UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549

FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


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 offices)

(Zip Code)


913-621-9500(Registrant's telephone number)

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

Securities registered pursuant to Section 12(g) of the Act Common Stock $0.01 par value

Indicate by check mark whether 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    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 the 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, 2009) was approximately $499,000,000.

There
were 36,183,567 shares of common stock of the registrant outstanding as of February 12, 2010.

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 2010 Annual Meeting of Shareholders, which will be filed with the Commission within 120 days after the end of the registrant's fiscal year.



---



Table of Contents

TABLE OF CONTENTS



PART IItem 1.

Business

1Item 1A.

Risk Factors

7Item 1B.

Unresolved Staff Comments

15Item 2.

Properties

15Item 3.

Legal Proceedings

15PART IIItem 5.

Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities

16Item 6.

Selected Financial Data

19Item 7.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

20Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk

40Item 8.

Financial Statements and Supplementary
Data

41Item 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

41Item 9A.

Controls and Procedures

41Item 9B.

Other Information

45PART IIIItem 10.

Directors, Executive Officers and Corporate
Governance

45Item 11.

Executive Compensation

45Item 12.

Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters

45Item 13.

Certain Relationships and Related Transactions, and Director
Independence

45Item 14.

Principal Accounting Fees and Services

45PART IVItem 15.

Exhibits, Financial Statement Schedules

46


---



Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

Forward-looking
statements may be identified by words or phrases such as "believe," "expect," "anticipate," "should," "planned," "may," "estimated," "goal," "objective," and "potential."
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, Item 1A,"Risk
Factors"of this report lists 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 in this report or in future communications to reflect future events or
developments.

---





Table of Contents

PART I

ITEM 1.    BUSINESS

General Development of Business

Epiq Systems, Inc. is a provider of integrated technology solutions for the legal profession. References below to "we," "us" and
"our" may refer to Epiq Systems, Inc. exclusively or to one or more of our subsidiaries. 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, government agencies 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 the second quarter of 2008 we acquired all of the equity of
Uberdevelopments Limited and its wholly-owned operating subsidiary Pinpoint Global Limited (collectively, "Pinpoint"), an electronic discovery business with operations in the United Kingdom, to expand
our market in the United Kingdom. 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
bankruptcy segment 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 clients of our settlement administration segment.

Our
trademarks and service marks include Epiq, Epiq Systems, Bankruptcy Link®, CasePower®, CasePower 13®,
ClaimsMatrix®, ClassMatrix, CreditorMatrix, DebtorMatrix, DocuMatrix, eDataMatrix®, IQ Review, IQ
ReviewSM, LegalMatrix, TCMS®, TCMSWeb, and XFrame. The trademarks and service marks have been filed but are not yet registered; the
registered marks have durations ranging from 2011 through 2019.

Financial Information About Segments

Our business is organized into three reporting segments: electronic discovery, bankruptcy, and settlement administration. Segment
information related to revenues, a performance measure of profit or loss, capital expenditures, and total assets is contained in Note 14 of the Notes to Consolidated Financial Statements.

Narrative Description of Business

Electronic Discovery Segment

Our electronic discovery segment provides collections and forensics, processing, search and review, and document 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 a hosted environment, and our DocuMatrix software allows for efficient attorney 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 litigation and regulatory matters.

The
substantial amount of electronic documents and other data used by businesses has changed the dynamics of how attorneys support discovery in complex litigation matters. Due to the
complexity of cases, the volume of data that are maintained electronically, and the volume of documents that are

1

---



Table of Contents

produced
in all types of litigation, law firms have become increasingly reliant on electronic evidence management systems to organize and manage the litigation discovery process.

Following
is a description of the significant sources of revenue in our electronic discovery business.



In
the first half of 2009 we opened new offices in Brussels and Hong Kong, establishing global reach for our offices and data centers in the U.S., Europe and Asia; and expanded
our offerings to include data forensics and collections services, as well as document review services. In 2009 we also launched IQ Review, a revolutionary combination of new intelligent
technology and expert services which incorporates new prioritization technology into DocuMatrix, our flagship document management platform.

Bankruptcy Segment

Bankruptcy is an integral part of the United States' economy. As reported by the Administrative Office of the U.S. Courts for
the fiscal years ended September 30, 2009, 2008, and 2007, there were approximately 1.40 million, 1.04 million, and 0.80 million new bankruptcy filings, respectively.
Bankruptcy filings for the twelve-month period ended September 30, 2009 increased 34% versus the twelve-month period ended September 30, 2008. During this period, Chapter 7
filings increased 45%, Chapter 11 filings increased 68%, and Chapter 13 filings increased 13%. The quarter ended September 30, 2009 represented the highest quarterly filing period
since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted.

Our
bankruptcy business provides solutions that address the needs of Chapter 7, Chapter 11, and Chapter 13 bankruptcy trustees to administer bankruptcy proceedings
and of debtor corporations that file a plan of reorganization.



2

---



Table of Contents



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 our trustee customers at no direct charge, and they maintain deposit accounts for bankruptcy cases under their
administration at a designated banking institution. We have 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 years ended December 31, 2009 and 2008, a majority of our Chapter 7 trustee clients' deposits were
maintained at Bank of America. See Note 9 of the Notes to Consolidated Financial Statements for additional information on this significant customer.

Chapter 11
bankruptcy engagements are generally long-term, multi-year assignments that provide revenue visibility into future periods. For the
Chapter 7 trustee services component of the bankruptcy segment, the increase in filings is expected to translate into growth in client deposit balances related to asset liquidations. Our
trustee services deposit portfolio reached $2.0 billion during the fourth quarter of 2009, while pricing was at floor pricing levels under our agreements due to the low short-term
interest rate environment.

The
key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor's legal counsel, the creditors, the creditors' legal counsel, and the
bankruptcy judge. Chapter 7 and Chapter 13 cases also include a professional bankruptcy trustee, who is responsible for administering the bankruptcy case. The end-user
customers of our bankruptcy solutions are debtor corporations that file a plan of reorganization and 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.

Following
is a description of the significant sources of revenue in our bankruptcy business.



3

---



Table of Contents

Settlement Administration Segment

Our settlement administration segment provides managed services, including legal notification, claims administration, project
administration and controlled disbursement.

The
customers of our settlement administration segment are corporations that are administering the settlement or resolution of class action cases or administering projects. We sell our
services directly to those customers and other interested parties, including legal counsel, which often provide access to these customers. During the years ended December 31, 2009, 2008 and
2007, approximately 12%, 22%, and less than 1%, respectively, of our consolidated revenue was derived from a large contract with IBM in support of the federal government's analog to digital conversion
program. This revenue was recognized in our settlement administration segment. The contract began in the fourth quarter of 2007 and, as expected, wound-down in 2009.

Following
is a description of the significant sources of revenue in our settlement administration business.



Key
participants in this marketplace include law firms that specialize in representing class action and mass tort plaintiffs and other law firms that specialize in representing
defendants. Class action and mass tort 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. Mass tort refers to class action cases that are particularly large or prominent. Class action and mass tort litigation is often complex and the cases, including administration of any
settlement, may last several years.

Competition

Electronic Discovery

The electronic discovery market is highly fragmented, intensely competitive and rapidly evolving. Competitors include Electronic
Evidence Discovery, Inc., Fios, Inc., Kroll Ontrack (Marsh & McLennan Companies), Attenex (FTI Consulting, Inc.), Autonomy ZANTAZ, Inc., Stratify, Inc. (Iron
Mountain Incorporated), and Clearwell Systems, Inc. Competition is primarily based on the quality of service, technology innovations, and price.

Bankruptcy

Our bankruptcy segment competes in a more mature market. We are one of two primary providers in the Chapter 7 bankruptcy market,
along with Bankruptcy Management Solutions, Inc.; and in the Chapter 11 bankruptcy market competitors include Kurtzman Carson Consultants LLC and The Garden City
Group, Inc. In both the Chapter 7 and Chapter 11 markets there are also several smaller competitors. Competition is primarily based on quality of service and technology
innovations.

4

---



Table of Contents

Settlement Administration

The primary competitors with our settlement administration segment are The Garden City Group, Inc., Rust
Consulting, Inc., and Gilardi & Co LLC, as well as several smaller competitors. Competition is primarily based on the quality of service, technology innovations, and price.

In
addition to the competitors mentioned above, certain law firms, accounting firms, management consultant firms, turnaround specialists and crisis management firms offer products and
services that compete with our products and services in each of our segments.

Key
competitive factors and the relative strength of our products and services versus our competitors are directly and indirectly affected by our technology innovations, the quality of
our services, price, ease of use of our technology solutions, quality of our technical support, reliability, and our domain expertise. Our ability to continually innovate and differentiate our product
offerings has enabled us to achieve and maintain leadership positions in the various markets that we serve.

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 longstanding relationships. We focus on attracting and retaining customers by providing superior integrated technology solutions and 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.

Government Regulation

Our products and services are not directly regulated by the government. However, our bankruptcy segment customers are subject to
significant regulation under the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. 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 of evidence and rules
of procedure established by the courts.

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. Among other things, these 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' electronically stored information, (ii) expand the reach of federal court subpoenas to
include electronically stored information, (iii) allow for parties to object to production of electronically stored information 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 electronically stored information 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. We anticipate the federal and state court discovery rules relating to electronic documents and information will continue to evolve and affect the way we develop and
implement technology and service solutions to those changing discovery rules.

5

---



Table of Contents

Employees

As of December 31, 2009, we employed approximately 550 full-time employees, none of whom is covered by a collective
bargaining agreement. We believe the relationship with our employees is good.

Financial Information About Geographic Areas

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.

Available Information

Our company internet address is www.epiqsystems.com. We make a variety of information available, free of charge, at our Investor
Relations website, www.epiqsystems.com/investors.php, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on
Form 8-K, and any amendments to those reports 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 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.

6

---





Table of Contents

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 on the basis of the technological features, capabilities and price 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 and offer competitive pricing for our products and services.

The markets for our products and services are competitive, continually evolving and subject to technological change. We believe that
key 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, the pricing of our products and services, 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. If we do
not keep pace with technological changes, we could lose existing customers and fail to attract new business. Likewise, technology products and services can become more price sensitive over time, and
if we are not able to maintain price competitive products and services we could lose existing customers and fail to attract new customers. The impact of not keeping pace with technological changes or
maintaining competitive pricing could adversely affect our results of operations.

Security problems with our software products, systems or services could cause increased service costs and 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 and impaired market acceptance of our products, any of which could result in higher expenses or lower revenues.

Improper disclosure of personal data could harm our reputation and result in liability and increased expense for litigation and diversion of management time.

We store and process large amounts of personally identifiable information. Our software products also enable our customers to store and
process personal data. It is possible that our security controls over personal data, our selection and training of employees, and other practices we follow may not prevent the improper disclosure of
personally identifiable information. Such disclosure could harm our reputation and subject us to liability in regulatory proceedings and private litigation under laws that protect personal data,
resulting in increased costs or loss of revenue. Perceptions that our products and services do not adequately protect the privacy of personal information could inhibit sales of our products and
services. Additionally, improper disclosure of personal data could result in lawsuits or

7

---



Table of Contents

regulatory
proceedings alleging damages. Defending these types of claims could result in increased expenses for litigation and claims 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, disburse funds, generate and distribute legal notices 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 lower revenues. Additionally, these types of errors or fraud could result in lawsuits alleging damages. Defending these types of claims could result in
increased expenses for litigation and claims settlement and a significant diversion of our management's attention.

Any claims or threats of litigation could distract us from business operations and strategic planning, and costs of litigation or settlement could adversely affect our
financial condition or results of operations.

Any claims made or litigation commenced against the company, or our officers or directors, may distract our board of directors,
management, or other key employees from business operations and strategic planning. There may also be an increase versus prior periods in potential claims or litigation relative to company operational
growth. Claims resolution frequently
entails a cost/benefit analysis, which would include consideration of the potential risks, expenses and impact to business operations. We may determine to litigate or settle such claims (including
threatened claims) even if we believe those claims have little or no merit. The cost of litigation or settlements could adversely affect our financial condition or our results of operations.

Interruptions or delays in service 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, which increases our vulnerability to problems with the services they provide, 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 or services 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.

Releases of new software products or upgrades to our existing software products may have undetected errors, which could cause litigation claims against us or damage to our
reputation.

Certain of our services utilize software solutions developed by us for our customers. We issue new releases of our software products to
our customers 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 upgrade to existing software products has a risk of undetected errors. These undetected errors may be discovered only after a product has been installed

8

---



Table of Contents

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 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.

Our software solutions may not achieve our customer's desired objectives, which could cause loss of business and potential litigation claims against us or damage to our
reputation.

The software products and solutions we provide our customers are increasingly complex in response to the needs of our customers. While
our products and services are designed to meet the needs of our customers, our software products may fail to achieve the customer's desired objectives, which could result in the loss of that customer,
loss of future business, potential litigation claims against us and damage to our reputation.

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. The hardware is typically
standardized hardware from national vendors. The software licenses are generally standardized, commercial software licenses from national software vendors. We are generally able to select from a
number of competing hardware and software applications, and, from time to time, we have changed the hardware and software technologies incorporated into our software products and solutions. Any errors
or defects in third party hardware or software incorporated into our products could result in a failure of our service or errors in our software, which in turn could adversely affect our customer
relationships and result in the loss of customers, the loss of future business, potential litigation claims against us, and damage to our reputation.

Revenue in our bankruptcy segment related to trustee deposits is collected through a few financial institutions, and the adverse modification or termination of any of those
arrangements, including a component of pricing tied to prevailing interest rates, could cause uncertainty and adversely affect our future bankruptcy segment 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 one of the designated financial institutions with which we have an arrangement. We then collect fees from each financial institution which are largely based
on a percentage of the total funds on deposit pursuant to contracts with that financial institution. The great majority of our clients' funds are currently deposited at two such financial
institutions. Fees we earn for deposits placed with those financial institutions vary,
within certain limits, based on fluctuations in short-term interest rates. The significant decline in short-term interest rates, which began in 2008 and continued into 2009,
resulted in pricing under those arrangements reaching the low end of the variable fee schedule. Fluctuations in short-term interest rates could affect the fees we earn for the
Chapter 7 deposits in the future. These bankruptcy deposit-based fees represent a material percentage of our bankruptcy segment revenues.

Our
pricing and terms with the two financial institutions are in the form of agreements that are currently non-cancellable, without cause, prior to June 2012. We have,
however, from time to time agreed with the financial institutions to modify the pricing or terms of those agreements and we may

9

---



Table of Contents

do
so again in the future. Any modifications to pricing or terms could adversely affect our bankruptcy segment revenue and earnings. Likewise, a termination of a financial institution arrangement
could adversely affect our bankruptcy segment revenue 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 senior
executives or other key personnel, including key sales professionals, 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 in the future 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 or businesses we acquire include those associated
with:



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

We have expanded our business internationally with offices in London, Brussels and Hong Kong, primarily related to our electronic
discovery business. We could expand other businesses internationally and we could enter other world markets. It requires 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.

10

---



Table of Contents

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:



To the extent our revenues are paid in foreign currencies, and currency exchange rates become unfavorable, we may lose some of the economic value of the revenues in U.S.
dollar terms.

As we expand our international operations, more of our customers pay us in foreign currencies and we incur more of our expenses in
foreign currencies. The revenues recorded and collected in a foreign currency may not match the expenses paid or incurred in that same currency. Conducting business in currencies other than U.S.
dollars subjects us to fluctuations in currency exchange rates. Unfavorable changes in currency exchange rates could have a negative impact on our revenues, expenses and earnings.

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 adequately 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

11

---



Table of Contents

adverse
determination could also prevent us from offering our service to others, which could result in a loss of revenues and profits.

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

Compliance with changing laws, regulations and standards relating to financial reporting, corporate governance and public disclosure,
including new accounting standards, SEC regulations, and The NASDAQ Stock Market and FINRA (Financial Industry Regulatory Authority) rules, are time consuming and expensive. We have spent substantial
amounts of management time and have incurred substantial legal and accounting expense in the past complying with these federal securities laws. 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.

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 reporting segments and the customers served
by those businesses are, however, directly or indirectly affected by federal and state laws and regulations and court rules. For example, bankruptcy reform legislation, class action and tort reform
legislation and amendments to the Federal Rules of Civil Procedure regarding discovery of "electronically stored information" have all affected our customers, and indirectly, our business segments.
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.

Goodwill comprises a significant portion of our total assets. We assess goodwill for impairment at least annually, which could result in a material, non-cash
write-down and could have a material adverse effect on our results of operations and financial condition.

The carrying value of our goodwill was approximately $264.2 million, or approximately 60% of our total assets, as of
December 31, 2009. We assess goodwill for impairment on an annual basis at a reporting unit level. Goodwill is assessed between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying value. Our impairment reviews require extensive use of accounting judgment and financial estimates. Application
of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organization level, could produce significantly different results. We may be required to recognize
impairment of goodwill based on future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of
our reporting units. Impairment of goodwill could result in material charges that could, in the future, result in a material, non-cash write-down of goodwill, which could have
a material adverse effect on our results of operations and financial condition. As of July 31, 2009, which is the date of our most recent impairment test, the fair value of the bankruptcy
trustee management reporting unit had approximately $75.2 million of goodwill allocated to it, and the fair value of this reporting unit exceeded its carrying value by approximately 32%; the
fair value of each of our other reporting units was substantially in excess of the carrying value of the reporting unit.

12

---



Table of Contents

The continuing uncertainty in national and global economic conditions could negatively affect our business, results of operations and financial condition.

The recent financial crisis affecting the banking system and financial markets and the continuing uncertainty in national and global
economic conditions resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in credit, equity and fixed income markets. It is
difficult to estimate the exact impact of the economic crisis on our business, but we believe that it adversely affected our electronic discovery segment in 2009, while generally benefitting our
bankruptcy segment. There could still be a number of unforeseen or unidentified follow-on effects from these economic developments on our business and our customers. National economic
risks that we have considered in our planning processes in the past 12 months include risks associated with the inability or unwillingness of our credit banks to fund draws on our revolving
credit facility, our inability to increase or renew our current revolving credit facility, failure of our customers to pay us on a timely basis or at all, and delays in business and litigation-related
expenditures by our customers. If the global economy or the U.S. economy remains uncertain or weakens further, the consequences could have an adverse effect on our business, operating results and
financial condition.

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 in the past and may fluctuate in the future. Our quarterly revenues and operating results can be
difficult to forecast. 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:



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.

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:



13

---



Table of Contents

In
addition, the stock market has experienced significant price and volume fluctuations 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.

We historically have not paid 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 historically have not paid 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. The convertible notes
mature in June 2010. 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 and cash flow from operations, our capital requirements, our financial condition and any other factors that the board of
directors may consider. Unless we pay cash dividends on our common stock in the future, 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 fund, in part, acquisitions and to refinance debt incurred in connection with acquisitions. 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 an electronic discovery business acquisition. During June 2004, we issued $50.0 million of convertible notes, which are convertible at the option of the note
holders on or before June 15, 2010, 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 an 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.

14

---



Table of Contents

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

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

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

ITEM 3.    LEGAL PROCEEDINGS

Purported Derivative Shareholder Complaint

On July 29, 2008, the Alaska Electrical Pension Fund filed a putative shareholder derivative action in the U.S. District
Court for the District of Kansas (Civil Action No. 08-CV-2344 CM/JPO), alleging that each of our current directors and certain current and former executive officers and
directors engaged in misconduct regarding stock option grants.

The
complaint asserts, among other things, that the company backdated certain stock options and that the individual defendants either participated in the backdating or permitted it to
occur, violations of generally accepted accounting principles as a result of the alleged backdating of options, related claims
of false and misleading proxy statements and annual reports filed by the company under the Securities Exchange Act of 1934, also as a result of the alleged backdating of options, and various
violations of state law, breaches of fiduciary duty of loyalty and insider trading in company stock. The complaint seeks, among other things, unspecified money damages, an accounting for profits
obtained from the alleged backdating of options, specified changes in our corporate governance policies, punitive damages and rescission of the allegedly backdated options.

In
October 2008, the company and the individual defendants filed a motion to dismiss the plaintiff's complaint on a variety of grounds. In June 2009, the Court entered an order on
defendants' motion to dismiss plaintiff's complaint. In that order, the Court: (i) barred certain of plaintiff's federal securities law claims arising before July 29, 2005, leaving only
the claim for the stock option grant dated June 3, 2006; (ii) held that the statute of limitations was tolled on those federal securities law claims; (iii) barred plaintiff's
other federal securities law claims arising before December 9, 2003; (iv) declined to rule at that time on defendants' motions to dismiss plaintiff's state law claims based on any
statute of repose or statute of limitations; (v) dismissed plaintiff's state law claim for constructive fraud; and (vi) held that plaintiff's complaint stated federal securities law and
state law claims with sufficient particularity to avoid dismissal at that stage in the proceedings. The individual defendants and the company have filed an answer denying plaintiff's claims.

The
plaintiff, the individual defendants and the company are participating in mediation required by the court. In connection with this on-going mediation, the company has
accrued a liability, of approximately $1.0 million at December 31, 2009 in the accompanying Consolidated Financial Statements. The ultimate resolution of this matter may materially
differ from the amount recorded as of December 31, 2009 as a result of future court rulings or potential settlement. Any liability relative to this matter may be funded in part, or in whole, by
the company's insurance carrier.

We
believe the plaintiff's claims are without merit and have been defending against them vigorously.

15

---





Table of Contents

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 our common stock for the calendar quarters of 2009 and 2008 as reported by NASDAQ.

2009

2008High

Low

High

LowFirst Quarter

$
18.30

$
14.41

$
18.28

$
12.11Second Quarter


18.43


13.39


16.83


14.16Third Quarter


16.31


14.50


16.19


10.52Fourth Quarter


15.23


12.37


17.72


10.73


Holders

As of February 12, 2010, there were approximately 72 owners of record of our common stock and approximately 7,000 beneficial
owners of our common stock.

Dividends

We historically have not paid 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. The
convertible notes mature in June 2010. 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 and cash flow from operations, our capital requirements, our financial condition and any other
factors that the board of directors may consider. 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, 2009 (a) the number of securities to be issued upon exercise of
outstanding options, warrants and rights, (b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for
future issuance under equity compensation plans (excluding securities reflected in column (a)).

(a)

(b)

(c)Plan Category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))Equity compensation plans approved by security holders


7,181,000

$
11.62


1,212,000Equity compensation plans not approved by security holders


575,000

$
13.95


-Total


7,756,000

$
11.79


1,212,000


16

---



Table of Contents

As
of December 31, 2009, 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, 2009, equity compensation plans not approved by security shareholders consist of stock options issued in conjunction with acquisitions. Inducement stock options
were issued in conjunction with the execution of employment agreements with certain key employees of acquired companies to become employees of our newly acquired subsidiaries. In accordance with the
NASDAQ corporate governance rules, shareholder approval was not required for these inducement stock option grants.

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

We did not purchase any shares of our common stock during the fourth quarter of 2009.

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 & Data
Processing Index (the "NASDAQ Computer Index"), and (iii) the Standard & Poor's 500 Total Return Index (the "S&P 500 Index") for our last five fiscal years (December 31,
2004 through December 31, 2009) 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, 2009). 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, 2004, at the price of $9.76 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, 2004 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.

17

---



Table of Contents

Five-Year Performance Graph

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

GRAPHIC

ASSUMES
$100 INVESTED ON DEC. 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2009

Performance Graph Since Initial Public Offering

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG EPIQ SYSTEMS, INC., S&P TOTAL RETURN INDEX
AND NASDAQ COMPUTER & DATA PROCESSING INDEX

GRAPHIC

ASSUMES
$100 INVESTED ON FEB. 4, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2009

18

---



Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

The following table presents selected historical financial data for the years ended December 31, 2009, 2008, 2007, 2006, and
2005 (in thousands, except per share data).

Year Ended December 31,2009

2008

2007

2006

2005Income Statement Data:Total revenue

$
239,071

$
236,118

$
174,413

$
224,170

$
106,330Income from operations


28,211


25,821


22,876


71,225


445Net income (loss)


14,595


13,836


6,929


35,131


(3,842
)Diluted net income (loss) per share

$
0.38

$
0.36

$
0.21

$
1.05

$
(0.14
)Balance Sheet Data:Total assets

$
437,941

$
418,946

$
392,794

$
382,220

$
418,471Long-term obligations


4,654


55,310


58,266


83,873


145,906


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, 2004 and 2005 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, 2003, 2004 and 2005 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, 2004 and 2005, 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 years ended December 31, 2007, 2008
and 2009, we did not defer any bankruptcy trustee revenue or recognize any previously deferred bankruptcy trustee revenue.

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.

19

---





Table of Contents

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction
with the "Cautionary Statement Concerning Forward-Looking Statements," our "Risk Factors," "Selected Financial Data," and "Financial Statements and Supplementary Data" included in this
Form 10-K.

Management's Overview

Electronic Discovery Segment

Our electronic discovery segment provides collections and forensics, processing, search and review, and document 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 a hosted environment, and our DocuMatrix software allows for efficient attorney 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 litigation and regulatory matters.

The
substantial amount of electronic documents and other data used by businesses has changed the dynamics of how attorneys support discovery in complex litigation matters. 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, law firms have become increasingly reliant on
electronic evidence management systems to organize and manage the litigation discovery process.

Following
is a description of the significant sources of revenue in our electronic discovery business.



In
the first half of 2009, we opened new offices in Brussels and Hong Kong, establishing global reach for our offices and data centers in the U.S., Europe and Asia; and expanded our
offerings to include data forensics and collections services, as well as document review services. In 2009 we also launched IQ Review, a revolutionary combination of new intelligent
technology and expert services which incorporates new prioritization technology into DocuMatrix, our flagship document management platform.

Bankruptcy Segment

Bankruptcy is an integral part of the United States' economy. As reported by the Administrative Office of the U.S. Courts for the
fiscal years ended September 30, 2009, 2008, and 2007, there were approximately 1.40 million, 1.04 million, and 0.80 million new bankruptcy filings, respectively.
Bankruptcy filings for the twelve-month period ended September 30, 2009 increased 34% versus the twelve-month period ended September 30, 2008. During this period, Chapter 7
filings increased 45%, Chapter 11 filings increased 68%, and Chapter 13 filings increased 13%. The quarter ended

20

---



Table of Contents

September 30,
2009 represented the highest quarterly filing period since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted.

Our
bankruptcy business provides solutions that address the needs of Chapter 7, Chapter 11, and Chapter 13 bankruptcy trustees to administer bankruptcy proceedings
and of debtor corporations that file a plan of reorganization.



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 our trustee customers at no direct charge, and they maintain deposit accounts for bankruptcy cases under their
administration at a designated banking institution. We have 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, 2009 and 2008, a majority of our Chapter 7 trustee clients' deposits were
maintained at Bank of America. See Note 9 of the Notes to Consolidated Financial Statements for additional information on this significant customer.

Chapter 11
bankruptcy engagements are generally long-term, multi-year assignments that provide revenue visibility into future periods. For the
Chapter 7 trustee services component of the bankruptcy segment, the increase in filings is expected to translate into growth in client deposit balances related to asset liquidations. Our
trustee services deposit portfolio reached $2.0 billion during the fourth quarter of 2009, while pricing was at floor pricing levels under our agreements due to the low short-term
interest rate environment.

The
key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor's legal counsel, the creditors, the creditors' legal counsel, and the
bankruptcy judge. Chapter 7 and Chapter 13 cases also include a professional bankruptcy trustee, who is responsible for administering the bankruptcy case. The end-user
customers of our bankruptcy solutions are debtor corporations that file a plan of reorganization and 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

21

---



Table of Contents

for
the Executive Office for United States Trustees and for the bankruptcy court. Trustees manage an entire caseload of bankruptcy cases simultaneously.

Following
is a description of the significant sources of revenue in our bankruptcy business.



Settlement Administration Segment

Our settlement administration segment provides managed services, including legal notification, claims administration, project
administration and controlled disbursement.

The
customers of our settlement administration segment are corporations that are administering the settlement or resolution of class action cases or administering projects. We sell our
services directly to those customers and other interested parties, including legal counsel, which often provide access to these customers. During the years ended December 31, 2009, 2008 and
2007 approximately 12% and 22%, and less than 1%, respectively, of our consolidated revenue was derived from a large contract with IBM in support of the federal government's analog to digital
conversion program. This revenue was recognized in our settlement administration segment. The contract began in the fourth quarter of 2007, and, as expected, wound-down in 2009.

Following
is a description of the significant sources of revenue in our settlement administration business.



Key
participants in this marketplace include law firms that specialize in representing class action and mass tort plaintiffs and other law firms that specialize in representing
defendants. Class action and mass tort 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. Mass tort refers to class

22

---



Table of Contents

action
cases that are particularly large or prominent. Class action and mass tort litigation is often complex and the cases, including administration of any settlement, may last several years.

Results of Operations for the Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008

Consolidated Results of Operations

Revenue

Total revenue was $239.1 million in 2009, an increase of $3.0 million, or 1%, as compared to $236.1 million in the
prior year. A portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services. We reflect the operating revenue from these
reimbursed direct costs as a separate line item on our accompanying Consolidated Statements of Income. Revenue originating from reimbursed direct costs was $30.5 million, an increase of
$2.2 million, or 8%, from $28.3 million in the prior year. This increase corresponded to the increase in reimbursed direct costs. Although reimbursed operating revenue may fluctuate
significantly from period to period, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating
revenue exclusive of revenue originating from reimbursed direct costs, which we refer to as operating revenue before reimbursed direct costs, was $208.5 million in 2009,
an increase of $0.6 million as compared to $207.9 million in the prior year. The increase consisted of a $31.2 million increase in the bankruptcy segment, offset by a
$28.2 million decrease in the settlement administration segment, and a $2.3 million decrease in the electronic discovery segment. Changes by segment are discussed below.

Operating Expenses

The direct cost of services, exclusive of depreciation and amortization, was $71.9 million in 2009, a decrease of
$10.0 million, or 12%, as compared to $81.9 million in the prior year. Contributing to this decrease was a $9.8 million decrease in the cost of outside services, primarily related
to telephone, mailing and temporary help services, and a $5.6 million decrease in legal noticing. These declines were partially offset by $4.8 million increase in compensation related
expense, and a $0.9 million increase in software maintenance costs. Changes by segment are discussed below.

The
direct cost of bundled products and services, exclusive of depreciation and amortization, was $3.5 million in 2009, a decrease of $0.1 million, or 3%, compared to
$3.6 million in the prior year. Changes by segment are discussed below.

Reimbursed
direct costs increased in 2009 to $30.2 million compared to $28.1 million in the prior year. This increase corresponded to the increase in revenue originating
from reimbursed direct costs. Changes by segment are discussed below.

General
and administrative costs increased $7.3 million, or 10%, to $78.4 million in 2009 compared to $71.1 million in the prior year. Contributing to this increase
was a $6.1 million increase in share-based compensation expense, which was the result of the timing of when certain awards were granted. There were no share-based awards granted to executive
management in fiscal year 2008, and awards pertaining to both 2008 and 2009 were granted in fiscal year 2009. Expense related to cash based incentive awards to executive management in 2009 was
$0.2 million compared to $2.4 million in the prior year. Compensation, commission and benefits expense increased $0.8 million, primarily resulting from expanded staffing to meet
client demands; data line and telephone expense increased $0.8 million, due primarily to data center expansion; expense related to outside services increased $0.6 million; and
$0.5 million of expense in 2009 related to a litigation settlement reserve. Partially offsetting these increases were a $1.2 million decrease in professional fees, due primarily to a
decline in legal fees; and

23

---



Table of Contents

a
$0.7 million decrease in travel expense, related to expense management measures in 2009. Changes by segment are discussed below.

Depreciation
and software and leasehold amortization costs in 2009 were $18.8 million, an increase of $2.5 million, or 15%, compared to $16.3 in the prior year. This
increase was primarily the result of increased software amortization expense and increased hardware depreciation largely related to investment in our electronic discovery segment.

Amortization
of identifiable intangible assets in 2009 was $7.4 million, a decrease of $1.7 million, or 18%, compared to $9.1 million in the prior year. This
decrease was primarily the result of certain non-compete and customer contract intangible assets that were fully amortized during the year.

Other
operating expense in 2009 of $0.6 million increased $0.4 million, compared to $0.2 million in the prior year. Expense in 2009 is primarily comprised of
acquisition-related expense, and in 2008, other operating expense was comprised of $2.1 million of expense related to potential acquisitions and non-capitalized acquisition related
expenses, and a $2.4 million gain related to interest rate floor options purchased during 2007 and recognized in 2008.

Interest Expense, Net

Interest expense was $1.5 million, compared to $1.8 million in the prior year, a decrease of $0.3 million, or 16%.
Contributing to the decline was a $0.1 million decrease in loan fee amortization and a $0.1 million decrease in other interest expense.

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 convertible notes that remain outstanding. The holders of the convertible notes may chose at any
time on or prior to June 15, 2010 to convert some or all of the notes into our common shares. See Note 5 of the Notes to Consolidated Financial Statements for additional information
regarding this conversion right.

We
estimated the fair value of the option to extend immediately prior to the note holders' vote to extend and recorded a final adjustment to the fair value of the option to extend the
subordinated convertible notes' maturity. We are currently amortizing the exercise date fair value of the option as a reduction to interest expense over the term of the extension. During both 2009 and
2008 we recognized a reduction to interest expense of approximately $1.6 million related to the amortization of the carrying value of the option to extend the maturity term subsequent to the
extension date.

Effective Tax Rate

Our effective tax rate for 2009 was 45.7% compared with an effective rate of 43.2% for the prior year. The increase compared to the
prior year was primarily related to non-deductible equity compensation in 2009 for which a comparable expense did not exist in the prior year and approximately $0.9 million of
additional state income taxes, offset by $0.9 million of both research credits and benefits related to the domestic production activities deduction. State taxes, non-deductible
equity compensation and foreign losses on which we have recorded valuation allowances were the primary reasons our tax rate was higher than the statutory federal rate of 35%. We have significant
operations located in New York City that are subject to state and local tax rates that are higher than the tax rates assessed by other jurisdictions where we operate.

Although
our income tax returns for 2006 and later are generally subject to exam, it is reasonably possible that we will recognize approximately $0.5 million of previously
unrecognized tax benefits as a result of anticipated lapses in the statute of limitations within twelve months of our reporting date. If recognized, the $0.5 million of tax benefits would
affect the effective tax rate.

24

---



Table of Contents

Net Income

We had net income of $14.6 million for 2009 compared to $13.8 million for the prior year, an increase of
$0.8 million, or 5%. Strong growth in our bankruptcy segment, driven primarily by an increase in corporate restructuring engagements, was offset in part by declines in our electronic discovery
segment, driven by lower revenues related to the current economic climate and lower pricing, as well as an increase in expense related to the expansion of service and geographic expansion of the
business; a decline in our settlement administration segment, driven primarily by the wind down of the analog to digital conversion contract in 2009; an increase in share-based compensation expense,
the result of there being no share-based awards granted to executive management in fiscal year 2008, while awards pertaining to both 2008 and 2009 were granted in fiscal year 2009; a decline in cash
based incentive awards granted to executive management in 2009 compared to the prior year; a decline in other operating income due to the gain on the interest rate floor options recognized in the
prior year; and an increase in our 2009 effective tax rate, resulting in higher tax expense, due to the items mentioned above.

Results of Operations by Segment

The following segment discussion 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 in 2009 was $55.8 million, a decrease of
$2.3 million, or 4%, compared to $58.1 million in the prior year. The change from the prior year primarily related to a slower pace in the start-up of litigation matters in
2009, as well as industry pricing pressures, the impact of which was an approximate 16% decline in the average price of services, both of which can be attributed to the current economic climate. While
we believe the national financial, banking and economic crisis that began in the fourth quarter of 2008 and that continued in 2009 had a direct effect on the volume of electronic discovery in
litigation and regulatory proceedings in 2009, we cannot quantify the impact in 2009 or predict the extent to which continuing economic and financial concerns will affect our electronic discovery
business in 2010.

Electronic
discovery direct and administrative expenses, including reimbursed direct costs, were $37.7 million in 2009, an increase of $5.7 million, or 18%, compared to
$32.0 million in the prior year.
This increase was due to a $2.8 million increase in compensation related expense, a $1.1 million increase in building and equipment lease expense and utility expense; a
$1.0 million increase in outside services; and a $0.9 million increase in software maintenance costs. The increases in expense were primarily related to the expansion of service
offerings and geographic expansion, including certain costs related to data center expansion.

Bankruptcy Segment

Bankruptcy operating revenue before reimbursed direct costs was $91.0 million in 2009, an increase of $31.2 million, or
52%, compared to $59.8 million in the prior year. This increase was primarily attributable to an increase in corporate restructuring engagements, which is the direct result of an increase in
Chapter 11 bankruptcy filings. Corporate restructuring engagements are generally long-term, multi-year assignments. This has provided us with a strong inventory of cases
in the early stages of administration.

The
increase in revenue related to corporate restructuring engagements was slightly offset by a decline in Chapter 7 bankruptcy trustee fees. The Chapter 7 fees reflect
year-end deposit portfolio increasing 27% in 2009 compared to 2008, and the impact of lower pricing, resulting from short-term

25

---



Table of Contents

interest
rates lowering our pricing formulas to floor levels. Short-term interest rates began declining in the fourth quarter of 2008 and continued to decline in 2009.

Bankruptcy
direct and administrative expenses, including reimbursed direct costs, were $54.2 million in 2009, an increase of $20.1 million, or 59%, compared to
$34.1 million in the prior year. The increases in these costs were directly related to the increase in corporate restructuring engagements, as we have expanded our capacity to support increased
volumes. Compensation related expense increased $6.7 million, expense related to outside services increased $4.4 million, call center expense increased $1.9 million, legal
notification costs increased $0.7 million, and building and equipment lease expense increased $0.3 million. Also contributing to the increase in costs was an increase in reimbursed
direct costs of $5.7 million, which directly corresponded to the increase in revenue originating from reimbursed direct costs.

Settlement Administration

Settlement administration operating revenue before reimbursed direct costs was $61.7 million in 2009, a decrease of
$28.2 million, or 31%, compared to $89.9 million in the prior year, primarily due to the planned wind down of the major analog to digital conversion contract during 2009, which declined
$21.0 million from the prior year, as well as a decrease in legal notification and settlement revenue of $7.7 million.

Settlement
administration direct and administrative expenses, including reimbursed direct costs, were $65.2 million in 2009, a decrease of $28.0 million, or 30%, compared
to $93.2 million in the prior year, primarily due to the planned wind down of the major analog to digital conversion contract during 2009, which resulted in a $17.8 million decrease in
costs from the prior year; as well as a decrease of $9.3 million in legal noticing, outside services and production supplies expenses from the prior year.

Results of Operations for the Year Ended December 31, 2008 Compared with the Year Ended December 31, 2007

Consolidated Results of Operations

Revenue

Total revenue was $236.1 million in 2008, an increase of $61.7 million, or 35%, as compared to $174.4 million in
the prior year. A portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services. We reflect the operating revenue from these
reimbursed direct costs as a separate line item on our accompanying Consolidated Statements of Income. Revenue originating from reimbursed direct costs was $28.3 million, an increase of
$5.5 million, or 24%, from $22.8 million in the prior year. This increase directly corresponded to the increase in reimbursed direct costs. Although reimbursed operating
revenue may fluctuate significantly from period to period, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating
revenue exclusive of revenue originating from reimbursed direct costs, which we refer to as operating revenue before reimbursed direct costs, was $207.9 million in 2008,
an increase of $56.3 million, or 37%, as compared to the prior year. The increase consists of a $9.1 million increase in the electronic discovery segment and a $47.6 million
increase in the settlement administration segment, partially offset by a $0.5 million decrease in the bankruptcy segment. Changes by segment are discussed below.

Operating Expenses

Direct cost of services, exclusive of depreciation and amortization, was $81.9 million in 2008, an increase of
$40.4 million, or 98%, as compared to $41.5 million in the prior year. Contributing to this

26

---



Table of Contents

increase
was a $26.2 million increase in the cost of outside services, primarily related to telephone, mailing and temporary help services; a $5.3 million increase in legal noticing; a
$1.8 million increase in compensation related expense; and a $4.9 million increase in production supplies. Changes by segment are discussed below.

Direct
cost of bundled products and services, exclusive of depreciation and amortization, was $3.6 million in 2008, a decrease of $0.1 million, or 2%, compared to
$3.7 million in the prior year. Changes by segment are discussed below.

Reimbursed
direct costs increased in 2008 to $28.1 million compared to $22.6 million in the prior year. This increase directly corresponded to the increase in revenue
originating from reimbursed direct costs. Changes by segment are discussed below.

General
and administrative costs increased $8.6 million, or 14%, to $71.1 million in 2008 compared to $62.5 million in the prior year. Contributing to this increase
was a $4.9 million increase in compensation, commission and benefits expense, primarily resulting from expanded staffing to meet client demands; a $1.5 million increase in travel
expense; a $1.9 million increase in professional services; and a $1.4 million increase in bad debt expense. These increases were partially offset by a decrease of $2.8 million in
share-based compensation expense which was the result of the timing of when certain awards were
granted. There were no share-based awards granted to executive management in fiscal year 2008. Changes by segment are discussed below.

Depreciation
and software and leasehold amortization costs in 2008 were $16.3 million, an increase of $3.5 million, or 28%, compared to the prior year. This increase was
primarily the result of increased software amortization expense and increased hardware depreciation largely related to investment in our electronic discovery segment.

Amortization
of identifiable intangible assets in 2008 was $9.1 million, a decrease of $0.5 million, or 5%, compared to the prior year. This decrease was primarily the
result of certain customer contracts and trade names that became fully amortized during the year, partially offset by an increase in non-compete amortization resulting from our second
quarter acquisition of an electronic discovery business in the United Kingdom.

Other
operating expense of $0.2 million in 2008 primarily consists of $0.9 million of non-capitalized acquisition-related expenses related to the acquisition of
an electronic discovery business in the United Kingdom in the second quarter of 2008, as well as $1.2 million of expenses incurred throughout 2008 related to potential acquisitions that were
not completed. The acquisition-related expenses consisted of legal services, executive compensation, indirect and general costs, accounting services, and valuation services. Partially offsetting these
expenses is a $2.4 million gain in 2008 related to interest rate floor options purchased during 2007.

Interest Expense, Net

Interest expense was $1.8 million, compared to $12.0 million in the prior year, a decrease of $10.2 million, or
85%. Contributing to the decline was a $6.3 million decrease in interest expense related to our credit facility, a $3.2 million decrease in expense related to the value of our
subordinated convertible note holders' option to extend the maturity of the subordinated convertible notes from June 15, 2007 to June 15, 2010, and a $0.6 million decrease in loan
fee amortization.

The
$6.3 million decrease in credit facility interest expense resulted from our repayment and termination of the credit facility term loan and the repayment in full of the credit
facility revolving loan during 2007 from the proceeds of a common stock offering in November 2007. The $0.6 million decrease in loan fee amortization expense was primarily the result of the
completion of the amortization of fees related to the contingent convertible subordinated debt and the credit facility term loan during 2007.

27

---



Table of Contents

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 convertible notes that remain outstanding. The holders of the convertible 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 Consolidated Financial Statements for additional information regarding this conversion right.

We
estimated the fair value of the option to extend immediately prior to the note holders' vote to extend and recorded a final adjustment to the fair value of the option to extend the
subordinated convertible notes' maturity. We are currently amortizing the exercise date fair value of the option as a reduction to interest expense over the term of the extension. During 2008 we
recognized a reduction to interest expense of approximately $1.6 million related to the amortization of the carrying value of the option to extend the maturity term subsequent to the extension
date.

Effective Tax Rate

Our effective tax rate was 43.2% for 2008 compared with an effective rate of 37.0% 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 increase in the effective tax rate compared with the prior year is primarily due to a larger proportion of our income being taxed in high
tax rate jurisdictions and the reversal of a valuation allowance related to our United Kingdom net operating loss carryforward in 2007. During the fourth quarter of 2007, we determined that it was
more likely than not that the United Kingdom 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 resulting in a lower effective tax rate in 2007.

Net Income

We had net income of $13.8 million for 2008 compared to $6.9 million for the prior year, an increase of
$6.9 million, or 100%. Growth in our settlement administration segment,
resulting from a large contract in support of the federal government's analog to digital conversion program; as well as the decline in net interest expense, contributed to the increase in net income.
These increases were offset in part by the bankruptcy segment, which declined as a result of reduced short-term interest rates throughout 2008, combined with lower bankruptcy deposits.

Results of Operations by Segment

The following segment discussion 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 in 2008 was $58.1 million, an increase of
$9.1 million, or 18%, compared to the prior year. This increase is attributable to additional projects from existing clients, as well as an expansion of our client base, which resulted in an
increase in hosting and processing revenue.

Electronic
discovery direct and administrative expenses, including reimbursed direct costs, were $32.0 million in 2008, an increase of $7.2 million, or 29%, compared to the
prior year. Factors contributing to this increase include a $4.0 million increase in compensation, commission and benefits expense, resulting from expanded staffing to support increased
operating revenue; a $0.2 million increase in bad debt expense; a $0.4 million increase in promotional expense; a $0.2 million increase in professional services; a
$0.4 million increase in purchased software; a $0.7 million increase in building

28

---



Table of Contents

and
equipment lease expense, primarily related to data center expansion; and an $0.8 million increase in maintenance expense.

Bankruptcy Segment

Bankruptcy operating revenue before reimbursed direct costs was $59.8 million in 2008, a decrease of $0.5 million, or 1%,
compared to the prior year. This slight decrease was the result of an $8.6 million decline in our bankruptcy trustee fees; offset in part by an $8.2 million increase in bankruptcy
restructuring engagements.

Bankruptcy
direct and administrative expenses, including reimbursed direct costs, were $34.1 million in 2008, an increase of $4.2 million, or 14%, compared to the prior
year. This increase was primarily the result of a $0.3 million increase in compensation, commission and benefits expense, primarily due to increased headcount; a $1.3 million increase in
bad debt expense, resulting from several clients moving from Chapter 11 to Chapter 7 bankruptcy and additional accruals; and a $1.9 million increase in outside services expense,
resulting from several large noticing engagements.

Settlement Administration

Settlement administration operating revenue before reimbursed direct costs was $89.9 million in 2008, an increase of
$47.6 million, or 113%, compared to the prior year. This increase was due to a $38.3 million increase in call center and direct mailing revenue, primarily related to the large contract
in support of the analog to digital conversion program; a $5.5 million increase in legal notification revenue, resulting from several large class action cases; and an $8.8 million
increase in professional services. These increases were partially offset by a $3.4 million decrease in transaction processing revenue.

Settlement
administration direct and administrative expenses, including reimbursed direct costs, were $93.2 million in 2008, an increase of $41.9 million, or 82%, compared
to the prior year. This increase is primarily the result of a $29.2 million increase in call center, outside service, and mailing supplies costs to support the large contract referenced above.
Also contributing to the increase was a $5.3 million increase in the cost of legal noticing that is directly related to the increase in legal notification revenue; and a $5.3 million
increase in reimbursable expenses, which is offset directly by an increase in operating revenue from reimbursable costs. Additional staffing requirements to meet client demands resulted in a
$1.1 million increase in compensation, commissions and benefits, and a $0.6 million increase in outside services.

29

---





Table of Contents

Liquidity and Capital Resources

Cash Flows

Fiscal year 2009

Operating Activities

During the year ended December 31, 2009, our operating activities provided net cash of $51.8 million. Contributing to net
cash provided by operating activities was net income of $14.6 million; and non-cash expenses, such as depreciation and amortization, bad debt expense and share-based compensation
expense, of $36.7 million. The changes in operating assets and liabilities primarily consisted of a $3.5 million decrease in trade accounts receivable and other assets, offset by a
decrease of $1.3 million in accounts payable and other liabilities, and a $1.6 million decrease in deferred revenue. Trade accounts receivable will fluctuate from period to period
depending on the timing of sales and collections. Accounts payable will fluctuate from period to period depending on the timing of purchases and payments.

Investing Activities

During the year ended December 31, 2009, we used cash of approximately $10.3 million for purchases of property and
equipment, including computer hardware, purchased software licenses primarily for our electronic discovery business, and purchased computer hardware primarily for our bankruptcy trustee business.
Enhancements to our existing software and the development of new software is essential to our continued growth, and, during 2009, we used cash of $7.6 million to fund internal costs related to
the development of software for which technological feasibility had been established. Our property, equipment and third-party software purchases consisted primarily of computer-related
hardware, purchased software, and leasehold improvements. 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, 2009, we used cash to pay approximately $6.1 million as a principal reduction on our
deferred acquisition notes and capital lease payments, and $1.8 million to acquire treasury stock related to shares used to satisfy tax withholding upon the vesting of restricted stock awards.
This financing use of cash was partially offset by $2.9 million of net proceeds from stock issued in connection with the exercise of employee stock options. We also recognized a portion of the
tax benefit related to the exercise of stock options as a financing source of cash.

As
of December 31, 2009 and 2008, our borrowings consisted of $50.7 million and $52.3 million, respectively, including the fair value of the embedded option, of
contingent convertible subordinated notes, which bear interest at 4% based on the $49.9 million and $50.0 million, respectively, of principal amount outstanding; and approximately
$8.1 million and $8.9 million, respectively, of obligations related to capital leases and deferred acquisition price payments. During 2007, the term of our contingent convertible
subordinated notes was extended to June 15, 2010. The holders of the contingent convertible subordinated notes have the right to convert at a price of approximately $11.67 per share. The notes
will require the use of $49.9 million of cash at the extended maturity date of June 15, 2010 if the remaining note holders do not convert their notes into shares of our common stock. We
will use a combination of cash on hand and our revolving credit facility, if necessary, to fund the payment of these notes if the remaining notes are not converted prior to maturity. For any of the
notes that are converted into shares of our common stock prior to the scheduled maturity there will be no cash requirements associated with those converted notes, other than the regular payment of
interest earned

30

---



Table of Contents

prior
to the conversion date. One holder of the notes converted a nominal principal amount of the notes into shares of common stock in 2009.

As
of December 31, 2009 and December 31, 2008, we did not have any borrowings outstanding under our $100.0 million senior revolving loan. 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 325 basis points over the LIBOR rate. As of December 31, 2009, significant financial covenants, all as defined within our credit facility agreement, include a leverage
ratio not to exceed 3.00 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, 2009 and December 31,
2008, we were in compliance with all financial covenants.

Covenants
contained in our credit facility and in our contingent convertible subordinated notes include limitations on acquisitions, should we pursue acquisitions in the future. Pursuant
to the terms of our credit facility, we generally cannot incur indebtedness outside the credit facility, with the exceptions of capital leases and 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 bank permission must be obtained for an acquisition for which cash consideration exceeds $80.0 million or total consideration exceeds
$125.0 million.

We
believe that 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, payments on any of the convertible notes that are not converted prior to
maturity, and payments for other contractual obligations.

Fiscal year 2008

Operating Activities

During the year ended December 31, 2008, our operating activities provided net cash of $34.2 million. Contributing to net
cash provided by operating activities was net income of $13.8 million and non-cash expenses, such a depreciation and amortization and share-based compensation expense, of
$30.5 million. These items were partially offset by a $10.1 million net use of cash resulting from changes in operating assets and liabilities. The most significant change in operating
assets and liabilities was a $16.9 million increase in trade accounts receivable, related to a large settlement administration customer and several matters in the bankruptcy segment. Trade
accounts receivable will also fluctuate from period to period depending on the timing of sales and collections. Partially offsetting this increase in accounts receivable was an increase in accounts
payable and other liabilities of $4.6 million. Accounts payable will fluctuate from period to period depending on timing of purchases and payments.

Investing Activities

During the year ended December 31, 2008, we used cash of approximately $14.5 million for purchases of property and
equipment, including computer hardware, purchased software licenses for our electronic discovery business, and purchased computer hardware for our bankruptcy trustee business. Enhancements to our
existing software and the development of new software is essential to our continued growth, and, during 2008, we used cash of $6.6 million to fund internal costs related to the development of
software for which technological feasibility had been established. We also used cash of $4.8 million to fund the acquisition of an electronic discovery business located in the United Kingdom.
Our property, equipment and third-party software purchases consisted primarily of

31

---



Table of Contents

computer-related
hardware, purchased software, and leasehold improvements to support the expansion of our electronic discovery business.

Financing Activities

During the year ended December 31, 2008, we used cash to pay approximately $4.0 million as a principal reduction on our
deferred acquisition notes and capital lease payments, and $0.8 million in closing costs as part of our amended credit facility. This financing use of cash was partially offset by
$2.5 million of net proceeds from stock issued in connection with the exercise of employee stock options. We also recognized a portion of the tax benefit related to the exercise of stock
options as a financing source of cash.

Off-balance Sheet Arrangements

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

Contractual Obligations

As of December 31, 2009, we did not have any borrowings outstanding under our $100.0 million senior revolving loan. To
determine the amount that we may borrow, the $100.0 million available under the revolving loan is reduced by $1.8 million in outstanding letters of credit.

The
following table sets forth a summary of our contractual obligations and commitments, excluding periodic interest payments for capital lease obligations, as of December 31,
2009.

Payments Due By Period
(In Thousands)Contractual Obligation(1)

Total

Less than 1 Year

1 - 3 Years

3 - 5 Years

More Than 5 YearsLong-term obligations and future accretion(2)

$
53,608

$
53,124

$
484

$


$
Interest payments(3)


2,323


1,898


425





Employment agreements(4)


1,399


1,074


325





Capital lease obligations


5,190


1,020


2,084


2,086


Operating leases


33,821


7,866


12,804


10,634


2,517Total

$
96,341

$
64,982

$
16,122

$
12,720

$
2,517


(1)Approximately
$5.3 million of unrecognized tax benefits are not included in this contractual obligations table due to the uncertainty related to the
timing of any payments. Settlement of such amounts would require the utilization of working capital.(2)Convertible
debt is included at stated value of the principal redemption and is net of the carrying value of the embedded option, which will not be paid in
cash. The holders of the contingent convertible subordinated notes have the right to convert at a price of approximately $11.67 per share. Any conversion to our common stock of part or all of the
convertible debt will reduce our cash obligation related to the convertible debt. A portion of the purchase price for acquisitions was paid in the form of non-interest bearing notes or
below market rate notes, which were discounted using an appropriate imputed rate. The discounts are accreted over the life of the note and each period's accretion is added to the principal of the
respective note. The amount in the above contractual obligation table includes both the notes' principal, as reflected on our December 31, 2009 consolidated balance sheet, and all future
accretion.


32

---



Table of Contents

(3)Represents
payments on fixed interest debt and assumes all contingent convertible subordinate notes are held to the extended maturity date.(4)In
conjunction with acquisitions, we have entered into employment agreements with certain key employees of the acquired companies.


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

Following
is a description of significant sources of our revenue:



Non-Software Arrangements

Services related to electronic discovery and settlement administration are billed based on volume. For these contractual arrangements,
we have identified each deliverable service element. 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. 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. Revenue is recognized as the services are rendered, our fee becomes fixed and determinable, and collectability is

33

---



Table of Contents

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 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 held by the trustees with that financial institution related to
the software license, hardware lease, hardware maintenance, and postcontract customer support services. 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 elements, which are postcontract
customer support services. This revenue, when recognized, is included as a component of "Case management services revenue". Revenue related to postcontract customer support 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 as the fee becomes fixed or determinable at the
time actual usage occurs and collectibility is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we
have also satisfied the other revenue recognition criteria since we have
persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectability 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
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, and 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.
Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals; 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 achieve 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 for the years ended December 31, 2009, 2008 and 2007, is included in the Consolidated Statements of Income as a component of "Case management services" revenue.

Reimbursements

We have revenue related to the reimbursement of certain costs, primarily postage. Reimbursed postage and other reimbursable direct
costs are recorded gross in the Consolidated Statements of Income as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs", respectively.

Share-based compensation

We measure compensation cost for share-based awards at fair value and recognize the expense as compensation expense over the service
period for awards expected to vest. To date, the share-based compensation awards we have issued are stock option and nonvested share awards (also referred to as

34

---



Table of Contents

restricted
stock awards). We are required to estimate the share-based awards that we ultimately expect to vest and to reduce share-based compensation expense for the effects of estimated forfeitures
of
awards over the expense recognition period. Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ. In addition, to the extent our actual
forfeitures are different than our estimates, we record a true-up for the difference in the period that the awards vest, and such true-ups could affect our operating results.

We
estimate the fair value of employee stock options using a Black-Scholes valuation model. The fair value of an award is affected by our stock price on the date of grant, as well as
other assumptions including the expected volatility of our stock price over the term of the awards, the estimated period of time that we expect the stock options will be held, 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 based on daily stock prices. 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; accordingly, our expected dividend rate is zero.

The
fair value of nonvested share awards is determined based on the number of shares granted and the quoted price of our common stock.

We
record deferred tax assets for share-based awards that potentially result in deductions on our income tax returns. We estimate the deferred tax asset based on the amount of
share-based compensation recognized and the statutory tax rate in the jurisdictions in which we will receive a tax deduction. Because the deferred tax asset we record is based upon the share-based
compensation expense in a particular jurisdiction, the aforementioned inputs that affect the fair value of our stock awards also indirectly affect our income tax expense. In addition, differences
between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If
the tax deduction is less than the deferred tax asset, such shortfalls reduce our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would
increase our income tax expense.

Recognition
of share-based compensation expense has had, and will likely continue to have, a material effect on our"Direct cost of services" and "General and administrative" line items
within our Consolidated Statements of Income, and also may have a material effect on our"Deferred income taxes" and "Additional paid-in capital" line items within our Consolidated Balance
Sheets. For additional information see Note 12 of the Notes to the Consolidated Financial Statements.

Business combination accounting

We have acquired a number of businesses in the past, and we may acquire additional businesses in the future. Business combination
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 quoted market prices and estimates of future cash flows to be generated by the acquired assets. Acquisition-related costs for potential
and completed acquisitions are expensed, as incurred, and are included in "Other operating expense (income)" in our Consolidated Statements of Income.

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

35

---



Table of Contents

over
the intangible asset's estimated economic benefit period, generally from five to ten 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

Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired
less liabilities assumed. We assess goodwill for impairment on an annual basis 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 have determined that our reporting units are bankruptcy trustee management, corporate
restructuring, electronic discovery, and settlement administration. Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating
performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our
stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units. Our annual test is performed as of July 31 each year.

Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
goodwill to reporting units, and determination of the fair value of each reporting unit. We considered both a market approach and an income approach in order to develop an estimate of the fair value
of each reporting unit for purposes of our annual impairment test. When evaluating the market approach, we determined that directly comparable publicly-traded companies did not exist, primarily due to
the unique business model characteristics and projected growth of each reporting unit. Instead, we utilized a discounted projected future cash flow analysis (income approach) to determine the fair
value of each reporting unit. Potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. This analysis requires significant
judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life
over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and
goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, used to
determine our discount rate, and through our stock price, used to determine our market capitalization. We may be required to recognize impairment of goodwill based on future economic factors such as
unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units.

If
we determine that the estimated fair value of any reporting unit is less than the reporting unit's carrying value, then we proceed to the second step of the goodwill impairment
analysis to measure the potential impairment charge. An impairment loss is recognized for any excess of the carrying value of the reporting unit's goodwill over the implied fair value. 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 $264.2 million as of December 31, 2009. As of July 31, 2009, which is the date of our most recent impairment test, the fair value of
each of our reporting units was substantially in excess of the carrying value of the reporting unit, except for the bankruptcy trustee management reporting unit. The bankruptcy trustee management
reporting unit had approximately

36

---



Table of Contents

$75.2 million
of goodwill allocated to it and the fair value of this reporting unit exceeded its carrying value by approximately 32%.

Identifiable intangible assets

Each year we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each identifiable
intangible asset. All of our identifiable intangible assets have finite lives. If we were to 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 resulting from our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable which 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 $19.5 million as of December 31, 2009.

Income Taxes

A deferred tax asset or liability is 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 Statements of Income. 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 Income.

We
follow accounting guidance which 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 this guidance, 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 this guidance 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
Income. The cumulative effect of applying the provisions of this new guidance 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

37

---



Table of Contents

additional
information related to uncertain tax positions see Note 10 of the Notes to the Consolidated Financial Statements.

Derivative financial instruments

In August of 2007, 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 recorded this derivative instrument in our Consolidated Balance
Sheet at fair value. As the interest rate floor options were not designated as an accounting hedge, changes in the fair value of the derivatives were recorded each period in current earnings. For the
year ended December 31, 2007, the change in the fair value of the interest rate floor options was recognized as an unrealized gain of $1.1 million and was included as a component of
other operating income on the accompanying Consolidated Statements of Income. During February 2008, we sold the interest rate floor options and realized a $3.5 million gain. The
$2.4 million difference between the realized gain of $3.5 million and the previously recognized gain of $1.1 million is included as a component of other operating income on the
accompanying Consolidated Statements of Income. As of December 31, 2009 and 2008, we did not hold any interest rate floor options, other derivatives, or auction rate securities.

Recently Adopted Accounting Pronouncements

In December 2007, new guidance was issued for the recognition and measurement of assets, liabilities and equity in business
combinations. This guidance was effective for us as of January 1, 2009. Due to these new guidelines, we now expense, as incurred, acquisition-related costs for potential and completed
acquisitions. Acquisition-related costs expensed in 2009 were approximately $0.7 million and are included in "Other operating expense (income)" in our Consolidated Statements of Income. This
guidance also requires the recognition of changes in an acquirer's income tax valuation allowance on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the
effective date to be expensed. This new guidance will primarily apply to all future acquisitions.

In
December 2007, new guidance was issued that changed the way in which noncontrolling interests in subsidiaries are measured and classified on the balance sheet. These provisions were
effective for us as of January 1, 2009. The adoption of these new guidelines had no impact on our consolidated financial position or results of operations.

In
March 2008, new guidance was issued that changed the disclosure requirements for derivative instruments and hedging activities. This guidance was effective for us as of
January 1, 2009. The adoption of these new guidelines had no impact on our consolidated financial position or results of operations. Disclosures required by this guidance are included in
Note 15 to the Consolidated Financial Statements.

In
April 2008, new guidance was issued on determining the useful life of a recognized intangible asset. These provisions were effective for us as of January 1, 2009 and had no
impact on our consolidated financial position or results of operations as we did not renew or extend the useful lives of any of our intangible assets.

In
June 2008, new guidance was issued that clarified that share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents
before vesting should be considered participating securities, and requires them to be included in the computation of earnings per share pursuant to the two-class method. This guidance was
effective for us as of January 1, 2009 with the requirement that all prior period income per share data presented to be adjusted retroactively. We have determined that nonvested share awards
that were granted in the first quarter of 2009 are participating securities as defined by this guidance because they have equivalent common stock dividend rights. Accordingly, we have included these
shares in our basic and diluted share calculations

38

---



Table of Contents

as
appropriate. There is no prior period impact of this guidance as there were no participating securities outstanding prior to the first quarter of 2009. Details of the income per share calculation
are described in Note 11.

In
June 2008, the Financial Accounting Standards Board ("FASB") ratified the consensus reached by the Emerging Issues Task Force ("EITF") on three issues discussed at its June 12,
2008 meeting pertaining to how an entity should evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions; how the currency in which the strike price of an equity-linked financial instrument (or embedded feature) is denominated affects the determination of
whether the instrument is indexed to an entity's own stock; and how the issuer should account for market-based employee stock option valuation. This guidance was effective for us January 1,
2009 and did not have an impact on our consolidated financial position.

In
April 2009, new guidance was issued that addressed application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance was effective for us for any business combinations
completed on or after January 1, 2009. This guidance has not had an impact on our consolidated financial position as we have not completed any business combinations since the date of adoption.

In
April 2009, new guidance was issued that required disclosure about the fair value of financial instruments in interim as well as in annual financial statements. These standards were
effective for periods ending after June 15, 2009. The disclosures required by this guidance are included in Note 9 to the Consolidated Financial Statements.

In
May 2009, new guidance was issued that established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This guidance was
effective for reporting periods ending after June 15, 2009. The disclosures required by this guidance are included in Note 1.

In
June 2009, new guidance was issued that identified the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States, commonly referred to as the Accounting Standards Codification. This
guidance was effective for periods ending after September 15, 2009, and the appropriate references to accounting guidance have been incorporated into this Form 10-K.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards require entities
to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price method. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early
adoption is permitted. We are currently evaluating both the timing and the impact of the pending adoption of these standards on our consolidated financial statements.

In
October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of
pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These
new standards are effective for

39

---



Table of Contents

us
beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We are currently evaluating both the timing and the impact of the pending adoption of these standards on our
consolidated financial statements.

In
January 2010, the FASB issued updated guidance that require entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. In addition, the update requires entities to present separately information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements are effective
for us in 2010 and the disclosures related to Level 3 fair value measurements are effective for us in 2011. The update requires new disclosures only, and will have no impact on our consolidated
financial position, results of operations, or cash flows.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal market risks to which we are exposed include interest rates under our senior revolving credit facility, foreign exchange
rates giving rise to translation, and fluctuations in short-term interest rates on a portion of our bankruptcy trustee revenue.

Interest Rate Risk

Interest on our senior revolving credit facility is generally based on a spread, not to exceed 325 basis points over the LIBOR rate.
There were no amounts due under our senior revolving credit facility as of December 31, 2009 or 2008, thereby we had no market risk exposure.

As
of December 31, 2007, we had market risk exposure to interest rates as we held interest rate floor options with a notional value of $800 million. During February 2008,
we sold the interest rate floor options and realized a $3.5 million gain, thereby eliminating our market risk exposure related to these instruments. At December 31, 2009 and 2008, we did
not hold any interest rate floor options or other derivatives.

Foreign Currency Risk

We have operations in the United Kingdom, Brussels and Hong Kong; therefore, a portion of our revenues and expenses are incurred in a
currency other than U.S. dollars. We do not utilize hedge instruments to manage the exposures associated with fluctuating currency exchange rates. Our operating results are exposed to changes in
exchange rates between the U.S. dollar and the appropriate functional currency. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues and expenses denominated in
foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs.

40

---





Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Supplementary DataQuarterly Financial Information (Unaudited)

The following table sets forth the quarterly financial data for the quarters of the years ended December 31, 2009 and 2008 (in
thousands, except per share data):

1st

2nd

3rd

4thYear ended December 31, 2009Total revenue

$
60,828

$
66,190

$
57,809

$
54,244Gross profit(1)

$
29,660

$
33,934

$
29,611

$
29,642Net income

$
3,278

$
2,886

$
4,869

$
3,562Net income per shareBasic(2)

$
0.09

$
0.08

$
0.13

$
0.10Net income per shareDiluted(2)

$
0.09

$
0.08

$
0.12

$
0.09Year ended December 31, 2008Total revenue

$
49,010

$
64,842

$
58,883

$
63,383Gross profit(1)

$
22,043

$
29,389

$
29,041

$
32,615Net income

$
2,656

$
3,154

$
3,994

$
4,032Net income per shareBasic(2)

$
0.08

$
0.09

$
0.11

$
0.11Net income per shareDiluted(2)

$
0.07

$
0.08

$
0.10

$
0.10


---

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, 2009, 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.

41

---



Table of Contents

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, 2009. 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, 2009, 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, 2009 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report which appears beginning on page 43.

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, 2009, that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

42

---





Table of Contents

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, 2009, 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 Annual 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, 2009, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

43

---



Table of Contents

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, 2009 of the Company and our report dated March 1, 2010 expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

Kansas City, Missouri
March 1, 2010

44

---





Table of Contents

ITEM 9B.    OTHER INFORMATION

None.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference to our Proxy Statement for our 2010 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, 2009.

ITEM 11.    EXECUTIVE COMPENSATION

Incorporated by reference to our Proxy Statement for our 2010 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, 2009.

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

Incorporated by reference to our Proxy Statement for our 2010 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, 2009.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference to our Proxy Statement for our 2010 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, 2009.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to our Proxy Statement for our 2010 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, 2009.

45

---





Table of Contents

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES







46

---







Table of Contents

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 1, 2010

EPIQ SYSTEMS, INC.By:

/s/ TOM W. OLOFSON Tom W. Olofson Chairman of the Board, Chief Executive Officer and Director


In
accordance with the Exchange Act this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.

Signature

Name and Title

Date/s/ TOM W. OLOFSON

Tom W. Olofson
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)

March 1, 2010/s/ CHRISTOPHER E. OLOFSON

Christopher E. Olofson
President, Chief Operating Officer
and Director

March 1, 2010/s/ ELIZABETH M. BRAHAM

Elizabeth M. Braham
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

March 1, 2010/s/ W. BRYAN SATTERLEE

W. Bryan Satterlee
Director

March 1, 2010/s/ EDWARD M. CONNOLLY, JR.

Edward M. Connolly, Jr.
Director

March 1, 2010/s/ JAMES A. BYRNES

James A. Byrnes
Director

March 1, 2010/s/ JOEL PELOFSKY

Joel Pelofsky
Director

March 1, 2010


47

---





Table of Contents

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, 2009 and 2008, and the related
consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. 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 the 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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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 uncertainty in income taxes in 2007.

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, 2009, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Kansas City, Missouri
March 1, 2010

F-1

---





Table of Contents

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

As of December 31,2009

2008ASSETSCURRENT ASSETS:Cash and cash equivalents

$
48,986

$
19,006Trade accounts receivable, less allowance for doubtful accounts of $2,928 and $2,600, respectively


43,471


48,540Prepaid expenses


4,867


6,015Other current assets


2,341


2,552Total Current Assets


99,665


76,113LONG-TERM ASSETS:Property and equipment, net


40,005


39,951Internally developed software costs, net


13,732


11,024Goodwill


264,239


263,871Other intangibles, net of accumulated amortization of $49,188 and $41,714, respectively


19,524


26,851Other


776


1,136Total Long-term Assets, net


338,276


342,833Total Assets

$
437,941

$
418,946LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
8,260

$
12,781Accrued compensation


4,429


7,525Deposits


2,996


2,150Deferred revenue


760


2,363Other accrued expenses


4,138


2,628Current maturities of long-term obligations


54,144


5,912Total Current Liabilities


74,727


33,359LONG-TERM LIABILITIES:Deferred income taxes


22,261


20,988Other long-term liabilities


9,901


8,794Long-term obligations (excluding current maturities)


4,654


55,310Total Long-term Liabilities


36,816


85,092COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITY:Preferred stock$1 par value; 2,000,000 shares authorized; none issued and outstanding





Common stock$0.01 par value; 100,000,000 shares authorized; issued and outstanding36,237,562 and 35,657,823 shares


362


357Additional paid-in capital


248,937


237,644Accumulated other comprehensive loss


(1,815
)

(2,683
)Retained earnings


79,772


65,177Treasury stock, at cost56,473 shares and -0- shares


(858
)

Total Stockholders' Equity


326,398


300,495Total Liabilities and Stockholders' Equity

$
437,941

$
418,946


See accompanying Notes to Consolidated Financial Statements.

F-2

---





Table of Contents

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

Year Ended December 31,2009

2008

2007REVENUE:Case management services

$
137,170

$
128,331

$
96,612Case management bundled products and services


15,206


17,774


26,424Document management services


56,153


61,751


28,601Operating revenue before reimbursed direct costs


208,529


207,856


151,637Operating revenue from reimbursed direct costs


30,542


28,262


22,776Total Revenue


239,071


236,118


174,413OPERATING EXPENSE:Direct cost of services (exclusive of depreciation and amortization shown separately below)


71,864


81,884


41,470Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)


3,520


3,642


3,700Reimbursed direct costs


30,217


28,134


22,618General and administrative


78,441


71,113


62,546Depreciation and software and leasehold amortization


18,775


16,302


12,766Amortization of identifiable intangible assets


7,409


9,051


9,531Other operating expense (income)


634


171


(1,094
)Total Operating Expense


210,860


210,297


151,537INCOME FROM OPERATIONS


28,211


25,821


22,876INTEREST EXPENSE (INCOME):Interest expense


1,474


1,757


11,973Interest income


(124
)

(279
)

(92
)Net Interest Expense


1,350


1,478


11,881INCOME BEFORE INCOME TAXES


26,861


24,343


10,995PROVISION FOR INCOME TAXES


12,266


10,507


4,066NET INCOME

$
14,595

$
13,836

$
6,929NET INCOME PER SHARE INFORMATION:Basic

$
0.41

$
0.39

$
0.23Diluted

$
0.38

$
0.36

$
0.21WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic


35,895


35,459


30,424Diluted


41,908


41,425


32,564


See
accompanying Notes to Consolidated Financial Statements.

F-3

---





Table of Contents

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

Common
Stock

Treasury
Stock



Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

AOCI(1)

TotalBalance at January 1, 2007




29,218






$
292

$
136,947

$
46,922

$


$
18

$
184,179Comprehensive income:Net income


















6,929








6,929Foreign currency translation adjustment
























(14
)

(14
)Total comprehensive income


















6,929





(14
)

6,915Change in accounting principle


















(2,510
)







(2,510
)Excess tax benefits from share-based compensation















1,497











1,497Exercise of stock options




1,059







11


9,433











9,444Share-based compensation















5,602











5,602Equity offering




5,000







50


78,505











78,555Balance at December 31, 2007




35,277







353


231,984


51,341





4


283,682Comprehensive income:Net income


















13,836








13,836Foreign currency translation adjustment
























(2,687
)

(2,687
)Total comprehensive income


















13,836





(2,687
)

11,149Excess tax benefits from share-based compensation















308











308Exercise of stock options




381







4


2,521











2,525Share-based compensation















2,831











2,831Balance, December 31, 2008




35,658







357


237,644


65,177





(2,683
)

300,495Comprehensive income:Net income


















14,595








14,595Foreign currency translation adjustment
























868


868Total comprehensive income


















14,595





868


15,463Treasury stock purchases







(117
)












(1,782
)




(1,782
)Excess tax benefits from share-based compensation















784











784Issuance of common stock under share-based compensation plans




292


61




5


1,934





924





2,863Share-based compensation




285










8,543











8,543Issuance of common stock upon conversion of convertible notes




3










32











32Balance at December 31, 2009




36,238


(56
)


$
362

$
248,937

$
79,772

$
(858
)
$
(1,815
)
$
326,398


(1)AOCIAccumulated
Other Comprehensive Income (Loss)


See accompanying Notes to Consolidated Financial Statements.

F-4

---





Table of Contents

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

Year Ended December 31,2009

2008

2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
14,595

$
13,836

$
6,929Adjustments to reconcile net income to net cash provided by operating activities:Expense (benefit) for deferred income taxes


1,276


938


(2,534
)Depreciation and software amortization


18,775


16,302


12,766Expense related to embedded option


(1,610
)

(1,610
)

1,788Amortization of intangible assets


7,409


9,051


9,531Share-based compensation expense


8,543


2,831


5,602Provision for bad debts


1,732


1,678


479Other, net


597


1,277


(482
)Changes in operating assets and liabilities:Trade accounts receivable


3,520


(16,919
)

(612
)Prepaid expenses and other assets


(11
)

885


(2,091
)Accounts payable and other liabilities


(1,255
)

4,566


1,686Deferred revenue


(1,603
)

1,130


161Excess tax benefit related to share-based compensation


(579
)

(95
)

(583
)Other


433


348


3,572Net cash provided by operating activities


51,822


34,218


36,212CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment


(10,301
)

(14,539
)

(14,796
)Internally developed software costs


(7,562
)

(6,562
)

(4,813
)Cash paid for business acquisition, net of cash acquired





(4,762
)

Other investing activities, net


302


38


330Net cash used in investing activities


(17,561
)

(25,825
)

(19,279
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from revolver





3,000


44,000Payments on revolver





(3,000
)

(122,028
)Debt issuance costs





(795
)

Payments under long-term obligations


(6,065
)

(4,037
)

(19,346
)Excess tax benefit related to share-based compensation


579


95


583Purchases of treasury stock


(1,782
)




Net proceeds from equity offering








78,555Proceeds from issuance of common stock under share-based compensation plans


2,863


2,525


9,444Net cash used in financing activities


(4,405
)

(2,212
)

(8,792
)Effect of exchange rate changes on cash


124


(590
)

NET INCREASE IN CASH AND CASH EQUIVALENTS


29,980


5,591


8,141CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


19,006


13,415


5,274CASH AND CASH EQUIVALENTS, END OF YEAR

$
48,986

$
19,006

$
13,415


See
accompanying Notes to Consolidated Financial Statements.

F-5

---





Table of Contents

EPIQ SYSTEMS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2009, 2008 AND 2007

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.

In
preparing these financial statements, we have evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

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.

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 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.

Internally Developed Software 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 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

F-6

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

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 consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired
less liabilities assumed. We assess goodwill for impairment on an annual basis 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 have determined that our reporting units are bankruptcy trustee management, corporate
restructuring, electronic discovery, and settlement administration. Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating
performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our
stock price and market capitalization or unfavorable changes in the estimated discounted cash flows of our reporting units. Our annual test is performed as of July 31 each year.

Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
goodwill to reporting units, and determination of the fair value of each reporting unit. We considered both a market approach and
an income approach in order to develop an estimate of the fair value of each reporting unit for purposes of our annual impairment test. When evaluating the market approach, we determined that directly
comparable publicly-traded companies did not exist, primarily due to the unique business model characteristics and projected growth of each reporting unit. Instead, we utilized a discounted projected
future cash flow analysis (income approach) to determine the fair value of each reporting unit. Potential impairment is indicated when the carrying value of a reporting unit, including goodwill,
exceeds its estimated fair value. This analysis requires significant judgments, including estimation of cash flows, which is dependent on internal forecasts, estimation of the long-term
rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions
could materially affect the determination of fair value and goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement
through our weighted average cost of capital, used to determine our discount rate, and through our stock price, used to determine our market capitalization. We may be required to recognize impairment
of goodwill based on future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our
reporting units.

F-7

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

If
we determine that the estimated fair value of any reporting unit is less than the reporting unit's carrying value, then we proceed to the second step of the goodwill impairment
analysis to measure the potential impairment charge. An impairment loss is recognized for any excess of the carrying value of the reporting unit's goodwill over the implied fair value. 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 $264.2 million as of December 31, 2009. As of July 31, 2009, which is the date of our most recent impairment test, the fair value of
each of our reporting units was substantially in excess of the carrying value of the reporting unit except for the bankruptcy trustee management reporting unit. The bankruptcy trustee management
reporting unit had approximately $75.2 million of goodwill allocated to it, and the fair value of this reporting unit exceeded its carrying value by approximately 32%.

Each
year we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each identifiable intangible asset. If we were to 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 resulting from our annual assessment, or other events and circumstances, may indicate that the carrying value
of one or more identifiable intangible assets is not recoverable which would result in recognition of an impairment charge.

Identifiable
intangible assets, resulting from various business acquisitions, consist primarily of customer relationships and agreements not to compete. All of our identifiable
intangible assets have finite lives, and are amortized 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

We reduce the carrying amounts of long-lived assets to their fair values when events or changes in circumstances indicate
that the fair value of such asset is determined to be less than their carrying amounts (i.e., assets are deemed to be impaired). Fair value is typically estimated using a discounted cash flow
analysis, which requires us to estimate the future cash flows anticipated to be generated by the particular asset being tested for impairment as well as to select a discount rate to measure the
present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. Estimating
future cash flows requires significant judgment by management in such areas as future economic conditions, industry-specific conditions, product pricing, and necessary capital expenditures. The use of
different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets.

F-8

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

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 long-term assets on our Consolidated Balance Sheets. Amortization costs are included as a component of interest
expense on our Consolidated Statements of Income.

Share-Based Compensation

We 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 recognize that cost over the period during which an employee is required to provide service in exchange for the award.

We
have recognized compensation costs related to share-based compensation beginning in 2006. We recognize this expense on a straight-line basis over the requisite service
period of the award.

Income Taxes

A deferred tax asset or liability is 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 Statements of Income. 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 Income.

We
follow accounting guidance which 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 this guidance, 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 this guidance 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

F-9

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

material
impact on our Consolidated Statements of Income. The cumulative effect of applying the provisions of this new guidance 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 uncertain tax positions see Note 10.

Revenue Recognition

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

Following
is a description of significant sources of our revenue:



Non-Software Arrangements

Services related to electronic discovery and settlement administration are billed based on volume. For these contractual arrangements,
we have identified each deliverable service element. 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. 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. Revenue is

F-10

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

recognized
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 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 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 held by the trustees with that financial institution related to
the software license, hardware lease, hardware maintenance, and postcontract customer support services. 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 elements, which are postcontract
customer support services. This revenue, when recognized, is included as a component of "Case management services revenue". Revenue related to postcontract customer support 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 as the fee becomes fixed or determinable at the
time actual usage occurs and collectibility is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we
have also satisfied the other revenue recognition criteria since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and
collectability 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
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, and 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.
Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals; 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 achieve 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 for the years ended December 31, 2009, 2008 and 2007, is included in the Consolidated Statements of Income as a component of "Case management services" revenue.

F-11

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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. Reimbursed postage and other reimbursable direct
costs are recorded gross in the Consolidated Statements of Income as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs", respectively.

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

We expense contract acquisition, origination, and set-up costs as incurred.

Depreciation and Software and Leasehold Amortization

The caption "Depreciation and software and leasehold amortization" in the accompanying Consolidated Statements of Income includes costs
that are directly related to services of approximately $10.6 million, $9.4 million, and $7.1 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Income Per Share

Basic net income per share is computed on the basis of weighted average outstanding common shares. Diluted net income per share is
computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options and convertible debt, if dilutive. The numerator of the diluted net income
per share calculation is increased by the amount of interest expense, net of tax, related to outstanding convertible debt, and the allocation of net income to nonvested shares, if the net impact is
dilutive.

When
calculating incremental shares related to outstanding share options, we have historically applied 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 awards, are used to repurchase outstanding shares at the average market price for the period.

Based
upon new guidance which was effective January 1, 2009, we determined that the nonvested share awards (also referred to as restricted stock awards) that were issued during
the first quarter of 2009 were participating securities because they have non-forfeitable rights to dividends. Accordingly, basic net income per share is calculated under the
two-class method calculation. In determining the number of diluted shares outstanding, we are required to disclose the more dilutive earnings per share result between the treasury stock
method calculation and the two-class method calculation. For the year ended December 31, 2009, the two-class method calculation was more dilutive; therefore, the diluted
net income per share calculation for the year ended December 31, 2009 is presented following the two-class method. There was no impact to our calculations for the years ended
December 31, 2008 or 2007, as we did not have any participating securities outstanding during those periods.

F-12

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

Segment Information

We consider how we organize our business internally for making operating decisions and assessing business performance to determine our
reportable segments.

Foreign Currency Translation

Local currencies are the functional currencies for our operating subsidiaries. Accordingly, assets and liabilities of these
subsidiaries are translated at the rate of exchange at the balance sheet date. Adjustments from the translation process are part of accumulated other comprehensive income (loss) and are included as a
separate component of stockholders' equity. The changes in foreign currency translation adjustments were not adjusted for income taxes since they relate to indefinite term investments in
non-United States subsidiaries. Income and expense items of significant value are translated as of the date of the transactions for these subsidiaries; however, day to day operational
transactions are translated at average rates of exchange. As of
December 31, 2009, 2008 and 2007, cumulative translation adjustments included in accumulated other comprehensive income (loss) were ($1.8 million), ($2.7 million), and less than
$0.1 million, respectively.

Fair Value Measurement

Unless otherwise specified, we believe the carrying value of financial instruments approximates their fair value.

Accounting for Contingencies

We are involved in various legal proceedings that arise from time to time in the ordinary course of business. Except for income tax
contingencies, we record accruals for contingencies to the extent that we conclude their occurrence is probable and that the related liabilities are estimable. We record anticipated recoveries under
existing insurance contracts when we are assured of recovery. Many factors are considered when making these assessments, including the progress of the case, opinions or views of legal counsel, prior
case law, our experience or the experience of other companies with similar cases, and our intent on how to respond. Litigation and other contingencies are inherently unpredictable and excessive damage
awards do occur. As such, these assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

Use of Estimates

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

Recently Adopted Accounting Pronouncements

In December 2007, new guidance was issued for the recognition and measurement of assets, liabilities and equity in business
combinations. This guidance was effective for us as of January 1, 2009.

F-13

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

Due
to these new guidelines, we now expense, as incurred, acquisition-related costs for potential and completed acquisitions. Acquisition-related costs expensed in 2009 were approximately
$0.7 million and are included in "Other operating expense (income)" in our Consolidated Statements of Income. This guidance also requires the recognition of changes in an acquirer's income tax
valuation allowance on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date to be expensed. This new guidance will primarily apply to all
future acquisitions.

In
December 2007, new guidance was issued that changed the way in which noncontrolling interests in subsidiaries are measured and classified on the balance sheet. These provisions were
effective for us as of January 1, 2009. The adoption of these new guidelines had no impact on our consolidated financial position or results of operations.

In
March 2008, new guidance was issued that changed the disclosure requirements for derivative instruments and hedging activities. This guidance was effective for us as of
January 1, 2009. The adoption of these new guidelines had no impact on our consolidated financial position or results of operations. Disclosures required by this guidance are included in
Note 15.

In
April 2008, new guidance was issued on determining the useful life of a recognized intangible asset. These provisions were effective for us as of January 1, 2009 and had no
impact on our consolidated financial position or results of operations as we did not renew or extend the useful lives of any of our intangible assets.

In
June 2008, new guidance was issued that clarified that share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents
before vesting should be considered participating securities, and requires them to be included in the computation of earnings per share pursuant to the two-class method. This guidance was
effective for us as of January 1, 2009 with the requirement that all prior period income per share data presented to be adjusted retroactively. We have determined that nonvested share awards
that were granted in the first quarter of 2009 are participating securities as defined by this guidance because they have equivalent common stock dividend rights. Accordingly, we have included these
shares in our basic and diluted share calculations as appropriate. There is no prior period impact of this guidance as there were no
participating securities outstanding prior to the first quarter of 2009. Details of the income per share calculation are described in Note 11.

In
June 2008, the Financial Accounting Standards Board ("FASB") ratified the consensus reached by the Emerging Issues Task Force ("EITF") on three issues discussed at its June 12,
2008 meeting pertaining to how an entity should evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions; how the currency in which the strike price of an equity-linked financial instrument (or embedded feature) is denominated affects the determination of
whether the instrument is indexed to an entity's own stock; and how the issuer should account for market-based employee stock option valuation. This guidance was effective for us January 1,
2009 and did not have an impact on our consolidated financial position.

In
April 2009, new guidance was issued that addressed application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a

F-14

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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

business
combination. This guidance was effective for us for any business combinations completed on or after January 1, 2009. This guidance has not had an impact on our consolidated financial
position as we have not completed any business combinations since the date of adoption.

In
April 2009, new guidance was issued that required disclosure about the fair value of financial instruments in interim as well as in annual financial statements. These standards were
effective for periods ending after June 15, 2009. The disclosures required by this guidance are included in Note 9.

In
May 2009, new guidance was issued that established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This guidance was
effective for reporting periods ending after June 15, 2009. The disclosures required by this guidance are included in Note 1.

In
June 2009, new guidance was issued that identified the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States, commonly referred to as the Accounting Standards Codification. This
guidance was effective for periods ending after September 15, 2009, and the appropriate references to accounting guidance have been incorporated into these financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards require entities
to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price method. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early
adoption is permitted. We are currently evaluating both the timing and the impact of the pending adoption of these standards on our consolidated financial statements.

In
October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of
pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These
new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We are currently evaluating both the timing and the impact of the pending
adoption of these standards on our consolidated financial statements.

In
January 2010, the FASB issued updated guidance that require entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. In addition, the update requires entities to present separately information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3). The disclosures related to Level 1 and Level 2 fair value measurements are effective
for us in 2010 and the disclosures related to Level 3 fair value measurements are effective for us in 2011. The update requires new disclosures only, and will have no impact on our consolidated
financial position, results of operations, or cash flows.

F-15

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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 Life2009

2008Land

$
192

$
192Building and building and leasehold improvements


12,736


11,977

5 - 30 yearsFurniture and fixtures


2,976


2,680

5 - 7 yearsComputer and purchased software


54,671


48,089

2 - 5 yearsTransportation equipment


7,523


7,522

3 - 5 yearsOperations equipment


5,784


1,151

3 - 5 yearsConstruction in progress


684


2,25884,566


73,869Accumulated depreciation and amortization


(44,561
)

(33,918
)Property and equipment

$
40,005

$
39,951


Computer
and purchased software includes property acquired under capital leases. As of December 31, 2009 and 2008, assets acquired under capital leases had a historical cost basis
of $10.8 million and $5.6 million, respectively, and accumulated amortization of $4.7 million and $1.4 million, respectively.

NOTE 3:    INTERNALLY DEVELOPED SOFTWARE

The following is a summary of internally developed software capitalized (in thousands):

Year Ended December 31,2009

2008Amounts capitalized, beginning of year

$
32,055

$
25,383Development costs capitalized


7,562


6,562Foreign currency translation


22


Acquired software





279Dispositions


(390
)

(169
)Amounts capitalized, end of year


39,249


32,055Accumulated amortization, end of year


(25,517
)

(21,031
)Software development costs, net

$
13,732

$
11,024


Included
in the above are capitalized software development costs for unreleased products of $5.8 million and $4.1 million at December 31, 2009 and 2008,
respectively. During the years ended

F-16

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 3:    INTERNALLY DEVELOPED SOFTWARE (Continued)

December 31,
2009, 2008 and 2007, we recognized amortization expense related to capitalized software development costs of $4.8 million, $5.5 million, and $4.6 million,
respectively.

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for 2009 and 2008 was as follows (in thousands):

Electronic
Discovery

Bankruptcy

Settlement
Administration

TotalBalance as of December 31, 2007

$
76,048

$
151,700

$
32,936

$
260,684Acquisitions


5,342


-


-


5,342Foreign currency translation and other


(1,804
)

(262
)

(89
)

(2,155
)Balance as of December 31, 2008


79,586


151,438


32,847


263,871Foreign currency translation and other


368


-


-


368Balance as of December 31, 2009

$
79,954

$
151,438

$
32,847

$
264,239


The
net $3.2 million increase in goodwill in 2008 primarily resulted from the April 2008 acquisition of an electronic discovery business in the United Kingdom, partially offset by
a reversal of FIN 48 tax liabilities, as certain federal and state tax returns were closed under the statute of limitations.

Amortizing
identifiable intangible assets as of December 31, 2009 and December 31, 2008 consisted of the following (in thousands):

December 31, 2009

December 31, 2008Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
AmortizationCustomer relationships

$
40,057

$
25,880

$
39,986

$
22,039Trade names


745


745


745


745Non-compete agreements


27,910


22,563


27,834


18,930$
68,712

$
49,188

$
68,565

$
41,714


F-17

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS (Continued)

Customer
relationships and non-compete agreements both carry a weighted average life of eight years. Amortization expense for each year in the three year period ended
December 31, 2009, 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:2007

$
9,5312008


9,0512009


7,409Estimated amortization expense:2010

$
6,6922011


4,8322012


4,6522013


3,0702014


192


See
Note 1 for further discussion of goodwill and identifiable intangible assets.

NOTE 5:    LONG-TERM OBLIGATIONS

The following is a summary of long-term obligations outstanding (in thousands):

Year Ended December 31,2009

2008Contingent convertible subordinated notes, including embedded option

$
50,706

$
52,348Capital leases


5,190


4,682Deferred acquisition price


2,902


4,192Total long-term obligations, including current portion


58,798


61,222Current maturities of long-term obligations


(54,144
)

(5,912
)Long-term obligations

$
4,654

$
55,310


Credit Facilities

During July 2008, we amended and restated our credit facility. The amended credit facility, with KeyBank National Association as
administrative agent, consists of a $100.0 million senior revolving loan. The facility matures in 2011. 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 amended credit facility is secured by liens on our real property and a significant portion of our personal property.
Interest on the amended credit facility is generally based on a spread, not to exceed 325 basis points, over the LIBOR rate. There were no amounts due under the senior revolving loan as of
December 31, 2009 or as of December 31, 2008. To determine the amount that we may borrow, the

F-18

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 5:    LONG-TERM OBLIGATIONS (Continued)

$100.0 million
available under the revolving loan is reduced by $1.8 million in outstanding letters of credit.

Our
amended 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, 2009
and 2008, 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 ("convertible notes") with a fixed 4% per
annum interest rate and an original maturity of June 15, 2007. The holders of the convertible notes had the right to extend the maturity date by up to three years. In 2007, the holders
exercised this right and the maturity date of the convertible notes was extended to June 2010. If we change our capital structure (for example, through a stock dividend or stock split) while the
convertible notes are outstanding, the conversion price would be adjusted on a consistent basis and, accordingly, the number of shares of common stock we would issue on conversion would be adjusted.
The convertible notes are convertible into 4.3 million shares of our common stock at a price of approximately $11.67 per share, and do not contain the right to any dividends. We have the right
to require that the holders of the convertible notes convert to equity if our share price exceeds $23.33 on a weighted average basis for 20 consecutive trading days.

For
any of the notes that are converted into shares of our common stock prior to the scheduled maturity there will be no cash requirements associated with those converted notes, other
than the regular payment of interest earned prior to the conversion date. One holder of the notes converted a nominal principal amount of the notes into shares of common stock in 2009. If the note
holders do not convert the remainder of the notes into shares of our common stock by the extended maturity date of June 2010, the notes will require the use of approximately $49.9 million of
cash. If the remaining notes are not converted prior to maturity, we will use a combination of cash on hand and our revolving credit facility, if necessary, to fund the payment of these notes.

The
right to extend the maturity of the convertible notes was accounted for as an embedded option subject to bifurcation. The embedded option was initially valued at $1.2 million
and the convertible notes balance was reduced by the same amount. During April 2007, the holders of the convertible notes exercised their 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 convertible notes, was
approximately $4.8 million. The $4.8 million estimated fair value of the embedded option is amortized as a credit to "Interest expense" on the Consolidated Statements of Income over the
period to the extended maturity, which is June 15, 2010. The balance of this embedded option is included as a component of "Current maturities of long-term obligations" on the
Consolidated Balance Sheet at December 31, 2009 and is a component of "Long-term obligations (excluding current maturities)" at December 31, 2008. During the third quarter of
2009, a nominal principal amount of the notes were converted into shares of common stock. As a result of this conversion, we recognized a nominal gain in the third quarter related to the unamortized
embedded option value associated with the converted notes. The above

F-19

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 5:    LONG-TERM OBLIGATIONS (Continued)

changes
related to the carrying value of the convertible notes, 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.

Capital Leases

We lease certain property and software under capital leases that expire during various years through 2014.

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, 2009 and 2008, the discounted value of
the remaining note payments, for which the final payment is due in 2011, was approximately $2.9 million and $4.2 million, respectively, of which approximately $2.4 million and
$1.5 million, respectively, was classified as a current liability in the Consolidated Balance Sheets as of December 31, 2009 and 2008, respectively.

Scheduled Principal Payments

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

2010

$
54,1442011


1,5512012


1,0172013


1,0832014


1,003Total

$
58,798


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. Landlord provided tenant improvement allowances are recorded as a liability and amortized as a reduction to rent expense. Additionally, we have non-cancelable
operating leases for office equipment and automobiles expiring through 2012.

F-20

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 6:    OPERATING LEASES (Continued)

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
Payments2010

$
7,866

$
516

$
7,3502011


6,950





6,9502012


5,854





5,8542013


5,579





5,5792014


5,055





5,055Thereafter


2,517





2,517Total minimum lease payments

$
33,821

$
516

$
33,305


Expense
related to operating leases for the years ended December 31, 2009, 2008 and 2007 was approximately $8.7 million, $5.2 million, and $5.7 million,
respectively; net of sublease income of $1.0 million, $1.2 million, and $0.6 million, respectively.

NOTE 7:    STOCKHOLDERS' EQUITY

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

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.

F-21

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 8:    EMPLOYEE BENEFIT PLANS (Continued)

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 expense was approximately $1.2 million, $1.5 million, and $1.3 million for the years ended
December 31, 2009, 2008, and 2007, respectively.

NOTE 9:    FINANCIAL INSTRUMENTS AND CONCENTRATIONS

Fair Values of Assets and Liabilities

Fair value accounting guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets
or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are listed below.



Assets

The carrying value and estimated fair value of our cash equivalents, which consist of short-term money market funds, are
classified as Level 1 and are presented in the following table at December 31, 2009 and 2008. As of December 31, 2009 and 2008, the carrying value of our trade accounts receivable
approximated fair value.

Estimated Fair Value MeasurementsSignificant
Other
Observable
InputsQuoted
Prices in
Active Markets

Significant
Unobservable
InputsCarrying
ValueItems Measured at Fair Value on a Recurring Basis

(Level 1)

(Level 2)

(Level 3)December 31, 2009:Financial Assets:Money market funds

$
44,428

$
44,428

$


$
December 31, 2008:Financial Assets:Money market funds

$
19,340

$
19,340

$


$



F-22

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 9:    FINANCIAL INSTRUMENTS AND CONCENTRATIONS (Continued)

Liabilities

As of December 31, 2009 and 2008, the carrying value of accounts payable, deferred acquisition price payments, capital leases,
and the embedded option related to our convertible notes approximated fair value. As of both December 31, 2009 and 2008, the carrying value of convertible debt was approximately
$50.0 million. The fair value of our convertible debt was estimated at $59.9 million and $71.6 million as of December 31, 2009 and 2008, respectively. This amount was
estimated by taking the outstanding convertible debt, divided by the conversion price of $11.67 per share, to arrive at an estimated number of shares that would be issued assuming conversion of all of
the notes. The estimated number of shares was then multiplied by the closing price of our common stock on the last day of the respective reporting period to arrive at an estimate of the fair value of
our convertible debt.

Significant Customer and Concentration of Credit Risk

During the years ended December 31, 2009, 2008 and 2007, approximately 12%, 22% and 1%, respectively, of our consolidated
revenue was derived from a contract with IBM in support of the national analog to digital television conversion program, which was launched in the fourth quarter of 2007. This revenue was recognized
in our settlement administration segment. Accounts receivable related to this contract represented approximately 1% and 22% of our accounts receivable balance as of December 31, 2009 and 2008,
respectively. The contract was substantially completed in 2009.

Revenues
recognized by us from Bank of America, primarily related to our bankruptcy segment, were approximately 5%, 7% and 14% of our total revenues for the years ended
December 31, 2009, 2008 and 2007, respectively. Additionally, Bank of America represented approximately 4% and 3% of our accounts receivable balance as of December 31, 2009 and 2008,
respectively.

F-23

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 10:    INCOME TAXES

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

Year Ended December 31,2009

2008

2007Income before income taxes

$
26,861

$
24,343

$
10,995Provision for income taxesCurrently payable income taxesFederal

$
6,536

$
7,677

$
5,451State


4,205


1,368


1,145Foreign


249


524


4Total


10,990


9,569


6,600Deferred income taxesFederal


1,909


(157
)

(2,232
)State


(421
)

1,283


(248
)Foreign


(212
)

(188
)

(54
)Total


1,276


938


(2,534
)Provision for income taxes

$
12,266

$
10,507

$
4,066


A
reconciliation of the provision for income taxes at the statutory rate of 35% for the year ended December 31, 2009, 35% for the year ended December 31, 2008, and 34% for
the year ended December 31, 2007 to the provision for income taxes at our effective rate is shown below (in thousands):

Year Ended December 31,2009

2008

2007Computed at the statutory rate

$
9,402

$
8,520

$
3,738Change in taxes resulting from:State income taxes, net of federal tax effect


2,460


1,723


592Non-deductible compensation


935


-


-Permanent differences


238


668


671Foreign tax and change in foreign valuation allowance


281


(75
)

(330
)Research and development credits


(846
)

(255
)

(532
)Other


(204
)

(74
)

(73
)Provision for income taxes

$
12,266

$
10,507

$
4,066


F-24

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

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 31,2009

2008Deferred tax assets:Allowance for doubtful accounts

$
1,382

$
1,430Share-based compensation


6,362


4,831Contingent convertible subordinated notes


279


896Intangible assets


46


50Accrued liabilities


2,669


2,741Foreign loss carryforwards


113


State net operating loss carryforwards


130


34Capital loss carryforward





63Valuation allowances


(113
)

(63
)Total deferred tax assets


10,868


9,982Deferred tax liabilities:Prepaid expenses


(1,385
)

(1,454
)Intangible assets


(20,285
)

(20,486
)Property and equipment and software development costs


(10,230
)

(8,092
)Other


(267
)

(49
)Total deferred tax liabilities


(32,167
)

(30,081
)Net deferred tax liability

$
(21,299
)
$
(20,099
)


As
of December 31, 2009, we had as filed state and local operating loss carryforwards of $4.7 million. These carryforwards expire in varying amounts in years 2021 through
2029. Management believes that it is more likely than not that we will be able to utilize these carryforwards and, therefore, no valuation allowance is necessary. The state net operating losses for
which a deferred tax asset is recognized for financial reporting purposes is smaller than the as filed losses due to unrecognized tax benefits.

As
of December 31, 2008, we had state and local capital loss carryforwards of $0.6 million. Prior to filing our 2008 tax return, we determined that the reported
$0.6 million capital loss was an ordinary loss. This redetermination allowed us to use this loss to offset taxable income on our 2008 tax return. Therefore,
the valuation allowance was reversed as the re-characterized deferred tax asset relating to the capital loss was fully utilized on our 2008 tax return.

During
2009 we recorded a $0.1 million valuation allowance relating to net operating losses generated from our Hong Kong operations. The valuation allowance offset a
$0.1 million deferred tax asset associated with a $0.7 million net operating loss carryforward. The valuation allowance will be released when management believes it is more likely than
not that based on the available positive and

F-25

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 10:    INCOME TAXES (Continued)

negative
evidence the deferred tax asset will be realizable. Hong Kong net operating losses have an unlimited carryover period.

As
a result of certain realization requirements related to share-based compensation, we were unable to realize a $0.1 million excess tax benefit that arose directly from state net
operating losses created by equity compensation tax deductions in excess of compensation recognized for financial reporting as of December 31, 2008. In 2009, the related state net operating
losses were fully utilized and as a result, we were able to realize the excess tax benefit. Accordingly, equity increased by $0.1 million. We use tax law ordering for the purpose of determining
when excess tax benefits have been realized.

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

December 31,2009

2008Current deferred income tax asset

$
962

$
889Long-term deferred income tax liability


(22,261
)

(20,988
)Net deferred tax liability

$
(21,299
)
$
(20,099
)


U.S.
income and foreign withholding taxes have not been recognized on the excess of earnings for financial reporting over the tax basis of investments in foreign subsidiaries that are
essentially permanent in duration. Generally, such earnings become subject to U.S. taxation upon the remittance of dividends or a sale or liquidation of the foreign subsidiary. The amount of such
excess totaled approximately $1.2 million at December 31, 2009. It is not practicable to estimate the amount of any deferred tax liability related to this amount.

As
of December 31, 2009, 2008, and 2007, the gross amount of unrecognized tax benefits, including penalty and interest, was approximately $7.8 million, $6.3 million,
and $5.7 million, respectively. If recognized, approximately $6.6 million, $5.7 million, and $4.2 million would have affected our effective tax rate in 2009, 2008, and
2007, respectively.

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

2009

2008

2007Unrecognized Tax Benefits as of January 1

$
5,197

$
4,505

$
4,801Gross increases for prior years tax positions


406


174


243Gross decreases for prior years tax positions


(401
)

(381
)

(356
)Gross increase for current year tax positions


2,384


1,639


669Settlements


-


-


(62
)Lapse of statute of limitations


(1,012
)

(740
)

(790
)Unrecognized Tax Benefits at December 31

$
6,574

$
5,197

$
4,505


F-26

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 10:    INCOME TAXES (Continued)

We
file income tax returns in the U.S. federal jurisdiction, the United Kingdom, Hong Kong, Belgium, and various state jurisdictions. We have also made an evaluation of the potential
impact of assessments by state jurisdictions in which we have not filed tax returns.

In
2007 the State of New York initiated an examination of our 2003 - 2005 New York state income tax returns. During 2009, this examination was expanded to
include the years 2006 and 2007. As of December 31, 2009 the examination was not concluded. It is possible that the examination will conclude in 2010 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
2009, lapses in the statute of limitations for certain federal and state tax returns resulted in recognizing $1.0 million of net unrecognized tax benefits, of which
$1.0 million reduced tax expense. For statutes closing in 2008 we recognized $1.0 million of net unrecognized tax benefits, of which $0.7 million decreased goodwill and
$0.3 million reduced tax expense. For statutes closing in 2007, 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, 2009, the 2006 - 2008 federal, state and foreign tax returns are subject to examination. In addition, the 2005 statute of limitations
remains open in certain state and foreign jurisdictions. As of December 31, 2009, it is reasonably possible that approximately $0.5 million of net unrecognized tax benefits would be
recognized in the following twelve months due to the closing of 2005 and 2006 years for federal and state jurisdictions, of which $0.5 million would affect our effective tax rate.

We
have classified interest and penalties as a component of income tax expense. Estimated interest and penalties classified as a component of income tax expense during 2009, 2008 and
2007 totaled $0.1 million, $0.1 million and $0.2 million, respectively. Accrued interest and penalties, included as a component of "Other long-term liabilities" on the
accompanying Consolidated Balance Sheets, totaled $1.0 million and $0.2 million, respectively, as of December 31, 2009. As of December 31, 2008, the accrued interest and
penalties were $0.9 million and $0.2 million respectively.

NOTE 11:    NET INCOME PER SHARE

Basic net income per share is computed on the basis of weighted average outstanding common shares. Diluted net income per share is computed on the basis of basic weighted average
outstanding common shares adjusted for the dilutive effect of stock options and convertible debt, if dilutive. The numerator of the diluted net income per share calculation is increased by the amount
of interest expense, net of tax, related to outstanding convertible debt, and the allocation of net income to nonvested shares, if the net impact is dilutive.

Based
upon new guidance effective January 1, 2009, we determined that the nonvested share awards (also referred to as restricted stock awards) that were issued during the first
quarter of 2009 were participating securities because they have non-forfeitable rights to dividends. Accordingly, basic net income per share is calculated under the two-class
method calculation. In determining the number of diluted shares outstanding, we are required to disclose the more dilutive earnings per share result between the treasury stock method calculation and
the two-class method calculation. For the year

F-27

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 11:    NET INCOME PER SHARE (Continued)

ended
December 31, 2009, the two-class method calculation was more dilutive; therefore, the diluted net income per share information below is presented following the
two-class method. There was no impact to our prior year calculations, which were completed using the treasury stock method, as we did not have any participating securities outstanding
during the prior year.

The
computation of basic and diluted net income per share for the year ended December 31, 2009 is as follows (in thousands, except per share data):

Net Income
(Numerator)

Weighted Average
Common
Shares
Outstanding
(Denominator)

Per Share
AmountNet income

$
14,595Less: net income allocated to nonvested shares(1)


(57
)Basic net income available to common stockholders


14,538


35,895

$
0.41Effect of dilutive securities:Stock options





1,729Convertible debt


1,209


4,284Add-back: net income allocated to nonvested shares(1)


57


Less: net income re-allocated to nonvested shares


(56
)

Diluted net income available to common stockholders

$
15,748


41,908

$
0.38


(1)Net
income allocated to holders of nonvested shares is calculated based upon a weighted average percentage of nonvested shares in relation to total shares
outstanding.


The
computation of basic and diluted net income per share for the year ended December 31, 2008 and 2007 is as follows (in thousands, except per share data):

Year ended December 31, 2008

Year ended December 31, 2007Net Income

Weighted
Average
Common
Shares
Outstanding

Per Share
Amount

Net Income

Weighted
Average
Common
Shares
Outstanding

Per Share
AmountBasic net income available to common stockholders

$
13,836


35,459

$
0.39

$
6,929


30,424

$
0.23Effect of dilutive securities:Stock options


-


1,680





-


2,140Convertible debt


1,212


4,286





-


-Diluted net income available to common stockholders

$
15,048


41,425

$
0.36

$
6,929


32,564

$
0.21


F-28

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 11:    NET INCOME PER SHARE (Continued)

For
the years ended December 31, 2009, 2008 and 2007 weighted-average outstanding share options totaling approximately 2.4 million, 1.9 million and
0.4 million shares of common stock, respectively, were antidilutive and, therefore not included in the computation of diluted net income per share. For the year ended December 31, 2007,
we did not assume conversion of the convertible debt as the effect would be antidilutive.

NOTE 12:    SHARE-BASED COMPENSATION

Share-based compensation is measured at grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period. See
Note 1 for additional information.

The
following table presents total share-based compensation expense, which is a non-cash charge, included in the Consolidated Statements of Income (in thousands):

Year Ended December 31,2009

2008

2007Direct costs of services

$
427

$
814

$
741General and administrative


8,116


2,017


4,861Pre-tax share-based compensation expense


8,543


2,831


5,602Income tax benefit


(2,375
)

(1,050
)

(2,182
)Total share-based compensation expense, net of tax


6,168


1,781


3,420


Share-based
compensation expense was adjusted for share options and awards that we estimate will be forfeited prior to vesting. We use historical information to estimate employee
termination and the resulting forfeiture rate. As of December 31, 2009, there was $7.6 million of total unrecognized compensation cost related to nonvested share-based compensation
arrangements, which will be recognized over a weighted-average period of 3.0 years. The increase in share-based compensation expense in 2009 was the result of the timing of when certain awards
were granted. There were no share-based awards granted to executive management in fiscal year 2008, and awards pertaining to both 2008 and 2009 were granted in fiscal year 2009.

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 nonvested share
(commonly referred to as restricted stock) awards 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 generally be available for further grants. At December 31, 2009, there were approximately 1,212,000 shares of common stock available for future equity-related grants under the
2004 Plan.

As
part of certain acquisitions and as an inducement to key employees, stock options are issued outside of the 2004 Plan from time to time. 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

F-29

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 12:    SHARE-BASED COMPENSATION (Continued)

vested.
Although various forms of equity instruments may be issued, through December 31, 2009 we have only issued incentive stock options, nonqualified stock options, and nonvested share awards
under this Plan.

Stock Options

Stock options are awards which allow the employee or director to purchase shares of our common stock at prices equal to the fair value
at the date of grant. Stock options are issued with an exercise price equal to the grant date closing market price of our common stock. Stock options become exercisable under various vesting
schedules, ranging from immediate vesting to a 7 year vesting period, and expire 10 years from the date of grant.

The
estimated fair value of stock options is determined using the Black-Scholes valuation model. Key inputs and assumptions to estimate the fair value of stock options include the grant
price of the award, the expected option term, the volatility of the company's stock, the risk-free interest rate, and the company's dividend yield. We estimate our expected volatility
based on implied volatilities from traded share options on our stock and on our stock's historical volatility. Estimates of fair value are not intended to predict actual future events or the value
ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company.

The
fair value of each stock option grant was estimated at the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions
used and the weighted-average fair value per option granted.

Year Ended December 31,2009

2008

2007Expected life of stock option (years)


6.4


5.0


5.2Expected volatility


41
%

41
%

37
%Risk-free interest rate


3.0
%

2.7
%

4.0
%Dividend yield


0
%

0
%

0
%Weighted average grant-date fair value

$
6.84

$
5.82

$
6.46


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
volatility is estimated based upon implied volatilities from traded share options on our stock and on our stock's historical
volatility, based on daily stock prices. 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; accordingly our expected dividend rate is zero.

F-30

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 12:    SHARE-BASED COMPENSATION (Continued)

A
summary of option activity during the year ended December 31, 2009 is presented below (shares and aggregate intrinsic value in thousands):

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Contractual
Term

Aggregate
Intrinsic
ValueOutstanding, beginning of period


7,862

$
11.53Granted


496


14.88Exercised


(353
)

8.10Forfeited


(243
)

14.80Expired


(6
)

11.04Outstanding, end of period


7,756

$
11.79


5.73

$
20,749Options vested and expected to vest, end of period


7,560

$
11.71


5.66

$
20,702Options exercisable, end of period


6,043

$
10.98


5.15

$
19,844


The
aggregate intrinsic value was calculated using the difference between the December 31, 2009 market price and the grant price for only those awards that have a grant price that
is less than the December 31, 2009 market price.

The
following table summarizes information about stock options outstanding as of December 31, 2009 (in thousands, except contractual life and price data):

Options Outstanding

Options ExercisableRange of
Exercise Prices

Number
Outstanding

Weighted-
Average
Remaining
Contractual Life
(in years)

Weighted-
Average
Exercise
Price

Number
Exercisable

Weighted-
Average
Exercise
Price$3.11 to $9.97


2,048


4.07

$
8.35


2,028

$
8.35$9.98 to $11.00


2,070


4.86


10.62


1,997


10.63$11.01 to $14.27


2,119


6.50


13.02


1,429


12.86$14.28 to $18.15


1,519


8.09


16.33


589


16.687,756


5.73


11.79


6,043


10.98


Exercises of Stock Options

The total intrinsic value of share options exercised during the years ended December 31, 2009, 2008 and 2007 was
$2.7 million, $3.2 million and $6.7 million, respectively. During the years ended December 31, 2009, 2008 and 2007 we received cash for payment of the grant price of
exercised share options of approximately $2.9 million, $2.5 million and $9.4 million, respectively, and we anticipate we will realize a tax benefit related to these exercised
share options of approximately $2.7 million, $0.4 million and $1.9 million, respectively. The cash received for payment of the grant price is included as a component of cash flows
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

F-31

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 12:    SHARE-BASED COMPENSATION (Continued)

flows
from financing activities on the consolidated statement of cash flows, and the remainder of the tax benefit is included as a component of cash flows from operating activities.

We
settle stock option exercises and nonvested share awards primarily with newly issued common shares. As a result of the repurchase of shares of common stock to satisfy tax withholdings
that result from the vesting of nonvested share awards, we also may have treasury stock. Treasury stock is also used to satisfy option exercises. As of December 31, 2009 we held 56,473 shares
of treasury stock. We held no treasury stock as of December 31, 2008. After our treasury shares are exhausted, we will use newly issued shares to satisfy option exercises. We do not anticipate
that we will repurchase shares on the open market during the next year for the purpose of satisfying share-based compensation awards.

Nonvested Share Awards

Nonvested share awards entitle the holder to shares of common stock as the award vests. In 2009 we issued 285,000 nonvested share
awards at a weighted-average grant date fair value of $14.49 per share, and with a six-month vesting period. The 285,000 awards vested in full in the third quarter of 2009 and the total
fair value was $4.1 million. We measure the fair value of nonvested share awards based upon the market price of the underlying common stock as of the date of grant, and amortize the expense
over the vesting period using a straight-line method. As of December 31, 2009 there were no nonvested share awards outstanding.

NOTE 13:    ACQUISITIONS

Pinpoint Global Limited

On April 4, 2008, our wholly-owned subsidiary, Epiq Systems Holding B.V., acquired all of the equity of Uberdevelopments
Limited and its wholly-owned operating subsidiary, Pinpoint Global Limited (collectively, "Pinpoint"), an electronic discovery business with operations in the United Kingdom. The value of the
transaction was $7.1 million, consisting of $4.9 million of cash, $1.7 million of deferred payments and $0.5 million of capitalized transaction costs. Certain revenue
targets were satisfied as of September 30, 2008, which required an additional payment of $0.6 million in the fourth quarter of 2008; and the accrual of an additional payment of
approximately £545,000 (as of December 31, 2009 and 2008 approximately $0.9 million and $0.8 million, respectively, including interest) due in 2010. These additional
payments were recorded as purchase price adjustments. If certain other revenue targets are satisfied prior to the second and third anniversary dates of the agreement, we are required to make
additional payments. We have determined
that it is probable that these targets will be satisfied and have began accruing a liability for total payments of approximately £400,000 (as of both December 31, 2009 and 2008
approximately $0.6 million). These amounts are recorded as compensation expense over the contingency period.

The
allocation of the purchase price was as follows: $0.3 million to net assets, $1.1 million to customer contracts, $1.1 million to non-compete
agreements, $0.7 million to establish a deferred tax liability related to the acquired intangible assets, and $5.3 million to goodwill. The purchase price in excess of the value of the
acquired identifiable net assets reflects the strategic value we placed on Pinpoint as this acquisition facilitated the expansion of our electronic discovery business in the United Kingdom.

F-32

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 13:    ACQUISITIONS (Continued)

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 the acquired entities are included within our electronic discovery segment. The pro forma results of the acquired entity for the period from January 1,
2008 through the date of acquisition were not material to our consolidated results of operations.

NOTE 14:    SEGMENT REPORTING

We have three reporting segments: electronic discovery, bankruptcy, and settlement administration. Our electronic discovery business provides collections and forensics, processing,
search and review, and document review services to companies and the litigation departments of law firms. Produced documents are made available primarily through a hosted environment, and our
DocuMatrix software allows for efficient attorney review and data requests. Our
bankruptcy business provides solutions that address the needs of trustees to administer bankruptcy proceedings and of debtor corporations that file a plan of reorganization. Our settlement
administration segment provides managed services including legal notification, claims administration, project administration and controlled disbursement.

The
segment performance measure is based on earnings before interest, taxes, depreciation and amortization, other operating expense (income), and share-based compensation expense. In
management's evaluation of performance, certain costs, such as compensation for administrative staff and executive management, are not allocated by segment and, accordingly, the following reporting
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 prepaid assets and other assets are not allocated to our segments. Although we can and do
identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets to reporting segments, we do not allocate the related
depreciation and amortization to the segment as management evaluates segment performance exclusive of these non-cash charges.

F-33

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 14:    SEGMENT REPORTING (Continued)

Following
is a summary of segment information for the year ended December 31, 2009. The intersegment revenues during 2009 related primarily to call center services performed by
the settlement administration segment for the bankruptcy segment.

Year Ended December 31, 2009Electronic
Discovery

Bankruptcy

Settlement
Administration

Eliminations

Total(in thousands)Revenue:Operating revenue before reimbursed direct costs

$
55,806

$
91,002

$
61,721

$


$
208,529Intersegment revenue


1


1


1,889


(1,891
)

Operating revenue before reimbursed direct costs


55,807


91,003


63,610


(1,891
)

208,529Operating revenue from reimbursed direct costs


382


10,635


19,525





30,542Total revenue


56,189


101,638


83,135


(1,891
)

239,071Direct costs, general and administrative costs


37,674


54,191


65,248


(1,891
)

155,222Segment performance measure

$
18,515

$
47,447

$
17,887

$


$
83,849


Following
is a summary of segment information for the year ended December 31, 2008. Intersegment revenues for this period were not considered material to the segment reporting
information.

Year Ended December 31, 2008Electronic
Discovery

Bankruptcy

Settlement
Administration

Total(in thousands)Revenue:Operating revenue before reimbursed direct costs

$
58,128

$
59,828

$
89,900

$
207,856Operating revenue from reimbursed direct costs


182


4,936


23,144


28,262Total revenue


58,310


64,764


113,044


236,118Direct costs, general and administrative costs


31,987


34,144


93,192


159,323Segment performance measure

$
26,323

$
30,620

$
19,852

$
76,795


F-34

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 14:    SEGMENT REPORTING (Continued)

Following
is a summary of segment information for the year ended December 31, 2007. Intersegment revenues for this period were not considered material to the segment reporting
information.

Year Ended December 31, 2007Electronic
Discovery

Bankruptcy

Settlement
Administration

Total(in thousands)Revenue:Operating revenue before reimbursed direct costs

$
49,062

$
60,289

$
42,286

$
151,637Operating revenue from reimbursed direct costs


95


4,807


17,874


22,776Total revenue


49,157


65,096


60,160


174,413Direct costs, general and administrative costs


24,787


29,993


51,334


106,114Segment performance measure

$
24,370

$
35,103

$
8,826

$
68,299


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

Year Ended December 31,2009

2008

2007(in thousands)Segment performance measure

$
83,849

$
76,795

$
68,299Corporate and unallocated expenses


(20,277
)

(22,619
)

(18,618
)Share based compensation expense


(8,543
)

(2,831
)

(5,602
)Depreciation and software and leasehold amortization


(18,775
)

(16,302
)

(12,766
)Amortization of identifiable intangible assets


(7,409
)

(9,051
)

(9,531
)Other operating (expense) income


(634
)

(171
)

1,094Interest expense, net


(1,350
)

(1,478
)

(11,881
)Income before income taxes

$
26,861

$
24,343

$
10,995


Following
are total assets by segment (in thousands):

December 31,
2009

December 31,
2008AssetsElectronic Discovery

$
133,515

$
139,216Bankruptcy


187,484


184,906Settlement Administration


54,213


60,146Corporate and unallocated


62,729


34,678Total consolidated assets

$
437,941

$
418,946


F-35

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 14:    SEGMENT REPORTING (Continued)

Following
are capital expenditures by segment (in thousands):

Year Ended December 31,2009

2008

2007Capital ExpendituresElectronic Discovery

$
8,688

$
14,687

$
14,610Bankruptcy


7,009


4,820


5,699Settlement Administration


5,759


2,067


289Corporate and unallocated


1,753


2,567


1,577Total consolidated capital expenditures

$
23,209

$
24,141

$
22,175


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

Year Ended December 31,2009

2008

2007RevenueUnited States

$
228,961

$
225,950

$
169,764Other countries


10,110


10,168


4,649Total

$
239,071

$
236,118

$
174,413


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

December 31,
2009

December 31,
2008Long-lived assetsUnited States

$
50,324

$
49,717Other countries


3,413


1,258Total

$
53,737

$
50,975


NOTE 15:    DERIVATIVE FINANCIAL INSTRUMENTS

Interest Rate Floors

A portion of our bankruptcy trustee revenue is subject to variability based on fluctuations in short-term interest rates.
During 2007, 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 accounted for this transaction by recording this derivative instrument on our balance sheet at fair value. As the interest
rate floor options were not designated as an accounting hedge, changes in the fair values of the derivatives were recorded each period in current earnings. For the year ended December 31, 2007,
the change in the fair value of the interest rate floor options was recognized as an unrealized gain of

F-36

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 15:    DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

$1.1 million
and was included as a component of "Other operating expense (income)" in our Consolidated Statements of Income. During February 2008, we sold the interest rate floor options and
realized a $3.5 million gain. The $2.4 million difference between the realized gain of $3.5 million and the previously unrealized gain of $1.1 million was included as a
component of "Other operating expense (income)" for the year ended December 31, 2008 on the accompanying Consolidated Statements of Income. As of December 31, 2008 and
December 31, 2009 we did not hold any interest rate floor options, other derivatives, or auction rate securities.

Contingently Convertible Subordinated Notes

The holders of our convertible notes had the right to extend the maturity of these notes for a period not to exceed three years. 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. For any convertible notes converted into shares of our common stock
prior to the scheduled extended maturity, 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 is included as a component of "Current maturities of long-term obligations" on the Consolidated Balance Sheet
at December 31, 2009 and is a component of "Long-term obligations (excluding current maturities)" at December 31, 2008. 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 Income.

NOTE 16:    SUPPLEMENTAL CASH FLOW INFORMATION

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

Year Ended December 31,2009

2008

2007Cash paid for:Interest

$
2,717

$
2,876

$
9,617Income taxes paid, net


7,958


9,335


2,995Non-cash investing and financing transactions:Capitalized lease obligations incurred


5,072


3,709


2,566Property, equipment, and leasehold improvements accrued in accounts payable and other long-term liabilities


490


2,018


848Obligation incurred in purchase transaction





810


Conversion of convertible notes to common stock


32








F-37

---



Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009, 2008 AND 2007

NOTE 17:    LEGAL PROCEEDINGS

On July 29, 2008, the Alaska Electrical Pension Fund filed a putative shareholder derivative action in the U.S. District Court for the District of Kansas (Civil Action
No. 08-CV-2344 CM/JPO), alleging that each of our current directors and certain current and former executive officers and directors engaged in misconduct regarding stock
option grants.

The
complaint asserts, among other things, that the company backdated certain stock options and that the individual defendants either participated in the backdating or permitted it to
occur, violations of generally accepted accounting principles as a result of the alleged backdating of options, related claims of false and misleading proxy statements and annual reports filed by the
company under the Securities Exchange Act of 1934, also as a result of the alleged backdating of options, and various violations of state law, breaches of fiduciary duty of loyalty and insider trading
in company stock. The complaint seeks, among other things, unspecified money damages, an accounting for profits obtained from the alleged backdating of options, specified changes in our corporate
governance policies, punitive damages and rescission of the allegedly backdated options.

In
October 2008, the company and the individual defendants filed a motion to dismiss the plaintiff's complaint on a variety of grounds. In June 2009, the Court entered an order on
defendants' motion to dismiss plaintiff's complaint. In that order, the Court: (i) barred certain of plaintiff's federal securities law claims arising before July 29, 2005, leaving only
the claim for the stock option grant dated June 3, 2006; (ii) held that the statute of limitations was tolled on those federal securities law claims; (iii) barred plaintiff's
other federal securities law claims arising before December 9, 2003; (iv) declined to rule at that time on defendants' motions to dismiss plaintiff's state law claims based on any
statute of repose
or statute of limitations; (v) dismissed plaintiff's state law claim for constructive fraud; and (vi) held that plaintiff's complaint stated federal securities law and state law claims
with sufficient particularity to avoid dismissal at that stage in the proceedings. The individual defendants and the company have filed an answer denying plaintiff's claims.

The
plaintiff, the individual defendants and the company are participating in mediation required by the court. In connection with this on-going mediation, the company has
accrued a liability, of approximately $1.0 million at December 31, 2009 in the accompanying Consolidated Financial Statements. The ultimate resolution of this matter may materially
differ from the amount recorded as of December 31, 2009 as a result of future court rulings or potential settlement. Any liability relative to this matter may be funded in part, or in whole, by
the company's insurance carrier.

We
believe the plaintiff's claims are without merit and have been defending against them vigorously.

F-38

---



EPIQ SYSTEMS, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

AdditionsDescription

Balance at
beginning of
year

Charged to
costs and
expenses

Charged to
other
accounts

Deductions
from
reserves

Balance at
end of
yearAllowance for doubtful receivablesFor the year ended December 31, 2009

$
2,600

$
1,732

$
8

$
(1,412
)
$
2,928For the year ended December 31, 2008

$
1,437

$
1,678

$
103

$
(618
)
$
2,600For the year ended December 31, 2007

$
1,684

$
479

$


$
(726
)
$
1,437




AdditionsDescription

Balance at
beginning of
year

Charged to
costs and
expenses

Charged to
other
accounts

Deductions
from
reserves

Balance at
end of
yearDeferred tax valuation allowanceFor the year ended December 31, 2009

$
63

$
113

$


$
(63
)
$
113For the year ended December 31, 2008

$


$
63

$


$


$
63For the year ended December 31, 2007

$
228

$


$


$
(228
)
$



---





EXHIBIT INDEX

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

Exhibit Number

Description1.1

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. Incorporated by reference and previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2007,
filed with the Securities and Exchange Commission on March 4, 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. Incorporated by reference and 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 as of July 30, 2008, 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 quarterly report on Form 10-Q for the quarter ended June 30, 2008, filed with the Securities and Exchange Commission on July 30,
2008.10.4

Form of Nonqualified Stock Option Agreement under 2004 Equity Incentive Plan. Incorporated by reference and 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.


---



Exhibit Number

Description10.5

Employment arrangement between Epiq Systems, Inc. and Lorenzo Mendizabal dated as of May 20, 2005, as amended October 19, 2005. Incorporated by reference and previously filed as an exhibit to the annual report
on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 9, 2007.10.6

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). Incorporated by reference and previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on
March 9, 2007.10.7

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, 2007.10.8

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, 2007.10.9

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, 2007.10.10

Form of Restricted Stock Award Agreement. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on February 27,
2009.12.1

Computation of ratio of earnings to fixed charges.*21.1

List of Subsidiaries.*23.1

Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.*31.1

Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1

Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350.*


*Filed
herewith.


---