**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

**Forthe fiscal year ended December 31, 2004**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transition period from               to               **

**Commissionfile number 0-22081**

**EPIQ SYSTEMS, INC.**

(Exact name of registrantas specified in its charter)

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

 

Registrant’s telephonenumber, including area code **(913) 621-9500**

Securities registeredpursuant to Section 12(b) of the Act: **None**

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

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

Indicate by check mark ifdisclosure 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 informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes x  No o

The aggregate market valueof voting common stock held by non-affiliates of the registrant (based upon thelast reported sale price on the Nasdaq National Market), as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter(June 30, 2004) was approximately $259,000,000.

There were 17,887,593shares of common stock of the registrant outstanding as of February 4,2005.

Documentsincorporated by reference:  Theinformation required by Part III of Form 10-K is incorporatedherein by reference to the registrant’s definitive Proxy Statement relating toits 2005 Annual Meeting of Shareholders, which will be filed with theCommission within 120 days after the end of the registrant’s fiscal year.

 

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**EPIQ SYSTEMS, INC.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**
| **PART I**   |
|-------------------|
| **ITEM 1.**       | **Business** | **1** |
| **ITEM 2.**       | **Properties** | **13** |
| **ITEM 3.**       | **Legal Proceedings** | **13** |
| **ITEM 4.**       | **Submission of Matters to a Vote of Security  Holders** | **13** |
| **PART II**  |
| **ITEM 5.**       | **Market for the Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities** | **13** |
| **ITEM 6.**       | **Selected Financial Data** | **15** |
| **ITEM 7.**       | **Management’s Discussion and Analysis of  Financial Condition And Results of Operations** | **16** |
| **ITEM 7A.**      | **Quantitative and Qualitative  Disclosures About Market Risk** | **25** |
| **ITEM 8.**       | **Financial Statements and  Supplementary Data** | **26** |
| **ITEM 9.**       | **Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure** | **26** |
| **ITEM 9A.**      | **Controls and Procedures** | **26** |
| **ITEM 9B.**      | **Other Information** | **29** |
| **PART III** |
| **ITEM 10.**      | **Directors and Executive  Officers of the Registrant** | **29** |
| **ITEM 11.**      | **Executive Compensation** | **29** |
| **ITEM 12.**      | **Security Ownership of Certain  Beneficial Owners and Management** | **29** |
| **ITEM 13.**      | **Certain Relationships and  Related Transactions** | **29** |
| **ITEM 14.**      | **Principal Accountant Fees and  Services** | **29** |
| **PART IV**  |
| **ITEM 15.**      | **Exhibits and Financial  Statement Schedules** | **30** |

 

 

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**CAUTIONARYSTATEMENT CONCERNING FORWARD-LOOKING STATEMENTS**

In this report, in other filings with the SEC and inpress releases and other public statements by our officers throughout the year,EPIQ Systems, Inc. makes or will make statements that plan for oranticipate the future. These forward-looking statements include statementsabout our future business plans and strategies, and other statements that arenot historical in nature. These forward-looking statements are based on ourcurrent expectations. Many of these statements are found in the **“Business”** and **“Management’s Discussionand Analysis of Financial Condition and Results of Operations”**sections of this report.

Forward-looking statements may be identified by wordsor phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,”“estimated,” “potential,” “goal,” and “objective.”  Section 27A of the Securities Act of1933, as amended and Section 21E of the Securities Exchange Act of 1934,as amended, provide a “safe harbor” for forward-looking statements. In order tocomply with the terms of the safe harbor, and because forward-lookingstatements involve future risks and uncertainties, listed herein are a varietyof factors that could cause actual results and experience to differ materiallyfrom the anticipated results or other expectations expressed in ourforward-looking statements. These factors include the **“Risk Factors”** section of this report. Weundertake no obligation to update any forward-looking statements containedherein or in future communications to reflect future events or developments.

 

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**PART I**

**ITEM 1**.                BUSINESS

**General**

EPIQ Systems providestechnology-based products and services for fiduciary management and claimsadministration applications. Our solutions enable clients to optimize theadministration of large and complex bankruptcy, class action, mass tort, andother similar legal proceedings. Our clients include corporations, attorneys,bankruptcy trustees and administrative professionals who require sophisticatedcase administration and document management capabilities, extensive subjectmatter expertise and a high service capacity. We provide clients with anintegrated offering of both proprietary technology and value-added servicesthat comprehensively address their extensive business requirements.

Acquisitions have been apart of our business expansion. During 2003, we acquired Bankruptcy ServicesLLC to enter the market for Chapter 11 administrative services. During 2004, weacquired the Poorman-Douglas Corporation to enter the market for class actionand mass tort administrative services.

In November 2003, wedetermined that our infrastructure software business, which operated in theautomated data exchange software market, was no longer aligned with ourlong-term strategic objectives. On April 30, 2004, we completed the saleof this business.

During 2004, we changedthe structure of our operating segments to reflect changes in our businessoperations. Performance is now assessed for our case management and documentmanagement operating segments. Case management solutions provide clients withintegrated technology-based products and services for the automation of variousadministrative tasks. Document management solutions include proprietarytechnology and production services to ensure timely, accurate and completeadministration of the many documents associated with multi-faceted legal casesand communications applications.

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

Our principal executiveoffice is located at 501 Kansas Avenue, Kansas City, Kansas 66105. Thetelephone number at that address is (913) 621-9500, and our websiteaddress is *www.epiqsystems.com*. We make availablefree of charge through our Internet website our annual report on Form 10-K,our quarterly reports on Form 10-Q, our current reports on Form 8-Kand amendments to those reports filed with or furnished to the SEC as soon asreasonably practicable after we electronically file those reports with orfurnish them to the SEC. The public may read and copy any materials filed by uswith the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,Washington, DC 20459. The public may obtain information on the operation of thePublic Reference Room by calling the SEC at 1-800-SEC-0330.The SEC maintains an Internet site that contains reports, proxy and informationstatements and other information regarding issuers that file electronicallywith the SEC at *http://www.sec.gov*. The contentsof these websites are not incorporated into this report. Further, our referencesto the URLs for these websites are intended to be inactive textual referencesonly.

**Industry Environment**

Both our case managementsegment and our document management segment provide products and servicesprimarily to the bankruptcy and the class action/mass tort industries.

Bankruptcy is an integralpart of the United States’ economy, and bankruptcy filings have remained nearrecord levels for the past several years. As reported by the AdministrativeOffice of the U.S. Courts for the government fiscal years ended September 30,2002, 2003, and 2004, there were approximately 1.55 million, 1.66 million,and 1.62 million new bankruptcy filings, respectively.

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

·       Chapter7 is a liquidation bankruptcy for individuals or businesses that, as measuredby the number of new cases filed in 2004, accounted for approximately 71% ofall bankruptcy filings. In a Chapter 7 case, the debtor’s assets areliquidated and the resulting cash proceeds are used to pay creditors. Chapter 7cases typically last several years.

·       Chapter11 is a reorganization model of bankruptcy for corporations that, as measuredby the number of new cases filed in 2004, accounted for approximately 1% of allbankruptcy filings. Chapter 11 generally allows a company to continue operatingunder a plan of reorganization to restructure its business and to modifypayment terms of both secured and unsecured obligations. Chapter 11 cases maylast several years.

·       Chapter13 is a reorganization model of bankruptcy for individuals that, as measured bythe number of new cases filed in 2004, accounted for approximately 28% of allbankruptcy filings. In a Chapter 13 case, debtors make periodic cashpayments into a reorganization plan and a trustee uses these cash payments tomake monthly distributions to creditors. Chapter 13 cases typically lastbetween three and five years.

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

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

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

**Products and Services**

*Case Management Segment*

Casemanagement support for client engagements generally lasts several years and hasa revenue profile that typically includes a recurring component. Our casemanagement segment generates revenue primarily through the following integratedtechnology-based products and services.

·       Anintegrated solution of a proprietary technology platform and relatedprofessional services that facilitates case administration of class action,mass tort and Chapter 11 client engagements.

·       Comprehensivesupport for the balloting and voting activities that accompany Chapter 11 bankruptcyrestructurings.

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·       *TCMS*®, an integrated solution comprised ofa proprietary software product, computer hardware, and support services,installed in Chapter 7 bankruptcy trustee offices to facilitate the efficientmanagement of asset liquidations, creditor distributions, and governmentreporting.

·       *CasePowe*r®, proprietary software designedto enable Chapter 13 bankruptcy trustees to manage efficiently debtor payments,creditor distributions and government reporting.

·       Databaseconversions, maintenance and processing.

·       Professionaland support services, including case management, claims processing, claimsreconciliation, and customized programming and technology services.

·       Callcenter support.

*Document ManagementSegment*

Document managementrevenue is generally non-recurring due to the unpredictable nature of thefrequency, timing and magnitude of the clients’ business requirements. Ourdocument management segment generates revenue primarily through the followingservices.

·       Legalnoticing services to parties of interest in bankruptcy and class action andmass tort matters.

·       Reimbursementfor costs incurred related to postage on mailing services.

·       Mediacampaign and advertising management.

·       Documentcustody services.

**Customers**

The end-user customers of our *TCMS®* (Chapter 7) and *CasePower®* (Chapter 13) products andservices are professional bankruptcy trustees. Bankruptcy trustees are appointed by the Executive Office forUnited States Trustees. A United States Trustee is appointed in most federalcourt districts and generally has responsibility for overseeing the integrityof the bankruptcy system. The bankruptcy trustee’s primary responsibilitiesinclude liquidating the debtor’s assets (Chapter 7) or collecting fundsfrom the debtor (Chapter 13), distributing the collected funds tocreditors pursuant to the orders of the bankruptcy court and preparing regularstatus reports for the Executive Office for United States Trustees and for thebankruptcy court. Trustees typically manage an entire caseload of bankruptcycases simultaneously.

The application of Chapter 7 bankruptcy regulationshas the practical effect of discouraging trustee customers from incurring directadministrative costs for computer system expenses. As a result, we provide ourChapter 7 products and services to trustee customers at no direct charge, andour trustee customers agree to maintain deposit accounts for bankruptcy casesunder their administration at a designated banking institution. We havemarketing arrangements with various banks under which we provide trustee casemanagement software and related services and the bank provides the trustee withdeposit-related banking services. Under these Chapter 7 deposit relationships,we receive revenues based on factors such as the aggregate amount of trusteedeposits maintained at the bank, the number of customers using our product,software upgrades, and ancillary professional services.

Prior to April 1, 2004, we had an exclusivemarketing arrangement with Bank of America for Chapter 7 trustee productsand services. Effective April 1, 2004, this relationship became anon-exclusive marketing arrangement that extends through September 30,2006. Since April 1, 2004, we have established new deposit relationshipswith additional financial institutions. At December 31, 2004,substantially all Chapter 7 deposits were maintained at Bank of America.

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Our customers for Chapter 11 solutions are debtorsfiling a plan of reorganization. Law firms representing these companies are akey conduit through which both we and our competitors gain access to the debtorcompanies prior to their filing for bankruptcy. Debtors’ counsel often use our services and products directlyon behalf of their client, and we have developed relationships with thebankruptcy departments at various law firms.

Our customers for classaction and mass tort solutions are primarily large corporations. We sell ourservices directly to those customers; however, our relationships with otherinterested parties, including plaintiff and defense law firms, often providesaccess to these customers.

**Sales and Marketing**

Our sales departmentmarkets our case management and document management products and servicesdirectly to bankruptcy trustees, Chapter 11 debtors, bankruptcy and classaction and mass tort legal counsel, class action and mass tort defendants, andgovernment entities through on-site sales calls. We focus on attracting andretaining customers by providing integrated technology solutions with leadingedge features and by providing exceptional customer service. Our accountexecutives, case managers and relationship managers are responsible forproviding ongoing support services for existing customers. Various relationshipmanagers, case managers and sales representatives attend bankruptcy and classaction and mass tort trade shows. We also conduct direct mail campaigns and weadvertise in trade journals.

**Competition**

There are a variety ofcompanies competing for the finite number of available bankruptcy trusteeengagements as well as the corporate reorganizations, class action and masstort lawsuits filed each year. Selected competitors include BMC Group, Inc.,Bankruptcy Management Solutions, Inc., The Garden City Group Inc., RustConsulting Inc., The Trumbull Group and others. Additionally, certain lawfirms, accounting firms, management consultant firms, turnaround specialistsand crisis management firms offer certain products and services that competewith ours.

**GovernmentRegulation**

Our products and servicesare not directly regulated by the government. Our bankruptcy trustee customersand Chapter 11 debtors are, however, subject to significant regulation. Ourbankruptcy trustee customers and Chapter 11 debtor customers are subject to theUnited States Bankruptcy Code, the Federal Rules of Bankruptcy Procedureand local rules and procedures established by bankruptcy courts. TheExecutive Office for United States Trustees, a division of the United StatesDepartment of Justice, oversees the bankruptcy industry and establishesadministrative rules governing our clients’ activities. The success of ourbankruptcy product lines has been, and will continue to be, dependent in parton our ability to develop and maintain products and provide services that allowtrustees to perform their duties within applicable regulatory and judicial rules andprocedures and that allow Chapter 11 debtors to make required filings and toprovide required notices to creditors on a timely and accurate basis. Our classaction and mass tort cases are subject to various federal and state laws aswell as rules and procedures established by the courts. In February 2005,new federal class action and tort reform legislation was passed and signed byPresident Bush. The primary impact of the new federal legislation is to requirethat certain types of class action lawsuits be brought in federal court ratherthan state courts. We believe the new federal legislation will likely result infewer class action lawsuits in state courts. The slower processing of classaction lawsuits in federal courts could delay the ultimate settlement of thosecases, which could adversely affect the timing of services we provide in thosecases. Similar to this recent federal experience, there have been variousefforts at the state level to modify and reform the laws and procedures relatedto class action and mass tort. We cannot predict the effect, if any, that statelegislative action would have on the number or size of class action and masstort lawsuits filed, or on the claims administration process.

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**Employees**

Asof December 31, 2004, we employed approximately 400 full-time employees,none of whom is covered by a collective bargaining agreement. We believe the relationshipwith our employees is good.

**Risk Factors**

*This report, other reports to befiled by us with the SEC, press releases made by us and other public statementsby our officers, oral and written, contain or will contain forward-lookingstatements within the meaning of Section 27A of the Securities Actof 1933, as amended and Section 21E of the Securities Exchange Act of1934, as amended, including those relating to the possible or assumed futureresults of operations and financial condition. Because those statements aresubject to a number of uncertainties and risks, actual results may differmaterially from those expressed or implied by the forward-looking statements. Listedbelow are certain risks associated with an investment in our securities that couldcause actual results to differ from those expressed or implied.*

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

Our bankruptcy depositbased fees are highly dependent on the amount of liquidated asset proceedsdeposited by Chapter 7 bankruptcy trustees and the number of bankruptcy filingsin the United States. Consumer and business debt combined with economicfluctuations in the United States affect the number of bankruptcy filings andthe dollar volume flowing through the federal bankruptcy system. A significantreduction in Chapter 7 liquidated asset proceeds on deposit by our bankruptcytrustee customers with our Chapter 7 depository banks would likely have amaterial adverse effect on our results of operations.

**Substantially all of our Chapter 7 revenues arecollected through a single financial institution, and our change from anexclusive to a non-exclusive arrangement and establishing new arrangements withadditional financial institutions could cause uncertainty and adversely affectour future revenue and earnings.**

The application ofChapter 7 bankruptcy regulations discourages Chapter 7 trustees from incurringdirect administrative costs for computer system expenses. As a result, weprovide our products and services to Chapter 7 trustee customers at no directcharge, and our Chapter 7 trustee customers agree to deposit the cash proceedsfrom liquidations of debtors’ assets with a designated financial institutionwith which we have a Chapter 7 marketing arrangement. We have arrangements withseveral financial institutions under which our Chapter 7 trustees place theirliquidated assets on deposit. Under these arrangements:

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

·       thefinancial institution provides certain banking services to the joint trusteecustomers; and

·       wecollect from the financial institution monthly revenues based primarily upon apercentage of the total liquidated assets on deposit.

Previously we promoted our Chapter 7 productexclusively through a marketing arrangement established with Bank of America inNovember 1993. Substantially all of our Chapter 7 revenues are collectedthrough this relationship. On April 1, 2004, this exclusive marketingarrangement became a non-exclusive arrangement with pricing establishedthrough September 30, 2006. The business terms after September 30,2006, if the agreement is extended, could be less favorable to us than ourcurrent terms which could adversely affect our case management revenue andearnings after that date.

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In 2004 we formedmarketing arrangements with additional financial institutions. The addition ofnew banking relationships could create uncertainty with current and prospectivetrustee customers or operational difficulties for trustees, which couldadversely affect our relationships with those joint customers and our casemanagement revenues and earnings. Additionally, we may seek to establishadditional Chapter 7 depository bank relationships in the future. The businessterms with new Chapter 7 depository banks and renegotiations of the businessterms of our existing Chapter 7 depository bank relationships could result inless favorable terms than our historic arrangements. A change in pricingaffecting a material portion of our Chapter 7 deposits could adversely affectour case management revenues and our results of operations.

**If a financial institution with which we have amarketing arrangement for Chapter 7 products and services is perceivednegatively by current or prospective trustee clients, our case managementrevenue and earnings could be adversely affected.**

The Chapter 7 depositorybanks with which we have joint marketing arrangements provide banking productsand services directly to our trustee clients. If the financial institution providesineffective or below market banking products or services to the jointcustomers, or if the financial institution has errors or omissions in itsprocessing, we could experience collateral damage to our reputation. We cannotcontrol the quality of products and services provided by the Chapter 7depository banks to the joint customers. Additionally, if a depository bankarrangement is discontinued, it could disrupt the effective delivery of bankingservices to trustees. If the migration to a successor depository bank is notcompleted smoothly or we were unable to move the trustee customer’s deposits toa different banking arrangement prior to the expiration, we could lose trusteecustomers which would adversely affect our case management revenues and ourresults of operations.

**We have historically lacked product and businessdiversification. If we are unable to expand our primary business, our futurerevenues and earnings may not grow and could decline.**

Prior to 1992, our soleline of business activity was the provision of automation services to Chapter13 trustees. In 1992, we entered the Chapter 7 market. In 2003, we entered theChapter 11 market through an acquisition, and in 2004 we entered the classaction and mass tort market through an acquisition. While acquisitions haveincreased our business diversification, we are limited to fiduciary managementand claims administration operations. If we are unable to maintain and grow theoperating revenues from our case management and document management operations,our future revenues and earnings may not grow and could decline. Our lack ofproduct and business diversification could inhibit the opportunities for growthof our business, revenues and earnings.

**Bankruptcy reform legislation could alter the marketfor our products and services, which could cause a reduction in our revenuesand earnings.**

Bankruptcy reform legislation has been introduced inCongress in each of the last few years but has not been passed. We believeproposed legislation will be reintroduced annually and will ultimately beenacted. The recently proposed bankruptcy legislation could restrict debtors’choices of how to file bankruptcy, making the bankruptcy process morecumbersome for some debtors. For example, new legislation could force certaindebtors to file bankruptcy under Chapter 13 instead of Chapter 7, therebycausing the debtor to file a plan of reorganization to repay creditors overtime rather than liquidating the debtor’s assets. Although we do not think therecent proposals would materially affect the aggregate Chapter 7 deposits heldby our trustee customers in the foreseeable future, this legislation, ifpassed, could affect the number of bankruptcy filings. Future bankruptcy reformproposals could differ materially from past proposed legislation and could bemore adverse to our bankruptcy management business than recent legislativeproposals.

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**Tort reform legislation could reduce the number andscope of class action and mass action cases, thus reducing our businessprospects in the class action market.**

In February 2005, newfederal class action and tort reform legislation was passed and signed byPresident Bush. The primary impact of the new federal legislation is to requirethat certain types of class action lawsuits be brought in federal court ratherthan state courts. We believe the new federal legislation will likely result infewer class action lawsuits in state courts, which are generally perceived asfaster and more plaintiff-friendly than federal courts. The slower processingof class action lawsuits in federal courts could delay the ultimate settlementof those cases, which could adversely affect the timing of services we providein those cases. Likewise, the new federal legislation could have the effect oflowering the overall number of class action cases, whether filed in federal orstate courts. Similar to this recent federal experience, there have beenvarious efforts at the state level to modify and reform the laws and proceduresrelated to class action and mass tort. The goal of certain state tort reformproposals has been to reduce the number and scope of class action and massaction cases. While we cannot predict whether any tort reform legislation willpass at the state levels or the substance of any future changes, anylegislative efforts that are successful in reducing the number or scope ofclass action or mass action cases would likely have an adverse effect on ourresults of operations.

**We have a limited number of bankruptcy trustee clientsand a limited number of significant referral sources for Chapter 11 and class action and mass tortengagements. The loss of even a limited number of our trustee customers orreferral sources could result in a loss of revenue and earnings.**

A single bankruptcytrustee customer can comprise an important portion of our operating revenues,although we did not have revenues related to any single bankruptcy trusteecustomer in excess of 1% of our operating revenues during 2004. Additionally,we rely heavily on a limited number of Chapter 11 and class action referralsources to earn new business engagements. Our future financial performance willdepend on our ability to maintain existing trustee customer accounts, toattract business from trustees that are currently using a competitor’s softwareproduct, to maintain our existing referral relationships, and to develop newreferral relationships. The loss of even a limited number of trustee customersor a reduction in referral sources could result in a material loss of revenueand earnings.

**The fluctuations in quarterly projects for clientshave affected and may affect in the future the timing of quarterly revenues andearnings and are likely to affect future quarterly results.**

The initiation ortermination of a large Chapter 11, class action or mass tort engagement candirectly affect our revenues and earnings for a particular quarter, and thelevels of services, particularly services related to document management,required for an ongoing Chapter 11, class action or mass tort engagement canfluctuate quarter to quarter during the time that the debtor is in Chapter 11reorganization or the class action or mass tort lawsuit is active.

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

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

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

·       fluctuationsin trustees’ deposit balances or caseloads;

·       unanticipatedexpenses related to software maintenance or customer service;

·       thetiming, size, cancellation or rescheduling of customer orders; and

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

**Our stock price may be volatile even if our quarterlyresults do not fluctuate significantly.**

If our quarterlyresults fluctuate, the market price for our common stock may fluctuate as welland those fluctuations may be significant. Even if we report stable orincreased earnings, the market price of our common stock may be volatile. Thereare a number of factors, beyond earnings fluctuations, that can affect themarket price of our common stock, including the following:

·       adecrease in market demand for our stock;

·       downwardrevisions in securities analysts’ estimates;

·       announcementsof technological innovations or new products developed by us or ourcompetitors;

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

·       generalmarket conditions and other economic factors; and

·       theperception that the economy is improving and the corresponding assumption thatour bankruptcy business will decline when the economy improves.

In addition, the stockmarket has experienced significant price and volume fluctuations that haveparticularly affected the market prices of stocks of technology companies andthat have often been unrelated to the operating performance of particularcompanies. The market price of our common stock has been volatile, and this islikely to continue.

**If Chapter 11 cases on which we are retained convertto Chapter 7, we may not be paid for the products and services we haveprovided.**

In Chapter 11 engagementswe provide services directly to the debtor and we are paid directly by thedebtor. If a debtor’s Chapter 11 case converts to Chapter 7 liquidation, wemight not be paid for products and services previously provided and we wouldmost likely lose all future revenue from the case. We have had Chapter 11 casesconvert to Chapter 7 cases in the past. The conversion of a major Chapter 11case to Chapter 7 could have a material adverse effect on our results ofoperations.

**If the bankruptcy court reduces or eliminates our feesin major Chapter 11 cases, our results of operations could be impaired.**

In Chapter 11, thebankruptcy court may reduce or eliminate fees paid for administrative servicessuch as those we provide. If the court reduced or eliminated fees due to us ina major Chapter 11 case, our results of operations could be materiallyaffected.

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

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

·       enhanceour existing products;

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

·       maintainour technology skills; and

·       respondto technological advances and emerging industry standards on a timely andcost-effective basis.

We may not be able toincorporate future technological advances into our business, and futureadvances in technology may not be beneficial to or compatible with our business.In addition, keeping abreast of technological advances in our business mayrequire substantial expenditures and lead-time. We may not be successful inusing new technologies, adapting our solutions to emerging industry standards,or developing, introducing and marketing software products or enhancements. Furthermore,we may experience difficulties that could delay or prevent the successfuldevelopment, introduction or marketing of these products. If we incur increasedcosts or are unable, for technical or other reasons, to develop and introducenew products or enhancements in a timely manner in response to changing marketconditions or customer requirements, we could lose existing customers and failto attract new business.

**New releases of our software products may haveundetected errors, which could cause litigation claims against us or damage toour reputation.**

We intend to continue to issue new releases of oursoftware products periodically. Complex software products, such as those weoffer, can contain undetected errors when first introduced or as new versionsare released. Any introduction of new products and future releases has a riskof undetected errors. Despite extensive pre-release testing of our software,these undetected errors may be discovered only after a product has beeninstalled and used by our customers. Likewise, the software products we acquirein business acquisitions have a risk of undetected errors.

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

**Security problems with, or product liability claimsarising from, our software products and business processes could causeincreased expense for litigation, increased service costs and damage to ourreputation.**

We have included security features in our productsthat are intended to protect the privacy and integrity of data. Security forour products is critical given the highly confidential nature of theinformation our software processes. Our software products and the servers onwhich the products are used may not be impervious to intentional break-ins (“hacking”)or other disruptive problems caused by the Internet or by other users. Hackingor other disruptive problems could result in the diversion of developmentresources, damage to our reputation, increased service costs or impaired marketacceptance of our products, any of which could result in higher expenses orlower revenues. Additionally, we could be exposed to potential 

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liability related tohacking or other disruptive problems. Defending these liability claims couldresult in increased expenses for litigation and a significant diversion of ourmanagement’s attention.

Furthermore, we administerclaims for third parties. Errors or fraud related to the processing or paymentof these claims could result in the diversion of management resources, damageto our reputation, increased service costsor impaired market acceptance of our services, any of which could result inhigher expenses and/or lower revenues. Additionally, such errors or fraudrelated to the processing or payment of claims could result in lawsuitsalleging damages. Defending such claims could result in increased expenses forlitigation and a significant diversion of our management’s attention.

**Our intellectual propertyis not protected through patents or formal copyright registration. Therefore,we do not have the full benefit of patent or copyright laws to prevent othersfrom replicating our software.**

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

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

Our products and servicesare not directly regulated by the government. Our bankruptcy customers are,however, subject to significant regulation, including the United StatesBankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules andprocedures established by bankruptcy courts. The Executive Office for UnitedStates Trustees, a division of the United States Department of Justice,oversees bankruptcy trustees and establishes administrative rules governingtrustees’ activities. Additionally, the process of administering the settlementof class action or mass tort cases is subject to court supervision and reviewby opposing plaintiffs’ and defendants’ counsel. The success of our businesshas been, and will continue to be, partly dependent on our ability to developand maintain products and provide services that allow clients to perform theirduties within applicable regulatory and judicial rules and procedures andthat allow Chapter 11 debtors to make filings and send required notices on atimely and accurate basis. Future regulation and court practices or proceduresmay limit or eliminate the ability of clients to utilize the types of productsand services that we currently provide. Our failure to adapt our products andservices to changes in the Bankruptcy Code and applicable legislative andjudicial rules and procedures could cause us to lose existing customers orfail to attract new customers.

**The integration of acquired businesses is timeconsuming, may distract our management from our other operations, and can beexpensive, all of which could reduce or eliminate our expected earnings.**

During January 2004, we acquired Poorman-Douglasfor approximately $116 million. Over the prior five years, we acquired fiveother businesses at a combined cost of approximately $100 million. We mayconsider additional opportunities to acquire other companies, assets or productlines that complement or expand our business. If we are unsuccessful inintegrating these companies or product lines with our existing operations, orif integration is more difficult than anticipated, we may experiencedisruptions to our operations. A difficult or unsuccessful integration of anacquired business would likely have a material adverse effect on our results ofoperations.

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Some of the risksthat may affect our ability to integrate or realize any anticipated benefitsfrom companies we acquire include those associated with:

·       unexpectedlosses of key employees or customers of the acquired company;

·       conformingthe acquired company’s standards, processes, procedures and controls with ouroperations;

·       increasingthe scope, geographic diversity and complexity of our operations;

·       difficultiesin transferring processes and know-how;

·       difficultiesin the assimilation of acquired operations, technologies or products;

·       diversionof management’s attention from other business concerns; and

·       adverseeffects on existing business relationships with customers.

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

We have used our commonstock to refinance debt incurred for several prior acquisitions. Most recently,we issued $50 million of convertible notes, which are convertible intoapproximately 2,857,000 shares of common stock, to refinance a portion of thepurchase price for the Poorman-Douglas acquisition. We may consider furtheropportunities to acquire companies, assets or product lines that complement orexpand our business. We expect that future acquisitions, if any, could providefor consideration to be paid in cash, shares of our common stock, or acombination of cash and shares. If the consideration for an acquisition is paidin common stock, existing shareholders’ investments could be diluted.Furthermore, we may decide to issue convertible debt or additional shares ofcommon stock and use part or all of the proceeds to finance or refinance thecosts of any future acquisitions.

**We depend upon our key personnel and we may not beable to retain them or to attract, assimilate and retain new, highly qualifiedemployees in the future.**

Our future success willdepend in significant part upon the continued service of our senior managementand certain of our key technical personnel and our continuing ability to attract,assimilate and retain highly qualified technical, managerial and sales andmarketing personnel. While we have non-disclosure agreements and non-competeagreements with substantially all of our employees, we do not have employmentagreements with our Chief Executive Officer, our President, or our ChiefFinancial Officer. We do have employment agreements with our Chief ExecutiveOfficer—Poorman-Douglas Corporation and our President—Bankruptcy Services LLC.We maintain key-man life insurance policies on our Chief Executive Officer andour President. The loss of the services of any of these executives or other keypersonnel or the inability to hire or retain qualified personnel in the futurecould have a material adverse impact on our results of operations.

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

We presently do not intendto pay any cash dividends on our common stock and, under the terms of ourconvertible notes, cannot pay any dividends on our common stock untilJanuary 1, 2006. On and after January 1, 2006, the payment ofdividends is within the discretion of our board of directors and will dependupon our future earnings, if any, our capital requirements, our financialcondition and any other factors that the board of directors may consider. Inaddition, certain other terms of our convertible notes and certain provisionsin our credit agreement may restrict our ability to pay dividends in thefuture. We currently intend to retain all earnings to reduce our debt and foruse in the operation and expansion of our 

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business.As a result, the success of your investment in our common stock will dependentirely upon its future appreciation. Our common stock may not appreciate invalue or even maintain the price at which you purchased your shares.

**Our articles of incorporation contain a provision thatcould be used by us, without shareholder approval, to discourage or prevent atakeover of our company.**

Our articles ofincorporation authorize our board of directors to issue preferred stock in oneor more series, without shareholder approval, and to fix the designation,rights and preferences of each series of preferred stock. Our board ofdirectors could issue a series of preferred stock in a manner designed toprevent or discourage a takeover of our company.

**Future changes infinancial accounting standards or practices or existing taxation rules orpractices may cause adverse unexpected revenue fluctuations and affect ourreported results of operations.**

Past changes and futurechanges in financial accounting standards or practices or taxationrules or practices have had and in the future could have a significanteffect on our reported financial results. For example, recent accountingchanges now require us to include shares issuable upon the exercise of the $50million of convertible notes we have outstanding in our fully diluted earningsper share computations. Similarly, new accounting rules for expensing ofstock option grants will directly affect our reported results of operations in2005. Future accounting changes may even affect our reporting of previouslycompleted transactions. Numerous new accounting pronouncements and taxationrules and varying interpretations of accounting pronouncements andtaxation practice have occurred and are likely to occur in the future. Changesto existing rules or the questioning of current practices may adverselyaffect our reported financial results or the way we conduct our business.

**Compliance with changing regulation of corporategovernance and public disclosure may result in additional expenses.**

Compliance with changing laws, regulations andstandards relating to corporate governance and public disclosure, including theSarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Marketrules, are time consuming and expensive. Since 2002, we have spent substantialamounts of management time and have incurred substantial legal and accountingexpense in complying with the Sarbanes-Oxley Act and regulatory initiativesresulting from that Act. Complying with these new laws and regulations alsocreates uncertainty for companies such as ours. These new or changed laws,regulations and standards are subject to varying interpretations in many casesdue to their lack of specificity. As a result, their application in practicemay evolve over time as new guidance is provided by regulatory and governingbodies, which could result in continuing uncertainty regarding compliancematters and higher costs necessitated by ongoing revisions to disclosure andgovernance practices. We are committed to maintaining high standards ofcorporate governance and public disclosure. As a result, our efforts to complywith evolving laws, regulations and standards have resulted in, and are likelyto continue to result in, increased general and administrative expenses and adiversion of management time and attention from revenue-generating activitiesto compliance activities. In particular, our efforts to comply withSection 404 of the Sarbanes-Oxley Act of 2002 and the related regulationsregarding our required assessment of our internal controls over financialreporting and our external auditors’ certification of that assessment have requiredthe commitment of significant financial and managerial resources. We expectthese efforts to require the continued commitment of significant resources. Ifour efforts to comply with new or changed laws, regulations and standardsdiffer from the activities intended by regulatory or governing bodies due toambiguities related to practice, our reputation may be harmed.

SECrules implementing Section 404 of Sarbanes-Oxley require disclosureof the remediation of significant deficiencies or material weaknesses ininternal controls over financial reporting and the 

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existence,at year-end, of material weaknesses related to our internal control overfinancial reporting. If we are required to make any of these types ofdisclosures in the future, it could adversely affect the price of our commonstock.

**ITEM 2**.                PROPERTIES

Our corporateoffices are located in a 49,000-square-foot facility in KansasCity, Kansas. This owned property serves as collateral under our creditfacility. Significant leased properties include:

·       approximately16,000 square feet of office space in New York, New York, throughAugust 31, 2013; and

·       approximately 88,000 squarefeet of office and document processing space in Beaverton, Oregon, throughSeptember 30, 2015.

**ITEM 3**.                LEGALPROCEEDINGS

We occasionally becomeinvolved in litigation arising in the normal course of business. There is nocurrently pending or, to the knowledge of management, threatened materiallitigation against us.

**ITEM 4**.                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedin the fourth quarter of 2004 to a vote of security holders.

**PART II**

**ITEM 5**.                MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market Information**

Ourcommon stock is traded under the symbol “EPIQ” on the Nasdaq National Market. Thefollowing table shows the reported high and low sales prices for the commonstock for the calendar quarters of 2004 and 2003 as reported by Nasdaq:
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 20.90      |     | $          | 15.50 |   | $ | 20.50 |   | $ | 14.87 |   |
| Second Quarter |       | 17.80    |       | 13.24    |       | 22.95 |   | 15.91 |   |
| Third Quarter  |       | 16.65    |       | 12.63    |       | 20.00 |   | 16.20 |   |
| Fourth Quarter |       | 17.03    |       | 13.81    |       | 18.74 |   | 14.78 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**Holders**

As of February 11,2005, there were approximately 110 owners of record of our common stock andapproximately 5,000 beneficial owners of our common stock.

**Dividends**

At this time, we intend toretain our earnings to reduce our debt and for use in the operation andexpansion of our business. Accordingly, we do not expect to declare or pay anycash dividends in the foreseeable future. Under the terms of our convertiblenotes, we cannot pay dividends, other than stock dividends, on our capitalstock until January 1, 2006. Commencing January 1, 2006, the paymentof dividends is within the discretion of our board of directors and will dependupon various factors, including future earnings, capital requirements,financial condition, the terms of our credit agreement, the terms of ourconvertible notes, and other factors deemed relevant by the board of directors.There is no restriction 

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on theability of our subsidiaries to transfer funds to EPIQ in the form of cashdividends, loans or advances.

**Equity CompensationPlan Information**

Thefollowing table sets forth as of December 31, 2004 (a) the number ofsecurities to be issued upon exercise of outstanding options, warrants andrights, (b) the weighted average exercise price of outstanding options,warrants and rights and (c) the number of securities remaining availablefor future issuance under equity compensation plans (excluding securitiesreflected 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**     |       |       | 2,950,000  |                                                                                                                                                 |       |                                                                                                        | $          | 13.25 |   |   |   | 2,321,000 |   |   |
| **Equity compensation plans not approved by  security holders** |       |       | 280,000    |                                                                                                                                                 |       |                                                                                                        | $          | 17.89 |   |   |   | 0 |   |   |
| **Total**                                                       |       |       | 3,230,000  |                                                                                                                                                 |       |                                                                                                        | $          | 13.65 |   |   |   | 2,321,000 |   |   |
|                                                                 |            |            |            |                                                                                                                                                      |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2004, equity compensationplans approved by security holders consist of our 1995 Stock Option Plan andour 2004 Equity Incentive Plan. Securities remaining available for futureissuance under equity compensation plans approved by security holders consistsolely of shares available under the 2004 Equity Incentive Plan. Securitiesremaining available for future issuance under our 2004 Equity Incentive Planmay be issued, in any combination, as incentive stock options, non-qualifiedstock options, stock appreciation rights or restricted stock.

As of December 31, 2004, equity compensation plansnot approved by security shareholders consist solely of stock options issued inconjunction with our acquisitions of BSI and Poorman-Douglas. The stock options issued to key executives ofBSI and Poorman-Douglas were inducement stock options issued in conjunctionwith the execution of employment agreements by each of those executives tobecome officers of our newly acquired subsidiaries. In accordance with theNasdaq corporate governance rules, shareholder approval of these inducementstock option grants was not required.

The stock options grantedunder equity compensation plans not approved by security holders were grantedat an option exercise price equal to fair market value of the common stock onthe date of grant, are non-qualified options, are exercisable for up to 10years from the date of grant and otherwise have terms substantially identicalto the material terms of the 1995 Stock Option Plan and the 2004 EquityIncentive Plan. Stock options granted in conjunction with the acquisition ofBSI vested 20% on January 31, 2003, the grant date thereof, and continueto vest 20% per year on each anniversary of the grant date until fully vestedon January 31, 2007. Stock options granted in conjunction with theacquisition of Poorman-Douglas vest 20% per year, with the initial vestinghaving occurred January 31, 2005, over five years.

**Recent Sales ofUnregistered Securities**

None.

**Purchases of EquitySecurities by the Issuer and Affiliated Purchasers**

None.

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**ITEM 6**.                SELECTEDFINANCIAL DATA
| ** **                                             | ** ** | **Years Ended December 31,**                        | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                             | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| INCOME  STATEMENT DATA:                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues from continuing operations                    |       | $                                                                  | 125,420    |   | $ | 67,936 |   | $ | 36,256 |   | $ | 28,149 |   | $ | 19,906 |   |
| Income from continuing operations                      |       | 9,063                                                              |       | 14,525 |   | 9,766 |   | 6,253 |   | 1,980 |   |
| Income (loss) from discontinued operations             |       | 667                                                                |       | (5,818 | ) | (1,533 | ) | (1,311 | ) | 152 |   |
| Net income                                             |       | 9,730                                                              |       | 8,707 |   | 8,233 |   | 4,942 |   | 2,132 |   |
| Income  (loss) per share—Diluted                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| from continuing operations                             |       | $                                                                  | 0.49       |   | $ | 0.80 |   | $ | 0.64 |   | $ | 0.44 |   | $ | 0.18 |   |
| from discontinued operations                           |       | $                                                                  | 0.03       |   | $ | (0.32 | ) | $ | (0.10 | ) | $ | (0.09 | ) | $ | 0.02 |   |
| Net income per share—Diluted                      |       | $                                                                  | 0.52       |   | $ | 0.48 |   | $ | 0.54 |   | $ | 0.35 |   | $ | 0.20 |   |
| BALANCE SHEET DATA:                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Working capital related to continuing  operations |       | $                                                                  | 22,979     |   | $ | 38,856 |   | $ | 63,503 |   | $ | 27,286 |   | $ | 13,374 |   |
| Total assets                                           |       | 240,088                                                            |       | 141,927 |   | 108,037 |   | 70,648 |   | 44,938 |   |
| Long-term debt                                         |       | 74,499                                                             |       | 3,066 |   | 289 |   | 594 |   | 924 |   |
| Stockholders’  equity                             |       | 139,883                                                            |       | 129,255 |   | 102,375 |   | 65,144 |   | 35,923 |   |

 

During March 2000, weacquired substantially all of the business assets of PHiTECH. These assets andcorresponding operations constituted our infrastructure software business. Theacquisition was accounted for using the purchase method of accounting with theoperating results of PHiTECH included in our statement of income since the dateof acquisition. During November 2003, the decision was made to dispose ofour infrastructure software business and the business was sold in April 2004.Accordingly, all revenues, cost of sales, operating expenses, assets andliabilities related to infrastructure software have been reclassified asdiscontinued operations for all periods presented. See Note 14 of Notes toConsolidated Financial Statements.

During December 2000, wecompleted a private placement of 2,025,000 shares of common stock and receivednet proceeds of $12.5 million.

During June 2001, wecompleted a follow-on offering of 1,537,500 shares of common stock and receivednet proceeds of $22.7 million.

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

During July 2002, we acquired the Chapter 7trustee business of CPT Group, Inc. The acquisition was accounted forusing the purchase method of accounting with the operating results of CPT Groupincluded in our statements of income since the date of acquisition. See Note 13of Notes to Consolidated Financial Statements.

During November 2002, wecompleted a private placement of 2,000,000 shares of common stock and receivednet proceeds of $28.1 million.

During January 2003, weacquired the member interests of BSI. The acquisition was accounted for usingthe purchase method of accounting with the operating results of BSI included inour statements of income since the date of acquisition. See Note 13 of Notes toConsolidated Financial Statements.

During January 2004, weacquired the equity of P-D Holding Corp. and its wholly-owned operatingsubsidiary, Poorman-Douglas Company (Poorman-Douglas). The acquisition wasaccounted for using the 

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purchasemethod of accounting with the operating results of Poorman-Douglas included inour statement of income since the date of acquisition. See Note 13 of Notes toConsolidated Financial Statements.

Allper share amounts have been adjusted to reflect the two 3-for-2stock splits effected as 50% stock dividends paid on February 23, 2001 andNovember 30, 2001.

**ITEM 7**.                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

**Management’sOverview**

Our operations consist primarily of integratedtechnology-based products and services for fiduciary management and claimsadministration applications. Our solutions enable clients to optimize theadministration of large and complex bankruptcy, class action, mass tort, andother similar legal proceedings. We have two operating segments: casemanagement and document management.

Our case management segment generates revenueprimarily through integrated technology-based products and services for classaction, mass tort and bankruptcy proceedings that support client engagementsthat generally last several years and has a revenue profile that typicallyincludes a recurring component. Our document management segment generatesrevenue primarily through legal noticing services, reimbursement for costsincurred related to postage on mailing services, media campaign and advertisingmanagement and document custody services. Document management revenue isgenerally less recurring due to the unpredictable nature of the frequency,timing and magnitude of the clients’ business requirements.

The number of new bankruptcy filings each year mayvary based on the level of consumer and business debt, the general economy,interest rate levels and other factors. For the government fiscal years ended September 30,2002, 2003, and 2004, the Administrative Office of the U.S. Courts reported approximately1.55 million, 1.66 million, and 1.62 million new bankruptcyfilings, respectively. We believe an important indicator of futurebankruptcy filings is the level of consumer and business debt outstanding. Themost recent available Federal Reserve *Flow of Funds Accounts ofthe United States*, dated December 9, 2004, reported increasesin both consumer and business debt outstanding as compared with the same periodof the prior year.

During 2003, we determined that our infrastructuresoftware segment was no longer aligned with our long-term strategic objectives,and we developed a plan to sell this segment within a year. Accordingly, ourinfrastructure software results for 2004, 2003, and 2002, including our gain ondisposition of the infrastructure software business, are included entirelywithin the discontinued operations section of our income statement. We believethis disposition will enhance long-term shareholder value by enabling us tofocus our management and financial resources on the operations of our casemanagement and document management operations.

We have acquired a number of businesses during thepast several years. In January 2003, we acquired BSI to expand ourofferings to include an integrated solution of a proprietary technologyplatform and professional services for Chapter 11 restructurings. In January 2004,we acquired Poorman-Douglas and expanded our product and service offerings toinclude class action, mass tort, and other similar legal proceedings.

As discussed under the caption “Results of Operationsfor the Year Ended December 31, 2004 Compared with the Year Ended December 31,2003” below, the increase in both our revenue and our costs during 2004 isprimarily attributable to our acquisition of Poorman-Douglas.

Poorman-Douglas has significant reimbursed revenue,primarily related to postage, on which we realize little or no profit. As aresult, we now separately report revenue before reimbursed revenue, which werefer to as operating revenue, and which management believes is a more relevantmeasure of our 

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performance. Theacquisitions of Poorman-Douglas and BSI have also affected our operatingrevenue mix. For the year ended December 31, 2002, which was prior to ouracquisition of either Poorman-Douglas or BSI, document management operatingrevenue represented 3% of our total operating revenue. For the year ended December 31,2003, during which we acquired BSI, our document management operating revenuerepresented 20% of our total operating revenue. For the year ended December 31,2004, during which we acquired Poorman-Douglas, our document managementoperating revenue represented 35% of our total operating revenue. This increasein the mix of document management revenue versus case management revenue mayresult in increased revenue fluctuations from period to period based on ourclients’ business requirements.

Also during 2004, we hadnotable changes to our capital structure. During June 2004, we issued$50.0 million of convertible notes. Net proceeds of approximately $47.4 millionwere used to repay and terminate our subordinated term loan and to pay in fullour revolving loan. During July 2004,we entered into a new credit facility with KeyBank National Association asadministrative agent. This facility consists of a $25.0 million seniorterm loan, with amortizing quarterly principal payments of $1.6 millionbeginning September 30, 2004, and a $50.0 million senior revolving loan. Duringthe term of the loan we have the right, subject to compliance with ourcovenants, to increase the senior revolving loan to $75.0 million. The seniorterm loan and the senior revolving loan mature June 30, 2008.

**Critical AccountingPolicies**

We consider our accounting policies related to revenuerecognition, business combinations, goodwill, and identifiable intangibleassets to be critical policies in understanding our historical and futureperformance.

*Revenue recognition*.   Wehave agreements with customers obligating us to deliver various products andservices each month. Case management fees paid are contingent upon themonth-to-month delivery of the products and services defined by the contractsand are related primarily to the size and complexity of the ongoing engagement.The formula-based fees earned each month become fixed and determinable on amonthly basis as a result of our completion of all contractually requiredperformance obligations related to products delivered and services rendered byus during the month. Document management revenues are recognized in the periodthe services are provided. Significant sources of revenue include:

·       amonthly fee from financial institutions based on a percentage of total liquidatedassets on deposit and on the number of trustees;

·       feesfor database conversions, database processing, maintenance and softwareupgrades;

·       monthlyrevenue based on the number of cases in a database;

·       feesbased on the number of claims in a case; and

·       feesfor services, including technology services, claims reconciliation, documentprinting, noticing, balloting, voting tabulation and other professionalservices.

*Business combination accounting.  *Wehave acquired a number of businesses during the last several years, and we mayacquire additional businesses in the future. Business combination accounting,often referred to as purchase accounting, requires us to determine the fairvalue of all assets acquired, including identifiable intangible assets, andliabilities assumed. The cost of the acquisition is allocated to the assetsacquired and liabilities assumed in amounts equal to the fair value of eachasset and liability, and any remaining acquisition cost is classified asgoodwill. This allocation process requires extensive use of estimates andassumptions, including estimates of future cash flows to be generated by theacquired assets. Certain identifiable intangible assets, such as customer listsand covenants not to compete, are amortized on a straight-line basis over theintangible asset’s estimated useful life. The estimated useful life ofamortizable identifiable intangible assets range from two to 14 years. Goodwilland certain other 

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identifiable intangibleassets are not amortized. Accordingly, the acquisition cost allocation has had,and will continue to have, a significant impact on our current operatingresults.

*Goodwill.  *Weassess goodwill, which is not subject to amortization, for impairment as ofeach July 31 and also at any other date when events or changes incircumstances indicate that the carrying value of these assets may exceed theirfair value. This assessment is performed at a reporting unit level. A reportingunit is a component of a segment that constitutes a business, for whichdiscrete financial information is available, and for which the operatingresults are regularly reviewed by management.

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

The estimate of fair value is highly subjective andrequires significant judgment. If we determine that the fair value of anyreporting unit is less than the reporting unit’s carrying value, then we willrecognize an impairment charge. If goodwill on our balance sheet becomesimpaired during a future period, the resulting impairment charge could have amaterial impact on our results of operations and financial condition. Ourunimpaired, recognized goodwill totaled $147.7 million as of December 31,2004.

*Identifiable intangible assets.  *Eachperiod we evaluate whether events and circumstances warrant a revision to theremaining estimated useful life of each identifiable intangible asset. Ifevents and circumstances warrant a change to the estimate of an identifiableintangible asset’s remaining useful life, then the remaining carrying amount ofthe identifiable intangible asset would be amortized prospectively over thatrevised remaining useful life. Furthermore, information developed during ourannual assessment, or other events and circumstances, may indicate that thecarrying value of one or more identifiable intangible assets is not recoverableand its fair value is less than the identifiable intangible asset’s carryingvalue and would result in recognition of an impairment charge. During November 2003,we determined that our infrastructure software segment was no longer alignedwith our long-term strategic objectives and we developed a plan to sell thissegment within a year. As a result, we recognized a pre-tax impairment chargeof approximately $0.9 million related to identifiable intangible assets duringthe year ended December 31, 2003.

A change in the estimateof the remaining life of one or more identifiable intangible assets or theimpairment of one or more identifiable intangible assets could have a materialimpact on our results of operations and financial condition. Our identifiableintangible assets’ carrying value, net of amortization, was $24.1 million as ofDecember 31, 2004.

**Resultsof Operations for the Year Ended December 31, 2004 Compared with the YearEnded December 31, 2003**

**ConsolidatedResults**

***Revenue***

Total revenue of $125.4million for the year ended December 31, 2004 represents an approximate 85%increase compared with $67.9 million of revenue for the same period in theprior year. With our acquisition of Poorman-Douglas, revenue related toreimbursed expenses, such as postage pertaining to document managementservices, increased significantly. We reflect the revenue from these reimbursedexpenses as a separate line item on our Consolidated Statements of Income. Whilerevenues from reimbursed expenses may fluctuate significantly from quarter toquarter, these fluctuations have a minimal effect on our operating income as werealize little or no margin from this revenue. Revenue exclusive of 

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revenuerelated to reimbursed expenses, which we refer to as operating revenue,increased $42.7 million, or approximately 68%, to $105.1 million for the yearended December 31, 2004 compared with $62.4 million for the same period inthe prior year. All revenue is directly related to a segment and changes inrevenue by segment are discussed below.

***OperatingExpenses***

Direct costs, general and administrative expenses, anddepreciation and software amortization increased $54.9 million, orapproximately 145%, to $92.8 million for the year ended December 31, 2004compared with $37.9 million for the same period in the prior year. Thisincrease primarily results from the inclusion of Poorman-Douglas’ expensessubsequent to the acquisition date. As a result of the Poorman-Douglasacquisition, we realized a higher ratio of document management revenue relativeto case management revenue than during the same period in the prior year, whichresulted in an increase in reimbursed expenses. In addition, corporateadministrative costs not attributable to segment operations increased primarilydue to significant increased expenses related to compliance with regulationsand standards imposed by Section 404 of the Sarbanes-Oxley Act of 2002,increased amortization expense primarily resulting from our acquisition ofadditional operating software licenses, increased travel expense primarilyrelated to additional locations, and increased insurance coverage due tobusiness expansion.

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

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

***Expenses Related to Financing***

Expenses related tofinancing totaled $7.2 million during the year ended December 31, 2004compared with $0.1 million of interest income during the same period in theprior year. This increase related to various financing components. During theyear ended December 31, 2004, we recognized a $1.0 million charge forthe write-off of loan fees related to a credit facility we terminated. Variableinterest expense related to our credit facilities, fixed interest expenserelated to our convertible debt, and interest accreted on debt with no statedinterest rate totaled $3.9 million during the year ended December 31, 2004.Amortization of loan fees related to our credit facilities and related to ourconvertible debt offering totaled $2.1 million during the year ended December 31,2004. Our convertible debt facility includes a provision allowing theconvertible debt holders to extend the debt maturity from three years to sixyears. Under SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*, this provision is accounted foras an embedded option. At inception, the embedded option was valued at $1.2 millionand the convertible debt balance was reduced by the same amount. Theconvertible debt accretes approximately $0.1 million each quarter such that, atthe end of three years, the convertible debt balance will total $50.0 million. Theembedded option must be revalued at each period end based on the probabilityweighted discounted cash flows related to the additional 4% interest ratepayments which would be made if the convertible debt maturity is extended anadditional three years. While the changes in fair value of the embedded optionand carrying value of the convertible debt do not affect our current cash flow,the aggregate of these changes in value, totaling $0.3 million of expense forthe year ended December 31, 2004, is accounted for as a current income orexpense item and is included on our accompanying Consolidated Statements ofIncome as a component of interest expense. If the embedded option is eventuallyexercised, the value assigned to the embedded option will be amortized toincome as a reduction to our 4% convertible debt interest expense 

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over theperiods payments are made. If the option is not exercised by some or allconvertible debt holders, any remaining related value assigned to the embeddedoption will be recognized as a gain during that period.

***Effective Tax Rate***

Our effective tax raterelated to income from continuing operations increased slightly from 41.2% forthe year ended December 31, 2003 to 41.3% for the year ended December 31,2004. Our tax rate is higher than the statutory federal rate of 35% primarilydue to state taxes, including taxes related to our New York operations whichare subject to relatively high state and local New York tax rates.

***Discontinued Operations***

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

**Business Segments**

***Revenue***

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

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

***Operating Expenses***

Case management direct costs, general andadministrative expenses, and depreciation and software amortization increased$15.1 million, or approximately 115%, to $28.2 million for the year ended December 31,2004 compared with $13.1 million for the same period in the prior year. Thisincrease primarily results from the inclusion of Poorman-Douglas’ expensessubsequent to the acquisition date. Exclusive of Poorman-Douglas expenses, casemanagement’s direct and administrative expenses, including depreciation andsoftware amortization, increased $0.9 million due primarily to increases inoperating software amortization and wage related expense. Our case managementcost structure is relatively stable and generally does not fluctuate materiallywith changes in operating revenues.

Document management direct costs, general andadministrative expenses, and depreciation and software amortization increased$31.8 million to $41.5 million for the year ended December 31, 2004 

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compared with $9.7 millionfor the prior year. This increase primarily results from the inclusion ofPoorman-Douglas’ expenses, including reimbursed expenses, subsequent to theacquisition date. Exclusive of Poorman-Douglas’ expenses, our documentmanagement expenses declined $2.4 million due primarily to a decline in postageand print expense related to a decrease in noticing services. Documentmanagement direct expenses include reimbursed expenses and other operatingexpenses which are more variable than case management direct expenses and willfluctuate based on document management business requirements delivered.

Both the case managementand document management segments have identifiable intangible assets. Amortizationof case management’s identifiable intangible assets increased $3.1 million to$5.2 million for the year ended December 31, 2004 compared with $2.1million for the prior year. Amortization of document management’s identifiableintangible assets increased $1.0 million to $2.5 million for the year ended December 31,2004 compared with $1.5 million for the prior year. For both segments, thisincrease is due primarily to the amortization expense related to the acquiredintangible assets resulting from the Poorman-Douglas transaction and the February 2004commencement of amortization related to the BSI trade name. Note 4 to theaccompanying Consolidated Financial Statements provides a summary of the totalidentified intangible assets, the scheduled amortization expense and thescheduled amortization periods for intangible assets acquired through thePoorman-Douglas and BSI acquisitions.

**Resultsof Operations for the Year Ended December 31, 2003 Compared with the YearEnded December 31, 2002**

**ConsolidatedResults**

***Revenue***

Total revenue of $67.9million for the year ended December 31, 2003 represents an approximate 87%increase compared with $36.3 million of revenue during the prior year. Oursegment reporting reflects the revenue from reimbursed expenses as a separateline item. Although reimbursed revenues and expenses may fluctuatesignificantly from quarter to quarter, these fluctuations have a minimal effecton our operating income as we realize little or no margin from this revenue. Revenueexclusive of reimbursed expenses, which we refer to as operating revenue,increased $26.8 million, or approximately 75%, to $62.4 million for theyear ended December 31, 2003 compared with $35.6 million during the prioryear. All revenue is directly related to a segment and changes in revenue bysegment are discussed below.

***OperatingExpenses***

Direct costs, general and administrative expenses, anddepreciation and software amortization increased $17.8 million, orapproximately 89%, to $37.9 million for the year ended December 31, 2003compared to $20.1 million during the prior year. This increase resultsprimarily from the inclusion of BSI’s expenses subsequent to the BSIacquisition date. In addition, corporate administrative costs not attributableto segment operations also increased as a result of our growth, includingincreases in administrative and compensation expense and travel expense tosupport integration of the operations of BSI into our consolidated operations.

Amortization of identifiable intangible assetsincreased $3.2 million to $3.6 million for the year ended December 31,2003 compared with $0.4 million for the same period in the prior year. Allidentifiable intangible assets are directly related to a segment and changes inamortization of identifiable intangible assets by segment are discussed below.

Acquisition relatedexpenses, consisting of executive bonuses, legal, accounting and valuationservices, and travel, increased $1.2 million, to $1.8 million for the yearended December 31, 2003, due to the investigation of potentialacquisitions and non-capitalized expenses related to completed acquisitions.

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***Effective Tax Rate***

Our effective tax raterelated to income from continuing operations increased to 41.2% for the yearended December 31, 2003 compared with 37.8% for the year ended December 31,2002. This increase is primarily due to the acquisition of BSI. BSI primarilygenerates revenue in the city and state of New York, both of which haverelatively high corporate tax rates.

***DiscontinuedOperations***

Our infrastructuresoftware results are included entirely within the discontinued operationssection of our income statement. The $7.1 million increase in infrastructuresoftware’s loss before income tax benefit, to a $9.6 million loss during theyear ended December 31, 2003 as compared with $2.5 million loss during theyear ended December 31, 2002, is primarily the result of a $7.6 millionimpairment charge to reduce goodwill, other intangible assets, software andother long-lived assets to their estimated fair value.

**Business Segments**

***Revenue***

Case management operating revenue increased $15.1million, or approximately 44%, to $49.7 million for the year ended December 31,2003 compared to $34.6 million for the year ended December 31, 2002. Thisincrease primarily results from the inclusion of BSI’s operating revenuesubsequent to the acquisition of BSI on January 30, 2003. The remainder ofthe increase in our case management operating revenue resulted primarily froman increase in fees related to bankruptcy trustee deposits.

Document managementoperating revenue increased $11.7 million to $12.7 million for the year ended December 31,2003 compared to $1.0 million during the prior year. Document managementrevenue for reimbursed expenses increased $4.5 million to $5.2 million for theyear ended December 31, 2003 compared to $0.7 million during the prioryear. Both the increase in operating revenue and the increase in revenue fromreimbursed expenses result primarily from the inclusion of BSI’s operatingrevenue and reimbursed revenue subsequent to the BSI acquisition date.

***Operating Expenses***

Case management’s direct costs, general andadministrative expenses, and depreciation and software amortization increased$1.6 million, or approximately 14%, to $13.1 million for the year ended December 31,2003 compared to $11.5 million during the prior year. This increase isattributable primarily to the inclusion of BSI’s expenses subsequent to the BSIacquisition date.

Document management’s direct costs, general andadministrative expenses, and depreciation and software amortization increased$8.5 million to $9.7 million for the year ended December 31, 2003 comparedto $1.2 million during the prior year. This increase is attributable primarilyto the inclusion of BSI’s expenses subsequent to the BSI acquisition date.

Both the case managementand document management segments have identifiable intangible assets. Amortizationof case management’s identifiable intangible assets increased $1.7 million to$2.1 million for the year ended December 31, 2003 compared with $0.4million for the prior year. This increase primarily results from the amortizationexpense related to the acquired intangible assets resulting from the BSItransaction. Amortization of document management’s identifiable intangibleassets was $1.5 million for the year ended December 31, 2003. Documentmanagement did not have any identifiable intangible assets prior to the January 2003acquisition of BSI.

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**Liquidity andCapital Resources**

***Operating Activities***

During the year ended December 31, 2004, ouroperating activities provided net cash of $31.6 million. The primary sources ofcash from operating activities were net income of $9.7 million and adjustmentsfor non-cash charges and credits, primarily depreciation and amortization anddeferred tax charges, of $24.7 million.

Changes in operating assets and liabilities as adirect result of assets acquired or liabilities assumed have been excluded fromour Consolidated Statements of Cash Flows. However, subsequent to thePoorman-Douglas acquisition, cash flows related to these acquired assets andassumed liabilities are reflected in our Consolidated Statements of Cash Flows.For example, accounts payable and accrued expenses assumed as a part of thetransaction are not reflected as a source of cash. The subsequent payment ofassumed accounts payable and accrued expenses are, however, reflected as anoperating use of cash.

Changes in operatingassets and liabilities used net cash of $2.8 million. The most significant useof cash related to changes in operating assets and liabilities was our paymentof approximately $8.0 million of liabilities assumed in our acquisition ofPoorman-Douglas that were the direct result of acquisition-relatedtransactions, primarily withholding taxes resulting from the vesting ofrestricted Poorman-Douglas stock concurrent with the acquisition, and that weredue and payable shortly after the transaction closed. In addition, a reductionin trade payables and accrued expenses, exclusive of the liabilities acquiredin the Poorman-Douglas acquisition, used $3.1 million of cash. The mostsignificant source of cash from changes in operating assets and liabilities wasa reduction in accounts receivable of $8.0 million.

***Investing Activities***

Our most significant useof cash for investing activities was the acquisition of Poorman-Douglas. Net of$2.8 million cash acquired in the acquisition, we used cash of approximately$113.1 million related to this transaction. During the year ended December 31,2004, we used cash of approximately $5.4 million to purchase property andequipment. Enhancements to our existing software and development of newsoftware is essential to our continued growth and, during the year ended December 31,2004, we used cash of approximately $1.7 million to fund internal costs relatedto development of software for which technological feasibility has beenestablished. During April 2004, we completed the sale of ourinfrastructure software business for cash and a note receivable payable inmonthly installments over 15 months. During the year ended December 31,2004, we realized cash proceeds of $1.1 million related to this transaction.

***Financing Activities***

In conjunction with our acquisition ofPoorman-Douglas, we replaced our $25.0 million line of credit with a $100.0million credit facility. The credit facility consisted of a $45.0 millionsenior term loan, with amortizing quarterly principal payments of $4.5 millionbeginning April 30, 2004, a $25.0 million senior revolving loan, and a$30.0 million subordinated term loan. At inception of this facility, weborrowed approximately $92.0 million that, in combination with available cashon hand, was used to finance our acquisition of Poorman-Douglas.

During June 2004, we issued $50.0 million ofcontingent convertible subordinated notes. Net proceeds of approximately $47.4million were used to repay and terminate our subordinated term loan and to payin full our revolving loan.

During July 2004, we entered into a new creditfacility with KeyBank National Association as administrative agent. Thisfacility consists of a $25.0 million senior term loan, with amortizingquarterly 

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principal payments of $1.6million beginning September 30, 2004, and a $50.0 million senior revolvingloan. During the term of the loan, we have the right, subject to compliancewith our covenants, to increase the senior revolving loan to $75.0 million. Thesenior term loan and the senior revolving loan mature June 30, 2008.

At inception of the new credit facility, we borrowedthe $25.0 million term loan and $8.0 million of the revolving loan. We usedthese proceeds plus available cash on hand to pay in full the borrowingsoutstanding under our prior credit facility and that credit facility wasterminated.

As of December 31, 2004, our borrowings consistedof $50.3 million from the contingent convertible subordinated notes (includingthe fair value of the embedded option), $21.9 million under the new creditfacility’s senior term loan, $5.0 million under the new credit facility’ssenior revolving loan, and approximately $5.0 million of obligations related tocapitalized leases and deferred acquisition price.

We believe that the funds generated from operationsplus amounts available under our new credit facility’s senior revolving loanwill be sufficient over the next year to finance currently anticipated workingcapital requirements, software expenditures, property and equipmentexpenditures, payments for contractual obligations, interest payments due onour credit facility borrowings, and the required quarterly principal paymentsof $1.6 million on our senior term loan.

We may pursue an acquisitionin the future and we may use the availability under our revolving loan and cashon hand to finance a future acquisition. If the acquisition price exceeds thecapacity of these sources of financing, we may decide to issue equity,restructure our credit facility, partly finance the acquisition with a notepayable, or some combination of the preceding. Covenants contained in ourcredit facility may limit our ability to consummate an acquisition.

***Contractual Obligations***

Thefollowing table sets forth a summary of our contractual obligations as of December 31,2004.
| ** **                              | ** ** | **Payments Due By Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation**         | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1–3 Years** | ** ** | **3–5 Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **                              | ** ** | **(In Thousands)**                   | ** ** |
| Long-term debt  and future accretion(1) |       | $                                         | 80,320     |   | $ | 6,806 |   |   | $ | 64,796 |   |   |   | $ | 8,718 |   |   |   | $ | — |   |   |
| Employment  agreements                  |       | 5,634                                     |       | 1,999 |   |   | 3,148 |   |   |   | 487 |   |   |   | — |   |   |
| Capital lease  obligations              |       | 1,773                                     |       | 858 |   |   | 915 |   |   |   | — |   |   |   | — |   |   |
| Operating leases                        |       | 18,961                                    |       | 2,699 |   |   | 4,765 |   |   |   | 3,411 |   |   |   | 8,086 |   |   |
| Total                                   |       | $                                         | 106,688    |   | $ | 12,362 |   |   | $ | 73,624 |   |   |   | $ | 12,616 |   |   |   | $ | 8,086 |   |   |
|                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Aportion of the BSI purchase price was paid in the form of a non-interestbearing note, which was discounted using an imputed rate of 5% per annum. Thediscount is accreted over the life of the note and each period’s accretion isadded to the note’s principal. The amount in the above contractual obligationtable includes both the note’s principal, as reflected on our December 31,2004 Consolidated Balance Sheet, and all future accretion. Convertible debt isincluded at stated value of the principal redemption and excludes adjustmentsrelated to the embedded option, which will not be paid in cash. Any conversionto our common stock of part or all of the convertible debt will reduce our cashobligation related to the convertible debt.

**Recent AccountingPronouncements**

In December 2004,the Financial Accounting Standards Board (the FASB) issued Statement ofFinancial Accounting Standard No. 153 (SFAS 153), *Exchanges ofNonmonetary Assets, an amendment of APB Opinion No. 29.*SFAS153 expanded the scope of APB Opinion No. 29 to require that the 

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nonmonetary exchange of similar productive assets should bemeasured based on the fair value of the assets exchanged. EPIQ is required andplans to adopt the provisions of SFAS 153 for our quarter ending September 30,2005. We do not anticipate that adoption of this statement will have a materialimpact on our consolidated financial statements.

In December 2004, theFASB issued Statementof Financial Accounting Standards No. 123 (revised 2004) (SFAS 123R), *Share-Based Payment*. SFAS 123R establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services or incurs liabilities in exchange for goods or servicesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments. SFAS 123R requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments based on the grant-date fair value of the awardand to recognize that cost over the period during which an employee is requiredto provide service in exchange for the award. We are required and plan to adoptthe provisions of SFAS 123R, likely using the modified version of prospectiveapplication, for our quarter ending September 30, 2005. Adoption of SFAS123R will materially increase our recognized compensation expense and will havea material impact on our consolidated income statements and balance sheets. Weare unable to estimate the impact of adoption of this statement on ourconsolidated financial statements as the impact will depend, in part, on stockawards and stock option awards made prior to the adoption date, whether awardsgranted were qualified or non-qualified, the vesting period of those awards,and forfeitures related to both existing awards and new awards. Subsequent to December 31,2004, our Compensation Committee approved acceleration of the vesting ofcertain unvested options for employees, including an executive officer andnon-employee directors. This action will reduce the impact of adoption of SFAS123R on our consolidated financial statements. If, subsequent to December 31,2004, no new awards were issued and no existing awards were forfeited, weestimate that adoption of SFAS 123R would increase our pre-tax compensationexpense, on an annualized basis, by approximately $1.3 million. We do notanticipate that adoption of SFAS 123R will have a material impact on our consolidatedstatements of cash flows.

**ITEM 7A.**   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk that a change in thelevel of one or more market prices, interest rates, indices, volatilities,correlations or other market factors, such as liquidity, will result in lossesfor a certain financial instrument or group of financial instruments. Duringthe year ended December 31, 2004, certain transactions created an exposureto market risk related to other than trading instruments. We do not activelymanage these market risks.

During 2004, we issued $50.0 million of convertiblenotes with a 4% fixed interest rate. While we do not have cash flow riskrelated to this instrument, the instrument does contain an embedded optionrelated to the right of security holders to extend the maturity of theconvertible notes which creates an earnings risk. A 10% increase in our stockvalue would result in a $0.2 million increase in the fair value of the embeddedoption and a corresponding decrease in earnings. A 10% decrease in our stockvalue would result in a $0.1 million decrease in the fair value of the embeddedoption and a corresponding increase in earnings. The estimated changes in fairvalue were calculated using a pricing model that incorporates assumptionsregarding future volatility, interest rates and credit risk.

At December 31, 2004, we have borrowingsoutstanding under a credit facility. Interest on borrowings under our creditfacility is computed at a variable rate based on the LIBOR rate and the primerate and results in a market risk related to interest rates. A 1% increase ordecrease in the LIBOR rate and the prime rate would have increased ordecreased, respectively, our annual interest expense on variable rateborrowings outstanding as of December 31, 2004 by approximately $0.3million.

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated FinancialStatements appear following Item 15 of this Report.

**Supplementary Data—QuarterlyFinancial Information**

Thefollowing table sets forth quarterly unaudited financial data for the quartersof the years ended December 31, 2004 and 2003 (in thousands, except pershare data):
| ** **                                  | ** ** | **Quarters** | ** ** |
|---------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **1**st      | ** ** | **2**nd | ** ** | **3**rd | ** ** | **4**th | ** ** |
| **Year end December 31, 2004**         |       |         |       |   |   |   |   |   |   |
| Revenues from  continuing operations        |       | $            | 26,012     |   | $ | 34,908 |   | $ | 35,694 |   | $ | 28,806 |   |
| Income from  continuing operations          |       | 2,001        |       | 2,983 |   | 2,161 |   | 1,918 |   |
| Income (loss)  from discontinued operations |       | (264         | )          | 1,008 |   | (77 | ) | — |   |
| Net income                                  |       | 1,737        |       | 3,991 |   | 2,084 |   | 1,918 |   |
| Income per share—Diluted               |       |         |       |   |   |   |   |   |   |
| Income from continuing operations           |       | $            | 0.11       |   | $ | 0.16 |   | $ | 0.12 |   | $ | 0.10 |   |
| Income (loss) from discontinued operations  |       | (0.01        | )          | 0.06 |   | (0.01 | ) | — |   |
| Net income per share—Diluted           |       | $            | 0.10       |   | $ | 0.22 |   | $ | 0.11 |   | $ | 0.10 |   |
| **Year  ended December 31, 2003**      |       |         |       |   |   |   |   |   |   |
| Revenues from  continuing operations        |       | $            | 14,075     |   | $ | 17,084 |   | $ | 18,375 |   | $ | 18,402 |   |
| Income from  continuing operations          |       | 2,676        |       | 3,875 |   | 4,205 |   | 3,769 |   |
| Loss from  discontinued operations          |       | (364         | )          | (267 | ) | (279 | ) | (4,908 | ) |
| Net income (loss)                           |       | 2,312        |       | 3,608 |   | 3,926 |   | (1,139 | ) |
| Income (loss) per share—Diluted        |       |         |       |   |   |   |   |   |   |
| Income from continuing operations           |       | $            | 0.15       |   | $ | 0.21 |   | $ | 0.23 |   | $ | 0.21 |   |
| Loss from discontinued operations           |       | (0.02        | )          | (0.01 | ) | (0.02 | ) | (0.27 | ) |
| Net income (loss)  per share—Diluted   |       | $            | 0.13       |   | $ | 0.20 |   | $ | 0.21 |   | $ | (0.06 | ) |

 

**ITEM 9**.                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A**.   CONTROLS AND PROCEDURES

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934. Based on their evaluation as ofDecember 31, 2004, the end of the period covered by this Annual Report on10-K, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures were sufficiently effective at areasonable assurance level to ensure that the information required to bedisclosed in this Annual Report was recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and formsfor Form 10-K, and was accumulated and communicated to management,including our principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

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**Management’s Reporton Internal Control Over Financial Reporting**

(a)   Our management is responsible for establishing and maintainingadequate internal control over financial reporting. Our internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples and includes those policies and procedures that:

·       Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company;

·       Providereasonable assurance that the transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and

·       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions or that the degree of compliance with the policies or proceduresmay deteriorate.

Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2004. Inmaking this assessment, our management used the criteria set forth by Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework.*

Based on ourassessment, management believes that, as of December 31, 2004, EPIQ’sinternal control over financial reporting is effective based on those criteria.

(b)   Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2004 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated intheir report which appears on page 34.

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

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of DirectorsEPIQ Systems, Inc.Kansas City, Kansas

We have audited management’s assessment, included assection (a) in the accompanying Management’s Report on Internal ControlOver Financial Reporting appearing under Item 9A of this Annual Report on Form 10-K,that EPIQ Systems, Inc. and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of December 31,2004, based on criteria established in*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat the controls may become inadequate because of changes in conditions, orthat the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on criteria established in*Internal Control—Integrated Framework*issuedby the COSO. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2004, based on criteria established in*Internal Control—Integrated Framework*issuedby the COSO.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the financialstatements and financial statement schedule as of and for the year ended December 31,2004 of the Company and our report dated February 22, 2005 expressed anunqualified opinion on these financial statements and the financial statementschedule.

DELOITTE & TOUCHELLPKansas City, MissouriFebruary 22, 2005

28

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**ITEM 9B**.   OTHER INFORMATION

None.

**PART III**

**ITEM 10**.   DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by referenceto our Proxy Statement for our Annual Meeting of Shareholders to be filed withthe Securities and Exchange Commission within 120 days after the close of theyear ended December 31, 2004.

**ITEM 11**.   EXECUTIVECOMPENSATION

Incorporated by referenceto our Proxy Statement for our Annual Meeting of Shareholders to be filed withthe Securities and Exchange Commission within 120 days after the close of theyear ended December 31, 2004.

**ITEM 12**.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by referenceto our Proxy Statement for our Annual Meeting of Shareholders to be filed withthe Securities and Exchange Commission within 120 days after the close of theyear ended December 31, 2004.

**ITEM 13**.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by referenceto our Proxy Statement for our Annual Meeting of Shareholders to be filed withthe Securities and Exchange Commission within 120 days after the close of theyear ended December 31, 2004.

**ITEM 14**.   PRINCIPALACCOUNTANT FEES AND SERVICES

Incorporated by reference to our Proxy Statement forour Annual Meeting of Shareholders to be filed with the Securities and ExchangeCommission within 120 days after the close of the year ended December 31,2004.

29

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**PART IV**

**ITEM 15.   EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

**(a)****         Thefollowing documents are filed as a part of this report:**

**(1)   Financial Statements.  **Thefollowing financial statements, contained on pages F-1 through F-32of this report, are filed as part of this report under Item 8 “FinancialStatements and Supplementary Data.”
| Report of Independent Registered Public  Accounting Firm                                                                | F-1 |
|-------------------------------------------------------------------------------------------------------------------------|-----|
| Consolidated  Balance Sheets—December 31, 2004 and 2003                                                       | F-2 |
| Consolidated Statements of Income—Years Ended  December 31, 2004, 2003 and 2002                               | F-3 |
| Consolidated Statements of Changes in Stockholders’  Equity—Years Ended December 31, 2004, 2003 and 2002 | F-4 |
| Consolidated Statements of  Cash Flows—Years Ended December 31, 2004, 2003 and 2002                           | F-5 |
| Notes to Consolidated Financial  Statements                                                                             | F-6 |

 

**(2)   FinancialStatement Schedules.  **EPIQ Systems, Inc. andsubsidiaries for each of the years in the three-year period ended December 31,2004.
| Schedule II—Valuation and  qualifying accounts |   |
|-----------------------------------------------------|--------|

 

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

30

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| Dated:   March 1, 2005 | Epiq SYSTEMS, INC. |
|---------------------------------------|--------------------|
|                                  | By:                |   | /s/  TOM W. OLOFSON |
|                                  |               | Tom W. Olofson |
|                                  |               | *Chairman of the Board, Chief Executive* |
|                                  |               | *Officer and Director* |

 

Inaccordance with the Exchange Act this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities indicatedon the dates indicated.
|                                             | **Signature** | ** **                                                                                 | ** **          | ** ** | **Name and Title** | ** ** | ** ** | **Date** | ** ** |
|---------------------------------------------|---------------|--------------------------------------------------------------------------------------------|---------------------|------------|--------------------|------------|------------|----------|------------|
| /s/  TOM W. OLOFSON               |          | Tom W. Olofson                                                                             | March 1,  2005 |
|                                        |          | Chairman of the  Board, Chief Executive Officer and Director (Principal Executive Officer) |                |
| /s/  CHRISTOPHER E. OLOFSON       |          | Christopher E. Olofson                                                                     | March 1,  2005 |
|                                        |          | President, Chief  Operating Officer and Director                                           |                |
| /s/  ELIZABETH M. BRAHAM          |          | Elizabeth M. Braham                                                                        | March 1,  2005 |
|                                        |          | Senior Vice  President, Chief Financial Officer (Principal Financial Officer)              |                |
| /s/  DOUGLAS W. FLEMING           |          | Douglas W. Fleming                                                                         | March 1,  2005 |
|                                        |          | Director of  Finance, Chief Accounting Officer (Principal Accounting Officer)              |                |
| /s/  W. BRYAN SATTERLEE           |          | W. Bryan Satterlee                                                                         | March 1,  2005 |
|                                        |          | Director                                                                                   |                |
| /s/  EDWARD M. CONNOLLY, JR. |          | Edward M.  Connolly, Jr.                                                              | March 1,  2005 |
|                                        |          | Director                                                                                   |                |
| /s/  JAMES A. BYRNES              |          | James A. Byrnes                                                                            | March 1,  2005 |
|                                        |          | Director                                                                                   |                |
| /s/  JOEL PELOFSKY                |          | Joel Pelofsky                                                                              | March 1,  2005 |
|                                        |          | Director                                                                                   |                |

 

31

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of DirectorsEPIQ Systems, Inc.**Kansas City, Kansas

We have audited the accompanying consolidated balancesheets of EPIQ Systems, Inc. andsubsidiaries (the “Company”) as of December 31, 2004 and 2003, and therelated consolidated statements of income, stockholders’ equity, and cash flowsfor each of the three years in the period ended December 31, 2004. Ouraudits also included the schedule of valuation and qualifying accounts listedin the Index at Item 15(a)(2). These consolidated financial statements andfinancial statement schedule are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 statementspresent fairly, in all material respects, the financial position of EPIQ Systems, Inc. andsubsidiaries as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2004, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 22, 2005 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financialreporting.
| DELOITTE & TOUCHE LLP                |
|-----------------------------------------------|
| Kansas City, Missouri  February 22, 2005 |

 

F-1

----

**EPIQ SYSTEMS, INC.CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share and Per Share Data)**
| ** **                                                                                                                                                      | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                                                      |       |                                  |       |   |   |
| **CURRENT ASSETS:**                                                                                                                                             |       |                                  |       |   |   |
| Cash  and cash equivalents                                                                                                                                      |       | $                                     | 13,330     |   | $ | 30,347 |   |
| Trade  accounts receivable, less allowance for doubtful accounts of $1,069 and $340,  respectively                                                              |       | 18,690                                |       | 11,337 |   |
| Prepaid  expenses                                                                                                                                               |       | 2,052                                 |       | 996 |   |
| Income  taxes refundable                                                                                                                                        |       | 3,477                                 |       | — |   |
| Deferred  income taxes                                                                                                                                          |       | 754                                   |       | 1,736 |   |
| Other  current assets                                                                                                                                           |       | 736                                   |       | 942 |   |
| Current  assets held for sale                                                                                                                                   |       | —                                |       | 1,304 |   |
| Total  Current Assets                                                                                                                                           |       | 39,039                                |       | 46,662 |   |
| **LONG-TERM ASSETS:**                                                                                                                                           |       |                                  |       |   |   |
| Property  and equipment, net                                                                                                                                    |       | 20,431                                |       | 11,886 |   |
| Software  development costs, net                                                                                                                                |       | 5,838                                 |       | 2,799 |   |
| Goodwill                                                                                                                                                        |       | 147,728                               |       | 64,188 |   |
| Other  intangibles, net of accumulated amortization of $11,707 and $4,250, respectively                                                                         |       | 24,057                                |       | 16,325 |   |
| Other                                                                                                                                                           |       | 2,995                                 |       | 67 |   |
| Total  Long-term Assets, net                                                                                                                                    |       | 201,049                               |       | 95,265 |   |
| **Total  Assets**                                                                                                                                               |       | $                                     | 240,088    |   | $ | 141,927 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                  |       |                                  |       |   |   |
| **CURRENT LIABILITIES:**                                                                                                                                        |       |                                  |       |   |   |
| Accounts  payable                                                                                                                                               |       | $                                     | 4,263      |   | $ | 1,998 |   |
| Customer  deposits                                                                                                                                              |       | 2,375                                 |       | 1,712 |   |
| Accrued  compensation                                                                                                                                           |       | 873                                   |       | 1,353 |   |
| Other  accrued expenses                                                                                                                                         |       | 899                                   |       | 590 |   |
| Current  maturities of long-term obligations                                                                                                                    |       | 7,650                                 |       | 849 |   |
| Current  liabilities held for sale                                                                                                                              |       | —                                |       | 1,137 |   |
| Total  Current Liabilities                                                                                                                                      |       | 16,060                                |       | 7,639 |   |
| **LONG-TERM LIABILITIES:**                                                                                                                                      |       |                                  |       |   |   |
| Deferred  income taxes                                                                                                                                          |       | 9,696                                 |       | 1,967 |   |
| Deferred  acquisition price (excluding current portion)                                                                                                         |       | 2,667                                 |       | 3,066 |   |
| Long-term  obligations (excluding current maturities)                                                                                                           |       | 71,832                                |       | — |   |
| Total  Long-term Liabilities                                                                                                                                    |       | 84,195                                |       | 5,033 |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                  |       |                                  |       |   |   |
| Preferred  stock—$1  par value; 2,000,000 shares authorized; none issued and outstanding                                                                   |       | —                                |       | — |   |
| Common  stock—$0.01  par value; 50,000,000 shares authorized; issued and outstanding—17,883,917  and 17,780,854 shares at 2004 and 2003, respectively |       | 179                                   |       | 178 |   |
| Additional  paid-in capital                                                                                                                                     |       | 102,738                               |       | 101,891 |   |
| Retained  earnings                                                                                                                                              |       | 36,916                                |       | 27,186 |   |
| Total  Stockholders’ Equity                                                                                                                                |       | 139,833                               |       | 129,255 |   |
| **Total Liabilities and Stockholders’  Equity**                                                                                                            |       | $                                     | 240,088    |   | $ | 141,927 |   |

 

See accompanying notes to consolidated financial statements.

F-2

----

**EPIQ SYSTEMS, INC.CONSOLIDATED STATEMENTS OF INCOME(In Thousands, Except Per Share Data)**
| ** **                                                                                                                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **REVENUE:**                                                                                                                                                          |       |                                        |       |   |   |   |   |
| Case  management                                                                                                                                                      |       | $                                           | 68,526     |   | $ | 49,688 |   | $ | 34,600 |   |
| Document  management                                                                                                                                                  |       | 36,549                                      |       | 12,730 |   | 984 |   |
| Operating  revenue                                                                                                                                                    |       | 105,075                                     |       | 62,418 |   | 35,584 |   |
| Reimbursed  expenses                                                                                                                                                  |       | 20,345                                      |       | 5,518 |   | 672 |   |
| Total  Revenue                                                                                                                                                        |       | 125,420                                     |       | 67,936 |   | 36,256 |   |
| **OPERATING EXPENSES:**                                                                                                                                               |       |                                        |       |   |   |   |   |
| Direct  costs                                                                                                                                                         |       | 60,384                                      |       | 16,490 |   | 6,363 |   |
| General  and administrative                                                                                                                                           |       | 25,886                                      |       | 16,868 |   | 9,443 |   |
| Depreciation  and software amortization                                                                                                                               |       | 6,527                                       |       | 4,568 |   | 4,249 |   |
| Amortization  of intangibles                                                                                                                                          |       | 7,767                                       |       | 3,610 |   | 350 |   |
| Acquisition  related                                                                                                                                                  |       | 2,197                                       |       | 1,793 |   | 575 |   |
| Total  Operating Expenses                                                                                                                                             |       | 102,761                                     |       | 43,329 |   | 20,980 |   |
| **INCOME FROM OPERATIONS**                                                                                                                                            |       | 22,659                                      |       | 24,607 |   | 15,276 |   |
| **EXPENSES (INCOME) RELATED  TO FINANCING:**                                                                                                                          |       |                                        |       |   |   |   |   |
| Interest  expense                                                                                                                                                     |       | 6,343                                       |       | 201 |   | 137 |   |
| Interest  income                                                                                                                                                      |       | (128                                        | )          | (284 | ) | (573 | ) |
| Debt  extinguishment                                                                                                                                                  |       | 995                                         |       | — |   | — |   |
| Net  Expenses (Income) Related to Financing                                                                                                                           |       | 7,210                                       |       | (83 | ) | (436 | ) |
| **INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES**                                                                                                             |       | 15,449                                      |       | 24,690 |   | 15,712 |   |
| **PROVISION FOR INCOME TAXES**                                                                                                                                        |       | 6,386                                       |       | 10,165 |   | 5,946 |   |
| **INCOME  FROM CONTINUING OPERATIONS**                                                                                                                                |       | 9,063                                       |       | 14,525 |   | 9,766 |   |
| **DISCONTINUED OPERATIONS:**                                                                                                                                          |       |                                        |       |   |   |   |   |
| Income  (loss) from operations of discontinued infrastructure  segment (including gain on disposal of  $1,616 during the year ended December 31, 2004) |       | 1,104                                       |       | (9,562 | ) | (2,466 | ) |
| Income  tax (expense) benefit from operations of discontinued  infrastructure segment                                                                            |       | (437                                        | )          | 3,744 |   | 933 |   |
| **TOTAL  DISCONTINUED OPERATIONS**                                                                                                                                    |       | 667                                         |       | (5,818 | ) | (1,533 | ) |
| **NET INCOME**                                                                                                                                                        |       | $                                           | 9,730      |   | $ | 8,707 |   | $ | 8,233 |   |
| **NET INCOME PER SHARE INFORMATION:**                                                                                                                                 |       |                                        |       |   |   |   |   |
| Income  per share—Basic                                                                                                                                          |       |                                        |       |   |   |   |   |
| Income  from continuing operations                                                                                                                                    |       | $                                           | 0.51       |   | $ | 0.82 |   | $ | 0.66 |   |
| Income  (loss) from discontinued operations                                                                                                                           |       | 0.04                                        |       | (0.33 | ) | (0.10 | ) |
| Net  income per share—Basic                                                                                                                                      |       | $                                           | 0.55       |   | $ | 0.49 |   | $ | 0.56 |   |
| Income  per share—Diluted                                                                                                                                        |       |                                        |       |   |   |   |   |
| Income  from continuing operations                                                                                                                                    |       | $                                           | 0.49       |   | $ | 0.80 |   | $ | 0.64 |   |
| Income  (loss) from discontinued operations                                                                                                                           |       | 0.03                                        |       | (0.32 | ) | (0.10 | ) |
| Net  income per share—Diluted                                                                                                                                    |       | $                                           | 0.52       |   | $ | 0.48 |   | $ | 0.54 |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:**                                                                                                                       |       |                                        |       |   |   |   |   |
| Basic                                                                                                                                                                 |       | 17,848                                      |       | 17,619 |   | 14,775 |   |
| Diluted                                                                                                                                                               |       | 19,828                                      |       | 18,104 |   | 15,309 |   |

 

See accompanying notes to consolidated financial statements.

F-3

----

**EPIQ SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY(In Thousands)**
| ** **                                                   | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| PREFERRED SHARES (2,000 authorized)                          |       | —                                |       | — |   | — |   |
| COMMON SHARES (50,000 authorized):                           |       |                                  |       |   |   |   |   |
| Shares, beginning of year                                    |       | 17,781                                |       | 16,538 |   | 14,398 |   |
| Shares issued upon exercise of  options                      |       | 103                                   |       | 189 |   | 140 |   |
| Shares issued in private  placement of stock                 |       | —                                |       | — |   | 2,000 |   |
| Shares issued in acquisition  of business                    |       | —                                |       | 1,054 |   | — |   |
| Shares, end of year                                          |       | 17,884                                |       | 17,781 |   | 16,538 |   |
| COMMON STOCK—PAR VALUE $0.01 PER SHARE:                 |       |                                  |       |   |   |   |   |
| Balance, beginning of year                                   |       | $                                     | 178        |   | $ | 165 |   | $ | 144 |   |
| Proceeds from exercise of  options                           |       | 1                                     |       | 2 |   | 1 |   |
| Net proceeds from private  placement of stock                |       | —                                |       | — |   | 20 |   |
| Shares issued in acquisition  of business                    |       | —                                |       | 11 |   | — |   |
| Balance, end of year                                         |       | 179                                   |       | 178 |   | 165 |   |
| ADDITIONAL PAID-IN CAPITAL:                                  |       |                                  |       |   |   |   |   |
| Balance, beginning of year                                   |       | 101,891                               |       | 83,731 |   | 54,754 |   |
| Proceeds from exercise of  options                           |       | 595                                   |       | 1,039 |   | 420 |   |
| Tax benefit from exercise of  options                        |       | 252                                   |       | 746 |   | 437 |   |
| Net proceeds from (expenses  for) private placement of stock |       | —                                |       | (114 | ) | 28,120 |   |
| Shares issued in acquisition  of business                    |       | —                                |       | 16,489 |   | — |   |
| Balance, end of year                                         |       | 102,738                               |       | 101,891 |   | 83,731 |   |
| RETAINED EARNINGS:                                           |       |                                  |       |   |   |   |   |
| Balance, beginning of year                                   |       | 27,186                                |       | 18,479 |   | 10,246 |   |
| Net income                                                   |       | 9,730                                 |       | 8,707 |   | 8,233 |   |
| Balance, end of year                                         |       | 36,916                                |       | 27,186 |   | 18,479 |   |
| TOTAL STOCKHOLDERS’ EQUITY                              |       | $                                     | 139,833    |   | $ | 129,255 |   | $ | 102,375 |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**EPIQ SYSTEMS, INC.CONSOLIDATED STATEMENTS OFCASH FLOWS(In Thousands)**
| ** **                                                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                       |       |                                        |       |   |   |   |   |
| Net  income                                                                                                      |       | $                                           | 9,730      |   | $ | 8,707 |   | $ | 8,233 |   |
| Adjustments to reconcile net  income to net cash from operating activities:                                      |       |                                        |       |   |   |   |   |
| Provision  (benefit) for deferred income taxes                                                                   |       | 8,208                                       |       | (1,855 | ) | 1,380 |   |
| Depreciation  and software amortization                                                                          |       | 6,527                                       |       | 5,796 |   | 5,456 |   |
| Loan  fee amortization and debt extinguishment                                                                   |       | 3,115                                       |       | — |   | — |   |
| Change  in valuation of embedded option and  convertible debt                                               |       | 292                                         |       | — |   | — |   |
| Amortization  of intangible assets                                                                               |       | 7,767                                       |       | 3,745 |   | 498 |   |
| Asset  impairment charges                                                                                        |       | —                                      |       | 7,615 |   | — |   |
| Gain  on sale of discontinued operation                                                                          |       | (1,616                                      | )          | — |   | — |   |
| Other,  net                                                                                                      |       | 370                                         |       | 234 |   | 225 |   |
| Changes in operating assets  and liabilities, net of effects  from  business acquisitions:                  |       |                                        |       |   |   |   |   |
| Trade  accounts receivable                                                                                       |       | 7,951                                       |       | (5,948 | ) | (1,149 | ) |
| Prepaid  expenses and other assets                                                                               |       | 1,187                                       |       | (981 | ) | (581 | ) |
| Accounts  payable and accrued expenses                                                                           |       | (3,055                                      | )          | 2,522 |   | (827 | ) |
| Withholdings  and related liabilities assumed in the  acquisition  of a business and subsequently paid |       | (7,973                                      | )          | — |   | — |   |
| Income  taxes, including tax benefit from exercise  of stock  options                                       |       | (1,180                                      | )          | 731 |   | 504 |   |
| Other                                                                                                            |       | 266                                         |       | 85 |   | 37 |   |
| Net  cash provided by operating activities                                                                       |       | 31,589                                      |       | 20,651 |   | 13,776 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                       |       |                                        |       |   |   |   |   |
| Purchase  of property and equipment                                                                              |       | (5,424                                      | )          | (3,772 | ) | (4,938 | ) |
| Software  development costs                                                                                      |       | (1,670                                      | )          | (2,753 | ) | (1,955 | ) |
| Cash  paid for acquisition of business, net of cash acquired                                                     |       | (113,111                                    | )          | (43,263 | ) | (682 | ) |
| Proceeds  from sale of discontinued operations                                                                   |       | 1,111                                       |       | — |   | — |   |
| Other  investing activities, net                                                                                 |       | 65                                          |       | (209 | ) | 112 |   |
| Net  cash used in investing activities                                                                           |       | (119,029                                    | )          | (49,997 | ) | (7,463 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                       |       |                                        |       |   |   |   |   |
| Proceeds  from long-term debt borrowings                                                                         |       | 193,500                                     |       | — |   | — |   |
| Debt  issuance costs                                                                                             |       | (5,931                                      | )          | — |   | — |   |
| Principal  payments under long-term debt and capital  lease obligations                                |       | (118,455                                    | )          | (347 | ) | (353 | ) |
| Net  proceeds from (expenses for) stock issuance                                                                 |       | —                                      |       | (114 | ) | 28,140 |   |
| Proceeds  from exercise of stock options                                                                         |       | 595                                         |       | 1,041 |   | 421 |   |
| Net  cash provided by financing activities                                                                       |       | 69,709                                      |       | 580 |   | 28,208 |   |
| **NET INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS**                                                   |       | (17,731                                     | )          | (28,766 | ) | 34,521 |   |
| **CASH AND  CASH EQUIVALENTS, BEGINNING OF YEAR**                                                                |       | 30,347                                      |       | 59,827 |   | 25,306 |   |
| (Increase)  decrease in cash classified as held for sale                                                         |       | 714                                         |       | (714 | ) | — |   |
| **CASH AND CASH EQUIVALENTS,  END OF YEAR**                                                                      |       | $                                           | 13,330     |   | $ | 30,347 |   | $ | 59,827 |   |

 

See accompanying notes to consolidated financial statements.

F-5

----

**EPIQ SYSTEMS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2004, 2003 AND 2002**

**NOTE 1:**   NATUREOF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

***Principles of Consolidation***

The consolidated financialstatements include the accounts of EPIQ Systems, Inc. (“EPIQ”) and itswholly-owned subsidiaries. All significant intercompany transactions andbalances have been eliminated in consolidation.

***Nature of Operations***

EPIQ is a nationalprovider of technology-based solutions for fiduciary management and claimsadministration applications used by attorneys, trustees, and corporationsprimarily engaged in bankruptcy, class action, mass tort, and other similarlycomplex legal proceedings. Our solutions combine advanced technology within-depth subject matter expertise to offer customers an efficient environmentin which to comprehensively manage the complexities of case administration anddocument management.

***Cash and Cash Equivalents***

Cash and cash equivalentsinclude cash on hand and in banks and all liquid investments with originalmaturities of three months or less.

***Software Development Costs***

Certain internal softwaredevelopment costs incurred in the creation of computer software products arecapitalized once technological feasibility has been established. Developmentcosts incurred prior to establishment of technological feasibility are expensedand shown as general and administrative expenses in the accompanyingConsolidated Statements of Income. Capitalized costs are amortized based on theratio of current revenue to current and estimated future revenue for eachproduct with minimum annual amortization equal to the straight-lineamortization over the remaining estimated economic life of the product.

***Goodwill and Identifiable Intangible Assets***

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

Identifiable intangibleassets, resulting from various business acquisitions, consist primarily ofcustomer contracts, trade names and agreements not to compete. Customercontracts, trade names and agreements not to compete are being amortized on astraight-line basis over their estimated economic benefit period, generallyfrom two to 14 years. Identifiable intangibles assets are reviewed forimpairment whenever events or changes in circumstances have indicated that thecarrying amount of these assets might not be recoverable.

F-6

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**NOTE 1:**   NATURE OFOPERATIONS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)

***Impairment of Long-lived Assets***

Long-lived assets arereviewed for impairment, using our best estimates of operating cash flows basedon reasonable and supportable assumptions and projections, whenever events orchanges in circumstances indicate that the carrying amount of its assets mightnot be recoverable.

***Deferred Loan Fees***

Incremental, third partycosts related to establishing credit facilities and issuing convertible debtare capitalized and amortized based on the amortization schedule of the relateddebt. The unamortized costs are included as a component of other long-termassets on our Consolidated Balance Sheets. Amortized costs are included as acomponent of interest expense on our Consolidated Statements of Income. Unamortizedcosts related to debt extinguished prior to maturity due to refinancing wereexpensed and comprise debt extinguishment on our Consolidated Statements ofIncome.

***Stock-Based Compensation***

Stockcompensation awards are accounted for under the intrinsic method of AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees*. Opinion No. 25 requires compensation costto be recognized based on the excess, if any, between the quoted market priceat the date of grant and the amount an employee must pay to acquire stock. Stockoptions awarded by us are granted with an exercise price equal to the fairmarket value on the date of the grant. As required by Statement of FinancialAccounting Standard (“SFAS”) No. 148, *Accountingfor Stock-Based Compensation—Transitionand Disclosure, an amendment of FASB Statement No. 123*, following is a reconciliation of reportednet income and net income per share to pro forma net income and pro forma netincome per share had the compensation cost been determined based on thefair value at the grant dates using SFAS No. 123, *Accountingfor Stock-Based Compensation*, for the years ended December 31,2004, 2003 and 2002 (in thousands, except per share data):
| ** **                                                                                                                          | ** **  | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|-------------|---------------------------------------------|------------|
| ** **                                                                                                                          | ** **  | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income, as  reported                                                                                                            |        | $                                           | 9,730      |   | $ | 8,707 |   | $ | 8,233 |   |
| Add: stock-based  employee compensation included in reported net earnings, net of tax                                               |        | —                                      |       | — |   | — |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all options, net of tax |        | (2,975                                      | )          | (2,195 | ) | (2,258 | ) |
| Net income, pro  forma                                                                                                              |        | $                                           | 6,755      |   | $ | 6,512 |   | $ | 5,975 |   |
| Net income per share—Basic                                                                                                     | As reported |                                        | $          | 0.55 |   | $ | 0.49 |   | $ | 0.56 |   |
|                                                                                                                                | Pro forma   |                                        | $          | 0.38 |   | $ | 0.37 |   | $ | 0.40 |   |
| Net income per share—Diluted                                                                                                   | As reported |                                        | $          | 0.52 |   | $ | 0.48 |   | $ | 0.54 |   |
|                                                                                                                                | Pro forma   |                                        | $          | 0.34 |   | $ | 0.36 |   | $ | 0.39 |   |

 

Pro forma amounts presented above are based on actualearnings and consider only the effects of estimated fair values of stockoptions.

F-7

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**NOTE 1:**   NATURE OFOPERATIONS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES (Continued)

The fair value of stockoptions is estimated using the Black-Scholes option-pricing model with thefollowing key assumptions:
| ** **               | ** ** | **    2004    ** | ** ** | **    2003    ** | ** ** | **    2002    ** | ** ** |
|--------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Expected life  (years)   |       | 5.3 -  5.4                                               |       | 5.5 -  6.2                                               |       | 6.2                                                      |       |
| Volatility               |       | 30% -  48%                                               |       | 50% -  55%                                               |       | 53%                                                      |       |
| Risk-free  interest rate |       | 2.9%  - 3.9%                                             |       | 2.2%  - 3.1%                                             |       | 3.2%  - 4.4%                                             |       |
| Dividend yield           |       | 0%                                                       |       | 0%                                                       |       | 0%                                                       |       |

 

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions, which have no vesting restrictions and are fully transferable. In addition,option valuation models require the input of highly subjective assumptions,including the expected stock price volatility. Because our employee stockoptions have characteristics significantly different from those of tradedoptions and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options.

***Income Taxes***

A liability or asset isrecognized for the deferred tax consequences of temporary differences betweenthe tax basis of assets or liabilities and their reported amounts in thefinancial statements. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Avaluation allowance is provided when, in the opinion of management, it is morelikely than not that some portion or all of a deferred tax asset will not berealized.

***Revenue Recognition***

We have agreements with customers obligating us todeliver various products and services each month. Case management fees earnedare contingent upon the month-to-month delivery of the products and servicesdefined by the contracts and are related primarily to the size and complexityof the ongoing engagement. The formula-based fees earned each month becomefixed and determinable on a monthly basis as a result of our completion of allcontractually required performance obligations related to products deliveredand services rendered by us during the month. Document management revenues arerecognized in the period the services are provided.

We receive expensereimbursements, primarily for postage, from customers. Based on guidanceprovided by the Financial Accounting Standard’s Board’s (the “FASB”) EmergingIssues Task Force (the “EITF”), reimbursements received are reported as revenueon an accrual basis. The expense related to the reimbursement is recorded as acomponent of direct costs on our accompanying Consolidated Statements ofIncome.

***Derivative Financial Instrument***

The holders of ourcontingently convertible subordinated notes have the right to extend thematurity of these notes for a period not to exceed three years. Under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, the right to extend the maturity of the notes representsan embedded option and is accounted for as a derivative financial instrument. Thefair value of our obligation related to the embedded option has been includedas a component of our long-term obligations on our accompanying ConsolidatedBalance Sheets. Changes in the fair value of the embedded option are 

F-8

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

recorded each period as a component of interestexpense on our accompanying Consolidated Statements of Income. Changes in thefair value of the embedded option do not affect our cash flows and,accordingly, are reflected as an adjustment to reconcile net income to net cashfrom operating activities on our accompanying Consolidated Statements of CashFlows.

***Comprehensive Income***

We do not have anycomponents of other comprehensive income; therefore comprehensive income equalsnet income for each of the three years ended December 31, 2004, 2003 and2002.

***Income Per Share***

The EITF reached a consensus regarding Issue No. 04-08,*The Effect of Contingently Convertible Debt on EPS,*that the dilutive effect of contingently convertible debtinstruments should be included in the diluted earnings per share calculationsin all periods, regardless of whether the contingency is met, unless the effectof such inclusion would be antidilutive. This change in accounting for thedilutive effect of convertible debt must be applied to reporting periods endingafter December 15, 2004 and, accordingly, has been reflected in theaccompanying consolidated financial statements. This change in accounting methodhad a minimal effect on our previously reported diluted income per share anddoes not change previously reported quarterly diluted income per share amounts.

Basic net income per shareis computed by dividing net income available to common stockholders by theweighted average number of common shares outstanding for the period. Dilutednet income per share is computed by dividing net income available to commonshareholders, increased by the amount of interest expense, net of tax, relatedto outstanding convertible debt by the weighted average number of outstandingcommon shares and shares that may be issued in future periods relating tooutstanding stock options and convertible debt, if dilutive.

***Segment Information***

In determining ourreportable segments, we consider how we organize our business internally formaking operating decisions and assessing business performance. Our revenues arederived from sources within the United States of America and all of ourlong-lived assets are located in the United States of America.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements. Estimates also affect the reported amounts of revenues and expensesduring the periods reported. Actual results could differ from those estimates.

***Recent Accounting Pronouncements***

In December 2004,the FASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29.*SFAS 153 expandedthe scope of APB Opinion No. 29 to require that the nonmonetary exchangeof similar productive assets should be measured based on the fair valueof the assets exchanged. EPIQ is required to adopt the provisions of SFAS 153for our quarter ending 

F-9

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

September 30, 2005. Wedo not anticipate that adoption of this statement will have a material impacton our consolidated financial statements.

In December 2004, theFASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), *Share-Based Payment*. SFAS 123R establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services or incurs liabilities in exchange for goods or servicesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments. SFAS 123R requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments based on the grant-date fair value of the awardand to recognize that cost over the period during which an employee is requiredto provide service in exchange for the award. EPIQ is required and plans toadopt the provisions of SFAS 123R, likely using the modified version ofprospective application, for our quarter ending September 30, 2005. Adoptionof SFAS 123R will materially increase our recognized compensation expense andwill have a material impact on our consolidated income statement and balancesheet. We are unable to estimate the impact of adoption of this statement onour consolidated financial statements as the impact will depend, in part, onstock awards and stock option awards made prior to adoption date, whetherawards granted were qualified or non-qualified, the vesting period ofthose awards, and forfeitures related to both existing awards and new awards. Subsequentto December 31, 2004, our Compensation Committee approved acceleration ofthe vesting of certain unvested options for employees, including an executiveofficer and non-employee directors. This action will reduce the impact ofadoption of SFAS 123R on our consolidated financial statements. If, subsequentto December 31, 2004, no new awards were issued and no existing awardswere forfeited, we estimate that adoption of SFAS 123R would increase ourpre-tax compensation expense, on an annualized basis, by approximately $1.3million. We do not anticipate that adoption of SFAS 123R will have a materialimpact on our consolidated statements of cash flows.

***Reclassification***

Certain reclassificationshave been made to the prior years’ financial statements to conform to thecurrent year’s financial statement presentation.

**NOTE 2:**   PROPERTYAND EQUIPMENT

Property,equipment and leasehold improvements are stated at cost and depreciated oramortized on a straight-line basis over the estimated useful life of each asset.The classification of property and equipment and their estimated useful livesis as follows (in thousands):
| ** **                                           | ** ** | **December 31,**                                | ** ** | **Estimated**                                        | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                             | ** ** | **2003**                                             | ** ** | **Useful Life** | ** ** |
| Land                                                 |       | $        192 |       | $        192 |       |   |   |
| Building                                             |       | 4,091                                                |       | 4,091                                                |       | 30 years |   |
| Improvements—building  and leasehold            |       | 4,821                                                |       | 1,820                                                |       | 5 - 12 years |   |
| Furniture and  fixtures                              |       | 2,035                                                |       | 1,776                                                |       | 5 - 10 years |   |
| Computer  equipment                                  |       | 16,666                                               |       | 11,338                                               |       | 2 - 5 years |   |
| Office equipment                                     |       | 1,545                                                |       | 906                                                  |       | 3 - 5 years |   |
| Transportation  equipment                            |       | 4,855                                                |       | 2,518                                                |       | 3 - 5 years |   |
|                                                 |       | 34,205                                               |       | 22,641                                               |       |   |   |
| Less accumulated depreciation and amortization       |       | (13,774                                              | )          | (10,755                                              | )          |   |   |
| Property, equipment and  leasehold improvements, net |       | $                                                    | 20,431     |                                                 | $          | 11,886 |   |   |   |
|                                                      |            |                                                      |            |                                                      |            |  |  |  |  |

 

F-10

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**NOTE 2:**   PROPERTY ANDEQUIPMENT (Continued)

Property, equipment andleasehold improvements are reviewed by management for impairment wheneverevents or changes in circumstances have indicated that the carrying amount ofits assets might not be recoverable.

**NOTE 3:**   SOFTWAREDEVELOPMENT COSTS

Thefollowing is a summary of software development costs capitalized (inthousands):
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Amounts  capitalized, beginning of year                                |       | $                                     | 7,212      |   | $ | 9,031 |   |
| Development costs capitalized                                          |       | 1,670                                 |       | 2,753 |   |
| Acquisitions                                                           |       | 2,956                                 |       | 341 |   |
| Impairment, gross  of amortization                                     |       | —                                |       | (4,913 | ) |
| Amounts  capitalized, end of year                                      |       | 11,838                                |       | 7,212 |   |
| Accumulated amortization, end of year                                  |       | (6,000                                | )          | (4,187 | ) |
| Net software  development costs                                        |       | 5,838                                 |       | 3,025 |   |
| Less: Net software  development costs included in assets held for sale |       | —                                |       | (226 | ) |
| Net software development  costs related to continuing operations       |       | $                                     | 5,838      |   | $ | 2,799 |   |

 

Included in the above arecapitalized software development costs for unreleased products of $1.3 millionand $1.7 million at December 31, 2004 and 2003, respectively. During theyears ended December 31, 2004 and 2003, we recognized amortization expenserelated to capitalized software development costs of $1.8 million and $1.9million, respectively.

**NOTE 4:**   GOODWILLAND INTANGIBLE ASSETS

Changesin the carrying amounts of goodwill by segment are as follows (in thousands):
| ** **                           | ** ** | **Year Ended December 31, 2004** | ** ** | **Year Ended December 31, 2003** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **Case  Management**                                 | ** ** | **Document  Management**                             | ** ** | **Total** | ** ** | **Case  Management** | ** ** | **Document  Management** | ** ** | **Total** | ** ** |
| Balance,  beginning of period        |       |                                                 | $          | 43,716                                               |       |   |   | $ | 20,472 |   |   | $ | 64,188 |   |   | $ | 17,449 |   |   |   | $ | — |   |   | $ | 17,449 |   |
| Goodwill acquired  during the period |       |                                                 | 62,655     |                                                 |       |   | 20,885 |   |   | 83,540 |   |   | 26,267 |   |   |   | 20,472 |   |   | 46,739 |   |
| Balance, end of period               |       |                                                 | $          | 106,371                                              |       |   |   | $ | 41,357 |   |   | $ | 147,728 |   |   | $ | 43,716 |   |   |   | $ | 20,472 |   |   | $ | 64,188 |   |

 

During November 2003 (the “Measurement Date”), adecision was made to dispose of our infrastructure software business. Inaccordance with SFAS No. 144, long-lived assets classified as held forsale are measured at the lower of their carrying amounts or fair value lesscost to sell. Accordingly, as of the Measurement Date, we performed animpairment analysis based on estimated proceeds from the sale less sellingcosts. Based on this analysis, the carrying amount of goodwill related to theinfrastructure software segment, with a balance of $3.8 million as of January 1,2003, was entirely impaired. The resulting $3.8 million pre-tax impairmentcharge is included as a component of Discontinued Operations on our ConsolidatedStatements of Income for the year ended December 31, 2003.

F-11

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**NOTE 4:**   GOODWILL ANDINTANGIBLE ASSETS (Continued)

Other intangible assets asof December 31, 2004 and 2003 consisted of the following (in thousands):
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Amortized  Identifiable Intangible Assets:  |       |                  |       |   |   |
| Customer contracts                          |       | $                     | 16,560     |   | $ | 8,060 |   |
| Accumulated amortization                    |       | (7,656                | )          | (2,925 | ) |
| Customer contracts, net                     |       | 8,904                 |       | 5,135 |   |
| Trade names                                 |       | 1,574                 |       | 60 |   |
| Accumulated amortization                    |       | (721                  | )          | (45 | ) |
| Trade names, net                            |       | 853                   |       | 15 |   |
| Non-compete agreements                      |       | 17,630                |       | 11,980 |   |
| Accumulated amortization                    |       | (3,330                | )          | (1,279 | ) |
| Non-compete agreements, net                 |       | 14,300                |       | 10,701 |   |
| Total amortized  intangible assets, net     |       | 24,057                |       | 15,851 |   |
| Unamortized Identifiable Intangible Assets: |       |                  |       |   |   |
| Trade names                                 |       | —                |       | 474 |   |
| Total Other Intangible  Assets, net         |       | $                     | 24,057     |   | $ | 16,325 |   |

 

In conjunction with our January 2004 acquisitionof Poorman-Douglas, we reassessed our use of all trade names. As a result of thisreassessment, in February 2004 we began amortizing the BSI trade name on astraight-line basis over two years.

Amortizationexpense for each year in the three year period ended December 31, 2004 andestimated amortization expense for each of the next five years is as follows(in thousands):
| ** **                                                         | ** ** | **For the Years  Ending  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Aggregate  amortization expense included in continuing operations: |       |                                                   |       |   |   |
| 2002                                                               |       |                                                   | $          | 350 |   |   |
| 2003                                                               |       |                                                   | 3,610      |   |   |
| 2004                                                               |       |                                                   | 7,767      |   |   |
| Estimated amortization expense:                                    |       |                                                   |       |   |   |
| 2005                                                               |       |                                                   | 5,904      |   |   |
| 2006                                                               |       |                                                   | 4,987      |   |   |
| 2007                                                               |       |                                                   | 3,027      |   |   |
| 2008                                                               |       |                                                   | 2,855      |   |   |
| 2009                                                               |       |                                                   | 1,773      |   |   |
|                                                                    |            |                                                        |            |  |  |  |

 

During November 2003, a decision was made todispose of our infrastructure software business. In accordance with SFAS No. 144,long-lived assets classified as held for sale are measured at the lower oftheir carrying amounts or fair value less cost to sell. Accordingly, as of theMeasurement Date, we performed an impairment analysis based on estimatedproceeds from the sale less selling costs. Based on this analysis, the carryingamount of identified intangible assets related to the infrastructure softwaresegment, with a balance of $1.0 million as of January 1, 2003, wasentirely impaired. The resulting $0.9 million pre-tax impairment charge,representing the unamortized balance as of the Measurement Date, is included asa component of Discontinued Operations on our Consolidated Statements ofIncome.

F-12

----

**NOTE 5:**   INDEBTEDNESS

Thefollowing is a summary of indebtedness outstanding (in thousands):
| ** **                                                           | ** ** | **Year Ended December 31,**                                       | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| Senior term loan                                                     |       |                                                                             | $21,875    |   |   |   | $ | — |   |   |
| Senior revolving  loan                                               |       |                                                                             | 5,000      |   |   |   | — |   |   |
| Contingent  convertible subordinated debt, including embedded option |       |                                                                             | 50,292     |   |   |   | — |   |   |
| Capital leases                                                       |       |                                                                             | 1,773      |   |   |   | 66 |   |   |
| Deferred  acquisition price                                          |       |                                                                             | 3,209      |   |   |   | 3,849 |   |   |
| Total indebtedness                                                   |       |                                                                             | $82,149    |   |   |   | $ | 3,915 |   |   |

 

***Credit Facilities***

As of December 31, 2003, we had an unsecured $25.0million line of credit with a scheduled maturity of May 31, 2006. Noborrowings were outstanding under this line of credit as of December 31,2003. To fund our acquisition of Poorman-Douglas, during January 2004 weterminated our $25.0 million line of credit and replaced it with a $100.0million credit facility. The credit facility consisted of a $45.0 millionsenior term loan, with amortizing quarterly principal payments of $4.5 millionbeginning April 30, 2004, a $25.0 million senior revolving loan, and a$30.0 million subordinated term loan. The subordinated term loan was paid infull and terminated during our quarter ended June 30, 2004, and theremainder of the facility was paid in full and terminated during our quarterended September 30, 2004. Concurrent with the termination of this creditfacility, unamortized loan fees of $1.0 million were charged as an expenserelated to financing on the accompanying Consolidated Statements of Income.

During July 2004, we entered into a new creditfacility with KeyBank National Association as administrative agent. Thisfacility consists of a $25.0 million senior term loan, with amortizingquarterly principal payments of $1.6 million commencing September 30,2004, and a $50.0 million senior revolving loan. During the term of the loan wehave the right, subject to compliance with our covenants, to increase thesenior revolving loan to $75.0 million. At inception of the new creditfacility, we borrowed $25.0 million under the senior term loan and $8.0 millionof the senior revolving loan. We used these proceeds plus available cash onhand to pay in full the borrowings outstanding under our prior credit facilityand that credit facility was terminated.

Under our new creditfacility, the senior term loan and the senior revolving loan mature June 30,2008. Interest on the credit facility is generally based on a spread over theLIBOR rate. This new credit facility is secured by liens on our real propertyand a significant portion of our personal property and contains financialcovenants related to earnings before interest, provision for income taxes,depreciation and amortization (“EBITDA”), total debt, senior debt, fixedcharges and working capital. We were in compliance with all financial covenantsas of December 31, 2004. As calculated at December 31, 2004,additional availability under this facility was approximately $30.2 million. Asof December 31, 2004, our borrowings under the new credit facility totaled$26.9 million, consisting of $21.9 million borrowed under the senior term loanand $5.0 million borrowed under the senior revolving loan. As of December 31,2004, the interest rate charged on outstanding borrowings ranged from 5.1% to6.0%.

F-13

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**NOTE 5:**   INDEBTEDNESS(Continued)

***Contingent Convertible Subordinated Debt***

During June 2004, we issued $50.0 million ofcontingent convertible subordinated notes. These contingent convertiblesubordinated notes:

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

·       undercertain circumstances are convertible into shares of our common stock at aprice of $17.50 per share; and

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

Net proceeds of $47.4 million were used to repay andterminate our subordinated term loan described above and to pay in full ourthen outstanding revolving loan balance.

The note holders’right to convert the notes is contingent on the market price of our commonstock as follows:

·       throughJanuary 14, 2005, the shares are convertible only if the arithmeticaverage of the price of our common stock equals or exceeds $19.25 on any tenconsecutive trading days or if the price of our common stock is less than$10.75 on any five consecutive trading days;

·       afterJanuary 14, 2005, the shares are convertible only if the arithmeticaverage of the price of our common stock equals or exceeds $19.25 on any fiveconsecutive trading days or if the price of our common stock is less than$10.75 on any five consecutive trading days.

The contingency has not been satisfied and,accordingly, the notes are not currently convertible. If the contingency weresatisfied and all shares were converted, the notes would convert intoapproximately 2,857,000 shares of our common stock. If we change our capitalstructure (for example, through a stock dividend or stock split) while thenotes are outstanding, the conversion price will be adjusted on a consistentbasis and, accordingly, the number of shares of common stock we would issue onconversion would be adjusted.

The EITF reached a consensus regarding Issue No. 04-08,*The Effect of Contingently Convertible Debt on EPS,*that the dilutive effect of contingently convertible debtinstruments should be included in the diluted earnings per share calculationsin all periods, regardless of whether the contingency is met, unless the effectof such inclusion would be antidilutive. This consensus is effective forreporting periods ending on or after December 15, 2004. Accordingly, theshares issuable on conversion have been included, retroactive to the date thecontingently convertible debt was issued, in our diluted shares calculation forthe year ended December 31, 2004.

The holders of the notes have the right to extend thematurity of the contingent convertible notes for a period not to exceed threeyears. Under SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, the right to extend the maturityof the notes represents an embedded option subject to bifurcation. The embeddedoption was initially valued at $1.2 million and the convertible debt balancewas reduced by the same amount. The convertible debt is accreted approximately$0.1 million each quarter such that, at the end of three years, the convertibledebt balance will total $50.0 million. On our accompanying ConsolidatedStatements of Income, this accretion is a component of interest expense. Theembedded option must be revalued at each period end based on the probabilityweighted discounted cash flows related to the additional 4% interest ratepayments that will be made if the convertible debt maturity is extended anadditional three years. Under this methodology, the embedded option has acurrent value of approximately $1.3 million. On our accompanying ConsolidatedBalance Sheet, our obligation related to the embedded option has been includedas a component of the convertible note payable. From date of 

F-14

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**NOTE 5:**   INDEBTEDNESS(Continued)

issuance through December 31,2004, the value of the embedded option increased by approximately $0.1 millionand this increase is included as a component of interest expense on ouraccompanying Consolidated Statements of Income for the year ended December 31,2004. The changes in carrying value of the convertible debt and fair value ofthe embedded option do not affect our cash flow and, if the embedded option isexercised, the value assigned to the embedded option will be amortized as areduction to our 4% convertible debt interest expense over the periods paymentsare made. If the option is not exercised by some or all convertible debtholders, any remaining related value assigned to the embedded option will berecognized as a gain during that period.

The notes evidencing thecontingent subordinated convertible debt contains financial covenants relatedto EBITDA, total debt, and senior debt. We were in compliance with allfinancial covenants as of December 31, 2004.

***Capital Lease***

On June 30, 2004, weentered into a capital lease to finance the purchase of operating software. Atinception of the capital lease, we recorded this transaction as a debtobligation in the amount of $2.7 million and as purchased software, also in theamount of $2.7 million, included on the balance sheet as a component ofproperty and equipment. At December 31, 2004, the accumulated amortizationrelated to this capital lease totaled $0.5 million. As this was a non-cashinvesting and financing activity, these initial amounts are not included on ourConsolidated Statements of Cash Flows. Subsequent payments on the capital leaseare included in our Consolidated Statements of Cash Flows during the period inwhich they are made. At December 31, 2004, our debt obligation related tothis capital lease was approximately $1.8 million, of which approximately $0.9million was classified as a current liability.

***Deferred Acquisition Price***

On January 31, 2003,we acquired 100% of the membership interests of Bankruptcy Services LLC (“BSI”),a provider of technology-based case management, consulting and administrativeservices for Chapter 11 restructurings, for a purchase price of $67.0 million. Aportion of the purchase price was deferred which consists of a $4.0 millionnon-interest bearing note, payable in five annual installments, discountedusing an imputed interest rate of 5% per annum. At December 31, 2004, thediscounted value of the remaining note payments was approximately $3.2 millionof which approximately $0.5 million was classified as a current liability.

***Scheduled Principal Payments***

Ourlong-term obligations, including credit facility debt outstanding as of December 31,2004, convertible debt (including embedded option), deferred acquisition costs,and capitalized leases, mature as follows for year ending December 31 (inthousands):
| 2005  |   | $       | 7,650  |   |
|-------|--------|---------|--------|--------|
| 2006  |   | 8,816   |   |
| 2007  |   | 57,066  |   |
| 2008  |   | 8,617   |   |
| Total |   | $82,149 |   |

 

**NOTE 6:   OPERATINGLEASES**

We have non-cancelable operating leases for officespace at various locations expiring at various times through 2015. Each of theleases requires us to pay all executory costs (property taxes, maintenance and 

F-15

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**NOTE 6:**   OPERATING LEASES(Continued)

insurance). Additionally,we have non-cancelable operating leases for office equipment and automobilesexpiring through 2008.

Futureminimum lease payments during the years ending December 31 are as follows(in thousands):
| 2005                          |   | $     | 2,699  |   |
|-------------------------------|--------|-------|--------|--------|
| 2006                          |   | 2,529 |   |
| 2007                          |   | 2,236 |   |
| 2008                          |   | 1,896 |   |
| 2009                          |   | 1,515 |   |
| Thereafter                    |   | 8,086 |   |
| Total minimum lease  payments |   | $     | 18,961 |   |

 

Expense related tooperating leases was approximately $2.5 million, $1.0 million, and $0.4 millionfor the years ended December 31, 2004, 2003 and 2002, respectively.

**NOTE 7:   STOCKHOLDERS’EQUITY**

On November 7, 2002, we completed a privateplacement of 2,000,000 shares of our common stock and received net proceeds ofapproximately $28.1 million, after underwriter’s discount and offering expensesof $1.9 million.

On January 31, 2003, we issued approximately1,054,000 shares of restricted common stock, valued at approximately $16.5million, as a part of the transaction to purchase the membership interests ofBSI. Half of the restricted shares could not be sold, transferred or encumberedfor a period of one year from the date of issue, and the other half of therestricted shares could not be sold, transferred or encumbered for a period oftwo years from the date of issue. As of February 2005, all shares of ourcommon stock issued in connection with the BSI acquisition are unrestricted.

At this time we intend toretain our earnings to reduce our debt and for use in the operation andexpansion of our business and, accordingly, do not expect to declare or pay anycash dividends during the foreseeable future. Under the terms of ourconvertible notes, we cannot pay dividends, other than stock dividends, on ourcapital stock until January 1, 2006. On and after January 1, 2006,the payment of dividends is within the discretion of our board of directors andwill depend upon various factors, including future earnings, capitalrequirements, financial condition, the terms of our credit agreement, the termsof our subordinated contingent convertible notes, and other factors deemedrelevant by the board of directors. There is no restriction on the ability ofour subsidiaries to transfer funds to EPIQ in the form of cash dividends, loansor advances.

**NOTE 8:   EMPLOYEEBENEFIT PLANS**

***Stock Purchase Plan***

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

F-16

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**NOTE 8:**   EMPLOYEE BENEFIT PLANS (Continued)

***Defined Contribution Plan***

We have definedcontribution 401(k) plans covering substantially all employees. For EPIQand BSI employees, we match 60% of the first 10% of employee contributions andalso have the option of making discretionary contributions. For Poorman-Douglasemployees, the percent match is based on years of service. After three years ofservice, we match 100% of the first 6% of employee contributions. Ourcontributions under both plans were approximately $0.8 million, $0.4 million,and $0.3 million for the years ended December 31, 2004, 2003, and 2002,respectively.

**NOTE 9:   FINANCIALINSTRUMENTS AND CONCENTRATIONS**

***Fair Value of Financial Instruments***

Estimates of fair values are subjective in nature andinvolve uncertainties and matters of significant judgment and therefore cannotbe determined with precision. Changes in assumptions could affect theestimates.

The fair value of cash,cash equivalents, trade receivables and notes receivable approximate fair value.Our notes payable are repriced frequently at market rates and approximate fairvalue. Our note related to the BSI deferred acquisition price is discounted atan imputed interest rate of 5%, and the carrying value approximates fair value.Our contingent subordinated convertible debt, which has a fixed interest rateof 4%, has a carrying value of $50.3 million and a fair value of $49.6 million.The fair value was calculated using a pricing model that incorporatesassumptions regarding future volatility, interest rates and credit risk.

***Significant Customer and Concentration of Credit Risk***

On April 1, 2004, ourexclusive national marketing arrangement with Bank of America became anon-exclusive arrangement with pricing established through September 30,2006. We currently promote our Chapter 7 *TCMS*®software related products and services through marketing arrangements with variousfinancial institutions. Bank of America has been, and continues to be, asignificant customer and revenues recognized by us from Bank of America wereapproximately 24%, 51% and 82% of our total revenues for 2004, 2003 and 2002,respectively. These revenues are all related to our case management segment. Additionally,Bank of America represented approximately 12% and 57% of our accountsreceivable balance as of December 31, 2004 and 2003, respectively.

F-17

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**NOTE 10:   INCOMETAXES**

Thefollowing table presents the income from operations, all from domestic sources,before income taxes and the provision for (benefit from) income taxes (inthousands):
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income from  continuing operations before income taxes:             |       | $                                           | 15,449     |   | $ | 24,690 |   | $ | 15,712 |   |
| Provision for income taxes from continuing  operations:             |       |                                        |       |   |   |   |   |
| Currently payable (receivable) income taxes                         |       |                                        |       |   |   |   |   |
| Federal                                                             |       | $                                           | (16        | ) | $ | 7,245 |   | $ | 4,438 |   |
| State                                                               |       | 83                                          |       | 2,886 |   | 1,007 |   |
| Total                                                               |       | 67                                          |       | 10,131 |   | 5,445 |   |
| Deferred income taxes                                               |       |                                        |       |   |   |   |   |
| Federal                                                             |       | 5,843                                       |       | 28 |   | 441 |   |
| State                                                               |       | 476                                         |       | 6 |   | 60 |   |
| Total                                                               |       | 6,319                                       |       | 34 |   | 501 |   |
| Provision for income taxes from continuing  operations              |       | 6,386                                       |       | 10,165 |   | 5,946 |   |
| Provision (benefit) for income taxes from  discontinued operations: |       |                                        |       |   |   |   |   |
| Current income taxes                                                |       | (1,452                                      | )          | (1,855 | ) | (1,812 | ) |
| Deferred income taxes                                               |       | 1,889                                       |       | (1,889 | ) | 879 |   |
| Provisions  (benefit) for income taxes from discontinued operations |       | 437                                         |       | (3,744 | ) | (933 | ) |
| Consolidated  income tax provision                                  |       | $                                           | 6,823      |   | $ | 6,421 |   | $ | 5,013 |   |

 

Areconciliation of the provision for income taxes from continuing operations atthe statutory rate (35% in 2004 and 2003 and 34% in 2002) to provision forincome taxes from continuing operations at our effective rate is shown below(in thousands):
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Computed at the  statutory rate                        |       | $                                           | 5,407      |   | $ | 8,641 |   | $ | 5,342 |   |
| Change in taxes  resulting from:                       |       |                                        |       |   |   |   |   |
| State income taxes, net of federal tax effect          |       | 717                                         |       | 1,372 |   | 553 |   |
| Other                                                  |       | 262                                         |       | 152 |   | 51 |   |
| Provision for income  taxes from continuing operations |       | $                                           | 6,386      |   | $ | 10,165 |   | $ | 5,946 |   |

 

During 2004, tax benefitsrelated to the Poorman-Douglas acquisition of $0.5 million were recorded as areduction to goodwill.

F-18

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**NOTE 10:**   INCOME TAXES(Continued)

The tax effects oftemporary differences that give rise to significant portions of deferred taxassets and deferred tax liabilities on the accompanying Consolidated BalanceSheets are as follows (in thousands):
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax  assets:                                  |       |                  |       |   |   |
| Allowance for doubtful accounts                        |       | $                     | 467        |   | $ | 164 |   |
| Convertible debt                                       |       | 115                   |       | — |   |
| Intangible assets                                      |       | 127                   |       | 1,890 |   |
| Property and equipment and software development  costs |       | —                |       | 109 |   |
| State net operating loss carryforwards                 |       | 781                   |       | — |   |
| Other                                                  |       | —                |       | 28 |   |
| Total deferred tax assets                              |       | 1,490                 |       | 2,191 |   |
| Deferred tax liabilities:                              |       |                  |       |   |   |
| Prepaid expenses                                       |       | 494                   |       | 342 |   |
| Intangible assets                                      |       | 6,396                 |       | 939 |   |
| Property and equipment and software development  costs |       | 3,542                 |       | 1,141 |   |
| Total deferred tax liabilities                         |       | 10,432                |       | 2,422 |   |
| Net deferred tax  liability                            |       | $                     | (8,942     | ) | $ | (231 | ) |

 

We have aggregate state operating loss carryforwards,primarily related to our acquisition of Poorman-Douglas, of $17.9 million. Thesecarryforwards expire as follows: $1.5 million in 2014 and $16.4 million in 2019.Management believes that it is more likely than not that we will be able toutilize these carryforwards and, therefore, no valuation allowance isnecessary.

Theabove net deferred tax liability is presented on the Consolidated BalanceSheets as follows (in thousands):
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Current deferred  income tax assets        |       | $                     | 754        |   | $ | 1,736 |   |
| Long-term  deferred income tax liabilities |       | (9,696                | )          | (1,967 | ) |
|                                       |       | $(8,942               | )          | $ | (231 | ) |
|                                            |            |                       |            |  |  |  |  |

 

F-19

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**NOTE 11:**   NETINCOME PER SHARE

Thedetails of the calculation of basic and diluted net income per share fromcontinuing operations are as follows (in thousands, except per share data):
| ** **                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **Net    Income**                | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share    Amount** | ** ** | **Net    Income** | ** ** | **Weighted  Average**SharesOutstanding | ** ** | **Per  Share    Amount** | ** ** | **Net    Income** | ** ** | **Weighted  Average**SharesOutstanding | ** ** | **Per  Share    Amount** | ** ** |
| Basic income per share from continuing operations    |       |                                       | $          | 9,063 |   |   |   | 17,848 |   |   |   | $ | 0.51 |   |   | $ | 14,525 |   |   | 17,619 |   |   |   | $ | 0.82 |   |   |   | $ | 9,766 |   |   |   | 14,775 |   |   |   | $ | 0.66 |   |   |
| Effect of dilutive  securities:                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                        |       |                                       |       |   |   |   | 411 |   |   |   |   |   |   |   |   |   | 485 |   |   |   |   |   |   |   |   |   |   |   | 534 |   |   |   |   |   |   |
| Convertible debt                                     |       |                                       | $          | 647 |   |   |   | 1,569 |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| Diluted  income per share from continuing operations |       |                                       | $          | 9,710 |   |   |   | 19,828 |   |   |   | $ | 0.49 |   |   | $ | 14,525 |   |   | 18,104 |   |   |   | $ | 0.80 |   |   |   | $ | 9,766 |   |   |   | 15,309 |   |   |   | $ | 0.64 |   |   |

 

Weighted-averageoutstanding stock options for the years ended December 31, 2004, 2003, and2002, to purchase 1,464,000, 113,000 and 99,000 shares of common stock,respectively, were antidilutive and therefore not included in the computationof diluted earnings per share.

**NOTE 12:**   STOCKOPTIONS

During June 2004, our 2004 Equity Incentive Plan(the “2004 Plan”) was approved by our shareholders and replaced our 1995 StockOption Plan, as amended (the “1995 Plan”). The 2004 Plan limits the combinedgrant of options to acquire shares of common stock, stock appreciation rights,and restricted stock to 3,000,000 shares. Any grant under the 2004 Plan thatexpires or terminates unexercised, becomes unexercisable or is forfeited willbe available for further grants unless, in the case of options granted, relatedstock appreciation rights are exercised. At December 31, 2004, there wereapproximately 2,321,000 options available for future grants under the 2004 Plan.Under the 2004 Plan, the option price may not be less than 100% of the fair marketvalue of the common stock on the date of grant for a non-qualified stock optionor an incentive stock option (“ISO”). In the case of an ISO granted to anemployee owning more than 10% of the voting stock of EPIQ, the option price maynot be less than 110% of the fair market value of the common stock on the dateof grant.

The Compensation Committee of the Board of Directorsadministers the 2004 Plan and has discretion to determine the term of anoption, which may not be exercised more than ten years after the date of grant.In the case of an ISO granted to an employee owning more than 10% of the votingstock of EPIQ, the term may not exceed five years from the date of grant. Optionsmay not be transferred by an optionee except by will or the laws of descent anddistribution or to a family member by gift or qualified domestic relationsorder and are exercisable during the lifetime of an optionee only by theoptionee or the optionee’s guardian or legal representatives. Assuming theoption is otherwise still exercisable, options must be 

F-20

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**NOTE 12:**   STOCK OPTIONS(Continued)

exercised within one yearof termination of employment due to death or disability, and within threemonths of any other termination of employment.

The Board of Directors may require in its discretionthat any option granted becomes exercisable only in installments or after someminimum period of time, or both. The vesting schedule for outstanding optionsranges from three months to five years.

During the year ended December 31, 2004, asinducements to new executives we granted, outside the 1995 Plan and 2004 Plan,stock options to acquire up to 300,000 shares of common stock. The options weregranted at an option exercise price equal to fair market value of the commonstock on the date of grant, were non-qualified options, were exercisable for upto ten years from the date of grant and vested 20% on the first anniversary ofthe grant date and continue to vest 20% per year on each anniversary of the grantdate until fully vested. During the year, one of the executives transitionedfrom full-time employee status to a consulting role and his option to purchase100,000 shares of common stock was terminated.

During the year ended December 31, 2003, as an inducementto a new executive we granted, outside the 1995 Plan and 2004 Plan, a stockoption to acquire up to 100,000 shares of common stock. The option was grantedat an option exercise price equal to fair market value of the common stock onthe date of grant, were non-qualified options, were exercisable for up to tenyears from the date of grant and vested 20% on the grant date and continues tovest 20% per year on each anniversary of the grant date until fully vested. Duringthe year ended December 31, 2003, the vested portion of the option wasexercised to purchase 20,000 shares of common stock.

Followingis a summary of our stock options outstanding as of each year ended December 31(in thousands, except price data):
| ** **                                                      | ** ** | **2004**   | ** ** | **2003**                                | ** ** | **2002**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding,  beginning of year                                 |       | 2,192      |       |                                    | $          | 12.38      |       |   | 1,744 |   |   | $ | 6.87 |   |   | 1,293 |   |   | $ | 5.88 |   |   |
| Granted                                                         |       | 1,370      |       |                                    | 15.48      |       |       | 727 |   |   | 16.42 |   |   | 679 |   |   | 15.79 |   |   |
| Forfeited                                                       |       | (232       | )          |                                    | 15.83      |       |       | (87 | ) |   | 10.08 |   |   | (91 | ) |   | 8.96 |   |   |
| Exercised                                                       |       | (100       | )          |                                    | 5.75       |       |       | (192 | ) |   | 5.36 |   |   | (137 | ) |   | 3.00 |   |   |
| Outstanding, end  of year                                       |       | 3,230      |       |                                    | 13.65      |       |       | 2,192 |   |   | 12.38 |   |   | 1,744 |   |   | 6.87 |   |   |
| Options exercisable, end of year                                |       | 1,783      |       |                                    |       |       |       | 1,225 |   |   |   |   |   | 791 |   |   |   |   |   |
| Weighted-average fair  value of options granted during the year |       | $          | 7.04       |                                    |       |       |       |   | $ | 8.34 |   |   |   |   |   | $ | 8.92 |   |   |   |   |   |
|                                                                 |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-21

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**NOTE 12:**   STOCK OPTIONS(Continued)

The following tablesummarizes information about stock options outstanding as of December 31,2004 (in thousands, except life and price data):
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise   Price** | ** ** |
| $1.56 to $5.99                          |       |                         | 421        |                         |       | 4.36 years |   |   | $ | 4.35 |   |   |   | 404 |   |   |   | $ | 4.34 |   |   |
| $6.00 to $12.99                         |       |                         | 408        |                         |       | 6.57 years |   |   | 10.20 |   |   |   | 303 |   |   |   | 10.33 |   |   |
| $13.00 to $14.99                        |       |                         | 803        |                         |       | 9.52 years |   |   | 14.41 |   |   |   | 263 |   |   |   | 14.93 |   |   |
| $15.00 to $16.99                        |       |                         | 1,101      |                         |       | 8.64 years |   |   | 16.06 |   |   |   | 650 |   |   |   | 16.29 |   |   |
| $17.00 and over                         |       |                         | 497        |                         |       | 8.35 years |   |   | 17.80 |   |   |   | 163 |   |   |   | 17.43 |   |   |
|                                    |       |                         | 3,230      |                         |       | 7.99 years |   |   | 13.65 |   |   |   | 1,783 |   |   |   | 12.48 |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 13:   BUSINESSACQUISITIONS**

***P-D Holding Corp.***

On January 30,2004, we acquired for cash 100% of the equity of P-D Holding Corp. and itswholly-owned subsidiary, Poorman-Douglas Corporation (collectively, “Poorman-Douglas”).We believe this acquisition provides complementary diversification to ourexisting legal services business as Poorman-Douglas is a provider oftechnology-based products and services for class action, mass tort andbankruptcy case administration. The total value of the transaction, includingcapitalized acquisition costs, was approximately $115.9 million. Based on ourvaluation, the purchase price has been allocated as follows (in thousands):
| Current assets            |   | $       | 21,870  |   |
|---------------------------|--------|---------|---------|--------|
| Deferred tax  assets      |   | 6,620   |    |
| Property and  software    |   | 8,391   |    |
| Trade names               |   | 1,100   |    |
| Customer backlog          |   | 6,200   |    |
| Customer  relationships   |   | 2,300   |    |
| Non-compete  agreements   |   | 5,900   |    |
| Goodwill                  |   | 83,540  |    |
| Current  liabilities      |   | (12,920 | )       |
| Deferred tax  liabilities |   | (7,125  | )       |
| Total purchase price      |   | $       | 115,876 |   |

 

All acquired identifiable intangible assets areamortized on a straight-line basis as follows: the trade names over two years, the customer backlog over three years,the customer relationships over twelve years, and the non-compete agreementsover five years. The excess purchase price of $83.5 million was allocated togoodwill and is not amortized but will be reviewed for impairment annually andbetween annual tests if events or changes in circumstances indicate that theasset might be impaired. The purchase price in excess of the tax basis of theassets, primarily allocated to identifiable intangible assets and goodwill, isnot expected to be deductible for tax purposes.

The acquisition was accounted for using the purchasemethod of accounting with the operating results included in the accompanyingconsolidated financial statements from the date of acquisition.

F-22

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**NOTE 13:**   BUSINESS ACQUISITIONS (Continued)

A $10.0 million indemnity escrow is outstanding. As ofDecember 31, 2004, we have not submitted any claims related to this escrow.The escrow arrangement terminates July 2005, at which time any unclaimedamount reverts to the selling shareholders.

***Bankruptcy Services LLC***

On January 31,2003, we acquired 100% of the membership interests of Bankruptcy Services LLC (“BSI”),a provider of technology-based case management, consulting and administrativeservices for Chapter 11 cases. The total value of the transaction, includingcapitalized transaction costs, was $67.0 million of which $45.5 million waspaid in cash, $16.5 million (1,054,000 shares) was paid in our common stock,$3.4 million was deferred in the form of a non-interest bearing note with aface value of $4.0 million discounted using an imputed interest rate of 5% perannum, $1.3 million of liabilities were assumed, and $0.3 million was paid inacquisition costs. The purchase price was allocated as follows (in thousands):
| Current assets          |   | $      | 2,616  |   |
|-------------------------|--------|--------|--------|--------|
| Property and  software  |   | 755    |   |
| Trade names             |   | 474    |   |
| Customer backlog        |   | 4,700  |   |
| Non-compete  agreements |   | 11,730 |   |
| Goodwill                |   | 46,739 |   |
| Total purchase price    |   | $      | 67,014 |   |

 

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

The acquisition wasaccounted for using the purchase method of accounting with the operatingresults included in the accompanying consolidated financial statements from thedate of acquisition.

***CPT Group, Inc.***

On July 10, 2002, we acquired the Chapter 7trustee business of CPT Group, Inc. The purchase price, includingacquisition costs, totaled $0.9 million and was paid in cash. The purchaseprice was allocated primarily to customer contracts. The customer contracts,with an estimated fair value of $0.6 million at acquisition date, are beingamortized on a straight-line basis over ten years. The remainder of thepurchase price was allocated to goodwill, which is not being amortized but willbe reviewed for impairment annually and between annual tests if events orchanges in circumstances indicate that the asset might be impaired.

The acquisition wasaccounted for using the purchase method of accounting with the operatingresults included in the accompanying consolidated financial statements from thedate of acquisition.

F-23

----

**NOTE 13:**   BUSINESSACQUISITIONS (Continued)

***Pro Forma Information***

Unauditedpro forma operations, assuming each purchase acquisition was made at thebeginning of the year preceding the acquisition, are shown below (in thousands,except per share data):
| ** **                         | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Total revenues                     |       | $                                                             | 132,103    |   | $ | 133,532 |   | $ | 63,368 |   |
| Income from continuing operations  |       | 8,890                                                         |       | 15,438 |   | 9,829 |   |
| Discontinued  operations           |       | 667                                                           |       | (5,818 | ) | (1,533 | ) |
| Net income                         |       | $                                                             | 9,557      |   | $ | 9,620 |   | $ | 8,296 |   |
| Net income per  share:             |       |                                                          |       |   |   |   |   |
| Income per share—Basic        |       |                                                          |       |   |   |   |   |
| Income from continuing operations  |       | $                                                             | 0.50       |   | $ | 0.88 |   | $ | 0.66 |   |
| Loss from discontinued operations  |       | 0.04                                                          |       | (0.33 | ) | (0.10 | ) |
| Net income per share—Basic    |       | $                                                             | 0.54       |   | $ | 0.55 |   | $ | 0.56 |   |
| Income per share—Diluted      |       |                                                          |       |   |   |   |   |
| Income from continuing operations  |       | $                                                             | 0.48       |   | $ | 0.85 |   | $ | 0.64 |   |
| Loss from discontinued operations  |       | 0.03                                                          |       | (0.32 | ) | (0.10 | ) |
| Net income per  share—Diluted |       | $                                                             | 0.51       |   | $ | 0.53 |   | $ | 0.54 |   |

 

Pro forma data reflect thedifference in amortization expense between EPIQ and the acquired company aswell as other adjustments, including income taxes and management compensation. Thepro forma information is not necessarily indicative of what would have occurredhad the acquisition been completed on that date nor is it necessarilyindicative of future operating results.

**NOTE 14:   DISCONTINUEDOPERATIONS**

The primary offering for our infrastructure softwarebusiness was *DataExpress®*, asoftware product line that automates the exchange of data files between acompany’s customers and their business partners. During November 2003, wedetermined that the infrastructure software business was no longer aligned withour long-term strategic objectives. Accordingly, we developed a plan to sell,within one year, our infrastructure software business. At the time, wedetermined that this business should be classified as a discontinued operationand that the related long-lived assets should be measured at the lower of theircarrying amounts or fair value less cost to sell. Our estimated proceeds fromthe sale of our infrastructure software business, net of estimated sellingcosts, was less than the carrying amount of this business. As a result, for theyear ended December 31, 2003 we reduced the carrying value of theseassets, consisting of property and equipment, goodwill and other intangibleassets, and recorded a pre-tax impairment charge, included in DiscontinuedOperations in the accompanying Consolidated Statements of Income, ofapproximately $7.6 million. The tax benefit related to this impairment charge,also included in Discontinued Operations in the accompanying ConsolidatedStatements of Income, was approximately $3.0 million.

On April 30, 2004, we sold our infrastructuresoftware business to a private company with expertise in file transfertechnology. As consideration, we received $0.5 million in cash and a $1.1million note receivable bearing 6.5% interest and with monthly payments duethrough July 31, 2005. At December 31, 2004, the remaining balancerelated to this note receivable was $0.5 million. The buyer also acquiredcertain assets and assumed certain liabilities related to our infrastructurebusiness. During the year ended December 31, 2004, we recognized a gainrelated to this sale of approximately $1.0 million, net of tax.

F-24

----

**NOTE 14:**   DISCONTINUED OPERATIONS (Continued)

Theassets and liabilities of this discontinued business have been classified inthe accompanying 2003 Consolidated Balance Sheet as held for sale. Revenues,cost of sales, and operating expenses related to this discontinued business, aswell as the gain on sale, have been classified as “Discontinued Operations” inthe accompanying Consolidated Statements of Income for all periods presented. Followingis summary financial information for Discontinued Operations (in thousands):

**Condensedbalance sheets of discontinued operations:**
| ** **                                                                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                           |       |                  |       |   |   |
| **Current  Assets:**                                                                                 |       |                  |       |   |   |
| Cash                                                                                                 |       | $                     | —     |   | $ | 714 |   |
| Trade accounts receivable, less allowance for  doubtful accounts of $16 as of December 31, 2003 |       | —                |       | 258 |   |
| Other                                                                                                |       | —                |       | 332 |   |
| Total Current Assets                                                                                 |       | —                |       | 1,304 |   |
| **LIABILITIES**                                                                                      |       |                  |       |   |   |
| **Current  Liabilities:**                                                                            |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                                |       | —                |       | 173 |   |
| Deferred revenue                                                                                     |       | —                |       | 964 |   |
| Total Current Liabilities                                                                            |       | —                |       | 1,137 |   |
| **Net  assets of discontinued operations**                                                           |       | $                     | —     |   | $ | 167 |   |

 

**Netrevenue and pre-tax income (loss) from discontinued**operations:
| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net revenue from  discontinued operations           |       | $                                           | 661        |   | $ | 1,988 |   | $ | 2,020 |   |
| Pre-tax income  (loss) from discontinued operations |       | $                                           | 1,104      |   | $ | (9,562 | ) | $ | (2,466 | ) |

 

**NOTE 15:   SEGMENTREPORTING**

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

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

Each segment’s performance is assessed based onsegment revenues less costs directly attributable to that segment. Inmanagement’s evaluation of performance certain costs, such as shared services,administrative staff, and executive management, are not allocated by segmentand, accordingly, the 

F-25

----

**NOTE 15:**   SEGMENTREPORTING (Continued)

following operatingsegment results do not include those unallocated costs. Assets reported withina segment are those assets used by the segment in its operations and consist ofproperty and equipment, software, identifiable intangible assets and goodwill. Allother assets are classified as unallocated.

Informationconcerning operations of our reportable segments is as follows (in thousands):
| ** **                                                                       | ** ** | **Year Ended December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Case  Management**                                 | ** ** | **Document  Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
| Revenue:                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating revenue                                                                |       |                                                 | $          | 68,526 |   |   |   | $ | 36,549 |   |   |   | $ | — |   |   |   | $ | 105,075 |   |   |
| Reimbursed expenses                                                              |       |                                                 | 2,465      |   |   |   | 17,880 |   |   |   | — |   |   |   | 20,345 |   |   |
| Total revenue                                                                    |       |                                                 | 70,991     |   |   |   | 54,429 |   |   |   | — |   |   |   | 125,420 |   |   |
| Costs and  expenses:                                                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct and administrative costs and depreciation and  software amortization |       |                                                 | 28,204     |   |   |   | 41,507 |   |   |   | 23,086 |   |   |   | 92,797 |   |   |
| Amortization of identifiable intangible assets                                   |       |                                                 | 5,243      |   |   |   | 2,524 |   |   |   | — |   |   |   | 7,767 |   |   |
| Acquisition related                                                              |       |                                                 | —     |   |   |   | — |   |   |   | 2,197 |   |   |   | 2,197 |   |   |
| Total operating expenses                                                         |       |                                                 | 33,447     |   |   |   | 44,031 |   |   |   | 25,283 |   |   |   | 102,761 |   |   |
| Operating income                                                                 |       |                                                 | $          | 37,544 |   |   |   | $ | 10,398 |   |   |   | $ | (25,283 | ) |   |   | 22,659 |   |   |
| Net expenses  related to financing                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | (7,210 | ) |   |
| Income from continuing operations before income taxes                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 15,449 |   |   |
| Provision for income taxes                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 6,386 |   |   |
| Net income from  continuing operations                                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | $ | 9,063 |   |   |
| Total assets                                                                     |       |                                                 | $          | 131,233 |   |   |   | $ | 51,264 |   |   |   | $ | 57,591 |   |   |   | $ | 240,088 |   |   |
| Provisions for  depreciation and amortization                                    |       |                                                 | $          | 9,505 |   |   |   | $ | 2,998 |   |   |   | $ | 1,791 |   |   |   | $ | 14,294 |   |   |
| Capital  expenditures, including capital leases                                  |       |                                                 | $          | 5,326 |   |   |   | $ | 36 |   |   |   | $ | 4,464 |   |   |   | $ | 9,826 |   |   |

 

F-26

----

**NOTE15:   SEGMENT REPORTING (Continued)**
| ** **                                                                       | ** ** | **Year Ended December 31, 2003** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Case  Management**                                 | ** ** | **Document  Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
| Revenue:                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating revenue                                                                |       |                                                 | $          | 49,688 |   |   |   | $ | 12,730 |   |   |   | $ | — |   |   |   | $ | 62,418 |   |   |
| Reimbursed expenses                                                              |       |                                                 | 311        |   |   |   | 5,207 |   |   |   | — |   |   |   | 5,518 |   |   |
| Total revenue                                                                    |       |                                                 | 49,999     |   |   |   | 17,937 |   |   |   | — |   |   |   | 67,936 |   |   |
| Costs and  expenses:                                                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct and administrative costs and depreciation and  software amortization |       |                                                 | 13,118     |   |   |   | 9,658 |   |   |   | 15,150 |   |   |   | 37,926 |   |   |
| Amortization of identifiable intangible assets                                   |       |                                                 | 2,102      |   |   |   | 1,508 |   |   |   | — |   |   |   | 3,610 |   |   |
| Acquisition related                                                              |       |                                                 | —     |   |   |   | — |   |   |   | 1,793 |   |   |   | 1,793 |   |   |
| Total operating expenses                                                         |       |                                                 | 15,220     |   |   |   | 11,166 |   |   |   | 16,943 |   |   |   | 43,329 |   |   |
| Operating income                                                                 |       |                                                 | $          | 34,779 |   |   |   | $ | 6,771 |   |   |   | $ | (16,943 | ) |   |   | 24,607 |   |   |
| Net income  related to financing                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 83 |   |   |
| Income from continuing operations before income taxes                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 24,690 |   |   |
| Provision for income taxes                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 10,165 |   |   |
| Net income from continuing operations                                            |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | $ | 14,525 |   |   |
| Total assets                                                                     |       |                                                 | $          | 59,518 |   |   |   | $ | 26,806 |   |   |   | $ | 55,603 |   |   |   | $ | 141,927 |   |   |
| Provisions for  depreciation and amortization                                    |       |                                                 | $          | 5,881 |   |   |   | $ | 1,516 |   |   |   | $ | 781 |   |   |   | $ | 8,178 |   |   |
| Capital expenditures                                                             |       |                                                 | $          | 3,609 |   |   |   | $ | — |   |   |   | $ | 2,916 |   |   |   | $ | 6,525 |   |   |

 

F-27

----

**NOTE15:   SEGMENT REPORTING (Continued)**
| ** **                                                                  | ** ** | **Year Ended December 31, 2002** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Case**                                             | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Management**                                       | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
| Revenue:                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating revenue                                                           |       |                                                 | $          | 34,600 |   |   |   | $ | 984 |   |   |   | $ | — |   |   |   | $ | 35,584 |   |   |
| Reimbursed expenses                                                         |       |                                                 | —     |   |   |   | 672 |   |   |   | — |   |   |   | 672 |   |   |
| Total revenue                                                               |       |                                                 | 34,600     |   |   |   | 1,656 |   |   |   | — |   |   |   | 36,256 |   |   |
| Costs and  expenses:                                                        |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct and administrative costs and depreciation and  software amortization |       |                                                 | 11,505     |   |   |   | 1,217 |   |   |   | 7,333 |   |   |   | 20,055 |   |   |
| Amortization of identifiable intangible assets                              |       |                                                 | 350        |   |   |   | — |   |   |   | — |   |   |   | 350 |   |   |
| Acquisition related                                                         |       |                                                 | —     |   |   |   | — |   |   |   | 575 |   |   |   | 575 |   |   |
| Total operating expenses                                                    |       |                                                 | 11,855     |   |   |   | 1,217 |   |   |   | 7,908 |   |   |   | 20,980 |   |   |
| Operating income                                                            |       |                                                 | $          | 22,745 |   |   |   | $ | 439 |   |   |   | $ | (7,908 | ) |   |   | 15,276 |   |   |
| Net income  related to financing                                            |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 436 |   |   |
| Income from continuing operations before income  taxes                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 15,712 |   |   |
| Provision for income taxes                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | 5,946 |   |   |
| Net income from  continuing operations                                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   | $ | 9,766 |   |   |
| Total assets                                                                |       |                                                 | $          | 25,780 |   |   |   | $ | 9 |   |   |   | $ | 82,248 |   |   |   | $ | 108,037 |   |   |
| Provisions for  depreciation and amortization                               |       |                                                 | $          | 4,047 |   |   |   | $ | 15 |   |   |   | $ | 538 |   |   |   | $ | 4,600 |   |   |
| Capital expenditures                                                        |       |                                                 | $          | 2,869 |   |   |   | $ | — |   |   |   | $ | 4,024 |   |   |   | $ | 6,893 |   |   |

 

F-28

----

**NOTE 16:   ADDITIONALCASH FLOWS INFORMATION**

***Additional CashInformation (in thousands)***
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest paid                 |       | $                                          | 3,877      |   | $ | 53 |   | $ | 151 |   |
| Income taxes paid  (received) |       | $                                          | (207       | ) | $ | 7,518 |   | $ | 3,128 |   |

 

***Noncash Investing and Financing Activities***

Weacquired certain assets and assumed certain liabilities of Poorman-Douglas,BSI, and CPT Group in 2004, 2003, and 2002 respectively. During 2002, wereceived a settlement for contingencies related to a prior acquisition. Supplementalcash flow information related to these transactions is as follows (inthousands):
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Fair value of  assets acquired                        |       | $                                          | 135,921    |   | $ | 67,014 |   | $ | 852 |   |
| Deferred  obligation incurred in purchase transaction |       | —                                     |       | (3,445 | ) | — |   |
| Restricted stock  issued                              |       | —                                     |       | (16,500 | ) | — |   |
| Settlement of  contingencies from ROC acquisition     |       | —                                     |       | — |   | (170 | ) |
| Liabilities  assumed                                  |       | (20,045                                    | )          | (1,250 | ) | — |   |
| Cash paid for  acquisition                            |       | 115,876                                    |       | 45,819 |   | 682 |   |
| Cash acquired                                         |       | 2,765                                      |       | 2,556 |   | — |   |
| Cash paid for acquisition,  net of cash acquired      |       | $                                          | 113,111    |   | $ | 43,263 |   | $ | 682 |   |

 

*     *     *

F-29

----

**EPIQ SYSTEMS, INC. SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS(in thousands)**
| ** **                                                            | ** ** | ** ** | ** ** | **Additions**                                | ** ** | ** **                                    | ** ** | ** **                           | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|
| **Description**                                                       | ** ** | ** ** | ** ** | **Balance at  beginning of  year** | ** ** | **Charged to  costs and  expenses** | ** ** | **Charged to  other  accounts** | ** ** | **Deductions  from  reserves** | ** ** | **Balance at  end of  year** | ** ** |
| Allowance  for doubtful  receivables from  continuing operations |       |       |       |                                         |       |                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| For the year ended  December 31, 2004                       |       |       | $          | 340                                          |       |                                          |       | $                                    | 1,099      |   |   |   |   |   | $ | (370 | ) |   |   | $ | 1,069 |   |   |
| For the year ended  December 31, 2003                       |       |       | $          | 5                                            |       |                                          |       | $                                    | 347        |   |   |   |   |   | $ | (12 | ) |   |   | $ | 340 |   |   |
| For the year ended  December 31,  2002                      |       |       | $          | 5                                            |       |                                          |       |                                 |       |   |   |   |   |   |   |   |   | $ | 5 |   |   |
|                                                                       |            |            |            |                                              |            |                                               |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

**EXHIBITINDEX**

The following exhibits are filed with this Form 10-Kor are incorporated herein by reference:
| Exhibit Number | ** **                                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                                                                    | **Description** |
|---------------------|--------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 3.1                 |                 | Articles of Incorporation, as  amended. Incorporated by reference and previously filed as an exhibit to the  quarterly report on Form 10-Q for the quarter ended June 30, 2001,  filed with the Securities and Exchange Commission on August 9, 2001.                                                                                                                                                          |
| 3.2                 |                                                                                       | Bylaws, as amended and  restated. Incorporated by reference and previously filed as an exhibit to the  quarterly report on Form 10-Q for the quarter ended March 31, 2001,  filed with the Securities and Exchange Commission on May 11, 2001.                                                                                                                                                                 |
| 4.1                 |                                                                                       | Reference is made to exhibits  3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.2                 |                                                                                       | Securities Purchase Agreement  dated as of June 10, 2004, among EPIQ Systems, Inc. and the Buyers  listed on Exhibit A thereto. Incorporated by reference and previously  filed as an exhibit to the current report on Form 8-K filed with the  Securities and Exchange Commission on June 14, 2004.                                                                                                 |
| 4.3                 |                                                                                       | Registration Rights Agreement  dated as of June 10, 2004, among EPIQ Systems, Inc. and the Buyers  listed on the Schedule of Buyers attached thereto. Incorporated by reference  and previously filed as an exhibit to the current report on Form 8-K  filed with the Securities and Exchange Commission on June 14, 2004.                                                                                |
| 4.4                 |                                                                                       | Form of Contingent  Convertible Subordinated Note. Incorporated by reference and previously filed  as an exhibit to the current report on Form 8-K filed with the  Securities and Exchange Commission on June 14, 2004.                                                                                                                                                                                        |
| 4.5                 |                                                                                       | Credit and Security Agreement  dated as of July 20, 2004, among EPIQ Systems, Inc., the Lenders  named therein, and KeyBank National Association, as Lead Arranger, Sole Book  Runner. Incorporated by reference and previously filed as an exhibit to the  quarterly report on Form 10-Q for the quarter ended June 30, 2004,  filed with the Securities and Exchange Commission on August 6, 2004. |
| 10.1                |                                                                                       | 1995 Stock Option Plan, as  amended. Incorporated by reference and previously filed as an exhibit to the  registration statement on Form SB-2 filed with the Securities and  Exchange Commission (File No. 333-51525) on May 1, 1998.                                                                                                                                                                          |
| 10.2                |                                                                                       | 2004 Equity Incentive Plan.  Incorporated by reference and previously filed as an exhibit to the  Definitive Proxy Statement filed with the Securities and Exchange Commission  on April 28, 2004.                                                                                                                                                                                                                       |
| 10.3                |                                                                                       | Securities Purchase Agreement  dated as of November 7, 2002, among the Company and the Purchasers named  therein. Incorporated by reference and previously filed as an exhibit to the  current report on Form 8-K filed with the Securities and Exchange  Commission on November 15, 2002.                                                                                                                     |
| 10.4                |                                                                                       | Membership Interest Purchase  Agreement dated as of January 31, 2003, among Jay D. Chazanoff, Stephen  R. Simms, Ron L. Jacobs, Kathleen Gerber, Bankruptcy Services LLC, EPIQ  Systems Acquisition, Inc. and the Company. Incorporated by reference and  previously filed as an exhibit to the current report on Form 8-K  filed with the Securities and Exchange Commission on February 10, 2003.       |
| 10.5                |                                                                                       | Employment Agreement dated as  of January 31, 2003, among Bankruptcy Services LLC, the Company and Ron  Jacobs.  Incorporated by reference and previously filed as an  exhibit to the current report on Form 8-K filed with the  Securities and Exchange Commission on February 10, 2003.                                                                                                                 |
| 10.6                |                                                                                       | Employment Agreement dated as  of January 31, 2003, among Bankruptcy Services LLC, the Company and  Kathleen Gerber. Incorporated by reference and previously filed as an exhibit  to the current report on Form 8-K filed with the Securities and  Exchange Commission on February 10, 2003.                                                                                                                  |
|                     |                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                               |                 |  |

----

 
| 10.7  |   | Stock Option Agreement among  the Company, Bankruptcy Services LLC and Ron Jacobs dated as of January 31,  2003.  Incorporated by reference and previously filed as an exhibit  to the current report on Form 8-K filed with the Securities and  Exchange Commission on February 10, 2003.                                                                                                                        |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Agreement and Plan of Merger among P-D Holding Corp., the Company, PD  Merger Corp., and Endeavour Capital Fund III, L.P., in its capacity as  Shareholders’ Representative, dated as of January 30, 2004. Incorporated by reference and previously filed  as an exhibit to the current report on Form 8-K filed with the  Securities and Exchange Commission on February 13, 2004.                                    |
| 10.9  |   | Agreement Related to Merger Agreement among the Company, P-D Holding Corp., certain  shareholders of P-D Holding Corp.  and Endeavour Capital Fund III, L.P., in its capacity as Shareholders’  Representative, dated as of January 30, 2004. Incorporated by reference and previously filed as an exhibit to the  current report on Form 8-K filed with the Securities and Exchange  Commission on February 13, 2004. |
| 10.10 |   | Employment and Non-Competition Agreement between Poorman-Douglas  Corporation and Jeffrey B. Baker dated as of January 30, 2004. Incorporated by reference and previously filed  as an exhibit to the current report on Form 8-K filed with the  Securities and Exchange Commission on February 13, 2004.                                                                                                                   |
| 10.11 |   | Stock Option Agreement between the Company and Jeffrey B. Baker dated  as of January 30, 2004. Incorporated  by reference and previously filed as an exhibit to the current report on Form 8-K  filed with the Securities and Exchange Commission on February 13, 2004.                                                                                                                                                     |
| 21.1  |   | List of Subsidiaries.*                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1  |   | Consent of Deloitte & Touche LLP,  Independent Registered Public Accountants.*                                                                                                                                                                                                                                                                                                                                                    |
| 31.1  |   | Certifications of Chief Executive Officer of the Company under Rule 13a-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                                                                                           |
| 31.2  |   | Certifications of Chief Financial Officer of the Company under Rule 13a-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                                                                                           |
| 32.1  |   | Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350.*                                                                                                                                                                                                                                                                                                                                                                    |

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*                    Filed herewith.

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