**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D. C. 20549**

**FORM 10-Q**

**Quarterly Report Under Section 13or 15(d)**

**of theSecurities Exchange Act of 1934**
| **x****  For the Quarterly Period Ended June 30,  2007**        |
|----------------------------------------------------------------------|
| ** **                                                           |
| **OR**                                                               |
| ** **                                                           |
| **o****  Transition Report Pursuant to Section 13 or  15(d)**   |
| **of the  Securities Exchange Act of 1934**                          |
|                                                                 |
| **For the  transition period from ______________ to ______________** |
|                                                                 |
| **Commission  File Number 0-22081**                                  |

 

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**EPIQ SYSTEMS, INC.**

(Exact name ofregistrant as specified in its charter)

| **Missouri**                     |   | **48-1056429**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (IRS Employer  Identification Number) |
| incorporation or  organization)  |   |                                  |

 

**501 Kansas Avenue, Kansas City,Kansas 66105-1300**

(Address ofprincipal executive office)

**913-621-9500**

(Registrant’stelephone number)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes xNo  o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act).

Yes o  No x

The number of sharesoutstanding of registrant’s common stock at July 19, 2007:
| Class                         | ** ** | **Outstanding** |
|-------------------------------|------------|-----------------|
| Common Stock,  $.01 par value |       | 30,178,304      |

 

 

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**EPIQSYSTEMS, INC.**

**FORM 10-Q**

**QUARTER ENDED JUNE 30, 2007**

**CONTENTS**
| ** **                          | **Pa**ge |
|-------------------------------------|----------|
| **PART I - FINANCIAL  INFORMATION** |     |
| ** **                          |     |
| Item 1.                             |     | Condensed  Consolidated Financial Statements |   |
|                                |     |   |   |
|                                |     | Condensed  Consolidated Statements of Income –   Three and six months ended June 30, 2007 and 2006 (Unaudited) | 1 |
|                                |     |   |   |
|                                |     | Condensed  Consolidated Balance Sheets –  June 30, 2007 and December 31, 2006 (Unaudited) | 2 |
|                                |     |   |   |
|                                |     | Condensed  Consolidated Statement of Changes in Stockholders’ Equity –  Six months ended June 30, 2007 (Unaudited) | 3 |
|                                |     |   |   |
|                                |     | Condensed  Consolidated Statements of Cash Flows –   Six months ended June 30, 2007 and 2006 (Unaudited) | 4 |
|                                |     |   |   |
|                                |     | Notes to  Condensed Consolidated Financial Statements (Unaudited) | 5 |
|                                |     |
| Item 2.                             |     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 21 |
|                                |     |   |   |
| Item 3.                             |     | Quantitative  and Qualitative Disclosures about Market Risk | 31 |
|                                |     |   |   |
| Item 4.                             |     | Controls and  Procedures | 31 |
|                                |     |   |   |
| **PART II - OTHER  INFORMATION**    |     |
| ** **                          |     |
| Item 1A.                            |     | Risk Factors | 32 |
|                                |     |   |   |
| Item 4.                             |     | Submission  of Matters to a Vote of Security Holders | 32 |
|                                |     |   |   |
| Item  6.                            |     | Exhibits | 32 |
|                                |     |   |   |
| Signatures                          | 33       |
|                                     |          |  |  |  |  |  |

 

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**PART I -FINANCIAL INFORMATION**

**ITEM 1. Condensed Consolidated Financial Statements.**

##### **EPIQ SYSTEMS, INC.**

##### **CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(InThousands, Except Share and Per Share Data)**

**(Unaudited)**
| ** **                                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **REVENUE:**                                                                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Case management  services                                                                                         |       | $                                               | 23,702     |                                          | $          | 18,182 |   | $ | 44,534 |   | $ | 37,083 |   |
| Case management  bundled products and services                                                                    |       | 6,733                                           |       | 67,009                                        |       | 13,412 |   | 67,694 |   |
| Document  management services                                                                                     |       | 7,736                                           |       | 8,929                                         |       | 15,321 |   | 21,904 |   |
| Operating  revenue before reimbursed direct costs                                                                 |       | 38,171                                          |       | 94,120                                        |       | 73,267 |   | 126,681 |   |
| Operating  revenue from reimbursed direct costs                                                                   |       | 6,035                                           |       | 6,376                                         |       | 12,068 |   | 12,033 |   |
| Total Revenue                                                                                                     |       | 44,206                                          |       | 100,496                                       |       | 85,335 |   | 138,714 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **OPERATING EXPENSES:**                                                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Direct costs of  services (exclusive of depreciation and amortization shown separately below)                     |       | 10,415                                          |       | 10,752                                        |       | 20,746 |   | 25,128 |   |
| Direct cost of bundled products and services (exclusive of depreciation  and amortization shown separately below) |       | 898                                             |       | 980                                           |       | 1,784 |   | 2,015 |   |
| Reimbursed  direct costs                                                                                          |       | 6,010                                           |       | 6,447                                         |       | 12,032 |   | 12,167 |   |
| General and  administrative                                                                                       |       | 15,252                                          |       | 12,359                                        |       | 28,177 |   | 24,058 |   |
| Depreciation and  software and leasehold amortization                                                             |       | 2,837                                           |       | 2,494                                         |       | 5,798 |   | 4,791 |   |
| Amortization of  identifiable intangible assets                                                                   |       | 2,352                                           |       | 2,878                                         |       | 4,876 |   | 5,645 |   |
| Acquisition  related                                                                                              |       | —                                          |       | 250                                           |       | — |   | 250 |   |
| Total Operating  Expenses                                                                                         |       | 37,764                                          |       | 36,160                                        |       | 73,413 |   | 74,054 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **INCOME FROM OPERATIONS**                                                                                        |       | 6,442                                           |       | 64,336                                        |       | 11,922 |   | 64,660 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **INTEREST EXPENSE (INCOME):**                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                                                                                   |       | (25                                             | )          | (42                                           | )          | (32 | ) | (88 | ) |
| Interest expense                                                                                                  |       | 3,345                                           |       | 3,382                                         |       | 8,447 |   | 6,692 |   |
| Net Interest  Expense                                                                                             |       | 3,320                                           |       | 3,340                                         |       | 8,415 |   | 6,604 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **INCOME BEFORE INCOME TAXES**                                                                                    |       | 3,122                                           |       | 60,996                                        |       | 3,507 |   | 58,056 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **PROVISION FOR INCOME TAXES**                                                                                    |       | 1,328                                           |       | 24,704                                        |       | 1,563 |   | 23,513 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **NET INCOME**                                                                                                    |       | $                                               | 1,794      |                                          | $          | 36,292 |   | $ | 1,944 |   | $ | 34,543 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **NET  INCOME PER SHARE INFORMATION:**                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                             |       | $                                               | .06        |                                          | $          | 1.25 |   | $ | .07 |   | $ | 1.19 |   |
| Diluted                                                                                                           |       | $                                               | .06        |                                          | $          | 1.06 |   | $ | .06 |   | $ | 1.01 |   |
| ** **                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| **WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING:**                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                             |       | 29,848                                          |       | 29,082                                        |       | 29,559 |   | 29,005 |   |
| Diluted                                                                                                           |       | 31,980                                          |       | 34,507                                        |       | 31,458 |   | 34,738 |   |

 

**Seeaccompanying notes to condensed consolidated financial statements.**

1

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**EPIQSYSTEMS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(InThousands, Except Share Data)**

**(Unaudited)**
| ** **                                                                                                                                                                         | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                         | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **CURRENT  ASSETS:**                                                                                                                                                               | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Cash and cash equivalents                                                                                                                                                          |       | $                           | 3,776      |                            | $          | 5,274 |   |
| Trade accounts receivable, less allowance for  doubtful accounts of  $1,252 and  $1,684, respectively                                                                         |       | 37,980                      |       | 33,066                          |       |
| Prepaid expenses                                                                                                                                                                   |       | 3,113                       |       | 2,537                           |       |
| Income taxes refundable                                                                                                                                                            |       | 1,559                       |       | 332                             |       |
| Deferred income taxes                                                                                                                                                              |       | 499                         |       | 1,313                           |       |
| Other current assets                                                                                                                                                               |       | 579                         |       | 740                             |       |
| Total Current Assets                                                                                                                                                               |       | 47,506                      |       | 43,262                          |       |
|                                                                                                                                                                               |       |                        |       |                            |       |
| **LONG-TERM  ASSETS:**                                                                                                                                                             | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Property, equipment and leasehold improvements, net                                                                                                                                |       | 29,086                      |       | 23,153                          |       |
| Software development costs, net                                                                                                                                                    |       | 9,829                       |       | 9,611                           |       |
| Goodwill                                                                                                                                                                           |       | 261,243                     |       | 260,609                         |       |
| Identifiable intangible assets, net of accumulated  amortization of  $19,402 and $13,758,  respectively                                                                       |       | 38,964                      |       | 43,840                          |       |
| Other                                                                                                                                                                              |       | 1,040                       |       | 1,745                           |       |
| Total Long-term Assets                                                                                                                                                             |       | 340,162                     |       | 338,958                         |       |
| **Total  Assets**                                                                                                                                                                  |       | $                           | 387,668    |                            | $          | 382,220 |   |
|                                                                                                                                                                               |       |                        |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                      | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **CURRENT  LIABILITIES:**                                                                                                                                                          | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Accounts payable                                                                                                                                                                   |       | $                           | 13,229     |                            | $          | 7,930 |   |
| Customer deposits                                                                                                                                                                  |       | 2,016                       |       | 1,978                           |       |
| Accrued compensation                                                                                                                                                               |       | 4,854                       |       | 3,514                           |       |
| Other accrued expenses                                                                                                                                                             |       | 3,814                       |       | 4,143                           |       |
| Deferred revenue                                                                                                                                                                   |       | 831                         |       | 1,073                           |       |
| Current maturities of long-term obligations                                                                                                                                        |       | 2,976                       |       | 70,488                          |       |
| Total Current Liabilities                                                                                                                                                          |       | 27,720                      |       | 89,126                          |       |
|                                                                                                                                                                               |       |                        |       |                            |       |
| **LONG-TERM  LIABILITIES:**                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Long-term obligations (excluding current maturities)                                                                                                                               |       | 136,381                     |       | 83,873                          |       |
| Deferred income taxes                                                                                                                                                              |       | 20,088                      |       | 23,307                          |       |
| Other long-term  liabilities                                                                                                                                                       |       | 9,527                       |       | 1,735                           |       |
| Total Long-term Liabilities                                                                                                                                                        |       | 165,996                     |       | 108,915                         |       |
|                                                                                                                                                                               |       |                        |       |                            |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                                                                 | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                                                         | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                                                    | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Common stock - $0.01 par value; 50,000,000 shares  authorized; issued and outstanding –30,142,948 and 29,218,259 shares at June  30, 2007 and December 31, 2006, respectively |       | 301                         |       | 292                             |       |
| Additional paid-in capital                                                                                                                                                         |       | 147,259                     |       | 136,947                         |       |
| Accumulated other comprehensive income                                                                                                                                             |       | 37                          |       | 18                              |       |
| Retained earnings                                                                                                                                                                  |       | 46,355                      |       | 46,922                          |       |
| Total Stockholders’ Equity                                                                                                                                                    |       | 193,952                     |       | 184,179                         |       |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                                               |       | $                           | 387,668    |                            | $          | 382,220 |   |

 

**See accompanying notes to condensed consolidated financialstatements.**

2

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**EPIQSYSTEMS, INC.**

**CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(InThousands)**

**(Unaudited)**
| ** **                                                                                       | ** ** | **Six Months Ended   June 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                                                             |       |                                                          |       |
| COMMON SHARES (50,000 authorized):                                                               |       |                                                          |       |
| Shares, beginning of year                                                                        |       | 29,218                                                        |       |
| Shares issued upon exercise of  options                                                          |       | 925                                                           |       |
|                                                                                             |       |                                                          |       |
| Shares, end of period                                                                            |       | 30,143                                                        |       |
|                                                                                             |       |                                                          |       |
| COMMON STOCK –PAR VALUE $0.01 PER SHARE:                                                    |       |                                                          |       |
| Balance, beginning of year                                                                       |       | $                                                             | 292        |   |
| Proceeds from exercise of  options                                                               |       | 9                                                             |       |
|                                                                                             |       |                                                          |       |
| Balance, end of period                                                                           |       | 301                                                           |       |
|                                                                                             |       |                                                          |       |
| ADDITIONAL PAID-IN CAPITAL:                                                                      |       |                                                          |       |
| Balance, beginning of year                                                                       |       | 136,947                                                       |       |
| Proceeds from exercise of  options                                                               |       | 8,183                                                         |       |
| Share-based income tax benefit                                                                   |       | 1,115                                                         |       |
| Share-based compensation  expense                                                                |       | 1,014                                                         |       |
|                                                                                             |       |                                                          |       |
| Balance, end of period                                                                           |       | 147,259                                                       |       |
|                                                                                             |       |                                                          |       |
| ACCUMULATED OTHER COMPREHENSIVE INCOME:                                                          |       |                                                          |       |
| Balance, beginning of year                                                                       |       | 18                                                            |       |
| Foreign currency translation  adjustment                                                         |       | 19                                                            |       |
|                                                                                             |       |                                                          |       |
| Balance, end of period                                                                           |       | 37                                                            |       |
|                                                                                             |       |                                                          |       |
| RETAINED EARNINGS:                                                                               |       |                                                          |       |
| Balance, beginning of year                                                                       |       | 46,922                                                        |       |
| Cumulative effect of adoption  of FIN 48,*Accounting for   Uncertainty in Income Taxes (note 4)* |       | (2,511                                                        | )          |
| Net income                                                                                       |       | 1,944                                                         |       |
|                                                                                             |       |                                                          |       |
| Balance, end of period                                                                           |       | 46,355                                                        |       |
|                                                                                             |       |                                                          |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                  |       | $                                                             | 193,952    |   |

 

**See accompanying notes to condensed consolidated financialstatements.**

3

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**EPIQ SYSTEMS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(InThousands)**

**(Unaudited)**
| ** **                                                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                              |       | $                                                 | 1,944      |   | $ | 34,543 |   |
| Adjustments to reconcile net income to net cash from  operating activities:             |       |                                              |       |   |   |
| Share-based compensation expense                                                        |       | 1,014                                             |       | 1,092 |   |
| (Benefit) expense for deferred income taxes                                             |       | (1,327                                            | )          | 20,505 |   |
| Depreciation and software and leasehold amortization                                    |       | 5,798                                             |       | 4,791 |   |
| Change in valuation of embedded option and  convertible debt                            |       | 2,660                                             |       | 717 |   |
| Amortization of identifiable intangible assets                                          |       | 4,876                                             |       | 5,645 |   |
| Other                                                                                   |       | 522                                               |       | 375 |   |
| Changes in operating assets and liabilities, net of  effects from business acquisition: |       |                                              |       |   |   |
| Trade accounts receivable                                                               |       | (4,482                                            | )          | 1,621 |   |
| Prepaid expenses and other assets                                                       |       | (452                                              | )          | (533 | ) |
| Accounts payable and other liabilities                                                  |       | 2,337                                             |       | (637 | ) |
| Deferred revenue                                                                        |       | (242                                              | )          | (53,379 | ) |
| Excess tax benefit related to share-based  compensation                                 |       | (441                                              | )          | (154 | ) |
| Income taxes                                                                            |       | 2,656                                             |       | 3,740 |   |
| Net cash provided by operating activities                                               |       | 14,863                                            |       | 18,326 |   |
| ** **                                                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                      |       | (4,979                                            | )          | (4,358 | ) |
| Software development costs                                                              |       | (2,354                                            | )          | (2,020 | ) |
| Cash paid for acquisition of business                                                   |       | —                                            |       | (3,485 | ) |
| Other                                                                                   |       | 271                                               |       | (133 | ) |
| Net cash used in investing activities                                                   |       | (7,062                                            | )          | (9,996 | ) |
| ** **                                                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from long-term debt borrowings                                                 |       | 29,000                                            |       | — |   |
| Principal payments under long-term debt obligations                                     |       | (46,932                                           | )          | (16,720 | ) |
| Excess tax benefit related to share-based  compensation                                 |       | 441                                               |       | 154 |   |
| Proceeds from exercise of share options                                                 |       | 8,192                                             |       | 1,623 |   |
| Other                                                                                   |       | —                                            |       | (137 | ) |
| Net cash used in financing activities                                                   |       | (9,299                                            | )          | (15,080 | ) |
| ** **                                                                              |       |                                              |       |   |   |
| **NET  DECREASE IN CASH AND CASH EQUIVALENTS**                                          |       | (1,498                                            | )          | (6,750 | ) |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                     |       | 5,274                                             |       | 13,563 |   |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                           |       | $                                                 | 3,776      |   | $ | 6,813 |   |

 

**Seeaccompanying notes to condensed consolidated financial statements.**

4

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**EPIQSYSTEMS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Principlesof Consolidation***

The condensedconsolidated financial statements include the accounts of Epiq Systems, Inc. (“Epiq”)and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated inconsolidation.

***Natureof Operations***

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

***Common Stock Split***

On May 17, 2007, the board of directors approved a 3for 2 stock split, effected in the form of a 50% stock dividend, payable June7, 2007 to holders of record as of May 24, 2007.  All per share and shares outstanding data inthe condensed consolidated financial statements and the accompanying notes havebeen revised to reflect the stock split.

***ComprehensiveIncome***

Statement of FinancialAccounting Standards No. 130, *Reporting ComprehensiveIncome*, establishes requirements for reporting and displayingcomprehensive income and its components. Our accumulated other comprehensive income is included as a separatecomponent of stockholders’ equity on our condensed consolidated balancesheets.  Other comprehensive income isnot considered material to the results of operations.

***Income taxes***

Effective January 1, 2007, we adopted the FinancialAccounting Standard Board (FASB) Interpretation No. 48 (FIN 48), *Accounting for Uncertainty in Income Taxes –*aninterpretation of FASB Statement No. 109, *Accounting for IncomeTaxes*.  FIN 48 prescribes acomprehensive model for how companies should recognize, measure, present, anddisclose in their financial statements uncertain tax positions taken orexpected to be taken on a tax return. Under FIN 48, tax positions are initially recognized in the financialstatements when it is more likely than not the position will be sustained uponexamination by the tax authorities.  Suchtax positions are initially and subsequently measured as the largest amount oftax benefit that is greater than 50% likely of being realized upon ultimatesettlement with the tax authority assuming full knowledge of the position andall relevant facts.  Application of FIN48 requires numerous estimates based on available information.  We consider many factors when evaluating andestimating our tax positions and tax benefits, which may require periodicadjustments and which may not accurately anticipate actual outcomes.  The cumulative effect of applying theprovisions of FIN 48 was reported as an adjustment to the opening balance ofretained earnings.  The cumulative effectadjustment 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 ouradoption of FIN 48, see note 4 of the condensed consolidated financialstatements.

***RevenueRecognition. ***

We provide two classes of products and services – casemanagement products and services and document management services.  Case management solutions provide clientswith integrated technology-based products and services for the automation ofvarious administrative tasks.  Documentmanagement solutions include proprietary technology and production services toensure timely, accurate and complete execution of the many documents associatedwith multifaceted legal cases.

Significant sources of revenue include:

·                  Feescontingent upon the month-to-month delivery of case management services definedby client contracts, such as claims processing, claims reconciliation,professional services, call center support, and conversion of data into anorganized, searchable electronic database. The amount we earn varies basedprimarily on the size and complexity of the engagement;

·                  Hostingfees based on the amount of data stored;

5

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·                  Deposit-basedfees from financial institutions, primarily based on a percentage of totalliquidated assets placed on deposit at that financial institution by ourbankruptcy trustee clients, to whom we provide, at no charge, softwarelicenses, limited hardware and hardware maintenance, and postcontract customersupport (PCS) services;

·                  Legalnoticing services, including media campaign and advertising management in whichwe coordinate notification through various media outlets, such as print, radioand television, to potential parties of interest for a particular clientengagement; and

·                  Reimbursementfor costs incurred, primarily related to postage on mailing services.

*Software Arrangements*

For our primary bankruptcy trustee arrangements, weprovide our trustee clients with a software license, hardware lease, hardwaremaintenance, and PCS services, all at no charge to the trustee.  The trustees place their liquidated estatedeposits with a financial institution with which we have an arrangement.  The financial institution pays us a monthlyfee contingent on the dollar level of average monthly deposits placed by thetrustees with that financial institution.

For these arrangements with financial institutions, weearn contingent monthly fees from the financial institution related to thesoftware license, hardware lease, hardware maintenance, and PCS services.  We account for the software license and PCSservice elements in accordance with Statement of Position 97-2, *Software Revenue Recognition* (SOP 97-2).  Since we have not established vendor specificobjective evidence (VSOE) of the fair value of the software license, we do notrecognize any revenue on delivery of the software.  The software element is deferred and includedwith the remaining undelivered element, which is PCS services.  This revenue, when recognized, is included onour condensed consolidated statements of income as a component of casemanagement bundled products and services revenue.  Revenue related to PCS services is entirelycontingent on the placement of liquidated estate deposits by the trustee withthe financial institution.  Accordingly,we recognize this contingent usage based revenue consistent with the guidanceprovided by the American Institute of Certified Public Accountants’ TechnicalPractice Aid (TPA) 5100.76, *Fair Value inMultiple-Element Arrangements That Include Contingent Usage-Based Fees andSoftware Revenue Recognition* as the fee becomes fixed ordeterminable at the time actual usage occurs and collectibility isprobable.  This occurs monthly as aresult of the computation, billing and collection of monthly deposit feescontractually agreed to.  At that time,we have also satisfied the other revenue recognition criteria contained in SOP97-2 as we have persuasive evidence that an arrangement exists, services havebeen rendered, the price is fixed and determinable, and collectibility isreasonably assured.

Prior to October 1, 2006, we had anarrangement with our primary depository financial institution underwhich we delivered two specified upgrades annually with the last specifiedupgrade in the second quarter of 2006.  Thisarrangement included specific pricing for each software upgrade and certainspecial projects in addition to the contingent deposit-based pricing related tothe software license, hardware, hardware maintenance, and PCS to each trusteeclient.  Therefore, the software upgrades and special projects are part of abundled arrangement.  Each softwareupgrade is considered a separate and discrete product and, as we do not sell eachsoftware upgrade on a standalone basis, we were unable to establish VSOE of thefair value of the software upgrades.  Asa result, the licensed software, software upgrade, special projects and PCSwere a combined unit of accounting. Revenue for this combined unit of accounting, when recognized, wasincluded as a component of case management bundled products and servicesrevenue.  Since we did not haveVSOE of the fair value of each separate upgrade, we deferred recognition ofsubstantially all revenue from the October 1, 2003 inception of thisarrangement until delivery, in the second quarter of 2006, of the final upgrade.  Theongoing costs related to this arrangement were recognized as expense whenincurred.  Payments received in advance of satisfaction of the related revenuerecognition criteria were recognized as deferred revenue until all revenuerecognition criteria had been satisfied. On delivery of the final upgrade during the second quarterof 2006, the only remaining undelivered element was PCS services.  In accordance with SOP 97-2, on delivery ofthe final software upgrade, we recognized revenue previously deferred on aproportionate basis over the three year term of the contract.  As the contract commenced October 1, 2003 andterminated September 30, 2006, we recognized approximately $60.1 million of netdeferred revenue during the second quarter of 2006 and we recognizedapproximately $6.0 million of deferred revenue related to this arrangementduring the third quarter of 2006.

We also provide ourtrustees with certain hardware, such as desktop computers, monitors, andprinters, and hardware maintenance.  Weretain ownership of all hardware provided and, based on guidance provided inEITF 01-8, *Determining Whether anArrangement Contains a Lease*, we account for this hardware as alease.  As the hardware maintenancearrangement is an executory contract similar to an operating lease, we useguidance related to contingent rentals in operating lease arrangements forhardware maintenance as well as for the hardware lease.  Since all of the payments under ourarrangements are contingent upon the level of trustee deposits and the deliveryof upgrades and other services and there 

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remain importantuncertainties regarding the amount of unreimbursable costs yet to be incurredby us, we account for the hardware lease as an operating lease in accordancewith SFAS 13, *Accounting for Leases*.  Therefore, all lease payments were accountedfor as contingent rentals under EITF Issue No. 98-9, *Accounting for Contingent Rent* and SAB Topic 13, whichrequires that we recognize rental income when the changes in the factor onwhich the contingent lease payment is based actually occur.  This occurs at the end of each period as weachieve our target when deposits are held at the depository financialinstitution as, at that time, evidence of an arrangement exists, delivery hasoccurred, the amount has become fixed and determinable, and collection isreasonably assured.  This revenue, whichis less than ten percent of our total revenue, is included in our condensedconsolidated statements of income as a component of “Case management services”revenue.

*Other Arrangements*

Services related to electronic discovery andsettlements and claims are billed based on volume and are evaluated pursuant toEmerging Issues Task Force (EITF) 00-21, *RevenueArrangements with Multiple Deliverables*.  For these contractual arrangements, we haveidentified the following deliverable services:

·                  ElectronicDiscovery

·               Data processing

·               Hosting

·                  Settlementsand Claims

·               Consulting

·               Claims administration

·               Printing and mailing

·               Document management

·               Notice campaigns

·               Call center support

·               Web site design/hosting

Based on our evaluation of each element, wehave determined that each element delivered has standalone value to ourcustomers because we or other vendors sell such services separately from anyother services/deliverables.  We havealso obtained objective and reliable evidence of the fair value of each elementbased either on the price we charge when we sell an element on a standalonebasis or based on third-party evidence of fair value of such services.  Lastly, our arrangements do not includegeneral rights of return.  Accordingly,each of the service elements in our multiple element case and documentmanagement arrangements qualifies as a separate unit of accounting under EITF00-21.  We allocate revenue to thevarious units of accounting in our arrangements based on the fair value of eachunit of accounting, which is generally consistent with the stated prices in ourarrangements. As we have evidence of an arrangement, revenue for each separateunit of accounting is recognized each period in accordance with StaffAccounting Bulletin Topic 13, *RevenueRecognition* (SAB Topic 13). As the services are rendered, our fee becomes fixed and determinable,and collectibility is reasonably assured. Payments received in advance of satisfaction of the related revenuerecognition criteria are recognized as a customer deposit until all revenuerecognition criteria have been satisfied.

*Reimbursements*

We have revenue related to the reimbursementof 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 directcosts are recorded gross in the condensed consolidated statement of income as “Operating  revenue from reimbursed direct costs” and as “Reimburseddirect costs”.

***Recent Accounting Pronouncements***

In February 2007, the FASB issued Statement of Financial AccountingStandards No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115* (SFAS 159). SFAS 159 permits the measurement of specified financial instruments andwarranty and insurance contracts at fair value on a contract-by-contract basis,with changes in fair value recognized in earnings each reporting period.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007.  We donot anticipate that adoption of this statement will have a material impact onour consolidated financial statements.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements*, (SFAS 157).  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 is effective for financialstatements issued for 

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fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years.  Management is still evaluating the impact, ifany, that the adoption of SFAS 157 will have on our financial position, resultsof operations, or cash flows.

In June 2007, the EITFissued Issue No. 06-11, *Accounting for Income TaxBenefits of Dividends on Share based Payment Awards* (EITF06-11).  EITF 06-11 provides interpretiveguidance on the recognition of income tax benefits received on dividends paidto nonvested equity share awards.  EITF06-11 is effective for fiscal years beginning after December 15, 2007.  We do not anticipate that adoption of EITF06-11 will have a material impact on our consolidated financial statements.

**NOTE2:   INTERIM FINANCIAL STATEMENTS**

The accompanyingcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America(GAAP) and with the rules and regulations for reporting on Form 10-Q forinterim financial statements. Accordingly, they do not include certain information and disclosuresrequired for comprehensive annual financial statements.  The interim financial statements have notbeen audited.  The financial statementsshould be read in conjunction with our audited financial statements andaccompanying notes, which are included in our Form 10-K for the year endedDecember 31, 2006.

In the opinion of ourmanagement, the accompanying condensed consolidated financial statementsreflect all adjustments necessary (consisting solely of normal recurringadjustments) to present fairly our financial position as of June 30, 2007, thechanges in stockholders’ equity for the six month period ended June 30, 2007,the results of operations for the three and six month periods ended June 30,2007 and 2006, and cash flows for the six month periods ended June 30, 2007 and2006.

The results of operationsfor the three and six month periods ended June 30, 2007 are not necessarilyindicative of the results to be expected for the entire year.

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#### **NOTE3:   GOODWILL AND INTANGIBLE ASSETS**

Amortizing identifiableintangible assets at June 30, 2007 and December 31, 2006 consisted of thefollowing (in thousands):
|                         | ** ** | **June 30, 2007**           | ** ** | **December 31, 2006**     | ** ** |
|-------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
| Customer  contracts     |       | $                                     | 39,287     |                                | $          | 15,421 |   | $ | 39,287 |   | $ | 12,779 |   |
| Trade names             |       | 745                                   |       | 700                                 |       | 2,414 |   | 2,301 |   |
| Non-compete  agreements |       | 27,526                                |       | 12,473                              |       | 27,526 |   | 10,307 |   |
|                    |       | $                                     | 67,558     |                                | $          | 28,594 |   | $ | 69,227 |   | $ | 25,387 |   |

 

Aggregate amortizationexpense related to identifiable intangible assets was $2.4 million and $2.9million for the three month periods ended June 30, 2007 and 2006, respectivelyand was $4.9 million and $5.6 million for the six month periods ended June 30,2007 and 2006, respectively. Amortization expense related to identifiable intangible assets for 2007and the following five years is estimated as follows (in thousands):
| Year Ending   December 31, | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| 2007                                      |       | $                                    | 9,531      |   |
| 2008                                      |       | 8,361                                |       |
| 2009                                      |       | 6,829                                |       |
| 2010                                      |       | 6,439                                |       |
| 2011                                      |       | 4,706                                |       |
| 2012                                      |       | 4,535                                |       |
|                                      |       | $                                    | 40,401     |   |

 

As of June 30, 2007 andDecember 31, 2006, goodwill had a carrying value of $261.2 million and $260.6million, respectively.  The $0.6 millionincrease in goodwill results from an adjustment of the acquisition date taxbasis pursuant to FIN 48, partly offset by a purchase price adjustment relatedto the receipt of cash on final settlement of an escrowed amount related to ouracquisition of our electronic discovery business.  Goodwill by segment is disclosed in note 8 ofthe condensed consolidated financial statements.

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### **NOTE 4: INCOME TAXES**

In June 2006, the FASBissued FASB Interpretation No. 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes –*an interpretation of FASB Statement No. 109, *Accounting for Income Taxes.* FIN 48 clarifies the accounting for uncertainty in income taxes in anenterprise’s financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*. This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return.  FIN 48 also provides guidance onderecognition of tax benefits, classification on the balance sheet, interestand penalties, accounting in interim periods, disclosures, and transition.

We adopted FIN 48effective January 1, 2007.  As a resultof the adoption, we recognized additional tax related liabilities ofapproximately $3.4 million consisting of a $2.5 million reduction to retainedearnings and a $0.9 million increase to goodwill related to prioracquisitions.  In addition, wereclassified approximately $1.3 million of income tax liabilities from acurrent liability classification to a non-current liability classification aspayment of the liability is not anticipated within one year of the balancesheet date. We also recorded approximately $1.2 million of deferred tax assetsrelating to the tax benefits associated with interest expense and federalbenefits associated with state tax expenses. As of January 1, 2007, the grossamount of unrecognized tax benefits, including penalty and interest wasapproximately $5.9 million.  If recognized,approximately $3.7 million would affect our effective tax rate.  As of June 30, 2007, the gross amount ofunrecognized tax benefits, including penalty and interest, was approximately$7.2 million.  If recognized,approximately $4.3 million would affect our effective tax rate.

We file income taxreturns in the U.S. federal jurisdiction, the United Kingdom, Australia andvarious state jurisdictions.  We havealso made an evaluation of the potential impact of assessments by statejurisdictions in which we have not filed tax returns. During the six monthsended June 30, 2007, the Internal Revenue Service initiated an examination ofour 2004 federal income tax return and the State of New York initiated anexamination of our 2003 – 2005 New York state income tax returns.  It is possible that the examination phase ofthese audits will conclude in 2007 and it is reasonably possible that a changein the unrecognized tax benefits may occur within the next twelve months; however,a quantification of an estimated range cannot be made at this time.

As of the January 1, 2007adoption date of FIN 48, the 2003 – 2006 federal tax returns remain open.  In addition, 2002 – 2006 state and foreigntax returns are open to audit under the statute of limitations.  As of both June 30, 2007 and January 1, 2007,it is reasonably possible that approximately $0.6 million of net unrecognizedtax benefits will be recognized in the next twelve months due to the closing of2002 and 2003 years for federal and state jurisdictions, of which $0.2 millionwould affect our effective tax rate and $0.4 million would decrease goodwill.

As permitted by FIN 48,we have classified interest and penalties as a component of income taxexpense.  Estimated interest andpenalties classified as a component of income tax expense for the three and sixmonths ended June 30, 2007 totaled $0.1 million and $0.2 million,respectively.  Accrued interest andpenalties were $1.4 million and $1.1 million as of June 30, 2007 and January 1,2007, respectively.

During the three and sixmonths ended June 30, 2007, we also recorded approximately $1.0 million and$1.1 million, respectively, of income tax benefit related to the exercise ofstock options that is recorded as a credit to additional paid-in capital and isnot a component of our total income tax expense or our effective tax rate.

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#### **NOTE 5:  INDEBTEDNESS**

The following is asummary of indebtedness outstanding (in thousands):
|                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Senior revolving  loan                                               |       | $                 | 78,028     |                  | $          | 78,028 |   |
| Senior term loan                                                     |       | —            |       | 15,000                |       |
| Contingent  convertible subordinated debt, including embedded option |       | 54,830            |       | 52,170                |       |
| Capital leases                                                       |       | 264               |       | 179                   |       |
| Deferred  acquisition price                                          |       | 6,235             |       | 8,984                 |       |
| Total indebtedness                                                   |       | $                 | 139,357    |                  | $          | 154,361 |   |

 

***CreditFacilities***

Asof December 31, 2006, we had a credit facility, with KeyBank NationalAssociation as administrative agent, that consisted of a $15.0 millionsenior term loan and a $100.0 million senior revolving loan.  During April 2007, we paid in full andterminated the senior term loan.  Thesenior revolving loan matures in November 2008. During the term of the credit facility, we have the right, subject tocompliance with our covenants, to increase the senior revolving loan to $175.0million.

The credit facility issecured by liens on our real property and a significant portion of our personalproperty.  Interest on the creditfacility is generally based on a spread, which as of June 30, 2007 was 325basis points, over the LIBOR rate.  As ofJune 30, 2007, the average interest rate charged on outstanding borrowingsunder the credit facility was approximately 8.7% per annum.

Our credit facilitycontains financial covenants related to earnings before interest, provision forincome taxes, depreciation, amortization and other adjustments as defined inthe agreements (EBITDA) and total debt. In addition, our credit facility also contains financial covenantsrelated to senior debt, fixed charges, and working capital.  As of June 30, 2007, we were in compliancewith all financial covenants.

***ContingentConvertible Subordinated Notes***

During June 2004, weissued $50.0 million of contingent convertible subordinated notes with a fixed4% per annum interest rate and an original maturity of June 15, 2007.  The holders of the convertible subordinated noteshad the right to extend the maturity date by up to three years.  During April 2007, the holders exercised thisright and the convertible subordinated notes maturity date was extended to June15, 2010.  If we change our capitalstructure (for example, through a stock dividend or stock split) while thenotes are outstanding, the conversion price will be adjusted on a consistentbasis and, accordingly, the number of shares of common stock we would issue onconversion would be adjusted.  During May2007, we declared a 3 for 2 stock split, effected as a stock dividend, payableJune 7, 2007, and we adjusted the conversion ratio to reflect this change inour capital structure.  As of June 7,2007, the notes are convertible into 4.3 million shares of our common stock ata price of approximately $11.67 per share.

Under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,the right to extend the maturity of the convertible subordinated notes wasaccounted for as an embedded option subject to bifurcation.  The embedded option was initially valued at$1.2 million and the subordinated convertible note balance was reduced by thesame amount.  The subordinatedconvertible note was accreted approximately $0.1 million each quarter such thatthe subordinated convertible note balance, exclusive of the embedded optionvalue, totaled $50.0 million as of the June 15, 2007 original maturitydate.  On our accompanying condensedconsolidated statements of income, this accretion is a component of interestexpense.  The embedded option wasrevalued at each period end based on the probability weighted discounted cashflows related to the additional 4% interest rate payments resulting from thethree year extension of the contingent convertible subordinated notes maturity.  During April 2007, the holders of theconvertible subordinated notes exercised this right to extend and we performeda final valuation to estimate the fair value of the embedded option as of theapproximate date of the extension.  Theestimated fair value of the embedded option at this date, included as acomponent of the subordinated convertible note payable on our accompanyingcondensed consolidated balance sheets, was approximately $4.8 million.  As a result of the increase in the estimatedfair value of the embedded option subsequent to March 31, 2007 and December 31,2006, we recognized additional expense, included as a component of interestexpense on our accompanying condensed consolidated 

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statements of income,during the three and six months ended June 30, 2007 of approximately $0.4million and $2.5 million, respectively. The $4.8 million estimated fair value of the embedded option isamortized as a credit to interest expense over the period to the extendedmaturity, which is June 15, 2010.  If anyconvertible debt is converted into shares of our common stock prior to June 15,2010, the unamortized embedded option value related to those shares will berecognized as a gain in the period the conversion occurs.  The above changes related to the carryingvalue of the contingent convertible subordinated note, the estimated fair valueof the embedded option, and the amortization of the fair value of the embeddedoption do not affect our cash flow.

***DeferredAcquisition Price***

Wehave made acquisitions for which a portion of the purchase price wasdeferred.  These deferred payments, whichare either non-interest bearing or have a below market interest rate, have beendiscounted at imputed interest rates ranging from 3% to 8%.  As of June 30, 2007 and December 31, 2006,the discounted value of the remaining note payments was approximately $6.2million and $9.0 million, respectively, of which approximately $2.9 million wasclassified as a current liability in the condensed consolidated balance sheetsas of both June 30, 2007 and December 31, 2006.

***ScheduledPrincipal Payments***

Basedon the extensions described above, our long-term obligations, including creditfacility debt, convertible debt (including embedded option), deferredacquisition costs, and capitalized leases, mature as follows for eachtwelve-month period ending June 30 (in thousands):

| 2008  |   | $      | 2,976   |   |
|-------|--------|--------|---------|--------|
| 2009  |   | 79,526 |    |
| 2010  |   | 56,285 |    |
| 2011  |   | 543    |    |
| 2012  |   | 27     |    |
| Total |   | $      | 139,357 |   |

 

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**NOTE6:   SHARE-BASED COMPENSATION**

During June 2004, our 2004 Equity Incentive Plan wasapproved by our shareholders and replaced our 1995 Stock Option Plan, asamended (the “1995 Plan”).  During June2006, an amendment to the 2004 Equity Incentive Plan was approved by ourshareholders.  The 2004 Equity IncentivePlan, as amended, (the “2004 Plan”) limits the combined grant of options toacquire shares of common stock, stock appreciation rights, and restricted stockunder the 2004 Plan to 7,500,000 shares. Any grant under the 2004 Plan that expires or terminates unexercised,becomes unexercisable or is forfeited will be available for further grantsunless, in the case of options granted, related stock appreciation rights areexercised.  At June 30, 2007, there wereapproximately 2,690,000 shares of common stock available for future equity-relatedgrants under the 2004 Plan.  Althoughvarious forms of equity instruments may be issued, to date we have issued onlyincentive share options and nonqualified share options under this Plan.  These share options, which have a contractualterm of 10 years, are issued with an exercise price equal to the grant dateclosing market price of our common stock. The vesting periods range from immediate to 5 years.  Share options which vest over 5 yearsgenerally vest either 20% per year on the first five anniversaries of the grantdate, or 25% per year on the second through fifth anniversaries of the grantdate.  Shares vesting over a shorterperiod will generally vest 100% as of the designated vesting date.  We issue new shares to satisfy share optionexercises.  We do not anticipate that wewill repurchase shares on the open market during 2007 for the purpose ofsatisfying share option exercises.

Following is informationrelated to exercisable share options and share options expected to vest as ofJune 30, 2007 (shares and aggregate intrinsic value in thousands):
|                                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
|                                 |       |       |       |                                   |       |                                                |       |                            |       |
| Options  exercisable                 |       | 4,884      |       | $                                      | 9.36       |                                                | 6.58       |                            | $          | 33,204 |   |
| Options vested and  expected to vest |       | 6,914      |       | $                                      | 10.28      |                                                | 7.20       |                            | $          | 40,895 |   |

 

The aggregate intrinsicvalue was calculated using the difference between the June 30, 2007 marketprice and the grant price for only those awards that have a grant price that isless than the June 30, 2007 market price.

The weighted averagegrant-date fair value of options granted during the three months ended June 30,2007 and 2006 were $5.67 and $4.72, respectively.  The total intrinsic value of optionsexercised during the three months ended June 30, 2007 and 2006 were $5.0million and $0.2 million, respectively. During the three months ended June 30, 2007 and 2006, we received cashfor payment of the grant price of exercised options of approximately $5.6million and $0.4 million, respectively, and we anticipate we will realize a taxbenefit related to these exercised options of approximately $2.0 million andless than $0.1 million, respectively.

During the three monthsended June 30, 2007 and 2006, we recognized share-based compensation expense,which is a non-cash charge, of approximately $0.7 million and $0.6 million,respectively, of which $0.2 million and $0.2 million, respectively, is includedunder the caption “Direct costs of services” and $0.5 million and $0.4 million,respectively, is included under the caption “General and administrative” on theaccompanying condensed consolidated statements of income.  During the three months ended June 30, 2007and 2006, we recognized a net tax benefit of approximately $0.3 million and $0.2million, respectively, related to aggregate share-based compensation expenserecognized during the same period.

The weighted averagegrant-date fair value of options granted during the six months ended June 30,2007 and 2006 were $5.30 and $5.00, respectively.  The total intrinsic value of optionsexercised during the six months ended June 30, 2007 and 2006 were $5.5 millionand $1.3 million, respectively.  Duringthe six months ended June 30, 2007 and 2006, we received cash for payment ofthe grant price of exercised options of approximately $8.2 million and $1.6million, respectively, and we anticipate we will realize a tax benefit relatedto these exercised options of approximately $2.2 million and $0.4 million,respectively.  The cash received for paymentof the grant price is included as a component of cash flow from financingactivities.  The tax benefit related tothe option exercise price in excess of the option fair value at grant date isseparately 

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disclosed as a componentof cash flow from financing activities on the consolidated statement of cashflows; the remainder of the tax benefit is included as a component of cash flowfrom operating activities.

During the six months ended June 30, 2007 and 2006, werecognized share-based compensation expense, which is a non-cash charge, ofapproximately $1.0 million and $1.1 million, respectively, of which $0.3million and $0.3 million, respectively, is included under the caption “Directcosts of services” and $0.7 million and $0.8 million, respectively, is includedunder the caption “General and administrative” on the accompanying condensedconsolidated statements of income. During the six months ended June 30, 2007 and 2006, we recognized a nettax benefit of approximately $0.3 million and $0.4 million, respectively,related to aggregate share-based compensation expense recognized during thesame period.  As of June 30, 2007, therewas $9.7 million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements, which will be recognized over aweighted-average period of 3.7 years.

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**NOTE7:   NET INCOME PER SHARE**

Basic net income pershare is computed by dividing net income available to common shareholders bythe weighted average number of common shares outstanding for the period.  Diluted net income per share is computed by dividingnet income available to common shareholders, increased by the amount ofinterest expense, net of tax, related to outstanding convertible debt, by theweighted average number of outstanding common shares and incremental sharesthat may be issued in future periods relating to outstanding share options andconvertible debt, if dilutive.  Whencalculating incremental shares related to outstanding share options, we applythe treasury stock method.  The treasurystock method assumes that proceeds, consisting of the amount the employee mustpay on exercise, compensation cost attributed to future services and not yetrecognized, and excess tax benefits that would be credited to additionalpaid-in capital on exercise of the share options, are used to repurchase outstandingshares at the average market price for the period.  The treasury stock method is applied only toshare grants for which the effect is dilutive.

The computations of basic and diluted net income per share are asfollows (in thousands, except per share data):
| ** **                      | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **Net   Income**                               | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per   Share  Amount** | ** ** |
|                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic net income per  share     |       | $                                                   | 1,794      |   | 29,848 |   | $ | .06 |   | $ | 36,292 |   | 29,082 |   | $ | 1.25 |   |
|                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive  securities: |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Share options                   |       |                                                |       | 2,132 |   |   |   |   |   | 1,139 |   |   |   |
| Convertible debt                |       | —                                              |       | — |   |   |   | 301 |   | 4,286 |   |   |   |
|                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted net income per share    |       | $                                                   | 1,794      |   | 31,980 |   | $ | .06 |   | $ | 36,593 |   | 34,507 |   | $ | 1.06 |   |

 

#### For the three month periodsended June 30, 2007 and 2006, weighted-average outstanding share optionstotaling approximately 1.1 million and 1.9 million shares of common stock,respectively, were antidilutive and therefore not included in the computationof diluted earnings per share.  For thethree months ended June 30, 2007, we did not assume conversion of thecontingent convertible subordinated convertible notes as the effect would havebeen antidilutive.

| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **Net   Income**                             | ** ** | **Weighted  Average Shares  Outstanding** | ** ** | **Per   Share   Amount** | ** ** | **Net   Income** | ** ** | **Weighted   Average   Shares   Outstanding** | ** ** | **Per   Share   Amount** | ** ** |
|                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Basic net income per  share         |       | $                                                 | 1,944      |   | 29,559 |   | $ | .07 |   | $ | 34,543 |   | 29,005 |   | $ | 1.19 |   |
|                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive  securities:     |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Share options                       |       |                                              |       | 1,899 |   |   |   |   |   | 1,447 |   |   |   |
| Convertible debt                    |       | —                                            |       | — |   |   |   | 600 |   | 4,286 |   |   |   |
|                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Diluted net income (loss) per share |       | $                                                 | 1,944      |   | 31,458 |   | $ | .06 |   | $ | 35,143 |   | 34,738 |   | $ | 1.01 |   |

 

#### For the six month periods endedJune 30, 2007 and 2006, weighted-average outstanding share options totalingapproximately 1.4 million and 1.3 million shares of common stock wereantidilutive and, therefore, not included in the computation of dilutedearnings per share.  For the six monthsended June 30, 2007, we did not assume conversion of the contingent convertiblesubordinated convertible notes as the effect would have been antidilutive.

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**NOTE8:   SEGMENT REPORTING**

In the first quarter of2007, we revised the structure of our operating segments and changed the natureof the financial information provided to our chief operating decisionmakers.  Additionally, certain of theinternal segment financial reporting information used to measure and evaluatethe performance of our operating segments, such as allocation of certain sharedcosts, have been revised for consistency with the underlying reorganizedsegment structure.  The segment measureof profit for the three and six months ended June 30, 2007 has been restated inaccordance with our new structure, including the changes in certain internalfinancial reporting information.  We havethree operating segments: (i) electronic discovery, (ii) bankruptcy trustee,and (iii) settlements and claims.  Ourelectronic discovery business provides electronic discovery services tocorporations and the litigation departments of law firms.  Produced documents are made availableprimarily through a hosted environment, and our DocuMatrixTM software allows forefficient plaintiff and defendant counsel review and data requests.  Our bankruptcytrustee segment provides solutions that address the needs of Chapter 7 andChapter 13 trustees to process large bankruptcy caseloads and to make requireddistributions to creditors accurately and efficiently. Our settlements andclaims segment administers complex legal proceedings which involve notificationof a class of actual or potential claimants or creditors and the administrationof funds related to settlement with the class of claimants or creditors.

Each segment’sperformance is assessed based on earnings before interest, taxes, depreciationand amortization, and share-based compensation expense.  In management’s evaluation of performance,certain administrative costs, such as compensation and related costs forcorporate staff and executive management, are not allocated by segment and,accordingly, the operating segment results do not include such unallocatedcosts.  Assets reported within a segmentare those assets that can be identified to a segment and primarily consist oftrade receivables, property, equipment and leasehold improvements, software,identifiable intangible assets and goodwill. Cash, tax-related assets, and certain prepaids and other assets are notallocated to our segments.  We  identify long-lived assets such as property,equipment and leasehold improvements, software, and identifiable intangibleassets to operating segments, however, we do not allocate the relateddepreciation and amortization to the segment as management evaluates segmentperformance exclusive of these non-cash expenses.

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Following is a summary ofsegment information (in thousands):
|                                                   | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic   Discovery**                               | ** ** | **Bankruptcy  Trustee** | ** ** | **Settlements  and Claims** | ** ** | **Total** | ** ** |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                          |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                             | 12,224     |   | $ | 8,329 |   | $ | 17,618 |   | $ | 38,171 |   |
| Operating  revenue from reimbursed direct costs   |       | 12                                                            |       | 108 |   | 5,915 |   | 6,035 |   |
| Total revenue                                     |       | 12,236                                                        |       | 8,437 |   | 23,533 |   | 44,206 |   |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 5,782                                                         |       | 2,645 |   | 18,500 |   | 26,927 |   |
| Segment  performance measure                      |       | $                                                             | 6,454      |   | $ | 5,792 |   | $ | 5,033 |   | $ | 17,279 |   |

 
|                                                   | ** ** | **Three Months Ended June 30, 2006** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic   Discovery**                               | ** ** | **Bankruptcy  Trustee** | ** ** | **Settlements  and Claims** | ** ** | **Total** | ** ** |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                          |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                             | 7,318      |   | $ | 68,731 |   | $ | 18,071 |   | $ | 94,120 |   |
| Operating  revenue from reimbursed direct costs   |       | 15                                                            |       | 98 |   | 6,263 |   | 6,376 |   |
| Total revenue                                     |       | 7,333                                                         |       | 68,829 |   | 24,334 |   | 100,496 |   |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 4,338                                                         |       | 2,870 |   | 19,042 |   | 26,250 |   |
| Segment  performance measure                      |       | $                                                             | 2,995      |   | $ | 65,959 |   | $ | 5,292 |   | $ | 74,246 |   |

 

Following is areconciliation of our segment performance measure to income before income taxes(in thousands):
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Segment  performance measure                          |       | $                                                   | 17,279     |   | $ | 74,246 |   |
| Corporate and  unallocated expenses                   |       | (4,945                                              | )          | (3,726 | ) |
| Share-based  compensation expense                     |       | (703                                                | )          | (562 | ) |
| Depreciation and  software and leasehold amortization |       | (2,837                                              | )          | (2,494 | ) |
| Amortization of  intangible assets                    |       | (2,352                                              | )          | (2,878 | ) |
| Acquisition  related                                  |       | —                                              |       | (250 | ) |
| Interest  expense, net                                |       | (3,320                                              | )          | (3,340 | ) |
| Income before  income taxes                           |       | $                                                   | 3,122      |   | $ | 60,996 |   |

 

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|                                                   | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic   Discovery**                             | ** ** | **Bankruptcy   Trustee** | ** ** | **Settlements   and Claims** | ** ** | **Total** | ** ** |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                        |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                           | 22,336     |   | $ | 16,597 |   | $ | 34,334 |   | $ | 73,267 |   |
| Operating  revenue from reimbursed direct costs   |       | 25                                                          |       | 215 |   | 11,828 |   | 12,068 |   |
| Total revenue                                     |       | 22,361                                                      |       | 16,812 |   | 46,162 |   | 85,335 |   |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 10,696                                                      |       | 5,282 |   | 36,145 |   | 52,123 |   |
| Segment  performance measure                      |       | $                                                           | 11,665     |   | $ | 11,530 |   | $ | 10,017 |   | $ | 33,212 |   |

 
|                                                   | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic   Discovery**                             | ** ** | **Bankruptcy   Trustee** | ** ** | **Settlements   and Claims** | ** ** | **Total** | ** ** |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                        |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                           | 15,692     |   | $ | 71,090 |   | $ | 39,899 |   | $ | 126,681 |   |
| Operating  revenue from reimbursed direct costs   |       | 48                                                          |       | 210 |   | 11,775 |   | 12,033 |   |
| Total revenue                                     |       | 15,740                                                      |       | 71,300 |   | 51,674 |   | 138,714 |   |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 7,733                                                       |       | 5,807 |   | 41,364 |   | 54,904 |   |
| Segment  performance measure                      |       | $                                                           | 8,007      |   | $ | 65,493 |   | $ | 10,310 |   | $ | 83,810 |   |

 

Following is areconciliation of our segment performance measure to income before income taxes(in thousands):
|                                                       | ** ** | **Six Months Ended June,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Segment  performance measure                          |       | $                                         | 33,212     |   | $ | 83,810 |   |
| Corporate and  unallocated expenses                   |       | (9,602                                    | )          | (7,372 | ) |
| Share-based  compensation expense                     |       | (1,014                                    | )          | (1,092 | ) |
| Depreciation and  software and leasehold amortization |       | (5,798                                    | )          | (4,791 | ) |
| Amortization of  intangible assets                    |       | (4,876                                    | )          | (5,645 | ) |
| Interest expense,  net                                |       | (8,415                                    | )          | (6,604 | ) |
| Acquisition  related                                  |       | —                                    |       | (250 | ) |
| Income before  income taxes                           |       | $                                         | 3,507      |   | $ | 58,056 |   |

 

 

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Following are totalassets by segment (in thousands):
|                            | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Electronic Discovery       |       | $                       | 132,682    |                        | $          | 125,515 |   |
| Bankruptcy Trustee         |       | 86,372                  |       | 85,646                      |       |
| Settlements and Claims     |       | 151,485                 |       | 150,343                     |       |
| Corporate and unallocated  |       | 17,129                  |       | 20,716                      |       |
| Total  consolidated assets |       | $                       | 387,668    |                        | $          | 382,220 |   |

 

Following is goodwill bysegment (in thousands):
|                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Goodwill**           |       |                    |       |                        |       |
| Electronic Discovery   |       | $                       | 76,392     |                        | $          | 76,369 |   |
| Bankruptcy Trustee     |       | 75,205                  |       | 74,937                      |       |
| Settlements and Claims |       | 109,646                 |       | 109,303                     |       |
| Total goodwill         |       | $                       | 261,243    |                        | $          | 260,609 |   |

 

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**NOTE 9:      SUPPLEMENTAL CASH FLOW INFORMATION**

Supplemental cash flowinformation is as follows (in thousands):
|                                                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                         |       |                                              |       |   |   |
| Cash paid  (received) for:                                                   |       |                                              |       |   |   |
| Interest                                                                     |       | $                                                 | 4,594      |   | $ | 4,880 |   |
| Income taxes paid (refunded), net                                            |       | 245                                               |       | (835 | ) |
| Non-cash  investing and financing transactions:                              |       |                                              |       |   |   |
| Capitalized lease obligations incurred                                       |       | 125                                               |       | — |   |
| Property, equipment, and leasehold improvements  accrued in accounts payable |       | 5,236                                             |       | 278 |   |
|                                                                              |            |                                                   |            |  |  |  |  |

 

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**ITEM 2.****                       Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

This discussion andanalysis should be read in conjunction with the condensed consolidatedfinancial statements and the accompanying notes to the condensed consolidatedfinancial statements included in this Form 10-Q.

### **Overview**

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

We have acquired a numberof businesses during the past several years. In January 2003, we acquired BSI, which expanded our offerings toinclude claims administration solutions for the Chapter 11 corporaterestructuring market.  In January 2004,we acquired Poorman-Douglas and expanded our administrative offerings insupport of the class action and mass tort market.  In October 2005, we acquired HilsoftNotifications, which enhanced our expert legal notification services related toclass action, mass tort and bankruptcy noticing.  In November 2005, we acquired nMatrix toexpand our product and service offerings to include electronic discovery.

Wehave three operating segments: electronic discovery, bankruptcy trustees, andsettlements and claims.

***ElectronicDiscovery Segment***

Ourelectronic discovery business provides processing and search and reviewservices to corporations and the litigation departments of law firms.  Our eDataMatrixTM software analyzes, filters,deduplicates and produces documents for review. Produced documents are made available primarily through a hostedenvironment, and our DocuMatrixTM software allows for efficient plaintiff anddefendant counsel review and data requests.

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

The substantial increase of electronic documents bybusinesses has changed the dynamics of how attorneys support discovery incomplex litigation matters.  According tothe 2006 Socha-Gelbmann Electronic Discovery Survey, the 2005 domesticcommercial electronic discovery revenues were estimated at $1.3 billion, anapproximate 56% increase from 2004. According to this same source, the market is expected to continue togrow at a substantial rate from 2006 to 2008, with expected increases ofapproximately 30% to 35% each year.  Dueto the increasing complexity of cases, the increasing volume of data that aremaintained electronically, and the increasing volume of documents that areproduced in all types of litigation, law firms are increasingly reliant onelectronic evidence management systems to organize and manage the electronicdiscovery process.

Significant sources of revenue include:

·                  Feesrelated to the conversion of data into an organized, searchable electronicdatabase. The amount we earn varies primarily on the size (number of documents)and complexity of the engagement; and

·                  Hostingfees based on the amount of data stored.

***BankruptcyTrustee Segment***

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

·                  Chapter 7 is a liquidation bankruptcy forindividuals or businesses that, as measured by the number of new cases filed in2006, accounted for approximately 75% of all bankruptcy filings.  In a Chapter 7 case, the debtor’s assets areliquidated and the resulting cash proceeds are used by the Chapter 7 bankruptcytrustee to pay creditors.  Chapter 7cases typically last several years.

·                  Chapter 13 is a reorganization model of bankruptcyfor individuals that, as measured by the number of new cases filed in 2006,accounted for approximately 24% of all bankruptcy filings.  In a Chapter 13 case, debtors make periodiccash 

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                        payments into a reorganization plan and a Chapter13 bankruptcy trustee uses these cash payments to make monthly distributions tocreditors.  Chapter 13 cases typicallylast between three and five years.

The participants in these bankruptcy proceedings includethe debtor, the debtor’s counsel, the creditors, the bankruptcy judge, and theprofessional bankruptcy trustee.

Ourend-user customers are professional bankruptcy trustees.  The Executive Officefor United States Trustees, a division of the U.S. Department of Justice,appoints all bankruptcy trustees.  AUnited States Trustee is appointed in most federal court districts andgenerally has responsibility for overseeing the integrity of the bankruptcysystem.  The bankruptcy trustee’s primaryresponsibilities include liquidating the debtor’s assets or collecting fundsfrom the debtor, distributing the collected funds to creditors pursuant to theorders of the bankruptcy court, and preparing regular status reports for theExecutive Office for United States Trustees and for the bankruptcy court.  Trustees manage an entire caseload ofbankruptcy cases simultaneously.

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

***Settlementsand Claims Segment***

Our settlements and claims segment supports theadministration of complex legal proceedings which involve notification of aclass of claimants or creditors and the administration of funds related tosettlement with the class of claimants or creditors for Chapter 11 bankruptciesand class action and mass tort lawsuits.

Chapter 11 is a reorganization model of bankruptcyfor corporations that, as measured by the number of new cases filed in fiscal2006, accounted for approximately 1% of all bankruptcy filings.  Chapter 11 generally allows a company, oftenreferred to as the debtor-in-possession, to continue operating under a plan ofreorganization to restructure its business and to modify payment terms of bothsecured and unsecured obligations. Chapter 11 cases may last several years. Key participants include the debtor-in-possession, the debtor’s counsel,the creditors, the creditors’ counsel, and the bankruptcy judge.

Class action and mass tort refer to litigation in whichclass representatives bring a lawsuit against a defendant company or otherpersons on behalf of a large group of similarly affected persons (theclass).  Mass tort refers to class actioncases that are particularly large or prominent. The class action and mass tort marketplace is significant, withestimated annual tort claim costs of approximately $260 billion in 2005,according to an update study issued in 2006 by Towers Perrin.  Administrative costs, which include costs,other than defense costs, incurred by either the insurance company orself-insured entity in the administration of claims, comprise approximately 20%of this total.  Key participants in thismarketplace include law firms that specialize in representing class action andmass tort plaintiffs and other law firms that specialize in representingdefendants.  Class action and mass tortlitigation is often complex and the cases, including administration of anysettlement, may last several years.

Our customers are companies thatadminister the settlement or resolution of class action cases and debtorcorporations that have filed a plan of reorganization.  We sell our services directly to thosecustomers; however, our relationships with other interested parties, includinglegal counsel, often provide access to these customers.

Significant sources of revenue include:

·                  Feescontingent upon the month-to-month delivery of case management services such asclaims processing, claims reconciliation, professional services, call centersupport, and controlled disbursements. The amount we earn varies primarily on the size and complexity of theengagement;

·                  Legalnoticing services, including media campaign and advertising management, inwhich we coordinate notification through various media outlets, such as print,radio and television, to potential parties of interest for a particular clientengagement; and

·                Reimbursementfor costs incurred related to postage on mailing services.

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**CriticalAccounting Policies**

In our Annual Report on Form10-K, we disclose accounting policies, referred to as critical accountingpolicies, that require management to use significant judgment or that requiresignificant estimates.  Managementregularly reviews the selection and application of our critical accountingpolicies.  Management determined that theapplication of FASB Interpretation No. 48 (FIN 48), *Accountingfor Uncertainty in Income Taxes —*an interpretation of FASBStatement No. 109, *Accounting for IncomeTaxes,*adopted effective January 1, 2007, requires significantmanagement judgment and the use of significant estimates.  Therefore, in addition to the criticalaccounting policies contained in our Annual Report on Form 10-K for the yearended December 31, 2006, we have added income taxes as a critical accountingpolicy.

***Income taxes***

FIN 48 prescribesa comprehensive model for how companies should recognize, measure, present, anddisclose in their financial statements uncertain tax positions taken orexpected to be taken on a tax return. Under FIN 48, tax positions are initially recognized in the financialstatements when it is more likely than not the position will be sustained uponexamination by the tax authorities.  Suchtax positions are initially and subsequently measured as the largest amount oftax benefit that is greater than 50% likely of being realized upon ultimatesettlement with the tax authority assuming full knowledge of the position andall relevant facts.  Application of FIN48 requires numerous estimates based on available information.  We consider many factors when evaluating andestimating our tax positions and tax benefits, which may require periodicadjustments and which may not accurately anticipate actual outcomes.  Changes in these factors may have a materialimpact, either positive or negative, on our effective tax rate.  As a result, the application of FIN 48 may,in the future, have a material affect on income tax expense recorded within ourcondensed consolidated statements of income and also may have a material affecton our current tax payable or refundable, our long-term tax payable, and bothcurrent and long-term deferred income tax line items within our condensedconsolidated balance sheets.  Foradditional information regarding the effect of adoption of FIN 48, see note 4of the condensed consolidated financial statements.

**Resultsof Operations for the Three Months Ended June 30, 2007 Compared with the ThreeMonths Ended June 30, 2006**

### **Consolidated Results**

### ***Revenue***

Total revenue of $44.2million for the three months ended June 30, 2007 decreased approximately $56.3million compared to $100.5 million of revenue for the same period in the prioryear.  As more fully explained under thecaption “Significant Accounting Policies, Revenue Recognition” in note 1 to thecondensed consolidated financial statements, the increase in total revenue forthe three months ended June 30, 2006 is primarily the result of recognition,following delivery of the final specified software upgrade, of previouslydeferred revenue related to a specific arrangement for our bankruptcy trusteesegment.  A significant part of our totalrevenue consists of reimbursement for direct costs we incur, such as postagerelated to document management services. We reflect the operating revenue from these reimbursed direct costs as aseparate line item on our accompanying condensed consolidated statements ofincome.  Although operating revenue fromreimbursed direct costs may fluctuate significantly from quarter to quarter,these fluctuations have a minimal effect on our operating income as we realizelittle or no margin from this revenue. Operating revenue exclusive of operating revenue from reimbursed directcosts, which we refer to as operating revenue before reimbursed direct costs,decreased approximately $55.9 million to $38.2 million for the three monthsended June 30, 2007 compared to $94.1 million for the same period in the prioryear.  The decrease primarily relates toa $60.4 million decrease in bankruptcy trustee operating revenue beforereimbursed direct costs, primarily the result of the recognition of previouslydeferred revenue related to a specific arrangement, partly offset by a $4.9million increase in electronic discovery operating revenue before reimburseddirect costs.  Changes by segment are discussedbelow.

### ***Operating Expenses***

Direct costs of services,exclusive of depreciation and amortization, decreased by approximately 3% toapproximately $10.4 million for the three months ended June 30, 2007 comparedwith $10.8 million during the same period in the prior year.  This decrease is primarily results from a$0.7 million decrease in the cost of outside services and legal noticing,partly offset by a $0.3 million increase in compensation and benefits expense.  Changes by segment are discussed below.

Direct cost of bundledproducts and services, exclusive of depreciation and amortization, decreased toapproximately $0.9 million for the three months ended June 30, 2007 comparedwith $1.0 million for the same period in the prior year as a result of a decreasein compensation and benefits expense. Changes by segment are discussed below.

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Reimbursed direct costsdecreased by approximately $0.4 million to $6.0 million for the three monthsended June 30, 2007 compared with $6.4 million during the same period in theprior year.  This decrease directlycorresponds to the decrease in operating revenue from reimbursed directcosts.  Changes by segment are discussedbelow.

General andadministrative costs increased $2.9 million, or approximately 23%, to $15.3 millionfor the three months ended June 30, 2007 compared with $12.4 million for thesame period in the prior year.  Theincrease is primarily due to a $1.9 million increase in compensation andbenefits expense primarily resulting from expanded staffing and increasedincentive compensation and benefits combined with increases of $0.2 millioneach related to travel expense, lease expense, and share-basedcompensation.  Changes by segment arediscussed below.

Depreciation and softwareand leasehold amortization costs increased $0.3 million to $2.8 million for thethree months ended June 30, 2007 compared with $2.5 million for the same periodin the prior year primarily as a result of increased software amortizationexpense and increased hardware depreciation related to our electronic discoverysegment.

Amortization ofidentifiable intangible assets, compared with the same period in the prioryear, decreased by $0.5 million to $2.4 million for the three months ended June30, 2007 compared with $2.9 million for the same period in the prior year,primarily as a result of certain customer contracts and tradenames that becamefully amortized.

***InterestExpense***

We recognized interestexpense of $3.3 million for the three months ended June 30, 2007 compared with$3.4 million for the same period in the prior year.  Changes in the components of interest expensefor the second quarter of 2007 were comprised primarily of a $0.4 milliondecrease in interest expense related to our credit facility, partly offset by a$0.3 million increase in interest expense related to our embedded option.  The decrease in interest expense related toour credit facility was primarily the result of a decrease in averageoutstanding borrowings partially offset by an increase in our weighted averageborrowing rate. The $0.3 million increase related to the embedded  option results from an increase in theestimated fair value of our subordinated convertible note holders’ option toextend the maturity of the subordinated convertible notes from June 15, 2007 toJune 15, 2010.  During April 2007, theholders of the contingent convertible subordinated notes exercised their rightto extend the maturity of the convertible notes.  As a result, we will continue to payinterest, at a rate of 4% per annum, during the extension period on anyconvertible notes that remain outstanding (the holders of the convertible notesmay chose at any time to convert some or all of the notes into our commonshares – see note 5 of the notes to the condensed consolidated financial statementsfor additional information regarding this conversion right).  We estimated the fair value of the optionimmediately prior to the note holders’ vote to extend and recorded a finaladjustment to the fair value of the option to extend the subordinateconvertible notes’ maturity.  This finaladjustment was recorded as a charge to interest expense.  We will amortize the fair value of the optionas a reduction to interest expense over the term of the extension.

***IncomeTaxes***

During the three monthsended June 30, 2007, our tax expense as a percent of pre-tax income was42.5%.  Our estimated annual effectivetax rate of 43.4% was reduced by a discrete adjustment to record tax benefitsassociated with the exercise of certain incentive stock options, partly offsetby an increase to tax expense related to a discrete adjustment to recordinterest on uncertain tax positions. During the three months ended June 30, 2006, the effective tax rate torecord the tax benefit related to our net loss was 40.5%.  Our tax rate is higher than the statutoryfederal rate of 35% primarily due to state taxes.  We have significant operations located in NewYork City that are subject to state and local tax rates that are higher thanthe tax rates assessed by other jurisdictions where we operate.

***NetIncome***

Our net income wasapproximately $1.8 million for the three months ended June 30, 2007 comparedwith net income of approximately $36.3 million for the same period in the prioryear. This $34.5 million change is primarily the result of $56.3 milliondecrease in operating revenue combined with a $2.2 million increase incompensation and benefits expense, partly offset by a $23.4 million decrease inincome tax expense.  The decrease inoperating revenue before reimbursed costs is primarily attributable to therecognition during the three months ended June 30, 2006 of $60.1 million ofpreviously deferred revenue, partly offset by a $4.9 million increase inelectronic discovery operating revenue before reimbursed costs.** **The decrease in income tax expense isprimarily attributable to the recognition during the six months ended June 30,2006 of deferred tax expense related to the deferred revenue.

**ElectronicDiscovery Segment**

Electronic discoveryoperating revenue before reimbursed direct costs increased $4.9 million, orapproximately 67%, to $12.2 million for the three months ended June 30, 2007compared to $7.3 million for the same period in the prior year.  This 

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increase is primarilyattributable to additional projects from existing clients as well as anexpansion of our client base, resulting in an increase in hosting andprocessing revenue of approximately $4.9 million.

Electronic discoverydirect and administrative expenses increased $1.4 million, or approximately33%, to $5.8 million for the three months ended June 30, 2007 compared with$4.3 million for the same period in the prior year.  This increase is primarily a result of a $1.1million increase in compensation and benefits expense resulting from expandedstaffing and increased commission and incentive compensation linked to improvedoperating performance.

**BankruptcyTrustee Segment**

Bankruptcy trusteeoperating revenue before reimbursed direct costs decreased $60.4 million to$8.3 million for the three months ended June 30, 2007 compared to $68.7 millionfor the same period in the prior year. As more fully explained under the caption “Significant AccountingPolicies, Revenue Recognition” in note 1 to the condensed consolidatedfinancial statements, the increase for the three months ended June 30, 2006 isprimarily the result of our revenue recognition related to a specificarrangement with our primary depository financial institution.  During the second quarter of 2006, wedelivered the final software upgrade specified under this arrangement.  As the only remaining undelivered element wasPCS services, in accordance with SOP 97-2 we recognized a pro-rated portion,totaling approximately $60.1 million, of previously deferred revenue.  This arrangement terminated September 30, 2006and the new arrangement with this depository financial institution does notinclude provisions related to software upgrades.  Accordingly, we now recognize this revenuebased on a contingent usage based revenue model and, during the three monthsended June 30, 2007, we did not defer any bankruptcy trustee revenue orrecognize any previously deferred bankruptcy trustee revenue.

Bankruptcy trustee directand administrative expenses decreased approximately 8% to $2.6 million for thethree months ended June 30, 2007 compared with approximately $2.9 million inthe same period in the prior year.  Thisdecrease is primarily attributable to a decrease in compensation and benefitsexpense.

**Settlementsand Claims Segment**

Settlements and claimsoperating revenue before reimbursed direct costs decreased $0.5 million, orapproximately 3%, to $17.6 million for the three months ended June 30, 2007compared to $18.1 million for the same period in the prior year.  This decrease is primarily the result of a$1.2 million decrease in legal notification revenue, partly offset by a $0.6increase in claims processing revenue. Legal notification revenue tends to be variable as an individualnoticing campaign may have a short duration and generate significant revenueduring that time.  During the threemonths ended June 30, 2007, we had fewer large legal noticing projects thanduring the same period in the prior year.

Settlements and claimsdirect and administrative expenses, including reimbursed direct costs,decreased $0.5 million, or approximately 3%, to $18.5 million for the threemonths ended June 30, 2007 compared to $19.0 million for the same period in theprior year.  This decrease is primarilythe result of a $0.8 million decrease in the cost of outside services and legalnoticing, which is directly related to the decrease in legal notificationrevenue, partly offset by a $0.2 million increase in the allowance for doubtfulaccounts.

**Resultsof Operations for the Six Months Ended June 30, 2007 Compared with the SixMonths Ended June 30, 2006**

### **Consolidated Results**

### ***Revenue***

Total revenue of $85.3million for the six months ended June 30, 2007 decreased approximately $53.4million, or 38%, compared to $138.7 million of revenue for the same period inthe prior year.  As more fully explainedunder the caption “Significant Accounting Policies, Revenue Recognition” innote 1 to the condensed consolidated financial statements, the increase intotal revenue for the six months ended June 30, 2006 is primarily the result ofrecognition, following delivery of the final specified software upgrade, ofpreviously deferred revenue related to a specific arrangement for ourbankruptcy trustee segment.  Asignificant part of our total revenue consists of reimbursement for directcosts we incur, such as postage related to document management services.  We reflect the operating revenue from thesereimbursed direct costs as a separate line item on our accompanying condensedconsolidated statements of income. Although reimbursed operating revenue may fluctuate significantly fromquarter to quarter, these fluctuations have a minimal effect on our operatingincome as we realize little or no margin from this revenue.  Operating revenue exclusive of operatingrevenue from reimbursed direct costs, which we refer to as operating revenuebefore reimbursed direct costs, decreased approximately $53.4 million, or 42%,to $73.3 million for the six months ended June 30, 2007 compared to $126.7million for the same period in the prior year. The decrease primarily relates to a $54.5 million decrease in bankruptcytrustee operating revenue before reimbursed direct costs, primarily the resultof the recognition of previously deferred revenue related to a specificarrangement, and a $5.6 million 

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decrease in settlements andclaims operating revenue before reimbursed direct costs, partly offset by a$6.6 million increase in electronic discovery operating revenue beforereimbursed direct costs.  Changes bysegment are discussed below.

### ***Operating Expenses***

Direct costs of services,exclusive of depreciation and amortization, decreased by approximately $4.4million, or 17%, to $20.7 million for the six months ended June 30, 2007compared with $25.1 million during the same period in the prior year, primarilyas a result of a $4.9 million decrease in legal notification expense partlyoffset by a $0.8 million increase in compensation and benefits expense.  Changes by segment are discussed below.

Direct cost of bundledproducts and services, exclusive of depreciation and amortization, decreased byapproximately $0.2 million to approximately $1.8 million for the six monthsended June 30, 2007 compared with $2.0 million for the same period in the prioryear as a result of a decrease in compensation and benefits expense.  Changes by segment are discussed below.

Reimbursed directcosts decreased to $12.0 million for the six months ended June 30, 2007compared with $12.2 million during the same period in the prior year.  This decrease directly corresponds to thedecrease in operating revenue from reimbursed direct costs.  Changes by segment are discussed below.

General andadministrative costs increased $4.1 million, or approximately 17%, to $28.2million for the six months ended June 30, 2007 compared with $24.1 million forthe same period in the prior year.  Theincrease is primarily due to a $3.7 million increase in compensation andbenefits expense primarily resulting from expanded staffing and increasedincentive compensation combined with an increase in rent expense of $0.6million. Changes by segment are discussed below.

Depreciation and softwareand leasehold amortization costs increased $1.0 million, or 21%, to $5.8million for the six months ended June 30, 2007 compared with $4.8 million forthe same period in the prior year primarily as a result of increased softwareamortization expense related to our electronic discovery segment.

Amortization ofidentifiable intangible assets decreased by approximately 14% to $4.9 millionfor the six months ended June 30, 2007 compared with $5.6 million for the sameperiod in the prior year, primarily as a result of certain customer contractsand tradenames that became fully amortized.

***InterestExpense***

We recognized interestexpense of $8.4 million for the six months ended June 30, 2007 compared with$6.7 million for the same period in the prior year.  This increase is primarily related to a $2.2 millionincrease in the estimated fair value of our contingent convertible subordinatednote holders’ option to extend the maturity of the contingent convertiblesubordinated notes from June 15, 2007 to June 15, 2010, partly offset by adecrease in interest expense related to our credit facility.  During April 2007, the holders of thecontingent convertible subordinated notes exercised their right to extend thematurity of the convertible notes.  As aresult, we will continue to pay interest, at a rate of 4% per annum, during theextension period on any convertible notes that remain outstanding (the holdersof the convertible notes may chose at any time to convert some or all of thenotes into our common shares — see note 5 of the notes to the condensedconsolidated financial statements for additional information regarding thisconversion right).  We estimated the fairvalue of the option immediately prior to the note holders’ vote to extend andrecorded a final adjustment to the fair value of the option to extend thesubordinate convertible notes’ maturity. This final adjustment was recorded as a charge to interest expense.  We will amortize the fair value of the optionas a reduction to interest expense over the term of the extension.  The increase related to the increase in theestimated fair value of the option to extend was partially offset by a decreasein interest expense related to our credit facility.  The decrease in interest expense related toour credit facility is primarily the result of a decrease in averageoutstanding borrowings partially offset by an increase in our average borrowingrate.

***IncomeTaxes***

During the six monthsended June 30, 2007, our tax expense as a percent of pre-tax income was44.6%.  Our estimated annual effectivetax rate of 43.4% was increased due to tax expense related to a discreteadjustment to record interest on uncertain tax positions, partly offset by adiscrete adjustment to record tax benefits associated with the exercise ofcertain incentive stock options.  Duringthe six months ended June 30, 2006, the effective tax rate to record the taxbenefit related to our net loss was 40.5%. Our tax rate is higher than the statutory federal rate of 35% primarilydue to state taxes.  We have significantoperations located in New York City that are subject to state and local taxrates that are higher than the tax rates assessed by other jurisdictions wherewe operate.

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***NetIncome***

Our net income wasapproximately $1.9 million for the six months ended June 30, 2007 compared withnet income of approximately $34.5 million for the same period in the prioryear.  This $32.6 million change isprimarily the result a $53.4 million decrease in operating revenue combinedwith a $4.4 million increase in compensation and benefits expense and a $1.8million increase in interest expense, partly offset by a $22.0 million decreasein income tax expense and a $4.9 million decrease in legal notificationcosts.  The decrease in operating revenueis primarily attributable to the recognition during the six months ended June30, 2006 of $53.6 million of previously deferred revenue, and the decrease inincome tax expense is primarily attributable to the recognition during the sixmonths ended June 30, 2006 of deferred tax expense related to the deferredrevenue.

**ElectronicDiscovery Segment**

Electronic discoveryoperating revenue before reimbursed direct costs increased $6.6 million, orapproximately 42%, to $22.3 million for the six months ended June 30, 2007compared to $15.7 million for the same period in the prior year.  This increase is primarily attributable toadditional projects from existing clients as well as an expansion of our clientbase, resulting in an increase in hosting and processing revenue ofapproximately $6.6 million.

Electronic discoverydirect and administrative expenses increased $3.0 million, or approximately38%, to $10.7 million for the six months ended June 30, 2007 compared with $7.7million for the same period in the prior year. This increase is primarily a result of a $2.5 million increase incompensation and benefits expense resulting from expanded staffing andincreased commission and incentive compensation linked to improved operatingresults and a $0.4 million increase in building and equipment lease expense.

**BankruptcyTrustee Segment**

Bankruptcy trusteeoperating revenue before reimbursed direct costs decreased $54.5 million to$16.6 million for the six months ended June 30, 2007 compared to $71.1 millionfor the same period in the prior year. As more fully explained under the caption “Significant AccountingPolicies, Revenue Recognition” in note 1 to the condensed consolidatedfinancial statements, this increase is primarily the result of our revenuerecognition related to a specific arrangement with our primary depositoryfinancial institution.  During the secondquarter of 2006, we delivered the final software upgrade specified under thisarrangement.  As the only remaining undeliveredelement was PCS services, in accordance with SOP 97-2 we recognized a pro-ratedportion, totaling approximately $53.6 million, of previously deferredrevenue.  This arrangement terminatedSeptember 30, 2006 and the new arrangement with this depository financialinstitution does not include provisions related to software upgrades.  Accordingly, we now recognize this revenuebased on a contingent usage based revenue model and, during the three monthsended June 30, 2007, we did not defer any bankruptcy trustee revenue orrecognize any previously deferred bankruptcy trustee revenue.

Bankruptcy trustee directand administrative expenses decreased approximately $0.5 million, orapproximately 9%, to approximately $5.3 million for the six months ended June30, 2007 compared with approximately $5.8 million in the same period in theprior year primarily as the result of a $0.2 million decrease in compensationand benefits expense combined with a $0.2 million decrease in informationtechnolgy expense.

**Settlementsand Claims Segment**

Settlements and claimsoperating revenue before reimbursed direct costs decreased $5.6 million, orapproximately 14%, to $34.3 million for the six months ended June 30, 2007compared to $39.9 million for the same period in the prior year.  This decrease is primarily the result of a$6.7 million decrease in legal notification revenue, partly offset by a $0.9increase in claims processing revenue. Legal notification revenue tends to be variable as an individualnoticing campaign may have a short duration and generate significant revenueduring that time.  During the six monthsended June 30, 2007, we had fewer large legal noticing projects than during thesame period in the prior year.

Settlements and claimsdirect and administrative expenses, including reimbursed direct costs,decreased approximately 13% to $36.1 million for the six months ended June 30,2007 compared to $41.4 million for the same period in the prior year.  This decrease is primarily the result of a$4.9 million decrease in the cost of legal noticing, which is directly relatedto the decrease in legal notification revenue.

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**Liquidity and Capital Resources**

***Operating Activities***

During the six monthsended June 30, 2007, our operating activities provided net cash of approximately$14.9 million.  The primary sources ofcash from operating activities was net income of $1.9 million, adjusted fornon-cash charges and credits, primarily depreciation and amortization of $13.5million, and changes in operating assets and liabilities that decreased ouroperating cash flow by $0.6 million, primarily as a result of increases inincome taxes and accounts payable, largely offset by a decrease related totrade accounts receivable.  The effect ofincome taxes will fluctuate from period to period depending on the accrualrelated to the current tax expense and the timing of estimated tax paymentsmade or refunds received.  Accountspayable will fluctuate from period to period depending on the timing ofpurchases and payments.  Trade accountsreceivable will fluctuate from period to period depending on the timing ofsales and collections.

***Investing Activities***

During the six monthsended June 30, 2007, we used cash of approximately $5.0 million for purchasesof property and equipment, primarily computer hardware and purchased softwarelicenses for our electronic discovery business and purchased computer hardwarefor our bankruptcy trustee business. Enhancements to our existing software and development of new software isessential to our continued growth and, during the six months ended June 30,2007, we used cash of approximately $2.4 million to fund internal costs relatedto development of software for which technological feasibility has beenestablished.  We anticipate that cashgenerated from operations will be adequate to fund our anticipated property,equipment and software spending for the foreseeable future.

***FinancingActivities***

During the six monthsended June 30, 2007, we used available cash to reduce our total credit facilityborrowings by $15.0 million and to pay approximately $2.9 million as aprincipal reduction on our deferred acquisition debt.  This financing use of cash was partly offsetby $8.2 million of net proceeds from stock issued in connection with theexercise of employee stock options. During the six months ended June 30, 2007, we recognized approximately$0.4 of excess tax benefit related to the exercise of stock options as afinancing cash flow.

As of June 30, 2007, ourindebtedness consisted of $54.8 million from the contingent convertiblesubordinated notes (including the fair value of the embedded option), $78.0million under our senior revolving loan, and approximately $6.5 million ofobligations related to capitalized leases and deferred acquisition price.

As of June 30, 2007,significant covenants, all as defined within our credit facility agreement,include a leverage ratio not to exceed 3.5 to 1.00, a senior leverage ratio notto exceed 2.5 to 1.00, a fixed charge coverage ratio of not less than 1.25 to1.00, and a current ratio of not less than 1.50 to 1.00.  As of June 30, 2007, we were in compliancewith all financial covenants.

We believe that the fundsgenerated from operations plus amounts available under our credit facility’ssenior revolving loan will be sufficient for the foreseeable future to financecurrently anticipated working capital requirements, software expenditures,property and equipment expenditures, interest payments due on our outstandingborrowings, and payments for contractual obligations.

We may pursue acquisitions in the future.  If the acquisition price exceeds our thenavailable cash and unused borrowing capacity, we may decide to issue equity,restructure our credit facility, partly finance the acquisition with a notepayable, or some combination of the preceding. Covenants contained in our credit facility may limit our ability toconsummate an acquisition.  Pursuant tothe terms of our credit facility, we generally cannot incur indebtednessoutside the credit facility, with the exceptions of capital leases with anaggregate principal limit of $5.0 million and subordinated debt with anaggregate principal limit of $100.0 million. Furthermore, for any acquisition we must be able to demonstrate that, ona pro forma basis, we would be in compliance with our covenants during the fourquarters prior to the acquisition and we must obtain bank permission for anyacquisition for which cash consideration exceeds $65.0 million or totalconsideration exceeds $125.0 million.

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**Off-balanceSheet Arrangements**

As a part of thepurchase price consideration to acquire nMatrix, we issued 1.8 million sharesof our common stock to the seller.  Inconjunction with the acquisition, we entered into an agreement with the sellingshareholder to register the shares of common stock issued as a part of theacquisition consideration.  Within thisagreement, we guaranteed the common stock price of $13.57 per share, valued asthe average closing price of our common stock for the 40 consecutive tradingdays ending on the date four trading days prior to the closing date, for aspecified period following registration of the shares.  No payments were made under this guarantee,which terminated as of the close of trading on May 17, 2007.

**Contractual Obligations**

The following table setsforth a summary of our contractual obligations and commitments for each twelvemonth period ending June 30 (in thousands):
|                                           | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual **Obligations (1) | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 – 3 Years** | ** ** | **3 – 5 Years** | ** ** | **More Than   5 Years** | ** ** |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  and future accretion (2)  |       | $                                         | 134,621    |   | $ | 3,093 |   | $ | 131,028 |   | $ | 500 |   | $ | — |   |
| Interest payments  (3)                    |       | 7,115                                     |       | 2,290 |   | 4,196 |   | 604 |   | 25 |   |
| Employment agreements  (4)                |       | 6,574                                     |       | 2,785 |   | 3,084 |   | 705 |   | — |   |
| Capital lease  obligations                |       | 264                                       |       | 58 |   | 115 |   | 91 |   | — |   |
| Operating leases                          |       | 40,099                                    |       | 5,630 |   | 10,795 |   | 9,702 |   | 13,972 |   |
| Total                                     |       | $                                         | 188,673    |   | $ | 13,856 |   | $ | 149,218 |   | $ | 11,602 |   | $ | 13,997 |   |

 

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(1)         Approximately $7.2million of unrecognized tax benefits are not included in this contractualobligations table due to the uncertainty related to the timing of any payments.

(2)         A portion of the purchaseprice of certain acquisitions were in the form of notes on which the interestrate was below our incremental borrowing rate, and which were discounted usingour estimated incremental borrowing rate. The discounts are accreted over the life of the note and each period’saccretion is added to the principal of the respective note.  The amount in the above contractualobligations table includes both the notes’ principal, as reflected on our June30, 2007 condensed consolidated balance sheet, and all future accretion.  If certain financial objectives aresatisfied, we will make additional payments over the next four years related toour acquisition of Hilsoft and Epiq Advisory Services.  Such payments, if any, are not included inthe above contractual obligation table. Convertible debt is included at the stated value of the principal redemptionand excludes adjustments related to the embedded option, which will not be paidin cash.  Any conversion to our commonstock of part or all of the convertible debt will reduce our cash obligationrelated to the convertible debt.

(3)         Representspayments on fixed interest debt and assumes all subordinate convertible debt isheld to the extended maturity date. Interest related to the variable interest revolving debt has beenexcluded due to uncertainties related to the amount of such payments.

(4)         Inconjunction with acquisitions, we have entered into employment arrangements withcertain key employees of the acquired companies.

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**Recent Accounting Pronouncements**

In February 2007, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 159, *The FairValue Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement No. 115** *(SFAS 159).  SFAS 159 permits the measurement of specifiedfinancial instruments and warranty and insurance contracts at fair value on acontract-by-contract basis, with changes in fair value recognized in earningseach reporting period.  SFAS 159 iseffective for fiscal years beginning after November 15, 2007.  We do not anticipate that adoption of thisstatement will have a material impact on our consolidated financial statements.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements*, (SFAS 157).  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years. Management is still evaluating the impact, if any, that the adoption ofSFAS 157 will have on our financial position, results of operations, or cashflows.

In June 2007, the EITFissued Issue No. 06-11, *Accounting for Income TaxBenefits of Dividends on Share based Payment Awards* (EITF06-11).  EITF 06-11 provides interpretiveguidance on the recognition of income tax benefits received on dividends paidto nonvested equity share awards.  EITF06-11 is effective for fiscal years beginning after December 15, 2007.  We do not anticipate that adoption of EITF 06-11will have a material impact on our consolidated financial statements.

**Forward-Looking Statements**

In this report, inother filings with the SEC and in press releases and other public statements byour officers throughout the year, Epiq Systems, Inc. makes or will makestatements that plan for or anticipate the future.  These forward-looking statements includestatements about our future business plans and strategies, and other statementsthat are not historical in nature.  Theseforward-looking statements are based on our current expectations.  In this Quarterly Report on Form 10-Q, wemake statements that plan for or anticipate the future.  Many of these statements are found in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section of this report.

Forward-lookingstatements 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, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,provide a “safe harbor” for forward-looking statements.  Because forward-looking statements involvefuture risks and uncertainties, listed below are a variety of factors thatcould cause actual results and experience to differ materially from theanticipated results or other expectations expressed in our forward-lookingstatements.  These factors include (1)any material changes in our total number of client engagements and the volumeassociated with each engagement, (2) any material changes in our client’sdeposit portfolio or the services required or selected by our clients inengagements, (3) material changes in the number of bankruptcy filings, classaction filings or mass tort actions each year, (4) risks associated withhandling of confidential data and compliance with information privacy laws, (5)changes in pricing structures and arrangements, (6) risks associated with theintegration of acquisitions into our existing business operations, (7) risksassociated with our indebtedness, (8) risks associated with the application ofcomplex accounting rules to unique transactions, including the risk that goodfaith application of those rules and audits of those results may be laterreversed by new interpretations of those rules or new views regarding theapplication of those rules, and (9) other risks detailed from time to time inour SEC filings, including our annual report on Form 10-K.  In addition, there may be other factors notincluded in our SEC filings that may cause actual results to differ materiallyfrom any forward-looking statements. We undertake no obligations to update anyforward-looking statements contained herein to reflect future events ordevelopments.

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**ITEM 3.          Quantitative and Qualitative Disclosures About MarketRisk.**

Marketrisk refers to the risk that a change in the level of one or more marketprices, interest rates, indices, volatilities, correlations or other marketfactors, such as liquidity, will result in losses for a certain financialinstrument or group of financial instruments. Our exposure to market risk has not changed significantly since December31, 2006.

**ITEM 4.          Controlsand Procedures.**

***DisclosureControls and Procedures***

Anevaluation was carried out by the Epiq Systems, Inc.’s (the Company’s) ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO) of the effectivenessof the design and operations of the Company’s disclosure controls andprocedures as defined in Exchange Act Rule 13a-15(e).  Based on this evaluation, our management,including the CEO and CFO, concluded that our disclosure controls andprocedures are effective.  Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by the Company in its periodic filings with the SEC is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by the Company inthe reports that it files or submits to the SEC is accumulated and communicatedto Company’s management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

***Changes inInternal Control Over Financial Reporting***

Therehave been no changes in our internal controls over financial reporting duringthe quarter ended June  30, 2007, thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

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**PART II -OTHER INFORMATION**

**ITEM 1A**.   **Risk Factors.**

There have been nomaterial changes in our Risk Factors from those disclosed in our 2006 AnnualReport on Form 10-K.

### **ITEM 4:**                **Submission of Matters to a Vote of Security Holders**

Our annual meeting of theshareholders was held on June 6, 2007, at which the shareholders elected thedirectors named below.  The results ofthe voting at the annual meeting were as follows:
| Election of Directors | ** ** | **For**    | ** ** | **Withhold  Authority** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------|------------|
|                            |       |       |       |                    |       |
| Tom W. Olofson                  |       | 17,587,564 |       | 213,358                 |       |
| Christopher E. Olofson          |       | 17,642,740 |       | 158,182                 |       |
| W. Bryan Satterlee              |       | 17,024,761 |       | 776,161                 |       |
| Edward M. Connolly, Jr.         |       | 17,007,143 |       | 793,779                 |       |
| James A. Byrnes                 |       | 17,032,693 |       | 768,229                 |       |
| Joel Pelofsky                   |       | 17,032,661 |       | 768,261                 |       |

 

No other matters weresubmitted to a vote of the shareholders at the annual meeting.

**ITEM 6**.                 **Exhibits.**
| 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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##### **SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                                       |   | **Epiq Systems, Inc.**                            |
|---------------------------------------|--------|---------------------------------------------------|
| ** **                            |   |                                              |
| Date:   July  30, 2007 |   | /s/ Tom W. Olofson                                |   |
|                                  |   | Tom W. Olofson                                    |
|                                  |   | Chairman of the Board                             |
|                                  |   | Chief Executive Officer                           |
|                                  |   | Director                                          |
|                                  |   | (Principal Executive Officer)                     |
|                                  |   |                                              |
|                                  |   |                                              |
| Date:   July  30, 2007 |   | /s/ Elizabeth M. Braham                           |   |
|                                  |   | Elizabeth M. Braham                               |
|                                  |   | Executive Vice President, Chief Financial Officer |
|                                  |   | (Principal Financial Officer)                     |
|                                  |   |                                              |
|                                  |   |                                              |
| Date:   July  30, 2007 |   | /s/ Douglas W. Fleming                            |   |
|                                  |   | Douglas W. Fleming                                |
|                                  |   | Director of Finance                               |
|                                  |   | (Principal Accounting Officer)                    |
|                                       |        |                                                   |  |  |  |

 

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