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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

Commission file number 0-22081

EPIQ SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Missouri(State or other jurisdiction of
incorporation or organization)

48-1056429(I.R.S. Employer Identification No.)501 Kansas Avenue, Kansas City, Kansas(Address of principal executive office)

66105-1300(Zip Code)


Registrant's
telephone number, including area code(913) 621-9500

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

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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The aggregate market value of voting common stock held by non-affiliates of the registrant (based upon the last reported sale price on the NASDAQ
Global Market), as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2008) was approximately $455,000,000.

There
were 35,684,401 shares of common stock of the registrant outstanding as of February 20, 2009.

Documents
incorporated by reference: The information required by Part III of Form 10-K is incorporated herein by reference to the registrant's definitive Proxy
Statement relating to its 2009 Annual Meeting of Shareholders, which will be filed with the Commission within 120 days after the end of the registrant's fiscal year.



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



PART IITEM 1.

Business

1ITEM 1A.

Risk Factors

7ITEM 1B.

Unresolved Staff Comments

14ITEM 2.

Properties

14ITEM 3.

Legal Proceedings

14ITEM 4.

Submission of Matters to a Vote of Security Holders

15PART IIITEM 5.

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

16ITEM 6.

Selected Financial Data

19ITEM 7.

Management's Discussion and Analysis of Financial Condition And
Results of Operation

21ITEM 7A.

Quantitative and Qualitative Disclosures About Market
Risk

38ITEM 8.

Financial Statements and Supplementary
Data

39ITEM 9.

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

39ITEM 9A.

Controls and Procedures

39ITEM 9B.

Other Information

43PART IIIITEM 10.

Directors, Executive Officers and Corporate
Governance

43ITEM 11.

Executive Compensation

43ITEM 12.

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

43ITEM 13.

Certain Relationships and Related Transactions, and Director's
Independence

43ITEM 14.

Principal Accounting Fees and Services

43PART IVITEM 15.

Exhibits and Financial Statement
Schedules

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

Forward-looking
statements may be identified by words or phrases such as "believe," "expect," "anticipate," "should," "planned," "may," "estimated," "goal," "objective," and "potential."
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, provide a "safe harbor" for forward-looking statements. In order
to comply with the terms of the safe harbor, and because forward-looking statements involve future risks and uncertainties, Item 1A,"Risk
Factors"of this report lists a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. We undertake no obligation to update any forward-looking statements contained in this report or in future communications to reflect future events or
developments.

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Table of Contents

PART I

ITEM 1.    BUSINESS

General

Epiq Systems, Inc. is a provider of integrated technology solutions for the legal profession. References below to "we," "us" and "our"
may refer to Epiq Systems, Inc. exclusively or to one or more of our subsidiaries. Our solutions streamline the administration of bankruptcy, litigation, financial transactions and regulatory
compliance matters. We offer innovative technology solutions for electronic discovery, document review, legal notification, claims administration and controlled disbursement of funds. Our clients
include law firms, corporate legal departments, bankruptcy trustees and other professional advisors who require innovative technology, responsive service and deep subject-matter expertise.

We
were incorporated in the State of Missouri on July 13, 1988, and on July 15, 1988 acquired all of the assets of an unrelated predecessor corporation.

As
a part of our business strategy, we have made several acquisitions and one disposition over the past five years. During the second quarter of 2008 we acquired all of the equity of
Uberdevelopments Limited and its wholly-owned operating subsidiary Pinpoint Global Limited (collectively, "Pinpoint"), an electronic discovery business with operations in the United Kingdom, to expand
our market in the United Kingdom. During 2006, we acquired the net assets of Gazes LLC (now Epiq Preference Solutions) to supplement our ability to provide claims preference services for our
bankruptcy segment clients. During 2005, we acquired nMatrix (now Epiq eDiscovery Solutions) to expand our offerings to include electronic discovery and Hilsoft, Inc., which enhanced our expert legal
noticing services for clients of our settlement administration segment. During 2004, we acquired Poorman-Douglas (now Epiq Class Action & Claims Solutions), which expanded our administrative
offerings in the settlement administration segment to include the class action and mass tort market, and we completed the disposition of our infrastructure software business, which was held for sale
as of December 31, 2003.

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

Our
principal executive office is located at 501 Kansas Avenue, Kansas City, Kansas 66105. The telephone number at that address is (913) 621-9500, and our website
address iswww.epiqsystems.com. We make available free of charge through our internet website our annual report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC as soon as reasonably
practicable after we electronically file those reports with or furnish them to the SEC, as well as our code of ethics and other governance documents. The public may read and copy materials
filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC atwww.sec.gov. The contents of these websites are not incorporated into this report. Further, our
references to the URLs for these websites are intended to be inactive textual references only.

Industry Environment

We provide products and services primarily to the legal profession. Our clients include leading law firms, corporate legal departments,
bankruptcy trustees, and other professional advisors who use our services for the administration of legal proceedings. Substantially all of our revenues are generated

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from
services provided within the United States, and substantially all of our assets are located within the United States.

In
the first quarter of 2008, we revised the structure of our reporting segments to reflect a change in the nature of the financial information provided to our chief operating decision
makers resulting from a change in the structure of our internal organization. Our business is organized into three reporting segments: electronic discovery, bankruptcy, and settlement administration.
Segment information related to revenues from external customers, a performance measure of profit or loss, capital expenditures, and total assets is contained in Note 14 of the Notes to
Consolidated Financial Statements.

Electronic Discovery Segment

The substantial increase of electronic documents in the business community has changed the dynamics of how attorneys support discovery
in complex litigation matters. According to the 2008 Socha-Gelbmann Electronic Discovery Survey, the 2007 domestic commercial electronic discovery revenues were estimated at $2.8 billion, an
approximate 43% increase from 2006. According to this same source, the market is expected to continue to grow at year over year annual rates of 21% for 2008, 20% for 2009 and 15% for 2010. Due to the
complexity of cases, the volume of data that are maintained electronically, and the volume of documents that are produced in all types of litigation, we anticipate that law firms will become
increasingly reliant on electronic evidence management systems to organize and manage the litigation discovery process.

Bankruptcy Segment

Bankruptcy is an integral part of the United States' economy. As reported by the Administrative Office of the U.S. Courts for the
fiscal years ended September 30, 2008, 2007, and 2006, there were approximately 1.04 million, 0.80 million, and 1.11 million new bankruptcy filings, respectively.



The
key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor's legal counsel, the creditors, the creditors' legal counsel, and the
bankruptcy judge. Chapter 7 and Chapter 13 cases also have a professional bankruptcy trustee, who is responsible for administering the bankruptcy case.

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Settlement Administration Segment

Class action and mass tort refer to litigation in which class representatives bring a lawsuit against a defendant company or other
persons on behalf of a large group of similarly affected persons. Mass tort refers to class action cases that are particularly large or prominent. The class action and mass tort marketplace is
significant, with estimated annual tort claim costs of approximately $250 billion in 2007, according to a study issued in 2008 by Towers Perrin. Administrative costs, which include costs, other
than defense costs, incurred by either the insurance company or self-insured entity in the administration of claims, comprise approximately 24% of this total.

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

Products, Services and Customers

Electronic Discovery Segment

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

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

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



Bankruptcy Segment

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

The
end-user customers of our bankruptcy business are debtor corporations that file a plan of reorganization and professional bankruptcy trustees. The Executive Office for United States
Trustees, a division of the U.S. Department of Justice, appoints all bankruptcy trustees. A United States Trustee is appointed in most federal court districts and generally has responsibility for
overseeing the integrity of the bankruptcy system. The bankruptcy trustee's primary responsibilities include liquidating the debtor's assets or collecting funds from the debtor, distributing the
collected funds to creditors pursuant to the orders of the bankruptcy court, and preparing regular status reports for the Executive Office for United States Trustees and for the bankruptcy court.
Trustees manage an entire caseload of bankruptcy cases simultaneously.

The
application of Chapter 7 bankruptcy regulations has the practical effect of discouraging trustee customers from incurring direct administrative costs for computer system
expenses. As a result, we provide our Chapter 7 products and services to trustee customers at no direct charge, and our trustee

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customers
maintain deposit accounts for bankruptcy cases under their administration at a designated banking institution. We have marketing arrangements with various banks under which we provide the
bankruptcy trustee case management software and related services and the bank provides the bankruptcy trustee with banking services. During the year ended December 31, 2008, a substantial
majority of our Chapter 7 trustee clients' deposits were maintained at Bank of America. See Note 9 of the Notes to Consolidated Financial Statements for additional information on
significant customers.

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



Settlement Administration Segment

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

The
customers of our settlement administration segment are corporations that are administering the settlement or resolution of class action cases or administering projects. We sell our
services directly to those customers and other interested parties, including legal counsel, which often provide access to these customers. During the year ended December 31, 2008, approximately
22% of our consolidated revenue was derived from a large contract. This revenue was recognized in our settlement administration segment. Revenue related to this contract is expected to decline
throughout 2009 as we reach the conclusion of the contract during 2009.

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



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Sales and Marketing

Our sales executives market our products and services directly to prospective customers and referral law firms through
on-site sales calls and through longstanding relationships. We focus on attracting and retaining customers by providing superior integrated technology solutions and by providing
exceptional customer service. Our client support specialists are responsible for providing ongoing support services for existing customers. Additionally, we maintain a website that clients and
potential clients may access to obtain additional information related to solutions we offer, we attend industry trade shows, we publish articles, and we conduct direct mail campaigns and advertise in
trade journals.

Competition

Electronic Discovery Segment

There are a variety of companies competing, primarily on the basis of quality of service, technology innovations, and price, for the
finite number of available client engagements that become available each year. Competitors include Electronic Evidence Discovery, Inc., Fios, Inc., Kroll Ontrack (Marsh & McLennan Companies),
Attenex (FTI Consulting, Inc.), Autonomy ZANTAZ, Inc., Stratify, Inc. (Iron Mountain Incorporated), and Clearwell Systems, Inc.

Bankruptcy Segment

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

Settlement Administration Segment

There are a variety of companies competing, primarily on the basis of quality of service, technology innovations, and price, for the
finite number of available client engagements that become available each year. Competitors include The Garden City Group Inc., Rust Consulting Inc. and Gilardi & Co. LLC.

Additionally,
certain law firms, accounting firms, management consultant firms, turnaround specialists and crisis management firms offer certain products and services that compete with
our products and services in each of these segments.

Government Regulation

Our products and services are not directly regulated by the government. However, our bankruptcy segment customers are subject to
significant regulation under the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. Additionally, the Executive
Office for United States Trustees, a division of the U. S. Department of Justice, oversees the federal bankruptcy system and establishes administrative rules governing our clients' activities.
Furthermore, class action and mass tort cases, as well as electronic discovery requirements related to litigation, are subject to various federal and state laws, as well as rules of evidence and rules
of procedure established by the courts.

In
April 2006, the United States Supreme Court approved certain amendments to the Federal Rules of Civil Procedure regarding the discovery in litigation of certain electronically stored
information. These amendments became effective on December 1, 2006. Among other things, these amendments (i) require early attention by parties in litigation to meet and confer regarding
discovery issues and to develop a discovery plan that identifies and addresses the parties' electronically stored information, (ii) expand the reach of federal court subpoenas to include
electronically stored

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information,
(iii) allow for parties to object to production of electronically stored information that is not reasonably accessible due to the undue burden or cost associated with such
retrieval, and (iv) provide a "safe harbor" to parties unable to provide electronically stored information lost or destroyed as a result of the routine, good-faith operation of an
electronic information system. While these federal rules do not apply in state court proceedings, the civil procedure rules of many states have been closely modeled on these provisions. While we
anticipate that these amendments to the Federal Rules of Civil Procedure may cause the electronic discovery market to experience an increase in volume and demand, the federal and state rules of civil
procedure will continue to evolve and be subject to interpretation by courts. We cannot predict the effect, if any, that these amendments will have on our business in future years.

Employees

As of December 31, 2008, we employed approximately 550 full-time employees, none of whom is covered by a collective bargaining
agreement. We believe the relationship with our employees is good.

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ITEM 1A.    RISK FACTORS

This report, other reports to be filed by us with the SEC, press releases made by us and other public
statements by our officers, oral and written, contain or will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, including those relating to the possible or assumed future results of operations and financial condition. Because those
statements are subject to a number of uncertainties and risks, actual results may differ materially from those expressed or implied by the forward-looking statements. Listed below are risks associated
with an investment in our securities that could cause actual results to differ from those expressed or implied. If any of the following risks occurs, our business, financial condition, results of
operations and prospects could be materially adversely affected.

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

The markets for our products and services are competitive, continually evolving and subject to technological change. We believe that
the principal competitive factors in the markets we serve include the breadth and quality of system and software solution offerings, the stability of the information systems provider, the features and
capabilities of the product and service offerings, and the potential for future product and service enhancements. Our success depends upon our ability to keep pace with technological change and to
introduce, on a timely and cost-effective basis, new and enhanced software solutions and services that satisfy changing client requirements. If we do not keep pace with technological
changes, we could lose existing customers and fail to attract new business, which could adversely affect our results of operations.

Security problems with our software products or services could cause increased service costs and damage to our reputation.

We have included security features in our products and processes that are intended to protect the privacy and integrity of data,
including confidential client or consumer data. Security for our products and processes is critical given the confidential nature of the information contained in our systems. Our software products,
the systems on which the products are used, and our processes may not be impervious to intentional break-ins ("hacking") or other disruptive disclosures or problems, whether as a result of
inadvertent third party action, employee action, malfeasance, or other. Hacking or other disruptive problems could result in the diversion of our development resources, damage to our reputation,
increased service costs and impaired market acceptance of our products, any of which could result in higher expenses or lower revenues.

Improper disclosure of personal data could result in liability and harm our reputation.

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

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

We administer claims and provide professional services for third parties. Errors or fraud could occur, for example, in the payment of
settlement claims in a case we are administering for a customer. Errors or fraud related to the processing or payment of these claims or errors related to the delivery of professional services could
result in the diversion of management resources, damage to our reputation, increased service costs or impaired market acceptance of our services, any of which could result in higher expenses and/or
lower revenues. Additionally, these types of errors or fraud could result in lawsuits alleging damages. Defending these types of claims could result in increased expenses for litigation and claims
settlement and a significant diversion of our management's attention.

Interruptions or delays in service related at the data centers we utilize could impair the delivery of our service and harm our business.

We provide certain of our services through computer hardware that is located in data centers operated by unrelated third parties. We do
not control the operation of these facilities, which increases our vulnerability to problems with the services they provide, and they are subject to damage or interruption from earthquakes, floods,
fires, power loss, terrorist attacks, telecommunications failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct.
The occurrence of any of these events, a decision to close a facility without adequate notice, or other unanticipated problems at a facility could result in interruptions in certain of our services.
In addition, the failure by our vendor to provide our required data communications capacity could result in interruptions in our service. Any damage to, or
failure of, our systems or services could reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their agreements with us and adversely affect our ability to
secure business in the future. Our business will be harmed if our customers and potential customers believe our services are unreliable.

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

All of our services utilize software solutions developed by us for our customers. We issue new releases of our software products to our
customers periodically. Complex software products, such as those we offer, can contain undetected errors when first introduced or as new versions are released. Any introduction of new software
products or upgrade to existing software products has a risk of undetected errors. These undetected errors may be discovered only after a product has been installed and used either in our internal
processing or by our customers. Likewise, the software products we acquire in business acquisitions have a risk of undetected errors.

Any
undetected errors, as well as any difficulties in installing and maintaining our software products or upgrade releases or difficulties training customers and their staffs on the
utilization of new software products or upgrade releases, may result in a delay or loss of revenue, diversion of development resources, damage to our reputation, increased service costs, increased
expense for litigation or claims settlement, or impaired market acceptance of our products.

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

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

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We rely on third-party hardware and software, which could cause errors or failures of our software or services.

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

A substantial amount of revenue in our bankruptcy segment related to trustee deposits is collected through a single financial institution, and the termination of that
marketing arrangement could cause uncertainty and adversely affect our future bankruptcy segment revenue and earnings.

The application of Chapter 7 bankruptcy regulations discourages Chapter 7 trustees from incurring direct administrative
costs for computer system expenses. As a result, we provide our products and services to these trustee customers at no direct charge, and these trustee customers agree to deposit the cash proceeds
from liquidations of debtors' assets with a designated financial institution with which we have an arrangement. We have arrangements with several financial institutions under which these trustees
deposit the liquidated assets at one of those financial institutions. Under these arrangements we collect monthly revenues from the financial institution based primarily upon a percentage of the total
liquidated assets on deposit at that financial institution. These bankruptcy deposit-based fees are a considerable amount of our bankruptcy segment revenues.

A
substantial amount of our bankruptcy segment revenues related to trustee deposits are collected through our relationship with Bank of America. Either party may, with appropriate
notice, wind down the arrangement over a period of three years, including the notice period. If either party were to terminate this arrangement, we could experience a decline in revenues and earnings
as those deposits are transferred.

Bankruptcy
segment revenues related to trustee deposits from Bank of America comprised 7%, 14%, and 38% of our total revenue recognized for the years ended December 31, 2008,
2007, and 2006, respectively.

Our pricing models for Chapter 7 trustee clients within the bankruptcy segment have a component of pricing tied to prevailing interest rates, and a significant
decline in interest rates could adversely affect our revenues and earnings.

Under the Chapter 7 marketing arrangements we have with each depository financial institution, certain fees we earn for deposits
placed with those financial institution could have, within certain limits, variability based on fluctuations in short-term interest rates. The decline in short-term interest rates during 2008 resulted
in fees under those arrangements reaching the low end of the variable fee schedule. Fluctuations in short-term interest rates could affect the fees we earn for the Chapter 7 deposits in the
future.

We depend upon our key personnel and we may not be able to retain them or to attract, assimilate and retain highly qualified employees in the future.

Our future success may depend upon the continued service of our senior management and certain of our key technical personnel and our
continuing ability to attract, assimilate and retain highly qualified technical, managerial, and sales and marketing personnel. We do not have employment agreements with our Chief Executive Officer,
President, or Chief Financial Officer. We maintain key-man life insurance policies on our Chief Executive Officer and our President. The loss of the services of any of these senior executives or other
key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse impact on our results of operations.

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The integration of acquired businesses is time consuming, may distract our management from our other operations, and can be expensive, all of which could reduce or eliminate
our expected earnings.

We have acquired businesses in the past and we may consider opportunities in the future to acquire other companies, assets or product
lines that complement or expand our business. If we are unsuccessful in integrating these companies or product lines with our existing operations, or if integration is more difficult than anticipated,
we may experience disruptions to our operations. A difficult or unsuccessful integration of an acquired business could have an adverse effect on our results of operations.

Some
of the risks that may affect our ability to integrate or realize any anticipated benefits from companies or businesses we acquire include those associated
with:



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

We have expanded our business internationally with offices in London, Brussels and Hong Kong, primarily related to our electronic
discovery business. We could expand other businesses internationally and we could enter other world markets. It requires significant management attention and financial resources to develop successful
global markets. In addition, new operations in geographies we may enter may not be immune from possible government monitoring or intrusion.

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



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

As we expand our international operations, more of our customers pay us in foreign currencies. Conducting business in currencies other
than U.S. dollars subjects us to fluctuations in currency exchange rates. Unfavorable changes in currency exchange rates could have a negative impact on our revenues and profits.

Our intellectual property is not protected through patents or formal copyright registration. Therefore, we do not have the full benefit of patent or copyright laws to
prevent others from replicating our software.

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

We may be sued by third parties for alleged infringement of their proprietary rights.

The software and internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by
frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past, and may receive in the future, communications from third
parties claiming that we have infringed on the intellectual property rights of others. Our technologies may not be able to withstand any third party claims or rights against their use. Any
intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan, and could require
us to pay monetary damages or enter into royalty or licensing agreements. In addition, certain customer agreements require us to indemnify our customers for third-party intellectual property
infringement claims, which would increase the cost to us of an adverse ruling on such a claim. An adverse determination could also prevent us from offering our service to others, which could result in
a loss of revenues and profits.

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

Compliance with changing laws, regulations and standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, The NASDAQ Stock Market and FINRA, (Financial Industry Regulatory Authority) rules, are time consuming and expensive. We have spent substantial amounts
of management time and have incurred substantial legal and accounting expense in the past complying with these federal securities laws. Complying with these laws and regulations also creates
uncertainty for companies such as ours. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity. As a result, their application in
practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices.

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

Our products and services are not directly regulated by the government. Each of our three reporting segments and the customers served
by those businesses are, however, directly or indirectly affected by federal and state laws and regulations and court rules. For example, bankruptcy reform legislation, class action and tort reform
legislation and amendments to the Federal Rules of Civil Procedure regarding discovery of "electronically stored information" have all affected our customers, and indirectly, our business segments.
Future federal or state legislation or court rules, or court interpretations of those laws and rules, could adversely affect the businesses we serve and thus could have an adverse impact on our
revenues and results of operations.

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

Goodwill is subject to an impairment assessment at least annually (or more frequently when events or circumstances indicate that an
impairment may have occurred) by applying a fair-value based test. The carrying value of our goodwill was approximately $263.9 million as of December 31, 2008. Our assessment
of goodwill for impairment could, in the future, result in a material, non-cash write-down of goodwill, which could have a material adverse effect on our results of operations
and stockholders' equity.

The recent financial crisis and current uncertainty in global economic conditions could negatively affect our business, results of operations and financial condition.

The recent financial crisis affecting the banking system and financial markets and the current uncertainty in global economic
conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in credit, equity and fixed income markets. There could be a
number of follow-on effects from these economic developments on our business and our customers, including the inability of our credit banks to fund draws on our revolving credit facility,
our inability to increase or renew our current revolving credit facility, failure of our customers to pay us on a timely basis or at all, or other currently unforeseen consequences. If the global
economy or the U.S. economy remain uncertain or weaken further, the consequences could have a material adverse effect on our business, operating results and financial condition.

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

Our quarterly results have fluctuated during the past and may fluctuate in the future. Our quarterly revenues and operating results are
increasingly difficult to forecast. Our business will continue to be affected by a number of factors, any one of which could substantially affect our results of operations for a particular fiscal
quarter. Specifically, our quarterly results from operations can vary due to:



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It
is possible that our future quarterly results from operations from time to time will not meet the expectations of securities analysts or investors. This could cause a material
decrease in the market price of our common stock.

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

Even if we report stable or increased earnings, the market price of our common stock may be volatile. There are a number of factors,
beyond earnings fluctuations, that can affect the market price of our common stock, including the following:



In
addition, the stock market has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of particular companies. The market
price of our common stock has been volatile and this is likely to continue.

We do not pay cash dividends on our common stock and our common stock may not appreciate in value or even maintain the price at which it was purchased.

We presently do not intend to pay any cash dividends on our common stock. In addition, certain terms of our contingent convertible
subordinated notes restrict our payment of dividends while the notes are outstanding, and certain provisions in our credit facility may restrict our ability to pay dividends in the future. Subject to
any financial covenants in current or future financing agreements that directly or indirectly restrict the payment of dividends, the payment of dividends is within the discretion of our board of
directors and will depend upon our future earnings, if any, our capital requirements, our financial condition and any other factors that the board of directors may consider. We currently intend to
retain all earnings for use in the operation and expansion of our business or for potential future debt repayment. As a result, the success of an investment in our common stock will depend entirely
upon its future appreciation. Our common stock may not appreciate in value or even maintain the price at which it was purchased.

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

We have used our common stock to partly fund acquisitions and to refinance debt incurred in connection with acquisitions. During
November 2007, we issued 5.0 million shares of common stock and used approximately $74.0 million of the net proceeds to pay debt outstanding under our credit facility. During November
2005, we issued approximately 1.8 million shares of common stock in connection with our nMatrix (now Epiq eDiscovery Solutions) acquisition. During June 2004, we issued $50.0 million of
convertible notes, which are convertible into approximately 4.3 million shares of common stock based upon a conversion price of $11.67 per share, to refinance a portion of the purchase price
for the Poorman-Douglas (now Epiq Class Action & Claims Solutions) acquisition.

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We
may consider further opportunities to acquire companies, assets or product lines that complement or expand our business. We expect that future acquisitions, if any, could provide for
consideration to be
paid in cash, shares of our common stock, or a combination of cash and shares. If the consideration for an acquisition is paid in common stock, existing shareholders' investments could be diluted.
Furthermore, we may decide to issue convertible debt or additional shares of common stock and use part or all of the proceeds to finance or refinance the costs of any future acquisitions.

Our articles of incorporation and Missouri law contain provisions that could be used by us to discourage or prevent a takeover of our company.

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

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

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

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

ITEM 3.    LEGAL PROCEEDINGS

Purported Derivative Shareholder Complaints

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

The
plaintiff complaint asserts, among other things, that the company backdated certain stock options from July 1997 through January 2006, and that the individual defendants either
participated in the backdating or permitted it to occur, violations of generally accepted accounting principles as a

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result
of the alleged backdating of options, related claims of false and misleading proxy statements and annual reports filed by the company under the Securities Exchange Act of 1934, also as a result
of the alleged backdating of options, and various violations of state law, breaches of fiduciary duty of loyalty and insider trading in company stock. The plaintiff is seeking, among other things,
unspecified money damages, an accounting for profits obtained from the alleged backdating of options, specified changes in our corporate governance policies, punitive damages and rescission of the
allegedly backdated options.

On
October 7, 2008, the company and the individual defendants filed a motion to dismiss the complaint on the following grounds: (i) the plaintiff lacks standing to assert
claims regarding any backdating prior to July 31, 2001, i.e., the date on which the plaintiff first claims to have acquired company shares, (ii) application of the statutes of
limitation that govern the plaintiff's claims reduces the plaintiff's case to a single alleged instance of backdating involving the grant of an option to a single non-defendant employee on
January 3, 2006, (iii) the complaint fails to plead sufficient facts to state any plausible claim that the defendants backdated any stock options and thus fails to meet the minimum
pleading requirements established under the Private Securities Litigation Reform Act of 1995 or the applicable Federal Rules of Civil Procedure, which failure mandates dismissal of all of the
plaintiff's claims, and (iv) the complaint fails to meet the pleading standards that apply to any of its individual federal and state-law claims, which separately mandate dismissal
of the entire case. On November 10, 2008, the plaintiff filed a memorandum in opposition to the dismissal motion, and on December 16, 2008, the company and the individual defendants
filed their reply to the plaintiff's opposition memorandum. The dismissal motion has not yet been ruled upon by the Court.

We
believe the plaintiff's claims are without merit and will continue to defend against them vigorously. No amounts have been recorded in the accompanying Consolidated Financial
Statements associated with this matter.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted in the fourth quarter of 2008 to a vote of the shareholders.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded under the symbol "EPIQ" on the NASDAQ Global Market. The following table shows the reported high and low
sales prices for our common stock for the calendar quarters of 2008 and 2007 as reported by NASDAQ. All sales prices have been revised to reflect our 3 for 2 stock split, effected in the form of a 50%
stock dividend, payable June 7, 2007 to holders of record as of May 24, 2007.

2008

2007High

Low

High

LowFirst Quarter

$
18.28

$
12.11

$
13.59

$
10.99Second Quarter


16.83


14.16


18.28


13.56Third Quarter


16.19


10.52


20.18


14.02Fourth Quarter


17.72


10.73


20.72


15.92


Holders

As of February 20, 2009, there were approximately 40 owners of record of our common stock and approximately 7,000
beneficial owners of our common stock.

Dividends

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

Equity Compensation Plan Information

The following table sets forth as of December 31, 2008 (a) the number of securities to be issued upon exercise of
outstanding options, warrants and rights, (b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for
future issuance under equity compensation plans (excluding securities reflected in column (a)).

(a)

(b)

(c)Plan Category

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

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

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


7,287,000

$
11.33


1,748,000Equity compensation plans not approved by security holders


575,000

$
13.95


Total


7,862,000

$
11.53


1,748,000


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As of December 31, 2008, equity compensation plans approved by security holders consist of our 1995 Stock Option Plan and our 2004 Equity Incentive Plan,
both as amended. Securities remaining available for future issuance under equity compensation plans approved by security holders consist solely of shares available under the 2004 Equity Incentive
Plan. Securities remaining available for future issuance under our 2004 Equity Incentive Plan may be issued, in any combination, as incentive stock options, non-qualified stock options,
stock appreciation rights or restricted stock.

As
of December 31, 2008, equity compensation plans not approved by security shareholders consist of stock options issued in conjunction with our acquisitions of nMatrix and
Pinpoint. Inducement stock options were issued in conjunction with the execution of employment agreements with certain key employees of nMatrix and Pinpoint to become employees of our newly acquired
subsidiaries. In accordance with the NASDAQ corporate governance rules, shareholder approval of each of these inducement stock option grants was not required.

The
stock options granted under equity compensation plans not approved by security holders were granted at option exercise prices equal to fair market value of the common stock on the
date of grant, are non-qualified options, are exercisable for up to 10 years from the date of grant, and otherwise have terms substantially identical to the material terms of the
1995 Stock Option Plan and the 2004 Equity Incentive Plan. Additional information related to the equity compensation plans not approved by security holders is contained in Note 12 of the Notes
to Consolidated Financial Statements.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Performance Graph

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

The following graphs show the total shareholder return of an investment of $100 in cash for (i) Epiq's common stock, (ii) the NASDAQ Stock Market
Computer Index (the "NASDAQ Computer Index"), and (iii) the Standard & Poor's 500 Index (the "S&P 500 Index") for our last five fiscal years (December 31, 2003 through
December 31, 2008) and for the period beginning on the date of our initial public offering through the end of the last fiscal year (February 4, 1997 through December 31, 2008).
All values assume reinvestment of the full amount of any dividends. The NASDAQ Computer Index and the S&P 500 Index are calculated by Standard & Poor's Institutional Market Services.

The
five-year graph assumes that $100.00 was invested in our common stock on December 31, 2003, at the price of $11.41 per share, the closing sales price on that date.
The second graph assumes that $100.00 was invested in our common stock on February 4, 1997, the date of our initial public offering, at the price of $0.93 per share, the closing sales price on
that date (after giving effect to the stock splits and stock dividends paid by Epiq). The closing sales prices were used for each index on December 31, 2003 or February 4, 1997, as
applicable, and all dividends were reinvested. No cash dividends have been declared on our common stock. Shareholder returns over the indicated period should not be considered indicative of future
shareholder returns.

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Five-Year Performance Graph

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

GRAPHIC

ASSUMES
$100 INVESTED ON DEC. 31, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2008

Performance Graph Since Initial Public Offering

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

GRAPHIC

ASSUMES
$100 INVESTED ON FEB. 4, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2008

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ITEM 6.    SELECTED FINANCIAL DATA

The following table presents selected historical financial data for the years ended December 31, 2008, 2007, 2006, 2005, and
2004 (in thousands, except per share data).

Year Ended December 31,2008

2007

2006

2005

2004Income Statement Data:Total revenue from continuing operations

$
236,118

$
174,413

$
224,170

$
106,330

$
98,368Income (loss) from continuing operations


13,836


6,929


35,131


(3,842
)

(7,290
)Income (loss) from discontinued operations














667Net income (loss)


13,836


6,929


35,131


(3,842
)

(6,623
)Income (loss) per shareBasic:From continuing operations

$
0.39

$
0.23

$
1.21

$
(0.14
)
$
(0.27
)From discontinued operations













$
0.02Net income (loss) per shareBasic

$
0.39

$
0.23

$
1.21

$
(0.14
)
$
(0.25
)Income (loss) per shareDiluted:From continuing operations

$
0.36

$
0.21

$
1.05

$
(0.14
)
$
(0.27
)From discontinued operations













$
0.02Net income (loss) per shareDiluted

$
0.36

$
0.21

$
1.05

$
(0.14
)
$
(0.25
)Balance Sheet Data:Total assets

$
418,946

$
392,794

$
382,220

$
418,471

$
244,317Long-term obligations


55,310


58,266


83,873


145,906


74,499


In
October 2003 we entered into a three-year arrangement related to our Chapter 7 bankruptcy trustee business that included various elements which had previously been
provided on a standalone basis. As a result, for the final quarter of 2003 and for the years ended December 31, 2005 and 2004 we deferred substantially all of our Chapter 7 bankruptcy
trustee revenue. The $59.7 million of revenue deferred during these periods related to this arrangement was recognized during the year ended December 31, 2006. The effect of this was to:
(i) reduce revenue recognized for the years ended December 31, 2005, 2004 and 2003 with a corresponding increase in revenue recognized for the year ended December 31, 2006; and
(ii) substantially decrease net income for the year ended December 31, 2003 and to incur a net loss for the years ended December 31, 2005 and 2004, with a corresponding increase
in net income for the year ended December 31, 2006. Effective October 1, 2006, we entered into a new arrangement with this depository financial institution; this new arrangement does not
include provisions related to software upgrades. Accordingly, we now recognize this revenue based on a contingent usage based revenue model and, during the years ended December 31, 2008 and
2007, we did not defer any bankruptcy trustee revenue or recognize any previously deferred bankruptcy trustee revenue.

During
November 2003, the decision was made to dispose of our infrastructure software business and the business was sold in April 2004. Accordingly, all revenues, cost of sales,
operating expenses, assets and liabilities related to infrastructure software have been reclassified as discontinued operations for all periods presented.

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

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During
October 2005, we acquired the equity of Hilsoft, Inc. The acquisition was accounted for using the purchase method of accounting with the operating results included in our
statements of income since the date of acquisition.

During
November 2005, we acquired the equity of nMatrix (now Epiq eDiscovery Solutions). The acquisition was accounted for using the purchase method of accounting with the operating
results included in our statements of income since the date of acquisition.

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R,Share-Based Payment("SFAS 123(R)"). We elected to adopt SFAS 123(R) using the modified version of prospective application. Using this method, we recognized compensation costs of $2.8 million,
$5.6 million and $5.4 million for the years ended December 31, 2008, 2007 and 2006, respectively. Prior to January 1, 2006, share-based payments were accounted for using
the intrinsic method pursuant to APB 25,Accounting for Stock Issued to Employees. As the options were granted at an option price equal to fair
market value of the common stock on the date of grant, we did not recognize any compensation cost related to share-based compensation for periods ended on or before December 31, 2005. See
Note 12 of the Notes to the Consolidated Financial Statements.

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

Effective
January 1, 2007, we adopted Financial Accounting Standard Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109, Accounting for Income Taxes("FIN 48"). FIN 48 prescribes a comprehensive model for how
companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Application of FIN 48 requires
numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions and tax benefits may not
accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits. These periodic adjustments had the net
effect of increasing tax expense by approximately $1.2 million during 2008, and decreasing tax expense by approximately $0.2 million during 2007, and also may affect our tax expense in
future years. See Note 10 of the Notes to the Consolidated Financial Statements.

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

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

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

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

Management's Overview

Electronic Discovery Segment

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

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

The
substantial increase of electronic documents in the business community has changed the dynamics of how attorneys support discovery in complex litigation matters. According to the
2008 Socha-Gelbmann Electronic Discovery Survey, 2007 domestic commercial electronic discovery revenues were estimated at $2.8 billion, an approximate 43% increase from 2006. According to this
same source, the market is expected to continue to grow at year over year annual rates of 21% for 2008, 20% for 2009 and 15% for 2010. Due to the complexity of cases, the volume of data that are
maintained electronically, and the volume of documents that are produced in all types of litigation, we anticipate that law firms will become increasingly reliant on electronic evidence management
systems to organize and manage the litigation discovery process.

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



Bankruptcy Segment

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

The
key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor's legal counsel, the creditors, the creditors' legal counsel, and the
bankruptcy judge. Chapter 7 and Chapter 13 cases also have a professional bankruptcy trustee, who is responsible for administering the bankruptcy case.

The
end-user customers of our bankruptcy business are debtor corporations that file a plan of reorganization and professional bankruptcy trustees. The Executive Office for United States
Trustees, a division of the U.S. Department of Justice, appoints all bankruptcy trustees. A United States Trustee is appointed in most federal court districts and generally has responsibility for
overseeing the integrity of the bankruptcy system. The bankruptcy trustee's primary responsibilities include liquidating the debtor's assets or collecting funds from the debtor, distributing the
collected funds to creditors pursuant to the

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orders
of the bankruptcy court, and preparing regular status reports for the Executive Office for United States Trustees and for the bankruptcy court. Trustees manage an entire caseload of bankruptcy
cases simultaneously.

The
application of Chapter 7 bankruptcy regulations has the practical effect of discouraging trustee customers from incurring direct administrative costs for computer system
expenses. As a result, we provide our Chapter 7 products and services to our trustee customers at no direct charge, and they maintain deposit accounts for bankruptcy cases under their
administration at a designated banking institution. We have marketing arrangements with various banks under which we provide the bankruptcy trustee case management software and related services and
the bank provides the bankruptcy trustee with deposit-related banking services. During the year ended December 31, 2008, a substantial majority of our Chapter 7 trustee clients' deposits
were maintained at Bank of America. See Note 9 of the Notes to Consolidated Financial Statements for additional information on this significant customer.

Bankruptcy
is an integral part of the United States' economy. As reported by the Administrative Office of the U.S. Courts for the fiscal years ended September 30, 2008, 2007, and
2006, there were
approximately 1.04 million, 0.80 million and 1.11 million new bankruptcy filings, respectively.



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



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Settlement Administration

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

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

The
customers of our settlement administration segment are corporations that are administering the settlement or resolution of class action cases or administering projects. We sell our
services directly to those customers and other interested parties, including legal counsel, which often provide access to
these customers. During the year ended December 31, 2008, approximately 22% of our consolidated revenue was derived from one large contract. This revenue was recognized in our settlement
administration segment. Revenue related to this contract is expected to decline throughout 2009 as we reach the conclusion of the contract during 2009.

Class
action and mass tort refer to litigation in which class representatives bring a lawsuit against a defendant company or other persons on behalf of a large group of similarly
affected persons. Mass tort refers to class action cases that are particularly large or prominent. The class action and mass tort marketplace is significant, with estimated annual tort claim costs of
approximately $250 billion in 2007, according to a study issued in 2008 by Towers Perrin. Administrative costs, which include costs, other than defense costs, incurred by either the insurance
company or self-insured entity in the administration of claims, comprise approximately 24% of this total.

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



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

Consolidated Results of Operations

Revenue

Total revenue was $236.1 million in 2008, an increase of $61.7 million, or 35%, as compared to the prior year. A portion
of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services. We reflect the operating revenue from these

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reimbursed
direct costs as a separate line item on our accompanying Consolidated Statements of Income. Operating revenue from reimbursed direct costs was $28.3 million, an increase of
$5.5 million, or 24%, from $22.8 million in the prior year. This increase directly corresponded to the increase in reimbursed direct costs. Although reimbursed operating revenue may
fluctuate significantly from period to period, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating
revenue exclusive of operating revenue from reimbursed direct costs, which we refer to as operating revenue before reimbursed direct costs, was $207.9 million in 2008,
an increase of $56.2 million, or 37%, as compared to the prior year. The increase consists of a $9.1 million increase in the electronic discovery segment and a $47.6 million
increase in the settlement administration segment, partially offset by a $0.5 million decrease in the bankruptcy segment. Changes by segment are discussed below.

Operating Expenses

Direct cost of services, exclusive of depreciation and amortization, was $81.9 million in 2008, an increase of
$40.4 million, or 98%, as compared to $41.5 million in the prior year. Contributing to this increase was a $26.2 million increase in the cost of outside services, primarily
related to telephone, mailing and temporary help services; a $5.3 million increase in legal noticing; a
$1.8 million increase in compensation related expense; and a $4.9 million increase in production supplies. Changes by segment are discussed below.

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

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

General
and administrative costs increased $8.6 million, or 14%, to $71.1 million in 2008 compared to $62.5 million in the prior year. Contributing to this increase
was a $4.9 million increase in compensation, commission and benefits expense, primarily resulting from expanded staffing to meet client demands; a $1.5 million increase in travel
expense; a $1.9 million increase in professional services; and a $1.4 million increase in bad debt expense. These increases were partially offset by a decrease of $2.8 million in
share-based compensation expense which was the result of a change in the timing of our equity compensation grants. Changes by segment are discussed below.

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

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

Other
operating expense of $0.2 million in 2008 primarily consists of $0.9 million of non-capitalized acquisition-related expenses related to the acquisition of
an electronic discovery business in the United Kingdom in the second quarter of 2008, as well as $1.2 million of expenses incurred throughout 2008 related to potential acquisitions that were
not completed. The acquisition-related expenses consisted of legal services, executive compensation, indirect and general costs,

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accounting
services, and valuation services. Partially offsetting these expenses is a $2.4 million gain in 2008 related to interest rate floor options purchased during 2007.

Interest Expense

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

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

During
April 2007, the holders of the contingent convertible subordinated notes exercised their right to extend the maturity of the convertible notes from June 2007 to June 2010. As a
result, we will continue to pay interest, at a rate of 4% per annum, during the extension period on any convertible notes that remain outstanding. The holders of the convertible notes may chose at any
time to convert some or all of the notes into our common shares. See Note 5 of the Notes to Consolidated Financial Statements for additional information regarding this conversion right.

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

Effective Tax Rate

Our effective tax rate was 43.2% for 2008 compared with an effective rate of 37.0% for the prior year. Our tax rate is generally higher
than the statutory federal rate primarily due to state and local taxes. Several of our subsidiaries operate in New York City and are subject to state and local tax rates which are higher than the tax
rates assessed by other jurisdictions where we operate. The increase in the effective tax rate compared with the prior year is primarily due to a larger proportion of our income being taxed in high
tax rate jurisdictions and the reversal of a valuation allowance related to our United Kingdom net operating loss carryforward in 2007. During the fourth quarter of 2007, we determined that it was
more likely than not that the United Kingdom net operating loss would be fully utilized within the carryforward period. Accordingly, we reversed the valuation allowance related to the remaining net
operating loss carryforward asset resulting in a lower effective tax rate in 2007.

Net Income

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

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Results of Operations by Segment

The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 14 of our
Notes to Consolidated Financial Statements.

Electronic Discovery Segment

Electronic discovery operating revenue before reimbursed direct costs in 2008 was $58.1 million, an increase of
$9.1 million, or 18%, compared to the prior year. This increase is attributable to additional projects from existing clients, as well as an expansion of our client base, which resulted in an
increase in hosting and processing revenue.

Electronic
discovery direct and administrative expenses, including reimbursed direct costs, were $32.0 million in 2008, an increase of $7.2 million, or 29%, compared to the
prior year. Factors contributing to this increase include a $4.0 million increase in compensation, commission and benefits expense, resulting from expanded staffing to support increased
operating revenue; a $0.2 million increase in bad debt expense; a $0.4 million increase in promotional expense; a $0.2 million increase in professional services; a
$0.4 million increase in purchased software; a $0.7 million increase in building and equipment lease expense, primarily related to data center expansion; and an $0.8 million
increase in maintenance expense.

Bankruptcy Segment

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

Revenue
from our bankruptcy trustee business could continue to be lower with comparable periods if short-term interest rates do not increase. This effect could be partly mitigated by an
increase in bankruptcy trustee revenue as an increase in bankruptcy filings could result in an increase in the bankruptcy trustee deposit portfolio. Noticing services depend on the timing of a case
and will fluctuate from period to period.

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

Settlement Administration

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

Settlement
administration direct and administrative expenses, including reimbursed direct costs, were $93.2 million in 2008, an increase of $41.9 million, or 82%, compared
to the prior year. This increase is primarily the result of a $29.2 million increase in call center, outside service, and mailing supplies costs to support the large contract referenced above.
Also contributing to the increase was a $5.3 million increase in the cost of legal noticing that is directly related to the increase in legal

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notification
revenue; and a $5.3 million increase in reimbursable expenses, which is offset directly by an increase in operating revenue from reimbursable costs. Additional staffing
requirements to meet client demands resulted in a $1.1 million increase in compensation, commissions and benefits, and a $0.6 million increase in outside services.

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

Consolidated Results of Operations

Revenue

Total revenue from operations was $174.4 million in 2007, a decrease of $49.8 million, or 22%, from the prior year. A
portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services. We reflect the operating revenue from these reimbursed direct
costs as a separate line item on our accompanying Consolidated Statements of Income. Although reimbursed operating revenue may fluctuate significantly from period to period, these fluctuations have a
minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating
revenue before reimbursed direct costs in 2007 was $151.6 million, a decrease of $48.1 million, or 24%, as compared to the same period in the prior year. This
decrease is primarily the result of a $58.4 million decrease in bankruptcy revenue before reimbursed direct costs and a $7.4 million decrease in settlement administration revenue before
reimbursed direct costs, partly offset by a $17.7 million increase in electronic discovery operating revenue before reimbursed direct costs. As more fully explained under the caption
"Significant Accounting PoliciesRevenue Recognition" in Note 1 to our Consolidated Financial Statements, the decrease in bankruptcy operating revenue before reimbursed direct costs
is primarily attributable to the recognition, during 2006, of approximately $59.7 million of revenue, deferred beginning in October 2003, following delivery of the final specified software
upgrade pursuant to a specific arrangement that expired September 30, 2006. All revenue is directly related to a segment and changes in revenue by segment are discussed below.

Operating Expenses

Direct cost of services, exclusive of depreciation and amortization, was $41.5 million in 2007, a decrease of
$6.9 million, or 14%, as compared to the prior year. This decrease is primarily attributable to a $6.2 million decrease in legal noticing combined with a $3.2 million decrease in
the cost of outside services, partly offset by a $1.1 million increase in compensation related expense and a $0.8 million increase in rent expense. Changes by segment are discussed
below.

Direct
cost of bundled products and services, exclusive of depreciation and amortization, was $3.7 million in 2007, a decrease of $0.2 million, or 6%, from the prior year,
primarily as a result of decreased compensation expense. Changes by segment are discussed below.

Reimbursed
direct costs in 2007 decreased $2.0 million, or 8%, to $22.6 million. This decrease directly corresponds to the decrease in operating revenue from reimbursed
direct costs.

General
and administrative expenses in 2007 were $62.5 million, an increase of $8.4 million, or 16%, compared to the prior year. The increase is attributable to a
$7.3 million increase in compensation expense, and a $3.1 million increase in bonus expense, primarily resulting from additional staffing to support growth in our electronic discovery
business. Also contributing to the increase was a $0.7 million increase in travel expenses and a $0.4 million increase in rent expense. Changes by segment are discussed below.

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Depreciation
and software and leasehold amortization costs in 2007 were $12.8 million, an increase of $2.7 million, or 26%, compared to the prior year. The increase
primarily resulted from an increase of $2.5 million in depreciation and amortization expense related to purchased and internally developed software and the related hardware required to support
the expansion of our electronic discovery business.

Amortization
of identifiable intangible assets in 2007 was $9.5 million, a decrease of $2.1 million, or 18%, compared to the prior year as certain customer contract
intangibles, primarily related to our settlements and claims business; and certain trade name intangibles, primarily related to our electronic discovery business; became fully amortized in 2007.

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

Interest Expense

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

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

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

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Effective Tax Rate

Our effective tax rate was 37.0% for 2007 compared with an effective rate of 39.4% for the prior year. Our tax rate is generally higher
than the statutory federal rate primarily due to state and local taxes. Several of our subsidiaries operate in New York City and are subject to state and local tax rates which are higher than the tax
rates assessed by other jurisdictions where we operate. The decrease in the effective tax rate compared with the prior year is primarily due to the reversal of valuation allowance related to our
United Kingdom net operating loss carryforward. Prior to 2007, we established a valuation allowance for the full amount of the net operating loss carryforward asset. The subsidiary generated taxable
income in 2007 and we utilized a portion of the net operating loss carryforward. During the fourth quarter of 2007, we determined that it was more likely than not that the net operating loss would be
fully utilized within the carryforward period. Accordingly, we reversed the valuation allowance related to the remaining net operating loss carryforward asset.

Net Income

We had net income of $6.9 million for 2007 compared to $35.1 million for the prior year. This change is primarily the
result of a $48.1 million decrease in operating revenue before reimbursed direct costs and an $8.5 million increase in general and administrative expense, partly offset by a
$9.1 million decrease in direct costs and an $18.8 million decrease in tax expense, all for 2007 compared with the prior year. The decrease in operating revenue before reimbursed direct
costs is primarily the result of a $58.4 million decrease in bankruptcy operating revenue before reimbursed direct costs, largely attributable to the recognition during 2006 of revenue which
was deferred beginning in October 2003 (as more fully explained under the "Results of Operations by SegmentBankruptcy Segment" caption below), and a $7.4 million decrease in
settlement administration operating revenue before reimbursed direct costs, largely the result of a decrease in legal notification revenue, partly offset by a $17.7 million increase in
electronic discovery operating revenue before reimbursed direct costs. The increase in general and administrative expenses is primarily the result of a $7.3 million increase in compensation
related expenses, largely attributable to additional staffing, primarily to support growth in our electronic discovery business, and an increase in bonus expense. The decrease in direct costs is
primarily the result of a $6.2 million decrease in legal notification costs, largely attributable to the decline in legal noticing revenue, and a $3.2 million decrease in outside
services. The decrease in tax expense is primarily the result of the recognition of previously deferred bankruptcy revenue during 2006.

Results of Operations by Segment

The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 14 of our
Notes to Consolidated Financial Statements.

Electronic Discovery Segment

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

Electronic
discovery direct and administrative costs in 2007 were $24.8 million, an increase of $7.8 million, or 46%, as compared to the prior year. The increase is
primarily due to expanded staffing and increased sales-related commissions, resulting in a $5.2 million increase in compensation related expenses; $1.6 million of expense related to the
relocation and expansion of our data center facilities; an increase in equipment, software maintenance and rent expense of $0.5 million; and an increase in relocation expense and travel related
expenses of $0.6 million.

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Bankruptcy Segment

Bankruptcy operating revenue before reimbursed direct costs in 2007 was $60.3 million, a decrease of $58.4 million, or
49%, as compared to the prior year. As more fully explained under the caption "Significant Accounting Policies, Revenue Recognition" in Note 1 to the Consolidated Financial Statements, this
decrease is primarily the result of our revenue recognition related to a specific arrangement in 2006 with our primary depository financial institution. During the second quarter of 2006, we delivered
the final software upgrade specified under this arrangement. As the only remaining undelivered element was postcontract customer support services, and as the contract
terminated September 30, 2006, during 2006 we recognized, in accordance with Statement of Position 97-2,Software Revenue Recognition("SOP 97-2"), $59.7 million of revenue that had been deferred during the period October 1, 2003 through December 31, 2005. Effective October 1, 2006, we
entered into a new arrangement with this depository financial institution; this new arrangement does not include provisions related to software upgrades. Accordingly, we now recognize this revenue
based on a contingent usage based revenue model and, during 2007, we did not defer any bankruptcy revenue or recognize any previously deferred bankruptcy revenue. Also contributing to the decrease in
bankruptcy operating revenue before reimbursed direct costs was a decline in average trustee deposits during 2007 compared with 2006 as a result of the decrease in bankruptcy filings during both
periods. Partially offsetting these declines was a $2.6 million increase in professional services.

Bankruptcy
direct and administrative costs in 2007 were $30.0 million, a decrease of $0.6 million, or 2%, as compared to the prior year, reflecting a bankruptcy operating
cost structure for 2007 that was consistent with the prior year's cost structure.

Settlement Administration

Settlement administration operating revenue before reimbursed direct costs in 2007 was $42.3 million, a decrease of
$7.4 million, or 15%, as compared to the prior year. This decrease is primarily the result of a $6.9 million decrease in document management revenue. The decrease in document management
revenue is attributable to a decline in legal noticing requirements compared with the prior year.

Settlement
administration direct and administrative costs in 2007 were $51.3 million, a decrease of $10.3 million, or 17%, as compared to the prior year. This decrease is
primarily the result of a $6.2 million reduction in the cost of legal noticing, a $3.3 million decrease in outside services, and a $1.7 million decrease in reimbursable expenses,
partly offset by a $0.2 million increase in compensation related expenses. Legal noticing expense generally fluctuates directly with legal noticing revenue and outside services costs will vary
depending on the timing of cases and the specific services required by the client.

Liquidity and Capital Resources

Operating Activities

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

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of
$4.6 million. Accounts payable will fluctuate from period to period depending on timing of purchases and payments.

Investing Activities

During the year ended December 31, 2008, we used cash of approximately $14.5 million for purchases of property and
equipment, including computer hardware, purchased software licenses for our electronic discovery business, and purchased computer hardware for our bankruptcy trustee business. Enhancements to our
existing software and the development of new software is essential to our continued growth, and, during 2008, we used cash of $6.6 million to fund internal costs related to the development of
software for which technological feasibility had been established. We also used cash of $4.8 million to fund the acquisition of an electronic discovery business located in the United Kingdom.
We anticipate that cash generated from operations will be adequate to fund our anticipated property, equipment, and software spending for the foreseeable future. Our property, equipment and
third-party software purchases consisted primarily of computer-related hardware, purchased software, and leasehold improvements to support the expansion of our electronic discovery business. We
believe that cash generated from operations will be adequate to fund our anticipated property, equipment and software spending over the next year.

Financing Activities

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

As
of December 31, 2008, our borrowings consisted of $52.3 million (including the fair value of the embedded option) from the contingent convertible subordinated notes,
which bears interest at 4% based on the $50.0 million principal amount, and approximately $8.9 million of obligations related to capital leases and deferred acquisition price payments.
During 2007, the term of our contingent convertible subordinated notes was extended to June 2010. The notes will require the use of $50.0 million of cash at the extended maturity date if the
note holders do not convert the notes into shares of our common stock. The holders of the contingent convertible subordinated notes have the right to convert at a price of approximately $11.67 per
share. If any or all notes are converted into shares of our common stock prior to the scheduled maturity of those notes, then there will be no cash requirements associated with those converted notes,
other than the regular payment of interest earned prior to the conversion date.

As
of December 31, 2008 we did not have any borrowings outstanding under our $100.0 million senior revolving loan. During the term of the credit facility, we have the
right, subject to compliance with our covenants, to increase the senior revolving loan to $175.0 million. Interest on the credit facility is generally based on a spread, not to exceed 325 basis
points over the LIBOR rate. As of December 31, 2008, significant financial covenants, all as defined within our credit facility agreement, include a leverage ratio not to exceed 3.00 to 1.00, a
fixed charge coverage ratio of not less than 1.25 to 1.00, and a current ratio of not less than 1.50 to 1.00. As of December 31, 2008, we were in compliance with all financial covenants.

Covenants
contained in our credit facility and in our contingent convertible subordinated notes include limitations on acquisitions, should we pursue acquisitions in the future. Pursuant
to the terms of our credit facility, we generally cannot incur indebtedness outside the credit facility, with the exceptions of capital leases and subordinated debt, with a limit of
$100.0 million of aggregate

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subordinated
debt. Furthermore, for any acquisition we must be able to demonstrate that, on a pro forma basis, we would be in compliance with our covenants during the four quarters prior to the
acquisition and bank permission must be obtained for an acquisition for which cash consideration exceeds $80.0 million or total consideration exceeds $125.0 million.

We
believe that funds generated from operations, plus our existing cash resources and amounts available under our credit facility, will be sufficient over the next 12 months, and
for the foreseeable future thereafter, to finance currently anticipated working capital requirements, internal software development expenditures, property, equipment and third party software
expenditures, deferred acquisition price agreements and capital leases, interest payments due on our outstanding borrowings, and payments for other contractual obligations.

Off-balance Sheet Arrangements

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

Contractual Obligations

As of December 31, 2008 we did not have any borrowings outstanding under our $100.0 million senior revolving loan. To
determine the amount that we may borrow, the $100.0 million available under the revolving loan is reduced by $1.8 million in outstanding letters of credit.

The
following table sets forth a summary of our contractual obligations and commitments, excluding periodic interest payments, as of December 31, 2008.

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

Total

Less than
1 Year

13 Years

35 Years

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

$
56,540

$
1,460

$
55,080

$


$
Interest payments(3)


3,927


2,285


1,642





Employment agreements(4)


3,208


1,539


1,669





Capital lease obligations


4,682


4,452


230





Operating leases


38,604


7,154


12,672


11,277


7,501Total

$
106,961

$
16,890

$
71,293

$
11,277

$
7,501


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Critical Accounting Policies

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

Revenue Recognition

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

Following
is a description of significant sources of our revenue.



Non-Software Arrangements

Services related to electronic discovery and settlement administration are billed based on volume and are evaluated pursuant to
Emerging Issues Task Force ("EITF") 00-21,Revenue Arrangements with Multiple Deliverables("EITF 00-21"). For these
contractual arrangements, we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has standalone value to our
customers because we or other vendors sell such services separately from any other services/deliverables. We have also obtained objective and reliable evidence of the fair value of each element based
either on the price we charge when we sell an element on a standalone basis or based on third-party evidence of fair value of such similar services. Lastly, our arrangements do not include general
rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting under
EITF 00-21. We allocate revenue to the various units of accounting in our arrangements based on the fair value of each unit of accounting, which is generally consistent with the
stated prices in our arrangements. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period in accordance with Staff Accounting Bulletin
Topic 13,

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Revenue Recognition("SAB Topic 13"). Revenue is recognized as the services are rendered, our fee becomes fixed and determinable, and collectability is reasonably
assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.

Software Arrangements

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

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

Reimbursements

We have revenue related to the reimbursement of certain costs, primarily related to postage. Consistent with guidance provided by EITF
No. 01-14,Income Statement Characterization of

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Reimbursements Received for "Out-of-Pocket" Expenses Incurred, reimbursed postage and other reimbursable direct costs are recorded gross in the
Consolidated Statements of Income as "Operating revenue from reimbursed direct costs" and as "Reimbursed direct costs", respectively.

Share-based compensation

We have accounted for share-based compensation pursuant to SFAS No. 123(R),Share Based
Payment("SFAS 123(R)"). SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. As a result of
our adoption of SFAS 123(R) on January 1, 2006, we now recognize expense related to share options issued prior to but unvested as of January 1, 2006 as well as expense related to
share options issued subsequent to January 1, 2006. For share options issued after January 1, 2006, the share options were also valued using the Black-Scholes option valuation model. Key
assumptions for the Black-Scholes option valuation model include expected volatility, expected term of share options granted, the expected risk-free interest rate, and the expected
dividend rate. We estimate our expected volatility based on implied volatilities from traded share options on our stock and on our stock's historical volatility. We have estimated the expected term of
our share options based on the historical exercise pattern of groups of employees that have similar historical exercise behavior. The expected risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of the grant. Historically, we have not paid dividends and we do not anticipate paying dividends in the foreseeable future; accordingly, our expected
dividend rate is zero. We recognize this expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Due to the numerous
assumptions involved in calculating share-based compensation expense, the expense recognized in our Consolidated Financial Statements may differ significantly from the value realized by employees on
exercise of the share-based instruments. In accordance with the methodology prescribed by SFAS 123(R), we do not adjust our recognized compensation expense to reflect these differences.
Recognition of share-based compensation expense had, and will likely continue to have, a material effect on our direct cost of services and general and administrative line items within our
Consolidated Statements of Income and also may have a material effect on our deferred income taxes and additional paid-in capital line items within our consolidated balance sheets. The
adoption of SFAS 123(R) also affected the classification within our consolidated statement of cash
flows of certain tax benefits as certain tax benefits formerly classified as an operating cash flow are now classified as a financing cash flow. As of December 31, 2008, the only share-based
compensation we have issued is share options. For additional information see Note 12 of the Notes to the Consolidated Financial Statements.

Business combination accounting

We have acquired a number of businesses during the last several years, and we may acquire additional businesses in the future. Business
combination accounting, often referred to as purchase accounting, requires us to determine the fair value of all assets acquired, including identifiable intangible assets, and liabilities assumed. The
cost of the acquisition is allocated to the assets acquired and liabilities assumed in amounts equal to the estimated fair value of each asset and liability, and any remaining acquisition cost is
classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including quoted market prices and estimates of future cash flows to be generated by the acquired
assets. Certain identifiable intangible assets, such as customer lists and covenants not to compete, are amortized based on the pattern in which the economic benefits of the intangible assets are
consumed over the intangible asset's estimated economic benefit period, generally from five to ten years. Goodwill is not amortized. Accordingly, the acquisition cost allocation has had, and will
continue to have, a significant impact on our current operating results.

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In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R),Business Combinations("SFAS 141(R)"). SFAS 141(R) establishes guidelines for the recognition and measurement of assets, liabilities and equity in business combinations. SFAS 141(R) is effective for
financial statements issued for fiscal years beginning after December 15, 2008. Management is still evaluating the impact that the adoption of SFAS 141(R) will have on our financial
position, results of operations, or cash flows. Due to the adoption of this standard on January 1, 2009, we have elected to expense, as incurred, all acquisition-related costs in 2008 for
business combinations for which the potential acquisition date was expected to be in fiscal 2009. For the year ended December 31, 2008, we had approximately $2.1 million of
acquisition-related expense resulting from non-capitalizable expenses under SFAS 141, as well as expenses related to potential acquisitions that did not result in a completed
transaction or were still under consideration as of December 31, 2008. This expense is included in "Other operating (income) expense, net" in our Consolidated Statements of Income.

Goodwill

We assess goodwill, which is not subject to amortization, for impairment each year as of July 31 and also at any other date when
events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. This assessment is performed at a reporting unit level. A reporting unit is a component
of a segment that constitutes a business, for which discrete financial information is available, and for which the operating results are regularly reviewed by management. We develop an estimate of the
fair value of each reporting unit using both a market approach and an income approach. If potential for impairment exists, the fair value of the reporting unit is subsequently measured against the
fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit's goodwill.

A
change in events or circumstances, including a decision to hold an asset or group of assets for sale, a change in strategic direction, or a change in the competitive environment could
adversely affect the fair value of one or more reporting units.

The
estimate of fair value is highly subjective and requires significant judgment related to the estimate of the magnitude and timing of future reporting unit cash flows. If we determine
that the estimated fair value of any reporting unit is less than the reporting unit's carrying value, then we proceed to the second step of the goodwill impairment analysis to measure the potential
impairment charge. If goodwill on our consolidated balance sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and
financial condition. Our recognized goodwill totaled $263.9 million as of December 31, 2008.

Identifiable intangible assets

Each period we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each identifiable
intangible asset. If we were to determine that events and circumstances warrant a change to the estimate of an identifiable intangible asset's remaining useful life, then the remaining carrying amount
of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life.

Additionally,
information developed during our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is
not recoverable and its fair value is less than the identifiable intangible asset's carrying value and would result in recognition of an impairment charge.

A
change in the estimate of the remaining life of one or more identifiable intangible assets or the impairment of one or more identifiable intangible assets could have a material impact
on our results of operations and financial condition. Our identifiable intangible assets' carrying value, net of amortization, was $26.9 million as of December 31, 2008.

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Income Taxes

A deferred tax asset or liability recognized for the anticipated future tax consequences of temporary differences between the tax basis
of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in the opinion of
management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Realization of the deferred tax assets is dependent on our ability to generate sufficient
future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that sufficient future taxable income, taking into consideration tax planning strategies,
may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation allowances by a charge to income tax expense in the period
such a determination is made. This charge may have a material impact on recognized income tax expense on our Consolidated Statements of Income. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. The recognition of a change in enacted tax rates may have a material impact on recognized income tax expense
and on our Consolidated Statements of Income.

Effective
January 1, 2007, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109, Accounting for Income Taxes("FIN 48"). FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present,
and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions are initially recognized in the financial
statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of
tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application of
FIN 48 requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions
and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits. These periodic
adjustments may have a material impact on our Consolidated Statements of Income. The cumulative effect of applying the provisions of FIN 48
was reported as an adjustment to the opening balance of retained earnings as of January 1, 2007. The cumulative effect adjustment does not include items that would not be recognized in
earnings, such as the effect on tax positions related to business combinations. For additional information related to our adoption of FIN 48, see Note 10 of the Notes to the Consolidated
Financial Statements.

Derivative financial instruments

SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as
amended and interpreted ("SFAS 133") establishes accounting and reporting standards for derivative instruments. In August of 2007, in order to limit our economic exposure to market fluctuations
in interest rates, we purchased one month LIBOR based interest rate floor options with a total notional amount of $800 million and initial contractual maturity of three years. We accounted for
this transaction pursuant to the guidance contained in SFAS 133. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. As the interest rate
floor options were not designated as an accounting hedge, changes in the fair value of the derivatives were recorded each period in current earnings. For the year ended December 31, 2007, the
change in the fair value of the interest rate floor options was recognized as an unrealized gain of $1.1 million and was included as a component of other operating income on the accompanying
Consolidated Statements of Income. During February 2008, we sold the interest rate floor options and realized a $3.5 million gain. The $2.4 million difference between

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the
realized gain of $3.5 million and the previously recognized gain of $1.1 million is included as a component of other operating income on the accompanying Consolidated Statements of
Income. As of December 31, 2008, we did not hold any interest rate floor options, other derivatives, or auction rate securities.

Recent Accounting Pronouncements

For information regarding recently issued accounting pronouncements and their expected impact to our future consolidated results of
operations or financial condition see Note 1 to the Consolidated Financial Statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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

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

Foreign Currency Risk

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

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Supplementary DataQuarterly Financial Information (Unaudited)

The following table sets forth the quarterly financial data for the quarters of the years ended December 31, 2008 and 2007 (in
thousands, except per share data):

1st

2nd

3rd

4thYear ended December 31, 2008Total revenue

$
49,010

$
64,842

$
58,883

$
63,383Gross profit(1)

$
22,990

$
30,297

$
29,951

$
33,491Net income

$
2,656

$
3,154

$
3,994

$
4,032Net income per shareBasic(2)

$
0.08

$
0.09

$
0.11

$
0.11Net income per shareDiluted(2)

$
0.07

$
0.08

$
0.10

$
0.10Year ended December 31, 2007Total revenue

$
41,128

$
44,206

$
44,847

$
44,232Gross profit(1)

$
22,271

$
25,104

$
27,098

$
25,079Net income

$
150

$
1,794

$
2,424

$
2,561Net income per shareBasic(2)

$
0.01

$
0.06

$
0.08

$
0.08Net income per shareDiluted(2)

$
0.01

$
0.06

$
0.07

$
0.07


---

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934. Based on their evaluation as of December 31, 2008, the end of the period covered by this Annual Report on
Form 10-K, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level to
ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Annual Report, were recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and was accumulated and communicated to management, including our principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting is designed to provide reasonable

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assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes
those policies and procedures that:



All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.

In
connection with the filing of our Annual Report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission inInternal
ControlIntegrated Framework. Based on our assessment using those criteria, management believes that, as of December 31, 2008, our internal control over
financial reporting is effective based on those criteria.

The
effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report which appears beginning on page 41.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2008, that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the internal control over financial reporting of Epiq Systems, Inc. and subsidiaries (the "Company") as of December 31, 2008, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on
our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

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We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2008 of the Company and our report dated March 4, 2009 expressed an unqualified opinion on those financial statements and financial
statement schedule.

/s/ DELOITTE & TOUCHE LLP

Kansas City, Missouri
March 4, 2009

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ITEM 9B.    OTHER INFORMATION

None.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference to our Proxy Statement for our 2009 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended December 31, 2008.

ITEM 11.    EXECUTIVE COMPENSATION

Incorporated by reference to our Proxy Statement for our 2009 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended December 31, 2008.

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

Incorporated by reference to our Proxy Statement for our 2009 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended December 31, 2008.

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

Incorporated by reference to our Proxy Statement for our 2009 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended December 31, 2008.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to our Proxy Statement for our 2009 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended December 31, 2008.

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  |                    |  |                                                                                              
|-------------------- |  | ------------------ |  | ---------------------------------------------------------------------------------------------
|Dated: March 4, 2009 |  | EPIQ SYSTEMS, INC.
|                     |  | By:                |  | /s/ TOM W. OLOFSON Tom W. Olofson Chairman of the Board, Chief Executive Officer and Director

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

|                            |  |                                                                                                          |  |              
|--------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | -------------
|
|                            |  |                                                                                                          |  |              
|/s/ TOM W. OLOFSON          |  | Tom W. Olofson
Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) |  | March 4, 2009
|/s/ CHRISTOPHER E. OLOFSON  |  | Christopher E. Olofson
President, Chief Operating Officer and Director                                   |  | March 4, 2009
|/s/ ELIZABETH M. BRAHAM     |  | Elizabeth M. Braham
Executive Vice President, Chief Financial Officer (Principal Financial Officer)      |  | March 4, 2009
|/s/ W. BRYAN SATTERLEE      |  | W. Bryan Satterlee
Director                                                                              |  | March 4, 2009
|/s/ EDWARD M. CONNOLLY, JR. |  | Edward M. Connolly, Jr.
Director                                                                         |  | March 4, 2009
|/s/ JAMES A. BYRNES         |  | James A. Byrnes
Director                                                                                 |  | March 4, 2009
|/s/ JOEL PELOFSKY           |  | Joel Pelofsky
Director                                                                                   |  | March 4, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Epiq Systems, Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Epiq Systems, Inc. and subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.

As
discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes,in 2007 and FASB Statement No. 123(R),Share-Based
Paymentin 2006.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2008, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 4, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Kansas City, Missouri
March 4, 2009

F-1

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

As of December 31,2008

2007ASSETSCURRENT ASSETS:Cash and cash equivalents

$
19,006

$
13,415Trade accounts receivable, less allowance for doubtful accounts of $2,600 and $1,437, respectively


48,540


33,925Prepaid expenses


6,015


2,888Other current assets


2,552


4,571Total Current Assets


76,113


54,799LONG-TERM ASSETS:Property and equipment, net


39,951


32,403Internally developed software costs, net


11,024


9,808Goodwill


263,871


260,684Other intangibles, net of accumulated amortization of $41,714 and $33,248, respectively


26,851


34,310Other


1,136


790Total Long-term Assets, net


342,833


337,995Total Assets

$
418,946

$
392,794LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
12,781

$
7,401Accrued compensation


7,525


7,430Deposits


2,150


1,618Deferred revenue


2,363


1,234Other accrued expenses


2,628


2,389Current maturities of long-term obligations


5,912


3,326Total Current Liabilities


33,359


23,398LONG-TERM LIABILITIES:Deferred income taxes


20,988


19,390Other long-term liabilities


8,794


8,058Long-term obligations (excluding current maturities)


55,310


58,266Total Long-term Liabilities


85,092


85,714COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITY:Preferred stock$1 par value; 2,000,000 shares authorized; none issued and outstanding





Common stock$0.01 par value; 100,000,000 and 50,000,000 shares authorized; issued and outstanding35,657,823 and
35,276,569 shares


357


353Additional paid-in capital


237,644


231,984Accumulated other comprehensive (loss) income


(2,683
)

4Retained earnings


65,177


51,341Total Stockholders' Equity


300,495


283,682Total Liabilities and Stockholders' Equity

$
418,946

$
392,794


See accompanying Notes to Consolidated Financial Statements.

F-2

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

Year Ended December 31,2008

2007

2006REVENUE:Case management services

$
128,331

$
96,612

$
76,534Case management bundled products and services


17,774


26,424


87,716Document management services


61,751


28,601


35,472Operating revenue before reimbursed direct costs


207,856


151,637


199,722Operating revenue from reimbursed direct costs


28,262


22,776


24,448Total Revenue


236,118


174,413


224,170OPERATING EXPENSES:Direct cost of services (exclusive of depreciation and amortization shown separately below)


81,884


41,470


48,345Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)


3,642


3,700


3,921Reimbursed direct costs


28,134


22,618


24,583General and administrative


71,113


62,546


54,071Depreciation and software and leasehold amortization


16,302


12,766


10,113Amortization of intangibles


9,051


9,531


11,629Other operating (income) expense, net


171


(1,094
)

283Total Operating Expenses


210,297


151,537


152,945INCOME FROM OPERATIONS


25,821


22,876


71,225INTEREST EXPENSE (INCOME):Interest expense


1,757


11,973


13,468Interest income


(279
)

(92
)

(208
)Net Interest Expense


1,478


11,881


13,260INCOME BEFORE INCOME TAXES


24,343


10,995


57,965PROVISION FOR INCOME TAXES


10,507


4,066


22,834NET INCOME

$
13,836

$
6,929

$
35,131NET INCOME PER SHARE INFORMATION:Basic

$
0.39

$
0.23

$
1.21Diluted

$
0.36

$
0.21

$
1.05WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic


35,459


30,424


29,099Diluted


41,425


32,564


34,573


See
accompanying Notes to Consolidated Financial Statements.

F-3

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Table of Contents

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

Number of
Outstanding
Shares

Common
Shares

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

TotalBalance at January 1, 2006


28,880

$
289

$
128,388

$
11,791

$


$
140,468Comprehensive income:Net income











35,131





35,131Foreign currency translation adjustment














18


18Total comprehensive income

















35,149Share-based compensation plans


338


3


8,559








8,562Balance at December 31, 2006


29,218


292


136,947


46,922


18


184,179Change in accounting principle (Note 10)











(2,510
)




(2,510
)Comprehensive income:Net income











6,929





6,929Foreign currency translation adjustment














(14
)

(14
)Total comprehensive income

















6,915Share-based compensation plans


1,059


11


16,532








16,543Equity offering


5,000


50


78,505








78,555Balance at December 31, 2007


35,277


353


231,984


51,341


4


283,682Comprehensive income:Net income











13,836





13,836Foreign currency translation adjustment














(2,687
)

(2,687
)Total comprehensive income

















11,149Share-based compensation plans


381


4


5,660








5,664Balance at December 31, 2008


35,658

$
357

$
237,644

$
65,177

$
(2,683
)
$
300,495


See
accompanying Notes to Consolidated Financial Statements.

F-4

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Table of Contents

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

Year Ended December 31,2008

2007

2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
13,836

$
6,929

$
35,131Adjustments to reconcile net income to net cash provided by operating activities:Expense (benefit) for deferred income taxes


938


(2,534
)

19,995Depreciation and software amortization


16,302


12,766


10,113Change in valuation of embedded option and convertible debt


(1,610
)

1,788


844Amortization of intangible assets


9,051


9,531


11,629Share-based compensation expense


2,831


5,602


5,357Provision for bad debts


1,678


479


458Other, net


1,277


(482
)

429Changes in operating assets and liabilities, net of effects from business acquisitions:Trade accounts receivable


(16,919
)

(612
)

2,255Prepaid expenses and other assets


885


(2,091
)

(430
)Accounts payable and other liabilities


4,566


1,686


3,067Deferred revenue


1,130


161


(59,151
)Excess tax benefit related to share-based compensation


(95
)

(583
)

(234
)Other


348


3,572


4,973Net cash provided by operating activities


34,218


36,212


34,436CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment


(14,539
)

(14,796
)

(6,431
)Internally developed software costs


(6,562
)

(4,813
)

(4,563
)Cash paid for acquisition of businesses, net of cash acquired


(4,762
)




(3,586
)Other investing activities, net


38


330


(71
)Net cash used in investing activities


(25,825
)

(19,279
)

(14,651
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from revolver


3,000


44,000


14,000Payments on revolver


(3,000
)

(122,028
)

(29,000
)Debt issuance costs


(795
)




(281
)Payments under long-term debt and capital lease obligations


(4,037
)

(19,346
)

(15,656
)Excess tax benefit related to share-based compensation


95


583


234Net proceeds from equity offering





78,555


Proceeds from exercise of stock options


2,525


9,444


2,629Net cash used in financing activities


(2,212
)

(8,792
)

(28,074
)Effect of exchange rate changes on cash


(590
)




NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


5,591


8,141


(8,289
)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


13,415


5,274


13,563CASH AND CASH EQUIVALENTS, END OF YEAR

$
19,006

$
13,415

$
5,274


See
accompanying Notes to Consolidated Financial Statements.

F-5

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Table of Contents

EPIQ SYSTEMS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2008, 2007 AND 2006

NOTE 1:    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Epiq Systems, Inc. ("Epiq") and its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations

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

Stock Split

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

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and all liquid investments with original maturities of three months or less
at the time of purchase.

Accounts Receivable

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

Software Development Costs

Certain internal software development costs incurred in the creation of computer software products for sale, lease or otherwise to be
marketed are capitalized once technological feasibility has been established. Capitalized costs are amortized, beginning in the period the product is available for general release, based on the ratio
of current revenue to current and estimated future revenue for each product with minimum annual amortization equal to the straight-line amortization over the remaining estimated economic
life of the product. Certain internal software development costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project

F-6

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

phase
is complete and when management, with the relevant authority, authorizes and commits funding to the project and it is probable the project will be completed and the software will be used to
perform the function intended. Capitalized costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over
the estimated economic life of the product.

Goodwill and Identifiable Intangible Assets

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business acquisitions accounted
for under the purchase method. Goodwill is not amortized but is assigned to a reporting unit and tested for impairment at least annually, and between annual tests if events or changes in circumstances
have indicated that the assets might be impaired. Generally, fair value represents discounted projected future cash flows and potential impairment is indicated when the carrying value of a reporting
unit, including goodwill, exceeds its estimated fair value. If potential for impairment exists, the fair value of the reporting unit is subsequently measured against the fair value of its underlying
assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit's goodwill. An impairment loss is recognized for any excess of the carrying value of the reporting
unit's goodwill over the implied fair value. Our annual impairment test, performed as of July 2008 and using a discounted cash flow analysis to determine the fair value of each reporting unit,
indicated that there were no impairments.

Identifiable
intangible assets, resulting from various business acquisitions, consist primarily of customer relationships and agreements not to compete. Identifiable intangible assets
are amortized over their estimated economic benefit period, generally from five to ten years. Identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances
have indicated that the carrying amount of these assets might not be recoverable.

Impairment of Long-lived Assets

Following the guidance provided in Statement of Accounting Standards ("SFAS") No. 144,Accounting for
the Impairment or Disposal of Long-Lived Assets, we review long-lived assets for impairment, using our best estimates of operating cash flows based on
reasonable and supportable assumptions and projections, whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.

Deferred Loan Fees

Incremental, third party costs related to establishing credit facilities are capitalized and amortized based on the terms of the
related debt. The unamortized costs are included as a component of other long-term assets on our Consolidated Balance Sheets. Amortization costs are included as a component of interest
expense on our Consolidated Statements of Income.

F-7

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

Share-Based Compensation

On January 1, 2006, we adopted SFAS No. 123 (revised 2004) ("SFAS 123(R)"),Share-Based
Payment. SFAS 123(R) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs
liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123(R)
requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize
that cost over the period during which an employee is required to provide service in exchange for the award.

We
elected to adopt SFAS 123(R) using the modified version of prospective application. Under the modified version of prospective application, we have recognized compensation costs
related to share-based compensation beginning January 1, 2006. We recognize this expense on a straight-line basis over the requisite service period of the last separately vesting
portion of the award.

Income Taxes

A deferred tax asset or liability is recognized for the anticipated future tax consequences of temporary differences between the tax
basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in the opinion of
management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

Effective
January 1, 2007, we adopted Financial Accounting Standard Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109,Accounting for Income Taxes("FIN 48").
FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on
a tax return. Under FIN 48, tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and all relevant facts. Application of FIN 48 requires numerous estimates based on available information. We consider many factors when
evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The cumulative effect of applying the
provisions of FIN 48 was reported as an adjustment to the opening balance of retained earnings as of January 1, 2007. The cumulative effect adjustment does not include items that would
not be recognized in earnings, such as the effect on tax positions related to business combinations. For additional information related to our adoption of FIN 48, see Note 10.

F-8

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

Revenue Recognition

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

Following
is a description of significant sources of our revenue.



Non-Software Arrangements

Services related to electronic discovery and settlement administration are billed based on volume and are evaluated pursuant to
Emerging Issues Task Force ("EITF") 00-21,Revenue Arrangements with Multiple Deliverables("EITF 00-21"). For these
contractual arrangements, we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has standalone value to our
customers because we or other vendors sell such services separately from any other services/deliverables. We have also obtained objective and reliable evidence of the fair value of each element based
either on the price we charge when we sell an element on a standalone basis or based on third-party evidence of fair value of such similar services. Lastly, our arrangements do not include general
rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting under
EITF 00-21. We allocate revenue to the various units of accounting in our arrangements based on the fair value of each unit of accounting, which is generally consistent with the
stated prices in our arrangements. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period in accordance with Staff Accounting Bulletin
Topic 13,Revenue Recognition("SAB Topic 13"). Revenue is recognized as the services are rendered, our fee becomes fixed and
determinable, and collectability is reasonably assured. Payments received in advance

F-9

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

of
satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.

Software Arrangements

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

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

F-10

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

determinable,
and collection is reasonably assured. This revenue, which is less than ten percent of our total revenue, is included in the Consolidated Statements of Income as a component of "case
management services" revenue.

During
the period October 1, 2003 through September 30, 2006, we had an arrangement with our primary depository financial institution under which we delivered two specified
upgrades annually with the last specified upgrade occurring in the second quarter of 2006. This arrangement included specific pricing for each software upgrade and certain special projects in addition
to the contingent deposit-based pricing related to the software license, hardware, hardware maintenance, and postcontract customer support to each trustee client. Therefore, the software upgrades and
special projects were part of a bundled arrangement. Each software upgrade was considered a separate and discrete product and, as we did not sell each software upgrade on a standalone basis, we were
unable to establish VSOE of the fair value of the software upgrades. As a result, the licensed software, software upgrade, special projects and postrcontract customer support were a combined unit of
accounting. Since we did not have VSOE of the fair value of each separate upgrade, we deferred recognition of substantially all revenue under this arrangement until the final upgrade was delivered.
The ongoing costs related to this arrangement were recognized as expense when incurred. On delivery of the final upgrade during the
second quarter of 2006, the only remaining undelivered element was postcontract customer support services. In accordance with SOP 97-2, on delivery of the final software upgrade, we
recognized revenue previously deferred on a proportionate basis over the three year term of the contract. Revenue for this combined unit of accounting, when recognized, was included as a component of
case management services revenue. As the contract terminated September 30, 2006, during 2006 we recognized approximately $59.7 million of revenue which had been deferred as of
December 31, 2005.

Reimbursements

We have revenue related to the reimbursement of certain costs, primarily postage. Consistent with guidance provided by EITF
No. 01-14,Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred, reimbursed postage and other reimbursable direct costs are recorded gross in the Consolidated Statements of Income as "Operating revenue from reimbursed direct costs"
and as "Reimbursed direct costs", respectively.

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

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

Comprehensive Income

SFAS No. 130,Reporting Comprehensive Income, establishes requirements for
reporting and display of comprehensive income and its components. Our accumulated other comprehensive income is included as a separate component of shareholders' equity on our Consolidated Balance
Sheets. The

F-11

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

changes
in our cumulative foreign currency translation adjustment were not adjusted for income taxes, as they relate to specific indefinite investments in foreign subsidiaries.

Depreciation and Software and Leasehold Amortization

The caption "Depreciation and software and leasehold amortization" in the accompanying Consolidated Statements of Income includes
direct costs of approximately $9.4 million, $7.1 million, and $6.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Income Per Share

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

Segment Information

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

Use of Estimates

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

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value
Measurements("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The adoption of SFAS 157 as of January 1, 2008 did not have a material impact on our financial position, results of operations, or cash

F-12

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

flows.
In February 2008, FASB issued Staff Position 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement13 ("FSP 157-1"). FSP 157-1
excludes from the scope of SFAS 157 accounting pronouncements that address fair value measurements for purposes of lease classification or measurements. This scope exception does not apply to
assets acquired and liabilities assumed in a business combination that are required to be measured at fair value, regardless of whether those assets and liabilities are related to leases. FSP
157-1 was effective upon the initial adoption of SFAS 157. Adoption of FSP 157-1, as of January 1, 2008, did not have a material impact
on our financial position, results of operations, or cash flows. In February 2008, FASB issued Staff Position 157-2,Effective Date of FASB Statement
No. 157, ("FSP 157-2") which, as of February 12, 2008, indefinitely delayed the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Management is still evaluating the impact, if any, that the
adoption of FSP 157-2 will have on our financial position, results of operations, or cash flows.

In
December 2007, the FASB issued SFAS No. 141(R),Business Combinations("SFAS 141(R)"). SFAS 141(R) establishes
guidelines for the recognition and measurement of assets, liabilities and equity in business combinations. SFAS 141(R) is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Management is still evaluating the impact that the adoption of SFAS 141(R) will have on our financial position, results of operations, or cash flows. Due to the
adoption of this standard on January 1, 2009, we have elected to expense, as incurred, all acquisition-related costs incurred in 2008 for business combinations for which the potential
acquisition date was expected to be in fiscal 2009. For the year ended December 31, 2008, we had approximately $2.1 million of acquisition-related expense resulting from
non-capitalizable expenses under SFAS 141,Business Combinations, as well as expenses related to potential acquisitions that were
still under consideration as of December 31, 2008. This expense is included in "Other operating (income) expense, net" in our Consolidated Statements of Income.

In
December 2007, the FASB issued SFAS No, 160,Noncontrolling Interest In Consolidated Financial Statements, ("SFAS 160").
SFAS 160 changes the way in which noncontrolling interests in subsidiaries are measured and classified on the balance sheet. SFAS 160 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Management anticipates that the adoption of SFAS 160 will not have a material effect on our financial position, results of operations, or
cash flows.

In
March 2008, the FASB issued SFAS No. 161,Disclosures About Instruments and Hedging Activitiesamendment of FASB
Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 is effective for financial
statements issued for fiscal years beginning after November 15, 2008. As SFAS 161 relates only to disclosure, management anticipates that the adoption of SFAS 161 will not have a
material effect on our financial position, results of operations, or cash flows.

F-13

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

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

In May, 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles("SFAS 162").
SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. SFAS 162 is effective 60 days following the SEC's approval of the PCAOB's amendments to U.S. Auditing Standards
(AU) Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management is still evaluating the
impact, if any, that the adoption of SFAS 162 will have on our financial position, results of operations, or cash flows.

In
April 2008, the FASB issued FSP FAS142-3,Determination of the Useful Life of Intangible Assets("FSP
FAS 142-3") . FSP FAS 142-3 provides guidance on determining the useful life of a recognized intangible asset. FSP FAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008. Management is still evaluating the impact, if any, that the adoption of FSP FAS 142-3 will
have on our financial position, results of operations, or cash flows.

NOTE 2: PROPERTY AND EQUIPMENT

Property and equipment, including leasehold improvements and purchased software, are stated at cost and depreciated or amortized on a straight-line basis over the estimated
useful life of each asset or, for leasehold improvements, the lesser of the lease term or useful life. The classification of property and equipment and the related estimated useful lives is as follows
(in thousands):

December 31,Estimated
Useful Life2008

2007Land

$
192

$
192Building and building and leasehold improvements


11,977


11,252

5 - 30 yearsFurniture and fixtures


2,680


2,472

5 - 7 yearsComputer and purchased software


48,089


35,698

2 - 5 yearsTransportation equipment


7,522


6,396

3 - 5 yearsMailroom equipment


1,151


1,151

3 - 5 yearsConstruction in progress


2,258


77373,869


57,934Accumulated depreciation and amortization


(33,918
)

(25,531
)Property and equipment

$
39,951

$
32,403


Computer
and purchased software includes property acquired under capital leases. As of December 31, 2008 and 2007, assets acquired under capital leases had a historical cost basis
of $5.6 million and $2.7 million, respectively, and accumulated amortization of $1.4 million and $0.5 million, respectively.

F-14

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 3:    INTERNALLY DEVELOPED SOFTWARE

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

Year Ended December 31,2008

2007Amounts capitalized, beginning of year

$
25,383

$
21,282Development costs capitalized


6,562


4,813Acquired software


279


Dispositions


(169
)

(712
)Amounts capitalized, end of year


32,055


25,383Accumulated amortization, end of year


(21,031
)

(15,575
)Software development costs, net

$
11,024

$
9,808


Included
in the above are capitalized software development costs for unreleased products of $4.1 million and $1.8 million at December 31, 2008 and 2007,
respectively. During the years ended December 31, 2008, 2007 and 2006, we recognized amortization expense related to capitalized software development costs of $5.5 million,
$4.6 million, and $3.7 million, respectively.

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for 2008 and 2007 was as follows:

Electronic
Discovery

Bankruptcy

Settlement
Administration

TotalBalance as of December 31, 2006

$
76,369

$
151,159

$
33,081

$
260,609Other


(321
)

541


(145
)

75Balance as of December 31, 2007


76,048


151,700


32,936


260,684Acquisitions


5,342








5,342Foreign currency and other


(1,804
)

(262
)

(89
)

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

$
79,586

$
151,438

$
32,847

$
263,871


The
$3.2 million increase in goodwill in 2008 primarily resulted from the April 2008 acquisition of an electronic discovery business in the United Kingdom, partially offset by a
reversal of FIN 48 tax liabilities, as certain federal and state tax returns were closed under the statute of limitations. The $0.1 million increase in goodwill in 2007 results from an
adjustment of the acquisition date tax basis pursuant to FIN 48, partly offset by a subsequent reversal of the acquisition date tax basis adjustment as certain federal and state tax returns
were closed under the statute of limitation and by a purchase price adjustment related to the receipt of cash on final settlement of an escrowed amount related to our acquisition of our electronic
discovery business.

F-15

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS (Continued)

Amortizing
identifiable intangible assets as of December 31, 2008 and December 31, 2007 consisted of the following (in thousands):

December 31, 2008

December 31, 2007Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
AmortizationCustomer relationships

$
39,986

$
22,039

$
39,287

$
17,863Trade names


745


745


745


745Non-compete agreements


27,834


18,930


27,526


14,640$
68,565

$
41,714

$
67,558

$
33,248


Customer
relationships and non-compete agreements both carry a weighted average life of seven years. Amortization expense for each year in the three year period ended
December 31, 2008, and estimated amortization expense for each of the next five years is as follows (in thousands):

For the Year Ending
December 31,Aggregate amortization expense:2006

$
11,6292007


9,5312008


9,051Estimated amortization expense:2009

$
7,6012010


6,6922011


4,8322012


4,6522013


3,070


NOTE 5:    LONG-TERM OBLIGATIONS

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

Year Ended December 31,2008

2007Contingent convertible subordinated debt, including embedded option

$
52,348

$
53,958Capital leases


4,682


1,790Deferred acquisition price


4,192


5,844Total long-term obligations, including current portion

$
61,222

$
61,592


F-16

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 5:    LONG-TERM OBLIGATIONS (Continued)

Credit Facilities

During July 2008, we amended and restated our credit facility. The amended credit facility, with KeyBank National Association as
administrative agent, consists of a $100.0 million senior revolving loan. The facility matures in 2011. During the term of the credit facility, we have the right, subject to compliance with our
covenants, to increase the senior revolving loan to $175.0 million. The amended credit facility is secured by liens on our real property and a significant portion of our personal property.
Interest on the amended credit facility is generally based on a spread, not to exceed 325 basis points, over the LIBOR rate. There were no amounts due under the senior revolving loan as of
December 31, 2008. To determine the amount that we may borrow, the
$100.0 million available under the revolving loan is reduced by $1.8 million in outstanding letters of credit.

Our
amended credit facility contains financial covenants related to earnings before interest, provision for income taxes, depreciation, amortization and other adjustments as defined in
the agreements ("EBITDA") and total debt. In addition, our credit facility also contains financial covenants related to senior debt, fixed charges, and working capital. As of December 31, 2008,
we were in compliance with all financial covenants.

Contingent Convertible Subordinated Notes

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

Under
SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133"), the right to extend the
maturity of the convertible subordinated notes was accounted for as an embedded option subject to bifurcation. The embedded option was initially valued at $1.2 million and the contingent
convertible subordinated note balance was reduced by the same amount. The subordinated convertible note was accreted approximately $0.1 million each quarter such that the contingent convertible
subordinated note balance, exclusive of the embedded option value, totaled $50.0 million as of the June 15, 2007 original maturity date. On our accompanying Consolidated Statements of
Income, this accretion is a component of interest expense. The embedded option was revalued at each period end based on the probability weighted discounted cash flows related to the additional 4%
interest rate payments resulting from the three year extension of the contingent convertible subordinated notes maturity. During April 2007, the holders of the convertible subordinated notes exercised
this right to extend and we performed a final valuation to estimate the fair value of the

F-17

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 5:    LONG-TERM OBLIGATIONS (Continued)

embedded
option as of the approximate date of the extension. The estimated fair value of the embedded option at this date, included as a component of the contingent convertible subordinated
note, was approximately $4.8 million. The $4.8 million estimated fair value of the embedded option is amortized as a credit to interest expense over the period to the extended maturity,
which is June 15, 2010. If any contingent convertible notes are converted into shares of our common stock prior to June 15, 2010, the unamortized embedded option value related to those
shares will be recognized as a gain in the period the conversion occurs. The above changes related to the carrying value of the contingent convertible subordinated note, the estimated fair value of
the embedded option, and the amortization of the fair value of the embedded option do not affect our cash flow.

Capital Leases

We lease certain property and software under capital leases that expire during various years through 2011.

Deferred Acquisition Price

We have made acquisitions for which a portion of the purchase price was deferred. These deferred payments, which are either
non-interest bearing or have a below market interest rate, have been discounted using an appropriate imputed interest rate. As of December 31, 2008 and 2007, the discounted value of
the remaining note payments, for which the final payment is due in 2011, was approximately $4.2 million and $5.8 million, respectively, of which approximately $1.5 million and
$2.5 million, respectively, was classified as a current liability in the consolidated balance sheets as of December 31, 2008 and 2007, respectively.

Scheduled Principal Payments

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

2009

$
5,9122010


54,7252011


5852012


2013


Total

$
61,222


NOTE 6:    OPERATING LEASES

We have non-cancelable operating leases for office space at various locations expiring at various times through 2015. Each of the leases requires us to pay all executory
costs (property taxes, maintenance and insurance). Certain of our lease agreements provide for scheduled rent increases during the lease term. Rent expense is recognized on a straight-line
basis over the lease term. Landlord provided tenant improvement allowances are recorded as a liability and amortized as a reduction to

F-18

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 6:    OPERATING LEASES (Continued)

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

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

Total Future
Minimum
Lease Payments

Sublease Rental
Income

Net Lease
Payments2009

$
7,154

$
1,048

$
6,1062010


6,719


258


6,4612011


5,953





5,9532012


5,757





5,7572013


5,520





5,520Thereafter


7,501





7,501Total minimum lease payments

$
38,604

$
1,306

$
37,298


Expense
related to operating leases, net of sublease income of $1.2 million for the year ended December 31, 2008, was approximately $5.2 million. Lease expense for
the years ended December 31, 2007 and 2006 was $5.7 million, and $5.6 million, respectively.

NOTE 7:    STOCKHOLDERS' EQUITY

Under the terms of our contingent convertible subordinated notes, we are restricted from payment of cash dividends while the notes are outstanding. Thereafter, the payment of cash
dividends is within the discretion of our board of directors and will depend upon various factors, including future earnings, capital requirements, financial condition, the terms of our credit
facility, and other factors deemed
relevant by the board of directors. There is no restriction on the ability of our subsidiaries to transfer funds to Epiq in the form of cash dividends, loans or advances.

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

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

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

F-19

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 8:    EMPLOYEE BENEFIT PLANS

Stock Purchase Plan

We have an employee stock purchase plan that allows employees to purchase shares of our common stock through payroll deduction. The
purchase prices for all employee participants are based on the closing bid price on the last business day of the month.

Defined Contribution Plan

We have a defined contribution 401(k) plan that covers substantially all employees. We match 60% of the first 10% of employee
contributions and also have the option of making discretionary contributions. Our plan expense was approximately $1.5 million, $1.3 million, and $1.1 million for the years ended
December 31, 2008, 2007, and 2006, respectively.

NOTE 9:    FINANCIAL INSTRUMENTS AND CONCENTRATIONS

Fair Value of Financial Instruments

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

As
of December 31, 2008, the carrying value of cash and cash equivalents, trade accounts receivable, and accounts payable approximated fair value. As of December 31, 2008,
the carrying value of our long-term debt instruments, consisting of convertible debt, deferred acquisition price, and capital leases, was approximately $61.2 million, and the fair
value was estimated at $82.8 million. The fair values are estimates based upon market conditions and perceived risks at December 31, 2008.

Significant Customer and Concentration of Credit Risk

We currently promote our Chapter 7TCMS® software related products
and services through marketing arrangements with various financial institutions. Bank of America has been, and continues to be, a significant partner for these marketing arrangements, and our
arrangement with Bank of America is open-ended. Either party may, with appropriate notice, wind down the agreement over a period of three years. Revenues recognized by us from Bank of
America, all related to our bankruptcy segment, were approximately 7%, 14% and 38% of our total revenues for the years ended December 31, 2008, 2007 and 2006, respectively. Additionally, Bank
of America represented approximately 3% and 11% of our accounts receivable balance as of December 31, 2008 and 2007, respectively.

During
the years ended December 31, 2008 and 2007 approximately 22% and 1%, respectively, of our consolidated revenue was derived from a large contract that was entered into in
2007. This revenue was recognized in our settlement administration segment. Revenue related to this contract is expected to decline throughout 2009 as we reach the conclusion of the contract during
2009. Additionally, accounts receivable related to this contract represented approximately 22% and 1% of our accounts receivable balance as of December 31, 2008 and 2007, respectively.

F-20

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 10:    INCOME TAXES

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

Year Ended December 31,2008

2007

2006Income before income taxes

$
24,343

$
10,995

$
57,965Provision for income taxesCurrently payable income taxesFederal

$
7,677

$
5,451

$
2,261State


1,368


1,145


491Foreign


524


4


87Total


9,569


6,600


2,839Deferred income taxesFederal


(157
)

(2,232
)

17,289State


1,283


(248
)

2,725Foreign


(188
)

(54
)

(19
)Total


938


(2,534
)

19,995Provision for income taxes

$
10,507

$
4,066

$
22,834


A
reconciliation of the provision for income taxes at the statutory rate of 35% for the year ended December 31, 2008 and 34% for the years ended December 31, 2007 and 2006
to the provision for income taxes at our effective rate is shown below (in thousands):

Year Ended December 31,2008

2007

2006Computed at the statutory rate

$
8,520

$
3,738

$
20,288Change in taxes resulting from:State income taxes, net of federal tax effect


1,723


592


2,090Permanent differences


668


671


683Foreign tax and change in foreign valuation allowance


(75
)

(330
)

221Research and development credits


(255
)

(532
)

(300
)Other


(74
)

(73
)

(148
)Provision for income taxes

$
10,507

$
4,066

$
22,834


Taxes
related to acquisitions of $0.7 million, $0.4 million, and $0.5 million were recorded as an increase to goodwill for the years ended December 31, 2008,
2007, and 2006, respectively.

F-21

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 10:    INCOME TAXES (Continued)

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

December 31,2008

2007Deferred tax assets:Allowance for doubtful accounts

$
1,430

$
647Share-based compensation


4,831


3,910Contingent convertible subordinated notes


896


1,519Intangible assets


50


278Accrued liabilities


2,741


1,794Foreign loss carryforwards





68State net operating loss carryforwards


34


1,215Capital loss carryforward


63


Valuation allowances


(63
)

Total deferred tax assets


9,982


9,431Deferred tax liabilities:Prepaid expenses


(1,454
)

(766
)Intangible assets


(20,486
)

(20,772
)Property and equipment and software development costs


(8,092
)

(5,878
)Interest rate floor options





(481
)Other


(49
)

Total deferred tax liabilities


(30,081
)

(27,897
)Net deferred tax liability

$
(20,099
)
$
(18,466
)


As
of December 31, 2008, we had as filed state and local operating loss carryforwards of $8.1 million. These carryforwards expire in varying amounts in years 2020 through
2028. Management believes that it is more likely than not that we will be able to utilize these carryforwards and, therefore, no valuation allowance is necessary.

As
of December 31, 2008, we had state and local capital loss carryforwards of $0.6 million. This capital loss expires in 2013. Corporation capital losses can only be
utilized against corporate capital gains and as a result, management believes that we will not be able to utilize these carryforwards within the carryforward period. Therefore, we have established a
$0.1 million valuation allowance.

As
a result of certain realization requirements of SFAS 123(R), the deferred tax assets and liabilities shown above exclude certain deferred tax assets relating to state net
operating losses at December 31, 2008 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be
increased by $0.1 million if and when such deferred tax assets are ultimately realized. We use tax law ordering for the purpose of determining when excess tax benefits have been realized.

F-22

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 10:    INCOME TAXES (Continued)

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

December 31,2008

2007Current deferred income tax asset

$
889

$
924Long-term deferred income tax liability


(20,988
)

(19,390
)Net deferred tax liability

$
(20,099
)
$
(18,466
)


U.S.
income and foreign withholding taxes have not been recognized on the excess of earnings for financial reporting over the tax basis of investments in foreign subsidiaries that are
essentially permanent in duration. Generally, such earnings become subject to U.S. taxation upon the remittance of dividends or a sale or liquidation of the foreign subsidiary. The amount of such
excess totaled approximately $1.1 million at December 31, 2008. It is not practicable to estimate the amount of any deferred tax liability related to this amount.

In
June 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprise's financial statements in accordance with SFAS
No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods, disclosures, and transition. We adopted FIN 48 effective January 1, 2007. As a result of the adoption, we recognized
additional tax related liabilities of approximately $3.4 million consisting of a $2.5 million reduction to retained earnings and a $0.9 million increase to goodwill related to
prior acquisitions. In addition, we reclassified approximately $1.3 million of income tax liabilities from a current liability classification to a non-current liability
classification as payment of the liability is not anticipated within one year of the balance sheet date. We also recorded approximately $1.2 million of deferred tax assets relating to the tax
benefits associated with interest expense and federal benefits associated with state tax expenses.

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

F-23

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 10:    INCOME TAXES (Continued)

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

2008

2007Unrecognized Tax Benefits as of January 1

$
4,505

$
4,801Gross increases for prior years tax positions


174


243Gross decreases for prior years tax positions


(381
)

(356
)Gross increase for current year tax positions


1,639


669Settlements





(62
)Lapse of statute of limitations


(740
)

(790
)Unrecognized Tax Benefits at December 31

$
5,197

$
4,505


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

In
2007 the State of New York initiated an examination of our 2003 - 2005 New York state income tax returns. As of December 31, 2008 the examination was
not concluded. It is possible that the examination will conclude in 2009 and it is reasonably possible that a change in the unrecognized tax benefits may occur within the next twelve months; however,
a quantification of an estimated range cannot be made at this time.

During
2008, federal and state tax returns closed under the statute of limitations. As a result, we recognized $1.0 million of net unrecognized tax benefits, of which
$0.7 million decreased goodwill and $0.3 million reduced tax expense. For statutes closing in 2007 we recognized $0.9 million of net unrecognized tax benefits, of which
$0.5 million decreased goodwill and $0.4 million reduced tax expense.

As
of December 31, 2008, the 2005 - 2007 federal tax returns remained open under the statute of limitations, and 2004 - 2007
state and foreign tax returns remained open. As of December 31, 2008, it is reasonably possible that approximately $1.0 million of net unrecognized tax benefits would be recognized in
the following twelve months due to the closing of 2004 and 2005 years for federal and state jurisdictions, of which $1.0 million would affect our effective tax rate. Of this
$1.0 million, approximately $0.5 million relates to goodwill. In accordance with SFAS 141(R), acquired uncertain tax positions will no longer be applied to goodwill but will be
recognized as an adjustment to income tax expense.

As
permitted by FIN 48, we have classified interest and penalties as a component of income tax expense. Estimated interest and penalties classified as a component of income tax
expense during 2008 and 2007 totaled $0.1 million and $0.2 million, respectively. Accrued interest and penalties, included as a component of "Other long-term liabilities" on
the accompanying Consolidated Balance Sheets, totaled $0.9 million and $0.2 million, respectively, as of December 31, 2008. As of December 31, 2007, the accrued interest
and penalties were $0.7 million and $0.5 million respectively.

F-24

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 11:    NET INCOME PER SHARE

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

The
computations of basic and diluted net income per share are as follows (in thousands, except per share data):

Year Ended December 31,2008

2007

2006Net
Income

Weighted
Average
Shares
Outstanding

Per Share
Amount

Net
Income

Weighted
Average
Shares
Outstanding

Per Share
Amount

Net
Income

Weighted
Average
Shares
Outstanding

Per Share
AmountBasic net income per share from continuing operations

$
13,836


35,459

$
0.39

$
6,929


30,424

$
0.23

$
35,131


29,099

$
1.21Effect of dilutive securities:Stock options





1,680








2,140








1,188Convertible debt


1,212


4,286














1,209


4,286Diluted net income per share from continuing operations

$
15,048


41,425

$
0.36

$
6,929


32,564

$
0.21

$
36,340


34,573

$
1.05


For the years ended December 31, 2008, 2007 and 2006 weighted-average outstanding share options totaling approximately 1.9 million,
0.4 million and 2.7 million shares of common stock, respectively, were antidilutive and, therefore, not included in the computation of diluted earnings per share. For the year ended
December 31, 2007, we did not assume conversion of the convertible debt as the effect would be antidilutive.

NOTE 12:    SHARE BASED COMPENSATION

During June 2004, our 2004 Equity Incentive Plan was approved by our shareholders and replaced our 1995 Stock Option Plan, as amended (the "1995 Plan"). During June 2006, an amendment to
the 2004 Equity Incentive Plan was approved by our shareholders. The 2004 Equity Incentive Plan, as amended (the "2004 Plan") limits the combined grant of options to acquire shares of common stock,
stock appreciation rights, and restricted stock under the 2004 Plan to 7,500,000 shares. Any grant under

F-25

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 12:    SHARE BASED COMPENSATION (Continued)

the
2004 Plan that expires or terminates unexercised, becomes unexercisable or is forfeited will be available for further grants unless, in the case of options granted, related stock appreciation
rights are exercised. At December 31, 2008, there were approximately 1,748,000 shares of common stock available for future equity-related grants under the 2004 Plan. We issue new shares
to satisfy share option exercises. We do not anticipate that we will repurchase shares on the open market during the next year for the purpose of satisfying share option exercises.

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

Although
various forms of equity instruments may be issued, through December 31, 2008 we have issued only incentive share options and nonqualified share options under this Plan.
These share options, which have a contractual term of 10 years, are issued with an exercise price equal to the grant date closing market price of our common stock. The vesting periods range
from immediate to 5 years. Share options which vest over 5 years generally vest either 20% per year on the first five anniversaries of the grant date, or 25% per year on the second
through fifth anniversaries of the grant date. Shares vesting over a shorter period will generally vest 100% as of the designated vesting date. As part of certain acquisitions and as inducement to key
employees, stock options are from time to time issued outside of the 2004 Plan. These options are granted at an option exercise price equal to fair market value of the common stock on the date of
grant, are non-qualified options, are exercisable for up to 10 years from the date of grant and generally vest 25% on the second anniversary of the grant date and continue to vest
25% per year on each anniversary of the grant date until fully vested. Share options granted are expensed on a straight-line basis over the option vesting period based on the estimated
fair value of the awards on the grant date using a Black-Scholes option pricing model.

Key
assumptions for the Black-Scholes option valuation model include expected volatility, expected term of share options granted, the expected risk-free interest rate, and
the expected dividend rate. We estimate our expected volatility based on implied volatilities from traded share options on our stock and on our stock's historical volatility. We have estimated the
expected term of our share options based on the historical exercise pattern of groups of employees that have similar historical exercise behavior. The expected risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, we have not paid dividends and we do not anticipate paying dividends in the foreseeable future; accordingly,
our expected dividend rate is zero. Following is a summary of key assumptions we used to value share options granted during the three years ended December 31, 2008.

2008

2007

2006Expected term (years)

5.0

5.0  6.0

5.0  6.0Expected volatility

38%  44%

25%  44%

30%  38%Risk-free interest rate

2.4%  3.2%

3.3%  5.1%

4.3%  5.0%Dividend yield

0%

0%

0%


F-26

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 12:    SHARE BASED COMPENSATION (Continued)

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

A
summary of option activity during the year ended December 31, 2008 is presented below (shares and aggregate intrinsic value in thousands):

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Contractual
Term

Aggregate
Intrinsic
ValueOutstanding, beginning of period


7,823

$
11.06Granted


769


14.74Exercised


(381
)

6.62Forfeited


(349
)

13.45Outstanding, end of period


7,862

$
11.53


6.45

$
40,938Options vested and expected to vest, end of period


7,360

$
11.32


6.31

$
39,795Options exercisable, end of period


5,546

$
10.43


5.71

$
34,884


The
aggregate intrinsic value was calculated using the difference between the December 31, 2008 market price and the grant price for only those awards that have a grant price that
is less than the December 31, 2008 market price.

The
weighted average grant-date fair value of share options granted during the years ended December 31, 2008, 2007 and 2006 was $5.82, $6.46 and $4.36, respectively.
The total intrinsic value of share options exercised during the years ended December 31, 2008, 2007 and 2006 was
$3.2 million, $6.7 million and $1.5 million, respectively. During the years ended December 31, 2008, 2007 and 2006 we received cash for payment of the grant price of
exercised share options of approximately $2.5 million, $9.4 million and $2.6 million, respectively, and we anticipate we will realize a tax benefit related to these exercised
share options of approximately $0.4 million, $1.9 million and $0.6 million, respectively. The cash received for payment of the grant price is included as a component of cash flows
from financing activities. The tax benefit related to the option exercise price in excess of the option fair value at grant date is separately disclosed as a component of cash flows from financing
activities on the consolidated statement of cash flows, and the remainder of the tax benefit is included as a component of cash flows from operating activities.

During
the years ended December 31, 2008, 2007 and 2006, we recognized share-based compensation expense, which is a non-cash charge, of approximately
$2.8 million, $5.6 million, and $5.4 million, respectively, of which $0.8 million, $0.7 million and $0.6 million, respectively, is included under the caption
"Direct costs of services" and $2.0 million, $4.9 million and $4.8 million, respectively, is included under the caption "General and administrative" on the accompanying
consolidated statements of income. During the years ended December 31, 2008, 2007 and 2006, we recognized a net tax benefit of approximately $1.0 million, $2.2 million and
$2.1 million, respectively, related to aggregate share-based compensation expense recognized during the same period. As a result, income before income taxes was reduced by approximately
$2.8 million, $5.6 million and $5.4 million,

F-27

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 12:    SHARE BASED COMPENSATION (Continued)

respectively,
net income was reduced by approximately $1.8 million, $3.4 million and $3.3 million, respectively, net income per sharebasic was reduced by
approximately $0.05, $0.11 and $0.11 per share, respectively, and net income per sharediluted was reduced by approximately $0.04, $0.11 and $0.10 per share, respectively. As of
December 31, 2008, there was $10.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which will be recognized over a
weighted-average period of 3.2 years.

The
following table summarizes information about stock options outstanding as of December 31, 2008 (in thousands, except contractual life and price data):

Options Outstanding

Options ExercisableRange of
Exercise Prices

Number
Outstanding

Weighted-
Average
Remaining
Contractual Life
(in years)

Weighted-
Average
Exercise
Price

Number
Exercisable

Weighted-
Average
Exercise
Price$2.45 to $8.13


1,371


4.80

$
7.22


1,330

$
7.19$8.17 to $10.39


1,881


6.48


9.99


1,659


9.98$10.43 to $11.33


1,437


4.57


10.90


1,358


10.89$11.86 to $13.31


1,333


6.75


12.70


773


12.67$13.51 to $16.07


918


8.92


15.01


3


14.19$16.07 to $18.15


922


8.87


16.90


423


16.767,862


6.45


11.53


5,546


10.43


NOTE 13:    ACQUISITIONS

Pinpoint Global Limited

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

The
preliminary allocation of the purchase price is as follows: $0.3 million to net assets, $1.1 million to customer contracts, $1.1 million to
non-compete agreements, $0.7 million to establish a deferred tax liability related to the acquired intangible assets, and $5.3 million to goodwill. The allocation of the
purchase price to the assets and liabilities acquired will be finalized, as necessary, up

F-28

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 13:    ACQUISITIONS (Continued)

to
one year after the acquisition closing date, when information that is known to be available or obtainable is obtained. The purchase price in excess of the value of the acquired identifiable net
assets reflects the strategic value we placed on Pinpoint as this acquisition facilitates the expansion of our electronic discovery business in the United Kingdom.

This
acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying Consolidated Financial Statements from the date of
acquisition. The operating results of the acquired entities are included within our electronic discovery segment. The pro forma results of the acquired entity for the period from January 1,
2008 through the date of acquisition were not material to our consolidated results of operations.

Epiq Advisory Services, LLC

On May 16, 2006, our wholly-owned subsidiary, Epiq Advisory Services LLC (now Epiq Preference Solutions), acquired the claims
preference business of Gazes LLC in an asset acquisition. The total value of the transaction was $13.8 million, consisting of $3.0 million of cash paid on closing, $10.2 million
of deferred payments, and $0.6 million of capitalized transaction costs. The preliminary allocation of the purchase price is as follows: less than $0.1 million to net assets,
approximately $2.4 million to customer relationships, amortizable on a straight-line basis over two years, and approximately $11.4 million to goodwill. The purchase price in
excess of the tax basis of the assets is expected to be deductible for tax purposes. This acquisition further expands our case management service offerings.

The
acquisition was accounted for using the purchase method of accounting with the operating results included in the accompanying Consolidated Financial Statements from the date of
acquisition. The operating results of Epiq Preference Solutions are included within our bankruptcy segment.

The
unaudited financial information in the table below summarizes the results of operations, on a pro forma basis, as though Epiq Preference Solutions had been combined as of the
beginning of the period presented. Pro forma data reflects the difference in amortization expense between Epiq and the acquired company as well as other adjustments, including income taxes and
management compensation (in thousands, except per share data):

Year Ended
December 31, 2006Total revenues

$
225,382Net income

$
35,033Net income per shareBasic

$
1.20Net income per shareDiluted

$
1.05


The
pro forma information is not necessarily indicative of what would have occurred if the acquisition had been completed on that date nor is it necessarily indicative of future
operating results.

F-29

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 14: SEGMENT REPORTING

In the first quarter of 2008, we revised the structure of our reporting segments to reflect a change in
the nature of the financial information provided to our chief operating decision makers resulting from a change in the structure of our internal organization. The segment measure of profit for the
years ended December 31, 2007 and 2006 has been recast in accordance with our new organization structure, including the changes in certain internal financial reporting information. We have
three reporting segments: electronic discovery, bankruptcy, and settlement administration. Our electronic discovery business provides processing and search and review services to corporations and the
litigation department of law firms. Produced documents are made available primarily through a hosted environment, and our DocuMatrix software allows for efficient plaintiff and defendant
counsel review and data requests. Our bankruptcy segment provides solutions that address the needs of trustees to administer bankruptcy proceedings and of debtor corporations that file a plan of
reorganization. Our settlement administration segment provides managed services including legal notification, claims administration and controlled disbursement.

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

F-30

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 14: SEGMENT REPORTING (Continued)

Following
is a summary of segment information (in thousands):

Year Ended December 31, 2008Electronic
Discovery

Bankruptcy

Settlement
Administration

TotalRevenue:Operating revenue before reimbursed direct costs

$
58,128

$
59,828

$
89,900

$
207,856Operating revenue from reimbursed direct costs


182


4,936


23,144


28,262Total revenue


58,310


64,764


113,044


236,118Direct costs, general and administrative costs


31,987


34,144


93,192


159,323Segment performance measure

$
26,323

$
30,620

$
19,852

$
76,795


Year Ended December 31, 2007Electronic
Discovery

Bankruptcy

Settlement
Administration

TotalRevenue:Operating revenue before reimbursed direct costs

$
49,062

$
60,289

$
42,286

$
151,637Operating revenue from reimbursed direct costs


95


4,807


17,874


22,776Total revenue


49,157


65,096


60,160


174,413Direct costs, general and administrative costs


24,787


29,993


51,334


106,114Segment performance measure

$
24,370

$
35,103

$
8,826

$
68,299


Year Ended December 31, 2006Electronic
Discovery

Bankruptcy

Settlement
Administration

TotalRevenue:Operating revenue before reimbursed direct costs

$
31,399

$
118,653

$
49,670

$
199,722Operating revenue from reimbursed direct costs


126


5,020


19,302


24,448Total revenue


31,525


123,673


68,972


224,170Direct costs, general and administrative costs


17,014


30,575


61,673


109,262Segment performance measure

$
14,511

$
93,098

$
7,299

$
114,908


F-31

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 14: SEGMENT REPORTING (Continued)

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

Year Ended December 31,2008

2007

2006Segment performance measure

$
76,795

$
68,299

$
114,908Corporate and unallocated expenses


(22,619
)

(18,618
)

(16,301
)Share-based compensation expense


(2,831
)

(5,602
)

(5,357
)Depreciation and software and leasehold amortization


(16,302
)

(12,766
)

(10,113
)Amortization of intangible assets


(9,051
)

(9,531
)

(11,629
)Other operating income (expense)


(171
)

1,094


(283
)Interest expense, net


(1,478
)

(11,881
)

(13,260
)Income before income taxes

$
24,343

$
10,995

$
57,965


Following
are total assets by segment (in thousands):

December 31,
2008

December 31,
2007AssetsElectronic Discovery

$
139,216

$
132,030Bankruptcy


184,906


178,937Settlement Administration


60,146


52,724Corporate and unallocated


34,678


29,103Total consolidated assets

$
418,946

$
392,794


Following
are capital expenditures by segment (in thousands):

Year Ended December 31,2008

2007

2006Capital ExpendituresElectronic Discovery

$
14,687

$
14,610

$
6,193Bankruptcy


4,820


5,699


3,007Settlement Administration


2,067


289


589Corporate and unallocated


2,567


1,577


1,363Total consolidated capital expenditures

$
24,141

$
22,175

$
11,152


F-32

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 14: SEGMENT REPORTING (Continued)

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

Year Ended December 31,2008

2007

2006RevenueU.S.

$
225,950

$
169,764

$
223,283UK


10,168


4,649


887Total

$
236,118

$
174,413

$
224,170


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

December 31,
2008

December 31,
2007Long-lived assetsU.S.

$
49,717

$
41,425UK


1,258


786Total

$
50,975

$
42,211


NOTE 15:    DERIVATIVE FINANCIAL INSTRUMENTS

Interest Rate Floors

A portion of our bankruptcy trustee revenue is subject to variability based on fluctuations in short-term interest rates. During 2007,
in order to limit our economic exposure to market fluctuations in interest rates, we purchased one-month LIBOR based interest rate floor options with a total notional amount of
$800 million and initial contractual maturity of three years. We accounted for this transaction pursuant to the guidance contained in SFAS 133 which requires that all derivative
instruments be recorded on the balance sheet at fair value. As the interest rate floor options were not designated as an accounting hedge, changes in the fair values of the derivatives were recorded
each period in current earnings. For the year ended December 31, 2007, the change in the fair value of the interest rate floor options was recognized as an unrealized gain of
$1.1 million and was included as a component of other operating income in our Consolidated Statements of Income. During February 2008, we sold the interest rate floor options and realized a
$3.5 million gain. The $2.4 million difference between the realized gain of $3.5 million and the previously unrealized gain of $1.1 million is included as a component of
other operating income for the year ended December 31, 2008. As of December 31, 2008 we did not hold any interest rate floor options, other derivatives, or auction rate securities.

Contingently Convertible Subordinated Notes

The holders of our contingently convertible subordinated notes had the right to extend the maturity of these notes for a period not to
exceed three years. Under SFAS 133 the right to extend the maturity of the notes represented an embedded option. The embedded option, which is a derivative

F-33

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 15:    DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

financial
instrument, was adjusted to estimated fair value at the end of each period, with a final adjustment to an estimated fair value of approximately $4.8 million immediately prior to the
April 2007 exercise of the embedded option to extend. This final fair value estimate is being amortized as a credit to interest expense over the period to the extended maturity, which is
June 15, 2010. If any convertible debt is converted into shares of our common stock prior to June 15, 2010, the unamortized embedded option value related to those shares will be
recognized as a gain in the period the conversion occurs. The estimated fair value and the amortized carrying value of our obligation related to the embedded option was included as a component of our
long-term obligations as of December 31, 2008 and 2007, respectively, on our accompanying consolidated balance sheets. Changes in the fair value of the embedded option through the
final fair value measurement date in April 2007 and the subsequent amortization of the embedded option fair value were recorded each period as a component of interest expense on our accompanying
consolidated statements of income. Changes in the fair value and carrying value of the embedded option do not affect our cash flows and, accordingly, are reflected as an adjustment to reconcile net
income to net cash provided by operating activities on our accompanying consolidated statements of cash flows.

NOTE 16:    SUPPLEMENTAL CASH FLOW INFORMATION

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

Year Ended December 31,2008

2007

2006Cash paid (received) for:Interest

$
2,876

$
9,617

$
10,708Income taxes paid (refunded), net


9,335


2,995


(2,328
)Non-cash investing and financing transactions:Capitalized lease obligations incurred


3,709


2,566


158Property and equipment accrued in accounts payable


2,018


848


671Obligation incurred in purchase transactions


810





10,173


NOTE 17:    LEGAL PROCEEDINGS

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

The
plaintiff complaint asserts, among other things, that the company backdated certain stock options from July 1997 through January 2006, and that the individual defendants either
participated in the backdating or permitted it to occur, violations of generally accepted accounting principles as a result of the alleged backdating of options, related claims of false and misleading
proxy statements and annual reports filed by the company under the Securities Exchange Act of 1934, also as a result of the alleged backdating of options, and various violations of state law, breaches
of fiduciary duty of loyalty and insider trading in company stock. The plaintiff is seeking among other things, unspecified money damages, an accounting for profits obtained from the alleged
backdating of options, specified changes

F-34

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Table of Contents

EPIQ SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008, 2007 AND 2006

NOTE 17:    LEGAL PROCEEDINGS (Continued)

in
our corporate governance policies, punitive damages and rescission of the allegedly backdated options.

On
October 7, 2008, the company and the individual defendants filed a motion to dismiss the plaintiff's complaint on the following grounds: (i) the plaintiff lacks standing
to assert claims regarding any backdating prior to July 31, 2001, i.e., the date on which the plaintiff first claims to have acquired company shares, (ii) application of the statutes of
limitation that govern the plaintiff's claims reduces the plaintiff's case to a single alleged instance of backdating involving the grant of an option to a single non-defendant employee on
January 3, 2006, (iii) the complaint fails to plead sufficient facts to state any plausible claim that the defendants backdated any stock options and thus fails to meet the minimum
pleading requirements established under the Private Securities Litigation Reform Act of 1995 or the applicable Federal Rules of Civil Procedure, which failure mandates dismissal of all of the
plaintiff's claims, and (iv) the complaint fails to meet the pleading standards that apply to any of its individual federal and state-law claims, which separately mandate dismissal
of the entire case. On November 10, 2008, the plaintiff filed a memorandum in opposition to the dismissal motion, and on December 16, 2008, the company and the individual defendants
filed their reply to the plaintiff's opposition memorandum. The dismissal motion has not yet been ruled upon by the Court.

We
believe the plaintiff's claims are without merit and will continue to defend against them vigorously. No amounts have been recorded in the accompanying Consolidated Financial
Statements associated with this matter.

F-35

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Table of Contents

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

AdditionsDescription

Balance at
beginning of
year

Charged to
costs and
expenses

Charged to
other
accounts

Deductions
from
reserves

Balance at
end of
yearAllowance for doubtful receivablesFor the year ended December 31, 2008

$
1,437

$
1,678

$
103

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

$
1,684

$
479

$


$
(726
)
$
1,437For the year ended December 31, 2006

$
3,481

$
458

$


$
(2,255
)
$
1,684


AdditionsDescription

Balance at
beginning of
year

Charged to
costs and
expenses

Charged to
other
accounts

Deductions
from
reserves

Balance at
end of
yearDeferred tax valuation allowanceFor the year ended December 31, 2008

$


$
63

$


$


$
63For the year ended December 31, 2007

$
228

$


$


$
(228
)
$
For the year ended December 31, 2006

$


$
228

$


$


$
228


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Table of Contents

EXHIBIT INDEX

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

Exhibit
Number

Description1.1

Placement Agency Agreement dated as of November 15, 2007, between Epiq Systems, Inc. and Wachovia Capital Markets, LLC. Incorporated by reference and previously filed as an exhibit to the current report on
Form 8-K filed with the Securities and Exchange Commission on November 16, 2007.3.1

Articles of Incorporation, as amended through February 28, 2008. Incorporated by reference and previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2007,
filed with the Securities and Exchange Commission on March 4, 2008.3.2

Bylaws, as amended and restated through May 17, 2007. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange Commission on
May 21, 2007.4.1

Reference is made to exhibits 3.1 and 3.2.4.2

Securities Purchase Agreement dated as of June 10, 2004, among Epiq Systems, Inc. and the Buyers listed on Exhibit A thereto. Incorporated by reference and previously filed as an exhibit to the current
report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2004.4.3

Amendment No. 1 to Securities Purchase Agreement among Epiq Systems, Inc. and the Holders, dated as of December 15, 2005. Incorporated by reference and previously filed as an exhibit to the current report
on Form 8-K filed with the Securities and Exchange Commission on December 21, 2005.4.4

Form of Contingent Convertible Subordinated Note, as amended. Incorporated by reference and previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2005, filed with
the Securities and Exchange Commission on March 8, 2006.4.5

Election of holders to extend the maturity of the Contingent Convertible Subordinated Notes from June 15, 2007, to June 15, 2010. Incorporated by reference and previously filed as an exhibit to the current
report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2007.10.1

1995 Stock Option Plan, as amended. Incorporated by reference and previously filed as an exhibit to the registration statement on Form SB-2 filed with the Securities and Exchange Commission (File
No. 333-51525) on May 1, 1998.10.2

2004 Equity Incentive Plan, as amended. Incorporated by reference and previously filed as an appendix to the Definitive Proxy Statement filed with the Securities and Exchange Commission on April 28,
2006.10.3

Amended and Restated Credit and Security Agreement dated as of July 30, 2008, among Epiq Systems, Inc., the Lenders named therein, and KeyBank National Association, as lead arranger, sole book runner and
administrative agent. Incorporated by reference and previously filed as an exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 2008, filed with the Securities and Exchange Commission on July 30,
2008.10.4

Form of Nonqualified Stock Option Agreement under 2004 Equity Incentive Plan. Incorporated by reference and previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31,
2005, filed with the Securities and Exchange Commission on March 8, 2006.


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Table of Contents

Exhibit
Number

Description10.5

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

Letter Agreement dated February 7, 2006, between Epiq Systems, Inc. and Bank of America, N.A. (portions of this exhibit have been omitted pursuant to grant of confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934). Incorporated by reference and previously filed as an exhibit to the annual report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on
March 9, 2007.10.7

The Qualified Executive Performance Plan, dated as of March 29, 2007. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange
Commission on April 4, 2007.10.8

The Strategic Executive Incentive Plan, dated as of March 29, 2007. Incorporated by reference and previously filed as an exhibit to the current report on Form 8-K filed with the Securities and Exchange
Commission on April 4, 2007.10.9

Form of Subscription Agreement dated as of November 15, 2007, between Epiq Systems, Inc. and the purchasers named therein. Incorporated by reference and previously filed as an exhibit to the current report on
Form 8-K filed with the Securities and Exchange Commission on November 16, 2007.10.10

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

Computation of ratio of earnings to fixed charges.*21.1

List of Subsidiaries.*23.1

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

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

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

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


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