**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-K**

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

**Forthe fiscal year ended December 31, 2003**

**or**

**o  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**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  telephone number, including area code **(913)  621-9500**                            |
|                                                                                                         |
| Securities  registered pursuant to Section 12(b) of the Act: **None**                         |
|                                                                                                         |
| Securities  registered pursuant to Section 12(g) of the Act: **Common Stock, $.01 par value** |
|                                                                                                         |

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

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

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

Theaggregate market value of voting common stock held by non-affiliates of theregistrant (based upon the last reported sale price on the Nasdaq NationalMarket), as of the last business day of the registrant’s most recentlycompleted second fiscal quarter (June 30, 2003) was approximately$259,000,000.

Therewere 17,821,747 shares of common stock of the registrant outstanding as of February 19,2004.

Documents incorporated by reference:  The information required by Part III of Form 10-Kis incorporated herein by reference to the registrant’s definitive ProxyStatement relating to its 2004 Annual Meeting of Shareholders, which will befiled with the Commission within 120 days after the end of the registrant’sfiscal year.

 

----

**EPIQ SYSTEMS, INC.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**
| **PART I**   |
|-------------------|
| **ITEM 1.**       | ** ** | **Business** | **1** |
| **ITEM 2.**       | ** ** | **Properties** | **15** |
| **ITEM 3.**       | ** ** | **Legal Proceedings** | **15** |
| **ITEM 4.**       | ** ** | **Submission of Matters to a Vote  of Security Holders** | **15** |
| **PART II**  |
| **ITEM 5.**       | ** ** | **Market for the Registrant’s  Common Stock and Related Stockholder Matters** | **16** |
| **ITEM 6.**       | ** ** | **Selected Financial Data** | **17** |
| **ITEM 7.**       | ** ** | **Management’s Discussion and  Analysis of Financial Conditions And Results of Operations** | **18** |
| **ITEM 7A.**      | ** ** | **Quantitative and Qualitative  Disclosures About Market Risk** | **25** |
| **ITEM 8.**       | ** ** | **Financial Statements and  Supplementary Data** | **25** |
| **ITEM 9.**       | ** ** | **Changes in and Disagreements  with Accountants on Accounting  and Financial Disclosure** | **26** |
| **ITEM 9A.**      | ** ** | **Controls and Procedures** | **26** |
| **PART III** |
| **ITEM 10.**      | ** ** | **Directors and Executive  Officers of the Registrant** | **27** |
| **ITEM 11.**      | ** ** | **Executive Compensation** | **27** |
| **ITEM 12.**      | ** ** | **Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters**  | **27** |
| **ITEM 13.**      | ** ** | **Certain Relationships and  Related Transactions** | **27** |
| **ITEM 14.**      | ** ** | **Principal Accounting Fees and  Services** | **27** |
| **PART IV**  |
| **ITEM 15.**      | ** ** | **Exhibits, Financial Statement  Schedules, and Reports on Form 8-K** | **28** |

 

----

**CAUTIONARYSTATEMENT CONCERNING FORWARD-LOOKING STATEMENTS**

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

Forward-lookingstatements may be identified by words or phrases such as “believe,” “expect,” “anticipate,”“should,” “planned,” “may,” “estimated,” “potential,” “goal,” and “objective.”  Section 27A of the Securities Act 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.

----

**PART I**

**ITEM 1.       BUSINESS**

**General**

EPIQ Systems provides technology-based case managementsolutions to attorneys, law firms, trustees and debtor companies thatadminister cases in the federal bankruptcy system. Customers implement our solutions to administer personal and corporatebankruptcy cases of all sizes and configurations. EPIQ Systems’ product andservice offerings automate various administrative tasks pertaining tobankruptcy claims, assets, financial records and other data associated withliquidations and reorganizations and assist customers in organizing andmanaging their databases of case information, preparing notices and mailings,and in fulfilling their additional responsibilities. Customers implementing ourbankruptcy management solution have a single environment in which to administertheir cases.

Our infrastructure software division, now held forsale and classified as a discontinued operation, serves corporate customersthat must frequently exchange data files with their business partners or theirown end-user customers. The *DataExpress*®product line automates the transmission of data files over the Internet orprivate networks in a secure environment.

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.

***TCMS***®,*CasePower*® and *DataExpress*® are our registered trademarks.

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.

***Recent Developments***

**Acquisition**

On January 30, 2004, we acquired 100% of theequity of P-D Holding Corp. and its wholly-owned operating subsidiary, Poorman-DouglasCompany, in a transaction accounted for under the purchase method of accounting.The approximate $115 million cash purchase price was financed using availablecash and approximately $92 million in borrowings under a newly established $100million credit facility. Poorman-Douglas, with headquarters in metropolitanPortland, Oregon, has approximately 300 employees.

We believe this acquisition will provide complementarydiversification to EPIQ Systems’ existing legal services business, asPoorman-Douglas is a provider of technology-based products and services forclass action and mass tort cases and bankruptcy case administration, withrevenue of $63.6 million for its fiscal year ended September 30, 2003.

Class action and mass tort is a form of litigationin which the class representatives bring a lawsuit against a defendant companyor other persons on behalf of a large group of similarly-affected persons (theclass). Mass action or mass tort refers to class action cases that areparticularly large or prominent. The procedural and resolution requirements ofclass action cases require a high volume of communications to class members(which can number in the thousands), repetitive tasks, tight timetables and lowtolerance for 

1

----

error. Poorman-Douglasprovides a variety of technology-based products and management services tofacilitate the administration of class action cases.

Poorman-Douglas customersconsist primarily of large corporations, plaintiff law firms, defense lawfirms, and government entities. Poorman-Douglas attracts and retains customersby providing case management and document management solutions that support theadministration of class action and mass tort cases. Competitors include theGarden City Group, Rust Consulting, and Ghirardelli.

**Credit Facility**

On January 30,2004, we terminated and replaced our existing $25 million line of credit with a$100 million syndicated credit facility. The credit facility consists of:

·       $45million senior term loan, with $4.5 million quarterly amortizing principalpayments beginning April 30, 2004 and a final maturity of July 31,2006;

·       $25million senior revolving loan, with a final maturity of July 31, 2006; and

·       $30million subordinated term loan, with no required amortizing principal paymentsand a final maturity of December 31, 2006.

Interest on creditfacility borrowings is generally based on a spread over the LIBOR rates. Thecredit facility contains financial covenants tied to EBITDA (earnings beforeinterest, taxes, depreciation and amortization) total debt and interest charges.The credit facility is secured by liens on our real property and a significantportion of our personal property.

**Disposition**

During November 2003,EPIQ Systems developed and committed to a plan to sell, within one year, ourinfrastructure software business. Accordingly, the financial statements andother financial information contained within this annual report reflect ourinfrastructure software business as a discontinued operation with the relatedassets and liabilities classified as held for sale.

***Bankruptcy and Related Services:***

EPIQ Systems’bankruptcy case management offerings include:

·       *TCMS®*, an integratedsolution including computer hardware, support services and a proprietarysoftware product installed in a Chapter 7 trustee’s office to manage assetliquidations, creditor distributions, and government reporting.

·       Anintegrated solution of professional services and proprietary technologyplatform that facilitates the administration of Chapter 11 restructurings.

·       *CasePower®,*aproprietary software and related support services designed to enable Chapter 13trustees to manage efficiently debtor payments, creditor distributions andgovernment reporting.

We generatebankruptcy revenues through a variety of arrangements. Significant sources ofrevenues include:

·       Amonthly fee from banks based on a percentage of total liquidated assets ondeposit and on the number of trustees.

·       Feesfor services, including technology services, claims reconciliation, documentprinting, noticing, balloting, marketing and strategic consulting services, andother professional services.

·       Feesfor conversions and software upgrades.

2

----

·       Monthlyrevenues based on the number of cases in their database.

·       Feesbased on the number of claims in a case.

The application of Chapter 7 bankruptcy regulationshas the practical effect of discouraging trustee customers from incurringdirect administrative costs for computer system expenses. As a result, weprovide our Chapter 7 products and services to trustee customers at no directcharge, and our trustee customers agree to maintain deposit accounts forbankruptcy cases under their administration at a designated banking institution.EPIQ has a marketing arrangement with Bank of America. Through thisarrangement, we receive revenues based on the level of customer deposits withBank of America, the number of customers using our product, databaseconversions, software upgrades, and technology management and strategicconsulting services. During October 2003, EPIQ and Bank of America reachedagreement that this marketing arrangement, which had been exclusive, willbecome a non-exclusive marketing arrangement effective April 1, 2004. Thenon-exclusive marketing arrangement will extend through September 30,2006, unless otherwise mutually agreed.

On January 31, 2003,we acquired 100% of the membership interests in Bankruptcy Services LLC (“BSI”).BSI provides technology-based case management, consulting and administrativeservices for Chapter 11 cases. The results of BSI’s operations have beenincluded in our consolidated results of operations since that date.

***Infrastructure Software Market:***

Our primary offering forthe infrastructure software market is *DataExpress®*,a software product line that automates the exchange of data files between ourcustomers and their business partners. *DataExpress®*serves customers in a variety of industries, including financial services,insurance and retail. We generate revenues through the licensing of thisproduct on a named-server basis, and we charge additional fees for annualsoftware maintenance and for professional services provided on a time andmaterials basis. Our infrastructure software business is held for sale and isreflected in all financial information presented in this report as adiscontinued operation. See “Business—General—Recent Developments—Disposition.”

**Industries**

*Bankruptcy andRelated Services Industry*

Bankruptcy is an integral part of the U.S. economy,and bankruptcy filings in the United States have remained near record levelsfor the past several years. As reported by the Administrative Office of theU.S. Courts for the government fiscal years ended September 30, 2001,2002, and 2003 there were approximately 1.44 million, 1.55 million, and1.66 million new bankruptcy filings, respectively.

There are fivechapters of the U.S. Bankruptcy Code that serve different purposes and requirevarious types of services and information:

·       Chapter7 is a liquidation bankruptcy for individuals or businesses that, as measuredby the number of new cases filed in 2003, accounted for approximately 71% ofall bankruptcy filings. In a Chapter 7 case, the debtor’s assets are liquidatedand the resulting cash proceeds are used to pay creditors. Chapter 7 casestypically last several years.

·       Chapter11 is a reorganization model of bankruptcy for corporations that, as measuredby the number of new cases filed in 2003, 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.

3

----

·       Chapter13 is a reorganization model of bankruptcy for individuals that, as measured bythe number of new cases filed in 2003, accounted for approximately 28% of allbankruptcy filings. In a Chapter 13 case, debtors make periodic cash paymentsinto a reorganization plan, and a trustee uses these cash payments to makemonthly distributions to creditors. Chapter 13 cases typically last betweenthree and five years.

·       Chapter12 (farm reorganization) and Chapter 9 (municipal reorganization) togetheraccounted for less than 1% of all bankruptcy cases filed in 2003.

The participants in a bankruptcy proceeding includethe debtor, the creditors, and the bankruptcy judge. Chapter 7 and Chapter 13cases also have a professional bankruptcy trustee. The trustee acts as anintermediary between the debtor and creditors and is responsible foradministering the bankruptcy case. The end-user customers of our Chapter 7 and13 bankruptcy products and services are trustees, not individual debtors orcreditors. For Chapter 11 bankruptcy products and services, the Company’scustomers are the debtor companies that file a plan of reorganization.

Bankruptcy trustees inChapters 7 and 13 are appointed by the Executive Office for United StatesTrustees. A United States Trustee is appointed in most federal court districtsand generally has responsibility for overseeing the integrity of the bankruptcysystem. The trustee’s primary responsibilities include liquidating the debtor’sassets (Chapter 7) or collecting funds from the debtor (Chapter 13),distributing the collected funds to creditors pursuant to the orders of thebankruptcy court and preparing regular status reports for the Executive Officefor United States Trustees and the bankruptcy court. Trustees typically areattorneys or certified public accountants who manage an entire caseload ofbankruptcy cases simultaneously. A trustee will usually specialize in eitherChapter 7 or Chapter 13.

*InfrastructureSoftware Industry*

Companies with complextechnology and business requirements often must share data files among theirinternal divisions, customers and outside business partners. A category ofinfrastructure software has emerged in the information technology industry tofulfill this business requirement. Companies implement this type of software tointegrate legacy and web systems, to manage payment files, and to exchange othertypes of business data. Our infrastructure software business is held for saleand is reflected in all financial information presented herein as adiscontinued operation. See “Business—General—Recent Developments—Disposition.”

**Products andServices**

*Bankruptcy andRelated Services*

Our primary offering for Chapter7 trustees is *TCMS®,* anintegrated solution including computer hardware, support services and aproprietary software product designed to manage asset liquidations, creditordistributions, and government reporting.

*TCMS® *isprovided to an end-user trustee customer without direct charge and includes thefollowing products and services:

·       Alicense to use our proprietary *TCMS®*software, which includes modules for case management, asset liquidation, calendaringand docketing, claims administration, document management, governmentreporting, financial recordkeeping and electronic banking;

·       Computerequipment necessary to operate the system;

·       Configurationand installation of hardware;

·       Databaseconversion from previous computer systems;

4

----

·       On-sitesoftware training;

·       Customizationof reports conforming to local bankruptcy court regulations; and

·       Toll-freecustomer service.

Our primaryoffering for Chapter 11 is an integrated solution of professional services andour proprietary technology platform, which is used by companies in Chapter 11and their counsel. Our services include the following:

·       Claimsmanagement;

·       Filingpreparation;

·       Noticingand communication;

·       Ballotingand solicitation;

·       Disbursement;and

·       Technologyconsulting.

Our Chapter 11technology platform provides secure, web-enabled access to case information andmanages the database from which services are provided. This platform isinstalled and hosted at our facility, and customers may access various featuresof the system over the Internet. The system capabilities include:

·       Documentmanagement, sharing and archive;

·       Casescheduling and calendar;

·       On-goingmonitoring of claims status and claims reconciliation;

·       Bulkprocessing of client data; and

·       Planvoting and ballot tabulation.

In Chapter 11, we collect a monthly fee from ourcustomers that typically is based on the number of claims in each case, and webill for our professional services on a time and materials basis. Additionally,we collect a fee for providing noticing services.

Our primary offering for Chapter 13 is *CasePower®*, proprietary software andrelated support services designed to manage debtor payments, creditordistributions and government reporting.

*CasePower® *isinstalled in a trustee customer’s office and is provided as an integratedsolution of products and services that include a combination of the followingoptions:

·       Alicense to use our proprietary *CasePower®*software,which includes modules for case management, debtor payments collection,calendaring and docketing, claims administration, government reporting, andfinancial recordkeeping;

·       Computerhardware and network integration;

·       Technicalsupport;

·       Databaseconversion from prior systems;

·       On-sitetraining;

·       Printing,noticing and mailing services;

·       Bankreconciliation services; and

5

----

·       Documentinput services.

We collect monthly revenuefrom Chapter 13 customers based on the size of their caseloads and the volumeof notices generated.

*InfrastructureProducts and Services*

Our primary offering for the infrastructure softwaremarket is *DataExpress*â*,* a software product line that automatesthe exchange of data files between our customers and their business partners. *DataExpress*âserves customers in a variety of industries, including financial services,insurance and retail. We license *DataExpress*âon a named-server basis, with additional fees for annual software maintenanceand for professional services, which are provided on a time and materials basis.Customers license the core functionality of *DataExpress*âand may choose from a variety of optional modules that extend the system’scapabilities.

Our services for this product include technicalsupport, systems management, installation and training, and customer-specificenhancements.

Our infrastructuresoftware business is held for sale and is reflected in all financialinformation presented herein as a discontinued operation. See “Business—General—RecentDevelopments—Disposition.”

**Customers**

*Bankruptcy Industry*

The end-user customers of our *TCMS®* and *CasePower®*bankruptcy products and services are trustee*s*,not individual debtors or creditors. Bankruptcy trustees are appointed by theExecutive Office for United States Trustees. A United States Trustee is appointedin most federal court districts and generally has responsibility for overseeingthe integrity of the bankruptcy system. The 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 a large number of bankruptcy casessimultaneously.

To support our Chapter 7 marketing arrangement withBank of America, we periodically provide various technology services directlyto Bank of America. When this arrangement becomes non-exclusive in April 2004,the level of these services will likely decline.

For Chapter 11 bankruptcyproducts and services, our customers are the debtors filing a plan ofreorganization. While these companies are the end-customer, law firmsrepresenting these companies are a key conduit through which both we and ourcompetitors gain access to the debtor companies prior to their filing forbankruptcy. Debtors’ counsel frequently use our services and products directlyon their clients’ behalf, and we have developed relationships with thebankruptcy departments at various law firms throughout the United States.

*InfrastructureSoftware Industry*

Businesses that mustfrequently exchange data files with their business partners or customers areour primary infrastructure software customers. Although our *DataExpress*âproduct is designed to support customers in a variety of industries, most ofour customers are in the financial services, insurance, and retail industries. Ourinfrastructure software business is held for sale and is reflected in allfinancial information presented herein as a discontinued operation. See “Business—General—RecentDevelopments—Disposition.”

6

----

**Sales and Marketing**

*Bankruptcy Industry*

Our internal sales department markets our bankruptcyproducts and services directly to bankruptcy trustees, to Chapter 11 debtors,and to bankruptcy legal counsel through on-site sales calls. We focus onattracting and retaining customers by providing software products with leadingedge features and by providing superior customer service.

The Executive Office for United States Trustees inWashington, D.C. periodically publishes a directory of all current bankruptcytrustees that we use as our prospect list for Chapters 7 and 13. Our salesrepresentatives attend various bankruptcy trade shows. We conduct direct mailcampaigns, and we advertise in trade journals.

*Chapter **7 Marketing Arrangement.  *Since1993, we have had a national marketing arrangement with Bank of America forChapter 7 trustees using our *TCMS*âproduct, under which we jointly promote products and services to trustees. Weare responsible for developing all facets of the *TCMS*â system and forleading the national sales and marketing effort. Bank of America is responsiblefor administering the banking services provided to trustee customers. During October 2003,EPIQ and Bank of America reached agreement that this exclusive marketingarrangement will become a non-exclusive marketing arrangement effective April 1,2004. The non-exclusive marketing arrangement will extend through September 30,2006, unless otherwise mutually agreed.

As a result of the bankingrelationships associated with our prior strategic acquisitions, we currentlysupport a number of trustee relationships through other banks. We anticipate wewill establish new relationships with an additional bank or banks after ourarrangement with Bank of America becomes non-exclusive on April 1, 2004.

*InfrastructureSoftware Industry*

We target infrastructuresoftware customers through a dedicated direct sales force and participation inkey industry trade shows. We also develop alliances with computer systemsproviders to complement our direct sales efforts. Our infrastructure softwarebusiness is held for sale and is reflected in all financial informationpresented herein as a discontinued operation. See “Business—General—RecentDevelopments—Disposition.”

**Competition**

*Bankruptcy Industry*

There are approximately 1,700 Chapter 7 trustees, ofwhom approximately 1,200 actively accept new cases. There are approximately 180Chapter 13 trustees. There are several competitors all competing for sales fromthis finite group of customers including Bankruptcy Management Services andother regional competitors.

In the Chapter 11 market,there are a variety of companies competing for the finite number of corporatereorganizations filed each year. Significant competitors include BMC Corp.,Trumbull Group and others. Additionally, certain law firms, accounting firms,management consultant firms, turnaround specialists and crisis management firmsoffer certain products and services that compete with our own.

*InfrastructureSoftware Industry*

There are many technologycompanies in the infrastructure software industry, many of whom have productlines with a file transfer functionality. Direct competitors who specialize infile transfer include Sterling Commerce, Momentum Systems, Tumbleweed, and BCEEmergis. Our infrastructure software 

7

----

businessis held for sale and is reflected in all financial information presented hereinas a discontinued operation. See “Business—General—Recent Developments—Disposition.”

**Government Regulation**

Our products and servicesare not directly regulated by the government. Our bankruptcy trustee customersand Chapter 11 debtors are, however, subject to significant regulation. Bankruptcytrustees and Chapter 11 debtors are subject to the United States BankruptcyCode, 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 the bankruptcy industry and establishes administrative rules governingour clients’ activities. The success of our bankruptcy and related servicessegment has been, and will continue to be, dependent in part on our ability todevelop and maintain products and provide services that allow trustees toperform 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.

**Employees**

Asof December 31, 2003, we employed approximately 180 full-time employeesnone of whom are covered by a collective bargaining agreement and believe therelationship with our employees is good.

**Risk Factors**

*This report, other reports to be filed by us with the SEC, press releasesmade by us and other public statements by our officers, oral and written,contain or will contain forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended and Section 21Eof the Securities Exchange Act of 1934, as amended, including those relating tothe possible or assumed future results of operations and financial condition. Becausethose statements are subject to a number of uncertainties and risks, actualresults may differ materially from those expressed or implied by theforward-looking statements. Listed below are certain risks associated with aninvestment in our common stock that could cause actual results to differ fromthose 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 profits to drop significantly.**

Our bankruptcy and related services segment is highlydependent on the amount of liquidated asset proceeds deposited by bankruptcytrustees and the number of bankruptcy filings in the United States. Consumerand business debt combined with economic fluctuations in the United Statesaffect the number of bankruptcy filings and the dollar volume flowing throughthe federal bankruptcy system. A significant reduction in Chapter 7 liquidatedasset proceeds on deposit by our bankruptcy trustee customers or the number ofpending bankruptcy cases could cause our bankruptcy and related servicessegment revenues and our profits to drop significantly.

**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 sole line of business activity wasthe provision of automation services to Chapter 13 trustees. In 1992, weentered the Chapter 7 market. In 2003, we entered the Chapter 11 industry withour acquisition of Bankruptcy Services, LLC. The bankruptcy and relatedservices segment of our business represented all of our revenues fromcontinuing operations in 2003. On January 30, 2004, we acquiredPoorman-Douglas Corporation. Through this acquisition we entered the classaction and mass tort services business. While this acquisition increases ourbusiness diversification, we will continue to rely heavily on our bankruptcyproducts and services. If we are unable to maintain and grow the operatingrevenues from 

8

----

our bankruptcy products andservices, our future revenues and earnings may not grow and could decline. Ourlack of product and business diversification could inhibit the opportunitiesfor growth of our business, revenues and profits.

**Bankruptcy reform legislation could decrease theamount of Chapter 7 liquidated asset proceeds on deposit by our Chapter 7trustee customers or the number of bankruptcy filings, which could cause areduction in our revenues and profits.**

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 eventually pass andbe signed by the President. The recently proposed bankruptcy legislation couldrestrict debtors’ choices of how to file bankruptcy, making the bankruptcyprocess more cumbersome for some debtors. For example, new legislation couldforce certain debtors to file bankruptcy under Chapter 13 instead of Chapter 7,thereby causing the debtor to file a plan of reorganization to repay creditorsover time, rather than liquidating the debtor’s assets. Although we do notthink the recent proposals would materially affect the aggregate Chapter 7deposits held by our trustee customers in the foreseeable future, thislegislation, if passed, could affect the number of bankruptcy filings. Futurebankruptcy reform proposals could differ materially from past proposedlegislation and could be more adverse to our bankruptcy management businessthan recent legislative proposals.

**Tort reform legislation could reduce the number andscope of class action and mass action cases, thus reducing the business andbusiness prospects of our recently acquired Poorman-Douglas subsidiary.**

Tort reform legislation has been introduced inCongress and various state legislatures in the past. We believe tort reformlegislation will be reintroduced periodically at both the federal and statelevels. The goal of certain tort reform proposals is to reduce the number andscope of class action and mass action cases. Other proposals would shift thosecases from state courts to federal courts, which would likely slow the numberand speed of those cases. While we cannot predict whether any tort reformlegislation will pass or the substance of any future changes, any legislativeefforts that are successful in reducing the number or scope of class action ormass action cases would likely reduce the future business and businessprospects of our recently acquired Poorman-Douglas subsidiary.

**Substantially all of our Chapter 7 revenues arecollected through our relationship with Bank of America, and recent changes tothis arrangement could cause our revenues and earnings to decline.**

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 institution. Wehave an arrangement with Bank of America under which most of our Chapter 7trustees place their liquidated assets on deposit with Bank of America. Underthis arrangement:

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

·       wecollect from Bank of America monthly revenues based, in part, upon a percentageof the total liquidated assets on deposit and on the number of trustees.

Historically, we have promoted our Chapter 7 productexclusively through our national marketing arrangement with Bank of America,which has been in place since November 1993. Substantially all of ourChapter 7 revenues are collected through our relationship with Bank of America.In 2003, we agreed with Bank of America that this exclusive marketingarrangement will become a non-exclusive arrangement effective April 1,2004. The non-exclusive arrangement will extend through September 30,2006, unless otherwise mutually agreed.

9

----

To support our national marketing arrangement withBank of America, we provide Bank of America with customized software solutions,related integration services and marketing and strategic consulting services. Therevenues from these products and services represented 8% of our totalbankruptcy and related services segment revenues during 2003. We expect tocontinue to provide these types of products and services to Bank of Americathrough April 1, 2004. After that date, our relationship with Bank ofAmerica will become non-exclusive, and we anticipate that Bank of America willreduce the requested level of customized products and services.

We are currently seeking to expand our Chapter 7deposit relationships. We may not be successful in establishing one or more ofthese relationships and cannot predict the timing or pricing terms of anyparticular new relationship. If we are not successful in accomplishing newbanking relationships, our bankruptcy revenues could decline or fail to grow atrates comparable to past revenue growth.

**The Chapter 7 bankruptcy market consists of a finitegroup of trustees, and the loss of even a limited number of our trusteecustomers could result in a loss of revenues and profits.**

There are approximately 1,700 Chapter 7 trustees, ofwhom approximately 1,200 actively accept new cases. A single trustee customerwith a large Chapter 7 deposit base can comprise an important portion of ouroperating revenues, although we did not have sales to any single bankruptcytrustee customer in excess of 5% of our revenues during 2001, 2002, or 2003. Ourfuture financial performance will depend on our ability to maintain existingtrustee customer accounts and to attract business from trustees that arecurrently using a competitor’s software product. The loss of even a limitednumber of trustee customers could result in a loss of revenue and profits.

**Our quarterly results may fluctuate in the future. Ifthey do, our operating results may not meet the expectations of securitiesanalysts or investors. This could cause a material drop in the market price ofour common stock.**

Our quarterly results in the future may fluctuate morethan they have in the past. If they do, our quarterly revenues and operatingresults may be increasingly difficult to forecast. It is possible that ourfuture quarterly results of operations from time to time will not meet theexpectations of securities analysts or investors. This could cause a materialdrop in the market price of our common stock.

Our bankruptcy andrelated services segment will continue to be affected by a number of factors,any one of which could substantially affect our results of operations for aparticular fiscal quarter. Specifically, our quarterly results of operationscan vary due to:

·       fluctuationsin trustees’ deposit balances or caseloads,

·       unanticipatedexpenses related to software maintenance or customer service,

·       thetiming, cancellation or rescheduling of customer orders, and

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

The initiation or termination of a large Chapter 11engagement can directly affect our revenues and earnings for a particularquarter, and the levels of services required for an ongoing Chapter 11engagement can fluctuate quarter to quarter during the time that the debtor isin Chapter 11 reorganization.

Our Poorman-Douglas subsidiary, which we acquired in January 2004,could have volatility in revenues and earnings. The initiation or terminationof a major new class action engagement can directly affect revenues andearnings for a particular quarter, and the levels of services required for anongoing class action engagement can fluctuate quarter to quarter during thetime that the class action lawsuit is active.

10

----

We anticipate that in the future we will have greaterquarterly volatility in our revenues and earnings than we have had in the pastdue to fluctuations in our Chapter 11 and our class action operations.

**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 stock market has experiencedsignificant price and volume fluctuations that have particularly affected themarket prices of stocks of technology companies and that have often beenunrelated to the operating performance of particular companies. The marketprice of our common stock has been volatile, and this is likely 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, we provide services directly to thedebtor, and we are paid directly by the debtor. If a debtor’s Chapter 11 caseconverts to Chapter 7 liquidation, we might not be paid for products andservices previously provided and we would most likely lose all future revenuefrom the case. The conversion of a major Chapter 11 case to Chapter 7 couldhave a material adverse effect on our results of operations.

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

In Chapter 11, the bankruptcy court may reduce oreliminate fees paid for administrative services, such as those we provide. Ifthe court reduced or eliminated fees due to us in a major Chapter 11 case, ourresults of operations could be materially affected.

**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 assuranceof the 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.

11

----

We may not be able to incorporate future technologicaladvances into our business, and future advances in technology may not bebeneficial to or compatible with our business. In addition, keeping abreast oftechnological advances in our business may require substantial expenditures andlead-time. We may not be successful in using new technologies, adapting oursolutions to emerging industry standards, or developing, introducing and marketingsoftware products or enhancements. Furthermore, we may experience difficultiesthat could delay or prevent the successful development, introduction ormarketing of these products. If we incur increased costs or are unable, fortechnical or other reasons, to develop and introduce new products orenhancements in a timely manner in response to changing market conditions orcustomer requirements, we could lose existing customers and fail to attract newbusiness.

**Our new releases and products may have undetectederrors, which could cause litigation claims against us or damage to ourreputation.**

We intend to continue to issue new releases of oursoftware products periodically. Complex software products, such as those weoffer, frequently contain undetected errors when first introduced or as newversions are released. Any introduction of new products and future releases hasa risk of undetected errors. Despite extensive pre-release testing of oursoftware, these undetected errors may be discovered only after a product hasbeen installed and used by our customers. Likewise, the software products weacquire in business acquisitions, including our recent Poorman-Douglasacquisition, has a risk of undetected errors.

Errors may be found in our software products in thefuture. Any undetected errors, as well as any difficulties in installing andmaintaining our new software and releases or difficulties training customersand their staffs on the utilization of new products and releases, may result ina delay or loss of revenue, diversion of development resources, damage to ourreputation, increased service costs, increased expense for litigation andimpaired market acceptance of our products.

**Security problems with or product liability claimsarising from our software products could cause increased expense forlitigation, increased service costs and damage to our reputation.**

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 liabilityrelated to hacking or other disruptive problems. Defending these liabilityclaims could result in increased expenses for litigation and a significantdiversion of our management’s attention.

**Our intellectual property is not protected throughpatents or formal copyright registration. Therefore, we do not have the fullbenefit of patent or copyright laws to prevent others from replicating oursoftware.**

Our intellectual property rights are not protectedthrough patents or formal copyright registration. We may not be able to protectour trade secrets or prevent others from independently developing substantiallyequivalent proprietary information and techniques or from otherwise gainingaccess to our trade secrets. In addition, foreign intellectual property lawsmay not protect our intellectual property rights. Moreover, litigation may benecessary to enforce our intellectual property rights, to protect our tradesecrets, to determine the validity and scope of the proprietary rights ofothers or to defend against claims of infringements. Litigation of this naturecould result in substantial expense for us and diversion of management andother resources, which could result in a loss of revenue and profits.

12

----

**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 services are not directly regulatedby the government. Our bankruptcy customers are, however, subject tosignificant regulation, including the United States Bankruptcy Code, theFederal Rules of Bankruptcy Procedure and local rules and proceduresestablished by bankruptcy courts. The Executive Office for United StatesTrustees, a division of the United States Department of Justice, overseesbankruptcy trustees and establishes administrative rules governingtrustees’ activities. The success of our bankruptcy and related servicessegment has been, and will continue to be, partly dependent on our ability todevelop and maintain products and provide services that allow trustees toperform their duties within applicable regulatory and judicial rules andprocedures and that allow Chapter 11 debtors to make filings and send requirednotices on a timely and accurate basis. Future regulation may limit oreliminate the ability of trustees to utilize the types of products and servicesthat we currently provide. Our failure to adapt our products and services tochanges in the Bankruptcy Code and applicable rules and procedures couldcause us to lose existing customers and fail to attract new customers.

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

During January 2004, we acquired Poorman-Douglasfor approximately $115 million in cash. Over the last five years, we acquiredfive other businesses at a combined cost in excess of $100 million. We intendto continue to consider additional opportunities to acquire other companies,assets or product lines that complement or expand our business. If we areunsuccessful in integrating these companies or product lines with our existingoperations, or if integration is more difficult than anticipated, we mayexperience disruptions to our operations. A difficult or unsuccessfulintegration of an acquired business could reduce or eliminate our profits.

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 intend to consider further opportunities to acquirecompanies, assets or product lines that complement or expand our business. Weexpect that future acquisitions, if any, could provide for consideration to bepaid in cash, shares of our common stock, or a combination of cash and shares. Ifthe consideration for an acquisition is paid in common stock, existingshareholders’ investments could be diluted. Furthermore, we may decide to issueconvertible debt or additional shares of common stock and use part or all ofthe proceeds to reduce debt we incurred to fund our Poorman-Douglas acquisitionor to fund future acquisitions. The issuance of convertible debt or additionalshares of common stock for that purpose would also dilute our existingshareholders’ investments.

13

----

**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 will depend in significant partupon the continued service of our senior management and certain of our keytechnical personnel and our continuing ability to attract, assimilate andretain highly qualified technical, managerial and sales and marketing personnel.While we have non-disclosure agreements and non-compete agreements withsubstantially all of our employees, we do not have employment agreements withany of our executive officers or other employees, other than employmentagreements with two key executives of our BSI subsidiary and, subsequent to ouryear end, employment agreements with six key employees of Poorman-Douglas. Wemaintain key-man life insurance policies on our Chairman and Chief ExecutiveOfficer and our President and Chief Operating Officer. The loss of the servicesof either of these persons or other key personnel or the inability to hire orretain qualified personnel in the future could substantially impair thecontinuing success of our business.

**The debt under our credit agreement dated January 30,2004, could accelerate if a change in control occurs or if we lost the servicesof either our Chairman and Chief Executive Officer or our President and ChiefOperating Officer.**

Our credit agreement dated January 30, 2004,provides that the occurrence of a change in control is an event of defaultunder the credit agreement. A “Change of Control” under the credit agreementmeans the occurrence of any of the following events: (a) if any person orrelated persons constituting a group (other than Tom Olofson and Christopher Olofson)become the “beneficial owners” (as such term is used in SEC Rule 13d-3),directly or indirectly, of more than 25% of the total voting power of allclasses of our capital stock, (b) we cease to, directly or indirectly, ownand control 100% of each class of the outstanding capital securities of each ofour subsidiaries, or (c) either of Tom Olofson or Christopher Olofsonceases to be actively involved in our day-to-day management for any reason anda successor reasonably satisfactory to our lenders does not assume such person’sresponsibilities and position within 180 days of such cessation. If a change incontrol occurs, as defined above, our lenders would have the right toaccelerate all indebtedness owed by us under our credit agreement.

**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 intend to pay any cash dividendson our common stock. The payment of future dividends is within the discretionof our board of directors and will depend upon our future earnings, if any, ourcapital requirements, our financial condition and any other factors that theboard of directors may consider. In addition, certain provisions in our creditagreement may restrict our ability to pay dividends in the future. We currentlyintend to retain all earnings to invest in our operations. As a result, thesuccess of your investment in our common stock will depend entirely upon itsfuture appreciation. Our common stock may not appreciate in value or evenmaintain 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 of directorscould issue a series of preferred stock in a manner designed to prevent ordiscourage a takeover of our company.

14

----

**ITEM 2.       PROPERTIES**

Our corporateoffices are located in a 49,000-square-foot facility in KansasCity, Kansas, which we own. We also lease:

·       approximately1,200 square feet of office space in Los Angeles, California, through December 31,2004;

·       approximately5,000 square feet of office space in San Francisco, California through November 30,2007;

·       approximately16,000 square feet of office space in New York, New York, through August 31,2013;

·       subsequentto year end, approximately 88,000 square feet of office and document processingspace in Beaverton, Oregon, through September 30, 2015; and

·       subsequent to year end,approximately 28,000 square feet of office space in Beaverton, Oregon, through June 30,2007.

**ITEM 3.       LEGAL PROCEEDINGS**

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

**ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

No matters were submitted in the fourth quarter of2003 to a vote of security holders.

15

----

**PART II**

**ITEM 5**.                    MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

**Market Information**

Ourcommon stock is traded on the Nasdaq National Market under the symbol “EPIQ.”  The following table shows the reported highand low sales prices for the common stock for the calendar quarters of 2003 and2002 as reported by Nasdaq:
| ** **     | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 20.50      |     | $          | 14.87 |   | $ | 21.48 |   | $ | 13.37 |   |
| Second Quarter |       | 22.95    |       | 15.91    |       | 17.72 |   | 11.95 |   |
| Third Quarter  |       | 20.00    |       | 16.20    |       | 21.30 |   | 13.55 |   |
| Fourth Quarter |       | 18.74    |       | 14.78    |       | 19.60 |   | 13.91 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**Holders**

As of February 16,2004, there were approximately 120 owners of record of our common stock andapproximately 4,000 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 and, accordingly, do not expect to declare or pay anycash dividends. The payment of future dividends is within the discretion of ourboard of directors and will depend upon various factors, including futureearnings, capital requirements, financial condition, the terms of our creditagreement, and other factors deemed relevant by the board of directors.

**Equity CompensationPlan Information**

Thefollowing table sets forth as of December 31, 2003 (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**     |       |       | 2,112,000    |                                                                                                                                                 |         |                                                                                                        | $          | 12.20 |   |   |   | 1,753,000 |   |   |
| **Equity compensation plans not approved by  security holders** |       |       | 80,000       |                                                                                                                                                 |         |                                                                                                        | $          | 17.10 |   |   |   | 0 |   |   |
| **Total**                                                       |       |       | 2,192,000    |                                                                                                                                                 |         |                                                                                                        | $          | 12.38 |   |   |   | 1,753,000 |   |   |
|                                                                 |            |            |              |                                                                                                                                                      |              |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2003, our 1995 Stock OptionPlan and 100,000 stock options issued in conjunction with our acquisition ofBSI were the only equity compensation plans or arrangements for purposes of theforegoing table. Subsequent to year end, and in connection with our acquisitionof Poorman-Douglas, we 

16

----

issued 300,000 stockoptions. The stockoptions issued to a key executive of BSI in 2003 and the stock options issuedto two key executives of Poorman-Douglas in January 2004 were inducementstock options issued in conjunction with the execution of employment agreementsby each of those executives to become officers of our newly acquiredsubsidiaries. In accordance with the Nasdaq corporate governance rules,shareholder approval of these inducement stock option grants was not required.

The three stock optiongrants that are outside of the 1995 Stock Option Plan were all granted at anoption exercise price equal to fair market value of the common stock on thedate of grant, are all non-qualified options, are all exercisable for up to 10years from the date of grant and are otherwise substantially identical to thematerial terms of the 1995 Stock Option Plan. The three option grants are allsubject to vesting schedules, which in the case of Ron Jacobs vests 20% vestedon January 31, 2003, the grant date thereof, and continues to vest 20% peryear on each anniversary of the grant date until fully vested on January 31,2007, and in the case of Jeffrey Baker and Edward Nimmo vest 20% per year onthe first five years of the date of grant (January 31, 2004).

**Recent Sales ofUnregistered Securities**

None.

**ITEM 6**.                    SELECTEDFINANCIAL DATA
| ** **                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2003**                                    | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                        | ** ** | **(In Thousands, Except Per Share Data)**   | ** ** |
| INCOME STATEMENT DATA:                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues from continuing operations               |       | $                                           | 67,936     |   | $ | 36,256 |   | $ | 28,149 |   | $ | 19,906 |   | $ | 14,820 |   |
| Income from continuing operations                 |       | 14,525                                      |       | 9,766 |   | 6,253 |   | 1,980 |   | 1,496 |   |
| Income (loss) from discontinued operations        |       | (5,818                                      | )          | (1,533 | ) | (1,311 | ) | 152 |   | — |   |
| Net income                                        |       | 8,707                                       |       | 8,233 |   | 4,942 |   | 2,132 |   | 1,496 |   |
| Income  (loss) per share—Diluted             |       |                                        |       |   |   |   |   |   |   |   |   |
| from continuing operations                        |       | $                                           | 0.80       |   | $ | 0.64 |   | $ | 0.44 |   | $ | 0.18 |   | $ | 0.14 |   |
| from discontinued operations                      |       | $                                           | (0.32      | ) | $ | (0.10 | ) | $ | (0.09 | ) | $ | 0.02 |   | — |   |
| Net income per share—Diluted                 |       | $                                           | 0.48       |   | $ | 0.54 |   | $ | 0.35 |   | $ | 0.20 |   | $ | 0.14 |   |
| BALANCE SHEET DATA:                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Working capital related to continuing  operations |       | $                                           | 38,856     |   | $ | 63,503 |   | $ | 27,286 |   | $ | 13,374 |   | $ | 4,347 |   |
| Total assets                                      |       | 141,927                                     |       | 108,037 |   | 70,648 |   | 44,938 |   | 26,222 |   |
| Long-term debt                                    |       | 3,066                                       |       | 289 |   | 594 |   | 924 |   | 67 |   |
| Stockholders’  equity                        |       | 129,255                                     |       | 102,375 |   | 65,144 |   | 35,923 |   | 20,925 |   |

 

During November 1999, weacquired substantially all of the business assets of DCI. The acquisition hasbeen accounted for using the purchase method of accounting with the operatingresults of DCI included in our statements of income since the date ofacquisition.

During March 2000, weacquired substantially all of the business assets of PHiTECH. These assets andcorresponding operations constitute our infrastructure software business. Theacquisition has been accounted for using the purchase method of accounting withthe operating results of PHiTECH included in our statement of income since thedate of acquisition. During November 2003, a decision was made to disposeof our infrastructure segment. Accordingly, all revenues, cost of sales,operating expenses, assets and liabilities related to infrastructure softwarehave been reclassified as discontinued operations for all 

17

----

periodspresented. See Note 15 of Notes to Financial Statements and see “Business—General—RecentDevelopments—Disposition.”

During December 2000, wecompleted a private placement of 2,025,000 shares of common stock and receivednet proceeds of $12,543,000.

During June 2001, wecompleted a follow-on offering of 1,537,500 shares of common stock and receivednet proceeds of $22,735,000.

During October 2001, weacquired certain assets from ROC Technologies. The acquisition has beenaccounted for using the purchase method of accounting with the operatingresults of ROC Technologies included in our statement of income since the dateof acquisition. See Note 14 of Notes to Consolidated Financial Statements.

During July 2002, we acquired the Chapter 7trustee business of CPT Group, Inc. The acquisition has been accounted forusing the purchase method of accounting with the operating results of CPT Groupincluded in our statement of income since the date of acquisition. See Note 14of Notes to Consolidated Financial Statements.

During November 2002, wecompleted a private placement of 2,000,000 shares of common stock and receivednet proceeds of $28,140,000.

During January 2003, weacquired the member interests of Bankruptcy Services, LLC (“BSI”). Theacquisition has been accounted for using the purchase method of accounting withthe operating results of BSI included in our statement of income since the dateof acquisition. See Note 14 of Notes to Consolidated 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 CONDITIONS AND RESULTS OF OPERATIONS

**Management’sOverview**

During the past three years, our operations haveconsisted primarily of products and services provided to the bankruptcyindustry. For the government fiscal years ended September 30, 2001, 2002,and 2003, the Administrative Office of theU.S. Courts reported approximately 1.44 million, 1.55 million, and1.66 million new bankruptcy filings, respectively. Our revenues do not,however, correlate directly with the number of bankruptcy filings. For Chapter7 bankruptcy filings, our revenues primarily depend on the level of trusteedeposits held by the trustees using our software. For Chapter 11 filings, ourrevenues primarily depend on the number of creditors of the bankrupt entity aswell as on the overall complexity of the case. For Chapter 13 bankruptcyfilings, our revenues primarily depend on the number of cases being managed bytrustees using our software.

The number of new bankruptcy filings each year mayvary based on interest rate levels, the level of consumer and business debt,the general economy, and other factors. We believe the level of consumer andbusiness debt is among the most important indicators of future bankruptcyfilings. The Federal Reserve reported consumer debt outstanding of $7.6trillion, $8.3 trillion, and $9.2 trillion as of September 30, 2001, 2002,and 2003, respectively. The Federal Reserve reported business debt outstandingof $6.8 trillion, $7.0 trillion, and $7.3 trillion as of September 30,2001, 2002, and 2003, respectively.

During 2003, bankruptcy case management revenuesaccounted for approximately 82% of total revenue received from Bank of Americaand are related to the level of trustee deposits and the number of trusteecustomers. Until September 30, 2006, we maintain our current bankruptcycase management fee 

18

----

structure with Bank ofAmerica. During 2003, bankruptcy professional services revenues accounted forapproximately 18% of the total revenue we received from Bank of America. Bankruptcyprofessional services revenues are earned based on database conversions,software upgrades, and technology management and strategic consulting servicesprovided to Bank of America. Through the end of the exclusive marketingrelationship, we will continue to provide Bank of America with professionalservices at levels approximately commensurate with prior periods. Beginning April 1,2004, we anticipate that aggregate professional services provided to Bank ofAmerica will decline compared with prior periods.

Acquisitions are a key component of our growthstrategy. We have acquired a number of businesses during the past severalyears, and we may acquire additional businesses in the future. In January 2003,we acquired BSI to begin offering an integrated solution of professionalservices and proprietary technology platform for Chapter 11 restructurings. In January 2004,we acquired Poorman-Douglas to begin offering class action and mass-tort casemanagement and document management solutions. In the future, we will continueto consider new acquisition opportunities.

During 2003, we determinedthat our infrastructure software segment was no longer germane to our long-termstrategic plan, and we developed a plan to sell this segment within a year. Accordingly,our infrastructure software results for 2001, 2002, and 2003 are includedentirely within the discontinued operations section of our income statement. Webelieve this disposition will enhance long-term shareholder value by enablingus to focus our management and financial resources on the operations of ourbankruptcy services and class action products and services.

**Critical AccountingPolicies**

We consider our accounting policies related to revenuerecognition, business combination accounting, goodwill and intangible assetsnot subject to amortization, and software capitalization to be criticalpolicies in understanding our historical and future performance.

*Revenuerecognition.*   Revenues are derived frombankruptcy case management fees and bankruptcy professional services. We haveagreements with each bankruptcy trustee or debtor in possession customerobligating us to deliver various products and services each month. The fees paidare contingent upon the month-to-month delivery of the products and servicesand are based on formulas, as defined by the contracts, related to the numberof trustees and cash balances in a trustee’s bank account, the number of casesin a trustee’s portfolio or the number of claims in each case. Theformula-based fees earned each month become fixed and determinable on a monthlybasis as a result of all contractually required products and services deliveredby us during the month. Bankruptcy professional services revenues arerecognized in the period the services are provided.

*Businesscombination** 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 straightline basis over theintangible asset’s estimated useful life. The estimated useful life of amortizableidentifiable assets range from two to fourteen years. Goodwill and certainother identifiable intangible assets are not amortized. Accordingly, theacquisition cost allocation has had a significant impact on our currentoperating results and will have a significant impact on our future operatingresults.

*Goodwilland intangible assets not subject to amortization.**  *We assess goodwill and intangibleassets not subject to amortization for impairment as of each July 31 andalso at any other date when events or 

19

----

changes in circumstancesindicate that the carrying value of these assets may exceed their fair value. Thisassessment is performed at a reporting unit level. A reporting unit is acomponent of a segment that constitutes a business, for which discretefinancial information is available, and for which the operating results areregularly reviewed by segment 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 in which any reportingunit operates, could adversely affect the fair value of one or more reportingunits. During 2003, we determined that our infrastructure software segment wasno longer germane to our long-term strategic plan, and we developed a plan tosell this segment within a year.

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. As a result of our intent to sell ourinfrastructure software business, during 2003 we recognized a pre-taximpairment charge of approximately $4,680,000 related to goodwill and otherintangible assets. If remaining goodwill and intangible assets on our balancesheet become impaired during a future period, the resulting impairment chargecould have a material impact on the Company’s results of operations andfinancial condition. Our unimpaired, recognized goodwill and intangible assetsnot subject to amortization totaled $64,662,000 as of December 31, 2003.

*Internal softwaredevelopment costs.**  *Certaininternal software development costs incurred in the creation of computersoftware products are capitalized once technological feasibility has beenestablished. Prior to the completion of detailed program design, developmentcosts are expensed and shown as general and administrative expenses on thestatements of income. Capitalized internal software development costs areamortized based on the greater of:

·       theratio of current revenue to current and estimated future revenue for eachproduct, or

·       thestraight-line amortization over the remaining estimated economic life of theproduct, not to exceed five years.

Management periodicallyreevaluates its previous estimated future revenue for each product and theremaining estimated economic life of the product. As a result of our decisionto hold our infrastructure software assets for sale, during 2003 we recognizeda pre-tax impairment charge related to capitalized software of theinfrastructure software business of approximately $2,699,000. Our capitalizedinternal software development costs, net of accumulated amortization, totaled$2,799,000 as of December 31, 2003.

**Results ofOperations**

***Year Ended December 31, 2003 compared to the YearEnded December 31, 2002***

**Revenues**

Revenues from the bankruptcy and related servicessegment increased by $31,680,000, or approximately 87%, to $67,936,000 for theyear ended December 31, 2003 compared to $36,256,000 during the prioryear.

Bankruptcy case management fees increased $11,031,000,or approximately 40%. $6,205,000 of this increase was the result of bankruptcycase management fees generated by BSI, which we acquired in January 2003. Theremainder of the increase was due to the growth of Chapter 7 average aggregatebankruptcy estate deposits, which increased in excess of 20% in 2003.

Bankruptcy professional services revenue increased by$20,649,000, primarily as a result of the acquisition of BSI. Fees from Bank ofAmerica for marketing and strategic consulting and technology servicesaccounted for approximately 21% of bankruptcy professional services revenuescompared to 73% 

20

----

in the same period of theprior year. Based on current projects and agreed upon fees with Bank ofAmerica, we anticipate that revenue from Bank of America for bankruptcyprofessional services during the first quarter of 2004 will be comparable torevenue earned in the same period in the prior year. After that date, ourrelationship with Bank of America will become non-exclusive, and we anticipatethat Bank of America will reduce the requested level of customized products andservices.

We are currently seekingto expand our Chapter 7 deposit relationships. We believe that we will besuccessful in establishing one or more of these relationships, but cannotpredict the timing or pricing terms of any particular new relationship. Therevenues from any new Chapter 7 deposit relationship may offset some or all ofthe anticipated decline in professional services revenue from Bank of America. Ifwe are not successful in establishing new banking relationships, our bankruptcyrevenues could decline or fail to grow at rates comparable to past revenuegrowth.

**Cost of Sales**

Total bankruptcy and related services cost of salesincreased 101% to $20,277,000, or 30% of bankruptcy and related servicesrevenues, for the year ended December 31, 2003 compared to $10,070,000, or28% of bankruptcy and related services revenues, for the prior year.

The increase in cost of sales as a percent ofbankruptcy and related services revenue is attributable to our acquisition ofBSI. As required by accounting principles generally accepted in the UnitedStates (commonly referred to as GAAP), BSI includes reimbursed expenses,primarily postage, in both its operating revenues and in its cost of sales. During2003, such reimbursed expenses totaled approximately $4,764,000. Exclusive ofthis reimbursed postage expense, bankruptcy and related services cost of salesas a percent of revenues decreased from 28% during 2002 to 25% in 2003. Thisdecrease is primarily the result of cost reductions and spending controls.

The primary components ofthe dollar increase in bankruptcy and related services cost of sales were theincrease in reimbursed expense as discussed above, an approximate $2,848,000increase in expense related to noticing and printing services, and anapproximate $1,901,000 increase in compensation expense. All of these increasesare primarily attributable to providing support for our new Chapter 11 casemanagement and professional services product lines.

**Operating Expenses**

Operating expenses increased 111% to $23,052,000 forthe year ended December 31, 2003 compared to $10,910,000 for the prioryear. Operating expenses as a percent of operating revenues were 34% for theyear ended December 31, 2003 compared to 30% for the year ended December 31,2002.

The largest component of operating expenses, generaland administrative expenses, increased 79% to $16,868,000 for the year ended December 31,2003 compared to $9,443,000 during the prior year. However, general andadministrative expenses as a percent of bankruptcy and related servicesrevenues decreased to approximately 25% for the year ended December 31,2003 compared to 26% for the prior year. The dollar increase in general andadministrative expenses was largely related to our acquisition of BSI,including increases in compensation expense, travel expense to supportintegration of the operations of BSI into our consolidated operations, and rentexpense for the acquired New York office facility.

Amortization expense related to acquired identifiableintangible assets increased $3,260,000 compared with the same period in theprior year primarily due to amortization expense of amortizable identifiableassets acquired as a part of the BSI transaction.

Acquisition relatedexpenses, consisting of executive bonuses, legal, accounting and valuationservices, and travel, increased $1,218,000 to $1,793,000 for the year ended December 31,2003, due to the investigation of potential acquisitions and non-capitalizableexpenses related to completed acquisitions.

21

----

 

**Effective Tax Rate**

Our effective tax raterelated to income from continuing operations increased to 41.2% for the yearended December 31, 2003, compared to 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 have highcorporate tax rates.

**DiscontinuedOperations**

Our infrastructuresoftware results for 2002 and 2003 are included entirely within thediscontinued operations section of our income statement. The $7,096,000increase in infrastructure software’s loss before income tax benefit during2003 as compared with 2002 is primarily the result of a $7,615,000 impairmentcharge to reduce goodwill, other intangible assets, software and otherlong-lived assets to their estimated fair value.

***Year Ended December 31, 2002 compared to the YearEnded December 31, 2001***

**Revenues**

Bankruptcy and relatedservices operating revenues increased by $8,107,000, or approximately 29%, to$36,256,000 for the year ended December 31, 2002, compared to $28,149,000during the prior year. Bankruptcy case management fees increased approximately36%, or $7,305,000, to $27,459,000 for the year ended December 31, 2002compared with the prior year primarily due to strong growth in both the valueof bankruptcy estate deposits as well as the number of trustee customers. Bankruptcyprofessional services revenue increased approximately 10%, or $802,000, to$8,797,000 for the year ended December 31, 2002 compared with the prioryear. This growth primarily resulted from increased fees from Bank of Americafor marketing and strategic consulting and technology services. These fees fromBank of America accounted for 73% of bankruptcy professional services revenuefor 2002 compared to 74% for 2001.

**Cost of Sales**

Total bankruptcy andrelated services cost of sales increased approximately 15% to $10,070,000, or28% of bankruptcy and related services revenues, for the year ended December 31,2002 compared to $8,748,000, or 31% of bankruptcy and related servicesrevenues, for the year ended December 31, 2001. The decrease in the costof products and services as a percentage of revenue was largely attributable tothe increase in the number of trustees and deposits from which revenues aregenerated. These bankruptcy-related fees provided increases in revenue withouta proportionate increase in the cost of products and services, resulting in animprovement in our gross profit percentage.

**Operating Expenses**

Operating expensesincreased approximately 10%, or $951,000, to $10,910,000 for the year-ended December 31,2002 compared to $9,959,000 for the prior year. Operating expenses as a percentof operating revenues were approximately 30% for the year-ended December 31,2002 compared to approximately 35% for the year ended December 31, 2001. Theincrease in operating expenses was primarily due to an approximate 12% increasein general and administrative expenses. To support our revenue growth, we hadincreased expenses related to personnel and insurance. Acquisition relatedexpenses, consisting primarily of legal, accounting and valuation services,travel and executive bonuses, increased $222,000 in 2002 due to the increasedvolume of work related to both potential and completed acquisitions. Theseincreases in operating expenses were partly offset by a $438,000 decrease inamortization expense related to goodwill and intangible assets. This decreaseresults primarily from our cessation of goodwill amortization effective January 1,2002, as required by SFAS No. 142, *Goodwilland Other Intangible Assets.*

22

----

 

**Effective Tax Rate**

Our effective tax raterelated to income from continuing operations was 37.8% for the year ended December 31,2002 compared to 38.1% for the year ended December 31, 2001.

**DiscontinuedOperations**

Our infrastructuresoftware results for 2001 and 2002 are included entirely within thediscontinued operations section of our income statement. The infrastructuresoftware segment’s loss before income tax benefit was $2,466,000 for the yearended December 31, 2002 compared to $2,117,000 for the year ended December 31,2001. The increase in loss was primarily the result of an increase in softwareamortization due to the completion and release into production of updatedsoftware products.

***Liquidity and Capital Resources***

During the yearended December 31, 2003, we generated $20,651,000 of cash and cashequivalents from operating activities. During the year ended December 31,2003, our cash and cash equivalents decreased by $28,766,000, from $59,827,000at January 1, 2003 to $31,061,000 at December 31, 2003. The cash andcash equivalents generated during this period and the $28,766,000 decrease incash and cash equivalents since the beginning of the year were primarily usedas follows:

·       $43,263,000,net of cash acquired, was paid as partial consideration for the purchase ofBSI;

·       $3,771,000was used to purchase property and equipment, primarily related to theinstallation of computer equipment at various trustee locations; and

·       $2,754,000was used to fund internal costs related to development of computer software forwhich technological feasibility has been established.

As of December 31, 2003, we maintained a workingcapital line of credit of $25,000,000, maturing on May 31, 2006. The$25,000,000 line of credit replaced two existing lines of credit, with anaggregate capacity of $15,000,000, that were in place as of December 31,2002. No amounts were borrowed under any line of credit during 2003.

Subsequent to year-end, we acquired 100% of the equityof Poorman-Douglas for approximately $115,000,000 in cash. To partly financethis acquisition, we terminated theline of credit outstanding at December 31, 2003 and entered into a$100,000,000 syndicated credit facility. The credit facility consists of a$45,000,000 senior term loan, with amortizing quarterly principal payments of$4,500,000 million beginning April 30, 2004, a $25,000,000 seniorrevolving loan, and a $30,000,000 subordinated term loan. At inception of thecredit facility, we borrowed $92,000,000 under the credit facility, consistingof all of the senior and subordinated term loans and $17,000,000 of the seniorrevolving loan, and used the proceeds to partly finance the acquisition ofPoorman-Douglas. The senior term loan and revolver mature July 31, 2006,while the subordinated term loan matures December 31, 2006.

We believe that the funds generated from operationsplus amounts available under our line of credit will be sufficient for theforeseeable future to finance currently anticipated working capitalrequirements, software and property and equipment expenditures, payments forcontractual obligations, interest payments due on our credit facilityborrowings, and the required principal payments on our senior term loan underthe credit facility.

During 2004, we may decideto issue equity, subordinated debt, or convertible subordinated debt to repaypart or all of the borrowings under the credit facility. Furthermore, wecontinue to explore acquisition opportunities. Covenants contained in our newcredit facility may limit our ability to consummate an acquisition. If we makean additional acquisition or acquisitions, it may be necessary to 

23

----

 

raiseadditional capital through a restructuring of our credit facility, the issuanceof equity, subordinated debt, or convertible subordinated debt, or somecombination of the preceding.

***Contractual Obligations***

Thefollowing table sets forth a summary of our contractual obligations as of December 31,2003.
| ** **                                   | ** ** | **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—continuing operations(1) |       | $                                         | 4,243      |   |   | $ | 799 |   |   |   | $ | 2,259 |   |   |   | $ | 1,185 |   |   |   | — |   |   |
| Employment  agreements                       |       | 3,267                                     |       |   | 800 |   |   |   | 1,600 |   |   |   | 867 |   |   |   | — |   |   |
| Capital lease  obligations                   |       | 66                                        |       |   | 66 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating leases                             |       | 7,188                                     |       |   | 1,309 |   |   |   | 1,918 |   |   |   | 1,289 |   |   |   | 2,672 |   |   |
| Total                                        |       | $                                         | 14,764     |   |   | $ | 2,974 |   |   |   | $ | 5,777 |   |   |   | $ | 3,341 |   |   |   | $ | 2,672 |   |   |
|                                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Debtincurred to partly finance the acquisition of Poorman-Douglas is not includedin this table as the debt was incurred subsequent to year-end. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources” for additional discussion of debt incurred subsequent toyear end.

**Recent AccountingPronouncements**

In May 2003, the Financial Accounting StandardsBoard (the “FASB”) issued Statement of Financial Accounting Standards No. 150(“SFAS 150”), *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.*SFAS150 established standards for classifying and measuring certain financialinstruments that embody obligations and have characteristics of bothliabilities and equity. SFAS 150 became effective June 1, 2003, for allfinancial instruments created or modified after May 31, 2003, and otherwise became effective as of July 1, 2003. In December 2003, the FASBdeferred for an indefinite period the application of the guidance in SFAS 150to noncontrolling interest that are classified as equity in the financialstatements of a subsidiary but, on application of SFAS 150, would be classifiedas a liability in the parent’s financial statements. The deferral is limited tomandatorily redeemable noncontrolling interests associated with finite-livedsubsidiaries. We believe we do not have any such entities and that futureguidance on this issue will not have a material impact on our consolidatedfinancial statements.

In January 2003, the FASB issued Interpretation No. 46(FIN 46), *Consolidation of Variable InterestEntities*. FIN 46, which applies to all public entities, clarifiesthe application of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. In December 2003, the FASB reissued FIN 46with certain modifications and clarifications. Application of this guidance waseffective for interests in certain variable interest entities commonly referredto as special-purpose entities as of December 31, 2003. Application forall other types of entities is required for periods ending after March 15,2004, unless previously applied. We expect that final adoption of thisstatement will not have a material impact on our consolidated financialstatements.

24

----

 

**ITEM 7A**.            QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to therisk that a change in the level of one or more market prices, interest rates,indices, volatilities, correlations or other market factors such as liquidity,will result in losses for a certain financial instrument or group of financialinstruments. As of December 31, 2003, EPIQ was exposed to credit risk oncredit extended to customers and interest risk on capital lease obligations,the deferred acquisition price note and cash equivalents. We do not currentlyuse any derivative financial instruments. Based on the controls in place,credit worthiness of the customer base and the relative size of these financialinstruments, we believe the risk associated with these instruments will nothave a material adverse effect on our financial position, results of operationsor cash flows.

**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, 2003 and 2002.
| ** **                               | ** ** | **Quarters**                                                       | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **1**st                                                            | ** ** | **2**nd | ** ** | **3**rd | ** ** | **4**th | ** ** |
| ** **                               | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| **Year end December 31, 2003**      |       |                                                               |       |   |   |   |   |   |   |
| Revenues from  continuing operations     |       | $                                                                  | 14,075     |   | $ | 17,084 |   | $ | 18,375 |   | $ | 18,402 |   |
| Gross profit from  continuing operations |       | 10,155                                                             |       | 12,064 |   | 12,845 |   | 12,595 |   |
| Income from  continuing operations       |       | 2,676                                                              |       | 3,875 |   | 4,205 |   | 3,769 |   |
| Loss from  discontinued operations       |       | (364                                                               | )          | (267 | ) | (279 | ) | (4,908 | ) |
| Net income                               |       | 2,312                                                              |       | 3,608 |   | 3,926 |   | (1,139 | ) |
| Income 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 per share—Diluted        |       | $                                                                  | 0.13       |   | $ | 0.20 |   | $ | 0.21 |   | $ | (0.06 | ) |
| **Year  ended December 31, 2002**   |       |                                                               |       |   |   |   |   |   |   |
| Revenues from  continuing operations     |       | $                                                                  | 8,508      |   | $ | 8,621 |   | $ | 9,202 |   | $ | 9,925 |   |
| Gross profit from  continuing operations |       | 6,069                                                              |       | 6,134 |   | 6,647 |   | 7,336 |   |
| Income from  continuing operations       |       | 2,179                                                              |       | 2,231 |   | 2,383 |   | 2,973 |   |
| Loss from  discontinued operations       |       | (326                                                               | )          | (355 | ) | (471 | ) | (381 | ) |
| Net income                               |       | 1,853                                                              |       | 1,876 |   | 1,912 |   | 2,592 |   |
| Income per share—Diluted            |       |                                                               |       |   |   |   |   |   |   |
| Income from continuing operations        |       | $                                                                  | 0.15       |   | $ | 0.15 |   | $ | 0.16 |   | $ | 0.18 |   |
| Loss from discontinued operations        |       | $                                                                  | (0.03      | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.02 | ) |
| Net income per  share—Diluted       |       | $                                                                  | 0.12       |   | $ | 0.13 |   | $ | 0.13 |   | $ | 0.16 |   |

 

25

----

 

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

None.

**ITEM 9A**.            CONTROLSAND PROCEDURES

An evaluation was carriedout by the Company’s Chief Executive Officer and Chief Financial Officer of theeffectiveness of the design and operations of the Company’s disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)). Basedupon that evaluation as of the end of the period covered by this report, theCEO and the CFO concluded that the Company’s disclosure controls and proceduresare effective in timely alerting them to material information relating to theCompany (including our consolidated subsidiaries) required to be included inthe Company’s periodic filings with the SEC. There were not any significantchanges in the Company’s internal controls or in other factors thatsignificantly affected these controls during the quarter ended December 31,2003.

26

----

 

**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, 2003.

**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, 2003.

**ITEM 12.**             SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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, 2003.

**ITEM 13.**             CERTAIN RELATIONSHIPSAND 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, 2003.

**ITEM 14.**             PRINCIPAL ACCOUNTINGFEES AND SERVICES

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, 2003.

27

----

 

**PART IV**

**ITEM 15.**             EXHIBITS, FINANCIALSTATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

**(a)   The following documents are filed as a partof this report:**

**(1)****          FinancialStatements.  **The following financial statements, contained on pages F-1through F-27 of this report, are filed as part of this report under Item8—“Financial Statements and Supplementary Data.”
| Independent  Auditors’ Report                                                                                      |
|-------------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance  Sheets—December 31, 2003 and 2002                                                       |
| Consolidated Statements of  Income—Years Ended December 31, 2003, 2002 and 2001                               |
| Consolidated Statements of Changes  in Stockholders’ Equity—Years Ended December 31, 2003, 2002 and 2001 |
| Consolidated Statements of Cash  Flows—Years Ended December 31, 2003, 2002 and 2001                           |
| Notes to Consolidated Financial  Statements                                                                             |

 

**(2)****          FinancialStatement Schedules.  **EPIQ Systems, Inc. and Subsidiariesfor each of the years in the three-year period ended December 31, 2003.

Schedule II—Valuation andqualifying accounts

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

**(b)   Reportson Form 8-K**

A report on Form 8-K, Item 5, was filed on October 20,2003, summarizing changes in the Company’s marketing arrangement with Bank ofAmerica.

A report on Form 8-K was filed on October 20,2003, furnishing the Company’s earnings release for the third quarter of 2003.

28

----

 

**SIGNATURES**

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this report to besigned by the undersigned, thereunto duly authorized.
| Dated:   March 9,  2004 |   | 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 9, 2004 |
|                                  |          | Chairman of the  Board, Chief Executive Officer and Director                  |       |               |
| /s/ Christopher E. Olofson       |          | Christopher E. Olofson                                                        |       | March 9, 2004 |
|                                  |          | President, Chief  Operating Officer and Director                              |       |               |
| /s/ Elizabeth M. Braham          |          | Elizabeth M. Braham                                                           |       | March 9, 2004 |
|                                  |          | Senior Vice  President, Chief Financial Officer (Principal Financial Officer) |       |               |
| /s/ Douglas W. Fleming           |          | Douglas W. Fleming                                                            |       | March 9, 2004 |
|                                  |          | Director of  Finance (Principal Accounting Officer)                           |       |               |
| /s/ W. Bryan Satterlee           |          | W. Bryan Satterlee                                                            |       | March 9, 2004 |
|                                  |          | Director                                                                      |       |               |
| /s/ Edward M. Connolly, Jr. |          | Edward M.  Connolly, Jr.                                                 |       | March 9, 2004 |
|                                  |          | Director                                                                      |       |               |
| /s/ James A. Byrnes              |          | James A. Byrnes                                                               |       | March 9, 2004 |
|                                  |          | Director                                                                      |       |               |

 

29

----

 

**INDEPENDENTAUDITORS’ REPORT**

Board of DirectorsEPIQ Systems, Inc.Kansas City, Kansas

We have audited the accompanying consolidated balancesheets of EPIQ Systems, Inc. (the “Company”) as of December 31, 2003and 2002, and the related consolidated statements of income, changes instockholders’ equity and cash flows for each of the three years in the periodended December 31, 2003. Our audits also included the schedule ofvaluation and qualifying accounts listed in Item 15(a)(2). These consolidatedfinancial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on the financialstatements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat 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 EPIQSystems, Inc. as of December 31, 2003 and 2002, and the results ofits operations and its cash flows for each of the three years in the periodended December 31, 2003 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, presents fairly the information setforth therein.

As discussed in Note 4 tothe consolidated financial statements, in 2002 the Company changed its methodof accounting for goodwill and other intangible assets to conform to Statementof Financial Accounting Standards No. 142.

DELOITTE & TOUCHE LLPKansas City, MissouriFebruary 25, 2004

F-1

----

**EPIQ SYSTEMS, INC.CONSOLIDATED BALANCE SHEETS(Dollars in Thousands, Except Share and Per Share Data)**
| ** **                                                                                                                                                           | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                           |       |                            |       |                            |       |   |   |   |   |
| **CURRENT ASSETS:**                                                                                                                                                  |       |                            |       |                            |       |   |   |   |   |
| Cash  and cash equivalents                                                                                                                                           |       |                            | $          | 30,347                          |       |   |   | $ | 59,827 |   |   |
| Accounts  receivable, trade, less allowance for doubtful accounts of  $340 and $5, respectively                                                                      |       |                            | 11,337     |                            |       |   | 5,109 |   |   |
| Prepaid  expenses and other                                                                                                                                          |       |                            | 1,938      |                            |       |   | 897 |   |   |
| Deferred  income taxes                                                                                                                                               |       |                            | 1,736      |                            |       |   | — |   |   |
| Current  assets held for sale                                                                                                                                        |       |                            | 1,304      |                            |       |   | 603 |   |   |
| Total  Current Assets                                                                                                                                                |       |                            | 46,662     |                            |       |   | 66,436 |   |   |
| **LONG-TERM ASSETS:**                                                                                                                                                |       |                            |       |                            |       |   |   |   |   |
| Property  and equipment, net                                                                                                                                         |       |                            | 11,886     |                            |       |   | 11,574 |   |   |
| Software  development costs, net                                                                                                                                     |       |                            | 2,799      |                            |       |   | 1,911 |   |   |
| Goodwill                                                                                                                                                             |       |                            | 64,188     |                            |       |   | 17,449 |   |   |
| Other  intangibles, net of accumulated amortization of $4,250 and $640,  respectively                                                                                |       |                            | 16,325     |                            |       |   | 3,031 |   |   |
| Other                                                                                                                                                                |       |                            | 67         |                            |       |   | 65 |   |   |
| Long-term  assets held for sale                                                                                                                                      |       |                            | —     |                            |       |   | 7,571 |   |   |
| Total  Long-term Assets, net                                                                                                                                         |       |                            | 95,265     |                            |       |   | 41,601 |   |   |
| **Total  Assets**                                                                                                                                                    |       |                            | $          | 141,927                         |       |   |   | $ | 108,037 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                        |       |                            |       |                            |       |   |   |   |   |
| **CURRENT LIABILITES:**                                                                                                                                              |       |                            |       |                            |       |   |   |   |   |
| Accounts  payable                                                                                                                                                    |       |                            | $          | 1,998                           |       |   |   | $ | 1,004 |   |   |
| Customer  deposits                                                                                                                                                   |       |                            | 1,712      |                            |       |   | 164 |   |   |
| Accrued  compensation                                                                                                                                                |       |                            | 1,353      |                            |       |   | 319 |   |   |
| Income  taxes payable                                                                                                                                                |       |                            | 275        |                            |       |   | 290 |   |   |
| Other  accrued expenses                                                                                                                                              |       |                            | 315        |                            |       |   | 222 |   |   |
| Current  portion of deferred acquisition price                                                                                                                       |       |                            | 783        |                            |       |   | 241 |   |   |
| Current  maturities of long-term obligations                                                                                                                         |       |                            | 66         |                            |       |   | 90 |   |   |
| Current  liabilities held for sale                                                                                                                                   |       |                            | 1,137      |                            |       |   | 1,011 |   |   |
| Total  Current Liabilities                                                                                                                                           |       |                            | 7,639      |                            |       |   | 3,341 |   |   |
| **LONG-TERM LIABILITIES:**                                                                                                                                           |       |                            |       |                            |       |   |   |   |   |
| Deferred  income taxes                                                                                                                                               |       |                            | 1,967      |                            |       |   | 1,980 |   |   |
| Deferred  acquisition price (excluding current portion)                                                                                                              |       |                            | 3,066      |                            |       |   | — |   |   |
| Long-term  obligations (excluding current maturities)                                                                                                                |       |                            | —     |                            |       |   | 289 |   |   |
| Long-term  liabilities held for sale                                                                                                                                 |       |                            | —     |                            |       |   | 52 |   |   |
| Total  Long-term Liabilities                                                                                                                                         |       |                            | 5,033      |                            |       |   | 2,321 |   |   |
| **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—17,780,854 and 16,538,287  shares at 2003 and 2002, respectively |       |                            | 178        |                            |       |   | 165 |   |   |
| Additional  paid-in capital                                                                                                                                          |       |                            | 101,890    |                            |       |   | 83,730 |   |   |
| Retained  earnings                                                                                                                                                   |       |                            | 27,187     |                            |       |   | 18,480 |   |   |
| Total  Stockholders’ Equity                                                                                                                                     |       |                            | 129,255    |                            |       |   | 102,375 |   |   |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                                 |       |                            | $          | 141,927                         |       |   |   | $ | 108,037 |   |   |

Seeaccompanying notes to consolidated financial statements.

F-2

----

**EPIQ SYSTEMS, INC.CONSOLIDATED STATEMENTS OF INCOME(In Thousands, Except Per Share Data)**
| ** **                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2003**                                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| **OPERATING REVENUES:**                                                           |       |                                        |       |   |   |   |   |
| Bankruptcy case management fees                                                   |       | $                                           | 38,490     |   | $ | 27,459 |   | $ | 20,154 |   |
| Bankruptcy professional services                                                  |       | 29,446                                      |       | 8,797 |   | 7,995 |   |
| Total Operating Revenues                                                          |       | 67,936                                      |       | 36,256 |   | 28,149 |   |
| **COST OF SALES:**                                                                |       |                                        |       |   |   |   |   |
| Cost of products and services                                                     |       | 16,490                                      |       | 6,363 |   | 5,462 |   |
| Depreciation and amortization (exclusive of intangible  amortization shown below) |       | 3,787                                       |       | 3,707 |   | 3,286 |   |
| Total Cost of Sales                                                               |       | 20,277                                      |       | 10,070 |   | 8,748 |   |
| **GROSS PROFIT**                                                                  |       | 47,659                                      |       | 26,186 |   | 19,401 |   |
| **OPERATING EXPENSES:**                                                           |       |                                        |       |   |   |   |   |
| General and administrative                                                        |       | 16,868                                      |       | 9,443 |   | 8,450 |   |
| Depreciation                                                                      |       | 781                                         |       | 542 |   | 368 |   |
| Amortization of goodwill and intangibles                                          |       | 3,610                                       |       | 350 |   | 788 |   |
| Acquisition related                                                               |       | 1,793                                       |       | 575 |   | 353 |   |
| Total Operating Expenses                                                          |       | 23,052                                      |       | 10,910 |   | 9,959 |   |
| **INCOME FROM OPERATIONS**                                                        |       | 24,607                                      |       | 15,276 |   | 9,442 |   |
| **INTEREST INCOME (EXPENSE):**                                                    |       |                                        |       |   |   |   |   |
| Interest income                                                                   |       | 284                                         |       | 573 |   | 753 |   |
| Interest expense                                                                  |       | (201                                        | )          | (137 | ) | (100 | ) |
| Net Interest Income                                                               |       | 83                                          |       | 436 |   | 653 |   |
| **INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES**                         |       | 24,690                                      |       | 15,712 |   | 10,095 |   |
| **PROVISION FOR INCOME TAXES**                                                    |       | 10,165                                      |       | 5,946 |   | 3,842 |   |
| **INCOME FROM CONTINUING OPERATIONS**                                             |       | 14,525                                      |       | 9,766 |   | 6,253 |   |
| **DISCONTINUED OPERATIONS:**                                                      |       |                                        |       |   |   |   |   |
| Loss from operations of discontinued infrastructure segment                       |       | (9,562                                      | )          | (2,466 | ) | (2,117 | ) |
| Income tax benefit from operations of discontinued infrastructure  segment        |       | 3,744                                       |       | 933 |   | 806 |   |
| **TOTAL DISCONTINUED OPERATIONS**                                                 |       | (5,818                                      | )          | (1,533 | ) | (1,311 | ) |
| **NET INCOME**                                                                    |       | $                                           | 8,707      |   | $ | 8,233 |   | $ | 4,942 |   |
| **NET INCOME PER SHARE  INFORMATION:**                                            |       |                                        |       |   |   |   |   |
| Income per share—Basic                                                       |       |                                        |       |   |   |   |   |
| Income from continuing operations                                                 |       | $                                           | 0.82       |   | $ | 0.66 |   | $ | 0.47 |   |
| Loss from discontinued operations                                                 |       | (0.33                                       | )          | (0.10 | ) | (0.10 | ) |
| Net income per share—Basic                                                   |       | $                                           | 0.49       |   | $ | 0.56 |   | $ | 0.37 |   |
| Income  per share—Diluted                                                    |       |                                        |       |   |   |   |   |
| Income from continuing operations                                                 |       | $                                           | 0.80       |   | $ | 0.64 |   | $ | 0.44 |   |
| Loss from discontinued operations                                                 |       | (0.32                                       | )          | (0.10 | ) | (0.09 | ) |
| Net income per share—Diluted                                                 |       | $                                           | 0.48       |   | $ | 0.54 |   | $ | 0.35 |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:**                                   |       |                                        |       |   |   |   |   |
| Basic                                                                             |       | 17,619                                      |       | 14,775 |   | 13,508 |   |
| Diluted                                                                           |       | 18,104                                      |       | 15,309 |   | 14,111 |   |

Seeaccompanying notes to consolidated financial statements.

F-3

----

**EPIQSYSTEMS, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(In Thousands, except for share and per share data)**
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| PREFERRED SHARES (2,000,000 authorized)                            |       | —                                     |       | — |   | — |   |
| COMMON SHARES (50,000,000 authorized):                             |       |                                       |       |   |   |   |   |
| Shares, beginning of year                                          |       | 16,538                                     |       | 14,398 |   | 8,374 |   |
| Shares issued upon exercise of  options                            |       | 189                                        |       | 140 |   | 201 |   |
| Shares issued in secondary  public offering                        |       | —                                     |       | — |   | 1,025 |   |
| Shares issued in private  placement of stock                       |       | —                                     |       | 2,000 |   | — |   |
| Shares issued in acquisition  of business                          |       | 1,054                                      |       | — |   | — |   |
| Stock split                                                        |       | —                                     |       | — |   | 4,798 |   |
| Shares, end of year                                                |       | 17,781                                     |       | 16,538 |   | 14,398 |   |
| COMMON STOCK—PAR VALUE $0.01 PER SHARE:                       |       |                                       |       |   |   |   |   |
| Balance, beginning of year                                         |       | $                                          | 165        |   | $ | 144 |   | $ | 84 |   |
| Shares issued upon exercise of  options                            |       | 2                                          |       | 1 |   | 2 |   |
| Net proceeds from secondary  public offering                       |       | —                                     |       | — |   | 10 |   |
| Net proceeds from private  placement of stock                      |       | —                                     |       | 20 |   | — |   |
| Shares issued in acquisition  of business                          |       | 11                                         |       | — |   | — |   |
| Stock split                                                        |       | —                                     |       | — |   | 48 |   |
| Balance, end of year                                               |       | 178                                        |       | 165 |   | 144 |   |
| ADDITIONAL PAID-IN CAPITAL:                                        |       |                                       |       |   |   |   |   |
| Balance, beginning of year                                         |       | 83,730                                     |       | 54,753 |   | 30,528 |   |
| Shares issued upon exercise of  options                            |       | 1,039                                      |       | 420 |   | 866 |   |
| Tax benefit from exercise of  options                              |       | 746                                        |       | 437 |   | 682 |   |
| Net proceeds from secondary  public offering                       |       | —                                     |       | — |   | 22,725 |   |
| Net proceeds from (expenses  for)  private placement of stock |       | (114                                       | )          | 28,120 |   | — |   |
| Shares issued in acquisition  of business                          |       | 16,489                                     |       | — |   | — |   |
| Stock split                                                        |       | —                                     |       | — |   | (48 | ) |
| Balance, end of year                                               |       | 101,890                                    |       | 83,730 |   | 54,753 |   |
| RETAINED EARNINGS:                                                 |       |                                       |       |   |   |   |   |
| Balance, beginning of year                                         |       | 18,480                                     |       | 10,247 |   | 5,311 |   |
| Net income                                                         |       | 8,707                                      |       | 8,233 |   | 4,942 |   |
| Cash paid in lieu of  fractional shares                            |       | —                                     |       | — |   | (6 | ) |
| Balance, end of year                                               |       | 27,187                                     |       | 18,480 |   | 10,247 |   |
| TOTAL STOCKHOLDERS’ EQUITY                                    |       | $                                          | 129,255    |   | $ | 102,375 |   | $ | 65,144 |   |

 

See accompanying notes to consolidated financialstatements.

F-4

----

**EPIQ SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)**
| ** **                                                                               | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                               | ** ** | **2003**                                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                               |       |                                        |       |   |   |   |   |
| Net income                                                                               |       | $                                           | 8,707      |   | $ | 8,233 |   | $ | 4,942 |   |
| Adjustments to reconcile net income to net cash from operating  activities:              |       |                                        |       |   |   |   |   |
| Provision (benefit) for  deferred income taxes                                           |       | (1,855                                      | )          | 1,380 |   | 459 |   |
| Depreciation and amortization                                                            |       | 3,863                                       |       | 3,700 |   | 3,174 |   |
| Amortization of software  development costs                                              |       | 1,933                                       |       | 1,756 |   | 977 |   |
| Amortization of goodwill and other  intangible assets                                    |       | 3,745                                       |       | 498 |   | 1,402 |   |
| Asset impairment charges                                                                 |       | 7,615                                       |       | — |   | — |   |
| Other, net                                                                               |       | 234                                         |       | 225 |   | 265 |   |
| Changes in operating assets and liabilities, net of effects from  business acquisitions: |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                      |       | (5,948                                      | )          | (1,149 | ) | (918 | ) |
| Prepaid expenses and other  assets                                                       |       | (981                                        | )          | (581 | ) | (204 | ) |
| Accounts payable and accrued  expenses                                                   |       | 2,522                                       |       | (827 | ) | 274 |   |
| Income taxes, including tax  benefit from exercise  of stock options                     |       | 731                                         |       | 504 |   | 740 |   |
| Other                                                                                    |       | 85                                          |       | 37 |   | (327 | ) |
| Net cash from operating activities                                                       |       | 20,651                                      |       | 13,776 |   | 10,784 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                |       |                                        |       |   |   |   |   |
| Purchase of property and  equipment                                                      |       | (3,771                                      | )          | (4,938 | ) | (7,287 | ) |
| Software development costs                                                               |       | (2,754                                      | )          | (1,955 | ) | (2,022 | ) |
| Cash paid for acquisition of  business, net of cash acquired                             |       | (43,263                                     | )          | (682 | ) | (12,188 | ) |
| Other investing activities, net                                                          |       | (209                                        | )          | 112 |   | 36 |   |
| Net cash used in investing  activities                                                   |       | (49,997                                     | )          | (7,463 | ) | (21,461 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                |       |                                        |       |   |   |   |   |
| Net repayments of borrowings on  lines of credit                                         |       | —                                      |       | — |   | (3,575 | ) |
| Principal payments under  capital lease obligations                                      |       | (97                                         | )          | (103 | ) | (167 | ) |
| Payment on deferred acquisition  price                                                   |       | (250                                        | )          | (250 | ) | (250 | ) |
| Net proceeds from (expenses  for) stock issuance                                         |       | (114                                        | )          | 28,140 |   | 22,735 |   |
| Proceeds from exercise of stock  options and warrants                                    |       | 1,041                                       |       | 421 |   | 868 |   |
| Cash paid in lieu of fractional  shares                                                  |       | —                                      |       | — |   | (6 | ) |
| Net cash from financing  activities                                                      |       | 580                                         |       | 28,208 |   | 19,605 |   |
| **NET INCREASE (DECREASE) IN CASH  AND****CASH EQUIVALENTS**                             |       | (28,766                                     | )          | 34,521 |   | 8,928 |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                        |       | 59,827                                      |       | 25,306 |   | 16,378 |   |
| Less cash classified as held  for sale                                                   |       | (714                                        | )          | — |   | — |   |
| **CASH AND CASH EQUIVALENTS, END  OF YEAR**                                              |       | $                                           | 30,347     |   | $ | 59,827 |   | $ | 25,306 |   |

 

See accompanying notes to consolidated financialstatements.

F-5

----

**EPIQ SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001**

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

***Nature of Operations***

EPIQ Systems, Inc. (the “Company”) providestechnology-based case management solutions to attorneys, law firms, trusteesand debtor companies that administer cases in the federal bankruptcy system. Customersimplement the Company’s solutions to administer personal and corporatebankruptcy cases of all sizes and configurations. EPIQ Systems’ product andservice offerings automate various administrative tasks pertaining tobankruptcy claims, assets, financial records and other data associated withliquidations and reorganizations and assist customers in organizing andmanaging their databases of case information, preparing notices and mailings,and in fulfilling their additional responsibilities. Customers implementing theCompany’s bankruptcy management solution have a single environment in which toadminister their cases.

The Company’s infrastructure software division, nowheld for sale and classified as a discontinued operation, serves corporatecustomers that must frequently exchange data files with their business partnersor their own end-user customers. The *DataExpress®*product line automates the transmission of data files over the Internet orprivate networks in a secure environment.

As discussed in Note 18,subsequent to year end the Company acquired P-D Holding Corp. and itswholly-owned operating subsidiary, Poorman-Douglas Company (collectively, “Poorman-Douglas”).Poorman-Douglas provides technology-based products and services for the classaction and mass tort market, as well as for the bankruptcy reorganizationmarket.

***Common Stock Splits***

On November 6, 2001,the Company announced that its Board of Directors had approved a 3 for 2 stocksplit effected as a 50% stock dividend, payable November 30, 2001, toholders of record as of November 16, 2001. The Company paid cash toshareholders in lieu of fractional shares. All per share and shares outstandingdata in the Consolidated Statements of Income and notes to the consolidatedfinancial statements have been retroactively restated to reflect the stocksplit.

***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 software development costs incurredin the creation of computer software products are capitalized oncetechnological feasibility has been established. Development costs incurredprior to establishment of technological feasibility are expensed and shown asgeneral and administrative expenses on the statements of income. Capitalizedcosts are amortized based on the ratio of current revenue to current andestimated future revenue for each product with an annual minimum equal to thestraight-line amortization over the remaining estimated economic life of theproduct, not to exceed five years. Amortization of software costs is includedin cost of sales in the Consolidated Statements of Income.

F-6

----

 

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

***Intangible Assets***

Intangible assets consist of goodwill, customercontracts, trade names and agreements not to compete, which were the result ofthe business acquisitions of CPT Group, Inc., ROC Technologies, Inc.,PHiTECH, Inc., DCI Chapter 7 Solutions, Inc., and Bankruptcy ServicesLLC. Customer contracts, trade names and agreements not to compete are beingamortized on a straight-line basis over their estimated economic benefitperiod, generally from 2 to 14 years.

The Company reviews its goodwill on an annual basis atJuly 31 and between annual tests if events or changes in circumstanceshave indicated that the assets might be impaired. In accordance with theadoption of SFAS No. 142 on January 1, 2002, goodwill is no longeramortized.

The Company reviews itsother intangibles for impairment whenever events or changes in circumstanceshave indicated that the carrying amount of its assets might not be recoverable.Amortization of intangible assets is reflected in the Consolidated Statementsof Income in operating expenses.

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

The Company, using itsbest estimates based on reasonable and supportable assumptions and projections,reviews for impairment long-lived assets and identifiable intangibles to beheld and used whenever events or changes in circumstances indicate that thecarrying amount of its assets might not be recoverable.

***Income Taxes***

The Company recognizes aliability or asset for the deferred tax consequences of temporary differencesbetween the tax basis of assets or liabilities and their reported amounts inthe financial statements. A valuation allowance is provided when, in theopinion of management, it is more likely than not that some portion or all of adeferred tax asset will not be realized.

F-7

----

 

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

***Stock-Based Compensation***

TheCompany has adopted the disclosure provisions of SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure, an amendment of FASB Statement No. 123*. TheStatement requires prominent disclosures in both annual and interim financialstatements regarding the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. The Companyaccounts for stock compensation awards under the intrinsic method of AccountingPrinciples Board Opinion No. 25. Opinion No. 25 requires compensationcost to be recognized based on the excess, if any, between the quoted marketprice at the date of grant and the amount an employee must pay to acquire stock.Options awarded under the Company’s plan are granted with an exercise priceequal to the fair market value on the date of the grant. Had the compensationcost been determined based on the fair value at the grant dates using SFAS No. 123,the Company’s December 31, 2003, 2002 and 2001 net income and net incomeper share would have been reduced to the following pro forma amounts:
| ** **                                                                                                                           | ** ** | ** **  | ** ** | **Years Ended December 31,**                          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | ** **  | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** | **     2001     ** | ** ** |
| ** **                                                                                                                           | ** ** | ** **  | ** ** | **(In Thousands, Except Per Share Data)**   | ** ** |
| Net income, as reported                                                                                                              |       |        |       |                                                                 | $          | 8,707 |   |   |   | $ | 8,233 |   |   |   | $ | 4,942 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all options, net of tax  |       |        |       |                                                                 | (2,195     | ) |   |   | (2,258 | ) |   |   | (829 | ) |   |
| Net income, pro  forma                                                                                                               |       |        |       |                                                                 | $          | 6,512 |   |   |   | $ | 5,975 |   |   |   | $ | 4,113 |   |   |
| Net income per share—Basic                                                                                                      |       | As reported |       |                                                                 | $          | 0.49 |   |   |   | $ | 0.56 |   |   |   | $ | 0.37 |   |   |
|                                                                                                                                 |       | Pro  forma  |       |                                                                 | $          | 0.37 |   |   |   | $ | 0.40 |   |   |   | $ | 0.30 |   |   |
| Net income per share—Diluted                                                                                                    |       | As reported |       |                                                                 | $          | 0.48 |   |   |   | $ | 0.54 |   |   |   | $ | 0.35 |   |   |
|                                                                                                                                 |       | Pro forma   |       |                                                                 | $          | 0.36 |   |   |   | $ | 0.39 |   |   |   | $ | 0.29 |   |   |

 

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

The fairvalue of the above options was estimated during the quarter of grant using theBlack-Scholes option-pricing model with the following key assumptions:
| ** **               | ** ** | **2003**     | ** ** | **2002**     | ** ** | **2001**     | ** ** |
|--------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Expected life (years)    |       | 5.5 - 6.2    |       | 6.2          |       | 6.5          |       |
| Volatility               |       | 50%  - 55%   |       | 53%          |       | 79%          |       |
| Risk-free  interest rate |       | 2.2%  - 3.1% |       | 3.2%  - 4.4% |       | 1.9%  - 6.7% |       |
| 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. Inaddition, option valuation models require the input of highly subjectiveassumptions, including the expected stock price volatility. Because the Company’semployee stock options have characteristics significantly different from thoseof traded options and because changes in the subjective input assumptions canmaterially affect the fair value

F-8

----

 

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

estimate,in management’s opinion the existing models do not necessarily provide areliable single measure of the fair value of its employee stock options.

***Revenue Recognition***

**Bankruptcy CaseManagement Fees**

Bankruptcy case management revenues are derived fromagreements with each bankruptcy trustee and debtor in possession customerobligating the Company to deliver various products and services each month. Thefees paid are contingent upon the month-to-month delivery of the products andservices and are based on formulas, as defined by the contracts, related to thenumber of trustees and cash balances in a trustee’s bank account, the number ofcases in a trustee’s portfolio or the number of claims in each case. Theformula-based fees earned each month become fixed and determinable on a monthlybasis as a result of all contractually required products and services deliveredby the Company during the month.

The Company receives an upgrade fee from Bank ofAmerica when it completes a major upgrade of the *TCMS*® product and the upgrade is delivered to every trusteethat has a contract with Bank of America. A major upgrade typically consists ofa combination of new technology and competitive enhancements that are designedto better serve the needs of the trustee. Revenue is collected through the Bankof America marketing arrangement and is recognized upon delivery of the upgradeto the trustees.

The Company receivesexpense reimbursements, primarily for postage, from customers. Based onguidance provided by the FASB’s Emerging Issues Task Force, the Company reportsreimbursements received as revenue on an accrual basis. The expense related tothe reimbursement is recorded as a component of cost of sales.

**BankruptcyProfessional Services**

Bankruptcy professionalservices revenues are derived from performing non-routine bankruptcy servicesfor trustees and debtor in possession customers, fees for processing andnoticing and mailing services, and additional billable services provideddirectly to Bank of America to assist the bank with activities that pertaindirectly to the bank’s support of bankruptcy trustee relationships. Revenuesare recognized as the services are provided.

***Comprehensive Income***

The Company has nocomponents of other comprehensive income; therefore comprehensive income equalsnet income for each of the three years ended December 31, 2003, 2002 and2001.

***Net Income Per Share***

Basic net income per shareis computed using the weighted average number of common shares outstanding forthe period. Diluted net income per share reflects the potential dilution ofsecurities by adding other common stock equivalents, primarily stock options,to the weighted average number of common shares outstanding for a period, ifdilutive.

***Segment Information***

In determining the Company’sreportable segments, the Company examines the way it organizes its businessinternally for making operating decisions and assessing business performance. TheCompany’s 

F-9

----

 

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

revenuesare derived from sources within the United States of America and all of itslong-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 and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

***Recent Accounting Pronouncements***

In May 2003, the Financial Accounting StandardsBoard (the “FASB”) issued Statement of Financial Accounting Standards No. 150(“SFAS 150”), *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.*SFAS150 established standards for classifying and measuring certain financialinstruments that embody obligations and have characteristics of bothliabilities and equity. SFAS 150 became effective June 1, 2003, for allfinancial instruments created or modified after May 31, 2003, andotherwise became effective as of July 1, 2003. In December 2003, theFASB deferred for an indefinite period the application of the guidance in SFAS150 to noncontrolling interests that are classified as equity in the financialstatements of a subsidiary but, on application of SFAS 150, would be classifiedas a liability in the parent’s financial statements. The deferral is limited tomandatorily redeemable noncontrolling interests associated with finite-livedsubsidiaries. The Company believes it does not have any such entities and thatfuture guidance on this issue will not have a material impact on itsconsolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46(FIN 46), *Consolidation of Variable InterestEntities*. FIN 46, which applies to all public entities, clarifiesthe application of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. In December 2003, the FASB reissued FIN 46with certain modifications and clarifications. Application of this guidance waseffective for interests in certain variable interest entities commonly referredto as special-purpose entities as of December 31, 2003. Application forall other types of entities is required for periods ending after March 15,2004, unless previously applied. The Company expects that final adoption ofthis statement will not have a material impact on its consolidated financialstatements.

***Reclassification***

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

F-10

----

 

**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:
| ** **                                           | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** | **Estimated  Useful Life** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(In Thousands)**     | ** ** | ** **                  | ** ** |
| Land                                                 |       |                        | $          | 192                         |       |                            |       | $ | 192 |   |   |   |   |
| Building                                             |       |                        | 4,091      |                        |       |                            | 4,091      |   |   | 30  years |   |
| Improvements—building  and leasehold            |       |                        | 1,820      |                        |       |                            | 1,065      |   |   | 5 – 10  years |   |
| Furniture and  fixtures                              |       |                        | 1,776      |                        |       |                            | 1,474      |   |   | 5 – 10  years |   |
| Computer  equipment                                  |       |                        | 11,338     |                        |       |                            | 10,859     |   |   | 2 – 5 years |   |
| Office equipment                                     |       |                        | 906        |                        |       |                            | 399        |   |   | 5 – 10  years |   |
| Transportation  equipment                            |       |                        | 2,518      |                        |       |                            | 2,518      |   |   | 3 – 5 years |   |
|                                                 |       |                        | 22,641     |                        |       |                            | 20,598     |   |   |   |   |
| Less accumulated depreciation and amortization       |       |                        | (10,755    | )                           |       |                            | (9,024     | ) |   |   |   |
| Property, equipment and  leasehold improvements, net |       |                        | $          | 11,886                      |       |                            |       | $ | 11,574 |   |   |   |   |

 

The Company reviews itsproperty, equipment and leasehold improvements for impairment whenever eventsor changes in circumstances have indicated that the carrying amount of itsassets might not be recoverable.

**NOTE 3:**                SOFTWAREDEVELOPMENT COSTS

Thefollowing is a summary of software development costs capitalized:
| ** **                                                             | ** ** | **Year Ended December 31,**                           | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **     2003     ** | ** ** | **     2002     ** | ** ** |
| ** **                                                             | ** ** | **(In Thousands)**                                              | ** ** |
| Amounts capitalized, beginning of year                                 |       |                                                                 | $          | 9,031 |   |   |   | $ | 7,065 |   |   |
| Development costs capitalized                                          |       |                                                                 | 2,753      |   |   |   | 1,955 |   |   |
| Acquisitions                                                           |       |                                                                 | 341        |   |   |   | 11 |   |   |
| Impairment, gross  of amortization                                     |       |                                                                 | (4,913     | ) |   |   | — |   |   |
| Amounts  capitalized, end of year                                      |       |                                                                 | 7,212      |   |   |   | 9,031 |   |   |
| Accumulated amortization, end of year                                  |       |                                                                 | (4,187     | ) |   |   | (4,695 | ) |   |
| Net software development costs                                         |       |                                                                 | 3,025      |   |   |   | 4,336 |   |   |
| Less: Net  software development costs included in assets held for sale |       |                                                                 | (226       | ) |   |   | (2,425 | ) |   |
| Net software development  costs related to continuing operations       |       |                                                                 | $          | 2,799 |   |   |   | $ | 1,911 |   |   |

 

Included in the above are capitalized softwaredevelopment costs for unreleased products. Such costs totaled $1,666,000 and$1,165,000 at December 31, 2003 and 2002, respectively. Of the $1,165,000capitalized as of December 31, 2002, $306,000 related to operationssubsequently discontinued and, accordingly, has been reclassified and includedin the accompanying Consolidated Balance Sheets under the caption “Long-termassets held for sale.”

F-11

----

**NOTE 4:**                GOODWILLAND INTANGIBLE ASSETS

In June 2001, the FASB issued SFAS No. 142,which was adopted by the Company on January 1, 2002, requiring, amongother things, the discontinuance of amortization of goodwill and certain otherintangible assets. In addition, the Statement includes provisions for thereclassification of certain existing recognized intangibles as goodwill,reassessment of the useful lives of existing recognized intangibles,reclassification of certain intangibles out of previously reported goodwill andthe identification of reporting units for purposes of assessing potentialfuture impairments of goodwill.

During November 2003 (the “Measurement Date”), adecision was made to dispose of the Company’s infrastructure software business.In accordance with SFAS No. 144, long-lived assets classified as held forsale are to be measured at the lower of their carrying amounts or fair valueless cost to sell. Accordingly, as of the Measurement Date the Companyperformed an impairment analysis based on estimated proceeds from the sale lessselling costs. Based on this analysis, the carrying amounts of the Company’slong-lived assets, including goodwill and intangible assets, were impaired. Forthe year ended December 31, 2003 the Company reduced the carrying value ofthese assets and recorded a pre-tax impairment charge of approximately$7,615,000. This impairment charge is included as a component of DiscontinuedOperations on our Consolidated Statements of Income.

Goodwill, net of amortization, was $64,188,000 and$17,449,000 for bankruptcy and related services as of December 31, 2003and 2002, respectively.

Thefollowing table reconciles the changes in the Company’s goodwill balancesduring 2003 and 2002.
| ** **                                             | ** ** | **Bankruptcy  Segment  Year Ended  December 31, 2003** | ** ** | **Bankruptcy  Segment  Year Ended  December 31, 2002** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **(in Thousands)**                                               | ** ** |
| Balance as of January 1                           |       |                                                                  | $          | 17,449                                                                |       |   |   | $ | 17,398 |   |   |
| Goodwill acquired  during the year                     |       |                                                                  | 46,739     |                                                                  |       |   | 221 |   |   |
| Settlement of  contingencies from previous acquisition |       |                                                                  | —     |                                                                  |       |   | (170 | ) |   |
| Balance as of  December 31                        |       |                                                                  | $          | 64,188                                                                |       |   |   | $ | 17,449 |   |   |

 

Goodwill related to the Company’s infrastructuresoftware segment, with a balance of $3,826,000 as of both January 1, 2002and 2003, was entirely impaired during 2003 and is a component of the pre-taximpairment charge of $7,615,000 discussed above.

F-12

----

**NOTE 4:     GOODWILL AND INTANGIBLE ASSETS (Continued)**

In accordance with SFAS No. 142,adopted January 1, 2002, the Company discontinued the amortization ofgoodwill. Net income and earnings per share for the year ended December 31,2001 adjusted to exclude this amortization expense, net of tax, is as follows:
| ** **                                              | ** ** | **Year Ended  December 31, 2001**               | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(In Thousands, Except  Per Share Data)** | ** ** |
| Income from continuing operations                       |       |                                                           | $          | 6,253 |   |   |
| Goodwill amortization, net of tax                       |       |                                                           | 386        |   |   |
| Adjusted income  from continuing operations, net of tax |       |                                                           | 6,639      |   |   |
| Loss from discontinued operations                       |       |                                                           | (1,311     | ) |   |
| Goodwill amortization, net of tax                       |       |                                                           | 289        |   |   |
| Adjusted loss  from discontinued operations, net of tax |       |                                                           | (1,022     | ) |   |
| Adjusted net income                                     |       |                                                           | $          | 5,617 |   |   |
| Income per share—Basic                             |       |                                                           |       |   |   |
| Income from continuing operations                       |       |                                                           | $          | 0.47 |   |   |
| Goodwill amortization, net of tax                       |       |                                                           | 0.03       |   |   |
| Adjusted income per share from continuing operations    |       |                                                           | 0.50       |   |   |
| Loss from discontinued operations                       |       |                                                           | (0.10      | ) |   |
| Goodwill amortization, net of tax                       |       |                                                           | 0.02       |   |   |
| Adjusted income per share from discontinued  operations |       |                                                           | (0.08      | ) |   |
| Adjusted net income per share—Basic                |       |                                                           | $          | 0.42 |   |   |
| Income per share—Diluted                           |       |                                                           |       |   |   |
| Income from continuing operations                       |       |                                                           | $          | 0.44 |   |   |
| Goodwill amortization, net of tax                       |       |                                                           | 0.03       |   |   |
| Adjusted income per share from continuing operations    |       |                                                           | 0.47       |   |   |
| Loss from discontinued operations                       |       |                                                           | (0.09      | ) |   |
| Goodwill amortization, net of tax                       |       |                                                           | 0.02       |   |   |
| Adjusted loss per share from discontinued operations    |       |                                                           | (0.07      | ) |   |
| Adjusted net  income per share—Diluted             |       |                                                           | $          | 0.40 |   |   |

 

F-13

----

**NOTE 4:     GOODWILL AND INTANGIBLE ASSETS (Continued)**

Other intangible assetsrelated to continuing operations at December 31, 2003 and 2002 consistedof the following:
| ** **                             | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **(In Thousands)**         | ** ** |
| Amortized Other  Intangible Assets:    |       |                            |       |                            |       |   |   |   |   |
| Customer contracts                     |       |                            | $          | 8,060                           |       |   |   | $ | 3,360 |   |   |
| Accumulated amortization               |       |                            | (2,925     | )                               |       |   | (460 | ) |   |
| Customer contracts, net                |       |                            | 5,135      |                            |       |   | 2,900 |   |   |
| Trade names                            |       |                            | 60         |                            |       |   | 60 |   |   |
| Accumulated amortization               |       |                            | (45        | )                               |       |   | (25 | ) |   |
| Trade names, net                       |       |                            | 15         |                            |       |   | 35 |   |   |
| Non-compete agreements                 |       |                            | 11,980     |                            |       |   | 250 |   |   |
| Accumulated amortization               |       |                            | (1,279     | )                               |       |   | (154 | ) |   |
| Non-compete agreements, net            |       |                            | 10,701     |                            |       |   | 96 |   |   |
| Total amortized intangible assets, net |       |                            | $          | 15,851                          |       |   |   | $ | 3,031 |   |   |
| Unamortized Other  Intangible Assets:  |       |                            |       |                            |       |   |   |   |   |
| Trade names                            |       |                            | $          | 474                             |       |   |   | — |   |   |
| Total Other  Intangible Assets, net    |       |                            | $          | 16,325                          |       |   |   | $ | 3,031 |   |   |

 

Thetable below lists both historical amortization and estimated amortization fromcontinuing operations related to intangible assets other than goodwill (beforethe effect of the Poorman-Douglas acquisition).
| ** **                                                  | ** ** | **For The Years  Ended December 31** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(In Thousands)**                                  | ** ** |
| Aggregate  amortization expense from continuing operations: |       |                                                     |       |   |   |
| 2001                                                        |       |                                                     | $          | 165 |   |   |
| 2002                                                        |       |                                                     | 350        |   |   |
| 2003                                                        |       |                                                     | 3,610      |   |   |
| Estimated  amortization expense from continuing operations: |       |                                                     |       |   |   |
| 2004                                                        |       |                                                     | $          | 3,894 |   |   |
| 2005                                                        |       |                                                     | 1,679      |   |   |
| 2006                                                        |       |                                                     | 1,483      |   |   |
| 2007                                                        |       |                                                     | 1,483      |   |   |
| 2008                                                        |       |                                                     | 1,483      |   |   |

 

F-14

----

**NOTE 4:     GOODWILL AND INTANGIBLE ASSETS (Continued)**

Other intangible assetsrelated to Discontinued Operations at December 31, 2003 and 2002 consistedof the following:
| ** **                              | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **(In Thousands)**         | ** ** |
| Amortized Other  Intangible Assets:     |       |                            |       |                            |       |   |   |   |   |
| Customer contracts                      |       |                            | $          | 700                             |       |   |   | $ | 700 |   |   |
| Accumulated amortization                |       |                            | (260       | )                               |       |   | (195 | ) |   |
| Impairment                              |       |                            | (440       | )                               |       |   | — |   |   |
| Customer contracts, net                 |       |                            | —     |                            |       |   | 505 |   |   |
| Trade names                             |       |                            | 650        |                            |       |   | 650 |   |   |
| Accumulated amortization                |       |                            | (241       | )                               |       |   | (182 | ) |   |
| Impairment                              |       |                            | (409       | )                               |       |   | — |   |   |
| Trade names, net                        |       |                            | —     |                            |       |   | 468 |   |   |
| Non-compete agreements                  |       |                            | 50         |                            |       |   | 50 |   |   |
| Accumulated amortization                |       |                            | (46        | )                               |       |   | (35 | ) |   |
| Impairment                              |       |                            | (4         | )                               |       |   | — |   |   |
| Non-compete agreements, net             |       |                            | —     |                            |       |   | 15 |   |   |
| Total amortized  intangible assets, net |       |                            | —     |                            |       |   | $ | 988 |   |   |
|                                         |            |                                 |            |                                 |            |  |  |  |  |  |  |

 

**NOTE 5:**                LINEOF CREDIT AND LONG-TERM OBLIGATIONS

***Line of Credit***

As of December 31, 2003, the Company had anunsecured $25,000,000 line of credit which matured May 31, 2006. Anyborrowing on the line of credit accrued interest at the Prime Rate as publishedin the Wall Street Journal or LIBOR plus 200 basis points, at the option of theCompany. The line of credit contained certain financial covenants pertaining tothe maintenance of minimum earnings before interest, taxes, depreciation andamortization (“EBITDA”) and maximum total debt to EBITDA. The $25,000,000 lineof credit replaced two existing lines of credit, with an aggregate capacity of$15,000,000, that were in place as of December 31, 2002.

No borrowings were outstanding under any line ofcredit as of either December 31, 2003 or 2002. The Company was incompliance with all of the financial covenants under the lines of credit as ofand for the years ended December 31, 2003 and 2002.

The line of creditoutstanding at December 31, 2003 was terminated as of January 30,2004 and replaced with a syndicated credit facility. The credit facilityconsists of a $45,000,000 senior term loan, with amortizing principal quarterlypayments of $4,500,000 beginning April 30, 2004, a $25,000,000 seniorrevolving loan, and a $30,000,000 subordinated term loan. The senior term loanand revolver mature July 31, 2006, while the subordinated term loanmatures December 31, 2006. Interest on the credit facility isgenerally based on a spread over the LIBOR rates. The credit facility containsfinancial covenants related to EBITDA, total debt and interest charges, and issecured by liens on real property and a significant portion of the Company’spersonal property.

F-15

----

**NOTE 5:**                LINEOF CREDIT AND LONG-TERM OBLIGATIONS (Continued)

***Deferred Acquisition Price***

On January 31,2003 EPIQ 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, for a purchase price of $67,014,000. A portionof the purchase price was deferred which consists of a non-interest bearingnote, payable in five annual installments, with a face value of $4,000,000discounted using an imputed rate of 5% per annum. At December 31, 2003 thediscounted liability was approximately $3,606,000 of which approximately$540,000 was classified as a current liability. The annual undiscountedpayments for this obligation at December 31, 2003 are as follows:
| ** ** | ** ** | **(In Thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2004       |       |                    | $          | 556 |   |   |
| 2005       |       |                    | 555        |   |   |
| 2006       |       |                    | 1,704      |   |   |
| 2007       |       |                    | 593        |   |   |
| 2008       |       |                    | 592        |   |   |
| Total      |       |                    | $          | 4,000 |   |   |

 

**NOTE 6:**                OPERATINGLEASES

The Company has non-cancelable operating leases foroffice space at various locations expiring at various times through August 2013.Each of the leases requires the Company to pay all executory costs (propertytaxes, maintenance and insurance). Additionally, the Company has non-cancelableoperating leases for office equipment and automobiles expiring through January 2007.

Future minimum leasepayments during the years ending December 31 are as follows:
| ** **                    | ** ** | **(In Thousands)** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| 2004                          |       |                    | $          | 1,309 |   |   |
| 2005                          |       |                    | 1,057      |   |   |
| 2006                          |       |                    | 861        |   |   |
| 2007                          |       |                    | 716        |   |   |
| 2008                          |       |                    | 573        |   |   |
| Thereafter                    |       |                    | 2,672      |   |   |
| Total minimum lease  payments |       |                    | $          | 7,188 |   |   |

 

Expense related tooperating leases was approximately $1,047,000, $425,000, and $431,000 for theyears ended December 31, 2003, 2002 and 2001, respectively. Included inrental expense was approximately $162,000 paid to a related party for the yearended December 31, 2001.

**NOTE 7:**                RELATEDPARTY TRANSACTIONS

The Company leased officespace for the corporate headquarters building in Kansas City, Kansas from apartnership in which the Chairman of the Board and Chief Executive Officer ofthe Company is a partner. The lease expired in February 2001 and became amonth-to-month lease. In May 2001 the Company purchased its corporateheadquarters building and land for a cash purchase price of $1,750,000. Thepurchase price was based on an independent appraisal of the building obtainedby the Company in January 2001.

F-16

----

**NOTE 8:**                EMPLOYEEBENEFIT PLANS

***Stock Purchase Plan***

The Company established anemployee stock purchase plan in October 2000. The plan creates anopportunity for the majority of employees to purchase shares of the Company’scommon stock through payroll deduction. The purchase prices for all employeeparticipants are based on the closing bid price on the last business day of themonth.

***Defined Contribution Plan***

The Company has a definedcontribution 401(k) plan covering substantially all employees. The Companymatches 60% of the first 10% of employee contributions and also has the optionof making discretionary contributions. Contributions were approximately$426,000, $337,000, and $270,000 for the years ended December 31, 2003,2002, and 2001, respectively.

**NOTE 9:**                STOCKHOLDERS’EQUITY

On June 6, 2001, the shareholders approved anamendment to the Articles of Incorporation of the Company to increase thenumber of authorized common shares to 50,000,000 from 20,000,000.

On June 29, 2001, the Company completed asecondary public offering of 1,537,500 shares of its common stock and receivednet proceeds of $22,735,000, after underwriter’s discount and offering expensesof $1,865,000.

On November 7, 2002, the Company completed aprivate placement of 2,000,000 shares of its common stock and received netproceeds of approximately $28,140,000, after underwriter’s discount andoffering expenses of $1,860,000.

On January 31, 2003, the Company issued 1,054,230shares of restricted common stock, valued at approximately $16,500,000, as apart of the transaction to purchase the membership interests of BSI. Half ofthe restricted shares cannot be sold, transferred or encumbered for a period ofone year from the date of issue, and the other half of the restricted sharescannot be sold, transferred or encumbered for a period of two years from thedate of issue.

In connection with theinitial public offering, the Company issued warrants to purchase 360,000 sharesof stock at $1.87 per share to its underwriters, expiring at the close ofbusiness on February 3, 2002. At December 31, 2000 warrants topurchase 107,550 shares of stock remained outstanding. In January 2001,103,670 warrants were exercised for their exercise price, resulting in theissuance of an additional 103,670 shares of common stock. In April 2001,2,588 of the remaining warrants were converted in a cashless exercise,resulting in the issuance of an additional 2,181 shares of common stock. Theremaining 1,293 warrants were converted to 1,165 shares of common stock in acashless exercise in May 2001. There were no remaining warrantsoutstanding after the May 2001 transaction.

F-17

----

**NOTE 10:**         INCOMETAXES

Thefollowing table presents the income from continuing operations, all fromdomestic sources, before income taxes and the provision (benefit) for incometaxes.
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                          | ** ** | **(In Thousands)**                     | ** ** |
| Income before  income taxes:                                        |       | $                                           | 24,690     |   | $ | 15,712 |   | $ | 10,095 |   |
| Provision for  income taxes from continuing operations:             |       |                                        |       |   |   |   |   |
| Currently payable  income taxes                                     |       |                                        |       |   |   |   |   |
| Federal                                                             |       | 7,245                                       |       | 4,438 |   | 3,015 |   |
| State                                                               |       | 2,886                                       |       | 1,007 |   | 672 |   |
| Total                                                               |       | 10,131                                      |       | 5,445 |   | 3,687 |   |
| Deferred income  taxes                                              |       |                                        |       |   |   |   |   |
| Federal                                                             |       | 28                                          |       | 441 |   | 136 |   |
| State                                                               |       | 6                                           |       | 60 |   | 19 |   |
| Total                                                               |       | 34                                          |       | 501 |   | 155 |   |
| Provision for income taxes from continuing  operations              |       | $                                           | 10,165     |   | $ | 5,946 |   | $ | 3,842 |   |
| Provision  (benefit) for income taxes from discontinued operations: |       |                                        |       |   |   |   |   |
| Current income tax                                                  |       | $                                           | (1,855     | ) | $ | (1,812 | ) | $ | (1,110 | ) |
| Deferred income taxes                                               |       | (1,889                                      | )          | 879 |   | 304 |   |
| (Benefit) for  income taxes from discontinued operations            |       | (3,744                                      | )          | (933 | ) | (806 | ) |
| Consolidated  income tax provision                                  |       | $                                           | 6,421      |   | $ | 5,013 |   | $ | 3,036 |   |

 

A reconciliation of theprovision for income taxes from continuing operations at the statutory rate(35% in 2003 and 34% in both 2002 and 2001) to provision for income taxes fromcontinuing operations at the Company’s effective rate is shown below:
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2003**                                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                             | ** ** | **(In Thousands)**                     | ** ** |
| Computed at the statutory rate                         |       | $                                           | 8,641      |   | $ | 5,342 |   | $ | 3,432 |   |
| Change in taxes  resulting from:                       |       |                                        |       |   |   |   |   |
| State income taxes, net of federal tax effect          |       | 1,372                                       |       | 553 |   | 361 |   |
| Other                                                  |       | 152                                         |       | 51 |   | 49 |   |
| Provision for income  taxes from continuing operations |       | $                                           | 10,165     |   | $ | 5,946 |   | $ | 3,842 |   |

 

F-18

----

**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 balance sheets are asfollows:
| ** **                                             | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(In Thousands)**     | ** ** |
| Deferred tax assets:                                   |       |                        |       |                        |       |   |   |   |   |
| Allowance for doubtful accounts                        |       |                        | $          | 164                         |       |   |   | $ | 12 |   |   |
| Intangible assets                                      |       |                        | 1,890      |                        |       |   | 110 |   |   |
| Property and equipment and software development  costs |       |                        | 109        |                        |       |   | — |   |   |
| Other                                                  |       |                        | 28         |                        |       |   | 82 |   |   |
| Total deferred tax assets                              |       |                        | 2,191      |                        |       |   | 204 |   |   |
| Deferred tax  liabilities:                             |       |                        |       |                        |       |   |   |   |   |
| Prepaid expenses                                       |       |                        | 342        |                        |       |   | 185 |   |   |
| Intangible assets                                      |       |                        | 939        |                        |       |   | 355 |   |   |
| Property and equipment and software development  costs |       |                        | 1,141      |                        |       |   | 1,750 |   |   |
| Total deferred tax liabilities                         |       |                        | 2,422      |                        |       |   | 2,290 |   |   |
| Net deferred tax  liability                            |       |                        | $          | (231                        | )          |   |   | $ | (2,086 | ) |   |

 

Theabove net deferred tax liability is presented on the balance sheets as follows:
| ** **             | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **(In Thousands)**     | ** ** |
| Current Assets:        |       |                        |       |                        |       |   |   |   |   |
| Deferred income taxes  |       |                        | $          | 1,736                       |       |   |   | $ | — |   |   |
| Current Liabilities:   |       |                        |       |                        |       |   |   |   |   |
| Other accrued expenses |       |                        | —     |                        |       |   | (106 | ) |   |
| Long-term Liabilities: |       |                        |       |                        |       |   |   |   |   |
| Deferred income taxes  |       |                        | (1,967     | )                           |       |   | (1,980 | ) |   |
|                   |       |                        | $          | (231                        | )          |   |   | $ | (2,086 | ) |   |

 

F-19

----

**NOTE 11:**         NETINCOME PER SHARE

Thedetails of the calculation of basic and diluted net income per share fromcontinuing operations are as follows:
| ** **                                           | ** ** | **2003**                                                           | ** ** | **2002**                                   | ** ** | **2001**               | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **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** | ** ** |
| ** **                                           | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| Basic income per share from continuing operations    |       | $                                                                  | 14,525     |                                       |       | 17,619                 |       |   |   | $ | 0.82 |   |   | $ | 9,766 |   |   | 14,775 |   |   |   | $ | 0.66 |   |   | $ | 6,253 |   |   | 13,508 |   |   |   | $ | 0.47 |   |   |
| Effect of  dilutive securities:                      |       |                                                               |       |                                       |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                        |       |                                                               |       |                                       | 485        |                   |       |   |   |   |   |   |   |   | 534 |   |   |   |   |   |   |   |   |   | 603 |   |   |   |   |   |   |
| Diluted income  per share from continuing operations |       | $                                                                  | 14,525     |                                       |       | 18,104                 |       |   |   | $ | 0.80 |   |   | $ | 9,766 |   |   | 15,309 |   |   |   | $ | 0.64 |   |   | $ | 6,253 |   |   | 14,111 |   |   |   | $ | 0.44 |   |   |

 

Options to purchase 113,000, 99,000 and 4,000 sharesof common stock as of December 31, 2003, 2002 and 2001, respectively, wereantidilutive and therefore not included in the computation of diluted earnings pershare.

**NOTE 12:**         STOCKOPTIONS

The Company’s 1995 Stock Option Plan (the “Plan”), asamended, limits the grant of options to acquire shares of common stock to4,500,000 shares. At December 31, 2003, there were approximately 1,753,000options available for future grants under the Plan. Under the Plan, the optionprice may not be less than 100% of the fair market value of the common stock onthe date of grant for a non-qualified stock option or an incentive stock option(“ISO”).

The Board of Directors administers the Plan and hasdiscretion to determine the term of an option, which may not be exercised morethan 10 years after the date of grant. In the case of an ISO granted to anemployee owning more than 10% of the voting stock of the Company, the term maynot exceed five years from the date of grant. Options may not be transferred byan optionee except by will or the laws of descent and distribution and areexercisable during the lifetime of an optionee only by the optionee or theoptionee’s guardian or legal representatives. Assuming the option is otherwisestill exercisable, options must be exercised within one year after atermination of employment due to death, one year after a termination ofemployment due to disability, and three months after any other termination ofemployment.

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 immediately to five years.

As of December 31, 2003, the Company hadoutstanding one stock option to acquire up to 80,000 shares of common stock,which option was granted outside the Plan as an inducement grant to a newexecutive. The option was granted at an option exercise price equal to fairmarket value of the common stock on the date of grant, is a non-qualifiedoption, is exercisable for up to 10 years from the date of grant and vests 20%on the grant date and continues to vest 20% per year on each anniversary of thegrant date until fully vested.

F-20

----

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

A summary of the Company’sstock options outstanding as of December 31, 2003, 2002 and 2001 ispresented below:
| ** **                                                      | ** ** | **2003**                                                  | ** ** | **2002**                                | ** ** | **2001**   | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **Shares**                                                | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| ** **                                                      | ** ** | **(In Thousands, Except Price Data)** | ** ** |
| Outstanding, beginning of year                                  |       | 1,744                                                     |       |                                    | $          | 6.87       |       |   | 1,293 |   |   | $ | 5.88 |   |   | 1,134 |   |   | $ | 3.92 |   |   |
| Granted                                                         |       | 727                                                       |       |                                    | 16.42      |       |       | 679 |   |   | 15.79 |   |   | 443 |   |   | 9.89 |   |   |
| Forfeited                                                       |       | (87                                                       | )          |                                    | 10.08      |       |       | (91 | ) |   | 8.96 |   |   | (87 | ) |   | 7.06 |   |   |
| Exercised                                                       |       | (192                                                      | )          |                                    | 5.36       |       |       | (137 | ) |   | 3.00 |   |   | (197 | ) |   | 3.09 |   |   |
| Outstanding, end  of year                                       |       | 2,192                                                     |       |                                    | 10.97      |       |       | 1,744 |   |   | 6.87 |   |   | 1,293 |   |   | 5.88 |   |   |
| Options exercisable at year-end                                 |       | 1,225                                                     |       |                                    |       |       |       | 791 |   |   |   |   |   | 355 |   |   |   |   |   |
| Weighted-average fair  value of options granted during the year |       | $                                                         | 9.67       |                                    |       |       |       |   | $ | 8.65 |   |   |   |   |   | $ | 7.23 |   |   |   |   |   |
|                                                                 |            |                                                           |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2003:
| ** **                              | ** ** | **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** | ** ** |
| ** **                              | ** ** | **(In Thousands, Except Life and Price Data)** | ** ** |
| $1.56 to $3.99                          |       |                                                                         | 97         |                                                     |       |   | 4.63 years |   |   |   | $ | 3.12 |   |   |   | 93 |   |   |   | $ | 3.09 |   |   |
| $4.00 to $5.99                          |       |                                                                         | 403        |                                                     |       |   | 5.58 years |   |   |   | 4.66 |   |   |   | 335 |   |   |   | 4.67 |   |   |
| $6.00 to $12.99                         |       |                                                                         | 464        |                                                     |       |   | 7.53 years |   |   |   | 10.07 |   |   |   | 278 |   |   |   | 10.35 |   |   |
| $13.00 to $15.99                        |       |                                                                         | 508        |                                                     |       |   | 9.76 years |   |   |   | 15.81 |   |   |   | 6 |   |   |   | 14.55 |   |   |
| $16.00 and over                         |       |                                                                         | 720        |                                                     |       |   | 8.87 years |   |   |   | 17.02 |   |   |   | 513 |   |   |   | 16.79 |   |   |
|                                    |       |                                                                         | 2,192      |                                                     |       |   | 8.00 years |   |   |   | 12.38 |   |   |   | 1,225 |   |   |   | 10.97 |   |   |

 

**NOTE 13:**         SIGNIFICANTCUSTOMER AND CONCENTRATION

The Company promotes its Chapter 7 *TCMS®* software related products andservices through a national marketing arrangement with Bank of America. Throughthis arrangement the Company receives revenues based on the number of trusteesand the level of trustees’ deposits with that institution. The Company alsoearns revenue from conversions, upgrades, electronic banking services,technology services and marketing and consulting services. Revenues recognizedby the Company from Bank of America as a result of these arrangements wereapproximately $34,324,000, $29,476,000, and $22,335,000 for 2003, 2002 and2001, respectively. The increase in each year shown was from increases in thenumber of trustees and deposits, electronic banking, technology integrationfees, technology management fees and marketing and consulting services. Additionally,Bank of America represented approximately 57% and 75% of the Company’s accountsreceivable balance as of December 31, 2003 and 2002, respectively.

In 2003, the Companyagreed with Bank of America that the exclusive marketing arrangement willbecome a non-exclusive marketing arrangement effective April 1, 2004. Thenon-exclusive marketing arrangement will extend through September 30,2006, unless otherwise mutually agreed.

F-21

----

**NOTE 14:**         BUSINESSACQUISITIONS

***Bankruptcy Services LLC***

On January 31,2003, EPIQ acquired 100% of the membership interests of Bankruptcy Services LLC(“BSI”), a provider of technology-based case management, consulting, andadministrative services for Chapter 11 cases, for a purchase price of$67,014,000. This acquisition provided complementary diversification to theCompany’s existing legal services business. The results of BSI’s operationshave been included in the consolidated results of operations since that date. Thepurchase price included the following components:
| Cash                                                |   | $          | 45,500,000 |   |
|-----------------------------------------------------|--------|------------|------------|--------|
| Restricted stock  (1,054,000 shares) of the Company |   | 16,500,000 |       |
| Deferred  acquisition price                         |   | 3,445,000  |       |
| Assumed  liabilities                                |   | 1,250,000  |       |
| Acquisition costs                                   |   | 319,000    |       |

 

The deferred acquisition price consists of anon-interest bearing note, payable in five annual installments, with a facevalue of $4,000,000 discounted using an imputed rate of 5% per annum.

Thepurchase price has been allocated to tangible and identifiable intangibleassets as follows:
| Net tangible  assets   |   | $          | 3,030,000 |   |
|------------------------|--------|------------|-----------|--------|
| Software               |   | 341,000    |      |
| Trade name             |   | 474,000    |      |
| Customer backlog       |   | 4,700,000  |      |
| Non-compete agreements |   | 11,730,000 |      |

 

The Company is using thestraight-line method to amortize the software over three years, the customerbacklog over two years and the non-compete agreements over ten years. The tradename has an indefinite life and, therefore, is not currently subject toamortization. Goodwill of $46,739,000, which is deductible for tax purposes,was assigned to the bankruptcy segment.

***CPT Group, Inc.***

On July 10, 2002, theCompany acquired the Chapter 7 trustee business of CPT Group, Inc. inOrange County, California. The purchase price totaled $852,000, includingacquisition costs of $52,000. The net purchase price of $800,000 was paid incash. The purchase price was allocated to software of $11,000 and customercontracts of $620,000. The software is being amortized on a straight-line basisover 12 months, while the customer contracts are being amortized on astraight-line basis over 10 years. The remainder of the purchase price was allocatedto goodwill and totaled $221,000. In accordance with SFAS No. 142, thegoodwill is not being amortized. The acquisition was accounted for using thepurchase method of accounting with the operating results included in theCompany’s Consolidated Statement of Income since the date of acquisition.

***ROC Technologies, Inc.***

On October 11, 2001,the Company acquired certain assets from ROC Technologies, Inc., thebankruptcy management software subsidiary of Imperial Bancorp. Imperial Bancorpis a subsidiary of Comerica, Inc. (“Comerica”). The acquisition followedComerica’s decision to exit the Chapter 7 trustee business. The purchase pricetotaled approximately $12,228,000, including acquisition costs of $188,000 andassumed liabilities of $40,000. The net purchase price of $12,188,000 was paidentirely in cash. The 

F-22

----

**NOTE 14:   BUSINESS ACQUISITIONS (Continued)**

purchaseprice was allocated to property and equipment of $118,000, software of$270,000, trade name of $60,000 and customer contracts of $1,840,000. Thesoftware and trade name are being amortized on a straight-line basis over 3years while the customer contracts are being amortized on a straight-line basisover 10 years. The remainder of the purchase price was allocated to goodwilland totaled $9,940,000. In accordance with SFAS No. 142, the goodwill isnot being amortized. The acquisition was accounted for using the purchasemethod of accounting with the operating results included in the Company’sConsolidated Statement of Income since the date of acquisition.

***Pro Forma Information***

Unauditedpro forma operations assuming each purchase acquisition was made at thebeginning of the year preceding the acquisition are shown below:
| ** **                         | ** ** | **For the Years  Ended December 31,**      | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                         | ** ** | **2003**                                                       | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                         | ** ** | **(In Thousands, Except  Per Share Data)** | ** ** |
| Operating revenues                 |       | $                                                              | 69,914     |   | $ | 63,368 |   | $ | 31,774 |   |
| Income from continuing operations  |       | 14,851                                                         |       | 9,829 |   | 4,740 |   |
| Discontinued  operations           |       | (5,780                                                         | )          | (1,533 | ) | (1,311 | ) |
| Net income                         |       | 9,071                                                          |       | 8,296 |   | 3,429 |   |
| Net income per share:              |       |                                                           |       |   |   |   |   |
| Income per  share—Basic       |       |                                                           |       |   |   |   |   |
| Income from continuing operations  |       | 0.84                                                           |       | 0.66 |   | 0.35 |   |
| Loss from discontinued operations  |       | (0.33                                                          | )          | (0.10 | ) | (0.10 | ) |
| Net income per share—Basic    |       | 0.51                                                           |       | 0.56 |   | 0.25 |   |
| Income per  share—Diluted     |       |                                                           |       |   |   |   |   |
| Income from continuing operations  |       | 0.82                                                           |       | 0.64 |   | 0.33 |   |
| Loss from discontinued operations  |       | (0.32                                                          | )          | (0.10 | ) | (0.09 | ) |
| Net income per  share—Diluted |       | 0.50                                                           |       | 0.54 |   | 0.24 |   |
|                                    |            |                                                                |            |  |  |  |  |  |  |  |

 

Pro forma data reflect the difference in amortizationexpense between EPIQ and the acquired company as well as other adjustments,including income taxes and management compensation. The pro forma informationis not necessarily indicative of what would have occurred had the acquisitionbeen completed on that date nor is it necessarily indicative of futureoperations.

 

F-23

----

**NOTE 15:**         DISCONTINUEDOPERATIONS

The Company acquired the infrastructure softwarebusiness in March 2000. The primary offering for the infrastructuresoftware market is *DataExpress®*,a software product line that automates the exchange of data files between theCompany’s customers and their business partners. During November 2003 (the“Measurement Date”), the Company determinedthat its infrastructure software segment was no longer germane to the Company’slong-term strategic plan. Accordingly, the Company developed and committed to aplan to sell, within one year, the infrastructure software business.

The disposal plan consists primarily of the activemarketing of the infrastructure business. The Company believes the sale ofinfrastructure software will be completed within one year of the MeasurementDate. The disposal of the infrastructure business represents a discontinuedoperation under SFAS No. 144 and is classified as held for sale. Accordingly,assets and liabilities related to this segment have been reclassified in theaccompanying Consolidated Balance Sheets as held for sale, and revenues, costof sales, and operating expenses related to this segment have been reclassifiedin the accompanying Consolidated Statements of Income for all periods presentedas “Discontinued Operations.”

In accordance with SFAS No. 144, long-livedassets classified as held for sale are to be measured at the lower of theircarrying amounts or fair value less cost to sell. Accordingly, as of theMeasurement Date, the Company performed an impairment analysis based onestimated proceeds from the sale less estimated selling costs. Based on thisanalysis, the carrying amounts of the long-lived assets including property andequipment, goodwill and other intangible assets, were impaired. For the yearended December 31, 2003 the Company wrote down the carrying value of theseassets and recorded a pre-tax impairment charge, included in DiscontinuedOperations in the accompanying Consolidated Statements of Income, ofapproximately $7,615,000. The tax benefit related to this impairment charge,also included in Discontinued Operations in the accompanying ConsolidatedStatements of Income, was approximately $3,000,000.

F-24

----

**NOTE 15:   DISCONTINUED OPERATIONS (Continued)**

The following tablessummarize financial information for Discontinued Operations.
| **Balance sheets of discontinued operations:**                             | ** ** | ** **              | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                     | ** ** | **(In Thousands)** | ** ** |
| **ASSETS**                                                                                     |       |                    |       |                        |       |                        |       |   |   |
| **CURRENT ASSETS:**                                                                            |       |                    |       |                        |       |                        |       |   |   |
| Cash                                                                                           |       |                    | $          | 714                         |       |                        |       | — |   |   |
| Accounts receivable, trade, less allowance for  doubtful accounts of $16 and $26, respectively |       |                    | 258        |                        |       |                        | $          | 538 |   |   |
| Prepaid expenses                                                                               |       |                    | 82         |                        |       |                        | 65         |   |   |
| Property and equipment, net                                                                    |       |                    | 24         |                        |       |                        | —     |   |   |
| Software development costs, net                                                                |       |                    | 226        |                        |       |                        | —     |   |   |
| Total Current Assets                                                                           |       |                    | 1,304      |                        |       |                        | 603        |   |   |
| **LONG-TERM  ASSETS:**                                                                         |       |                    |       |                        |       |                        |       |   |   |
| Property and equipment, net                                                                    |       |                    | —     |                        |       |                        | 312        |   |   |
| Software development costs, net                                                                |       |                    | —     |                        |       |                        | 2,425      |   |   |
| Goodwill                                                                                       |       |                    | —     |                        |       |                        | 3,826      |   |   |
| Other intangibles, net of accumulated amortization  of $412 in 2002                            |       |                    | —     |                        |       |                        | 988        |   |   |
| Other                                                                                          |       |                    | —     |                        |       |                        | 20         |   |   |
| Total Long-term Assets                                                                         |       |                    | —     |                        |       |                        | 7,571      |   |   |
| Total Assets                                                                                   |       |                    | 1,304      |                        |       |                        | 8,174      |   |   |
| **LIABILITIES**                                                                                |       |                    |       |                        |       |                        |       |   |   |
| **CURRENT LIABILITIES:**                                                                       |       |                    |       |                        |       |                        |       |   |   |
| Accounts payable                                                                               |       |                    | 146        |                        |       |                        | 72         |   |   |
| Accrued expenses                                                                               |       |                    | 27         |                        |       |                        | 115        |   |   |
| Deferred revenue                                                                               |       |                    | 964        |                        |       |                        | 817        |   |   |
| Current maturities of long-term obligations                                                    |       |                    | —     |                        |       |                        | 7          |   |   |
| Total Current Liabilities                                                                      |       |                    | 1,137      |                        |       |                        | 1,011      |   |   |
| **LONG-TERM  LIABILITIES:**                                                                    |       |                    |       |                        |       |                        |       |   |   |
| Deferred revenue                                                                               |       |                    | —     |                        |       |                        | 52         |   |   |
| Total Long-term Liabilities                                                                    |       |                    | —     |                        |       |                        | 52         |   |   |
| Total Liabilities                                                                              |       |                    | 1,137      |                        |       |                        | 1,063      |   |   |
| **NET  ASSETS OF DISCONTINUED OPERATIONS**                                                     |       |                    | $          | 167                         |       |                        |       | $ | 7,111 |   |   |

 
| ** **                                                      | ** ** | **Years Ended December 31** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Net revenue and pre-tax loss from  discontinued operations:** | ** ** | ** **                                 | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                      | ** ** | **(In Thousands)**                    | ** ** |
| Net revenue from discontinued operations                        |       | $                                          | 1,988      |   | $ | 2,020 |   | $ | 1,963 |   |
| Pre-tax loss from  discontinued operations                      |       | $                                          | (9,562     | ) | $ | (2,466 | ) | $ | (2,117 | ) |
|                                                                 |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

F-25

----

**NOTE 16:**         SEGMENTREPORTING

EPIQ Systems has two operating segments to which itallocates resources and assesses performance: bankruptcy and related servicesand infrastructure software. Gross profit, as reported in the ConsolidatedStatements of Income, is the financial measure used by the chief operatingdecision maker in assessing segment performance and deciding how to allocateresources.

The bankruptcy operating model is based on providingcomprehensive bankruptcy case management solutions supported by a bankruptcyshared services organization. The Company’s bankruptcy product and serviceofferings automate various administrative tasks pertaining to bankruptcyclaims, assets, financial records and other data associated with liquidationsand reorganizations, and assist customers in organizing and managing theirdatabases of case information, in preparing notices and mailings and infulfilling their various responsibilities.

The infrastructure software segment develops filetransfer software used by companies in various industries. During November 2003,the Company decided to dispose of the infrastructure software segment. Accordingly,this segment is classified as held for sale and is reported as DiscontinuedOperations. Revenues, cost of sales and operating expenses related to thissegment have been reclassified in the financial statements for all periodspresented as “Discontinued Operations.” 

Consistent with guidanceprovided by the Financial Accounting Standards Board, the Company has notpresented segment information related to its discontinued operation. As aresult, as of December 31, 2003, the Company had only a single reportablesegment, bankruptcy and related services.

**NOTE17:**         ADDITIONAL CASH FLOWSINFORMATION
| ** **                         | ** ** | **2003**                | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(In Thousands)** | ** ** |
| ***Additional  Cash Information*** |       |                    |       |     |       |     |       |
| Interest paid                      |       | $                       | 53         |     | $          | 151      |       | $ | 135 |   |
| Income taxes paid                  |       | $                       | 7,518      |     | $          | 3,128    |       | $ | 1,837 |   |

 

***Noncash Investing and Financing Activities***

TheCompany acquired certain assets and assumed certain liabilities of BSI in 2003.The Company acquired certain business assets of CPT Group, Inc and received asettlement for contingencies on the ROC acquisition in 2002. The Companyacquired certain business assets and assumed certain liabilities of ROC in 2001.In conjunction with the acquisitions, cash flow information is as follows:
| ** **                                            | ** ** | **2003**                | ** ** | **2002** | ** ** | **2001** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **(In Thousands)** | ** ** |
| Fair value of assets acquired                         |       | $                       | 67,014     |     | $          | 852      |       | $ | 12,228 |   |
| Deferred  obligation incurred in purchase transaction |       | (3,445                  | )          | —   |       | —   |       |
| Restricted stock  issued                              |       | (16,500                 | )          | —   |       | —   |       |
| Settlement of  contingencies from ROC acquisition     |       | —                  |       | (170     | )          | —   |       |
| Liabilities  assumed                                  |       | (1,250                  | )          | —   |       | (40      | )          |
| Cash paid for  acquisition                            |       | 45,819                  |       | 682      |       | 12,188   |       |
| Cash acquired                                         |       | 2,556                   |       | —   |       | —   |       |
| Cash paid for  acquisition, net of cash acquired      |       | $                       | 43,263     |     | $          | 682      |       | $ | 12,188 |   |

 

F-26

----

**NOTE 18:**         SUBSEQUENTEVENTS

On January 30, 2004, the Company acquired 100% ofthe equity of P-D Holding Corp. and its wholly-owned operating subsidiary,Poorman-Douglas Company (collectively, “Poorman-Douglas”) in a transactionaccounted for under the purchase method of accounting. The approximate $115million cash purchase price was financed using available cash and borrowingsunder a newly established $100 million credit facility. This transactionprovides complementary diversification to the Company’s existing legal servicesbusiness. The purchase price will be allocated to assets acquired, includingidentifiable intangible assets, and liabilities assumed based on the fair valueof such assets acquired and liabilities assumed. The purchase price in excessof the fair value of assets acquired less the fair value of liabilities assumedwill be recorded as goodwill. The Company has not completed the process ofidentifying and valuing all assets acquired and liabilities assumed.

On January 30,2004, the Company terminated and replaced its existing $25 million line ofcredit with a $100 million syndicated credit facility. The credit facilityconsists of

·       45million senior term loan, with $4.5 million quarterly amortizing principalpayments beginning April 30, 2004 and a final maturity of July 31,2006;

·       25million senior revolving loan, with a final maturity of July 31, 2006; and

·       30million subordinated term loan, with no required amortizing principal paymentsand a final maturity of December 31, 2006.

Interest on the credit facility is generally based ona spread over the LIBOR rates, contains financial covenants related to EBITDA,total debt and interest charges, and is secured by liens on the Company’s realproperty and most of its personal property.

*     *     *

 

F-27

----

**EPIQ SYSTEMS,INC.SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS****(InThousands)**
| ** **                                                   | ** ** | ** ** | ** ** | **Additions**                                | ** ** | ** **                                    | ** ** | ** **                           | ** ** |
|--------------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|
| **Description**                                              | ** ** | ** ** | ** ** | **Balance at  beginning of  year** | ** ** | **Charged to  costs and  expenses** | ** ** | **Charged to  other  accounts** | ** ** | **Deductions  from  reserves** | ** ** | **Balance at  end of  year** | ** ** |
| Allowance for doubtful receivables for continuing operations |       |       |       |                                         |       |                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| For the year ended  December 31, 2003                   |       |       | $          | 5                                            |       |                                          |       | $                                    | 347        |   |   |   |   |   | $ | (12 | ) |   |   | $ | 340 |   |   |
| For the year ended  December 31, 2002                   |       |       | 5          |                                         |       |                                          |       |                                 |       |   |   |   |   |   |   |   | 5 |   |   |
| For the year ended December 31, 2001                    |       |       | 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.(1)                                                                                                                                                                                                                                                                                                                                               |
| 3.2                     |       | Bylaws, as amended and restated.(2)                                                                                                                                                                                                                                                                                                                                                     |
| 4.1                     |       | Reference is made to exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                              |
| 10.1                    |       | 1995 Stock Option Plan, as amended.(3)                                                                                                                                                                                                                                                                                                                                                  |
| 10.2                    |       | Securities Purchase Agreement dated as of November 7, 2002, among  the Company and the Purchasers named therein.(4)                                                                                                                                                                                                                                                                |
| 10.3                    |       | 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.(5)                                                                                                                                                 |
| 10.4                    |       | Employment Agreement dated as of January 31, 2003, among  Bankruptcy Services LLC, the Company and Ron Jacobs.(5)                                                                                                                                                                                                                                                                  |
| 10.5                    |       | Employment Agreement dated as of January 31, 2003, among  Bankruptcy Services LLC, the Company and Kathleen Gerber.(5)                                                                                                                                                                                                                                                             |
| 10.6                    |       | Stock Option Agreement among the Company, Bankruptcy Services LLC and  Ron Jacobs dated as of January 31, 2003,.(5)                                                                                                                                                                                                                                                                |
| 10.7                    |       | 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.(6)                                                                                                                                                                |
| 10.8                    |       | 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.(6)                                                                                                                              |
| 10.9                    |       | Employment and  Non-Competition Agreement between Poorman-Douglas Corporation and Jeffrey B.  Baker dated as of January 30, 2004.(6)                                                                                                                                                                                                                                               |
| 10.10                   |       | Employment and  Non-Competition Agreement between Poorman-Douglas Corporation and Edward J.  Nimmo dated as of January 30, 2004.(6)                                                                                                                                                                                                                                                |
| 10.11                   |       | Stock Option Agreement  between the Company and Jeffrey B. Baker dated as of January 30, 2004.(6)                                                                                                                                                                                                                                                                                  |
| 10.12                   |       | Stock Option  Agreement between the Company and Edward J. Nimmo dated as of  January 30, 2004.(6)                                                                                                                                                                                                                                                                                  |
| 10.13                   |       | Credit Agreement  among the Company, Bankruptcy Services LLC and Poorman-Douglas Corporation,  as Borrowers; the various financial institutions party thereto, as Lenders;  LaSalle Bank National Association, as Administrative Agent; and Keybank  National Association, as Syndication Agent; LaSalle Bank National Association,  as Arranger, dated as of January 30, 2004.(6) |
| 21.1                    |       | List of  Subsidiaries.*                                                                                                                                                                                                                                                                                                                                                                 |
| 23.1                    |       | Consent of Deloitte & Touche LLP, Independent Auditors.*                                                                                                                                                                                                                                                                                                                       |
| 31.1                    |       | Certifications of  Chief Executive Officer of the Company under Rule 13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                        |

----

 
| 31.2 |   | Certifications of  Chief Financial Officer of the Company under Rule 13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certifications of  CEO and CFO pursuant to 18 U.S.C. Section 1350.*                                                                                         |

----

*                    Filed herewith.

(1)          Incorporatedby reference and previously filed as an exhibit to the quarterly report on Form 10-Qfor the quarter ended June 30, 2001, filed with the Securities andExchange Commission on August 9, 2001.

(2)          Incorporatedby reference and previously filed as an exhibit to the quarterly report on Form 10-Qfor the quarter ended March 31, 2001, filed with the Securities andExchange Commission on May 11, 2001.

(3)          Incorporatedby reference and previously filed as an exhibit to the registration statementon Form SB-2 filed with the Securities and Exchange Commission (FileNo. 333-51525) on May 1, 1998.

(4)          Incorporatedby reference and previously filed as an exhibit to the current report on Form 8-Kfiled with the Securities and Exchange Commission on November 15, 2002.

(5)          Incorporatedby reference and previously filed as an exhibit to the current report on Form 8-Kfiled with the Securities and Exchange Commission on February 10, 2003.

(6)           Incorporated by reference and previously filed as an exhibit to thecurrent report on Form 8-K filed with the Securities and ExchangeCommission on February 13, 2004.

 

----