UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2007

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
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|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 ý

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 ý

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 ý    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. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

|Large accelerated filer o |  | Accelerated filer ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

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, 2007) was approximately $431,000,000.

There
were 35,289,743 shares of common stock of the registrant outstanding as of February 19, 2008.

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 2008 Annual Meeting of Shareholders, which will be filed with the Commission within 120 days after the end of the registrant's fiscal year.



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EPIQ SYSTEMS, INC.        ANNUAL REPORT ON FORM 10-K        TABLE OF CONTENTS

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

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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.

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PART I

ITEM 1.    BUSINESS

General

We are a provider of integrated technology solutions for the legal profession. Our solutions streamline the administration of bankruptcy, litigation, financial
transactions and regulatory compliance matters. We offer innovative technology solutions for electronic discovery, document review, legal notification, claims administration and controlled
disbursement of funds. Our clients include law firms, corporate legal departments, bankruptcy trustees and other professional advisors who require innovative technology, responsive service and deep
subject-matter expertise.

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 business strategy, we have made several acquisitions and one disposition over the past five years. During 2006, we acquired the net assets of Gazes LLC (now Epiq
Preference Solutions) to supplement our ability to provide claims preference services for our corporate restructuring clients. During 2005, we acquired nMatrix (now Epiq eDiscovery Solutions) to
expand our offerings to include electronic discovery and Hilsoft, Inc. which enhanced our expert legal noticing services for our settlements and claims clients. During 2004, we acquired
Poorman-Douglas (now Epiq Class Action & Claims Solutions) which expanded our administrative offerings to include the class action and mass tort
market and we completed the disposition of our infrastructure software business, which was held for sale as of December 31, 2003. During 2003, we acquired BSI (now Epiq Bankruptcy Solutions) to
enter the market for corporate restructuring services.

Our
trademarks include Epiq, Epiq Systems, ClaimsMatrix, DebtorMatrix, LegalMatrix, CreditorMatrix,
ClassMatrix, eDataMatrix, DocuMatrix, XFrame, Bankruptcy Link®, TCMS®, CasePower®, and CasePower
13®. The trademarks have been filed but not yet registered; the registered marks have durations ranging from 2011 through 2013.

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

We provide products and services primarily to the legal profession. 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. Our business is organized into three operating segments: electronic discovery, bankruptcy trustee, and settlements and
claims. Segment information related to revenues from external customers, a performance measure of profit or loss, and total assets is contained in note 14 of the notes to consolidated financial
statements. Our clients include leading law

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firms,
corporate legal departments, bankruptcy trustees, and other professional advisors, who use our services for the administration of legal proceedings.

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 2007 Socha-Gelbmann Electronic Discovery Survey, the 2006 domestic commercial electronic discovery revenues were estimated at $2.0 billion, an approximate 51% increase
from 2005. According to this same source, the market is expected to continue to grow at year over year annual rates of 33% for 2007, 28% for 2008 and 23% for 2009. Due to the complexity of cases, the
volume of data that are maintained electronically, and the volume of documents that are produced in all types of litigation, we anticipate that law firms will become increasingly reliant on electronic
evidence management systems to organize and manage the litigation discovery process.

Bankruptcy Trustee

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, 2005, 2006, and 2007, there were approximately 1.78 million, 1.11 million, and 0.80 million new bankruptcy filings, respectively. Our bankruptcy trustee
segment is focused on satisfying the business requirements of bankruptcy trustees appointed by the Executive Office for United States Trustees, a division of the Department of Justice, to administer
Chapter 7 and Chapter 13 bankruptcy filings.

Chapter 7
is a liquidation bankruptcy for individuals or businesses that, as measured by the number of new cases filed in the government's fiscal year ended September 30,
2007 (fiscal year 2007), accounted for approximately 60% 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 13
is a reorganization model of bankruptcy for individuals that, as measured by the number of new cases filed in fiscal year 2007, accounted for approximately 39% 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 several years.

The
participants in a bankruptcy proceeding include the debtor, the debtor's legal 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.

Settlements & Claims

Our settlements and claims segment supports the administration of complex legal proceedings that involve notification of a class of claimants or creditors and the
administration of funds related to settlement with the class of claimants or creditors for Chapter 11 bankruptcies and class action and mass tort lawsuits.

Chapter 11
is a reorganization model of bankruptcy for corporations that, as measured by the number of new cases filed in fiscal year 2007, accounted for approximately 1% of all
bankruptcy filings. Chapter 11 generally allows a company, often referred to as the debtor-in-possession, to continue operating under a plan of reorganization to
restructure its business and to modify payment terms of both secured and unsecured obligations. Chapter 11 cases typically last several years.

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

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class).
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 $250 billion in 2006, according to a study issued in 2007 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.

Products and Services

Electronic Discovery

Our electronic discovery segment provides processing and search and review services to companies and the litigation departments of law firms. Our
eDataMatrix software analyzes, filters, deduplicates and produces documents for review. Produced documents are made available primarily
through our hosted site, and our DocuMatrix software allows for efficient plaintiff and defendant counsel review and data requests.

Significant
sources of revenue include:



Bankruptcy Trustee

Our bankruptcy trustee segment provides the bankruptcy trustees with software that enables them to efficiently administer a large volume of cases simultaneously.
The 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.

The
primary sources of revenue, consisting primarily of case management bundled products and services, are deposit-based fees, earned primarily on a percentage of Chapter 7 total
liquidated assets placed on deposit with a designated financial institution by our trustee clients, to whom we provide, at no charge, software licenses, limited hardware and hardware maintenance, and
postcontract customer support (PCS) services, as well as the number of cases managed by a Chapter 13 bankruptcy trustee. The fees earned based on total liquidated assets placed on deposit by
our trustee clients may vary based on fluctuations in short-term interest rates.

Settlements and Claims

Through our settlements and claims segment, we provide clients with back-office administrative support services related to complex legal proceedings
that involve notification of claimants or creditors as well as the administration of funds related to settlement with the class of claimants or creditors for Chapter 11 bankruptcies and class
action and mass tort lawsuits. These
engagements have both recurring and non-recurring revenue components. Significant sources of revenue include:



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Customers

Electronic Discovery

Our electronic discovery 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.

Bankruptcy Trustee

Our bankruptcy trustee customers are Chapter 7 and Chapter 13 professional bankruptcy trustees. The Executive Office for United States Trustees, a
division of the U.S. Department of Justice, appoints all 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 products and 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 the
bankruptcy trustee case management software and related services and the bank provides the bankruptcy trustee with deposit-related banking services. During the year ended December 31, 2007, 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.

Settlements and Claims

Our settlement and claims' customers are primarily large companies that are administering the settlement or resolution of class action cases and debtor
corporations that file a plan of reorganization. We sell our services directly to those customers as well as other interested parties, including legal counsel, who often provide access to these
customers.

Sales and Marketing

Our sales executives market our 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, we attend
industry trade shows, we publish articles, and we conduct direct mail campaigns and advertise in trade journals.

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Competition

Electronic Discovery

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 Electronic Evidence Discovery, Inc., Fios, Inc., Kroll Ontrack, Inc., Zantaz, Lexis Nexis and Applied
Discovery.

Bankruptcy Trustee

There are a variety of companies competing, primarily on the basis of quality of service and technology innovations for the finite number of available client
engagements that become available each year. Our primary competitor is Bankruptcy Management Solutions, Inc.

Settlements and Claims

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., Kurtzman Carson Consultants LLC, The Garden City Group Inc., Rust Consulting Inc.
and The Trumbull Group. Additionally, certain law firms, accounting firms, management consultant firms, turnaround specialists and crisis management firms offer certain products and services that
compete with our products and services.

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, federal class action and tort reform legislation was passed by Congress and signed into law by President Bush. The primary impact of the 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.

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 which a
debtor must accept or reject executory

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contracts
and unexpired leases, and potentially increasing certain priority claims. The impact of the bankruptcy reform legislation was to increase bankruptcy filings prior to the effective date of
the law in fiscal 2005 with a corresponding decrease in bankruptcy filings in fiscal 2006 and 2007. As reported by the Administrative Office of the U.S. Courts for the government fiscal years ended
September 30, 2005, 2006, and 2007, there were approximately 1.78 million, 1.11 million, and 0.80 million new bankruptcy filings, respectively. During 2007, there was a
decrease in Chapter 7 filings and an increase in Chapter 13 filings as a percent of total filings.

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. While we anticipate that these amendments to the FRCP may cause the electronic discovery market to experience an
increase in volume and demand, the federal and state rules of civil procedure will continue to evolve and be subject to interpretation by courts. We cannot predict the effect, if any, that these
recent amendments will have on our business in future years.

Employees

As of December 31, 2007, 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 our 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.

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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 revenue could be adversely affected if we are unable 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 or services could cause increased expense for litigation, increased service costs or
damage to our reputation.

We have included security features in our products and processes that are intended to protect the privacy and integrity of data, including confidential client or
consumer data. Security for our products and processes is critical given the confidential nature of the information contained in our systems. Our software products, the systems on which the products
are used, and our processes 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.

Errors or fraud related to our business processes could cause increased expense for litigation and diversion of management attention.

We administer claims and provide professional services for third parties. Errors or fraud could occur, for example, in the payment of settlement claims in a case
we are administering for a customer. 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 at the data centers we utilize could impair the delivery of our service and harm our business.

We provide certain of our services through computer hardware that is located in data centers operated by unrelated third-parties.. 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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Releases of new software products or upgrades to existing 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 software products or upgrades to existing software products 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.

Any
undetected errors, as well as any difficulties in installing and maintaining our new software products or upgrade releases or difficulties training customers and their staffs on the
utilization of new software products or upgrade 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 software or services.

We rely on hardware purchased or leased and software licensed from third parties for our service offerings. Any errors or defects in third-party hardware or
software could result in errors in our software or a failure of our service which could adversely affect our customer relationships and result in lower revenues and earnings.

A substantial majority of our bankruptcy trustee revenues are collected through a single financial institution, and the termination of that marketing arrangement could cause
uncertainty and adversely affect our future bankruptcy trustee 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 these trustee customers at no direct charge, and these trustee customers agree to deposit the cash proceeds from liquidations of debtors'
assets with a designated financial institution with which we have an arrangement. We have arrangements with several financial institutions under which these trustees deposit the liquidated assets at
one of those financial institutions. Under these arrangements:



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

Previously,
we maintained an exclusive marketing arrangement established with Bank of America established in November 1993. On April 1, 2004, this exclusive marketing arrangement
became a non-exclusive arrangement. During February 2006, the parties extended the non-exclusive arrangement indefinitely. A substantial majority of our bankruptcy trustee
revenues are collected through this relationship. 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 terminate this arrangement, we could experience a decline in revenues and earnings as those deposits are transferred.

Bankruptcy
trustee revenues from Bank of America comprised 14%, 38% and 3% of our total revenue recognized for the years ended December 31, 2007, 2006, and 2005, respectively.

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Our pricing models for Chapter 7 trustee clients have a component of pricing tied to prevailing interest rates, and a significant decline in interest rates could
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
could 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.

We have acquired businesses in the past and we may consider 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 could have an 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:



We have begun to expand our business internationally, which subjects us to additional risks associated with these international operations.

We have expanded our business internationally by establishing a London office which currently promotes our electronic discovery business. We could expand other
businesses internationally and we could enter other world markets. It may require significant management attention and financial resources to develop successful global markets. In addition, new
operations in geographies we may enter may not be immune from possible government monitoring or intrusion.

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Global
operations are subject to additional inherent risks, including certain risks that are not present with our domestic operations, and our future results could be adversely affected
by a variety of uncontrollable and changing factors. These include:



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, which could result in a loss of revenues and profits.

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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. 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 laws and regulations also creates uncertainty for companies such as ours. These 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 have required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources.

SEC
rules implementing Section 404 of Sarbanes-Oxley require disclosure of the remediation of significant deficiencies or material weaknesses in internal controls over financial
reporting and the existence, at year-end, of material weaknesses related to our internal control over financial reporting. If we 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.

Future government legislation or changes in court rules could adversely affect one or more of our business segments.

Our products and services are not directly regulated by the government. Each of our three business segments is, however, directly or indirectly affected by
federal and state laws and regulations and court rules. For example, legislation or court rule changes in 2005 and 2006 affected our bankruptcy segment, our settlements and claims segment and our
electronic discovery segment.

In
April 2005, the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed. 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 impact of the bankruptcy reform legislation was to increase bankruptcy filings prior to the effective date
of the law in fiscal 2005 with a corresponding decrease in bankruptcy filings in fiscal 2006 and 2007.

In
February 2005, federal class action and tort reform legislation was passed by Congress. The primary impact of this federal legislation is to require that certain types of class action
lawsuits be brought in federal court rather than state courts. 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.

11

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In
April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure regarding the discovery in litigation of certain "electronically stored
information." These amendments became effective on December 1, 2006.

Future
federal or state legislation or court rules, or court interpretations of those laws and rules, could adversely affect the businesses we serve and thus could have an adverse impact
on our revenues and results of operations.

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 decrease 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 market price of our common stock may be volatile even if our quarterly results do not fluctuate significantly.

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:



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 contingent convertible subordinated notes restrict our
payment of dividends while the notes are outstanding, and certain provisions in our credit facility 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 for use in the
operation and expansion of our business or for potential future debt repayment. 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 November 2007, we issued 5.0 million shares of common stock and
used approximately $74.0 million of the net proceeds to pay debt outstanding under our credit facility. During November 2005, we issued approximately 1.8 million shares of common stock
in connection with our nMatrix (now Epiq eDiscovery Solutions) acquisition. During June 2004, we issued $50.0 million of convertible notes, which are convertible into approximately
4.3 million shares of common stock based upon a conversion price of $11.67 per share, to refinance a portion of the purchase price for the Poorman-Douglas (now Epiq Class Action & Claims
Solutions) acquisition.

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 future
acquisitions.

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,

13

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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 leased offices in New York City and in metropolitan Portland, Oregon, and maintain smaller leased 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

A special meeting of the shareholders was held on February 8, 2008, at which the shareholders of record as of December 31, 2007, approved a proposal
to amend our articles of incorporation to increase the total number of authorized shares of common stock from 50,000,000 to 100,000,000. The results of the voting at the special meeting were as
follows:

For

Against

AbstainAmend the articles of incorporation to approve an increase in authorized shares

32,120,560

1,902,283

9,792


No
other matters were submitted to a vote of the shareholders at the special meeting.

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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 2007 and 2006 as reported by Nasdaq. All sales prices have been revised to reflect our 3 for 2 stock split, effected in the form of a 50% stock dividend, payable
June 7, 2007 to holders of record as of May 24, 2007.

|               |  | 2007 |       | 2006
|-------------- |  | ---- | ----- | ----
|
|First Quarter  |  | $    | 13.59 |     
|Second Quarter |  |      | 18.28 |     
|Third Quarter  |  |      | 20.18 |     
|Fourth Quarter |  |      | 20.72 |     

Holders

As of February 19, 2008, there were approximately 100 owners of record of our common stock and approximately 4,500 beneficial owners of our common stock.

Dividends

At this time, we intend to retain our earnings for use in the operation and expansion of our business or for potential future debt repayment and do not expect to
declare or pay any cash dividends during the foreseeable future. Under the terms of our contingent convertible subordinated notes, we are restricted from payment of dividends while the notes are
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 facility, and other factors deemed relevant by the board of directors. There is no restriction on the ability of our subsidiaries to transfer funds to the parent
company in the form of cash dividends, loans or advances.

Equity Compensation Plan Information

The following table sets forth as of December 31, 2007 (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)
|---------------------------------------------------------- |  | --------- |  | --- | ----- | ---
|
|Equity compensation plans approved by security holders     |  | 7,328,000 |  | $   | 10.91 |    
|Equity compensation plans not approved by security holders |  | 495,000   |  | $   | 13.27 |    
|Total                                                      |  | 7,823,000 |  | $   | 11.06 |    

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As
of December 31, 2007, 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, 2007, equity compensation plans not approved by security shareholders consist of stock options issued in conjunction with our acquisition of nMatrix. Inducement
stock options were issued in conjunction with the execution of employment agreements with certain key employees of nMatrix to become employees of our newly acquired subsidiaries. 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, 2002
through December 31, 2007) 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,
2007). 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, 2002, at the price of $10.18 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 $0.93 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, 2002 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

GRAPHIC

ASSUMES $100 INVESTED ON DEC. 31, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2007

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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

GRAPHIC

ASSUMES $100 INVESTED ON FEB. 4, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2007

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ITEM 6.    SELECTED FINANCIAL DATA

The following table presents selected historical financial data for the years ended December 31, 2007, 2006, 2005, 2004, and 2003 (in thousands, except per
share data).

|                                                           |                              | Years Ended December 31,            |        
|---------------------------------------------------------- | ---------------------------- | ----------------------------------- | -------
|
|Income Statement Data:                                     |                              |                                     |        
|Total revenue from continuing operations                   |                              | $                                   | 174,413
|Income (loss) from continuing operations                   |                              |                                     | 6,929  
|Income (loss) from discontinued operations                 |                              |                                     |       
|Net income (loss)                                          |                              |                                     | 6,929  
|Income (loss) per shareDiluted
from continuing operations |                              | $                                   | 0.21   
|                                                           | from discontinued operations |                                     | $      
|                                                           |                              | Net income (loss) per shareDiluted |        
|Balance Sheet Data:                                        |                              |                                     |        
|Total assets                                               |                              | $                                   | 392,794
|Long-term debt                                             |                              |                                     | 58,266 

During
January 2003, we acquired the member interests of BSI (now Epiq Bankruptcy Solutions). The acquisition was accounted for using the purchase method of accounting with the operating
results 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; and (ii) substantially decrease net income for the year ended December 31, 2003 and to incur a 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. Effective October 1, 2006, we entered into a new
arrangement with this depository financial institution; this new arrangement does not include provisions related to software upgrades. Accordingly, we now recognize this revenue based on a contingent
usage based revenue model and, during the year ended December 31 2007, we did not defer any bankruptcy trustee revenue or recognize any previously deferred bankruptcy trustee revenue.

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.

During
January 2004, we acquired the equity of P-D Holding Corp. and its wholly-owned operating subsidiary, Poorman-Douglas Company (now Epiq Class Action & Claims
Solutions). The acquisition was accounted for using the purchase method of accounting with the operating results included in our statements of operations since the date of acquisition.

During
October 2005, we acquired the equity of Hilsoft, Inc. The acquisition was accounted for using the purchase method of accounting with the operating results included in our
statements of operations since the date of acquisition. See note 13 of the notes to consolidated financial statements.

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During
November 2005, we acquired the equity of nMatrix (now Epiq eDiscovery Solutions). The acquisition was accounted for using the purchase method of accounting with the operating
results included in our statements of operations since the date of acquisition. See note 13 of the notes to consolidated financial statements.

Effective
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 of $5.6 million and $5.4 million for the years ended December 31, 2007 and 2006,
respectively. Prior to January 1, 2006, share-based payments were accounted for using the intrinsic method pursuant to APB 25,Accounting for Stock Issued to
Employees. As the options were granted at an option price equal to fair market value of the common stock on the date of grant, we did not
recognize any compensation cost related to share-based compensation for periods ended on or before December 31, 2005. See note 12 of the notes to the consolidated financial statements.

During
May 2006, we acquired the net assets of Gazes LLC and placed these assets in a newly formed subsidiary, Epiq Advisory Services (now Epiq Preference Solutions). The
acquisition was accounted for using the purchase method of accounting with the operating results included in our statements of operations since the date of acquisition. See note 13 of the notes
to consolidated financial statements.

Effective
January 1, 2007, we adopted Financial Accounting Standard Board (FASB) Interpretation No. 48 (FIN 48),Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 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 are initially
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 are initially and subsequently
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. Application of FIN 48 requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our
recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax
benefits. These periodic adjustments had the net effect of decreasing tax expense by approximately $0.2 million during 2007, and may affect our tax expense in future years. See note 10
of the notes to the consolidated financial statements.

In
November 2007, we completed a registered offering of 5,000,000 shares of common stock and received net proceeds of approximately $78.6 million.

All
per share amounts have been adjusted to reflect the 3-for-2 stock split, effected as 50% stock dividend, paid on June 7, 2007 to holders of record as
of May 24, 2007.

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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 consolidated financial
statements included in this Form 10-K.

Management's Overview

Electronic Discovery Segment

Our electronic discovery business provides processing and search and review services to companies and the litigation departments of law firms. Our
eDataMatrix software analyzes, filters, deduplicates and produces documents for review. Produced documents are made available primarily through our hosted website, and our
DocuMatrix software allows for efficient plaintiff and defendant counsel review and data requests.

Our
customers are typically large corporations that use our products and services cooperatively with their legal counsel to manage the electronic discovery process for complex litigation
matters.

The
substantial increase of electronic documents by businesses has changed the dynamics of how attorneys support discovery in complex litigation matters. According to the 2007
Socha-Gelbmann Electronic Discovery Survey, the 2006 domestic commercial electronic discovery revenues were estimated at $2.0 billion, an approximate 51% increase from 2005. According to this
same source, the market is expected to continue to grow at year over year annual rates of 33% for 2007, 28% for 2008 and 23% for 2009. Due to the complexity of cases, the volume of data that are
maintained electronically, and the volume of documents that are produced in all types of litigation, we anticipate that law firms will become increasingly reliant on electronic evidence management
systems to organize and manage the litigation discovery process.

Significant
sources of revenue include:



Bankruptcy Trustee Segment

Our bankruptcy trustee business addresses the needs of Chapter 7 and Chapter 13 bankruptcy trustees.



The
participants in these bankruptcy proceedings include the debtor, the debtor's counsel, the creditors, the bankruptcy judge, and the professional bankruptcy trustee.

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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 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 have developed marketing arrangements with various financial institutions under which we provide the bankruptcy trustee case management software and related services and the
financial institution provides the bankruptcy trustee with deposit-related banking services. The bankruptcy trustee segment's primary source of revenue is deposit-based fees, earned primarily as a
percentage of Chapter 7 total liquidated assets placed on deposit with a designated financial institution by our trustee clients, to whom we provide, at no charge, software licenses, limited
hardware and hardware maintenance, and postcontract customer support (PCS) services, as well as the number of cases managed by a Chapter 13 bankruptcy trustee. The fees we earn based on total
liquidated assets placed on deposit by our trustee clients may vary based on fluctuations in short-term interest rates.

Settlements and Claims Segment

Our settlements and claims segment supports the administration of complex legal proceedings that involve notification of a class of claimants or creditors and the
administration of funds related to settlement with the class of claimants or creditors for Chapter 11 bankruptcies and class action and mass tort lawsuits.

Chapter 11
is a reorganization model of bankruptcy for corporations that, as measured by the number of new cases filed in fiscal year 2007, accounted for approximately 1% of all
bankruptcy filings. Chapter 11 generally allows a company, often referred to as the debtor-in-possession, to continue operating under a plan of reorganization to
restructure its business and to modify payment terms of both secured and unsecured obligations. Chapter 11 cases typically last several years.

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 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 $250 billion in 2006, according to a study issued in 2007 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.

Our
customers are companies that are administering the settlement or resolution of class action cases and debtor corporations that have filed 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.

Significant
sources of revenue include:



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Critical Accounting Policies

We consider our accounting policies related to revenue recognition, share-based compensation, business combinations, goodwill, identifiable intangible assets,
income taxes and derivative financial instruments to be critical policies in understanding our historical and future performance.

Revenue recognition.We provide two groups or classes of servicescase management
services and document management services. 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.

Significant
sources of revenue include:



Non-Software Arrangements

Services related to electronic discovery and settlements and claims are billed based on volume and are evaluated pursuant to Emerging Issues Task Force (EITF)
00-21,Revenue Arrangements
with Multiple Deliverables. For these contractual arrangements, we have identified the following deliverable services:



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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 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 similar 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 collectability is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are
recognized as deferred revenue until all revenue recognition criteria have been satisfied. If we are unable to establish the fair value of each element on a standalone basis or based on third-party
evidence of fair value of such similar services, we may not be able to recognize revenue for services until the contract is complete, which would likely have a material effect on our consolidated
financial statements.

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, 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
Recognitionas the fee becomes fixed or determinable at the time actual usage occurs and collectability is probable. This occurs monthly as a result of the computation, billing
and collection of monthly

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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 collectability is reasonably assured. If our contractual arrangements were to change, we may not be able to
recognize revenue until the contract was complete or substantially complete, which would likely have a material effect on our consolidated financial statements.

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 Rentand 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

We 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 statements of operations as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs".

Share-based compensation.Effective January 1, 2006, we have accounted for share-based
compensation pursuant to 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 years ended December 31, 2007 and 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
after January 1, 2006, the share options were also valued using the Black-Scholes option valuation model. 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. 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

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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 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 cost of services 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. For additional information related to our adoption of SFAS No. 123R, see note 12 of the notes to the consolidated financial statements.

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 estimated
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 based on the pattern in which
the economic benefits of the intangible assets are consumed over the intangible asset's estimated useful life. The estimated useful life of amortizable identifiable intangible assets ranges from two
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 2007 annual assessment was consistent with the fair value estimate as of January 1, 2007, the date at which we revised the structure of our
operating segments.

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 related to the estimate of the magnitude and timing of future reporting unit cash flows. If we determine
that the estimated 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
$260.7 million as of December 31, 2007.

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 we were to

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determine
that 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.

Additionally,
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 $34.3 million as of December 31, 2007.

Income Taxes.A deferred tax asset or liability recognized for the anticipated future tax
consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. 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. Realization of the deferred tax
assets is dependent on our ability to generate sufficient future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that sufficient future taxable
income, taking into consideration tax planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation
allowances by a charge to income tax expense in the period such a determination is made. This charge may have a material impact on recognized income tax expense on our consolidated statement of
operations. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The recognition of a change in enacted
tax rates may have a material impact on recognized income tax expense and on our consolidated statements of operations.

Effective
January 1, 2007, we adopted Financial Accounting Standard Board (FASB) Interpretation No. 48 (FIN 48),Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 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 are initially
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 are initially and subsequently
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.
Application of FIN 48 requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized
tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits.
These periodic adjustments may have a material impact on our consolidated statements of operations. The cumulative effect of applying the provisions of FIN 48 was reported as an adjustment to
the opening balance of retained earnings as of January 1, 2007. The cumulative effect adjustment does not include items that would not be recognized in earnings, such as the effect on tax
positions related to business combinations. For additional information related to our adoption of FIN 48, see note 10 of the notes to the consolidated financial statements.

Derivative financial instruments.SFAS 133 establishes accounting and reporting standards for
derivative instruments. For a derivative instrument not designated as an accounting hedge, the gain or

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loss
is recognized in earnings in the period of change. In August of 2007, we purchased interest rate floor options with a notional value of $800 million, and these instruments were not
designated as accounting hedges. The interest rate floor options were purchased in negotiated transactions. As a result, we cannot determine the fair value of the interest rate floor options based on
quoted prices in active markets for identical assets. Instead, as of each period end we estimate the fair value of the interest rate floor options based on quoted prices for similar assets in active
markets and based on inputs other than quoted prices, primarily interest rates and yield curves, which are observable. Changes in these estimates, included as a component of other operating expenses,
may have a material impact on our consolidated statements of operations. If the one-month LIBOR increased by 100 basis points, we estimate the effect would be to decrease income before
taxes by approximately $1.6 million and that there would be no effect on our cash flow. If the one-month LIBOR decreased by 100 basis points, we estimate the effect would be to
increase income before taxes by approximately $4.1 million and that there would be no effect on our cash flow.

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Results of Operations for the Year Ended December 31, 2007 Compared with the Year Ended December 31, 2006

Revenue

Total revenue from operations of $174.4 million for the year ended December 31, 2007 represents an approximate $49.8 million, or 22%,
decrease compared with $224.2 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 statements 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 statements of operations, decreased $48.1 million, or approximately 24%, to $151.6 million for the year ended December 31, 2007 compared
with $199.7 million for the same period in the prior year. This decrease is primarily the result of an approximate $61.4 million decrease in bankruptcy trustee revenue before reimbursed
direct costs and an approximate $4.4 million decrease in settlements and claims revenue before reimbursed direct costs, partly offset by an approximate $17.7 million increase in
electronic discovery operating revenue before reimbursed direct costs. As more fully explained under the caption "Significant Accounting PoliciesRevenue Recognition" in note 1 to
the consolidated financial statements, the decrease in bankruptcy trustee operating revenue before reimbursed direct costs is primarily attributable to the recognition during 2006, of approximately
$59.7 million of revenue, deferred beginning in October 2003, following delivery of the final specified software upgrade pursuant to a specific arrangement that expired September 30,
2006. 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 14% to $41.5 million for the year ended December 31, 2007 compared with $48.3 million for the
prior year. This decrease is primarily attributable to a
$6.2 million decrease in legal noticing expense combined with a $3.2 million decrease in outside services, partly offset by a $1.1 million increase in compensation related expense
and a $0.8 million increase in rent expense. Changes by segment are discussed below.

Direct
cost of bundled products and services decreased approximately $0.2 million, or approximately 6%, to $3.7 million for the year ended December 31, 2007 compared
with $3.9 million for the prior year primarily as a result of decreased compensation expense. Changes by segment are discussed below.

Reimbursed
direct costs decreased approximately $2.0 million, or approximately 8%, to $22.6 million for the year ended December 31, 2007 compared with
$24.6 million for the prior year. This decrease directly corresponds to the decrease in operating revenue from reimbursed direct costs.

General
and administrative expenses increased approximately 16%, to $62.5 million for the year ended December 31, 2007 compared with $54.1 million for the prior
year. The increase is primarily attributable to a $7.3 million increase in compensation expense, primarily due to additional staffing to support growth in our electronic discovery business,
combined with a $3.1 million increase in bonus expense, as well as an approximate $0.7 million increase in travel expenses and an approximate $0.4 million increase in rent
expense. Changes by segment are discussed below.

Depreciation
and software and leasehold amortization increased $2.7 million, or approximately 26%, to $12.8 million for the year ended December 31, 2007 compared
with $10.1 million for the prior year. This increase primarily results from an increase of approximately $2.5 million in depreciation and

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amortization
expense related to purchased and internally developed software and the related hardware primarily required to support the expansion of our electronic discovery business.

Amortization
of intangibles decreased approximately $2.1 million, or 18%, to $9.5 million for the year ended December 31, 2007 compared with $11.6 million for
the prior year, primarily as certain customer contract intangibles, primarily related to our settlements and claims business, and certain trade name intangibles, primarily related to our electronic
discovery business, became fully amortized in 2007.

Other
operating expenses, which include the mark-to-market adjustment for the purchased interest rate floor options as well as acquisition related expenses,
reflect $1.1 million of income for the year ended December 31, 2007 compared with $0.3 million of expense for the prior year. A portion of our bankruptcy trustee pricing is tied
to short-term interest rates, and an increase or decrease in the short-term interest rate may result in corresponding changes in bankruptcy trustee revenue. To mitigate our
interest rate risk, during the third quarter of 2007, we purchased LIBOR based interest rate floors with strike prices ranging from 1.75% to 2.75% and a notional value of $800 million. These
instruments were not designated as accounting hedges. At
the end of each period, we estimate the fair value of these instruments and the change in market value is recognized as a component of other operating expenses. The adjustment for the year ended
December 31, 2007 resulted in the recognition of $1.1 million of income. Subsequent to December 31, 2007, we terminated these interest rate floor options and received cash of
approximately $5.1 million. We did not recognize any acquisition related expenses during the year ended December 31, 2007 compared with $0.3 million recognized for the year ended
December 31, 2006.

Interest Expense

Interest expense decreased $1.5 million to $12.0 million for the year ended December 31, 2007 compared with $13.5 million for the
prior year. This decrease is primarily related to a $2.0 million decrease in interest expense related to our credit facility and a $0.5 million decrease in the amortization of loan fees,
partly offset by a $1.1 million increase in net expense related to the holders' right to extend the maturity of the notes by up to three years.

The
decrease in interest expense related to our credit facility is primarily due to a decrease in outstanding borrowings from approximately $118.0 million as of the beginning of
2006 to approximately $77.0 million as of September 30, 2007. In November 2007, we used proceeds from a registered offering of our common shares to repay the credit facility in full.
Loan amortization expense decreased as the fees related to our contingent convertible subordinated notes became fully amortized during June 2007.

During
April 2007, the holders of the contingent convertible subordinated notes exercised their right to extend the maturity of the convertible notes from June 2007 to June 2010. As a
result, we will continue to pay interest, at a rate of 4% per annum, during the extension period on any notes that remain outstanding (the holders of the notes may chose at any time to convert some or
all of the notes into our common sharessee note 5 of the notes to the consolidated financial statements for additional information regarding this conversion right). We estimated
the fair value of the option immediately prior to the note holders' vote to extend and recorded a final adjustment to the fair value of the option to extend the notes' maturity. This final adjustment
was recorded as a charge to interest expense, resulting in an estimated fair value expense of $2.5 million during 2007 compared to an estimated fair value expense of $0.4 million during
2006. We are currently amortizing the exercise date fair value of the option as a reduction to interest expense over the term of the extension, which partly offsets the increase to interest expense
related to recognition of the estimated fair value of the right to extend the maturity of the contingent convertible subordinated notes.

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Effective Tax Rate

Our effective tax rate was 37.0% for the year ended December 31, 2007 compared with an effective rate of 39.4% for the prior year. Our tax rate is
generally higher than the statutory federal rate primarily due to state and local 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. The decrease in the effective tax rate compared with the prior year is primarily due to the reversal of valuation allowance
related to our United Kingdom net operating loss carryforward. Prior to 2007, we established a valuation allowance for the full amount of the net operating loss carryforward asset. The subsidiary
generated taxable income in 2007 and we utilized a portion of the net operating loss carryforward. During the fourth quarter of 2007, we determined that it was more likely than not that the net
operating loss would be fully utilized within the carryforward period. Accordingly, we reversed the valuation allowance related to the remaining net operating loss carryforward asset.

Net Income (Loss)

We had net income of $6.9 million for the year ended December 31, 2007 compared with $35.1 million for the prior year. This change is
primarily the result of a $48.1 million decrease in operating revenue before reimbursed direct costs and an $8.5 million increase in general and administrative expense, partly offset by
a $9.1 million decrease in direct costs and an $18.8 million decrease in tax expense, all for the year ended December 31, 2007 compared with the prior year. The decrease in
operating revenue before reimbursed direct costs is primarily the result of a $61.4 million decrease in bankruptcy trustee operating revenue before reimbursed direct costs, largely attributable
to the recognition during 2006 of revenue which was deferred beginning in October 2003 (as more fully explained under the "Business SegmentsBankruptcy Trustee Segment" caption below), and
a $4.4 million decrease in settlements and claims operating revenue before reimbursed direct costs, largely the result of a decrease in legal notification revenue, partly offset by a
$17.7 million increase in electronic discovery operating revenue before reimbursed direct costs. The increase in general and administrative expenses is primarily the result of a
$7.3 million increase in compensation related expenses, largely attributable to additional staffing, primarily to support growth in our electronic discovery business, and an increase in bonus
expense. The decrease in direct costs is primarily the result of a $6.2 million decrease in legal notification costs, largely attributable to the decline in legal noticing revenue, and a
$3.2 million decrease in outside services. The decrease in tax expense is primarily the result of the recognition of previously deferred bankruptcy trustee revenue during 2006.

Business Segments

The following management discussion and analysis is presented on a basis consistent with our segment disclosure contained in note 14 of our notes to
consolidated financial statements.

Electronic Discovery Segment

Electronic discovery operating revenue before reimbursed direct costs increased approximately $17.7 million, or 56%, to $49.1 million for the year
ended December 31, 2007 compared with $31.4 million for the prior year. This increase is primarily attributable to projects from existing clients as well as an expansion of our client
base. Hosting and processing services accounted for approximately $17.3 million of this increase, the remainder of the increase is related to ancillary professional services provided to our
clients.

Electronic
discovery direct costs and general and administrative expenses increased approximately $7.8 million, or 46%, to $24.8 million for the year ended
December 31, 2007 compared with $17.0 million for the same period in the prior year. The increase during the year ended December 31,

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2007
compared with the prior year is primarily due to expanded staffing and increased sales related commissions, resulting in a $5.2 million increase in compensation related expenses,
$1.6 million of expense related to the relocation and expansion of our data center facilities, an increase in equipment and software maintenance and rent expense of $0.5 million, and an
increase in relocation expense and travel related expenses of $0.6 million.

Bankruptcy Trustee Segment

Bankruptcy trustee operating revenue before reimbursed direct costs decreased approximately 65% to $32.9 million for the year ended December 31,
2007 compared with $94.2 million for the prior year. As more fully explained under the caption "Significant Accounting Policies, Revenue Recognition" in note 1 to the consolidated
financial statements, this decrease is primarily the result of our revenue recognition related to a specific arrangement in 2006 with our primary depository financial institution. During the second
quarter of 2006, we delivered the final software upgrade specified under this arrangement. As the only remaining undelivered element was PCS services and as the contract terminated
September 30, 2006, during 2006 we recognized, in accordance with SOP 97-2, $59.7 million of revenue that had been deferred during the period October 1, 2003
through December 31, 2005. Effective October 1, 2006, we entered into a new arrangement with this depository financial institution; this new arrangement does not include provisions
related to software upgrades. Accordingly, we now recognize this revenue based on a contingent usage based revenue model and, during the year ended December 31 2007, we did not defer any
bankruptcy trustee revenue or recognize any previously deferred bankruptcy trustee revenue. The remaining decrease of approximately $1.6 million in bankruptcy trustee operating revenue before
reimbursed is primarily attributable to a decline in average trustee deposits during 2007 compared with 2006 as a result of the decrease in bankruptcy filings during 2006 and 2007.

Bankruptcy
trustee direct costs and general and administrative expenses decreased approximately $0.2 million, or 2%, to $11.2 million for the year ended December 31,
2007 compared with $11.4 million for the prior year, reflecting a bankruptcy trustee operating cost structure for 2007 that was consistent with the prior year's cost structure.

Settlements and Claims Segment

Settlements and claims operating revenue before reimbursed direct costs decreased approximately $4.4 million, or 6%, to $69.7 million for the year
ended December 31, 2007 compared with $74.1 million for the prior year. This decrease is the result of a $6.9 million decrease in document management revenue partly offset by a
$2.5 million increase in case management revenue. Requirements in cases and the size of cases will vary from period to period creating variations in both document management and case management
services. The decrease in document management revenue is primarily attributable to a decline in legal noticing requirements compared with the prior year. The increase in case management revenue is
primarily the result of increased requirements and size of cases compared to the prior year, resulting in a $2.6 million increase in professional fees.

Settlement
and claims direct costs and general and administrative expenses decreased approximately $10.7 million, or approximately 13%, to $70.1 million for the year ended
December 31, 2007 compared with $80.8 million for the prior year. This decrease is primarily the result of a $6.2 million reduction in the cost of legal noticing, a
$3.4 million decrease in outside services, and a $1.9 million decrease in reimbursed direct costs, partly offset by a $0.3 million increase in compensation related expenses. Legal
noticing expense generally fluctuates directly with legal noticing revenue and outside services costs will vary depending on the timing of cases and the specific services required by the client.

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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 statements 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 statements of operations, increased approximately $117.0 million, or 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 $85.1 million increase in bankruptcy trustee revenue before reimbursed
direct costs, an approximate $4.2 million increase in settlements and claims revenue before reimbursed direct costs, and an approximate $27.8 million increase in electronic discovery
operating revenue before reimbursed direct costs. 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 products and 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

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acquired
entities. The remainder of the increase is primarily the result of a $0.7 million increase in internally developed software amortization due to our ongoing investment in software
development.

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.

Other
operating expenses for both years consisted entirely of acquisition related expenses. 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. Our tax rate is generally higher than the statutory federal rate primarily due to state and local 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. 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.

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 products and 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 "Bankruptcy Trustee 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. 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.

Business Segments

The following management discussion and analysis is presented on a basis consistent with our segment disclosure contained in note 14 of our notes to
consolidated financial statements.

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Electronic Discovery Segment

We entered the electronic discovery market through our acquisition of nMatrix on November 15, 2005, and nMatrix has been included in our results of
operations since that date. Electronic discovery operating revenue before reimbursed direct costs increased approximately $27.8 million to $31.4 million for the year ended
December 31, 2006 compared with $3.6 million for the prior year. This increase is primarily attributable to the inclusion of a full year of operating results for the year ended
December 31, 2006 compared with the inclusion of less than two months of operating results for the year ended December 31, 2005.

Electronic
discovery direct costs and general and administrative expenses increased to $17.0 million for the year ended December 31, 2006 compared with $1.1 million
for the same period in the prior year. This increase is primarily attributable to the inclusion of a full year of operating results for the year ended December 31, 2006 compared with the
inclusion of less than two months of operating results for the year ended December 31, 2005.

Bankruptcy Trustee Segment

Bankruptcy trustee operating revenue before reimbursed direct costs increased approximately $85.1 million to $94.2 million for the year ended
December 31, 2006 compared with $9.1 million for the prior year. This increase is due primarily to an $85.9 million increase in revenue from case management bundled products and
services. This increase primarily relates to an 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.

Bankruptcy
trustee direct costs and general and administrative expenses decreased slightly to $11.4 million for the year ended December 31, 2006 compared with
$11.9 million for the prior year, reflecting a bankruptcy trustee operating cost structure for 2006 that was consistent with the prior year's cost structure.

Settlements and Claims Segment

Settlements and claims operating revenue before reimbursed direct costs increased approximately $4.2 million to $74.1 million for the year ended
December 31, 2006 compared with $69.9 million for the prior year. This increase is primarily attributable to an $11.8 million increase in legal noticing revenue, primarily due to
the inclusion of Hilsoft operating results for the entire year compared with inclusion of only two months operating results for the prior year, partially offset by a decline in direct noticing revenue
and professional fees primarily as a result of fewer class action retentions.

Settlement
and claims direct costs and general and administrative expenses increased approximately $16.2 million, or approximately 25%, to $80.8 million for the year ended
December 31, 2006 compared with $64.6 million for the same period in the prior year. This increase is primarily attributable to a $10.3 million increase in legal noticing expense,
primarily due to the inclusion of Hilsoft operating results for the entire year compared with inclusion of only two months operating results for the prior year, combined with a $2.5 million
increase in outside services costs and a $0.7 million increase in reimbursable direct costs. Legal noticing expense generally fluctuates directly with legal noticing revenue and outside
services costs will vary depending on the timing of cases and the specific services required by the client.

35

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Liquidity and Capital Resources

Operating Activities

During the year ended December 31, 2007, our operating activities provided net cash of $36.2 million. The primary sources of cash from operating
activities was net income of $6.9 million, adjusted for $27.2 million of non-cash charges and credits, primarily depreciation and amortization expense of $22.3 million
and share-based compensation of $5.6 million, and cash resulting from changes in operating assets and liabilities of $2.1 million. The most significant changes in operating assets and
liabilities include a $3.0 million source of cash related to income taxes, net of the excess tax benefit related to share-based compensation, and a $1.7 million source of cash related to
accounts payable and other liabilities, partly offset by a $2.1 million use of cash related to prepaid expenses and other assets and a $0.6 million use of cash related to trade accounts
receivable. The source or use of cash related to income taxes will fluctuate from period to period based on the timing of estimated tax payments, the receipt of refunds due, and the amount of our
deduction related to the exercise of employee stock options. The source or use of cash related to accounts payable and accrued liabilities will fluctuate from period to period based on the timing of
payments made and the amount of accrued bonus and other compensation. For the year ended December 31, 2007, the source of cash related to accounts payable and accrued liabilities was primarily
from an increase in accrued compensation, partly offset by decreases in accrued professional fees, accrued interest, and accounts payable. The use of cash related to prepaid expense and other assets
is primarily related to the purchase of interest rate option floors during 2007. Trade accounts receivable will fluctuate from period to period depending on the timing of collections.

Investing Activities

During the year ended December 31, 2007, we used cash of approximately $14.8 million to purchase property, equipment and third-party software. Our
property, equipment and third-party software purchases consisted primarily of computer-related hardware, purchased software, and leasehold improvements to support the expansion of our electronic
discovery business. Enhancements to our existing software and development of new software used cash of approximately $4.8 million to fund internal costs related to development of software for
which technological feasibility has been established. 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, 2007, we paid in full our credit facility, using approximately $19.0 million of cash from operations and
approximately $74.0 million from proceeds received pursuant to an equity offering. During the year, we also paid $3.4 million as a principal reduction on deferred acquisition price, and
we paid $1.0 million due on capital leases. Financing sources of cash consisted primarily of $78.6 million of net proceeds from a 5.0 million common share equity offering and
$9.4 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 $0.6 million of
excess tax benefit as a financing cash flow rather than as an operating cash flow.

As
of December 31, 2007, our borrowings consisted of $54.0 million (including the carrying value of the embedded option) from the contingent convertible subordinated notes,
which bears interest at 4% based on the $50.0 million principal amount, and approximately $7.6 million of obligations related to capitalized leases and deferred acquisition price. During
2007, the term of our contingent convertible subordinated notes was extended to June 2010. The notes will require the use of $50.0 million of cash

36

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at
the extended maturity date if the note holders do not convert the notes into shares of our common stock. The holders of the contingent convertible subordinated notes have the right to convert at a
price of approximately $11.67 per share. If any or all notes 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 converted notes, other than the regular payment of interest earned prior to the conversion date.

As
of December 31, 2007 we did not have any borrowings outstanding under our $100.0 million senior revolving loan. We have the right to borrow against the senior revolving
loan until it matures in
November 2008. During the term of the credit facility, we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $175.0 million. Interest on the
credit facility is generally based on a spread, not to exceed 300 basis points, over the LIBOR rate. As of December 31, 2007, significant financial covenants, all as defined within our credit
facility agreement, include a leverage ratio not to exceed 3.00 to 1.00, a senior leverage ratio not to exceed 2.00 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, 2007, 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 contingent convertible subordinated 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.

Our
current credit facility matures in November 2008. Given our ability to obtain financing in the past, our historical cash flows from operations, and our banking relationships, we
anticipate that, if necessary, we will be able to establish a new credit facility on commercially reasonable terms. We believe that the funds generated from operations plus our existing cash resources
and amounts available under our credit facility will be sufficient over the next 12 months, and for the foreseeable future thereafter, to finance currently anticipated working capital
requirements, internal software development expenditures, property, equipment and third party software expenditures, deferred acquisition price agreements and capital leases, interest payments due on
our outstanding borrowings, and payments for other contractual obligations.

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.

37

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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, 2007 (in
thousands).

Payments Due By Period
(In Thousands)

|Contractual Obligation(1)                     |  | Total |         | Less than 1 Year |   | 1 - 3 Years |  | 3 - 5 Years |        | More Than 5 Years
|--------------------------------------------- |  | ----- | ------- | ---------------- | - | ----------- |  | ----------- | ------ | -----------------
|Long-term obligations and future accretion(2) |  | $     | 56,093  |                  | $ | 2,593       |  | $           | 53,000 |                  
|Interest payments(3)                          |  |       | 6,317   |                  |   | 2,428       |  |             | 3,862  |                  
|Employment agreements(4)                      |  |       | 4,413   |                  |   | 2,115       |  |             | 2,110  |                  
|Capital lease obligations                     |  |       | 1,790   |                  |   | 798         |  |             | 931    |                  
|Operating leases                              |  |       | 39,396  |                  |   | 6,465       |  |             | 11,410 |                  
|                                              |  |       |         |                  |   |             |  |             |        |                  
|Total                                         |  | $     | 108,009 |                  | $ | 14,399      |  | $           | 71,313 |                  
|                                              |  |       |         |                  |   |             |  |             |        |                  

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Recent Accounting Pronouncements

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. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. In February 2008, FASB issued Staff Position 157-2,Effective Date of FASB Statement No. 157, (FSP 157-2)
which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on
a recurring basis. Management is still evaluating the impact, if any, that the adoption of SFAS 157 and FSP 157-2 will have on our financial position, results of operations, or cash
flows.

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

38

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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. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not anticipate that adoption of this statement will have
a material impact on our consolidated financial statements.

In
June 2007, the EITF issued Issue No. 06-11,Accounting for Income Tax Benefits of Dividends on Share based Payment
Awards(EITF 06-11). EITF 06-11 provides interpretive guidance on the recognition of income tax benefits received on dividends paid to
nonvested equity share awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007. We do not anticipate that adoption of EITF 06-11
will have a material impact on our consolidated financial statements.

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 141(R),Business Combinations(SFAS 141(R)).
SFAS 141(R) establishes guidelines for the recognition and measurement of assets, liabilities and equity in business combinations. SFAS 141(R) is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Management is still evaluating the impact, if any, that the adoption of SFAS 141(R) will have on our financial position,
results of operations, or cash flows.

In
December 2007, FASB issued Statement of Financial Accounting Standards No, 160,Noncontrolling Interest In Consolidated Financial
Statements, (SFAS 160). SFAS 160 changes the way in which noncontrolling interests in subsidiaries are measured and classified on the balance sheet.
SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Management is still evaluating the impact, if any, that the adoption of
SFAS 160 will have on our financial position, results of operations, or cash flows.

In
April 2007, FASB issued Staff Position FIN 39-1,Amendment of FASB Interpretation No. 39, FSP
FIN 39-1. FSP FIN 39-1 changes the terms of FASB 39 to now include derivative instruments within its scope. It also all permits reporting entities to
offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for
derivative instruments executed with the same counterparty under the same master netting arrangement. The guidance in FSP FIN 39-1 is to be applied in the first fiscal years
beginning after November 15, 2007. We do not anticipate that adoption of this statement will have a material impact on 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. During the third quarter of 2007, we purchased three year interest rate floor
options, referenced to one-month LIBOR and with various strike prices, with a notional value of $800 million. Our interest rate floor options create a market risk for us. As of
December 31, 2007, the interest floor options had an estimated fair value of $2.7 million. If the one-month LIBOR increased by 100 basis points, we estimate the effect would
be to decrease income before taxes by approximately $1.6 million. If the one-month LIBOR decreased by 100 basis points, we estimate the effect would be to increase income before
income taxes by approximately $4.1 million. These estimated changes in income before income taxes would not affect our cash flows. We do not actively manage the market risk related to these
instruments.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements appear following Item 15 of this Report.

39

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Supplementary DataQuarterly Financial Information

The following table sets forth the quarterly financial data for the quarters of the years ended December 31, 2007 and 2006 (in thousands, except per share
data):

|                                          |  | (Unaudited)
Quarters |       
|----------------------------------------- |  | -------------------- | ------
|
|Year ended December 31, 2007              |  |                      |       
|Total revenue                             |  | $                    | 41,128
|Gross profit(1)                           |  |                      | 22,271
|Net income                                |  |                      | 150   
|Net income per shareBasic(2)             |  | $                    | 0.01  
|Net income per shareDiluted(2)           |  | $                    | 0.01  
|Year ended December 31, 2006              |  |                      |       
|Total revenue                             |  | $                    | 38,218
|Gross profit(1)                           |  |                      | 15,538
|Net income (loss)                         |  |                      | (1,749
|Net income (loss) per shareBasic(2)(3)   |  | $                    | (0.06 
|Net income (loss) per shareDiluted(2)(3) |  | $                    | (0.06 

---

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, 2007, 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.

40

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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:



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, 2007. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission inInternal
ControlIntegrated Framework. Based on our assessment using those criteria, management believes that, as of December 31, 2007, our internal control over
financial reporting is effective based on those criteria.

The
effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which appears beginning on page 42.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2007, that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial reporting.

41

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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 internal control over financial reporting of Epiq Systems, Inc. and subsidiaries (the "Company") as of December 31, 2007, based on criteria established
inInternal ControlIntegrated Frameworkissued 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, included in the
accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal ControlIntegrated
Frameworkissued 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, 2007 of the Company and our report dated March 4, 2008 expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule and included an explanatory paragraph regarding the change in accounting for uncertainty in income taxes upon the adoption of Financial Accounting Standards Board
Interpretation No. 48,"Accounting for Uncertainty in Income Taxes,an interpretation of Financial Accounting Standard
No. 109."

/s/ DELOITTE & TOUCHE LLPKansas City, Missouri
March 4, 2008

42

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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 2008 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, 2007.

ITEM 11.    EXECUTIVE COMPENSATION

Incorporated by reference to our Proxy Statement for our 2008 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, 2007.

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

Incorporated by reference to our Proxy Statement for our 2008 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, 2007.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to our Proxy Statement for our 2008 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, 2007.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to our Proxy Statement for our 2008 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, 2007.

43

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(1)

Financial Statements.The following consolidated financial statements, contained on pages F-1 through F-37 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, 2007 and 2006Consolidated Statements of OperationsYears Ended December 31, 2007, 2006 and 2005Consolidated Statements of Changes in Stockholders' EquityYears Ended December 31, 2007, 2006 and 2005Consolidated Statements of Cash FlowsYears Ended December 31, 2007, 2006 and 2005Notes 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, 2007.Schedule IIValuation and Qualifying Accounts(3)

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


44

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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 4, 2008

| | EPIQ SYSTEMS, INC.
| | ------------------
| | By:               

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. OLOFSONTom W. Olofson                   |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) |  | March 4, 2008
|/s/CHRISTOPHER E. OLOFSONChristopher E. Olofson   |  | President, Chief Operating Officer and Director                                           |  | March 4, 2008
|/s/ELIZABETH M. BRAHAMElizabeth M. Braham         |  | Executive Vice President, Chief Financial Officer (Principal Financial Officer)           |  | March 4, 2008
|/s/DOUGLAS W. FLEMINGDouglas W. Fleming           |  | Director of Finance, Chief Accounting Officer (Principal Accounting Officer)              |  | March 4, 2008
|/s/W. BRYAN SATTERLEEW. Bryan Satterlee           |  | Director                                                                                  |  | March 4, 2008
|/s/EDWARD M. CONNOLLY, JR.Edward M. Connolly, Jr. |  | Director                                                                                  |  | March 4, 2008
|/s/JAMES A. BYRNESJames A. Byrnes                 |  | Director                                                                                  |  | March 4, 2008
|/s/JOEL PELOFSKYJoel Pelofsky                     |  | Director                                                                                  |  | March 4, 2008

45

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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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, 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 Financial Accounting
Standards Board Statement No. 123(R), "Share-Based Payment" and the Company changed its method of accounting for uncertainty in income taxes upon
adoption of Financial Accounting Standards Board Interpretation No. 48,"Accounting for Uncertainty in Income Taxes, an interpretation of Financial Accounting Standard
No. 109."

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2007, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 4, 2008, expressed an unqualified opinion on the internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLPKansas City, Missouri
March 4, 2008

F-1

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

|                                           |                                                                                                                                                                 | As of December 31,         
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
|
|ASSETS                                     |                                                                                                                                                                 |                            
|CURRENT ASSETS:                            |                                                                                                                                                                 |                            
|                                           | Cash and cash equivalents                                                                                                                                       |                            
|                                           | Trade accounts receivable, less allowance for doubtful accounts of $1,437 and $1,684, respectively                                                              |                            
|                                           | Prepaid expenses                                                                                                                                                |                            
|                                           | Other current assets                                                                                                                                            |                            
|                                           |                                                                                                                                                                 |                            
|                                           |                                                                                                                                                                 | Total Current Assets       
|                                           |                                                                                                                                                                 |                            
|LONG-TERM ASSETS:                          |                                                                                                                                                                 |                            
|                                           | Property and equipment, net                                                                                                                                     |                            
|                                           | Internally developed software costs, net                                                                                                                        |                            
|                                           | Goodwill                                                                                                                                                        |                            
|                                           | Other intangibles, net of accumulated amortization of $33,248 and $25,387, respectively                                                                         |                            
|                                           | Other                                                                                                                                                           |                            
|                                           |                                                                                                                                                                 |                            
|                                           |                                                                                                                                                                 | Total Long-term Assets, net
|                                           |                                                                                                                                                                 |                            
|Total Assets                               |                                                                                                                                                                 | $                          
|                                           |                                                                                                                                                                 |                            
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                 |                            
|CURRENT LIABILITIES:                       |                                                                                                                                                                 |                            
|                                           | Accounts payable                                                                                                                                                |                            
|                                           | Accrued compensation                                                                                                                                            |                            
|                                           | Deposits                                                                                                                                                        |                            
|                                           | Deferred revenue                                                                                                                                                |                            
|                                           | Other accrued expenses                                                                                                                                          |                            
|                                           | Current maturities of long-term obligations                                                                                                                     |                            
|                                           |                                                                                                                                                                 |                            
|                                           |                                                                                                                                                                 | Total Current Liabilities  
|                                           |                                                                                                                                                                 |                            
|LONG-TERM LIABILITIES:                     |                                                                                                                                                                 |                            
|                                           | Deferred income taxes                                                                                                                                           |                            
|                                           | Other long-term liabilities                                                                                                                                     |                            
|                                           | Long-term obligations (excluding current maturities)                                                                                                            |                            
|                                           |                                                                                                                                                                 |                            
|                                           |                                                                                                                                                                 | Total Long-term Liabilities
|                                           |                                                                                                                                                                 |                            
|COMMITMENTS AND CONTINGENCIES              |                                                                                                                                                                 |                            
|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35,276,569 and 29,218,259 shares at December 31, 2007 and 2006, respectively |                            
|                                           | Additional paid-in capital                                                                                                                                      |                            
|                                           | Accumulated other comprehensive income                                                                                                                          |                            
|                                           | Retained earnings                                                                                                                                               |                            
|                                           |                                                                                                                                                                 |                            
|                                           |                                                                                                                                                                 | Total Stockholders' Equity 
|                                           |                                                                                                                                                                 |                            
|Total Liabilities and Stockholders' Equity |                                                                                                                                                                 | $                          
|                                           |                                                                                                                                                                 |                            

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,                         |       
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------
|
|REVENUE:                                    |                                                                                                                  |                                                  |       
|                                            | Case management services                                                                                         |                                                  | $     
|                                            | Case management bundled products and services                                                                    |                                                  |       
|                                            | Document management services                                                                                     |                                                  |       
|                                            |                                                                                                                  |                                                  |       
|                                            |                                                                                                                  | Operating revenue before reimbursed direct costs |       
|                                            | Operating revenue from reimbursed direct costs                                                                   |                                                  |       
|                                            |                                                                                                                  |                                                  |       
|                                            |                                                                                                                  | Total Revenue                                    |       
|                                            |                                                                                                                  |                                                  |       
|OPERATING EXPENSES:                         |                                                                                                                  |                                                  |       
|                                            | Direct cost of services (exclusive of depreciation and amortization shown separately below)                      |                                                  |       
|                                            | Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below) |                                                  |       
|                                            | Reimbursed direct costs                                                                                          |                                                  |       
|                                            | General and administrative                                                                                       |                                                  |       
|                                            | Depreciation and software and leasehold amortization                                                             |                                                  |       
|                                            | Amortization of intangibles                                                                                      |                                                  |       
|                                            | Other operating (income) expense, net                                                                            |                                                  |       
|                                            |                                                                                                                  |                                                  |       
|                                            |                                                                                                                  | Total Operating Expenses                         |       
|                                            |                                                                                                                  |                                                  |       
|INCOME FROM OPERATIONS                      |                                                                                                                  |                                                  | 22,876
|                                            |                                                                                                                  |                                                  |       
|INTEREST EXPENSE (INCOME):                  |                                                                                                                  |                                                  |       
|                                            | Interest expense                                                                                                 |                                                  |       
|                                            | Interest income                                                                                                  |                                                  |       
|                                            |                                                                                                                  |                                                  |       
|                                            |                                                                                                                  | Net Interest Expense                             |       
|                                            |                                                                                                                  |                                                  |       
|INCOME (LOSS) BEFORE INCOME TAXES           |                                                                                                                  |                                                  | 10,995
|PROVISION (BENEFIT) FOR INCOME TAXES        |                                                                                                                  |                                                  | 4,066 
|                                            |                                                                                                                  |                                                  |       
|NET INCOME (LOSS)                           |                                                                                                                  | $                                                | 6,929 
|                                            |                                                                                                                  |                                                  |       
|NET INCOME (LOSS) PER SHARE INFORMATION:    |                                                                                                                  |                                                  |       
|                                            | Basic                                                                                                            |                                                  | $     
|                                            | Diluted                                                                                                          |                                                  | $     
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |                                                                                                                  |                                                  |       
|                                            | Basic                                                                                                            |                                                  |       
|                                            | Diluted                                                                                                          |                                                  |       

See
accompanying notes to consolidated financial statements.

F-3

---





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

|                                        |                                                                                             | As of December 31,   |        
|--------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------- | -------
|
|PREFERRED SHARES (2,000 authorized)     |                                                                                             |                      |       
|COMMON SHARES (50,000 authorized):      |                                                                                             |                      |        
|                                        | Shares, beginning of year                                                                   |                      |        
|                                        | Shares issued upon exercise of options                                                      |                      |        
|                                        | Shares issued upon stock offering                                                           |                      |        
|                                        | Shares issued in acquisition of business                                                    |                      |        
|                                        |                                                                                             |                      |        
|                                        |                                                                                             | Shares, end of year  |        
|                                        |                                                                                             |                      |        
|COMMON STOCKPAR VALUE $0.01 PER SHARE: |                                                                                             |                      |        
|                                        | Balance, beginning of year                                                                  |                      | $      
|                                        | Proceeds from exercise of options                                                           |                      |        
|                                        | Net proceeds from equity offering                                                           |                      |        
|                                        | Shares issued in acquisition of business                                                    |                      |        
|                                        |                                                                                             |                      |        
|                                        |                                                                                             | Balance, end of year |        
|                                        |                                                                                             |                      |        
|ADDITIONAL PAID-IN CAPITAL:             |                                                                                             |                      |        
|                                        | Balance, beginning of year                                                                  |                      |        
|                                        | Proceeds from exercise of options                                                           |                      |        
|                                        | Net proceeds from equity offering                                                           |                      |        
|                                        | Share-based income tax benefit                                                              |                      |        
|                                        | Share-based compensation expense                                                            |                      |        
|                                        | Shares issued in acquisition of business                                                    |                      |        
|                                        |                                                                                             |                      |        
|                                        |                                                                                             | Balance, end of year |        
|                                        |                                                                                             |                      |        
|ACCUMULATED OTHER COMPREHENSIVE INCOME: |                                                                                             |                      |        
|                                        | Balance, beginning of year                                                                  |                      |        
|                                        | Foreign currency translation adjustment                                                     |                      |        
|                                        |                                                                                             |                      |        
|                                        |                                                                                             | Balance, end of year |        
|                                        |                                                                                             |                      |        
|RETAINED EARNINGS:                      |                                                                                             |                      |        
|                                        | Balance, beginning of year                                                                  |                      |        
|                                        | Cumulative effect of adoption of FIN 48,Accounting For Uncertainty in Income Taxes(note 10) |                      |        
|                                        | Net income                                                                                  |                      |        
|                                        |                                                                                             |                      |        
|                                        |                                                                                             | Balance, end of year |        
|                                        |                                                                                             |                      |        
|TOTAL STOCKHOLDERS' EQUITY              |                                                                                             | $                    | 283,682
|                                        |                                                                                             |                      |        

See
accompanying notes to consolidated financial statements.

F-4

---



EPIQ SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)

(In Thousands)

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

|                                                     |                                                                                         | Years Ended December 31,                                    |                                                    
|---------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                         |                                                             |                                                    
|                                                     | Net income (loss)                                                                       |                                                             | $                                                  
|                                                     | Adjustments to reconcile net income (loss) to net cash from operating activities:       |                                                             |                                                    
|                                                     |                                                                                         | Expense (benefit) for deferred income taxes                 |                                                    
|                                                     |                                                                                         | Depreciation and software amortization                      |                                                    
|                                                     |                                                                                         | Change in valuation of embedded option and convertible debt |                                                    
|                                                     |                                                                                         | Amortization of intangible assets                           |                                                    
|                                                     |                                                                                         | Share-based compensation expense                            |                                                    
|                                                     |                                                                                         | Other, net                                                  |                                                    
|                                                     | Changes in operating assets and liabilities, net of effects from business acquisitions: |                                                             |                                                    
|                                                     |                                                                                         | Trade accounts receivable                                   |                                                    
|                                                     |                                                                                         | Prepaid expenses and other assets                           |                                                    
|                                                     |                                                                                         | Accounts payable and other liabilities                      |                                                    
|                                                     |                                                                                         | Deferred revenue                                            |                                                    
|                                                     |                                                                                         | Excess tax benefit related to share-based compensation      |                                                    
|                                                     |                                                                                         | Income taxes payable                                        |                                                    
|                                                     |                                                                                         |                                                             |                                                    
|                                                     |                                                                                         |                                                             | Net cash provided by operating activities          
|                                                     |                                                                                         |                                                             |                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                         |                                                             |                                                    
|                                                     | Purchase of property and equipment                                                      |                                                             |                                                    
|                                                     | Internally developed software costs                                                     |                                                             |                                                    
|                                                     | Cash paid for acquisition of businesses, net of cash acquired                           |                                                             |                                                    
|                                                     | Purchase of short-term investments                                                      |                                                             |                                                    
|                                                     | Sale of short-term investments                                                          |                                                             |                                                    
|                                                     | Other investing activities, net                                                         |                                                             |                                                    
|                                                     |                                                                                         |                                                             |                                                    
|                                                     |                                                                                         |                                                             | Net cash used in investing activities              
|                                                     |                                                                                         |                                                             |                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                         |                                                             |                                                    
|                                                     | Proceeds from revolver                                                                  |                                                             |                                                    
|                                                     | Proceeds from long-term debt                                                            |                                                             |                                                    
|                                                     | Debt issuance costs                                                                     |                                                             |                                                    
|                                                     | Payments on revolver                                                                    |                                                             |                                                    
|                                                     | Payments under long-term debt and capital lease obligations                             |                                                             |                                                    
|                                                     | Excess tax benefit related to share-based compensation                                  |                                                             |                                                    
|                                                     | Net proceeds from equity offering                                                       |                                                             |                                                    
|                                                     | Proceeds from exercise of stock options                                                 |                                                             |                                                    
|                                                     |                                                                                         |                                                             |                                                    
|                                                     |                                                                                         |                                                             | Net cash (used in) provided by financing activities
|                                                     |                                                                                         |                                                             |                                                    
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                         |                                                             | 8,141                                              
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         |                                                                                         |                                                             | 5,274                                              
|                                                     |                                                                                         |                                                             |                                                    
|CASH AND CASH EQUIVALENTS, END OF YEAR               |                                                                                         | $                                                           | 13,415                                             
|                                                     |                                                                                         |                                                             |                                                    

See
accompanying notes to consolidated financial statements.

F-5

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

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. Intercompany transactions and
balances have been eliminated in consolidation.

Nature of Operations

We are a provider of integrated technology solutions for the legal profession. Our solutions streamline the administration of bankruptcy, litigation, financial
transactions and regulatory compliance matters. We offer innovative technology solutions for electronic discovery, document review, legal notification, claims administration and controlled
disbursement of funds. Our clients include law firms, corporate legal departments, bankruptcy trustees and other professional advisors who require innovative technology, responsive service and deep
subject-matter expertise.

Reclassifications

Certain prior year amounts have been reclassified, based on the aggregation rules contained in the Security and Exchange Commission's
Regulation S-X, Rule 5-02, to conform with the current year presentation.

Stock Split

On May 17, 2007, the board of directors approved a 3 for 2 stock split, effected in the form of a 50% stock dividend, payable June 7, 2007 to
holders of record as of May 24, 2007. The total number of authorized common shares was unchanged by the split. All per share and shares outstanding data in the consolidated financial statements
and the accompanying notes have been revised to reflect the stock split.

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.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. We maintain an allowance for doubtful accounts to reserve for
potentially uncollectible receivables. We review the accounts receivable by amounts due by customers which are past due to identify specific customers with known disputes or collectibility issues. In
determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations.

Software Development Costs

Certain internal software development costs incurred in the creation of computer software products for sale, lease or otherwise to be marketed are capitalized
once technological feasibility has

F-6

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

been
established. Capitalized costs are amortized, beginning in the period the product is available for general release, 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. Certain internal software development
costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is complete and when management, with the relevant authority,
authorizes and commits funding to the project and it is probable the project will be completed and the software will be used to perform the function intended. Capitalized costs are amortized,
beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated economic life of the product.

Goodwill and Identifiable Intangible Assets

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business acquistions accounted for under the purchase
method. 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 2007 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 and agreements not to compete. Identifiable intangible assets
are amortized on a straight-line basis over their estimated economic benefit period, generally from five to ten years. Identifiable intangible assets are reviewed for impairment whenever
events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable.

Impairment of Long-lived Assets

Following the guidance provided in Statement of Accounting Standards No. 144,Accounting for the Impairment or Disposal
Long-Lived Assets, we reviewed long-lived assets 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 are capitalized and amortized based on the terms of the related debt. The unamortized
costs are included as a component of other

F-7

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

long-term
assets on our consolidated balance sheets. Amortization costs are included as a component of interest expense 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 cost
related to share-based compensation for the year ended December 31, 2005 is reflected on a pro forma basis in note 12 of these consolidated financial statements.

Income Taxes

A deferred tax asset or liability recognized for the anticipated future tax consequences of temporary differences between the tax basis of assets or liabilities
and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. 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. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Effective
January 1, 2007, we adopted Financial Accounting Standard Board (FASB) Interpretation No. 48 (FIN 48),Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 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 are initially 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 are initially and subsequently 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. Application of FIN 48 requires

F-8

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

numerous
estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes. The cumulative effect of applying the provisions of FIN 48 was reported as an adjustment to the opening balance of retained earnings as of
January 1, 2007. The cumulative effect adjustment does not include items that would not be recognized in earnings, such as the effect on tax positions related to business combinations. For
additional information related to our adoption of FIN 48, see note 10 of the consolidated financial statements.

Revenue Recognition

We have agreements with clients pursuant to which we deliver various services each month.

Significant
sources of revenue include:



Non-Software Arrangements

Services related to electronic discovery and settlements and claims are billed based on volume and are evaluated pursuant to Emerging Issues Task Force (EITF)
00-21,Revenue Arrangements with Multiple Deliverables. For these contractual arrangements, we have identified the following deliverable
services:



F-9

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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



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 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 similar 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 Recognitionas the fee

F-10

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

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.

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 Rentand 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.

During
the period October 1, 2003 through September 30, 2006, we had 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 were part
of a bundled arrangement. Each software upgrade was considered a separate and discrete product and, as we did 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 were a combined unit of accounting. 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. Revenue for this
combined unit of accounting, when recognized, was included as a component of case management services revenue. 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.

F-11

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

Reimbursements

We 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 statements of operations as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs".

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

Staff Accounting Bulletin 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 Instruments

The holders of our contingently convertible subordinated notes had 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, (SFAS 133) the right to extend the maturity of the notes
represented an embedded option. The embedded option, which is a derivative financial instrument, was adjusted to estimated fair value at the end of each period, with a final adjustment to an estimated
fair value of approximately $4.8 million immediately prior to the April 2007 exercise of the embedded option to extend. This final fair value estimate is being amortized as a credit to interest
expense over the period to the extended maturity, which is June 15, 2010. If any convertible debt is converted into shares of our common stock prior to June 15, 2010, the unamortized
embedded option value related to those shares will be recognized as a gain in the period the conversion occurs. The estimated fair value and the amortized carrying value of our obligation related to
the embedded option was included as a component of our long-term obligations as of December 31, 2007 and 2006, respectively, on our accompanying consolidated balance sheets. Changes
in the fair value of the embedded option through the final fair value measurement date in April 2007 and the subsequent amortization of the embedded option fair value were recorded each period as a
component of interest expense on our accompanying consolidated statements of operations. Changes in the fair value and carrying 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.

During
August 2007, we purchased interest rate floor options that have not been designated as accounting hedges. Pursuant to SFAS 133, at the end of each period we estimate the
fair value of the interest rate floor options based on quoted prices for similar assets in active markets and based on inputs other than quoted prices, primarily interest rates and yield curves, which
are observable. Changes in these estimates, included as a component of other operating expense (income) on our consolidated statements of operations, may have a material impact on our net income. The
fair value of

F-12

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

our
obligation related to the interest rates floor options has been included as a component of other current assets. Changes in the fair value of the interest rate floor options 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.

Comprehensive Income

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 is included as a separate component of shareholders' equity on our consolidated balance sheets. Other comprehensive income is not considered material to the results of
operations.

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 $7.1 million, $6.7 million, and $5.0 million for the years ended December 31, 2007, 2006 and 2005, 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, net of tax deficiencies, 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

Following the guidance provided in Statement of Accounting Standards No. 131,Disclosure about Segments of an Enterprise and
Related information,we consider how we organize our business internally for making operating decisions and assessing business performance to determine our reportable segments.

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

F-13

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

date
of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Actual results may differ from those estimates.

Recent Accounting Pronouncements

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. In February 2008, FASB issued Staff Position 157-2,Effective Date of FASB Statement No. 157, (FSP 157-2) which
delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis. Management is still evaluating the impact, if any, that the adoption of SFAS 157 and FSP 157-2 will have on our financial position, results of operations, or cash
flows.

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. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not anticipate that adoption of this statement will have a material impact on our
consolidated financial statements.

In
June 2007, the EITF issued Issue No. 06-11,Accounting for Income Tax Benefits of Dividends on Share based Payment
Awards(EITF 06-11). EITF 06-11 provides interpretive guidance on the recognition of income tax benefits received on dividends paid to
nonvested equity share awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007. We do not anticipate that adoption of EITF 06-11
will have a material impact on our consolidated financial statements.

In
December 2007, FASB issued Statement of Financial Accounting Standards No. 141(R),Business Combinations(SFAS 141(R)).
SFAS 141(R) establishes guidelines for the recognition and measurement of assets, liabilities and equity in business combinations. SFAS 141(R) is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Management is still evaluating the impact, if any, that the adoption of SFAS 141(R) will have on our financial position,
results of operations, or cash flows.

In
December 2007, FASB issued Statement of Financial Accounting Standards No, 160,Noncontrolling Interest In Consolidated Financial
Statements, (SFAS 160). SFAS 160 changes the way in which noncontrolling interests in subsidiaries are measured and classified on the balance sheet.
SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Management is still evaluating the impact, if any, that the adoption of
SFAS 160 will have on our financial position, results of operations, or cash flows.

F-14

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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

In April 2007, FASB issued Staff Position FIN 39-1,Amendment of FASB Interpretation
No. 39, FSP FIN 39-1. FSP FIN 39-1 changes the terms of FASB 39 to now include derivative instruments within its scope. It
also all permits reporting entities to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair
value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The guidance in FSP FIN 39-1 is to be applied in
the first fiscal years beginning after November 15, 2007. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

NOTE 2:    PROPERTY AND EQUIPMENT

Property and equipment, including leasehold improvements and purchased software, 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 and equipment and the related estimated
useful lives is as follows (in thousands):

December 31,Estimated
Useful Life2007

2006Land

$
192

$
192Building and building and leasehold improvements


11,252


9,283

5 - 30 yearsFurniture and fixtures


2,472


2,261

5 - 7 yearsComputer and purchased software


35,698


26,424

2 - 5 yearsTransportation equipment


6,396


6,396

3 - 5 yearsMailroom equipment


1,151


1,015

3 - 5 yearsConstruction in progress


773


52557,934


46,096Accumulated depreciation and amortization


(25,531
)

(22,943
)Property and equipment

$
32,403

$
23,153


Computer
and purchased software includes property acquired under capital leases. As of December 31, 2007 and 2006, assets acquired under capital lease had a historical cost basis
of $2.7 million and $3.0 million, respectively, and accumulated amortization of $0.5 million and $2.4 million, respectively.

F-15

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 3:    SOFTWARE DEVELOPMENT COSTS

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

|                                       |  | Year Ended December 31, |        
|-------------------------------------- |  | ----------------------- | -------
|
|Amounts capitalized, beginning of year |  | $                       | 21,282 
|Development costs capitalized          |  |                         | 4,813  
|Dispositions                           |  |                         | (712   
|                                       |  |                         |        
|Amounts capitalized, end of year       |  |                         | 25,383 
|Accumulated amortization, end of year  |  |                         | (15,575
|                                       |  |                         |        
|Software development costs, net        |  | $                       | 9,808  
|                                       |  |                         |        

Included
in the above are capitalized software development costs for unreleased products of $1.8 million and $2.0 million at December 31, 2007 and 2006,
respectively. During the years ended December 31, 2007, 2006 and 2005, we recognized amortization expense related to capitalized software development costs of $4.6 million,
$3.7 million, and $2.1 million, respectively.

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS

Amortizing identifiable intangible assets as of December 31, 2007 and December 31, 2006 consisted of the following (in thousands):

|                       |  | December 31, 2007 |        | December 31, 2006
|---------------------- |  | ----------------- | ------ | -----------------
|
|Customer contracts     |  | $                 | 39,287 |                  
|Trade names            |  |                   | 745    |                  
|Non-compete agreements |  |                   | 27,526 |                  
|                       |  |                   |        |                  
|                       |  | $                 | 67,558 |                  
|                       |  |                   |        |                  

F-16

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS (Continued)

Amortization
expense for each year in the three year period ended December 31, 2007 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:2005

$
6,7512006


11,6292007


9,531Estimated amortization expense:2008


8,3612009


6,8292010


6,4392011


4,7062012


4,535


As
of December 31, 2007 and December 31, 2006, goodwill had a carrying value of $260.7 million and $260.6 million, respectively. The $0.1 million
increase in goodwill results from an adjustment of the acquisition date tax basis pursuant to FIN 48, partly offset by a subsequent reversal of the acquisition date tax basis adjustment as
certain federal and state tax returns were closed under the statute of limitation and by a purchase price adjustment related to the receipt of cash on final settlement of an escrowed amount related to
our acquisition of our electronic discovery business. Goodwill by segment is disclosed in note 14 of these consolidated financial statements.

As
of December 31, 2006 and December 31, 2005, goodwill had a carrying value of $260.6 million and $249.4 million, respectively. The $11.2 million
increase in goodwill results from primarily from the acquisition of Epiq Advisory Services.

NOTE 5:    LONG-TERM OBLIGATIONS

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

Year Ended December 31,2007

2006Senior term loan

$


$
15,000Senior revolving loan





78,028Convertible subordinated debt, including embedded option


53,958


52,170Capital leases


1,790


179Deferred acquisition price


5,844


8,984Total long-term obligations, including current portion

$
61,592

$
154,361


F-17

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 5:    LONG-TERM OBLIGATIONS (Continued)

Credit Facilities

As of December 31, 2006, our credit facility, with KeyBank National Association as administrative agent, consisted of a $15.0 million senior term
loan and a $100.0 million senior revolving loan. During April 2007, we paid in full and terminated the senior term loan. During November 2007, we used proceeds from our equity offering to pay
in full the senior revolving loan. We did not make any additional borrowings under the senior revolving loan during December 2007, and as such, there were no amounts due under the senior revolving
loan as of December 31, 2007. We have the right to borrow against the senior revolving loan until it matures in November 2008. During the term of the credit facility, 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. Interest on the credit facility is generally based on a spread, not to
exceed 300 basis points, over the LIBOR rate.

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, 2007, we
were in compliance with all financial covenants.

Contingent Convertible Subordinated Notes

During June 2004, we issued $50.0 million of contingent convertible subordinated notes with a fixed 4% per annum interest rate and an original maturity of
June 15, 2007. The holders of the convertible subordinated notes had the right to extend the maturity date by up to three years. In April 2007, the holders exercised this right and the
convertible subordinated notes maturity date was extended to June 15, 2010. 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. In May 2007, we declared
a 3 for 2 stock split, effected as a stock dividend, and paid in June 2007, and we adjusted the conversion ratio to reflect this change in our capital structure. After adjustment for the stock split,
the notes are convertible into 4.3 million shares of our common stock at a price of approximately $11.67 per share. We have the right to require that the holders of the convertible subordinated
notes convert to equity if our share price exceeds $23.33 on a weighted average basis for 20 consecutive trading days.

Under
SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, the right to extend the maturity of the
convertible subordinated notes was accounted for as an embedded option subject to bifurcation. The embedded option was initially valued at $1.2 million and the contingent convertible
subordinated note balance was reduced by the same amount. The subordinated convertible note was accreted approximately $0.1 million each quarter such that the contingent convertible
subordinated note balance, exclusive of the embedded option value, totaled $50.0 million as of the June 15, 2007 original maturity date. On our accompanying consolidated statements of
operations, this accretion is a component of interest expense. The embedded option was revalued at each period end

F-18

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 5:    LONG-TERM OBLIGATIONS (Continued)

based
on the probability weighted discounted cash flows related to the additional 4% interest rate payments resulting from the three year extension of the contingent convertible subordinated notes
maturity. During April 2007, the holders of the convertible subordinated notes exercised this right to extend and we performed a final valuation to estimate the fair value of the embedded option as of
the approximate date of the extension. The estimated fair value of the embedded option at this date, included as a component of the contingent convertible subordinated note, was approximately
$4.8 million. The $4.8 million estimated fair value of the embedded option is amortized as a credit to interest expense over the period to the extended maturity, which is June 15,
2010. If any contingent convertible notes are converted into shares of our common stock prior to June 15, 2010, the unamortized embedded option value related to those shares will be recognized
as a gain in the period the conversion occurs. The above changes related to the carrying value of the contingent convertible subordinated note, the estimated fair value of the embedded option, and the
amortization of the fair value of the embedded option do not affect our cash flow.

Deferred Acquisition Price

We have made acquisitions 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 using an appropriate imputed interest rate. As of December 31, 2007 and December 31, 2006, the discounted value of the remaining
note payments, for which the final payment is due in 2011, was approximately $5.8 million and $9.0 million, respectively, of which approximately $2.5 million and
$3.3 million, respectively, was classified as a current liability in the consolidated balance sheets as of December 31, 2007 and December 31, 2006, respectively.

Scheduled Principal Payments

Our long-term obligations, consisting of contingent convertible subordinated notes (including the carrying value of the embedded option), deferred
acquisition costs, and capitalized leases, mature as follows for years ending December 31 (in thousands):

2008

$
3,3262009


2,3182010


55,4252011


5232012


Total

$
61,592


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. 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

F-19

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 6:    OPERATING LEASES (Continued)

reduction
to rent expense. Additionally, we have non-cancelable operating leases for office equipment and automobiles expiring through 2011.

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

Total Future Minimum Lease Payments

Sublease Rental Income

Net Lease Payments2008

$
6,465

$
1,237

$
5,2282009


5,892


289


5,6032010


5,518





5,5182011


5,006





5,0062012


5,228





5,228Thereafter


11,287





11,287Total minimum lease payments

$
39,396

$
1,526

$
37,870


Expense
related to operating leases, net of sublease income of $0.6 million for the year ended December 31, 2007, was approximately $5.7 million. Lease expense for
the years ended December 31, 2006 and 2005 was $5.6 million, and $2.9 million, respectively.

NOTE 7:    STOCKHOLDERS' EQUITY

Under the terms of our contingent convertible subordinated notes, we are restricted from payment of dividends while the notes are 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 facility, 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.

On
May 17, 2007, the board of directors approved a 3 for 2 stock split, effected in the form of a 50% stock dividend, payable June 7, 2007 to holders of record as of
May 24, 2007. The total number of authorized common shares was unchanged by the split. All per share and shares outstanding data in the consolidated financial statements and the accompanying
notes have been revised to reflect the stock split.

During
November 2007, we issued 5,000,000 shares of common stock in connection with a registered direct offering. Net proceeds from the offering were approximately $78.6 million.

On
February 8, 2008, at a Special Meeting of the Shareholders of Epiq Systems, Inc., the shareholders approved an amendment to our articles of incorporation to increase the
authorized number of shares of common stock from 50,000,000 to 100,000,000.

F-20

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 8:    EMPLOYEE BENEFIT PLANS

Stock Purchase Plan

We have an employee stock purchase plan that allows 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 $1.3 million, $1.1 million, and $0.8 million for the years ended December 31, 2007, 2006, and 2005, respectively.

NOTE 9:    FINANCIAL INSTRUMENTS AND CONCENTRATIONS

Fair Value of Financial Instruments

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

As
of December 31, 2007, the carrying value of cash, cash equivalents, trade receivables, and accounts payable approximate fair value. As of December 31, 2007, the carrying
value of our long-term debt instruments, consisting of convertible debt, deferred acquisition price, and capital leases, was approximately $61.6 million, which approximates fair
value. We also have interest rate floor options, which were recorded at their estimated fair value of approximately $2.7 million as of the end of December 31, 2007. Fair values were
calculated using a pricing model that incorporates assumptions regarding future volatility, interest rates and credit risk.

Significant Customer and Concentration of Credit Risk

We currently promote our Chapter 7TCMS® 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, and our arrangement with Bank of
America is open-ended. Either party may, with appropriate notice, wind down the agreement over a period of three years. Revenues recognized by us from Bank of America, all related to our
bankruptcy trustee segment, were approximately 14%, 38% and 3% of our total revenues for the years ended December 31, 2007, 2006 and 2005, respectively. Additionally, Bank of America
represented approximately 11% and 13% of our accounts receivable balance as of December 31, 2007 and 2006, respectively.

F-21

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 10:    INCOME TAXES

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

Years Ended December 31,2007

2006

2005Income (loss) before income taxes

$
10,995

$
57,965

$
(6,242
)Provision (benefit) for income taxesCurrently payable (receivable) income taxesFederal

$
5,451

$
2,261

$
6,996State


1,145


491


468Foreign


4


87


Total


6,600


2,839


7,464Deferred income taxesFederal


(2,232
)

17,289


(8,560
)State


(248
)

2,725


(1,304
)Foreign


(54
)

(19
)

Total


(2,534
)

19,995


(9,864
)Provision (benefit) for income taxes


4,066


22,834


(2,400
)


A
reconciliation of the provision (benefit) for income taxes at the statutory rate of 34% for the years ended December 31, 2007, 2006 and 2005 to the provision (benefit) for
income taxes at our effective rate is shown below (in thousands):

Years Ended December 31,2007

2006

2005Computed at the statutory rate

$
3,738

$
20,288

$
(2,122
)Change in taxes resulting from:State income taxes, net of federal tax effect


592


2,090


(274
)Permanent differences


671


683


299Foreign tax and change in foreign valuation allowance


(330
)

221


Research and development credits


(532
)

(300
)

(196
)Other


(73
)

(148
)

(107
)Provision (benefit) for income taxes

$
4,066

$
22,834

$
(2,400
)


Taxes
related to acquisitions of $0.4 million and $0.5 million were recorded as an increase to goodwill for the years ended December 31, 2007 and 2006, respectively.
Taxes related to acquisitions of $0.3 million were recorded as a reduction to goodwill for the year ended December 31, 2005.

F-22

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 10:    INCOME TAXES (Continued)

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

December 31,2007

2006Deferred tax assets:Allowance for doubtful accounts


647


778Share-based compensation


3,910


2,054Contingent convertible subordinated notes


1,519


900Intangible assets


278


718Accrued liabilities


1,794


710Foreign loss:Carryforwards


68


228Valuation allowance





(228
)State net operating loss carryforwards


1,215


1,209Total deferred tax assets


9,431


6,369Deferred tax liabilities:Prepaid expenses


766


561Intangible assets


20,772


21,905Property and equipment and software development costs


5,878


5,815Interest rate floor options


481


Other





82Total deferred tax liabilities


27,897


28,363Net deferred tax liability

$
(18,466
)
$
(21,994
)


As
of December 31, 2007, we have aggregate state and local operating loss carryforwards of $24.8 million. These carryforwards expire in varying amounts in years 2019
through 2027. 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, 2007, we have an operating loss carryforward in the United Kingdom of $0.2 million, resulting in recognition of a $0.1 million deferred tax asset.
As of December 31, 2006 we had established a $0.2 million valuation allowance for the full amount of the foreign loss carryforward deferred tax asset. During 2007, we determined that it
was more likely than not that the net operating loss would be fully utilized within the carryforward period. Accordingly, we reversed the valuation allowance and reduced tax expense by
$0.2 million.

As
a result of certain realization requirements of SFAS 123(R), the deferred tax assets and liabilities shown above exclude certain deferred tax assets relating to state
NOL's at December 31, 2007 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be
increased by $0.1 million if and when such deferred

F-23

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 10:    INCOME TAXES (Continued)

tax
assets are ultimately realized. We use tax law ordering for the purpose of determining when excess tax benefits have been realized.

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

December 31,2007

2006Current deferred income tax asset

$
924

$
1,313Long-term deferred income tax liability


(19,390
)

(23,307
)Net deferred tax liability

$
(18,466
)
$
(21,994
)


In
June 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprise's financial statements in accordance with SFAS
No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods, disclosures, and transition.

We
adopted FIN 48 effective January 1, 2007. As a result of the adoption, we recognized additional tax related liabilities of approximately $3.4 million consisting
of a $2.5 million reduction to retained earnings and a $0.9 million increase to goodwill related to prior acquisitions. In addition, we reclassified approximately $1.3 million of
income tax liabilities from a current liability classification to a non-current liability classification as payment of the liability is not anticipated within one year of the balance sheet
date. We also recorded approximately $1.2 million of deferred tax assets relating to the tax benefits associated with interest expense and federal benefits associated with state tax expenses.
As of January 1, 2007, the gross amount of unrecognized tax benefits, including penalty and interest was approximately $5.9 million. If recognized, approximately $3.7 million
would affect our effective tax rate. As of December 31, 2007, the gross amount of unrecognized tax benefits, including penalty and interest, was approximately $5.7 million. If
recognized, approximately $4.2 million would affect our effective tax rate.

The
following table summarizes the activity related to our gross unrecognized tax benefits (in thousands):

Unrecognized Tax Benefits as of January 1, 2007

$
4,801Gross increases for prior years tax positions


243Gross decreases for prior years tax positions


(356
)Gross increase for current year tax positions


669Settlements


(62
)Lapse of statute of limitations


(790
)Unrecognized Tax Benefits at December 31, 2007

$
4,505


We
file income tax returns in the U.S. federal jurisdiction, the United Kingdom, and various state jurisdictions. We have also made an evaluation of the potential impact of assessments
by state

F-24

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 10:    INCOME TAXES (Continued)

jurisdictions
in which we have not filed tax returns. In January 2007, the Internal Revenue Service initiated an examination of our 2004 federal income tax return. In the fourth quarter of 2007, we
were informed that the examination was completed and that the IRS made no changes to our 2004 reported tax liability. As a result we considered the 2004 federal return effectively settled under
FIN 48 guidelines.

Also
in 2007, the State of New York initiated an examination of our 2003 - 2005 New York state income tax returns. As of December 31, 2007 the
examination was not concluded. It is possible that the examination will conclude in 2008 and it is reasonably possible that a change in the unrecognized tax benefits may occur within the next twelve
months; however, a quantification of an estimated range cannot be made at this time.

During
2007, federal and state tax returns closed under the statute of limitations. As a result, we recognized $0.9 million of net unrecognized tax benefits, of which
$0.5 million decreased goodwill and $0.4 million reduced tax expense.

As
of December 31, 2007, the 2004 - 2006 federal tax returns remained open under the statute of limitations, and 2003 - 2006
state and foreign tax returns remained open. As of December 31, 2007, it is reasonably possible that approximately $0.7 million of net unrecognized tax benefits would be recognized in
the following twelve months due to the closing of 2003 and 2004 years for federal and state jurisdictions, of which $0.2 million would affect our effective tax rate and
$0.5 million would decrease goodwill.

As
permitted by FIN 48, we have classified interest and penalties as a component of income tax expense. Estimated interest and penalties of classified as a component of income tax
expense during 2007 totaled $0.2 million. Accrued interest and penalties, included as a component of "Other long-term liabilities" on the accompanying consolidated balance sheets,
totaled $0.7 million and $0.5 million, respectively, as of December 31, 2007.

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 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, net of tax deficiencies, that would 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

F-25

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 11:    NET INCOME (LOSS) PER SHARE (Continued)

stock
method is applied only to share grants for which the effect is dilutive. Following is net income (loss) per share information (in thousands, except per share data):

|                                                           |                  | Year Ended December 31, |      
|---------------------------------------------------------- | ---------------- | ----------------------- | -----
|
|
|Basic income (loss) per share from continuing operations   |                  | $                       | 6,929
|                                                           |                  |                         |      
|Effect of dilutive securities:                             |                  |                         |      
|                                                           | Stock options    |                         |      
|                                                           | Convertible debt |                         |      
|                                                           |                  |                         |      
|Diluted income (loss) per share from continuing operations |                  | $                       | 6,929
|                                                           |                  |                         |      

For the years ended December 31, 2007 and 2006, weighted-average outstanding share options totaling approximately 0.4 million and
2.7 million shares of common stock, respectively, were antidilutive and, therefore, not included in the computation of diluted earnings per share. For the year ended December 31, 2007,
we did not assume conversion of the convertible debt as the effect would be antidilutive. For the year ended December 31, 2005, we did not assume conversion of the convertible debt or exercise
of any share-based options as the effect would be antidilutive.

F-26

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

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 an 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 year ended December 31, 2006. During the year ended December 31, 2005, compensation costs related to share-based compensation were not recognized as
expense in the accompanying consolidated statement of operations. Instead, the share-based compensation costs for the year ended December 31, 2005 are reflected on a pro forma basis in this
note to our consolidated financial statements. We 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 0.8 million unvested share options, with a weighted-average exercise price of
$9.52 per share, for certain employees, including an executive officer and non-employee directors. Unvested share options to purchase approximately 1.7 million shares, with a
weighted-average exercise price of approximately $10.17 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).

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 7,500,000 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, 2007, there were approximately 2,086,000 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

F-27

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 12:    STOCK OPTIONS (Continued)

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 2008 for the purpose of satisfying share option exercises.

As
part of acquisitions and inducement plans to key employees, stock options are from time to time issued outside of the 2004 plan. These options are granted at an option exercise price
equal to fair market value of the common stock on the date of grant, are non-qualified options, are exercisable for up to 10 years from the date of grant and generally 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.

As
a result of our adoption of SFAS No. 123R, during the years ended December 31, 2007 and 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. For share options issued
after January 1, 2006, the share options were also valued using the Black-Scholes option valuation model. 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. 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, 2007 (in thousands, except life and price data):

|                 |  | Options Outstanding |  | Options Exercisable
|---------------- |  | ------------------- |  | -------------------
|
|$2.45 to $8.13   |  | 1,599               |  | 5.29 years         
|$8.17 to $10.39  |  | 1,982               |  | 7.45 years         
|$10.43 to $11.86 |  | 1,574               |  | 5.70 years         
|$11.89 to $15.03 |  | 1,637               |  | 7.81 years         
|$15.29 and over  |  | 1,031               |  | 9.85 years         
|                 |  |                     |  |                    
|                 |  | 7,823               |  | 7.05 years         
|                 |  |                     |  |                    

F-28

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 12:    STOCK OPTIONS (Continued)

Following
is a summary of key assumptions we used to value share options granted during the three years ended December 31, 2007.

|                        |  | 2007        |  | 2006        |  | 2005       
|----------------------- |  | ----------- |  | ----------- |  | -----------
|Expected term (years)   |  | 5.0 - 6.0   |  | 5.0 - 6.0   |  | 5.0 - 5.3  
|Expected volatility     |  | 25% - 44%   |  | 30% - 38%   |  | 40%        
|Risk-free interest rate |  | 3.3% - 5.1% |  | 4.3% - 5.0% |  | 4.0% - 4.3%
|Dividend yield          |  | 0%          |  | 0%          |  | 0%         

Compensation
expense for the years ended December 31, 2007 and 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, 2007 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                   |  | 7,985  |   | $                               | 9.84  |                                             |      |                          
|Granted                                            |  | 1,635  |   |                                 | 15.97 |                                             |      |                          
|Exercised                                          |  | (1,058 | ) |                                 | 8.92  |                                             |      |                          
|Forfeited                                          |  | (739   | ) |                                 | 11.85 |                                             |      |                          
|                                                   |  |        |   |                                 |       |                                             |      |                          
|Outstanding, end of period                         |  | 7,823  |   |                                 | 11.06 |                                             | 7.05 |                          
|                                                   |  |        |   |                                 |       |                                             |      |                          
|Options vested and expected to vest, end of period |  | 7,312  |   |                                 | 10.88 |                                             | 6.94 |                          
|                                                   |  |        |   |                                 |       |                                             |      |                          
|Options exercisable, end of period                 |  | 5,432  |   |                                 | 10.04 |                                             | 6.42 |                          
|                                                   |  |        |   |                                 |       |                                             |      |                          

The
aggregate intrinsic value was calculated using the difference between the December 31, 2007 market price and the grant price for only those awards that have a grant price that
is less than the December 31, 2007 market price. The weighted average grant-date fair value of share options granted during the years ended December 31, 2007, 2006 and 2005
were $6.46, $4.36 and $4.31, respectively. The total intrinsic value of share options exercised during the years ended December 31,
2007 and 2006 was $6.7 and $1.5 million, respectively. During the years ended December 31, 2007 and 2006, we received cash for payment of the grant price of exercised share options of
approximately $9.4 and $2.6 million, respectively, and we anticipate we will realize a tax benefit related to these exercised share options of approximately $1.9 and $0.6 million,
respectively. 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 years ended December 31, 2007 and 2006, we recognized share-based compensation expense, which is a non-cash charge, of approximately $5.6 and
$5.4 million, respectively, of which $0.7

F-29

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 12:    STOCK OPTIONS (Continued)

and
$0.6 million, respectively, is included under the caption "Direct costs of services" and $4.9 and $4.8 million, respectively, is included under the caption "General and
administrative" on the accompanying consolidated statements of operations. During the years ended December 31, 2007 and 2006, we recognized a net tax benefit of approximately $2.2 and
$2.1 million, respectively, related to aggregate share-based compensation expense recognized during the same period. As a result, income before income taxes was reduced by approximately $5.6
and $5.4 million, respectively, net income was reduced by approximately $3.4 and $3.3 million, respectively, net income per sharebasic was reduced by approximately $0.11 and
$0.17 per share, respectively, and net income per sharediluted was reduced by approximately $0.11 and $0.14 per share, respectively. As of December 31, 2007, there was
$10.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which will be recognized over a weighted-average period of 3.4 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 year ended December 31, 2005. 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 year ended December 31, 2005 would have been adjusted to the following pro forma amounts (in
thousands, except per share data):

Year Ended December 31, 2005Net loss, as reported



$
(3,842
)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
)Net loss, pro forma



$
(10,447
)Net loss per shareBasic

As reported

$
(0.14
)Pro forma

$
(0.38
)Net loss per shareDiluted

As reported

$
(0.14
)Pro forma

$
(0.38
)


Pro
forma amounts presented above are based on actual earnings and consider only the effects of estimated fair values of stock options. For the year ended December 31, 2005 our
diluted loss per share calculation did not assume exercise of options or conversion of the convertible notes as the effects were antidilutive.

F-30

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 13:    BUSINESS ACQUISITIONS

Epiq Advisory Services, LLC

On May 16, 2006, our wholly-owned subsidiary, Epiq Advisory Services LLC (now Epiq Preference Solutions), 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. The preliminary allocation of the purchase price is as follows: less than $0.1 million to net assets, approximately
$2.4 million to customer relationships, 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 consolidated financial statements from the date of
acquisition. The operating results of Epiq Preference Solutions are included within our settlements and claims 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 $126.6 million, including capitalized acquisition costs. During
2006, the legal names of the acquired entities were changed and are now collectively referred to as Epiq eDiscovery. This acquisition provides complementary diversification to our existing legal
services business as Epiq eDiscovery provides electronic discovery services to law firms and in-house counsel. Epiq eDiscovery is included within our electronic discovery segment. The
purchase price consisted of cash of $100.0 million and approximately 1.8 million shares of our common stock. Based on our valuation, the purchase price was allocated as follows (in
thousands):

Accounts receivable

$
12,735Other current assets


2,926Property and software


7,236Trade names


569Customer relationships


24,614Non-compete agreements


6,676Current liabilities


(6,199
)Deferred tax liability


(16,333
)Goodwill


94,364Total 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

F-31

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 13:    BUSINESS ACQUISITIONS (Continued)

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.

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 settlements and claims 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. Based on our valuation, the purchase price has been allocated as follows (in thousands):

Tangible assets

$
438Trade name


271Customer relationships


323Non-compete agreements


2,680Current liabilities


(271
)Deferred taxes, net


(1,448
)Goodwill


7,300Total purchase price

$
9,293


Customer
relationships 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.

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

F-32

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 13:    BUSINESS ACQUISITIONS (Continued)

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

2005Total revenues

$
225,382

$
138,635Net income (loss)

$
35,033

$
(3,498
)Net income (loss) per shareBasic

$
1.20

$
(0.13
)Net income (loss) per shareDiluted

$
1.05

$
(0.13
)


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:    SEGMENT REPORTING

In the first quarter of 2007, we revised the structure of our operating segments to reflect a change in the nature of the financial information provided to our
chief operating decision makers. The segment measure of profit for the years ended December 31, 2007, 2006, and 2005 has been recast in accordance with our new structure. We have three
operating segments: (i) electronic discovery, (ii) bankruptcy trustee, and (iii) settlements and claims. Our electronic discovery business provides technology solutions to
corporations and the litigation departments of law firms. Produced documents are made available primarily through a hosted environment, and our DocuMatrix software allows for efficient
plaintiff and defendant counsel review and data requests. Our bankruptcy trustee segment provides solutions that address the needs of Chapter 7 and Chapter 13 trustees to process large
bankruptcy caseloads and to make required distributions to creditors accurately and efficiently. Our settlements and claims segment administers complex legal proceedings which involve notification of
a class of actual or potential claimants or creditors and the administration of funds related to settlement with the class of claimants or creditors.

Each
segment's performance is assessed based on earnings before interest, taxes, depreciation and amortization, other operating expenses, and share-based compensation expense. In
management's evaluation of performance, certain administrative costs, such as compensation and related costs for corporate staff and executive management, are not allocated by segment and,
accordingly, the operating segment results do not include such unallocated costs. Assets reported within a segment are those assets that can be identified to a segment and primarily consist of trade
receivables, property, equipment and leasehold improvements, software, identifiable intangible assets and goodwill. Cash, tax-related assets, and certain prepaids and other assets are not
allocated to our segments. We identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets by operating segment; however,
we do not allocate the related depreciation and

F-33

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 14:    SEGMENT REPORTING (Continued)

amortization
to the segment as management evaluates segment performance exclusive of these non-cash expenses.

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

|                                                 |               | Year Ended December 31, 2007
|------------------------------------------------ | ------------- | ----------------------------
|
|Revenue:                                         |               |                             
|Operating revenue before reimbursed direct costs |               | $                           
|Operating revenue from reimbursed direct costs   |               |                             
|                                                 |               |                             
|                                                 | Total revenue |                             
|Direct costs, general and administrative costs   |               |                             
|                                                 |               |                             
|Segment performance measure                      |               | $                           
|                                                 |               |                             

|
|

|                                                 |               | Year Ended December 31, 2006
|------------------------------------------------ | ------------- | ----------------------------
|
|Revenue:                                         |               |                             
|Operating revenue before reimbursed direct costs |               | $                           
|Operating revenue from reimbursed direct costs   |               |                             
|                                                 |               |                             
|                                                 | Total revenue |                             
|Direct costs, general and administrative costs   |               |                             
|                                                 |               |                             
|Segment performance measure                      |               | $                           
|                                                 |               |                             

|
|

|                                                 |               | Year Ended December 31, 2005
|------------------------------------------------ | ------------- | ----------------------------
|
|Revenue:                                         |               |                             
|Operating revenue before reimbursed direct costs |               | $                           
|Operating revenue from reimbursed direct costs   |               |                             
|                                                 |               |                             
|                                                 | Total revenue |                             
|Direct costs, general and administrative costs   |               |                             
|                                                 |               |                             
|Segment performance measure                      |               | $                           
|                                                 |               |                             

F-34

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 14:    SEGMENT REPORTING (Continued)

Following
is a reconciliation of our segment performance measure to income before income taxes (in thousands):

|                                                     |  | Year Ended December 31, |        
|---------------------------------------------------- |  | ----------------------- | -------
|
|Segment performance measure                          |  | $                       | 68,299 
|Corporate and unallocated expenses                   |  |                         | (18,618
|Share-based compensation expense                     |  |                         | (5,602 
|Depreciation and software and leasehold amortization |  |                         | (12,766
|Amortization of intangible assets                    |  |                         | (9,531 
|Other operating income (expense)                     |  |                         | 1,094  
|Interest expense, net                                |  |                         | (11,881
|                                                     |  |                         |        
|Income (loss) before income taxes                    |  | $                       | 10,995 
|                                                     |  |                         |        

Following
are total assets by segment (in thousands):

December 31,
2007

December 31,
2006AssetsElectronic Discovery

$
132,030

$
125,515Bankruptcy Trustee


86,713


85,646Settlements and Claims


144,948


150,343Corporate and unallocated


29,103


20,716Total consolidated assets

$
392,794

$
382,220


Following
is goodwill by segment (in thousands):

December 31, 2007

December 31, 2006GoodwillElectronic Discovery

$
76,048

$
76,369Bankruptcy Trustee


75,205


74,937Settlements and Claims


109,431


109,303Total goodwill

$
260,684

$
260,609


F-35

---



EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 14:    SEGMENT REPORTING (Continued)

Following
are capital expenditures by segment (in thousands):

|                     |                           | Year Ended December 31,                
|-------------------- | ------------------------- | ---------------------------------------
|
|Capital Expenditures |                           |                                        
|                     | Electronic Discovery      |                                        
|                     | Bankruptcy Trustee        |                                        
|                     | Settlements and Claims    |                                        
|                     | Corporate and unallocated |                                        
|                     |                           |                                        
|                     |                           | Total consolidated capital expenditures
|                     |                           |                                        

Following
is revenue, determined by the location providing the services, by geographical area (in thousands):

|        |      | Year Ended December 31,
|------- | ---- | -----------------------
|
|Revenue |      |                        
|        | U.S. |                        
|        | UK   |                        
|        |      |                        
|        |      | Total                  
|        |      |                        

Following
is long-lived assets by geographical area (in thousands):

|                  |      | December 31,
2007 |   | December 31,
2006
|----------------- | ---- | ----------------- | - | -----------------
|Long-lived assets |      |                   |   |                  
|                  | U.S. |                   | $ | 41,425           
|                  | UK   |                   |   | 786              
|                  |      |                   |   |                  
|                  |      | Total             |   | $                
|                  |      |                   |   |                  

NOTE 15:    DERIVATIVES

As discussed under Risk Factors in this Annual Report on Form 10-K, a portion of our bankruptcy trustee revenue is subject to variability based
on fluctuations in short-term interest rates. In order to limit our economic exposure to market fluctuations in interest rates, we purchased one-month LIBOR based interest rate
floor options with a total notional amount of $800 million and initial contractual maturity of three years. We are exposed to credit risk with the counterparty, which is a major financial
institution with an investment grade credit rating, to this derivative transaction. The counterparty is obligated to make payments to us only if the interest rate floor options are
in-the-money. As of December 31, 2007, none of the interest rate floor options were in-the-money. We account for this transaction pursuant to the
guidance contained in Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, as
amended and interpreted (SFAS 133). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair

F-36

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EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2007, 2006 AND 2005

NOTE 15:    DERIVATIVES (Continued)

value.
As the interest rate floor options have not been designated as an accounting hedge, changes in the fair value of the derivatives are recorded each period in current earnings. At inception, the
aggregate fair value of the interest rate floor options was approximately $1.6 million. The estimated fair value of the interest rate floor options as of December 31, 2007 was
approximately $2.7 million. On our accompanying consolidated balance sheets, the fair value of the interest rate floor options has been included as a component of other current assets. For the
year ended December 31, 2007, the $1.1 million increase in the estimated fair value of the interest rate floor options has been included as a component of other operating expense
(income) on our accompanying consolidated statements of operations. Subsequent to December 31, 2007, we terminated these interest rate floor options and received cash of approximately
$5.1 million.

NOTE 16:    SUPPLEMENTAL CASH FLOW INFORMATION

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

|                                               |                                                    | Year Ended December 31,
|---------------------------------------------- | -------------------------------------------------- | -----------------------
|
|Cash paid (received) for:                      |                                                    |                        
|                                               | Interest                                           |                        
|                                               | Income taxes paid (refunded), net                  |                        
|Non-cash investing and financing transactions: |                                                    |                        
|                                               | Capitalized lease obligations incurred             |                        
|                                               | Property and equipment accrued in accounts payable |                        
|                                               | Obligation incurred in purchase transactions       |                        
|                                               | Issuance of common shares in purchase transactions |                        

*    *    *

F-37

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

|                                     |  |   |       | Additions |   |       |  |  
|------------------------------------ |  | - | ----- | --------- | - | ----- |  | -
|
|Allowance for doubtful receivables   |  |   |       |           |   |       |  |  
|For the year ended December 31, 2007 |  | $ | 1,684 |           | $ | 479   |  | $
|For the year ended December 31, 2006 |  | $ | 3,481 |           | $ | 458   |  | $
|For the year ended December 31, 2005 |  | $ | 1,069 |           | $ | 1,119 |  | $

---

|                                     |  |   |     | Additions |   |     |  |  
|------------------------------------ |  | - | --- | --------- | - | --- |  | -
|
|Deferred tax valuation allowance     |  |   |     |           |   |     |  |  
|For the year ended December 31, 2007 |  | $ | 228 |           | $ |    |  | $
|For the year ended December 31, 2006 |  | $ |    |           | $ | 228 |  | $
|For the year ended December 31, 2005 |  | $ |    |           | $ |    |  | $

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EXHIBIT INDEX

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

|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1            |  | Placement Agency Agreement dated as of November 15, 2007, between Epiq Systems, Inc. and Wachovia Capital Markets, LLC. 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 16, 2007.                                                                                                                                         
|3.1            |  | Articles of Incorporation, as amended through February 28, 2008. *                                                                                                                                                                                                                                                                                                                                                                     
|3.2            |  | Bylaws, as amended and restated through May 17, 2007. 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 May 21, 2007.                                                                                                                                                                                                                
|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            |  | 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.                                                                                                                                                                                               
|4.5            |  | Election of holders to extend the maturity of the Contingent Convertible Subordinated Notes from June 15, 2007, to June 15, 2010. 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 April 4, 2007.                                                                                                                                   
|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           |  | 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.                               
|10.4           |  | 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.

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|10.5  |  | 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.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6  |  | 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. 
|10.7  |  | 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.                                                                                                                                                                                        
|10.8  |  | Employment arrangement between Epiq Systems, Inc. and Lorenzo Mendizabal dated as of May 20, 2005, as amended October 19, 2005.                                                                                                                                                                                                                                                                                                                 
|10.9  |  | Letter Agreement dated February 7, 2006, between Epiq Systems, Inc. and Bank of America, N.A. (portions of this exhibit have been omitted pursuant to grant of confidential treatment pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934).                                                                                                                                                                                        
|10.10 |  | The Qualified Executive Performance Plan, dated as of March 29, 2007. 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 April 4,
2007.                                                                                                                                                                                                        
|10.11 |  | The Strategic Executive Incentive Plan, dated as of March 29, 2007. 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 April 4,
2007.                                                                                                                                                                                                          
|10.12 |  | Form of Subscription Agreement dated as of November 15, 2007, between Epiq Systems, Inc. and the purchasers named therein. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the
Securities and Exchange Commission on November 16, 2007.                                                                                                                                               
|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.*                                                                                                                                                                                                                                                                                                                                                                              

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