tax expense is largely the result the recognition of income during 2006 compared with a loss during the prior year. The increase in depreciation and software and intangible asset amortization expense is largely attributable to the depreciation and amortization of assets acquired by acquisition during 2005 and 2006, primarily assets related to our electronic discovery acquisition. The increase in interest expense is primarily the result of additional bank debt incurred to finance these acquisitions. The increase in share-based compensation expense resulted from the adoption as of January 1, 2006, of the SFAS 123R, which resulted in recognition of expense related to issued and unvested stock options.

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Business Segments

The following management discussion and analysis is presented on a basis consistent with our segment disclosure contained in note 15 of our notes to consolidated financial statements.

Case Management Segment

Case management operating revenue before reimbursed direct costs increased approximately $109.4 million to $164.2 million for the year ended December 31, 2006 compared with $54.8 million for the prior year. Our recently acquired entities accounted for approximately $29.8 million of the increase. The remainder of the increase is primarily attributable to an $85.9 million increase in revenue from case management bundled software license, software upgrades and postcontract customer support services. This increase primarily relates to a bundled arrangement which began October 1, 2003 and ended September 30, 2006. As of December 31, 2005, we had deferred recognition of $59.7 million in revenue pending delivery of a final specified software upgrade under the contract provisions. As a result of this final delivery, we recognized the $59.7 million of previously deferred revenue during 2006. Additionally, we recognized, through the end of the arrangement, revenue for bundled software license, software upgrades and postcontract customer support services delivered during 2006. We also recognized revenue related to software licenses and postcontract customer support services delivered under a new arrangement, which commenced October 1, 2006. These increases in revenue were partly offset by an approximate $4.8 million decline in professional fees, primarily as a result of fewer class action client retentions.

Case management direct costs, general and administrative expenses, and depreciation and software amortization increased $22.3 million, or approximately 68%, to $54.9 million for the year ended December 31, 2006 compared with $32.6 million for the same period in the prior year. Our recently acquired entities accounted for approximately $19.5 million of the increase. The remainder of this increase is primarily attributable to an approximate $2.0 million increase in outside service costs. Our case management cost structure is relatively stable and generally does not fluctuate materially with changes in operating revenues.

Amortization of case management’s identifiable intangible assets increased to $9.7 million for the year ended December 31, 2006 compared with $5.0 million for the prior year. This increase is primarily attributable to the amortization related to the identifiable intangible assets acquired in the nMatrix acquisition. Note 4 of the notes to the consolidated financial statements provides a summary of the total identified intangible assets and the scheduled amortization expense related to these identified intangible assets over the next five years.

Document Management Segment

Document management operating revenue before reimbursed direct costs increased approximately $7.6 million, or approximately 27%, to $35.5 million for the year ended December 31, 2006 compared with $27.9 million for the prior year. This increase is primarily attributable to an increase in operating revenue before reimbursed direct costs related to recently acquired entities, partly offset by a decline in noticing services primarily as a result of fewer class action client retentions combined with a decrease in our bankruptcy noticing requirements. Document management revenues, including revenue related to media campaigns and services, can fluctuate materially from period to period based on clients’ business requirements.

Document management direct costs, general and administrative expenses, and depreciation and software amortization increased $11.5 million, or 32%, to $48.1 million for the year ended December 31, 2005 compared with $36.6 million for the prior year. This increase primarily results from an approximate $12.1 million increase in costs related to recently acquired entities, partly offset by an approximate $0.5 decrease in compensation expense related to reduced staffing. Our document management cost structure

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is more variable than case management and will fluctuate based on document management business requirements delivered.

Amortization of document management’s identifiable intangible assets increased to $2.0 million for the year ended December 31, 2006 compared with $1.7 million for the prior year. This increase is primarily attributable to 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 and the scheduled amortization expense related to these identified intangible assets over the next five years.

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

Consolidated Results

Revenue

Total revenue from operations of $106.3 million for the year ended December 31, 2005 represents an approximate $7.9 million, or 8%, increase compared with $98.4 million of revenue for the prior year. Total revenue includes operating revenue from reimbursed direct costs, which are presented as a separate line item captioned “Operating revenue from reimbursed direct costs” on our consolidated statement of operations. While operating revenue from reimbursed direct costs may fluctuate significantly from period to period, these fluctuations have a minimal effect on our income (loss) from operations as we realize little or no margin from this revenue. Operating revenue before reimbursed direct costs, also presented as a separate line item on our consolidated statement of operations, increased $4.7 million, or approximately 6%, to $82.7 million for the year ended December 31, 2005 compared with $78.0 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 cost of services decreased approximately $7.2 million, or 19% to $30.2 million for the year ended December 31, 2005 compared with $37.4 million for the prior year. Excluding our subsidiaries acquired during 2005, direct costs of services decreased $8.1 million, or approximately 22%, compared with the prior year. This decrease is primarily the result of a decrease in cost of advertising. Changes by segment are discussed below.

Direct cost of bundled software license, software upgrade and postcontract customer support services increased approximately $1.0 million to $3.8 million for the year ended December 31, 2005 compared with $2.8 million for the prior year primarily as a result of increased compensation costs. Changes by segment are discussed below.

Reimbursed direct costs increased approximately 18% to $23.8 million for the year ended December 31, 2005 compared with $20.1 million for the prior year. This increase directly corresponds to the increase in operating revenue from reimbursed direct costs.

General and administrative expenses increased $5.2 million, or approximately 20%, to $31.1 million for the year ended December 31, 2005 compared with $25.9 million for the prior year. Excluding our subsidiaries acquired during 2005, general and administrative expenses increased $4.4 million, or approximately 17%, compared with 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, and professional services. Changes by segment are discussed below.

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Depreciation and software and leasehold amortization expenses increased $0.8 million, or approximately 12%, to $7.3 million for the year ended December 31, 2005 compared with $6.5 million for the prior year. Excluding our subsidiaries acquired during 2005, depreciation and software and leasehold amortization expenses increased $0.5 million, or approximately 8%, compared with the prior year primarily as a result of increased software amortization. Changes by segment are discussed below.

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 expense related to amortization of identifiable intangible assets is directly related to a segment and changes in identifiable intangible amortization expense 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 bonuses, legal, accounting and valuation services, and travel incurred in connection with potential and completed transactions.

Interest Expense

Interest expense increased $0.5 million, to $6.8 million for the year ended December 31, 2005 compared with $6.3 million of interest expense for the prior year. This increase related to various 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.

·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 statement of operations 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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Debt Extinguishment

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. We did not recognize any debt extinguishment expense during 2005.

Effective Tax Rate

Our effective tax rate to record the tax benefit related to our loss from continuing operations increased from 37.2% for the year ended December 31, 2004 to 38.4% for the year ended December 31, 2005. The change in our 2005 effective tax benefit rate compared to the prior year is primarily the result of discrete events, including characterization of the loss from disposal of our discontinued operations from a business loss to a non-business loss and an increase in our research and expenditure credit. Our tax benefit rate is higher than the statutory federal rate of 34% primarily due to state taxes. Our corporate restructuring and electronic discovery businesses operate primarily in New York City and are subject to state and local tax rates which are higher than the tax rates assessed by other jurisdictions where we operate.

Net Loss

Our net loss decreased to a $3.8 million net loss for the year ended December 31, 2005 compared with a $6.6 million net loss for the prior year. This decrease in our net loss was primarily the result of an $8.0 million increase in revenue, primarily resulting from the inclusion of revenue from our electronic discovery business acquired during November 2005, and a $2.6 million decrease in direct costs, primarily resulting from a decrease in media campaign and advertising direct costs. This decrease in our net loss was partly offset by a $5.2 million increase in our general and administrative expenses, a $1.9 million decrease in our tax benefit primarily resulting from the reduced pre-tax loss, and a $0.7 million decrease of income from operations of our discontinued infrastructure segment compared with 2004.

Business Segments

The following management discussion and analysis is presented on a basis consistent with our segment disclosure contained in note 15 of our notes to consolidated financial statements.

Case Management Segment

Case management operating revenue before reimbursed direct costs increased approximately 32% to $54.8 million for the year ended December 31, 2005 compared with $41.5 million for the prior year. Our electronic discovery business, which was acquired on November 15, 2005, accounted for approximately $3.7 million of the increase in operating revenue before reimbursed direct costs. The remainder of the increase is primarily attributable to a $5.7 million increase in class action operating revenues before reimbursed direct costs resulting from the timing of several large cases and a $2.8 million increase resulting from a net increase in bankruptcy professional services.

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. Our electronic discovery business, which was acquired on November 15, 2005, accounted for approximately $1.4 million of the increase. Exclusive of electronic discovery, 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 and expenses related to the expansion of our

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bankruptcy service offerings. Our case management cost structure is relatively stable and generally does not fluctuate materially with changes in operating revenues.

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. Note 4 of the notes to the consolidated financial statements provides a summary of the total identified intangible assets and the scheduled amortization expense related to these identified intangible assets over the next five years.

Document  Management Segment

Document management operating revenue before reimbursed direct costs decreased approximately $8.6 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 media campaign and advertising services. Our media campaign and advertising services are primarily connected with class action and bankruptcy customers for whom we provide case administration services. Media campaign and advertising services vary significantly depending on the characteristics of the case. Generally, cases in which the specific identity of members of the plaintiff class is unknown will require significantly more media campaign and advertising services than cases in which the specific identity of the members of the plaintiff class is known. During 2004, we had several large cases in which the specific identity of the members of the plaintiff class was unknown and, therefore, required extensive media campaign and advertising services. During 2005, the identities of the members of the plaintiff class on our large cases were known and, therefore, did not require extensive media campaign and advertising services. Document management operating revenue from reimbursed direct costs of $20.5 million for the year ended December 31, 2005 increased approximately 15% compared with the same period in the prior year. Operating revenue from reimbursed direct costs has little or no margin and, accordingly, this increase in operating revenue from reimbursed direct costs did not have a material effect on our income from operations. Document management revenues, including revenues related to media campaign and services, can fluctuate materially from period to period based on clients’ business requirements.

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 media campaign and advertising, related to the decline in media campaign and 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.

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 and the scheduled amortization expense related to these identified intangible assets over the next five years.

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Liquidity and Capital Resources

Operating Activities

During the year ended December 31, 2006, our operating activities provided net cash of $34.4 million. The primary sources of cash from operating activities was net income of $35.1 million, adjusted for $48.8 million of non-cash charges and credits, primarily deferred tax expense of $20.0 million, share-based compensation of $5.4 million, and depreciation and amortization expense of $21.7 million. These sources of cash were partly offset by a $49.5 million net use of cash resulting from changes in operating assets and liabilities. The most significant change in operating assets and liabilities was a $59.2 million decrease in deferred revenue, primarily as a result of recognition of previously deferred amounts related to a three year arrangement that ended September 30, 2006. This use of cash was partly offset by a $5.0 million decrease in income taxes refundable, primarily as a result of the receipt of refunds due to us, a $3.1 million increase in accounts payable and other liabilities, primarily as a result of the recognition of lease expense in excess of cash lease payments and normal fluctuations, and a $2.3 million decrease in trade accounts receivable. Trade accounts receivable will fluctuate from period to period depending on the timing of collections.

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

During the year ended December 31, 2006, we used cash of approximately $6.4 million to purchase property and equipment. Our property and equipment purchases consisted primarily of computer-related hardware to support our electronic discovery and bankruptcy businesses. Enhancements to our existing software and development of new software is essential to our continued growth and we used cash of approximately $4.6 million to fund internal costs related to development of software for which technological feasibility has been established. We also used approximately $3.6 million of cash to partly fund an acquisition. We believe that cash generated from operations will be adequate to fund our anticipated property, equipment and software spending over the next year.

Financing Activities

During the year ended December 31, 2006, we paid approximately $10.0 million as a principal reduction on our senior term loan, we paid $4.7 million as a principal reduction on deferred acquisition debt, we paid $1.0 million due on capital leases, and we repaid, net of borrowings, $15.0 million of our senior revolving loan. This financing use of cash was partly offset by $2.6 million of net proceeds from stock issued in connection with the exercise of employee share options. As a result of the adoption of SFAS 123R, we also classify a portion of the tax benefit, referred to as excess tax benefit, that we realize on exercise of employee share options as a financing cash flow. The effect of this accounting change was to recognize $0.2 million of excess tax benefit as a financing cash flow rather than as an operating cash flow.

As of December 31, 2006, our borrowings consisted of $52.2 million from the contingent convertible subordinated notes (including the fair value of the embedded option), $15.0 million under our senior term loan, $78.0 million under our senior revolving loan, and approximately $9.2 million of obligations related to capitalized leases and deferred acquisition price. Our convertible debt of $50.0 million matures on June 15, 2007. The convertible notes will require the use of cash at their scheduled maturity in June 2007 if

33

the note holders do not extend the maturity of the notes, at their option, and do not convert the notes into shares of our common stock. If the maturity of the notes is extended or if they are converted into shares of our common stock prior to the scheduled maturity of those notes, then there will be no cash requirements associated with those convertible notes, other than the regular payment of interest on the outstanding notes. We anticipate continuing to pay interest on the notes from cash flow from operations, and we anticipate paying the principal of any maturing notes from the sources discussed below.

As of December 31, 2006, significant financial covenants, all as defined within our credit facility agreement, include a leverage ratio not to exceed 3.95 to 1.00, a senior leverage ratio not to exceed 2.75 to 1.00, a fixed charge coverage ratio of not less than 1.25 to 1.00, and a current ratio of not less than 1.50 to 1.00. As of December 31, 2006, we were in compliance with all covenants in our credit facility, including all financial covenants.

We may pursue acquisitions in the future. Covenants contained in our credit facility and in our convertible notes may limit our ability to consummate an acquisition. Pursuant to the terms of our credit facility, we generally cannot incur indebtedness outside the credit facility with the exception of capital leases and additional subordinated debt, with a limit of $100.0 million of aggregate subordinated debt. Furthermore, for any acquisition we must be able to demonstrate that, on a pro forma basis, we would be in compliance with our covenants during the four quarters prior to the acquisition and we must obtain bank permission for any acquisition for which cash consideration exceeds $65.0 million or total consideration exceeds $125.0 million.

We believe that the funds generated from operations plus our existing cash resources and amounts available under our senior revolving loan facility will be sufficient over the next 12 months, and for the foreseeable future thereafter, to finance currently anticipated working capital requirements, software expenditures, property and equipment expenditures, common share price protection payments, if any, related to common shares issued in conjunction with the acquisition of our electronic discovery business, principal payments due under the credit facility, deferred acquisition price agreements and capital leases, interest payments due on our outstanding borrowings, and payments for other contractual obligations. As noted above, if the holders of our outstanding convertible notes do not either (i) extend the maturity of those notes, at the option of the note holders, or (ii) convert the notes into shares of our common stock in accordance with the terms of the notes, those notes, in the outstanding principal amount of $50.0 million, will mature on June 15, 2007. If those notes mature at that time, our cash flow from operations from the date of this report through that maturity date is not anticipated to be sufficient to pay those notes (after the uses of anticipated cash flow from operations to meet our other normal uses of cash described above). Management believes we could increase liquidity to fund payment of these notes through a restructuring our credit facility, through the disposition of non-strategic assets, or through the issuance of debt or equity securities.

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. As discussed more fully in note 13 of the notes to consolidated financial statements, we guaranteed the price for approximately 1.2 million shares of our common stock issued in connection with the acquisition of nMatrix.

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Contractual Obligations

The following table sets forth a summary of our contractual obligations and commitments, excluding periodic interest payments, as of December 31, 2006.

	Payments Due By Period
Contractual Obligation	Total		Less than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
	(In Thousands)
Long-term obligations and future accretion(1)	$	152,513		$	68,393		$	82,120		$	2,000		$	—
Employment agreements(2)	8,763			3,097			3,821			1,845			—
Capital lease obligations	178			48			65			65			—
Operating leases	42,893			5,947			11,299			10,020			15,627
Total	$	204,347		$	77,485		$	97,305		$	13,930		$	15,627

(1)A portion of the BSI, Hilsoft, and Epiq Advisory Services purchase prices were paid in the form of non-interest bearing notes or below market rate notes, which were discounted using an imputed rate of 5%, 8%, 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, 2006 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. As of December 31, 2006, we had not made or accrued any additional payments. 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.

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

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits the measurement of specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is still evaluating the impact, if any, that the adoption of SFAS 157 will have on our financial position, results of operations, or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, (FIN 48) Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include an annual tabular rollforward of

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unrecognized tax benefits. The provisions of this interpretation are effective for fiscal years beginning after December 15, 2005. We will be required to apply the provisions of FIN 48 to all tax positions upon initial adoption with any cumulative effect adjustment to be recognized as an adjustment to retained earnings. We are currently evaluating what effect the adoption of FIN 48 will have on our consolidated financial statements.

In October 2006, the FASB issued Staff Position No. FAS 123(R)-5, Amendment of FASB Staff Position 123(R)-1 (FSP 123(R)-5). FSP 123(R)-5, which amends FSP 123(R)-1, addresses instruments originally issued as employee compensation and later modified solely to reflect an equity restructuring that occurs when the holders are no longer employees. In that situation, no change in the recognition or measurement (due to change in classification) of those instruments will result if (i) there is no increase in the fair value of the award, or an antidilution provision is not added to the terms of the award in contemplation of an equity restructuring; and (ii) all holders of the same class of equity instruments are treated in the same manner. The guidance in FSP 123(R)-5 is to be applied in the first reporting period beginning after October 15, 2006. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In October 2006, the FASB issued Staff Position No. FAS 123(R)-6, Technical Corrections of FASB Statement No. 123(R) (FSP 123(R)-6). FSP 123(R)-6 was issued to make several technical corrections to SFAS 123(R). These include exemption for non-public entities from disclosing the aggregate intrinsic value of outstanding fully vested share options, revision to the computation of the minimum compensation cost that must be recognized, indication that at the date the illustrative awards were no longer probable of vesting, any previously recognized compensation cost should have been reversed, and changes to the definition of short-term inducement to exclude an offer to settle an award. The guidance in FSP 123(R)-6 is effective in the first reporting period beginning after October 20, 2006. Early application is permitted in periods for which financial statements have not yet been issued. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance regarding the consideration given to prior year misstatements when determining materiality in current year financial statements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The impact of this adoption was not material to our consolidated financial statements.

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 $0.9 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 $1.0 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.

At December 31, 2006, 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, 2006 by approximately $0.9 million.

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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 the quarterly financial data for the quarters of the years ended December 31, 2006 and 2005 (in thousands, except per share data):

	Quarters
	1st			2nd		3rd		4th
	(Unaudited)
Year ended December 31, 2006
Total revenue	$	38,218		$	100,496	$	39,032	$	46,424
Gross profit(1)	15,538			80,616		23,365		21,053
Net income (loss)	(1,749		)	36,292		2,681		(2,093		)
Net income (loss) per share—Basic(2)	$	(0.09	)	$	1.87	$	0.14	$	(0.11	)
Net income (loss) per share—Diluted(2)	$	(0.09	)	$	1.59	$	0.13	$	(0.11	)
Year ended December 31, 2005
Total revenue	$	24,644		$	25,352	$	26,294	$	30,040
Gross profit(1)	9,714			10,592		10,349		12,891
Net income (loss)	(2,128		)	1,836		495		(4,045		)
Net income (loss) per share—Basic(2)	$	(0.12	)	$	0.10	$	0.03	$	(0.22	)
Net income (loss) per share—Diluted(2)	$	(0.12	)	$	0.10	$	0.03	$	(0.22	)

(1)Gross profit is calculated as total revenue less direct costs of services, reimbursed direct costs, and the      portion of depreciation and software amortization attributable to direct costs of services.

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

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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, 2006, the end of the period covered by this Annual Report on Form 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

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.

In connection with the filing of our Annual Report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment using those criteria, management believes that, as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

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Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears beginning on page 40.

Changes in Internal Control Over Financial Reporting

Changes in our internal control over financial reporting during the fourth quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, are as follows:

·We implemented new controls related to contracts or other arrangements that are within the scope of SOP 97-2 to provide a written analysis of the appropriate accounting for these contracts or other arrangements and to review our conclusions with qualified internal accounting personnel or third party accounting experts; and

·We have provided our accounting staff with additional training related to generally accepted accounting principles and financial statement reporting matters.

As a result of the above actions, management believes the material weakness in the Company’s internal control over financial reporting with respect to maintaining adequate controls related to the specific evaluation of vendor specific objective evidence of fair value for specified software upgrades provided within a bundled arrangement as required by  SOP 97-2 and as discussed in prior filings was remediated in the fourth quarter ended December 31, 2006.

39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Epiq Systems, Inc.
Kansas City, Kansas

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Epiq Systems, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 the effectiveness of the internal control over financial reporting 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, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria

40

established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006, of the Company and our report dated March 6, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the change in accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 6, 2007

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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 2007 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, 2006.

ITEM 11.EXECUTIVE COMPENSATION

Incorporated by reference to our Proxy Statement for our 2007 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, 2006.

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

Incorporated by reference to our Proxy Statement for our 2007 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, 2006.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to our Proxy Statement for our 2007 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, 2006.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to our Proxy Statement for our 2007 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, 2006.

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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-31 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, 2006 and 2005

Consolidated Statements of Operations—Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements of Changes in Stockholders’ Equity—Years Ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows—Years Ended December 31, 2006, 2005 and 2004

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, 2006.

ScheduleII—Valuation and qualifying accounts

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

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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 9, 2007	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 9, 2007
		Chairman of the Board, Chief Executive Officer and
		Director (Principal Executive Officer)
/s/ Christopher E. Olofson		Christopher E. Olofson		March 9, 2007
		President, Chief Operating Officer and Director
/s/ Elizabeth M. Braham		Elizabeth M. Braham		March 9, 2007
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)
/s/ Douglas W. Fleming		Douglas W. Fleming		March 9, 2007
		Director of Finance, Chief Accounting Officer
		(Principal Accounting Officer)
/s/ W. Bryan Satterlee		W. Bryan Satterlee		March 9, 2007
		Director
/s/ Edward M. Connolly, Jr.		Edward M. Connolly, Jr.		March 9, 2007
		Director
/s/ James A. Byrnes		James A. Byrnes		March 9, 2007
		Director
/s/ Joel Pelofsky		Joel Pelofsky		March 9, 2007
		Director

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
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, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These 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, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, 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.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

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, 2006, 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 6, 2007, 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.

/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 6, 2007

F-1

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

	As of December 31,
	2006		2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,274	$	13,563
Trade accounts receivable, less allowance for doubtful accounts of $1,684 and $3,481, respectively	33,066		33,504
Prepaid expenses	2,537		2,818
Income taxes refundable	332		4,643
Deferred income taxes	1,313		25,579
Other current assets	740		85
Total Current Assets	43,262		80,192
LONG-TERM ASSETS:
Property, equipment and leasehold improvements, net	23,153		23,751
Software development costs, net	9,611		8,848
Goodwill	260,609		249,427
Other intangibles, net of accumulated amortization of $25,387 and $13,758, respectively	43,840		53,399
Other	1,745		2,854
Total Long-term Assets, net	338,958		338,279
Total Assets	$	382,220	$	418,471
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	7,930	$	7,954
Other accrued expenses	9,635		9,462
Deferred revenue	1,073		60,224
Current maturities of long-term obligations	70,488		27,642
Total Current Liabilities	89,126		105,282
LONG-TERM LIABILITIES:
Deferred income taxes	23,307		26,815
Other long-term liabilities	1,735		—
Long-term obligations (excluding current maturities)	83,873		145,906
Total Long-term Liabilities	108,915		172,721
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—19,478,839 and 19,253,466 shares at 2006 and 2005, respectively	195		193
Additional paid-in capital	137,044		128,484
Accumulated other comprehensive income	18		—
Retained earnings	46,922		11,791
Total Stockholders’ Equity	184,179		140,468
Total Liabilities and Stockholders’ Equity	$	382,220	$	418,471

See accompanying notes to consolidated financial statements.

F-2

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

	Years Ended December 31,
	2006			2005			2004
REVENUE:
Case management services	$	76,534		$	53,042		$	41,275
Case management bundled software license, software upgrade and postcontract customer support services	87,716			1,771			199
Document management services	35,472			27,874			36,549
Operating revenue before reimbursed direct costs	199,722			82,687			78,023
Operating revenue from reimbursed direct costs	24,448			23,643			20,345
Total Revenue	224,170			106,330			98,368
OPERATING EXPENSES:
Direct cost of services (exclusive of depreciation and amortization shown separately below)	48,345			30,225			37,411
Direct cost of bundled software license, software upgrade and postcontract customer support services (exclusive of depreciation and amortization shown separately below)	3,921			3,809			2,849
Reimbursed direct costs	24,583			23,756			20,124
General and administrative	54,071			31,072			25,886
Depreciation and software and leasehold amortization	10,113			7,288			6,527
Amortization of intangibles	11,629			6,751			7,767
Acquisition related	283			2,984			2,197
Total Operating Expenses	152,945			105,885			102,761
INCOME (LOSS) FROM OPERATIONS	71,225			445			(4,393		)
EXPENSES (INCOME) RELATED TO FINANCING:
Interest expense	13,468			6,809			6,343
Interest income	(208		)	(122		)	(128		)
Debt extinguishment	—			—			995
Net Expenses (Income) Related to Financing	13,260			6,687			7,210
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	57,965			(6,242		)	(11,603		)
PROVISION (BENEFIT) FOR INCOME TAXES	22,834			(2,400		)	(4,313		)
INCOME (LOSS) FROM CONTINUING OPERATIONS	35,131			(3,842		)	(7,290		)
DISCONTINUED OPERATIONS:
Income from operations of discontinued infrastructure segment (including gain on disposal of $1,616 during the year ended December 31, 2004)	—			—			1,104
Income tax expense from operations of discontinued infrastructure segment	—			—			(437		)
TOTAL DISCONTINUED OPERATIONS	—			—			667
NET INCOME (LOSS)	$	35,131		$	(3,842	)	$	(6,623	)

F-3

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

	Years Ended December 31,
	2006		2005			2004
NET INCOME (LOSS) PER SHARE INFORMATION:
Income (loss) per share—Basic
Income (loss) from continuing operations	$	1.81	$	(0.21	)	$	(0.41	)
Income from discontinued operations	—		—			0.04
Net income (loss) per share—Basic	$	1.81	$	(0.21	)	$	(0.37	)
Income (loss) per share—Diluted
Income (loss) from continuing operations	$	1.58	$	(0.21	)	$	(0.41	)
Income from discontinued operations	—		—			0.04
Net income (loss) per share—Diluted	$	1.58	$	(0.21	)	$	(0.37	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	19,399		18,092			17,848
Diluted	23,048		18,092			17,848

See accompanying notes to consolidated financial statements.

F-4

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

	As of December 31,
	2006		2005			2004
PREFERRED SHARES (2,000 authorized)	—		—			—
COMMON SHARES (50,000 authorized):
Shares, beginning of year	19,253		17,884			17,781
Shares issued upon exercise of options	226		140			103
Shares issued in acquisition of business	—		1,229			—
Shares, end of year	19,479		19,253			17,884
COMMON STOCK—PAR VALUE $0.01 PER SHARE:
Balance, beginning of year	$	193	$	179		$	178
Proceeds from exercise of options	2		2			1
Shares issued in acquisition of business	—		12			—
Balance, end of year	195		193			179
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year	128,484		102,738			101,891
Proceeds from exercise of options	2,627		1,029			595
Share-based income tax benefit	576		496			252
Share-based compensation expense	5,357		—			—
Shares issued in acquisition of business	—		24,221			—
Balance, end of year	137,044		128,484			102,738
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year	—		—			—
Foreign currency translation adjustment	18		—			—
Balance, end of year	18		—			—
RETAINED EARNINGS:
Balance, beginning of year	11,791		15,633			22,256
Net income (loss)	35,131		(3,842		)	(6,623		)
Balance, end of year	46,922		11,791			15,633
TOTAL STOCKHOLDERS’ EQUITY	$	184,179	$	140,468		$	118,550

See accompanying notes to consolidated financial statements.

F-5

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

	Years Ended December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	35,131		$	(3,842	)	$	(6,623	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Expense (benefit) for deferred income taxes	19,995			(9,864		)	(2,491		)
Depreciation and software amortization	10,113			7,288			6,527
Loan fee amortization and debt extinguishment	1,445			1,147			3,115
Change in valuation of embedded option and convertible debt	844			1,034			292
Amortization of intangible assets	11,629			6,751			7,767
Share-based compensation expense	5,357			—			—
Gain on sale of discontinued operation	—			—			(1,616		)
Other, net	(558		)	1,015			370
Changes in operating assets and liabilities, net of effects from business acquisitions:
Trade accounts receivable	2,255			(3,141		)	7,951
Prepaid expenses and other assets	(430		)	(330		)	1,187
Accounts payable and other liabilities	3,067			3,126			(10,779		)
Deferred revenue	(59,151		)	24,742			27,069
Excess tax benefit related to share-based compensation	(234		)	—			—
Income taxes, including tax benefit of $576, $496 and $252 of tax benefit related to share-based compensation, respectively	4,973			(688		)	(1,180		)
Net cash provided by operating activities	34,436			27,238			31,589
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(6,431		)	(4,555		)	(5,424		)
Software development costs	(4,563		)	(2,269		)	(1,670		)
Cash paid for acquisition of businesses, net of cash acquired	(3,586		)	(110,533		)	(113,111		)
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	(71		)	38			65
Net cash used in investing activities	(14,651		)	(116,830		)	(119,029		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings	14,000			106,841			193,500
Debt issuance costs	(281		)	(938		)	(5,931		)
Payments under long-term debt and capital lease obligations	(44,656		)	(17,109		)	(118,455		)
Excess tax benefit related to share-based compensation	234			—			—
Proceeds from exercise of stock options	2,629			1,031			595
Net cash (used in) provided by financing activities	(28,074		)	89,825			69,709
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(8,289		)	233			(17,731		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	13,563			13,330			30,347
Increase in cash classified as held for sale	—			—			714
CASH AND CASH EQUIVALENTS, END OF YEAR	$	5,274		$	13,563		$	13,330

See accompanying notes to consolidated financial statements.

F-6

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006, 2005 AND 2004

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 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 discovery, bankruptcy administration and class action administration. Our clients include 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 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. Generally, fair value represents discounted projected future cash flows and potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. If potential for impairment exists, the fair value of the reporting unit is subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. An impairment loss is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. Our annual impairment test, performed as of July 2006 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 intangible assets are reviewed for impairment

F-7

whenever events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable.

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 operations. Unamortized costs related to debt extinguished prior to maturity due to refinancing were expensed and comprise debt extinguishment on our consolidated statements of operations.

Share-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment. SFAS No. 123R established 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.

We elected to adopt SFAS No. 123R using the modified version of prospective application. Under the modified version of prospective application, we have recognized compensation costs related to share-based compensation beginning January 1, 2006. We recognize this expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Prior to 2006, we accounted for stock-based compensation awards under the intrinsic method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which required 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. Compensation costs related to share-based compensation for periods ended on or before December 31, 2005 are reflected on a pro forma basis in note 12 of these consolidated financial statements.

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 clients pursuant to which we deliver various case management and document management services each month.

F-8

Significant sources of revenue include:

·Fees contingent upon the month-to-month delivery of case management services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, and conversion of data into an organized, searchable electronic database. The amount we earn varies based primarily on the size and complexity of the engagement;

·Hosting fees based on the amount of data stored;

·Deposit-based fees from financial institutions, primarily based on a percentage of total liquidated assets placed on deposit at that financial institution by our bankruptcy trustee clients, to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and postcontract customer support (PCS) services,

·Legal noticing services to parties of interest in bankruptcy and class action matters, including media campaign and advertising management, in which we coordinate notification through various media outlets, such as print, radio and television, to potential parties of interest for a particular client engagement, and

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

Non-Software Arrangements

Case and document management services related to electronic discovery, corporate restructuring, and class action revenue, which are billed based on volume, are evaluated pursuant to Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple Deliverables. For each of these contractual arrangements, we have identified the following deliverables and/or services:

·Electronic Discovery

·Data processing

·Hosting

·Corporate Restructuring

·Consulting

· Claims management

·Printing and reproduction

·Mailing and noticing

·Document management

·Class Action

·Consulting

·Notice campaigns

·Toll free customer support

·Web site design/hosting

·Claims administration

·Distribution

Based on our evaluation of each element, we have determined that each element delivered has standalone value to our customers because we or other vendors sell such services separately from any other

F-9

services/deliverables. We have also obtained objective and reliable evidence of the fair value of each element based either on the price we charge when we sell an element on a standalone basis or based on third-party evidence of fair value of such services. Lastly, our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting under EITF 00-21. We allocate revenue to the various units of accounting in our arrangements based on the fair value of each unit of accounting, which is generally consistent with the stated prices in our arrangements. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period in accordance with Staff Accounting Bulletin Topic 13, Revenue Recognition (SAB Topic 13). As the services are rendered, our fee becomes fixed and determinable, and collectibility is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.

Software Arrangements

For our Chapter 7 bankruptcy trustee arrangements, we provide our trustee clients with a software license, hardware lease, hardware maintenance, and postcontract customer support (PCS) services, all at no charge to the trustee. The trustees place their liquidated estate deposits with a financial institution with which we have an arrangement. We earn contingent monthly fees from the financial institutions based on the dollar level of average monthly deposits placed by the trustees with that financial institution, from the financial institution related to the software license, hardware lease, hardware maintenance, and PCS services. We account for the software license and PCS elements in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2). Since we have not established vendor specific objective evidence (VSOE) of the fair value of the software license, we do not recognize any revenue on delivery of the software. The software element is deferred and included with the remaining undelivered element, which is PCS. This revenue, when recognized, is included as a component of case management services revenue. Revenue related to PCS is entirely contingent on the placement of liquidated estate deposits by the trustee with the financial institution. Accordingly, except for the arrangement described in the following paragraph, we recognize this contingent usage based revenue consistent with the guidance provided by the American Institute of Certified Public Accountants’ Technical Practice Aid (TPA) 5100.76, Fair Value in Multiple-Element Arrangements That Include Contingent Usage-Based Fees and Software Revenue Recognition as the fee becomes fixed or determinable at the time actual usage occurs and collectibility is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we have also satisfied the other revenue recognition criteria contained in SOP 97-2, since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectibility is reasonably assured.

Effective October 1, 2003, we entered into an arrangement with our primary depository financial institution under which we delivered two specified upgrades annually with the last specified upgrade occurring in the second quarter of 2006. This arrangement included specific pricing for each software upgrade and certain special projects in addition to the contingent deposit-based pricing related to the software license, hardware, hardware maintenance, and PCS to each trustee client. Therefore, the software upgrades and special projects are part of a bundled arrangement. Each software upgrade is considered a separate and discrete product and, as we do not sell each software upgrade on a standalone basis, we were unable to establish VSOE of the fair value of the software upgrades. As a result, the licensed software, software upgrade, special projects and PCS are a combined unit of accounting. Revenue for this combined unit of accounting, when recognized, is included as a component of case management services revenue. Since we did not have VSOE of the fair value of each separate upgrade, we deferred recognition of substantially all revenue under this arrangement until the final upgrade was delivered. The ongoing costs related to this arrangement were recognized as expense when incurred. On delivery of the final upgrade during the second quarter of 2006, the only remaining undelivered element was PCS services. In

F-10

accordance with SOP 97-2, on delivery of the final software upgrade, we recognized revenue previously deferred on a proportionate basis over the three year term of the contract. As the contract terminated September 30, 2006, during 2006 we recognized approximately $59.7 million of revenue which had been deferred as of December 31, 2005.

We also provide our trustee clients with certain hardware, such as desktop computers, monitors, and printers, and hardware maintenance. We retain ownership of all hardware provided and, based on guidance provided in EITF 01-8, Determining Whether an Arrangement Contains a Lease, we account for this hardware as a lease. As the hardware maintenance arrangement is an executory contract similar to an operating lease, we use guidance related to contingent rentals in operating lease arrangements for hardware maintenance as well as for the hardware lease. Since the payments under all of our arrangements are contingent upon the level of trustee deposits and the delivery of upgrades and other services, there remain important uncertainties regarding the amount of unreimbursable costs yet to be incurred by us, we account for the hardware lease as an operating lease in accordance with SFAS 13, Accounting for Leases. Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals under EITF Issue No. 98-9, Accounting for Contingent Rent and SAB Topic 13, which requires that we recognize rental income when the changes in the factor on which the contingent lease payment is based actually occur. This occurs at the end of each period as we achieved our target when deposits are held at the depository financial institution as, at that time, evidence of an arrangement exists, delivery has occurred, the amount has become fixed and determinable, and collection is reasonably assured. This revenue, which is less than ten percent of our total revenue, is included as a component of case management services revenue.

Reimbursements

Our case and document management businesses both have revenue related to the reimbursement of certain costs, primarily postage. Consistent with guidance provided by EITF No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, reimbursed postage and other reimbursable direct costs are recorded gross in the consolidated statement of operations as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs”.

Costs Related to Contract Acquisition, Origination, and Set-up

SAB Topic 13 provides guidance that contract acquisition, origination, and set-up costs may be expensed as incurred or capitalized and amortized in accordance with FASB Technical Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts” or Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct costs of Leases.”  We have elected to expense these costs as incurred.

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 operations. Changes in the fair value of the embedded option do not affect our cash flows and, accordingly, are reflected as an adjustment to reconcile net income (loss) to net cash from operating activities on our accompanying consolidated statements of cash flows.

F-11

Comprehensive Income (Loss)

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, establishes requirements for reporting and display of comprehensive income and its components. Our accumulated other comprehensive income, which is not material to our financial position, results of operations, or cash flows, is included as a separate component of shareholders’ equity on our consolidated balance sheets  There were no reclassification adjustments from accumulated other comprehensive income to net income (loss) during the years ended December 31, 2006, 2005 and 2004.

Depreciation and Software and Leasehold Amortization

The caption “Depreciation and software and leasehold amortization” in the accompanying consolidated statements of operations includes direct costs of approximately $6.7 million, $5.0 million, and $4.5 million of for the years ended December 31, 2006, 2005 and 2004, respectively.

Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) 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 incremental shares that may be issued in future periods relating to outstanding share options and convertible debt, if dilutive. When calculating incremental shares related to outstanding share options, we apply the treasury stock method. The treasury stock method assumes that proceeds, consisting of the amount the employee must pay on exercise, compensation cost attributed to future services and not yet recognized, and excess tax benefits that would be credited to additional paid-in capital on exercise of the share options, are used to repurchase outstanding shares at the average market price for the period.

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 February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115  (SFAS 159). SFAS 159 permits the measurement of specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

F-12

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is still evaluating the impact, if any, that the adoption of SFAS 157 will have on our financial position, results of operations, or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, (FIN 48) Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include an annual tabular rollforward of unrecognized tax benefits. The provisions of this interpretation are effective for fiscal years beginning after December 15, 2005. We will be required to apply the provisions of FIN 48 to all tax positions upon initial adoption with any cumulative effect adjustment to be recognized as an adjustment to retained earnings. We are currently evaluating what effect the adoption of FIN 48 will have on our consolidated financial statements.

In October 2006, the FASB issued Staff Position No. FAS 123(R)-5, Amendment of FASB Staff Position 123(R)-1 (FSP 123(R)-5). FSP 123(R)-5, which amends FSP 123(R)-1, addresses instruments originally issued as employee compensation and later modified solely to reflect an equity restructuring that occurs when the holders are no longer employees. In that situation, no change in the recognition or measurement (due to change in classification) of those instruments will result if (i) there is no increase in the fair value of the award, or an antidilution provision is not added to the terms of the award in contemplation of an equity restructuring; and (ii) all holders of the same class of equity instruments are treated in the same manner. The guidance in FSP 123(R)-5 is to be applied in the first reporting period beginning after October 15, 2006. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In October 2006, the FASB issued Staff Position No. FAS 123(R)-6, Technical Corrections of FASB Statement No. 123(R) (FSP 123(R)-6). FSP 123(R)-6 was issued to make several technical corrections to SFAS 123(R). These include exemption for non-public entities from disclosing the aggregate intrinsic value of outstanding fully vested share options, revision to the computation of the minimum compensation cost that must be recognized, indication that at the date the illustrative awards were no longer probable of vesting, any previously recognized compensation cost should have been reversed, and changes to the definition of short-term inducement to exclude an offer to settle an award. The guidance in FSP 123(R)-6 is effective in the first reporting period beginning after October 20, 2006. Early application is permitted in periods for which financial statements have not yet been issued. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance regarding the consideration given to prior year misstatements when determining materiality in current year financial statements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The impact of this adoption was not material to our consolidated financial statements.

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NOTE 2: PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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 or, for leasehold improvements, the lesser of the lease term or useful life. The classification of property, equipment and leasehold improvements and their estimated useful lives is as follows (in thousands):

	December 31,						Estimated
	2006			2005			Useful Life
Land	$	192		$	192
Building and building and leasehold improvements	9,283			8,947			5–30 years
Furniture and fixtures	2,261			2,061			5–10 years
Computer and office equipment	26,424			23,044			2–5 years
Transportation equipment	6,396			6,396			3–5 years
Mailroom equipment	1,015			858			3–5 years
Construction in progress	525			—
	46,096			41,498
Accumulated depreciation and amortization	(22,943		)	(17,747		)
Property, equipment and leasehold improvements, net	$	23,153		$	23,751

Computer and office equipment includes property acquired under capital leases. As of December 31, 2006 and 2005, assets acquired under capital lease had a historical cost basis of $3.0 million and $2.9 million, respectively, and accumulated amortization of $2.4 million and $1.4 million, respectively.

NOTE 3: SOFTWARE DEVELOPMENT COSTS

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

	Year Ended December 31,
	2006			2005
Amounts capitalized, beginning of year	$	16,976		$	11,838
Development costs capitalized	4,563			2,269
Dispositions	(257		)	—
Acquisitions	—			2,869
Amounts capitalized, end of year	21,282			16,976
Accumulated amortization, end of year	(11,671		)	(8,128		)
Software development costs, net	$	9,611		$	8,848

Included in the above are capitalized software development costs for unreleased products of $2.0 million and $1.0 million at December 31, 2006 and 2005, respectively. During the years ended December 31, 2006, 2005 and 2004, we recognized amortization expense related to capitalized software development costs of $3.7 million, $2.1 million, and $1.8 million, respectively.

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NOTE 4: GOODWILL AND INTANGIBLE ASSETS

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

	Year Ended December 31, 2006								Year Ended December 31, 2005
	Case Management			Document Management			Total		Case Management			Document Management			Total
Balance, beginning of period		$	200,936		$	48,491	$	249,427		$	106,371		$	41,357	$	147,728
Goodwill acquired during the period and adjustments		11,116			66		11,182			94,565			7,134		101,699
Balance, end of period		$	212,052		$	48,557	$	260,609		$	200,936		$	48,491	$	249,427

Other intangible assets as of December 31, 2006 and 2005 consisted of the following (in thousands):

	December 31,						Estimated
	2006			2005			Useful Life
Amortized Identifiable Intangible Assets:
Customer relationships	$	39,287		$	37,313		2–14 years
Accumulated amortization	(12,779		)	(6,170		)
Customer relationships, net	26,508			31,143
Trade names	2,414			2,319			1–2 years
Accumulated amortization	(2,301		)	(1,578		)
Trade names, net	113			741
Non-compete agreements	27,526			27,525			5–10 years
Accumulated amortization	(10,307		)	(6,010		)
Non-compete agreements, net	17,219			21,515
Total amortized intangible assets, net	$	43,840		$	53,399

The weighted average life for identifiable intangibles acquired during 2006 are as follows:

Customer relationships 2.0 years

Amortization expense for each year in the three year period ended December 31, 2006 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:
2004		$	7,767
2005		6,751
2006		11,629
Estimated amortization expense:
2007		9,531
2008		8,361
2009		6,829
2010		6,439
2011		4,706

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NOTE 5: LONG-TERM OBLIGATIONS

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

	Year Ended December 31,
	2006		2005
Senior term loan	$	15,000	$	25,000
Senior revolving loan	78,028		93,028
Convertible subordinated debt, including embedded option	52,170		51,326
Capital leases	179		972
Deferred acquisition price	8,984		3,222
Total long-term obligations	$	154,361	$	173,548

Credit Facilities

As of December 31, 2005, we had a credit facility, with KeyBank National Association as administrative agent, which consisted of a $25.0 million senior term loan with an August 2006 maturity and a $100.0 million senior revolving loan with a November 2008 maturity. During 2006, we repaid $10.0 million of the senior term loan and, in June 2006, our credit facility was amended to extend the maturity of the outstanding senior term loan balance to June 30, 2007. The senior term loan does not have any required amortizing payments. 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.

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. As of December 31, 2006, our borrowings under the credit facility totaled $93.0 million, consisting of $15.0 million borrowed under the senior term loan and $78.0 million borrowed under the senior revolving loan. Interest on the credit facility is generally based on a spread, which as of December 31, 2006 was 300 basis points, over the LIBOR rate. As of December 31, 2006, the interest rate charged on outstanding borrowings under the credit facility ranged from 8.4% to 8.6%.

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 for the notes 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

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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 three years, the convertible debt balance will total $50.0 million. On our accompanying consolidated statements of operations, 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 had a fair value and carrying value at December 31, 2006 and 2005 of approximately $2.4 million and $1.9 million, respectively. On our accompanying consolidated balance sheets, our obligation related to the embedded option has been included as a component of the convertible note payable. The increase in the fair value of the embedded option is included as a component of interest expense on our accompanying consolidated statements of operations. 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.

Covenant Compliance

Our credit facility contains financial covenants related to earnings before interest, provision for income taxes, depreciation, amortization and other adjustments as defined in the agreements (EBITDA) and total debt. In addition, our credit facility also contains financial covenants related to senior debt, fixed charges, and working capital. As of December 31, 2006, we were in compliance with all financial covenants.

Deferred Acquisition Price

We have made three acquisitions, Bankruptcy Services, Hilsoft, and Epiq Advisory Services, for which a portion of the purchase price was deferred. These deferred payments, which are either non-interest bearing or have a below market interest rate, have been discounted at imputed interest rates (Bankruptcy Services at 5%, Hilsoft and Epiq Advisory Services at 8%). As of December 31, 2006 and 2005, the discounted value of the remaining note payments was approximately $9.0 million and $3.2 million, respectively, of which approximately $3.3 million and $1.7 million, respectively, was classified as a current liability in the consolidated balance sheets.

Scheduled Principal Payments

Our long-term obligations, including credit facility debt outstanding as of December 31, 2006, convertible debt (including embedded option), deferred acquisition costs, and capitalized leases, mature as follows for years ending December 31 (in thousands):

2007	$	70,488
2008	80,557
2009	1,440
2010	1,396
2011	480
Total	$	154,361

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). Certain of our lease agreements provide for scheduled rent increases during the lease term.

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Rent expense is recognized on a straight-line basis over the lease term. Also, landlord provided tenant improvement allowances are recorded as a liability and amortized as a reduction to rent expense. Additionally, we have non-cancelable operating leases for office equipment and automobiles expiring through 2010.

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

2007	$	5,947
2008	5,889
2009	5,410
2010	5,179
2011	4,841
Thereafter	15,627
Total minimum lease payments	$	42,893

Expense related to operating leases was approximately $5.6 million, $2.9 million, and $2.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

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.

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. Under the terms of our convertible subordinated debt agreement, we are restricted from payment of dividends while the convertible subordinated debt is outstanding. Thereafter, 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 a defined contribution 401(k) plan that covers substantially all employees. We match 60% of the first 10% of employee contributions and also have the option of making discretionary contributions. Our plan contributions were approximately $1.1 million, $0.8 million, and $0.8 million for the years ended December 31, 2006, 2005, and 2004, respectively.

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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, 2006, the carrying value of cash, cash equivalents, trade receivables, and accounts payable approximate fair value. Borrowings under our credit facility are repriced frequently at market rates and approximate fair value. Notes related to the BSI, Hilsoft, and Epiq Advisory Services deferred acquisition price, with a combined carrying value of $9.0 million as of December 31, 2006, are either non-interest bearing or bear interest at a below market rate and are discounted at an imputed interest rate of 5% and 8%, and 8%, respectively. We also have fixed rate convertible notes which, as of December 31, 2006, had a carrying value of $52.2 million. The aggregate carrying value of these deferred acquisition price and convertible notes approximates fair value as of December 31, 2006. 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 of three years. We currently promote our Chapter 7 TCMS® 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 38%, 3% and 3% of our total revenues for the years ended December 31, 2006, 2005 and 2004, respectively. Additionally, Bank of America represented approximately 13% of our accounts receivable balance as of both December 31, 2006 and 2005.

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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,
	2006			2005			2004
Income (loss) from continuing operations before income taxes	$	57,965		$	(6,242	)	$	(11,603	)
Provision (benefit) for income taxes from continuing operations:
Currently payable (receivable) income taxes
Federal	$	2,261		$	6,996		$	(16	)
State	491			468			83
Foreign	87			—			—
Total	2,839			7,464			67
Deferred income taxes
Federal	17,289			(8,560		)	(2,962		)
State	2,725			(1,304		)	(1,418		)
Foreign	(19		)	—			—
Total	19,995			(9,864		)	(4,380		)
Provision (benefit) for income taxes from continuing operations	22,834			(2,400		)	(4,313		)
Provision (benefit) for income taxes from discontinued operations:
Current income taxes	—			—			(1,452		)
Deferred income taxes	—			—			1,889
Provision for income taxes from discontinued operations	—			—			437
Consolidated income tax provision (benefit)	$	22,834		$	(2,400	)	$	(3,876	)

A reconciliation of the provision (benefit) for income taxes from continuing operations at the statutory rate of 35% for the year ended December 31, 2006 and 34% for the years ended December 31, 2005 and 2004 to the provision (benefit) for income taxes from continuing operations at our effective rate is shown below (in thousands):

	Years Ended December 31,
	2006			2005			2004
Computed at the statutory rate	$	20,288		$	(2,122	)	$	(3,945	)
Change in taxes resulting from:
State income taxes, net of federal tax effect	2,090			(274		)	(514		)
Research and development credits	(300		)	(196		)	(99		)
Permanent differences	683			299			239
Other	73			(107		)	6
Provision (benefit) for income taxes from continuing operations	$	22,834		$	(2,400	)	$	(4,313	)

Taxes related to acquisitions of $0.5 million were recorded as an increase to goodwill for the year ended December 31, 2006. For the years ended December 31, 2005 and 2004, taxes related to acquisitions of $0.3 million and $0.5 million, respectively, were recorded as a reduction to goodwill.

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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,
	2006			2005
Deferred tax assets:
Deferred revenue	$	—		$	23,601
Allowance for doubtful accounts	778			1,567
Share-based compensation	2,054			—
Convertible debt	900			567
Intangible assets	718			532
Accrued liabilities	710			906
Foreign loss:
Carryforwards	228			—
Valuation allowance	(228		)	—
State net operating loss carryforwards	1,209			572
Total deferred tax assets	6,369			27,745
Deferred tax liabilities:
Prepaid expenses	561			868
Intangible assets	21,905			22,958
Property and equipment and software development costs	5,815			4,873
Other	82			282
Total deferred tax liabilities	28,363			28,981
Net deferred tax asset (liability)	$	(21,994	)	$	(1,236	)

As of December 31, 2006, we have aggregate state operating loss carryforwards of $16.6 million. These carryforwards expire as follows:  $6.8 million in 2019, $2.7 million in 2025, and $7.1 million in 2026. 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.

As of December 31, 2006, we have an operating loss carryforward in the United Kingdom of $1.2 million, resulting in recognition of a $0.2 million deferred tax asset. During 2006, we established a valuation allowance for the full amount of the foreign loss carryforward deferred tax asset. Although this net operating loss carryforward does not expire, management believes a valuation allowance is appropriate until such time as reasonable evidence exists that this foreign operation will generate profits.

The above net deferred tax asset (liability) is presented on the consolidated balance sheets as follows (in thousands):

	December 31,
	2006			2005
Current deferred income tax asset	$	1,313		$	25,579
Long-term deferred income tax liability	(23,307		)	(26,815		)
	$	(21,994	)	$	(1,236	)

NOTE 11: NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) 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 incremental shares that may be issued in future periods relating to outstanding stock options and convertible debt, if dilutive. When calculating incremental shares related to outstanding stock options, we apply the treasury stock method. The treasury stock method assumes that proceeds, consisting of the amount the employee must pay on exercise, compensation cost attributed to future services and not yet recognized, and excess tax benefits that would

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be credited to additional paid-in capital on exercise of the options, are used to repurchase outstanding shares at the average market price for the period. The treasury stock method is applied only to share grants for which the effect is dilutive (in thousands, except per share data).

	Year Ended December 31,
	2006							2005									2004
	Net Income		Weighted Average Shares Outstanding		Per Share Amount			Net Loss			Weighted Average Shares Outstanding		Per Share Amount				Net Loss			Weighted Average Shares Outstanding		Per Share Amount
Basic income (loss) per share from continuing operations	$	35,131		19,399		$	1.81	$	(3,842	)		18,092		$	(0.21	)	$	(7,290	)		17,848		$	(0.41	)
Effect of dilutive securities:
Stock options				792								—
Convertible debt	1,209			2,857								—									—
Diluted income (loss) per share from continuing operations	$	36,340		23,048		$	1.58	$	(3,842	)		18,092		$	(0.21	)	$	(7,290	)		17,848		$	(0.41	)

For the year ended December 31, 2006, weighted-average outstanding stock options totaling approximately 1.8 million shares of common stock were antidilutive and, therefore, not included in the computation of diluted earnings per share. For the years ended December 31, 2005 and 2004, we did not assume conversion of the convertible debt or exercise of any share-based options as the effect would be anti-dilutive.

NOTE 12: STOCK OPTIONS

On January 1, 2006, we adopted 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.

We elected to adopt SFAS No. 123R using the modified version of prospective application. Using this method, we have recognized compensation costs related to share-based compensation beginning with the quarter ended March 31, 2006. Compensation costs related to share-based compensation for periods ended on or before December 31, 2005 are reflected on a pro forma basis in this note to our consolidated financial statements. We have elected as the transition method for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized based on a recalculation of the pool that would have been available had we adopted SFAS 123 for recognition purposes for all awards issue from the date (February 1997) of our initial grant of share-based options.

During February 2005 our compensation committee approved acceleration of the vesting of approximately 0.5 million unvested share options, with a weighted-average exercise price of $14.28 per share, for certain employees, including an executive officer and non-employee directors. Unvested share options to purchase approximately 1.2 million shares, with a weighted-average exercise price of approximately $15.26 per share, were not accelerated as the employees holding the unvested share options did not meet the criteria established by our compensation committee. The decision to accelerate the vesting of these share 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 the then pending change in accounting rules for share-based compensation. This action, which had an immaterial effect on our financial statements for the year ended December 31, 2005, reduced the amount of expense we would have recognized under SFAS 123R by approximately $2.2 million (approximately $0.8 million, $0.7 million, $0.5 million and $0.2 million for the years ending December 31, 2006, 2007, 2008, and 2009, respectively).

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During June 2004, our 2004 Equity Incentive Plan was approved by our shareholders and replaced our 1995 Stock Option Plan, as amended (the “1995 Plan”). During June 2006, an amendment to the 2004 Equity Incentive Plan was approved by our shareholders. The 2004 Equity Incentive Plan as amended (the “2004 Plan”) limits the combined grant of options to acquire shares of common stock, stock appreciation rights, and restricted stock under the 2004 Plan to 5,000,000 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, 2006, there were approximately 2,204,000 equity instruments available for future grants under the 2004 Plan. Although various forms of equity instruments may be issued, to date we have issued only incentive share options and nonqualified share options under this Plan. These share options, which have a contractual term of 10 years, are issued with an exercise price equal to the grant date closing market price of our common stock. The vesting periods range from immediate to 5 years. Share options which vest over 5 years generally vest either 20% per year on the first five anniversaries of the grant date, or 25% per year on the second through fifth anniversaries of the grant date. Shares vesting over a shorter period will generally vest 100% as of the designated vesting date. We issue new shares to satisfy share option exercises. We do not anticipate that we will repurchase shares on the open market during 2007 for the purpose of satisfying share option exercises.

During October 2006, inducement stock options were granted, outside the 2004 Plan, related to the hiring of key employees to acquire up to 200,000 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 vest 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 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 vest 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 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 two 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 2004, 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 2006, the other employee left and the unvested portion of his option to purchase common stock was terminated.

As a result of our adoption of SFAS No. 123R, during the year ended December 31, 2006 we recognized expense related to share options issued prior to but unvested as of January 1, 2006 as well as expense related to share options issued subsequent to January 1, 2006. For share options issued prior to but unvested as of January 1, 2006, compensation expense was based on the fair value of those share options as calculated using the Black-Scholes option valuation model at the date the share options were issued. Key assumptions for the Black-Scholes option valuation model include expected volatility, expected term of share options granted, the expected risk-free interest rate, and the expected dividend rate. For share options issued during the year ended December 31, 2006, the share options were also valued using the Black-Scholes option valuation models and with key assumptions related to expected volatility, expected term of share options granted, the expected risk-free interest rate, and the expected dividend

F-23

rate. We estimate our expected volatility based on implied volatilities from traded share options on our stock and on our stock’s historical volatility. We have estimated the expected term of our share options based on the historical exercise pattern of groups of employees that have similar historical exercise behavior. The expected risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, we have not paid dividends and we do not anticipate paying dividends in the foreseeable future; accordingly, our expected dividend rate is zero.

The following table summarizes information about stock options outstanding as of December 31, 2006 (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 $12.20		1,376		6.12 years		$	9.89		1,273		$	9.71
$12.21 to $15.09		1,112		7.73 years		14.43			680		14.39
$15.10 to $16.05		1,124		8.56 years		15.76			869		15.77
$16.06 to $18.96		1,091		6.36 years		17.45			746		17.06
$18.97 and over		620		8.91 years		19.61			185		19.04
		5,323		7.35 years		14.76			3,753		13.88

Following is a summary of key assumptions we used to value share options granted during the three years ended December 31, 2006.

	2006	2005	2004
Expected term (years)	5.0–6.0	5.0–5.3	5.3–5.4
Expected volatility	30%–38%	40%	30%–48%
Risk-free interest rate	4.3%–5.0%	4.0%–4.3%	2.9–3.9%
Dividend yield	0%	0%	0%

Compensation expense for year ended December 31, 2006 was adjusted for share options we estimate will be forfeited prior to vesting. We use historical information to estimate employee termination and the resulting option forfeiture rate.

A summary of option activity during the year ended December 31, 2006 is presented below (shares and aggregate intrinsic value in thousands):

	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding, beginning of period		4,769			$	14.49
Granted		1,033			16.10
Exercised		(225	)		11.67
Forfeited		(254	)		17.78
Outstanding, end of period		5,323			14.76			7.35		$	14,113
Options vested and expected to vest, end of period		4,983			14.61			7.24		$	13,738
Options exercisable, end of period		3,753			13.88			6.77		$	12,230

F-24

The aggregate intrinsic value was calculated using the difference between the December 31, 2006 market price and the grant price for only those awards that have a grant price that is less than the December 31, 2006 market price. The weighted average grant-date fair value of share options granted during the years ended December 31, 2006, 2005 and 2004 were $6.53, $6.46 and $7.04, respectively. The total intrinsic value of share options exercised during the year ended December 31, 2006, 2006 was $1.5 million. During the year ended December 31, 2006, we received cash for payment of the grant price of exercised share options of approximately $2.6 million and we anticipate we will realize a tax benefit related to these exercised share options of approximately $0.6 million. The cash received for payment of the grant price is included as a component of cash flow from financing activities. The tax benefit related to the option exercise price in excess of the option fair value at grant date is separately disclosed as a component of cash flow from financing activities on the consolidated statement of cash flows; the remainder of the tax benefit is included as a component of cash flow from operating activities.

During the year ended December 31, 2006, we recognized share-based compensation expense, which is a non-cash charge, of approximately $5.4 million, of which $0.6 million is included under the caption “Direct costs of services” and $4.8 million is included under the caption “General and administrative” on the accompanying consolidated statements of operations. During the year ended December 31, 2006, we recognized a net tax benefit of approximately $2.1 million related to aggregate share-based compensation expense recognized during the same period. As a result, income before income taxes was reduced by approximately $5.4 million, net income was reduced by approximately $3.3 million, net income per share—basic was reduced by approximately $0.17 per share, and net income per share—diluted was reduced by approximately $0.14 per share. As of December 31, 2006, there was $8.0 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which will be recognized over a weighted-average period of 3.7 years.

Prior to adoption of SFAS 123R, we accounted for stock-based compensation awards under the intrinsic method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which required 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. Share options awarded under our share option plans are granted with an exercise price equal to the fair market value on the date of the grant. As a result, our consolidated statements of operations do not include expense related to share-based compensation for the years ended December 31, 2005 and 2004. Had the compensation cost been determined based on the fair value at the grant dates based on the guidance provided by Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, our net loss and net loss per share for the years ended December 31, 2005 and 2004 would have been adjusted to the following pro forma amounts (in thousands, except per share data):

		Years Ended December 31,
		2005			2004
Net loss, as reported		$	(3,842	)	$	(6,623	)
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		)
Net loss, pro forma		$	(10,447	)	$	(9,598	)
Net loss per share—Basic	As reported	$	(0.21	)	$	(0.37	)
	Pro forma	$	(0.58	)	$	(0.54	)
Net loss per share—Diluted	As reported	$	(0.21	)	$	(0.37	)
	Pro forma	$	(0.58	)	$	(0.54	)

F-25

Pro forma amounts presented above are based on actual earnings and consider only the effects of estimated fair values of stock options. For the years ended December 31, 2005 and 2004, our diluted loss per share calculation did not assume exercise of options or conversion of the convertible notes as the effects were antidilutive. The convertible notes, if converted, would result in issuance of 2,857,000 shares of our common stock.

NOTE 13: BUSINESS ACQUISITIONS

Epiq Advisory Services, Inc.

On May 16, 2006, our wholly-owned subsidiary, Epiq Advisory Services Inc., acquired the claims preference business of Gazes LLC in an asset acquisition. The total value of the transaction was $13.8 million, consisting of $3.0 million of cash paid on closing, $10.2 million of deferred payments, and $0.6 million of capitalized transaction costs. If certain income targets are satisfied, we may be required to make additional payments, which would be recorded as compensation expense, to the seller. The preliminary allocation of the purchase price is as follows:  less than $0.1 million to net assets, approximately $2.4 million to customer contracts, amortizable on a straight-line basis over two years, and approximately $11.4 million to goodwill. The purchase price in excess of the tax basis of the assets is expected to be deductible for tax purposes. This acquisition further expands our case management service offerings.

The acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying condensed consolidated financial statements from the date of acquisition. The operating results of Epiq Advisory Services are included within our case management segment.

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. 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. nMatrix is included within our case management segment. 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. In conjunction with the acquisition, we entered into an agreement with the selling shareholder to register the shares of common stock issued as a part of the acquisition consideration. Within this agreement, we guaranteed the common stock price of $20.35 per share, valued as the average closing price of our common stock for the 40 consecutive trading days ending on the date four trading days prior to the closing date. This guarantee terminates as of the close of business on the date that is after any 15 trading days on which the selling shareholder may lawfully sell shares under a registration statement and the last sale price for our common stock has been equal to or greater than the $20.35. Based on our December 31, 2006 closing price of $16.97 per share, as of December 31, 2006 the guarantee amount would be approximately $4.2 million. A liability will not be recorded for this guarantee until the contingency is resolved. If a payment is made under this guarantee, we will reduce the equity proceeds recorded as a part of the acquisition transaction. Based on our valuation, the purchase price has been allocated as follows (in thousands):

F-26

Accounts receivable	$	12,735
Other current assets	2,926
Property and software	7,236
Trade names	569
Customer relationships	24,614
Non-compete agreements	6,676
Current liabilities	(6,199		)
Deferred tax liability	(16,333		)
Goodwill	94,364
Total purchase price	$	126,588

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 $94.4 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, 2006, we have not submitted any claims related to this escrow. The escrow 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.

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. 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 is included within our document management segment. Based on our valuation, the purchase price has been allocated as follows (in thousands):

Tangible assets	$	438
Trade name	271
Customer backlog	323
Non-compete agreements	2,680
Current liabilities	(271		)
Deferred taxes, net	(1,448		)
Goodwill	7,300
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 $7.3 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-27

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”). This acquisition allowed for expansion into class action and mass tort case and document management 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.

Pro Forma Information

Unaudited pro forma operations, assuming each purchase acquisition was made at the beginning of the year preceding the acquisition such that the pro-forma results of operations for the acquired company were included for the full year in both that preceding period and in the subsequent year, are shown below (in thousands, except per share data):

	For the Years Ended December 31,
	2006		2005			2004
Total revenues	$	225,382	$	138,635		$	119,875
Income (loss) from continuing operations	$	35,033	$	(3,498	)	$	(12,424	)
Discontinued operations	—		—			667
Net income (loss)	$	35,033	$	(3,498	)	$	(11,757	)
Net income (loss) per share:
Net income (loss) per share—Basic
Income (loss) from continuing operations	$	1.81	$	(0.18	)	$	(0.70	)
Income from discontinued operations	—		—			0.04
Net income (loss) per share—Basic	$	1.81	$	(0.18	)	$	(0.66	)
Income (loss) per share—Diluted
Income (loss) from continuing operations	$	1.57	$	(0.18	)	$	(0.70	)
Income (loss) from discontinued operations	—		—			0.04
Net income (loss) per share—Diluted	$	1.57	$	(0.18	)	$	(0.66	)

F-28

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.

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.

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. During the year ended December 31, 2004, we recognized $0.7 million of revenue from discontinued operations, and we realized pre-tax income from discontinued operations, including a gain on the sale of our discontinued operation, of approximately $1.1 million.

NOTE 15: SEGMENT REPORTING

We are organized into operating segments based on the nature of services provided. 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.

Performance is assessed for our case management and document management operating segments. 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 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.

F-29

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

	Year Ended December 31, 2006
	Case Management			Document Management			Unallocated				Consolidated
Revenue:
Operating revenue before reimbursed direct costs		$	164,250		$	35,472		$	—			$	199,722
Operating revenue from reimbursed direct costs		3,050			21,398			—				24,448
Total revenue		167,300			56,870			—				224,170
Costs and expenses:
Direct costs, general and administrative costs and depreciation and software and leasehold amortization		54,880			48,108			38,045				141,033
Amortization of identifiable intangible assets		9,657			1,972			—				11,629
Acquisition related		—			—			283				283
Total operating expenses		64,537			50,080			38,328				152,945
Operating income		$	102,763		$	6,790		$	(38,328	)		71,225
Net expenses related to financing												(13,260		)
Income from continuing operations before income taxes												57,965
Provision for income tax expense												22,834
Net income from continuing operations												$	35,131
Total assets		$	265,687		$	57,516		$	59,017			$	382,220
Provisions for depreciation and amortization		$	16,873		$	2,336		$	2,533			$	21,742
Capital expenditures, including capital leases		$	9,586		$	203		$	1,363			$	11,152

	Year Ended December 31, 2005
	Case Management			Document Management			Unallocated				Consolidated
Revenue:
Operating revenue before reimbursed direct costs		$	54,813		$	27,874		$	—			$	82,687
Operating revenue from reimbursed direct costs		3,138			20,505			—				23,643
Total revenue		57,951			48,379			—				106,330
Costs and expenses:
Direct costs, general and administrative costs and depreciation and software and leasehold 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		$	20,344		$	10,074		$	(29,973	)		445
Net expenses related to financing												(6,687		)
Loss from continuing operations before income taxes												(6,242		)
Provision for income tax benefit												(2,400		)
Net loss from continuing operations												$	(3,842	)
Total assets		$	260,831		$	59,581		$	98,059			$	418,471
Provisions for depreciation and amortization		$	9,681		$	2,155		$	2,203			$	14,039
Capital expenditures		$	4,961		$	38		$	1,825			$	6,824

F-30

	Year Ended December 31, 2004
	Case Management			Document Management			Unallocated				Consolidated
Revenue:
Operating revenue before reimbursed direct costs		$	41,474		$	36,549		$	—			$	78,023
Operating revenue from reimbursed direct costs		2,465			17,880			—				20,345
Total revenue		43,939			54,429			—				98,368
Costs and expenses:
Direct costs, general and administrative costs and depreciation and software and leasehold 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 loss		$	9,589		$	11,301		$	(25,283	)		(4,393		)
Net expenses related to financing												(7,210		)
Loss from continuing operations before income taxes												(11,603		)
Provision for income tax benefit												(4,313		)
Net loss from continuing operations												$	(7,290	)
Provisions for depreciation and amortization		$	9,505		$	2,998		$	1,791			$	14,294
Capital expenditures, including capital leases		$	5,326		$	36		$	4,465			$	9,827

NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION

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

	Year Ended December 31,
	2006			2005		2004
Cash paid (received) for:
Interest	$	10,708		$	3,376	$	3,877
Income taxes paid (refunded), net	(2,328		)	8,499		(207		)
Non-cash investing and financing transactions:
Capitalized lease obligations incurred	158			—		2,733
Issuance of common shares in purchase transactions	—			24,233		—
Obligation incurred in purchase transactions	10,173			463		—

*     *     *

F-31

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
For the year ended December 31, 2006		$	3,481		$	458		$	—			$	(2,255	)		$	1,684
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

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

				Additions
Description	Balance at beginning of year			Charged to costs and expenses			Charged to other accounts			Deductions from reserves			Balance at end of year
Deferred tax valuation allowance
For the year ended December 31, 2006		$	—		$	228		$	—		$	—		$	228
For the year ended December 31, 2005		$	—		$	—		$	—		$	—		$	—
For the year ended December 31, 2004		$	—		$	—		$	—		$	—		$	—

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. Previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 8, 2006.
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. Previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 8, 2006.
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, as amended. Incorporated by reference and previously filed as an appendix to the Definitive Proxy Statement filed with the Securities and Exchange Commission on April 28, 2006.
10.3	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.
10.4	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.
10.5	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.
10.6	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.
10.7	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.
10.8	Form of Nonqualified Stock Option Agreement under 2004 Equity Incentive Plan. Previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 8, 2006.
10.9	Escrow Agreement among Epiq Systems, Inc., Ajuta International Pty. Ltd., as trustee of Hypatia Trust, and Wells Fargo Bank, N.A. dated as of November 15, 2005. Incorporated by reference and previously filed as an exhibit to the Registration Statement No. 333-133296 on Form S-3/A filed with the Securities and Exchange Commission on June 14, 2006.
10.10	Employment arrangement between Epiq Systems, Inc. and Lorenzo Mendizabal dated as of May 20, 2005, as amended October 19 , 2005.*
10.11	Third Amendment Agreement dated as of June 26, 2006, amending the Amended and Restated Credit and Security Agreement dated as of November 15, 2005, among Epiq Systems, Inc., the Lenders named therein, and KeyBank, National Association, as 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 June 27, 2006.
10.12	Employment Offer Letter to William Carter dated September 18, 2006. 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 October 6, 2006.
10.13	Letter Agreement dated February 7, 2006, between Epiq Systems, Inc. and Bank of America, N.A. (redacted—request for confidential treatment pending with the Commission).*
10.14	Fourth Amendment Agreement dated as of September 29, 2006, amending the Amended and Restated Credit and Security Agreement dated as of November 15, 2005, among Epiq Systems, Inc., the Lenders named therein, and KeyBank, National Association, as 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 October 12, 2006.
10.15	Employment Offer Letter to Timothy Corcoran dated September 18, 2006. 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 October 20, 2006.
10.16	Fifth Amendment Agreement dated as of December 14, 2006, amending the Amended and Restated Credit and Security Agreement dated as of November 15, 2005, among Epiq Systems, Inc., the Lenders named therein, and KeyBank, National Association, as 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 December 19, 2006.
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 Accounting Firm.*
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-10.10

Exhibit 10.10

EXECUTION COPY

EMPLOYMENT AND NON-COMPETITION AGREEMENT

THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (this “Agreement”) is made as of May 20, 2005, between EPIQ Systems, Inc., a Missouri corporation (the “Company”), and Lorenzo Mendizabal (“Executive”).

WHEREAS, the Company and Executive desire to enter into this Agreement providing for Executive’s initial employment by the Company on the terms and conditions provided herein.

NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.Employment.  The Company shall employ Executive, and Executive hereby accepts employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on or about September 1, 2005 but not later than October 31, 2005, and continuing until terminated as provided in Section 4 hereof (the “Employment Period”).  Although Executive’s principal location for employment shall be his personal residence, Executive agrees that he will spend a significant portion of his business time in the Company’s New York City office and travel elsewhere as business conditions warrant and as reasonably requested.

2.Position and Duties.

(a)During the Employment Period, Executive shall render such administrative, sales, marketing and other executive and managerial services to the Company and its Subsidiaries as the Board of Directors of the Company (the “Board”) or the President of the Company may from time to time direct and shall be given the title of Senior Vice President.

(b)Notwithstanding the foregoing Section 2(a), until such time as Executive and the Company mutually agree that Executive is no longer restricted under the Existing Noncompete Agreement from engaging, in the United States of America, in either (x) bankruptcy claims administration services or (y) class actions claims administration services, Executive shall not render services for the Company or any of its Subsidiaries that either the Company or the Executive believes would violate the Existing Noncompete Agreement (such portion of the Employment Period is referred to herein as “Phase I”).  Following the termination of the non-compete period in the Existing Non-Compete Agreement, Executive shall also render services for Bankruptcy Services, LLC and Poorman Douglas, Inc. and other operations of the Company and its Subsidiaries (such portion of the Employment Period is referred to herein as “Phase II”).  For purposes of this Agreement, the “Existing Noncompete Agreement” means that certain Trade Secrets, Confidential Information and Non-Competition Agreement with Wells Fargo & Company and The Trumbull Group, L.L.C., dated as of February 1, 2005.

(c)Subject to the foregoing, Executive’s primary reporting relationship during the Employment Period shall be to the Company’s President, and Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and

its Subsidiaries.  Executive shall perform his duties, responsibilities and functions to the Company and its Subsidiaries hereunder to the best of his abilities in a diligent, trustworthy, professional and efficient manner and shall comply with the Company’s and its Subsidiaries’ policies and procedures in all material respects.

(d)For purposes of this Agreement, “Subsidiaries” shall mean any corporation or other entity of which the securities or other ownership interests having the voting power to elect a majority of the board of directors or other governing body are, at the time of determination, owned by the Company, directly or through one of more Subsidiaries.

3.Compensation and Benefits.

(a)During Phase I of the Employment Period, Executive’s base salary shall be not less than $250,000 per annum, and during Phase II of the Employment Period Executive’s base salary shall be not less than $375,000 per annum (as in effect from time to time, the “Minimum Salary Level” and, as adjusted from time to time, the “Base Salary”), which salary shall be payable by the Company in regular installments in accordance with the Company’s general payroll practices (as such practices may be in effect from time to time).  During the Employment Period, Executive shall be eligible to receive an annual bonus based on individual and Company performance with “base”, “goal” and “target” bonus amounts described below.  During the first calendar year of Phase I of the Employment Period, the “base”, “goal” and “target’ bonus amounts shall be $150,000, $200,000 and $250,000, respectively, and during Phase II of the Employment Period, the “base”, “goal” and “target’ bonus amounts shall be $100,000, $200,000 and $250,000, respectively.  For the first calendar year of the Employment Period, Executive shall be guaranteed to receive a bonus that is no less than $150,000, subject to Section 4.

(b)During Phase II of the Employment Period, the Company shall provide Executive with an apartment in Manhattan, New York that is similar to apartments provided by the Company to other executives and that permit Executive to have his family with him.

(c)During the Employment Period Executive shall be entitled to participate in all of the employee benefit programs of the Company for which senior executive employees of the Company are generally eligible, as such programs may be modified, replaced or eliminated from time to time.  Any payment which Executive is required to make pursuant to such employee benefit programs may be adjusted or implemented from time to time consistent with changes affecting the participants generally in such programs.

(d)During the Employment Period, Executive shall be entitled to five (5) weeks of paid vacation per calendar year, which amount shall be pro rated for any partial calendar year of employment during the Employment Period; provided, however, that Executive shall schedule such vacation time in a manner consistent with the business needs of the Company and its Subsidiaries.  Executive’s unused vacation time shall not be carried forward to any subsequent calendar year, and no compensation shall be payable in lieu thereof.

(e)During the Employment Period, the Company shall reimburse Executive for all reasonable and appropriate expenses actually incurred by Executive in the course of performing Executive’s duties and responsibilities under this Agreement, consistent with the

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Company’s policies governing senior executive employees of the Company in effect from time to time with respect to such expenses, upon presentation of expense statements, vouchers or other supporting information as may be required under the Company’s policies in effect from time to time.

(f)All amounts payable to Executive as compensation hereunder (including Section 4 hereof) shall be subject to all required and customary withholding by the Company.

(g)Upon the commencement of the Employment Period, Executive shall be granted a nonqualified stock option to purchase One Hundred Thousand (100,000) shares of the Company’s common stock pursuant to the Company’s 2004 Equity Incentive Plan.

(h)Executive shall be eligible to participate in the Company’s Executive Automobile Allowance Plan in accordance with the same terms and conditions as the senior executive employees of the Company.

4.Term.

(a)The Employment Period shall end on the three year anniversary of the date on which the Employment Period commenced (the “Termination Date”); provided that the Employment Period shall be automatically extended on the same terms and conditions set forth herein, as modified from time to time by the parties hereto, until terminated by the Company or Executive upon at least six (6) months prior written notice to the other party (notwithstanding anything to the contrary in this Agreement in no event shall such a notice of termination by the Company be deemed to be a termination without Cause); provided further that, subject to the foregoing, (i) the Employment Period shall terminate on the 90th day after Executive gives the Company notice that he is terminating the Employment Period for Good Reason, (ii) the Employment Period shall terminate immediately upon Executive’s death or Disability, and (iii) the Employment Period may be terminated by the Company at any time for Cause (as defined below).  Except as otherwise provided herein, any termination of the Employment Period by the Company shall be effective as specified in a written notice from the Company to Executive.

(b)If the Employment Period is terminated by the Company without Cause or by Executive for Good Reason, Executive shall be entitled to continue to receive (A) his Base Salary then in effect, payable in regular installments, from the date of termination through the later of (x) the Termination Date and (y) the date that is eighteen (18) months after the date on which the Employment Period is terminated (the “Severance Period”) and (B) Executive shall be entitled to receive, in accordance with the Company’s then standard payroll practices, a pro rated portion of any bonus Executive was eligible to receive had Executive’s employment not been terminated.  Notwithstanding the foregoing, Executive shall not be entitled to receive any amounts pursuant to this Section 4(b) unless (x) Executive has executed and delivered to the Company a customary release in form and substance satisfactory to the Company providing for the release of all claims (if any) Executive may have against the Company or any of its Subsidiaries and affiliates, employees or directors (other than claims for severance due hereunder) (the “Release”), and (y) the Release has become fully effective in all respects, and Executive has not breached the provisions of the Release or breached the provisions of Sections 5, 6 or 7 hereof.  In the case of Executive’s termination without Cause, Executive shall not be

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entitled to any other salary, compensation or benefits after termination of the Employment Period, except as specifically provided for in this Section 4(b) or as otherwise required by applicable law.

(c)If the Employment Period is terminated at any time for any reason other than as described in Section 4(a) or 4(b) above, Executive shall only be entitled to receive his Base Salary then in effect through the date of termination and shall not be entitled to any other salary, compensation or benefits from the Company or its Subsidiaries thereafter, except as required by applicable law.

(d)If prior to the first anniversary of the date on which Phase II begins, the Employment Period is terminated by the Company for Cause or by Executive without Good Reason, then Executive shall within five (5) business days after the date on which the Employment Period is so terminated pay to the Company, by cashier’s check or wire transfer of immediately available funds to an account designated by the Company, an amount equal to the aggregate amount of all bonuses previously paid by the Company to Executive during the Employment Period.

(e)Except as otherwise expressly provided herein, all of Executive’s rights to salary, bonuses, employee benefits and other compensation hereunder which would have accrued or become payable after the termination or expiration of the Employment Period shall cease upon such termination or expiration, other than those expressly required under applicable law.  The Company may offset any amounts Executive owes it or its Subsidiaries against any amounts it or its Subsidiaries owes Executive hereunder.

(f)For purposes of this Agreement, “Cause” shall mean with respect to Executive one or more of the following:  (i) the conviction, plea of guilty or plea of nolo contendre with respect to (x) a felony of any nature, or (y) any crime involving fraud with respect to the Company or any of its Subsidiaries or any of their customers, suppliers or other business relations, (ii) repeated conduct causing the Company or any of its Subsidiaries substantial public disgrace or disrepute or substantial economic harm, (iii) the continued failure, as determined in the good faith reasonable judgment of the Board, to perform his duties under this Agreement as reasonably directed by the Board or the President of the Company, which failure is not cured, if curable, within thirty (30) business days after delivery of written notice thereof to Executive, (iv) any act or omission aiding or abetting a competitor, supplier or customer of the Company or any of its Subsidiaries to the material disadvantage or detriment of the Company or any of its Subsidiaries, (v) gross negligence or willful misconduct or the commission of any other act or omission involving dishonesty, or disloyalty or fraud with respect to the Company or any of its Subsidiaries or (vi) any material breach of this Agreement which, if curable, is not cured within ten (10) business days after delivery of written notice thereof to Executive.

(g)For purposes of this Agreement, “Good Reason” shall mean if Executive resigns from employment with the Company prior to the end of the Employment Period as a result of one or more of the following reasons:  (i) the Company reduces the amount of the Base Salary then in effect below the Minimum Salary Level then in effect, (ii) the Company fails to pay the Base Salary then in effect or other benefits required to be provided by the Company to

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Executive hereunder, (iii) the Company materially reduces the overall compensation or benefits required to be provided by the Company to Executive hereunder, or (iv) any change of Executive’s principal office location to a location more distant than thirty (30) miles from Executive’s personal residence (it being understood that, as provided in Section 1, Executive agrees that he will be required to spend a significant portion of his business time in the Company’s New York City office and travel elsewhere as business conditions warrant and as reasonably requested); provided that written notice of Executive’s resignation for Good Reason must be delivered to the Company within thirty (30) days after the occurrence of any such event in order for Executive’s resignation with Good Reason to be effective hereunder; provided further that, in order for Executive’s resignation for Good Reason to be effective hereunder, the Company must not have cured such event (if curable) within twenty (20) days after receiving written notice thereof.

(h)For the purposes of this Agreement, “Disability” shall mean the Executive’s inability to perform the essential duties, responsibilities and functions of his position with the Company and its Subsidiaries as a result of any mental or physical impairment or incapacity even with reasonable accommodations of such disability or incapacity provided by the Company and its Subsidiaries or if providing such accommodations would be unreasonable, all as determined by the Board based on competent medical evidence in its reasonable good faith judgment.  Executive shall cooperate in all respects with the Company if a question arises as to whether he has become disabled.

5.Confidential Information.

(a)Executive acknowledges that the information, observations and data (including trade secrets) obtained by him while employed by the Company and its Subsidiaries concerning the business or affairs of the Company or any of its Subsidiaries (“Confidential Information”) are the property of the Company and/or one or more of its Subsidiaries.  Therefore, Executive agrees that he shall not disclose to any person or entity or use for his own purposes any Confidential Information or any confidential or proprietary information of other persons or entities in the possession of the Company and its Subsidiaries (“Third Party Information”), without the prior written consent of the President of the Company or the Board, unless and to the extent that the Confidential Information or Third Party Information becomes generally known to and available for use by the public other than as a result of Executive’s acts or omissions.  Executive shall deliver to the Company at the termination or expiration of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer files, disks and tapes, printouts and software and other documents and data (and copies thereof) embodying or relating to Third Party Information, Confidential Information, Work Product (as defined below) or the business of the Company or any of its Subsidiaries which Executive may then possess or have under his control.

(b)Executive shall be prohibited from using or disclosing any confidential information or trade secrets that Executive may have learned through any prior employment.  If at any time during his employment with the Company or any of its Subsidiaries, Executive believes he is being asked to engage in work that will, or will be likely to, jeopardize any confidentiality or other obligations Executive may have to former employers, Executive shall immediately advise the President of the Company so that Executive’s duties can be modified

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appropriately.  Executive represents and warrants to the Company that Executive took nothing with him which belonged to any former employer when Executive left his prior position and that Executive has nothing that contains any information which belongs to any former employer.  If at any time Executive discovers this is incorrect, Executive shall promptly return any such materials to Executive’s former employer.  The Company does not want any such materials, and Executive shall not be permitted to use or refer to any such materials in the performance of Executive’s duties hereunder.

6.Intellectual Property, Inventions and Patents.  Executive acknowledges that all discoveries, concepts, ideas, inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, patent applications, copyrightable work and mask work (whether or not including any confidential information) and all registrations or applications related thereto, all other proprietary information and all similar or related information (whether or not patentable) which relate to the Company’s or any of its Subsidiaries’ actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive (whether alone or jointly with others) while employed by the Company or its predecessor and its Subsidiaries, whether before or after the date of this Agreement (“Work Product”), belong to the Company or such Subsidiary.  Executive shall promptly disclose such Work Product to the President of the Company and, at the Company’s expense, perform all actions reasonably requested by the President of the Company or the Board (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments).  Executive acknowledges that all Work Product shall be deemed to constitute “works made for hire” under the U.S. Copyright Act of 1976, as amended.

7.Non-Compete and Non-Solicitation.

(a)Executive acknowledges that during the course of his employment with the Company and its Subsidiaries he shall become familiar with the Company’s trade secrets and with other Confidential Information concerning the Company and its Subsidiaries and that Executive’s services shall be of special, unique and extraordinary value to the Company and its Subsidiaries.  Therefore, in consideration of the Company’s agreement to employ Executive and the compensation to be paid to Executive hereunder Executive agrees that for eighteen (18) months after the date of termination of the Employment Period (the “Noncompete Period”), Executive shall not, directly or indirectly own any interest in, manage, control, participate in, consult with, render services for, be employed in an executive, managerial or administrative capacity by, or in any manner engage in any business competing with the businesses of the Company or any of its Subsidiaries, as such businesses exist or are in process during the Employment Period or on the date of the termination or expiration of the Employment Period, within any geographical area in which the Company or its Subsidiaries engage or plan to engage in such business.  Nothing herein shall prohibit Executive from being a passive owner of not more than 4.9% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation.

(b)For a period of twelve (12) months following the date of termination of the Employment Period, Executive shall not directly or indirectly through another person or entity (i) induce or attempt to induce any employee of the Company or any of its Subsidiaries to

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leave the employ of the Company or such Subsidiary, or in any way interfere with the relationship between the Company or any of its Subsidiaries and any employee thereof, (ii) hire any person who was an employee of the Company or any of its Subsidiaries at any time during the Employment Period or (iii) induce or attempt to induce any customer, referral source, supplier, licensee, licensor, franchisee or other business relation of the Company or any of its Subsidiaries to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any of its Subsidiaries (including, without limitation, making any negative or disparaging statements or communications regarding the Company or its Subsidiaries).

8.Enforcement.  If, at the time of enforcement of Sections 5, 6 or 7 of this Agreement, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law.  Because Executive’s services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that the Company would suffer irreparable harm from a breach of Sections 5, 6 or 7 by Executive and that money damages would not be an adequate remedy for any such breach of this Agreement.  Therefore, in the event of a breach or threatened breach of this Agreement, the Company or its successors or assigns, in addition to other rights and remedies existing in their favor, shall be entitled to specific performance and/or injunctive or other equitable relief from a court of competent jurisdiction in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security).  In addition, in the event of a breach or violation by Executive of paragraph 7, the Noncompete Period shall be automatically extended by the amount of time between the initial occurrence of the breach or violation and when such breach or violation has been duly cured.  Executive acknowledges (i) that the restrictions contained in Section 7 are reasonable, (ii) that Executive has reviewed the provisions of this Agreement with his legal counsel and (iii) that Executive is entering into this Agreement upon Executive’s initial employment of the Executive with the Company and its Subsidiaries.

9.Executive’s Representations.  Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity, except for the Existing Noncompete Agreement, and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms.  Executive hereby acknowledges and represents that he has consulted with independent legal counsel regarding his rights and obligations under this Agreement and that he fully understands the terms and conditions contained herein.

10.Survival.  Sections 4 through 23, inclusive, shall survive and continue in full force in accordance with their terms notwithstanding the expiration or termination of the Employment Period.

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11.Notices.  Any notice or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given (i) when personally delivered or sent by telecopy (with hard copy to follow), (ii) one business day after being sent by reputable overnight express courier (charges prepaid), or (iii) five (5) days following mailing by certified or registered mail, postage prepaid and return receipt requested.  Unless another address is specified in writing, notices and communications to Executive and the Company shall be sent to the addresses indicated below:

Notices to Executive:

Lorenzo Mendizabal

4 Kenwood Circle

Bloomfield, CT 06002

Notices to the Company:

EPIQ Systems, Inc.

Attention:  President

501 Kansas Avenue

Kansas City, KS 66105

12.Severability.  Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

13.Complete Agreement.  This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

14.No Strict Construction.  The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.

15.Counterparts.  This Agreement may be executed in separate counterparts (including by means of telecopier signature pages), each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

16.Successors and Assigns.  This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, successors and assigns, except that Executive may not assign his rights or delegate his duties or obligations hereunder without the prior written consent of the Company.

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17.Choice of Law.  All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York.

18.Amendment and Waiver.  The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement (including, without limitation, the Company’s right to terminate the Employment Period for Cause) shall affect the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any provision of this Agreement.

19.Insurance.  The Company may, at its discretion, apply for and procure in its own name and for its own benefit life and/or disability insurance on Executive in any amount or amounts considered advisable.  Executive agrees to cooperate in any medical or other examination, supply any information and execute and deliver any applications or other instruments in writing as may be reasonably necessary to obtain and constitute such insurance.  Executive hereby represents that he has no reason to believe that his life is not insurable at rates now prevailing for healthy men of his age.

20.Indemnification and Reimbursement of Payments on Behalf of Executive.

(a)The Company and its Subsidiaries shall be entitled to deduct or withhold from any amounts owing from the Company or any of its Subsidiaries to Executive any federal, state, local or foreign withholding taxes, excise tax, or employment taxes (“Taxes”) imposed with respect to Executive’s compensation or other payments from the Company or any of its Subsidiaries or Executive’s ownership interest in the Company (including, without limitation, wages, bonuses, dividends, the receipt or exercise of equity options and/or the receipt or vesting of restricted equity).  In the event the Company or any of its Subsidiaries does not make such deductions or withholdings, Executive shall indemnify the Company and its Subsidiaries for any amounts paid by the Company with respect to any such Taxes.

(b)The Company shall indemnify Executive in respect of any damages actually paid to his former employer or withheld by the former employer from Executive (including legal and other related costs), penalties and fines actually paid (including amounts paid in settlement) by Executive to his former employer arising out of an action, lawsuit, proceeding or other claim including a defense by the former employer alleging a breach of the Existing Noncompete as a result of Executive’s employment by the Company under this Agreement; provided that Executive gives prompt written notice to the Company after receiving notice of any action, lawsuit, proceeding or other claim against him for which he seeks indemnification hereunder.  The Company shall be entitled to assume the defense of such action, lawsuit, proceeding or other claim giving rise to the Executive’s claim for indemnification at the Company’s expense.  The Executive shall not be entitled to settle any such action, lawsuit,

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proceeding or other claim without the prior written consent of the Company, not to be unreasonably withheld.

21.Corporate Opportunity.  During the Employment Period, Executive shall submit to the President of the Company all business, commercial and investment opportunities or offers presented to Executive or of which Executive becomes aware which relate to the business of the Company and its Subsidiaries at any time during the Employment Period (“Corporate Opportunities”).  Unless approved by the President of the Company, Executive shall not accept or pursue, directly or indirectly, any Corporate Opportunities on Executive’s own behalf.

22.Dispute Resolution.

(a)Except as otherwise expressly provided in this Agreement, the parties agree that the arbitration procedure set forth below shall be the sole and exclusive method for resolving and remedying any and all disputes, controversies or claims that arise out of or in connection with, or relate in any manner to, the rights and liabilities of the parties hereunder or any provision of this Agreement or the interpretation, enforceability, performance, breach, termination or validity hereof, including this Section 22 relating to the resolution of disputes (the “Disputes”) and questions concerning arbitrability and including any claim under any state or federal statute or common law theory governing or relating to the employment relationship (except claims for workers compensation or unemployment benefits); provided that nothing in this Section 22 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below).  The parties hereby acknowledge and agree that, except as otherwise provided in this Section 22 or in the applicable rules for arbitration of business disputes (the “Rules”) promulgated by the American Arbitration Association (the “Arbitration Service”) as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to, the United States Arbitration Act, 9 U.S.C. §1 et. seq.

(b)Except as provided elsewhere herein, in the event that any party asserts that there exists a Dispute, such party shall deliver a written notice to each other party involved therein specifying the nature of the asserted Dispute and requesting a meeting to attempt to resolve the same.  If such resolution is not reached within ten (10) business days after the delivery of such notice, the party delivering such notice of Dispute (the “Disputing Person”) may thereafter commence arbitration hereunder by delivering to each other party involved therein a notice of arbitration (a “Notice of Arbitration”).  Such Notice of Arbitration shall specify the nature of any Dispute and any other matters required by the Rules as in effect from time to time to be included therein.  The Arbitrator shall permit and facilitate such discovery as the parties shall reasonably request but all such discovery must be sufficiently limited in scope so as to not jeopardize the timing of the Final Determination (as defined in subparagraph (d) of this Section 22.  The Company and Executive shall in good faith attempt to mutually agree upon one arbitrator to resolve any Dispute pursuant to the procedures set forth in this Section 22 and the Rules.  If the Company and Executive cannot mutually agree to an arbitrator within fifteen (15) days from receipt of the Notice of Arbitration, the arbitrator shall be appointed by the Arbitration Service within fifteen (15) days of being notified in writing of the Arbitration Service’s need to make such appointment or as soon thereafter as may be practicable.

(c)Except as otherwise provided by applicable law, the Company will pay all costs of the Arbitration Service and the arbitrator, less those amounts Executive would otherwise be required to pay if the claims were litigated in a court of law; provided that at the conclusion of the arbitration, the arbitrator shall award costs and expenses (including the costs of the arbitration previously advanced and the fees and expenses of attorneys, accountants and other experts) and reasonable interest to the prevailing party.

(d)The arbitration shall be conducted in New York City, New York under the Rules as in effect from time to time.  The parties shall use their reasonable best efforts to cause the arbitrator to conduct the arbitration so that a final result, determination, finding, judgment and/or award (the “Final Determination”) is made or rendered as soon as practicable, but in no event later than ninety (90) business days after the delivery of the Notice of Arbitration nor later than thirty (30) days following completion of the arbitration.  Notwithstanding any New York law to the contrary, the Final Determination shall be final and binding on all parties and there shall be no appeal from or reexamination of the Final Determination, except for fraud, perjury, evident partiality or misconduct by an arbitrator prejudicing the rights of any party and to correct manifest clerical errors.

(e)Notwithstanding anything to the contrary, nothing in this Section 22 shall be construed to impair the right of any person or entity to seek injunctive or other equitable relief in any court of competent jurisdiction.

23.Executive’s Cooperation.  During the Employment Period and thereafter, Executive shall cooperate with the Company and its Subsidiaries in any internal investigation, any administrative, regulatory or judicial investigation or proceeding or any dispute with a third party as reasonably requested by the Company (including, without limitation, Executive being available to the Company upon reasonable notice for interviews and factual investigations, appearing at the Company’s request to give testimony without requiring service of a subpoena or other legal process, volunteering to the Company all pertinent information and turning over to the Company all relevant documents which are or may come into Executive’s possession, all at times and on schedules that are reasonably consistent with Executive’s other activities and commitments).  In the event the Company requires Executive’s cooperation in accordance with this Section 23, the Company shall reimburse Executive solely for reasonable travel expenses (including lodging and meals) upon submission of receipts unless such request requires Executive to be available for a period longer than three (3) Days.  In such an event, Executive will be paid a per diem equal to the last adjusted Base Salary divided by 365.

****

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IN WITNESS WHEREOF, the parties hereto have executed this Employment and Non-Competition Agreement as of the date first written above.

EPIQ SYSTEMS, INC.
By:	/s/ Christopher E. Olofson
Name: Christopher E. Olofson
Its: President and Chief Operating Officer
/s/  Lorenzo Mendizabal
Lorenzo Mendizabal

	EPIQ Systems, Inc.
	501 Kansas Ave.
	Kansas City, KS 66105-1309
	Tel. 913.621.9500
	Fax. 913.621.7281
	colofson@epiqsystems.com
	www.epiqsystems.com
CHRISTOPHER E. OLOFSON
PRESIDENT
CHIEF OPERATING OFFICER

October 19, 2005

Mr. Lorenzo Mendizabal

4 Kenwood Circle

Bloomfield, CT 06002

Dear Lorenzo,

In connection with EPIQ Systems’ recent agreement with Wells Fargo, this letter confirms the arrangements that you and I have made to amend your employment agreement with EPIQ Systems dated May 20, 2005.

1.Your starting date has been rescheduled to January 2, 2006. Your initial annual base salary will be $375,000, and your performance bonus opportunity for the period January 2, 2006 through December 31, 2006 will have “base”, “goal”, and “target” amounts of $100,000, $200,000 and $250,000, respectively.

2.On your starting date of January 2, 2006, EPIQ Systems will pay you a lump sum sign-on bonus in the gross amount of $200,684.93, subject to normal deductions.

3.In light of your October 2005 agreement with Wells Fargo, which provides (among other things) that the employment restrictions imposed on you by the “Existing Non-Competition Agreement” expire on December 31, 2005, Section 2(b) and 20(b) of your employment agreement with EPIQ Systems are eliminated entirely.

4.Phase II of the Employment Period will begin on January 2, 2006, and there will be no Phase I.

5.If you (i) remain employed by EPIQ Systems as of September 1, 2006 or (ii) are terminated without cause or resign for good reason before that time, then EPIQ Systems will pay you a bonus in the gross amount of $207,000, subject to normal deductions, to be payable not later than September 10, 2006. This amount will be separate from the performance bonus opportunity discussed above.

If you are in agreement with this amendment, would you please sign and date below.

Sincerely,
/s/ Christopher E. Olofson
Christopher E. Olofson
Accepted:
/s/ Lorenzo Mendizabal	10/20/05
Lorenzo Mendizabal	Date

EX-10.13

Exhibit 10.13

Confidential Treatment Requested

Redacted sections marked by brackets [*   *] have been omitted pursuant to
a request for confidential treatment and have been filed separately with the
Commission.

February 7, 2006

Stephen C. Herndon

Senior Vice President

Global Government Group

600 Peachtree Street NE

Atlanta, GA 30308

Dear Stephen:

This letter details the agreement between EPIQ Systems and Bank of America to extend our marketing arrangement for Chapter 7 bankruptcy products and services, and unless otherwise indicated, the terms of this letter will become effective as of the date hereof.

1.Modification of Previous Agreements. This letter modifies and amends the Agreement for Computerized Trustee Case Management System dated November 22, 1993 (the “1993 Agreement”) and all other agreements between the parties in writing, with respect to the subject matter hereof, including but not limited to this letter and those letters dated October 2, 2003, December 5, 2003, and March 29, 2004, (collectively, with the 1993 Agreement, the “Letter Agreement”). If a provision of this letter conflicts or is inconsistent with any provision of any other component of the Letter Agreement, then the terms of this letter will be controlling. Except as modified by this letter, the terms of the 1993 Agreement and the Letter Agreements will continue in full force and effect and will constitute our entire agreement and supersede any other prior agreements (oral or written).  Terms with initial capital letters shall have the meanings as defined in this Agreement. The terms “party” and “parties” shall refer to EPIQ Systems and Bank of America.

2.Clients.

A.Bank of America reaffirms it will continue to accept new joint bankruptcy trustee clients into the EPIQ Systems & Bank of America marketing arrangement as described in Section 1 and agrees to make its products and services available to those bankruptcy trustee clients that execute the appropriate service agreements with EPIQ Systems and Bank of America, and such client shall be deemed to be a joint client (the “Joint Clients”); provided, however, that Bank of America, based on its reasonable business judgment, shall have the right to reject a business relationship with any such bankruptcy trustee client.

B.Each party will determine its own level of sales and marketing resources and its efforts with respect to marketing and servicing Joint Clients; provided, however, that each party will coordinate and cooperate with the other party in good faith with respect to Joint Client calls.

C.In client-facing contexts, both parties agree to refer to one another as a marketing ally and will not refer to one another as a vendor, customer, supplier or sub-contractor.

3.Non-Exclusive Relationship.

A.As of the effective date of this letter, the marketing arrangement between EPIQ Systems and Bank of America will continue on a non-exclusive basis for all products and services offered by either party. The marketing arrangement is not a vendor/supplier agreement, and neither party is a customer/vendor of the other.  Both parties may independently or jointly market their services to their respective bankruptcy trustee clients or other potential clients for the purpose of engaging in the Chapter 7 Trustee business.

B.EPIQ Systems and Bank of America will be entitled to engage other banks or software providers, respectively, to provide the same services to its clients as provided by the other party under the Letter Agreement.

C.[*Redacted pursuant to a request for confidential treatment and filed separately with the Commission.*]

4.Products and Services. EPIQ Systems and Bank of America agree to provide Joint Clients with products and services in accordance with the Letter Agreement and in compliance with the United States Trustee Chapter 7 Handbook and the United States Bankruptcy Code.  Each party will work in good faith to make its products and services competitive in the marketplace and to maintain the quality of its products and services on an on-going basis.

5.Fees.  Bank of America agrees to compensate EPIQ Systems for the deposit portfolio maintained at Bank of America and the Joint Client relationships according to the Fee Schedules attached hereto as Exhibit A and Exhibit B, as may be amended from time to time as permitted herein.  Modifications to the Fee Schedules may be requested by either party and require the prior written consent of both parties.  All fees will be paid only by Bank of America to EPIQ Systems directly.  No fee payable hereunder will be passed on or through to a Joint Client or any other third party.

6.Joint Clients.  Until this marketing arrangement between EPIQ Systems and Bank of America is terminated after following the procedure outlined in Section 9, the parties agree that each Joint Client has the right to remain a client of each of EPIQ Systems and Bank of America and to utilize each party’s respective products and services in accordance with the Letter Agreement.  Notwithstanding Section 3 above, Bank of America will not, and its Affiliates will not, directly or indirectly support with its products or services a Joint Client through any other arrangement with another third-party technology provider for a period of time which is eighteen (18) months following the completion of EPIQ Systems’ most recent financial investment in hardware or on-site training for the benefit of such Joint Client.

7.Industry Conventions.  Both parties shall remain in full compliance with U.S. Trustee and bankruptcy court regulations pertaining to customer relationships, products and services.  If regulatory changes alter the industry environment in a fashion that materially affects one or both parties, then the parties shall work in good faith to negotiate an appropriate modification, if any is warranted, to this marketing relationship.

8.Shared Costs.  If the parties mutually agree to cooperatively convene Joint Client entertainment, holiday dinners or other industry events, then the parties will share these costs equally and will promptly reimburse one another for actual out of pocket expenses (not to include charges for travel, lodging or meals incurred by their own personnel).  Neither party will be required to convene or pay for any such event, unless it so agrees in advance.

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9.Termination.

A.Termination.  The Letter Agreement will remain in effect unless terminated in accordance with the provisions of this Letter Agreement. Either party may initiate termination by providing written notice to the other party of such party’s intent to terminate the Letter Agreement, as amended (“Preliminary Termination Notice”); provided, however that neither party shall initiate termination prior to October 1, 2006.  This termination provision only relates to the Chapter 7 bankruptcy product of the parties, and will have no effect on any other products, business or development that Bank of America and EPIQ Systems may be promoting or conducting together.  The duration of the termination process will be three (3) years following receipt of the Preliminary Termination Notice (the “Disengagement Period”) and will be divided into the following three phases.

[*Redacted pursuant to a request for confidential treatment and filed separately with the Commission.*]

B.Dissemination of Information.  During the Disengagement Period, both parties will cooperate in the dissemination of information regarding their relationship and will cooperate with reasonable requests of the other party regarding public statements, communications with Joint Clients and regulatory bodies, meetings with interested parties, routine audit confirmations and due diligence inquiries and other appropriate matters.

C.Products, Services and Quality.  During the Disengagement Period, (i) both parties shall continue to offer all their respective products and services, in accordance with this Letter Agreement, and (ii) Joint Clients may continue using the combined products and services of both parties.  During the Intent to Terminate Period, the Transition Planning Period and the Wind-up Period, both parties will continue to accept and support new Joint Clients in accordance with the Letter Agreement and Section 9Aiii, above.

D.Applicability of all Terms and Conditions.  During the entirety of the Disengagement Period, all terms of the Letter Agreement, as amended, will remain in full force and effect

E.Fees.  During the Disengagement Period and any extension thereof, Bank of America will continue to pay directly to EPIQ Systems all fees, according to the Fee Schedule in effect at the time of receipt of a Conclusive Termination Notice by a party.

F.Termination for Cause.  Notwithstanding the provisions of this section 9, a party may initiate termination of the Letter Agreement upon Cause Notice (defined below) to the other party if, in the good faith determination of the terminating party, the other party:

i.breaches a material term or condition of the Letter Agreement; or

ii.terminates, liquidates or dissolves its business, disposes of a substantial portion of its assets or experiences a material adverse change, if such event renders it unable to perform its obligations hereunder.

G.“Cause Notice” hereunder shall be the following:  (I) the terminating party shall send notice (the “Initial Notice”) stating the basis for the breach as set forth in i or ii above, giving a 60 day right to cure.  (II) if the breach is not cured in 60 days, the terminating party shall then give notice (the “Second Notice”) of its intent to terminate in 60 days.  (III) 60 days following the Second Notice, the Letter Agreement may be terminated by the terminating party, immediately.

10.Intellectual Property Rights of EPIQ Systems.  EPIQ Systems will retain exclusive ownership of, and all right and title, interest in and to, all its Intellectual Property and Bank

3

of America will have no ownership of or right, title or interest in or to any of EPIQ Systems’ Intellectual Property. “Intellectual Property” will mean any and all tangible and intangible domestic and foreign intellectual property of every kind and nature and however designated (including, without limitation, patents, inventions, know-how, trade secrets, copyrights and copyrightable works, and trademarks), whether arising by operation of law, contract license, or otherwise and including, for the avoidance of doubt, software (including, without limitation, source code, object code, data, databases and documentation), design materials, data and object models.  Both parties confirm that the TCMS software, TCMS Web software, all updates, modifications and enhancements thereto, and all copies of the foregoing are proprietary to EPIQ Systems and title remains with EPIQ Systems.  All applicable rights to patents, copyrights, trademarks and trade secrets in the TCMS software and TCMS Web software, remain with EPIQ Systems.

11.Extraordinary Services.  If Bank of America and EPIQ Systems agree that EPIQ Systems will provide services outside the ordinary course of its business, to Bank of America or a Joint Client, a supplementary fee payable by Bank of America to EPIQ Systems will be negotiated in good faith by the parties [*Redacted pursuant to a request for confidential treatment and filed separately with the Commission *].

12.Severability.  In the event that any of the provisions or portion thereof of this letter are held by a court of competent jurisdiction to be unenforceable, invalid, or illegal, such provision shall be severed from this letter, and the remaining valid, enforceable, and legal provisions of this letter shall remain in full force. In lieu of such unenforceable, invalid, or illegal provision, there shall be added a clause or provision as similar in terms to such unenforceable, invalid, or illegal term or provision to make it enforceable, valid and legal.

13.Assignment.  Either party may assign its rights or obligations under the Letter Agreement without the consent of the other party upon change in control of that party’s assets or stock; provided that such assignee shall agree, in writing, prior to such assignment, to be bound by the terms and conditions hereof. Assignment for any other reason requires the written consent of the other party, which may be granted or withheld at that party’s sole discretion.

14.Dispute Resolution.

A.In the event of any dispute under or relating to this letter, the 1993 Agreement, and the Letter Agreements, including any claim based on or arising from an alleged tort, the parties agree that such dispute will first be submitted to mediation and then, should mediation fail, to binding and final arbitration, pursuant to the provisions of the Federal Arbitration Act, 9 U.S.C. Sec. 1 et seq. (“FAA”) under the Commercial Arbitration Rules of the American Arbitration Association. The parties agree that any such mediation or arbitration will be conducted in Chicago, Illinois. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy will not constitute a waiver of the right of any party to submit the controversy or claim to mediation and/or arbitration if the other party contests such action for judicial relief. This provision does not foreclose any action in aid of arbitration or for injunctive relief in any federal court sitting in Chicago, Illinois having jurisdiction thereof (which court also will have exclusive jurisdiction over any litigation instituted under this section). Any controversy concerning whether an issue can be arbitrated will be determined by the arbitrator(s). The mediator(s) and/or arbitrator(s) will give effect to statutes of limitation in determining any claim or controversy. The parties agree that the arbitrator(s) will have the broadest powers permitted under law to award such damages and/or injunctive relief. The parties agree that each will share equally in the estimated reasonable fees and costs of the mediation and/or arbitration procedure, subject to the power of the arbitrator(s) to apportion such fees and costs as he, she or they deem appropriate. The parties agree that the arbitrator(s) may, in his, her, or their discretion, award attorney fees to the prevailing party. The parties agree that submission of any such dispute to arbitration is a condition precedent for invoking the jurisdiction of any court over the subject matter of their dispute, except for suits for

4

injunctive relief and suits in aid of arbitration. Judgment on the award rendered by the arbitrator(s) may be entered in any federal court sitting in Illinois having jurisdiction thereof. The parties waive any claim that such court does not have personal jurisdiction over them or is an inconvenient forum. The prevailing party in connection with any dispute involving a court proceeding will be entitled to collect its costs, expenses, and reasonable attorney fees from the other party.

B.The mediation and arbitration and all proceedings, discovery and any mediation or arbitration award are confidential. Neither the parties nor the mediator(s) nor the arbitrator(s) will disclose any information obtained during the course of the mediation or arbitration to any person or entity who is not a party to the mediation or arbitration unless permitted by law. Attendance at the mediation or arbitration will be limited to the parties and those called as witnesses, if any. Witnesses will be sequestered, unless the parties agree otherwise.

C.The parties acknowledge that each has had the opportunity to consult with counsel of choice before signing this Agreement, and, to the extent permitted by law, each hereby knowingly and voluntarily, without coercion, WAIVES ALL RIGHTS TO TRIAL BY JURY of all disputes between them and instead agrees to resolve any such disputes by means of this alternate dispute resolution.  Notwithstanding the foregoing sentence, any such disputes brought in California state courts shall be determined by judicial reference in accordance with California Code of Civil Procedure Section 638.

D.This Section 14 will not be construed to prevent a party from instituting, and a party is authorized to institute, litigation solely and exclusively (i) to toll the expiration of any applicable limitations period; (ii) to preserve a superior position with respect to other creditors; (iii) to seek immediate injunctive relief with respect to an infringement or alleged infringement of such party’s intellectual property rights or confidentiality rights under this Agreement; or (iv) to enforce an arbitration award under this section. Subject to the foregoing, this section will provide the exclusive procedure for resolving disputes under this Agreement.

E.Each party will continue performing its obligations under this Agreement while any dispute submitted to arbitration or litigation under this section is being resolved until such obligations are terminated by the expiration or termination of this Agreement or by a final and binding arbitration award, order, or judgment to the contrary under this section.

15.Governing Law.  This letter agreement will be governed by, and construed and enforced in accordance with, the laws of the State of Illinois, without regard to conflicts of laws principles.

16.Third Party Beneficiary.  Nothing herein, with regard to any agreements, duties or obligations of the parties shall confer on any Joint Client, any rights or privileges as a third party beneficiary hereof.

17.Limitation of Liability.  Neither party shall be liable to the other for any special, indirect, incidental, consequential, punitive or exemplary damages, including, but not limited to, lost profits, even if such party alleged to be liable has knowledge of the possibility of such damages, provided, however, that the limitations set forth in this Section shall not apply to or in any way limit the indemnity obligations of a party under the Letter Agreement.

Sincerely,

/s/   Elizabeth M. Braham

Elizabeth M. Braham

5

Our signatures below will indicate our acceptance of the terms of this letter, including the Exhibits hereto.

EPIQ SYSTEMS, INC.		BANK OF AMERICA, N.A.
By:	/s/   Elizabeth M. Braham	By:		/s/   Stephen C. Herndon
Elizabeth M. Braham		Stephen C. Herndon
Its: Executive Vice President & CFO		Its:	Senior Vice President
			Treasury Management Sales Exec
			Global Treasury Management
			Global Government Group
Date: February 7, 2006		Date: February 7, 2006

6

EXHIBIT A

Fees For February 1, 2006 through September 30, 2006

[*Redacted pursuant to a request for confidential treatment and filed separately with the Commission.*]

7

EXHIBIT B

Fees Effective October 1, 2006 and thereafter

1.[*Redacted pursuant to a request for confidential treatment and filed separately with the Commission.*]

8

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,
	2006		2005			2004
Earnings (Loss)
income (loss) from continuing operations	$	35,131	$	(3,842	)	$	(7,290	)
tax expense (benefit) related to continuing operations	22,834		(2,400		)	(4,313		)
pre-tax earnings (loss)	57,965		(6,242		)	11,603		)
Plus
fixed charges	15,349		7,676			7,176
amortization of capitalized interest	—		—			—
distributed income - equity investees	—		—			—
share of pre-tax losses of equity investees	—		—			—
Less
capitalized interest	—		—			—
preference dividends of consolidated subs	—		—			—
minority interest in subs pre-tax income	—		—			—
Total Earnings (Loss)	73,314		1,434			(4,427		)
Fixed Charges
Interest expensed	12,023		5,662			4,223
Interest capitalized	—		—			—
amortized deferred loan charges	1,445		1,147			2,120
estimated interest expense in leases	1,881		867			833
preference dividends of consolidated subs	—		—			—
Total Fixed Charges	15,349		7,676			7,176
Ratio of earnings to fixed charges	4.8		0.2			n/a

For the year ended December 31, 2005, our earnings to fixed charges ratio was less than one to one coverage.  The amount of such deficiency was $6,242.

For the year ended December 31, 2004, we had a total loss.  Accordingly, our earnings to fixed charges ratio was less than one to one coverage.  The amount of such deficiency was $11,603.

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)	Rhode Island	Poorman Douglas Poorman Douglas Noticing
Novare, Inc.(2)	Illinois	Novare
Hilsoft, Inc.(2)	Pennsylvania	Hilsoft Notifications
Epiq Advisory Services, LLC(2)	New York	Epiq Advisory Services
nMatrix, Inc.(2)	Delaware	Epiq Electronic Discovery
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, 333-107111, and 333-119402 on Form S-8 of our reports dated March 6, 2007 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the change in accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”)relating to the financial statements and financial statement schedule of Epiq Systems, Inc. and subsidiaries 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. and subsidiaries for the year ended December 31, 2006.

/s/  DELOITTE & TOUCHE LLP

Kansas City, Missouri

March 6, 2007

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Tom W. Olofson, certify that:

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

2.      Based on my knowledge, this 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 report;

3.      Based on my knowledge, the financial statements, and other financial information included in this 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(s) 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 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 report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this 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(s) 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 9, 2007

/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 report on Form 10-K of Epiq Systems, Inc.;

2.      Based on my knowledge, this 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 report;

3.      Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.      The registrant’s other certifying officer(s) 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 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 report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this 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(s) 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 9, 2007

/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 9, 2007

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 9, 2007