**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D. C. 20549**

**FORM 10-Q/A**

**AmendmentNo. 1**

**QuarterlyReport Under Section 13 or 15(d)of the Securities Exchange Act of 1934**

**x****  For the Quarterly Period Ended September 30, 2006**

**OR**

**o**** Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

**For thetransition period from                      to                      **

**CommissionFile 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)  |   |                                  |

 

**501Kansas Avenue, Kansas City, Kansas 66105-1300**(Address of principal executive office)

**913-621-9500**(Registrant’s telephone 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 x   No  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 AcceleratedFiler  o         AcceleratedFiler  x         Non-AcceleratedFiler  o

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

Yes o   Nox

The number of sharesoutstanding of registrant’s common stock at November 1, 2006:
| Class                         | ** ** | **Outstanding** | ** ** |
|-------------------------------|------------|-----------------|------------|
| Common Stock,  $.01 par value |       | 19,475,194      |       |

 

 

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**EPIQ SYSTEMS, INC.FORM 10-Q/AQUARTER ENDED SEPTEMBER 30, 2006**

**CONTENTS**
|                                     | ** ** | ** **                                                                                                                        | ** ** | **Page** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **                          |       |                                                                                                                              |       |     |
| **PART I -  FINANCIAL INFORMATION** |       |                                                                                                                              |
| ** **                          |       |                                                                                                                              |
| Item 1.                             |       | Condensed Consolidated Financial Statements                                                                                       |       | 1        |
|                                |       |                                                                                                                              |       |     |
|                                |       | Condensed  Consolidated Statements of Income (Restated)–Three and nine months ended  September 30, 2006 and 2005 (Unaudited) |       | 1        |
|                                |       |                                                                                                                              |       |     |
|                                |       | Condensed  Consolidated Balance Sheets–September 30, 2006 and December 31, 2005  (Unaudited)                                 |       | 3        |
|                                |       |                                                                                                                              |       |     |
|                                |       | Condensed  Consolidated Statements of Cash Flows–Nine months ended September 30, 2006 and  2005 (Unaudited)                  |       | 4        |
|                                |       |                                                                                                                              |       |     |
|                                |       | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                 |       | 6        |
|                                |       |                                                                                                                              |       |     |
| Item 2.                             |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                       |       | 26       |
|                                |       |                                                                                                                              |       |     |
| Item 3.                             |       | Quantitative and Qualitative Disclosures about Market  Risk                                                                       |       | 41       |
|                                |       |                                                                                                                              |       |     |
| Item 4.                             |       | Controls and Procedures                                                                                                           |       | 41       |
|                                |       |                                                                                                                              |       |     |
| **PART  II - OTHER INFORMATION**    |       |                                                                                                                              |
|                                |       |                                                                                                                              |       |     |
| Item 1A.                            |       | Risk Factors                                                                                                                      |       | 42       |
|                                |       |                                                                                                                              |       |     |
| Item 6.                             |       | Exhibits                                                                                                                          |       | 42       |
|                                |       |                                                                                                                              |       |     |
| Signatures                          |       |                                                                                                                              |       | 43       |
|                                     |            |                                                                                                                                   |            |          |  |  |  |  |

 

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**Explanatory Note**

EpiqSystems, Inc. is filing this Amendment No. 1 to its Quarterly Report on Form10-Q for the three and nine months ended September 30, 2006 (Form 10-Q/A) torestate our previously issued financial statements initially filed with theSecurities and Exchange Commission (SEC) on November 14, 2006, as discussed innote 10 to the condensed consolidated financial statements.

This Form 10-Q/A amends and restates Items 1, 2 and 4 of Part I andItem 3 of Part II of the original filing to reflect the effects of thisrestatement.  The remaining Itemscontained in this Form 10-Q/A consist of all other Items contained in theoriginal Form 10-Q for the three and nine months ended September 30, 2006.  These remaining Items are not amended by thisfiling.  Except for the foregoing amendedinformation, this 10-Q/A continues to describe conditions as of the date of theoriginal filing, and the Company has not updated the disclosures containedherein to reflect events that occurred at a later date.  In addition, pursuant to the rules of theSEC, Exhibits 31.1, 31.2, 32.1, and 32.2 of the original filing have beenamended to contain currently dated certifications from our Chief ExecutiveOfficer and Chief Financial Officer.  Theupdated certifications are attached to this Form 10-Q/A as Exhibits 31.1, 31.2,32.1, and 32.2.

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**PART I -FINANCIAL INFORMATION**

**ITEM 1.          CondensedConsolidated Financial Statements.**

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

| ** **                                                                                                                                                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                  | ** ** | **(As Restated,  see note 10)**       | ** ** | **(As Restated,  see note 10)**      | ** ** | **(As Restated,  see note 10)** | ** ** | **(As Restated,  see note 10)** | ** ** |
| **REVENUE:**                                                                                                                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Case management  services                                                                                                                                                   |       | $                                                    | 16,980     |                                                | $          | 12,197 |   | $ | 54,064 |   | $ | 38,132 |   |
| Case management  bundled software license, software upgrade and postcontract customer support  services                                                                     |       | 12,818                                               |       | 550                                                 |       | 80,511 |   | 1,146 |   |
| Document  management services                                                                                                                                               |       | 4,591                                                |       | 7,373                                               |       | 26,495 |   | 19,895 |   |
| Operating  revenue before reimbursed direct costs                                                                                                                           |       | 34,389                                               |       | 20,120                                              |       | 161,070 |   | 59,173 |   |
| Operating  revenue from reimbursed direct costs                                                                                                                             |       | 4,643                                                |       | 6,174                                               |       | 16,676 |   | 17,118 |   |
| Total Revenue                                                                                                                                                               |       | 39,032                                               |       | 26,294                                              |       | 177,746 |   | 76,291 |   |
|                                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **COSTS AND EXPENSES:**                                                                                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Direct costs of  services (exclusive of depreciation and amortization shown separately below)                                                                               |       | 8,299                                                |       | 7,599                                               |       | 33,427 |   | 21,941 |   |
| Direct costs of  bundled software license, software upgrade and postcontract customer support  services (exclusive of depreciation and amortization shown separately below) |       | 961                                                  |       | 977                                                 |       | 2,976 |   | 2,837 |   |
| Reimbursed  direct costs                                                                                                                                                    |       | 4,685                                                |       | 6,199                                               |       | 16,852 |   | 17,296 |   |
| General and  administrative                                                                                                                                                 |       | 12,411                                               |       | 7,035                                               |       | 36,469 |   | 23,071 |   |
| Depreciation and  software and leasehold amortization                                                                                                                       |       | 2,633                                                |       | 1,732                                               |       | 7,424 |   | 5,281 |   |
| Amortization of  identifiable intangible assets                                                                                                                             |       | 3,027                                                |       | 1,442                                               |       | 8,672 |   | 4,492 |   |
| Acquisition  related                                                                                                                                                        |       | —                                               |       | 114                                                 |       | 250 |   | 114 |   |
| Total Operating  Expenses                                                                                                                                                   |       | 32,016                                               |       | 25,098                                              |       | 106,070 |   | 75,032 |   |
|                                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **INCOME FROM OPERATIONS**                                                                                                                                                  |       | 7,016                                                |       | 1,196                                               |       | 71,676 |   | 1,259 |   |
|                                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **INTEREST EXPENSE (INCOME):**                                                                                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                                                                                                                                             |       | (23                                                  | )          | (28                                                 | )          | (111 | ) | (106 | ) |
| Interest expense                                                                                                                                                            |       | 2,523                                                |       | 1,623                                               |       | 9,215 |   | 4,309 |   |
| Net Interest  Expense                                                                                                                                                       |       | 2,500                                                |       | 1,595                                               |       | 9,104 |   | 4,203 |   |
|                                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **INCOME (LOSS) FROM OPERATIONS  BEFORE INCOME TAXES**                                                                                                                      |       | 4,516                                                |       | (399                                                | )          | 62,572 |   | (2,944 | ) |
|                                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **INCOME TAX PROVISION (BENEFIT)**                                                                                                                                          |       | 1,835                                                |       | (894                                                | )          | 25,348 |   | (3,147 | ) |
|                                                                                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **NET INCOME**                                                                                                                                                              |       | $                                                    | 2,681      |                                                | $          | 495 |   | $ | 37,224 |   | $ | 203 |   |

 

1

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##### **EPIQ SYSTEMS, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(In Thousands, Except Per Share Data)(Unaudited)(Continued)**

| ** **                                       | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(As Restated,  see note 10)**       | ** ** | **(As Restated,  see note 10)**      | ** ** | **(As Restated,  see note 10)** | ** ** | **(As Restated,  see note 10)** | ** ** |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| **NET INCOME PER SHARE  INFORMATION:**           |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                            |       | $                                                    | 0.14       |                                                | $          | 0.03 |   | $ | 1.92 |   | $ | 0.01 |   |
| Diluted                                          |       | $                                                    | 0.13       |                                                | $          | 0.03 |   | $ | 1.65 |   | $ | 0.01 |   |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES  OUTSTANDING:** |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                            |       | 19,442                                               |       | 17,942                                              |       | 19,372 |   | 17,911 |   |
| Diluted                                          |       | 22,911                                               |       | 18,861                                              |       | 23,065 |   | 18,402 |   |

 

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

2

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**EPIQSYSTEMS, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(In Thousands, Except Share Data)(Unaudited)**

 
| ** **                                                                                                                                                                                | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| **CURRENT  ASSETS:**                                                                                                                                                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Cash and cash equivalents                                                                                                                                                                 |       | $                                | 4,026      |                            | $          | 13,563 |   |
| Trade accounts receivable, less allowance for doubtful accounts  of $1,739 and $3,481, respectively                                                                                       |       | 32,634                           |       | 33,504                          |       |
| Prepaid expenses                                                                                                                                                                          |       | 2,249                            |       | 2,818                           |       |
| Income taxes refundable                                                                                                                                                                   |       | 705                              |       | 4,643                           |       |
| Deferred income taxes                                                                                                                                                                     |       | 1,725                            |       | 25,579                          |       |
| Other current assets                                                                                                                                                                      |       | 578                              |       | 85                              |       |
| Total Current Assets                                                                                                                                                                      |       | 41,917                           |       | 80,192                          |       |
|                                                                                                                                                                                      |       |                             |       |                            |       |
| **LONG-TERM  ASSETS:**                                                                                                                                                                    | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Property, equipment and leasehold improvements, net                                                                                                                                       |       | 23,186                           |       | 23,751                          |       |
| Software development costs, net                                                                                                                                                           |       | 9,343                            |       | 8,848                           |       |
| Goodwill                                                                                                                                                                                  |       | 260,834                          |       | 249,427                         |       |
| Identifiable intangible assets, net of accumulated amortization of $22,430  and $13,758, respectively                                                                                     |       | 46,797                           |       | 53,399                          |       |
| Other                                                                                                                                                                                     |       | 1,962                            |       | 2,854                           |       |
| Total Long-term Assets, net                                                                                                                                                               |       | 342,122                          |       | 338,279                         |       |
| **Total  Assets**                                                                                                                                                                         |       | $                                | 384,039    |                            | $          | 418,471 |   |
|                                                                                                                                                                                      |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| **CURRENT  LIABILITIES:**                                                                                                                                                                 | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Accounts payable                                                                                                                                                                          |       | $                                | 5,053      |                            | $          | 7,954 |   |
| Customer deposits                                                                                                                                                                         |       | 2,322                            |       | 2,196                           |       |
| Accrued compensation                                                                                                                                                                      |       | 1,907                            |       | 3,944                           |       |
| Other accrued expenses                                                                                                                                                                    |       | 3,760                            |       | 3,322                           |       |
| Deferred revenue                                                                                                                                                                          |       | 826                              |       | 60,224                          |       |
| Current maturities of long-term obligations                                                                                                                                               |       | 72,000                           |       | 27,642                          |       |
| Total Current Liabilities                                                                                                                                                                 |       | 85,868                           |       | 105,282                         |       |
|                                                                                                                                                                                      |       |                             |       |                            |       |
| **LONG-TERM  LIABILITIES:**                                                                                                                                                               | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Long-term obligations (excluding current maturities)                                                                                                                                      |       | 88,206                           |       | 145,906                         |       |
| Deferred income taxes                                                                                                                                                                     |       | 26,077                           |       | 26,815                          |       |
| Other long-term liabilities                                                                                                                                                               |       | 1,454                            |       | —                          |       |
| Total Long-term Liabilities                                                                                                                                                               |       | 115,737                          |       | 172,721                         |       |
|                                                                                                                                                                                      |       |                             |       |                            |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                                                                        | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Common stock - $0.01 par value; 50,000,000 shares authorized;  issued and  outstanding – 19,475,194 and 19,253,466  shares at September 30, 2006 and December 31, 2005, respectively |       | 194                              |       | 193                             |       |
| Additional paid-in capital                                                                                                                                                                |       | 133,224                          |       | 128,484                         |       |
| Retained earnings                                                                                                                                                                         |       | 49,015                           |       | 11,791                          |       |
| Accumulated other comprehensive income, net                                                                                                                                               |       | 1                                |       | —                          |       |
| Total Stockholders’ Equity                                                                                                                                                           |       | 182,434                          |       | 140,468                         |       |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                                                      |       | $                                | 384,039    |                            | $          | 418,471 |   |

 

**See accompanying notes to condensed consolidatedfinancial statements.**

3

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**EPIQ SYSTEMS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**
| ** **                                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                                |       |                                                    |       |   |   |
| Net income                                                                                                |       | $                                                       | 37,224     |   | $ | 203 |   |
| Adjustments to  reconcile net income to net cash from operating activities:                               |       |                                                    |       |   |   |
| Share-based  compensation expense                                                                         |       | 1,671                                                   |       | — |   |
| Provision  (benefit) for deferred income taxes                                                            |       | 22,761                                                  |       | (7,428 | ) |
| Depreciation and  software and leasehold amortization                                                     |       | 7,424                                                   |       | 5,281 |   |
| Loan fee  amortization                                                                                    |       | 1,077                                                   |       | 833 |   |
| Amortization of  identifiable intangible assets                                                           |       | 8,672                                                   |       | 4,492 |   |
| Other                                                                                                     |       | (839                                                    | )          | 1,735 |   |
| Changes in  operating assets and liabilities, net of effects from business acquisition:                   |       |                                                    |       |   |   |
| Trade accounts  receivable                                                                                |       | 2,632                                                   |       | (8,632 | ) |
| Prepaid expenses  and other assets                                                                        |       | 28                                                      |       | (1,374 | ) |
| Accounts payable  and other liabilities                                                                   |       | (1,878                                                  | )          | 968 |   |
| Deferred revenue                                                                                          |       | (59,398                                                 | )          | 19,724 |   |
| Excess tax  benefit related to share-based compensation                                                   |       | (154                                                    | )          | — |   |
| Income taxes  (including $469 and $415 of tax benefit related to share-based compensation,  respectively) |       | 4,355                                                   |       | (2,065 | ) |
| Net cash  provided by operating activities                                                                |       | 23,575                                                  |       | 13,737 |   |
|                                                                                                      |       |                                                    |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                                                       |       | (5,182                                                  | )          | (3,035 | ) |
| Software  development costs                                                                               |       | (3,275                                                  | )          | (1,480 | ) |
| Cash paid for  acquisition of business                                                                    |       | (3,586                                                  | )          | (650 | ) |
| Purchase of  short-term investments                                                                       |       | —                                                  |       | (6,000 | ) |
| Sale of  short-term investments                                                                           |       | —                                                  |       | 6,000 |   |
| Other                                                                                                     |       | (45                                                     | )          | 502 |   |
| Net cash used in  investing activities                                                                    |       | (12,088                                                 | )          | (4,663 | ) |
|                                                                                                      |       |                                                    |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Proceeds from  long-term debt borrowings                                                                  |       | 3,000                                                   |       | 6,000 |   |
| Principal  payments under long-term debt obligations                                                      |       | (26,643                                                 | )          | (16,104 | ) |
| Excess tax  benefit related to share-based compensation                                                   |       | 154                                                     |       | — |   |
| Proceeds from  exercise of share options                                                                  |       | 2,602                                                   |       | 903 |   |
| Other                                                                                                     |       | (137                                                    | )          | — |   |
| Net cash used in  financing activities                                                                    |       | (21,024                                                 | )          | (9,201 | ) |
|                                                                                                      |       |                                                    |       |   |   |
| **NET DECREASE IN CASH AND CASH  EQUIVALENTS**                                                            |       | (9,537                                                  | )          | (127 | ) |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR**                                                         |       | 13,563                                                  |       | 13,330 |   |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                                             |       | $                                                       | 4,026      |   | $ | 13,203 |   |
| ** **                                                                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION:**                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Interest paid                                                                                             |       | $                                                       | 7,730      |   | $ | 2,649 |   |
| Income taxes (received)  paid, net                                                                        |       | $                                                       | (1,758     | ) | $ | 6,339 |   |

 

4

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**SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ANDFINANCING ACTIVITIES:**

 

We had propertyand equipment purchases accrued in accounts payable of approximately $0.4million as of September 30, 2006.

During the ninemonths ended September 30, 2006, we incurred an obligation in a businessacquisition, classified as a component of both current maturities of long-termobligations and long-term obligations, of approximately $10.2 million.

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

5

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**EPIQSYSTEMS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**NOTE1:   NATURE OF OPERATIONS AND SUMMARY OFRECENTLY ADOPTED ACCOUNTING POLICIES**

***Principlesof Consolidation***

The condensedconsolidated financial statements include the accounts of Epiq Systems, Inc.(Epiq) and its wholly-owned subsidiaries. All significant intercompany transactions and balances have beeneliminated in consolidation.

***Natureof Operations***

Epiq is a nationalprovider of technology-based solutions for the legal and fiduciary servicesindustries. Our solutions assist clients with the administration of complexlegal proceedings, including electronic discovery, bankruptcy administrationand class action administration. Our clients include leading law firms, corporatelegal departments, bankruptcy trustees, and other professional advisors whorequire sophisticated case administration and document management capabilities,extensive subject matter expertise and a high service capacity. We provideclients with an integrated offering of both proprietary technology andvalue-added services that comprehensively address their case and documentmanagement business requirements.

***ComprehensiveIncome***

Statement of Financial Accounting Standards No. 130, *Reporting Comprehensive Income*, establishes requirements forreporting and display of comprehensive income and its components.  Our total comprehensive income, whichincludes net income and foreign currency translation adjustments, was asfollows (in thousands):
| ** **                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                    |       | $                                                    | 2,681      |                                                | $          | 495 |   | $ | 37,224 |   | $ | 203 |   |
| Foreign currency  translation adjustment, net |       | 2                                                    |       | —                                              |       | 1 |   | — |   |
| Total comprehensive  income                   |       | $                                                    | 2,683      |                                                | $          | 495 |   | $ | 37,225 |   | $ | 203 |   |

 

***Revenue Recognition***

We have agreements with clients pursuant to which wedeliver various case management and document management services each month.

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;

·                  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 to parties of interest in bankruptcy and class actionmatters, including media campaign and advertising management in which wecoordinate notification through various media outlets, such as print, radio andtelevision, to potential parties of interest for a particular clientengagement; and

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

6

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*Non-Software Arrangements*

Case and document management servicesrelated to electronic discovery, corporate restructuring, and class actionrevenue, which are billed based on volume, are evaluated pursuant to EmergingIssues Task Force (EITF) 00-21, *RevenueArrangements with Multiple Deliverables*.  For each of these contractual arrangements,we have identified the following deliverables and/or services:

·                  Electronic Discovery

·               Data processing

·               Hosting

·                  Corporate Restructuring

·               Consulting

·               Claims management

·               Printing and reproduction

·               Mailing and noticing

·               Document management

·                  Class Action

·               Consulting

·               Notice campaigns

·               Toll free customer support

·               Web site design/hosting

·               Claims administration

·               Distribution

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.

*Software Arrangements*

For our Chapter 7 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 Chapter 7 related arrangements with financialinstitutions, we earn contingent monthly fees from the financial institutionrelated to the software license, hardware lease, hardware maintenance, and PCSservices.  We account for the softwarelicense and PCS service elements in accordance with Statement of Position 97-2,*Software Revenue Recognition* (SOP97-2).  Since we have not establishedvendor specific objective evidence (VSOE) of the fair value of the softwarelicense, we do not recognize 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 operations as a component of “Casemanagement bundled software license, software upgrade and postcontract customersupport services” revenue.  Revenuerelated to PCS services is entirely contingent on the placement of liquidatedestate deposits by the trustee with the financial institution.  Accordingly, we recognize this contingentusage based revenue consistent with the guidance provided by the AmericanInstitute of Certified Public Accountants’ Technical Practice Aid (TPA)5100.76, *Fair Value in Multiple-Element Arrangements ThatInclude Contingent Usage-Based Fees and Software Revenue Recognition*as the fee becomes fixed or determinable at the time actual usage occurs andcollectibility is probable.  This occursmonthly as a result of the computation, billing and collection of monthlydeposit fees contractually agreed to.  Atthat time, we have also satisfied the other revenue recognition criteriacontained in SOP 97-2, since we have persuasive 

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evidence that an arrangement exists, services havebeen rendered, the price is fixed and determinable, and collectibility isreasonably assured.

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 a lease.  As the hardware maintenance arrangement is anexecutory contract similar to an operating lease, we use guidance related tocontingent rentals in operating lease arrangements for hardware maintenance aswell as for the hardware lease.  Sinceall of the payments under all of our arrangements are contingent upon the levelof trustee deposits and the delivery of upgrades and other services and thereremain important uncertainties regarding the amount of unreimbursable costs yetto be incurred by us, we account for the hardware lease as an operating leasein accordance with SFAS 13, *Accounting forLeases*.  Therefore, all leasepayments, based on the estimated fair value of hardware provided, wereaccounted for as contingent rentals under EITF Issue No. 98-9, *Accounting for Contingent Rent* and SABTopic 13, which requires that we recognize rental income when the changes inthe factor on which the contingent lease payment is based actually occur.  This occurred 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 operations as a component of “Case managementservices” revenue.

Effective October 1, 2003, we entered into anarrangement with our primary depository financial institution under which wedelivered two specified upgrades annually with the last specified upgradeoccurring in the second quarter of 2006. This arrangement included specific pricing for each software upgrade andcertain special projects in addition to the contingent deposit-based pricingrelated to the software license, hardware, hardware maintenance, and PCS toeach trustee client.  Therefore, the software upgrades and specialprojects are part of a bundled arrangement. Each software upgrade is considered a separate and discrete product and,as we do not sell each software upgrade on a standalone basis, we were unableto establish VSOE of the fair value of the software upgrades.  As a result, the licensed software, softwareupgrade, special projects and PCS are a combined unit of accounting.  Revenue for this combined unit of accounting,when recognized, is included as a component of case management servicesrevenue.  Since we did not haveVSOE of the fair value of each separate upgrade, we deferred recognition ofsubstantially all revenue under this arrangement until the final upgrade wasdelivered.  The ongoing costs related tothis arrangement were recognized as expense when incurred.  On delivery of the final upgrade during thesecond quarter of 2006, the only remaining undelivered element was PCSservices.  In accordance with SOP 97-2,on delivery of the final software upgrade, we recognized revenue previouslydeferred on a proportionate basis over the three year term of thecontract.  As the contract commencedOctober 1, 2003 and terminated September 30, 2006, we recognized approximately$60.1 million of net deferred revenue during the second quarter of 2006 and werecognized approximately $6.0 million of deferred revenue related to thisarrangement during the third quarter of 2006.

*Reimbursements*

Our case and document management businesses both haverevenue related to the reimbursement of certain costs, primarily postage.  Consistent with guidance provided by EITF No.01-14, *Income Statement Characterization of ReimbursementsReceived for “Out-of-Pocket” Expenses Incurred*, reimbursed postageand other reimbursable direct costs are recorded gross as revenue fromreimbursed direct costs and as reimbursed direct costs.

***Share-based Compensation***

On January 1, 2006, weadopted Statement of Financial Accounting Standards No. 123 (revised 2004)(SFAS No. 123R), *Share-Based Payment*.  SFAS No. 123R established standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services or incurs liabilities in exchange for goods or servicesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments.  SFAS No. 123R requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award and torecognize that cost over the period during which an employee is required toprovide service in exchange for the award.

We elected to adopt SFAS No. 123R using the modifiedversion of prospective application. Under the modified version of prospective application, we haverecognized compensation costs related to share-based compensation beginningwith the quarter ended March 31, 2006. We recognize this expense on a straight-line basis over the requisiteservice period of the last separately vesting portion of the award.  Prior to 2006, we accounted for stock-basedcompensation awards under the intrinsic method of Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees,*whichrequired compensation cost to be recognized based on the excess, if any,between the quoted market price at the date of grant and the amount an employeemust pay to acquire stock.  Compensationcosts related to share-based compensation for periods ended 

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on or before December 31, 2005 are reflected on a proforma basis in note 6 of these condensed consolidated financial statements.

***Recent Accounting Pronouncements***

In September 2006, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 157, *Fair Value Measurements*(SFAS 157).  SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. We do not anticipate that adoption of this statement will have amaterial impact on our consolidated financial statements.

In June 2006, the FASBissued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48).  FIN48 applies to tax positions accounted for under Statement of FinancialAccounting Standard No. 109, *Accounting for IncomeTaxes*.  A tax positionincludes a current or future reduction in taxable income reported or expectedto be reported on a tax return, the decision not to report a transaction in atax return, and an assertion that a company is not subject to taxation.  FIN 48 requires that a tax position berecognized only if it is more-likely-than-not to be sustained based solely onits technical merits as of the reporting date. A recognized tax benefit is measured based on the largest benefit thatis more than 50 percent likely to be realized. FIN 48 is effective for an entity’s first fiscal year that begins afterDecember 15, 2006.  At adoption, anynecessary adjustment to our financial statements will be recorded directly tothe beginning balance of retained earnings in the period of adoption andreported as a change in accounting principle. At this time, we are unable to predict the impact, if any, that adoptionof FIN 48 will have on our consolidated financial statements.

In June 2006, the EITFreached a consensus regarding EITF 05-1, *Accounting for theConversion of an Instrument That Becomes Convertible Upon the Issuer’s Exerciseof a Call Option*.  EITF 05-1pertains only to debt instruments that become convertible at the time theissuer calls the debt, but are not convertible before the call isexercised.  Conversions of these instrumentstriggered by the call option would be accounted for as debt conversions andrecognized as debt extinguishments if the debt instrument did not contain asubstantive conversion feature at issuance. EITF 05-1 will be effective for conversions that occur as a result ofthe issuer’s exercise of a call option in the interim or annual periodbeginning after September 28, 2006. We do not anticipate that adoption of thisstatement will have a material impact on our consolidated financial statements.

In February 2006, theFASB issued Statement of Financial Accounting Standard No. 155, *Accounting for Certain Hybrid Financial Instruments—an amendment ofFASB Statements No. 133 and 140* (SFAS 155).  SFAS 155 allows an entity to make anirrevocable election to measure a financial instrument with an embeddedderivative, referred to as a hybrid financial instrument, at fair value in itsentirety rather than bifurcating and separately valuing the embedded derivativeinstrument.  SFAS 155 is effective forall financial instruments acquired, issued, or subject to a remeasurement (newbasis) event occurring after the beginning of an entity’s first fiscal yearthat begins after September 15, 2006.  Wedo not anticipate that adoption of this statement will have a material impacton our consolidated financial statements.

**NOTE2:   INTERIM FINANCIAL STATEMENTS**

The accompanying condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America (GAAP)and with the rules and regulations for reporting on Form 10-Q for interimfinancial statements.  Accordingly, theydo not include certain information and disclosures required for comprehensiveannual financial statements.  The interimfinancial statements have not been audited. The financial statements should be read in conjunction with our auditedfinancial statements and accompanying notes, which are included in our Form10-K/A for the year ended December 31, 2005.

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 September 30, 2006,the results of operations for the three and nine month periods ended September30, 2006 and 2005, and cash flows for the nine month periods ended September30, 2006 and 2005.

The results of operationsfor the three and nine month periods ended September 30, 2006 are notnecessarily indicative of the results to be expected for the entire year.

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

Amortizing identifiableintangible assets at September 30, 2006 and December 31, 2005 consisted of thefollowing (in thousands):
| ** **             | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer contracts     |       | $                                | 39,287     |                            | $          | 11,010 |   | $ | 37,313 |   | $ | 6,170 |   |
| Trade names            |       | 2,414                            |       | 2,196                           |       | 2,319 |   | 1,578 |   |
| Non-compete agreements |       | 27,526                           |       | 9,224                           |       | 27,525 |   | 6,010 |   |
|                   |       | $                                | 69,227     |                            | $          | 22,430 |   | $ | 67,157 |   | $ | 13,758 |   |

 

Aggregate amortizationexpense related to identifiable intangible assets was $3.0 million and $1.4million for the three month periods ended September 30, 2006 and 2005,respectively and was $8.7 million and $4.5 million for the nine month periodsended September 30, 2006 and 2005, respectively.  Amortization expense related to identifiableintangible assets for 2006 and the following five years is estimated as follows(in thousands):
| **Year Ending  December 31,** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| 2006                                    |       | $                                    | 11,620     |   |
| 2007                                    |       | 9,531                                |       |
| 2008                                    |       | 8,361                                |       |
| 2009                                    |       | 6,829                                |       |
| 2010                                    |       | 6,439                                |       |
| 2011                                    |       | 4,706                                |       |
|                                    |       |                                 |       |
|                                    |       | $                                    | 47,486     |   |

 

Changes in the carryingamounts of goodwill by segment are as follows (in thousands):
| ** **                                           | ** ** | **Nine Month Period Ended September 30, 2006** | ** ** | **Year Ended December 31, 2005** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **Case  Management**                                                         | ** ** | **Document  Management**                             | ** ** | **Total** | ** ** | **Case  Management** | ** ** | **Document  Management** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | ** **                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of  period                        |       | $                                                                            | 200,936    |                                                 | $          | 48,491 |   | $ | 249,427 |   | $ | 106,371 |   | $ | 41,357 |   | $ | 147,728 |   |
| Goodwill acquired  during the period and adjustments |       | 11,430                                                                       |       | (23                                                  | )          | 11,407 |   | 94,565 |   | 7,134 |   | 101,699 |   |
| Balance, end of period                               |       | $                                                                            | 212,366    |                                                 | $          | 48,468 |   | $ | 260,834 |   | $ | 200,936 |   | $ | 48,491 |   | $ | 249,427 |   |

 

We assess goodwill forimpairment as of each July 31 and also at any other date when events or changesin circumstances indicate that the carrying value of these assets may exceedtheir fair value.  We did not recognizeany impairment loss during the three and nine month periods ended September 30,2006 and 2005.

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### **NOTE 4:  BUSINESS ACQUISITIONS**

***EpiqAdvisory Services, Inc.***

On May 16, 2006, ourwholly-owned subsidiary, Epiq Advisory Services Inc., in an asset acquisition,acquired the claims preference business of Gazes LLC.  The total value of the transaction was $13.8million, consisting of $3.0 million of cash paid on closing, $10.2 million ofdeferred payments, and $0.6 million of capitalized transaction costs.  If certain income targets are satisfied, wemay be required to make additional payments, which would be recorded ascompensation expense, to the seller.  Thepreliminary allocation of the purchase price is as follows:  less than $0.1 million to tangible netassets, approximately $2.4 million to customer contracts, amortizable on astraight-line basis over two years, and approximately $11.4 million togoodwill.  The purchase price in excessof the tax basis of the assets is expected to be deductible for taxpurposes.  This acquisition furtherexpands our case management service offerings.

The acquisition wasaccounted for using the purchase method of accounting with the operatingresults included in the accompanying condensed consolidated financialstatements from the date of acquisition. The operating results of Epiq Advisory Services are included within ourcase management segment.

***nMatrix***

On November 15, 2005,Epiq, acting through a wholly-owned subsidiary, acquired all the issued andoutstanding shares of capital stock of nMatrix, Inc., nMatrix Australia Pty.Ltd., and nMatrix Ltd. (collectively, nMatrix) for approximately $126.3million, including capitalized acquisition costs.  The electronic discovery services of nMatrixfurther expands the service offerings of our legal services business.  The purchase price consisted of cash of$100.0 million and approximately 1.2 million shares of our common stock.  The fair value of our common stock issued,calculated based upon the five-day average of the closing price of the commonstock two days before and two days after the acquisition was consummated, wasapproximately $24.2 million.  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 $20.35 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.  This guarantee terminates as of the close ofbusiness on the date that is after any 15 trading days on which the sellingshareholder may lawfully sell shares under a registration statement and thelast sale price for our common stock has been equal to or greater than the$20.35.  Based on our September 30, 2006closing price of $14.71 per share, as of September 30, 2006 the guaranteeamount would be approximately $6.9 million. A liability will not be recorded for this guarantee until thecontingency is resolved.  If a payment ismade under this guarantee, we will reduce the equity proceeds recorded as apart of the acquisition transaction. Based on our valuation, the purchase price has been allocated as follows(in thousands):
| Accounts  receivable    |   | $       | 12,615  |   |
|-------------------------|--------|---------|---------|--------|
| Other current  assets   |   | 2,926   |    |
| Property and  software  |   | 7,236   |    |
| Trade names             |   | 569     |    |
| Customer  relationships |   | 24,614  |    |
| Non-compete  agreements |   | 6,676   |    |
| Current  liabilities    |   | (6,197  | )       |
| Deferred tax  liability |   | (16,807 | )       |
| Goodwill                |   | 94,664  |    |
|                    |   |    |    |
| Total purchase price    |   | $       | 126,296 |   |

 

Trade names, customerrelationships, and the non-compete agreements are amortized using thestraight-line method over one year, eight years, and five years, respectively.  The excess purchase price of $94.7 millionwas allocated to goodwill and is not amortized but will be reviewed forimpairment annually and between annual reviews if events or changes incircumstances indicate that the asset might be impaired.  The purchase price in excess of the tax basisof the assets, primarily allocated to identifiable intangible assets andgoodwill, is not expected to be deductible for tax purposes.  Of our 1.2 million common shares issued asconsideration, approximately 246,000 are held in escrow.  On submission of properly approvedindemnification claims, the escrow agent will sell sufficient shares to pay theindemnification claim.  As of September30, 2006, we have not submitted any claims related to this escrow.  This escrow arrangement terminates May 14,2007, at which time any of our common shares that have not been sold to payclaims will be distributed to the seller. Also, $4.0 million of the cash consideration was initially placed in aseparate escrow pending collection of certain pre-acquisition receivables.  

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Each month, a portion ofthis escrow is released to the seller based on the prior month’s collection ofthese pre-acquisition receivables.  As ofSeptember 30, 2006, approximately $0.3 million remained in this escrowaccount.  This escrow arrangementterminates following the payment for collections made through September 2006 ofthese pre-acquisition receivables, at which time any amount that remains inescrow will be distributed to Epiq.

The acquisition was accountedfor using the purchase method of accounting with the operating results includedin the accompanying condensed consolidated financial statements from the dateof acquisition.  The operating results ofnMatrix are included within our case management segment.

***Hilsoft, Inc.***

On October 20, 2005, we acquired for cash all theissued and outstanding shares of capital stock of Hilsoft, Inc.  Thespecialty legal notification services of Hilsoft further expand our documentmanagement capabilities.  Thetotal value of the transaction, including capitalized transaction costs, was$9.3 million.  If certain revenueobjectives are satisfied, we will be required to make additional payments of upto $3.0 million.

The acquisition wasaccounted for using the purchase method of accounting with the operatingresults included in the accompanying condensed consolidated financialstatements from the date of acquisition. The operating results are included within our document management segment.

***ProForma Results***

Pro forma results ofoperations assuming the above acquisitions were made at the beginning of 2005are shown below (in thousands, except per share data):
| ** **                   | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2005**                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                         |       |                                                 |       |                                                |       |   |   |
| Total revenue                |       | $                                                    | 36,312     |                                                | $          | 178,958 |   | $ | 103,328 |   |
|                         |       |                                                 |       |                                                |       |   |   |
| Net income  (loss)           |       | $                                                    | 573        |                                                | $          | 37,126 |   | $ | (168 | ) |
| Net income  (loss) per share |       |                                                 |       |                                                |       |   |   |
| Basic                        |       | $                                                    | 0.03       |                                                | $          | 1.92 |   | $ | (0.01 | ) |
| Diluted                      |       | $                                                    | 0.03       |                                                | $          | 1.65 |   | $ | (0.01 | ) |

 

Pro forma adjustmentsinclude estimated amortization expense, interest expense, managementcompensation and income taxes.  The proforma information is not necessarily indicative of what would have occurred ifthe acquisitions had been completed on that date nor is it necessarilyindicative of future operating results.

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

The following is asummary of indebtedness outstanding (in thousands):
|                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Senior term loan                                                     |       | $                      | 15,000     |                  | $          | 25,000 |   |
| Senior revolving loan                                                |       | 82,028                 |       | 93,028                |       |
| Contingent convertible  subordinated debt, including embedded option |       | 51,049                 |       | 51,326                |       |
| Capital leases                                                       |       | 31                     |       | 972                   |       |
| Deferred acquisition  price                                          |       | 12,098                 |       | 3,222                 |       |
| Total indebtedness                                                   |       | $                      | 160,206    |                  | $          | 173,548 |   |

 

***CreditFacilities***

Wehave a credit facility with KeyBank National Association as administrativeagent.  At inception, this facilityconsisted of a $25.0 million senior term loan, maturing in August 2006,and a $100.0 million senior revolving loan, maturing in November 2008.  During 2006, we repaid $10.0 million of thesenior term loan and, in June 2006, our credit facility was amended to extendthe maturity of the outstanding senior term loan balance to June 30, 2007.  The senior term loan does not have anyrequired amortizing payments.  During theterm of the loan we have the right, subject to compliance with our covenants,to increase the senior revolving loan to $175.0 million.

The credit facility issecured by liens on our real property and a significant portion of our personalproperty.  As of September 30, 2006, ourborrowings under the credit facility totaled $97.0 million, consisting of $15.0million under the senior term loan and $82.0 million under the senior revolvingloan.  Interest on the credit facility isgenerally based on a spread over the LIBOR rate.  Effective April 16, 2007, the calculation ofthe interest rate for the senior term loan will be adjusted to increase thespread over the LIBOR rate by 2%.  As ofSeptember 30, 2006, the interest rate charged on outstanding borrowings rangedfrom 8.3% to 9.5%.

***ContingentConvertible Subordinated Debt***

During June 2004, weissued $50.0 million of contingent convertible subordinated notes.  Net proceeds of $47.4 million were used torepay and terminate an outstanding subordinated term loan and to pay in fullour then outstanding revolving loan balance. The contingency has been satisfied, and the notes may, at the option ofthe holders, be converted into shares of our common stock at any time. Theseconvertible subordinated notes:

·                  bear interest at a fixed rate of 4%per annum, payable quarterly;

·                  are convertible into shares of ourcommon stock at a price of $17.50 per share; and

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

If all notes wereconverted, the notes would convert into approximately 2.9 million shares of ourcommon stock.  If we change our capitalstructure (for example, through a stock dividend or stock split) while thenotes are outstanding, the conversion price will be adjusted on a consistentbasis and, accordingly, the number of shares of common stock we would issue onconversion would be adjusted.

The holders of the noteshave the right to extend the maturity of the notes for a period not to exceedthree years.  Under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,the right to extend the maturity of the notes represents an embedded optionsubject to bifurcation.  The embeddedoption was initially valued at $1.2 million and the convertible debt balancewas reduced by the same amount.  Theconvertible debt is accreted approximately $0.1 million each quarter such that,at the end of three years, the convertible debt balance will total $50.0million.  On our accompanying condensedconsolidated statements of income, this accretion is a component of interestexpense.  The embedded option must berevalued at each period end based on the probability weighted discounted cashflows related to the additional 4% interest rate payments that will be made ifthe convertible debt maturity is extended an additional three years.  Under this methodology, the embedded optionhas a current value of approximately $1.4 million.  On our accompanying condensed consolidatedbalance sheets, our obligation related to the embedded option has been includedas a component of the convertible note payable. For the three and nine month periods ended September 30, 2006, the valueof the embedded option decreased by approximately $0.8 million and $0.6 million,respectively, and these decreases have been included as a 

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component of interestexpense on our accompanying condensed consolidated statements of income.  The changes in carrying value of theconvertible debt and fair value of the embedded option do not affect our cashflow and, if the embedded option is exercised, the value assigned to theembedded option will be amortized as a reduction to our 4% convertible debtinterest expense over the periods payments are made.  If the option is not exercised by some or allconvertible debt holders, any remaining related value assigned to the embeddedoption will be recognized as a gain during that period.

***CovenantCompliance***

Both our credit facilityand subordinated debt contain financial covenants related to earnings beforeinterest, provision for income taxes, depreciation, amortization and otheradjustments as defined in the agreements (EBITDA) and total debt.  In addition, our credit facility alsocontains financial covenants related to senior debt, fixed charges, and workingcapital.  As a result of the restatement,which resulted in the deferral of a substantial portion of revenue related tothe 2003 Arrangement as described in note 10, we were not in compliance withthese financial covenants through March 31, 2006.  As a result of recognition of the deferredrevenue during the second and third quarters of 2006; we are in compliance withall financial covenants as of June 30 and September 30, 2006.  The deferral of revenue through March 31,2006, and the recognition of the deferred revenue during the second and thirdquarter of 2006, were not anticipated by us or the banks at the time weestablished the current financial covenants in the credit facility.  On December 14, 2006, we obtained a waiverregarding this event of noncompliance from our credit facility syndicate.  Accordingly, we have classified this debt ascurrent or long-term based on the debt’s original scheduled maturity.  As a result, as of September 30, 2006 andDecember 31, 2005, debt obligations of $82.0 million and $144.4 million, respectively,which were classified as current prior to obtaining a waiver regarding theevent of non-compliance are classified as long-term in the accompanyingcondensed consolidated balance sheets.

***DeferredAcquisition Price***

Wehave made three acquisitions, Bankruptcy Services, Hilsoft, and Epiq AdvisoryServices, for which a portion of the purchase price was deferred.  These deferred payments, which are eithernon-interest bearing or have a below market interest rate, have been discountedat imputed interest rates (Bankruptcy Services at 5% and Hilsoft and EpiqAdvisory Services at 8%).  At September30, 2006, the discounted value of the remaining note payments was approximately$12.1 million of which approximately $5.9 million was classified as a currentliability.

***ScheduledPrincipal Payments***

Ourlong-term obligations, including credit facility debt, convertible debt(including embedded option), deferred acquisition costs, and capitalizedleases, mature as follows for each twelve-month period ending September 30 (inthousands):
| 2007  |   | $      | 72,000  |   |
|-------|--------|--------|---------|--------|
| 2008  |   | 2,952  |    |
| 2009  |   | 83,435 |    |
| 2010  |   | 1,360  |    |
| 2011  |   | 459    |    |
| Total |   | $      | 160,206 |   |

 

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**NOTE6:   SHARE-BASED COMPENSATION**

During the quarter endedMarch 31, 2006, we adopted SFAS No. 123R, *Share-Based Payment*.  SFAS No. 123R establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services or incurs liabilities in exchange for goods or servicesthat are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments.  SFAS No. 123R requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award and torecognize that cost over the period during which an employee is required toprovide service in exchange for the award.

We elected to adopt SFASNo. 123R using the modified version of prospective application.  Using this method, we have recognizedcompensation costs related to share-based compensation beginning with thequarter ended March 31, 2006. Compensation costs related to share-based compensation for periods endedon or before December 31, 2005 are reflected on a pro forma basis in this noteto our condensed consolidated financial statements.  We have not made an election as to thetransition method we will use for purposes of calculating the pool of excesstax benefits available to absorb tax deficiencies recognized subsequent to theadoption of SFAS No. 123R.

As disclosed in our February 18, 2005 filing on Form8-K, during February 2005 our compensation committee approved acceleration ofthe vesting of approximately 0.5 million unvested share options, with aweighted-average exercise price of $14.28 per share, for certain employees,including an executive officer and non-employee directors.  Unvested share options to purchaseapproximately 1.2 million shares, with a weighted-average exercise price ofapproximately $15.26 per share, were not accelerated as the employees holdingthe unvested share options did not meet the criteria established by ourcompensation committee.  The decision toaccelerate the vesting of these share options and eliminate future compensationexpense was based primarily on a review of our long-term incentive programsconsidering the effect on our financial statements of the then pending changein accounting rules for share-based compensation.  This action, which had an immaterial effecton our financial statements for the year ended December 31, 2005, reduced theamount of expense we would have recognized under SFAS 123R by approximately$2.2 million (approximately $0.2 million and $0.6 million during the threemonths and nine month periods ended September 30, 2006, respectively, andapproximately $0.8 million, $0.7 million, $0.5 million and $0.2 million for theyears ending December 31, 2006, 2007, 2008, and 2009, respectively).

Our 2004 Equity Incentive Plan (the Plan), which isshareholder approved, permits us to grant up to 5 million equity-basedinstruments.  Although various forms ofequity instruments may be issued, to date we have issued only incentive shareoptions 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 2006 for the purpose ofsatisfying share option exercises.

As a result of ouradoption of SFAS No. 123R, during the three and nine month periods endedSeptember 30, 2006 we recognized expense related to share options issued priorto but unvested as of January 1, 2006 as well as expense related to shareoptions issued subsequent to January 1, 2006. For share options issued prior to but unvested as of January 1, 2006,compensation expense was based on the fair value of those share options ascalculated using the Black-Scholes option valuation model at the date the shareoptions were issued. Key assumptions for the Black-Scholes option valuationmodel include expected volatility, expected term of share options granted, theexpected risk-free interest rate, and the expected dividend rate.  The assumptions used in those fair valuecalculations have been disclosed in our Annual Reports on Form 10-K previously filedwith the SEC.  For share options issuedduring the nine month period ended September 30, 2006, the share options werealso valued using the Black-Scholes option valuation models and with keyassumptions related to expected volatility, expected term of share optionsgranted, the expected risk-free interest rate, and the expected dividendrate.  We estimate our expectedvolatility based on implied volatilities from traded share options on our stockand on our stock’s historical volatility. We have estimated the expected term of our share options based on thehistorical exercise pattern of groups of employees that have similar historicalexercise behavior.  The expectedrisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of the grant.  Historically, wehave not paid dividends and we do not anticipate paying dividends in theforeseeable future; accordingly, our expected dividend rate is zero.

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Following is a summary ofkey assumptions we used to value share options granted during the nine monthsended September 30, 2006.
| Expected term (years)                 |   | 5.0           |
|---------------------------------------|--------|---------------|
| Expected  volatility                  |   | 30.0% - 38.0% |
| Weighted average  expected volatility |   | 37.1%         |
| Risk-free  interest rate              |   | 4.3% - 5.0%   |
| Dividend yield                        |   | 0%            |

 

Compensation expense for the three and nine monthperiods ended September 30, 2006 was adjusted for share options we estimatewill be forfeited prior to vesting.  Weuse historical information to estimate employee termination and the resultingoption forfeiture rate.

A summary of optionactivity during the three months ended September 30, 2006 is presented below(shares and aggregate intrinsic value in thousands):
|                                    | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
|                               |       |       |       |                                   |       |                                                |       |                            |       |
| Outstanding, beginning  of period  |       | 4,809      |       | $                                      | 14.77      |                                                |       |                            |       |   |
| Granted                            |       | 10         |       | 15.47                                  |       |                                                |       |                            |       |
| Exercised                          |       | (78        | )          | 12.45                                  |       |                                                |       |                            |       |
| Forfeited                          |       | (57        | )          | 18.00                                  |       |                                                |       |                            |       |
| Outstanding, end of  period        |       | 4,684      |       | 14.77                                  |       | 7.29                                                |       | $                               | 7,106      |   |
|                               |       |       |       |                                   |       |                                                |       |                            |       |
| Options exercisable, end of period |       | 3,272      |       | 13.62                                  |       | 6.75                                                |       | $                               | 6,703      |   |
|                                    |            |            |            |                                        |            |                                                     |            |                                 |            |  |  |

 

The aggregate intrinsicvalue was calculated using the difference between the September 30, 2006 marketprice and the grant price for only those awards that have a grant price that isless than the September 30, 2006 market price. The weighted average grant-date fair value of share options grantedduring the three months ended September 30, 2006 and 2005 were $5.52 and $7.23,respectively.  No share options weregranted during the three months ended September 30, 2005.  The total intrinsic value of share optionsexercised during the three months ended September 30, 2006 was $0.2million.  During the three months ended September30, 2006, we received cash for payment of the grant price of exercised shareoptions of approximately $1.0 million and we anticipate we will realize a taxbenefit related to these exercised share options of less than $0.1million.  The cash received for paymentof the grant price is included as a component of cash flow from financingactivities on the condensed consolidated statement of cash flows.

During the three months ended September 30, 2006, werecognized share-based compensation expense, which is a non-cash charge, ofapproximately $0.6 million, of which $0.2 million is included under the caption“Direct costs of services” and $0.4 million is included under the caption “Generaland administrative” on the accompanying condensed consolidated statements ofincome.  During the three months endedSeptember 30, 2006, we recognized a net tax benefit of approximately $0.2million related to aggregate share-based compensation expense recognized duringthe same period.  As a result, incomebefore income taxes was reduced by approximately $0.6 million, net income wasreduced by approximately $0.4 million, net income per share – basic was reducedby approximately $0.02 per share, and net income per share – diluted wasreduced by approximately $0.02 per share.

16

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A summary of optionactivity during the nine months ended September 30, 2006 is presented below(shares and aggregate intrinsic value in thousands):
|                                    | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
|                               |       |       |       |                                   |       |                                                |       |                            |       |
| Outstanding, beginning  of period  |       | 4,769      |       | $                                      | 14.49      |                                                |       |                            |       |   |
| Granted                            |       | 237        |       | 18.53                                  |       |                                                |       |                            |       |
| Exercised                          |       | (221       | )          | 11.74                                  |       |                                                |       |                            |       |
| Forfeited                          |       | (101       | )          | 17.06                                  |       |                                                |       |                            |       |
| Outstanding, end of  period        |       | 4,684      |       | 14.77                                  |       | 7.29                                                |       | $                               | 7,106      |   |
|                               |       |       |       |                                   |       |                                                |       |                            |       |
| Options exercisable, end of period |       | 3,272      |       | 13.62                                  |       | 6.75                                                |       | $                               | 6,703      |   |
|                                    |            |            |            |                                        |            |                                                     |            |                                 |            |  |  |

 

The aggregate intrinsicvalue was calculated using the difference between the September 30, 2006 marketprice and the grant price for only those awards that have a grant price that isless than the September 30, 2006 market price. The weighted average grant-date fair value of share options grantedduring the nine months ended September 30, 2006 and 2005 were $7.42 and $5.30,respectively.  The total intrinsic valueof share options exercised during the nine months ended September 30, 2006 was$1.5 million.  During the nine monthsended September 30, 2006, we received cash for payment of the grant price ofexercised share options of approximately $2.6 million and we anticipate we willrealize a tax benefit related to these exercised share options of approximately$0.5 million.  The cash received forpayment of the grant price is included as a component of cash flow fromfinancing activities.  The tax benefitrelated to the option exercise price in excess of the option fair value atgrant date is separately disclosed as a component of cash flow from financingactivities on the condensed consolidated statement of cash flows; the remainderof the tax benefit is included as a component of cash flow from operatingactivities.

During the nine months ended September 30, 2006, werecognized share-based compensation expense, which is a non-cash charge, ofapproximately $1.7 million, of which $0.4 million is included under the caption“Direct costs of services” and $1.3 million is included under the caption “Generaland administrative” on the accompanying condensed consolidated statements ofincome.  During the nine months endedSeptember 30, 2006, we recognized a net tax benefit of approximately $0.6million related to aggregate share-based compensation expense recognized duringthe same period.  As a result, incomebefore income taxes was reduced by approximately $1.7 million, net income wasreduced by approximately $1.1 million, net income per share – basic was reducedby approximately $0.06 per share, and net income per share – diluted wasreduced by approximately $0.05 per share. As of September 30, 2006, there was $7.1 million of total unrecognizedcompensation cost related to nonvested share-based compensation arrangements,which will be recognized over a weighted-average period of 2.2 years.

17

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Prior to adoption of SFAS 123R, we accounted forstock-based compensation awards under the intrinsic method of AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees,*which required compensation cost to berecognized based on the excess, if any, between the quoted market price at thedate of grant and the amount an employee must pay to acquire stock. Shareoptions awarded under our share option plans are granted with an exercise priceequal to the fair market value on the date of the grant.  As a result, our condensed consolidatedstatements of income do not include expense related to share-based compensationfor the three and nine month periods ended September 30, 2005.  Had the compensation cost been determinedbased on the fair value at the grant dates based on the guidance provided byStatement of Financial Accounting Standard (SFAS) No. 123, *Accountingfor Stock-Based Compensation,* our net income and net income pershare for the three month and nine month periods ended September 30, 2005 wouldhave been adjusted to the following pro forma amounts (in thousands, except pershare data):
|                                                                                                        | ** ** | ** **   | ** ** | **Three Months Ended   September 30, 2005** | ** ** | **Nine Months Ended   September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
|                                                                                                   |       |         |       |                                                                 |       |                                                                |       |
| Net income, as reported                                                                                |       |         |       | $                                                                    | 495        |                                                                | $          | 203 |   |
| Add: stock-based  employee compensation Included in reported net earnings, net of tax                  |       |         |       | —                                                               |       | —                                                              |       |
| Deduct: stock-based  employee compensation expense determined under the fair value method, net of  tax |       |         |       | (216                                                                 | )          | (5,482                                                              | )          |
| Net income (loss), pro  forma                                                                          |       |         |       | $                                                                    | 279        |                                                                | $          | (5,279 | ) |
|                                                                                                   |       |         |       |                                                                 |       |                                                                |       |
| Net income (loss) per  share – Basic                                                              |       | As  reported |       | $                                                                    | 0.03       |                                                                | $          | 0.01 |   |
|                                                                                                   |       | Pro  forma   |       | $                                                                    | 0.02       |                                                                | $          | (0.29 | ) |
|                                                                                                   |       |         |       |                                                                 |       |                                                                |       |
| Net income (loss) per  share – Diluted                                                            |       | As  reported |       | $                                                                    | 0.03       |                                                                | $          | 0.01 |   |
|                                                                                                   |       | Pro forma    |       | $                                                                    | 0.01       |                                                                | $          | (0.29 | ) |

 

Pro forma amounts presented here are based on actualearnings and consider only the effects of estimated fair values of shareoptions.  For the three and nine monthperiod ended September 30, 2005, we did not assume conversion of the convertiblenotes as the effect was antidilutive. For the three and nine month periods ended September 30, 2005, we didnot assume exercise of share options as the effect was antidilutive.

18

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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 bydividing net income available to common shareholders, increased by the amountof interest expense, net of tax, related to outstanding convertible debt, bythe weighted 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 repurchaseoutstanding shares at the average market price for the period.

The computations of basic and diluted net income per share are asfollows (in thousands, except per share data):
|                                 | ** **   | **Three Months Ended September 30,** | ** **   |
|---------------------------------|--------------|----------------------------------------------------------|--------------|
| ** **                      | ** **   | **2006**                                                 | ** **   | **2005** | ** ** |
| ** **                      | ** **   | ** Net Income**                                | ** **   | **Weighted  Average  Shares   Outstanding** | ** ** | **Per   Share  Amount** | ** ** | ** Net Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per   Share  Amount** | ** ** |
| *** ***                    | *** *** | *** ***                                             | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Basic net income per  share     |         | $                                                        | 2,681        |   | 19,442 |   | $ | 0.14 |   | $ | 495 |   | 17,942 |   | $ | 0.03 |   |
|                            |         |                                                     |         |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive  securities: |         |                                                     |         |   |   |   |   |   |   |   |   |   |   |
| Share options                   |         |                                                     |         | 612 |   |   |   |   |   | 919 |   |   |   |
| Convertible debt                |         | 305                                                      |         | 2,857 |   |   |   | — |   | — |   |   |   |
|                            |         |                                                     |         |   |   |   |   |   |   |   |   |   |   |
| Diluted net income per share    |         | $                                                        | 2,986        |   | 22,911 |   | $ | 0.13 |   | $ | 495 |   | 18,861 |   | $ | 0.03 |   |

 

#### For the three month periodsended September 30, 2006 and 2005, weighted-average outstanding share optionstotaling approximately 2.8 million and 0.1 million shares of common stock,respectively, were antidilutive and therefore not included in the computationof diluted earnings per share.  For thethree months ended September 30, 2005, we did not assume conversion of theconvertible notes as the effect was antidilutive.

|                                 | ** **   | **Nine Months Ended September 30,** | ** **   |
|---------------------------------|--------------|---------------------------------------------------------|--------------|
| ** **                      | ** **   | **2006**                                                | ** **   | **2005** | ** ** |
| ** **                      | ** **   | ** Net Income**                               | ** **   | **Weighted  Average  Shares  Outstanding** | ** ** | **Per   Share  Amount** | ** ** | ** Net Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per   Share  Amount** | ** ** |
| *** ***                    | *** *** | *** ***                                            | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Basic net income per  share     |         | $                                                       | 37,224       |   | 19,372 |   | $ | 1.92 |   | $ | 203 |   | 17,911 |   | $ | 0.01 |   |
|                            |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive  securities: |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |
| Share options                   |         |                                                    |         | 836 |   |   |   |   |   | 491 |   |   |   |
| Convertible debt                |         | 904                                                     |         | 2,857 |   |   |   | — |   | — |   |   |   |
|                            |         |                                                    |         |   |   |   |   |   |   |   |   |   |   |
| Diluted net income per share    |         | $                                                       | 38,128       |   | 23,065 |   | $ | 1.65 |   | $ | 203 |   | 18,402 |   | $ | 0.01 |   |

 

#### For the nine month periodsended September 30, 2006 and 2005, weighted-average outstanding share optionstotaling approximately 1.6 million and 1.5 million shares of common stock, respectively,were antidilutive and therefore not included in the computation of dilutedearnings per share.  For the nine monthsended September 30, 2005, we did not assume conversion of the convertible notesas the effect was antidilutive.

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#### **NOTE 8:  OPERATING LEASES**

We have non-cancelableoperating leases for office space at various locations expiring at varioustimes through 2015.  Each of the leasesrequires us to pay all executory costs (property taxes, maintenance and insurance).  Additionally, we have non-cancelableoperating leases for office equipment and automobiles expiring through 2010.

Future minimum leasepayments during each of the twelve months ending September 30 are as follows(in thousands):
| 2007                          |   | $      | 5,356  |   |
|-------------------------------|--------|--------|--------|--------|
| 2008                          |   | 4,754  |   |
| 2009                          |   | 4,319  |   |
| 2010                          |   | 4,194  |   |
| 2011                          |   | 3,771  |   |
| Thereafter                    |   | 12,868 |   |
| Total minimum lease  payments |   | $      | 35,262 |   |

 

Rent expense related tooperating leases was approximately $1.5 million and $0.7 million for the threemonth periods ended September 30, 2006 and 2005, respectively, andapproximately $4.0 million and $2.1 million for the nine month periods endedSeptember 30, 2006 and 2005, respectively.

**NOTE9:   SEGMENT REPORTING**

We have two operatingsegments: (i) case management and (ii) document management.  Case management solutions include proprietarytechnology and integrated services to address the administrative businessrequirements of a case.  Documentmanagement solutions include proprietary technology and production services toensure timely, accurate and complete execution of documents related to a case.

Each segment’sperformance is assessed based on segment revenues less costs directlyattributable to each segment.  In theevaluation of performance, certain costs, such as shared services,administrative staff, and executive management, are not allocated by segmentand, accordingly, the following operating segment results do not include suchunallocated costs.  Assets reportedwithin a segment are those assets used by the segment in its operations and consistof property, equipment and leasehold improvements, software, identifiableintangible assets and goodwill.  Allother assets are classified as unallocated.

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Following is a summary ofsegment information (in thousands):
| ** **                                                                                                | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **Case**                                                           | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **Management**                                                     | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
| Revenue:                                                                                                  |       |                                                               |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs                                                         |       | $                                                                  | 29,798     |   | $ | 4,591 |   | $ | — |   | $ | 34,389 |   |
| Operating  revenue from reimbursed direct costs                                                           |       | 813                                                                |       | 3,830 |   | — |   | 4,643 |   |
| Total revenue                                                                                             |       | 30,611                                                             |       | 8,421 |   | — |   | 39,032 |   |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Costs and expenses:                                                                                       |       |                                                               |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs and depreciation and software and leasehold  amortization |       | 12,800                                                             |       | 7,353 |   | 8,836 |   | 28,989 |   |
| Amortization of  identifiable intangible assets                                                           |       | 2,542                                                              |       | 485 |   | — |   | 3,027 |   |
| Total operating  expenses                                                                                 |       | 15,342                                                             |       | 7,838 |   | 8,836 |   | 32,016 |   |
| Income from operations                                                                                    |       | $                                                                  | 15,269     |   | $ | 583 |   | $ | (8,836 | ) | 7,016 |   |
| Interest expense, net                                                                                     |       |                                                               |       |   |   |   |   | 2,500 |   |
| Income from  operations before income taxes                                                               |       |                                                               |       |   |   |   |   | 4,516 |   |
| Provision for income  taxes                                                                               |       |                                                               |       |   |   |   |   | 1,835 |   |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Net income                                                                                                |       |                                                               |       |   |   |   |   | $ | 2,681 |   |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Provision for depreciation and software and leasehold amortization                                        |       | $                                                                  | 4,380      |   | $ | 574 |   | $ | 706 |   | $ | 5,660 |   |

 

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| ** **                                                                                                | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **Case**                                                           | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **Management**                                                     | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Revenue:                                                                                                  |       |                                                               |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs                                                         |       | $                                                                  | 12,747     |   | $ | 7,373 |   | $ | — |   | $ | 20,120 |   |
| Operating  revenue from reimbursed direct costs                                                           |       | 622                                                                |       | 5,552 |   | — |   | 6,174 |   |
| Total revenue                                                                                             |       | 13,369                                                             |       | 12,925 |   | — |   | 26,294 |   |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Costs and expenses:                                                                                       |       |                                                               |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs and depreciation and software and leasehold  amortization |       | 7,613                                                              |       | 9,692 |   | 6,237 |   | 23,542 |   |
| Amortization of  identifiable intangible assets                                                           |       | 1,069                                                              |       | 373 |   | — |   | 1,442 |   |
| Acquisition  related                                                                                      |       | —                                                             |       | — |   | 114 |   | 114 |   |
| Total operating  expenses                                                                                 |       | 8,682                                                              |       | 10,065 |   | 6,351 |   | 25,098 |   |
| Income from operations                                                                                    |       | $                                                                  | 4,687      |   | $ | 2,860 |   | $ | (6,351 | ) | 1,196 |   |
| Interest expense, net                                                                                     |       |                                                               |       |   |   |   |   | 1,595 |   |
| Loss from operations  before income taxes                                                                 |       |                                                               |       |   |   |   |   | (399 | ) |
| Benefit for income  taxes                                                                                 |       |                                                               |       |   |   |   |   | (894 | ) |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Net income                                                                                                |       |                                                               |       |   |   |   |   | $ | 495 |   |
|                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Provision for depreciation and software and leasehold amortization                                        |       | $                                                                  | 2,168      |   | $ | 464 |   | $ | 542 |   | $ | 3,174 |   |

 

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| ** **                                                                                                | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **Case**                                                          | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **Management**                                                    | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Revenue:                                                                                                  |       |                                                              |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs                                                         |       | $                                                                 | 134,575    |   | $ | 26,495 |   | $ | — |   | $ | 161,070 |   |
| Operating  revenue from reimbursed direct costs                                                           |       | 2,327                                                             |       | 14,349 |   | — |   | 16,676 |   |
| Total revenue                                                                                             |       | 136,902                                                           |       | 40,844 |   | — |   | 177,746 |   |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Costs and expenses:                                                                                       |       |                                                              |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs and depreciation and software and leasehold  amortization |       | 37,652                                                            |       | 34,050 |   | 25,446 |   | 97,148 |   |
| Amortization of  identifiable intangible assets                                                           |       | 7,185                                                             |       | 1,487 |   | — |   | 8,672 |   |
| Acquisition  related                                                                                      |       | —                                                            |       | — |   | 250 |   | 250 |   |
| Total operating  expenses                                                                                 |       | 44,837                                                            |       | 35,537 |   | 25,696 |   | 106,070 |   |
| Income from operations                                                                                    |       | $                                                                 | 92,065     |   | $ | 5,307 |   | $ | (25,696 | ) | 71,676 |   |
| Interest expense, net                                                                                     |       |                                                              |       |   |   |   |   | 9,104 |   |
| Income from operations  before income taxes                                                               |       |                                                              |       |   |   |   |   | 62,572 |   |
| Provision for income  taxes                                                                               |       |                                                              |       |   |   |   |   | 25,348 |   |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Net income                                                                                                |       |                                                              |       |   |   |   |   | $ | 37,224 |   |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Provision for depreciation and software and leasehold amortization                                        |       | $                                                                 | 12,471     |   | $ | 1,755 |   | $ | 1,870 |   | $ | 16,096 |   |

 

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| ** **                                                                                                | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **Case**                                                          | ** ** | **Document** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                | ** ** | **Management**                                                    | ** ** | **Management** | ** ** | **Unallocated** | ** ** | **Consolidated** | ** ** |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Revenue:                                                                                                  |       |                                                              |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs                                                         |       | $                                                                 | 39,278     |   | $ | 19,895 |   | $ | — |   | $ | 59,173 |   |
| Operating  revenue from reimbursed direct costs                                                           |       | 2,266                                                             |       | 14,852 |   | — |   | 17,118 |   |
| Total revenue                                                                                             |       | 41,544                                                            |       | 34,747 |   | — |   | 76,291 |   |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Costs and expenses:                                                                                       |       |                                                              |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs and depreciation and software and leasehold  amortization |       | 23,436                                                            |       | 26,355 |   | 20,635 |   | 70,426 |   |
| Amortization of  identifiable intangible assets                                                           |       | 3,280                                                             |       | 1,212 |   | — |   | 4,492 |   |
| Acquisition  related                                                                                      |       | —                                                            |       | — |   | 114 |   | 114 |   |
| Total operating  expenses                                                                                 |       | 26,716                                                            |       | 27,567 |   | 20,749 |   | 75,032 |   |
| Income from operations                                                                                    |       | $                                                                 | 14,828     |   | $ | 7,180 |   | $ | (20,749 | ) | 1,259 |   |
| Interest expense, net                                                                                     |       |                                                              |       |   |   |   |   | 4,203 |   |
| Loss from operations  before income taxes                                                                 |       |                                                              |       |   |   |   |   | (2,944 | ) |
| Benefit for income  taxes                                                                                 |       |                                                              |       |   |   |   |   | (3,147 | ) |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Net income                                                                                                |       |                                                              |       |   |   |   |   | $ | 203 |   |
|                                                                                                      |       |                                                              |       |   |   |   |   |   |   |
| Provision for depreciation and software and leasehold amortization                                        |       | $                                                                 | 6,557      |   | $ | 1,553 |   | $ | 1,663 |   | $ | 9,773 |   |

 

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**NOTE 10:      RESTATEMENTOF PREVIOUSLY ISSUED FINANCIAL STATEMENTS**

Subsequentto issuance on November 14, 2006 of our quarterly report on Form 10-Q for thethree and nine months ended September 30, 2006, based on a commentreceived from the Securities and Exchange Commission (SEC), management determined that direct cost ofservices should have been disaggregated into two components:  “Direct cost of services” and “Direct cost ofbundled software license, software upgrade and post contract customer supportservices”.  Additionally, managementdetermined that a portion of revenue included under the “Case managementservices” should have been included as a component of “Case management bundledsoftware license, software upgrade and postcontract customer support services”.

A summary of the significant effects of therestatement is as follows (in thousands, except per share data):

**Condensed Consolidated Statements of Income**
|                                                                                                                                                      | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **September 30, 2006**                   | ** ** | **September 30, 2005** | ** ** |
| ** **                                                                                                                                           | ** ** | **As   Previously   Reported**           | ** ** | **As Restated** | ** ** | **As Previously   Reported** | ** ** | **As Restated** | ** ** |
|                                                                                                                                                 |       |                                               |       |   |   |   |   |   |   |
| Case management  services                                                                                                                            |       | $                                                  | 22,353     |   | $ | 16,980 |   |   |   |   |   |
| Case management bundled  software license, software upgrade and postcontract customer support services                                               |       | 7,445                                              |       | 12,818 |   |   |   |   |   |
| Direct costs of  services (exclusive of depreciation and amortization)                                                                               |       | 9,260                                              |       | 8,299 |   | 8,576 |   | 7,599 |   |
| Direct costs of bundled software license, software upgrade and  postcontract customer support services (exclusive of depreciation and  amortization) |       | —                                             |       | 961 |   | — |   | 977 |   |
|                                                                                                                                                      |            |                                                    |            |  |  |  |  |  |  |  |  |

 

**Condensed Consolidated Statements of Income**
|                                                                                                                                                      | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **September 30, 2006**                  | ** ** | **September 30, 2005** | ** ** |
| ** **                                                                                                                                           | ** ** | **As   Previously   Reported**          | ** ** | **As Restated** | ** ** | **As Previously   Reported** | ** ** | **As Restated** | ** ** |
|                                                                                                                                                 |       |                                              |       |   |   |   |   |   |   |
| Case management  services                                                                                                                            |       | $                                                 | 65,653     |   | $ | 54,064 |   |   |   |   |   |
| Case management bundled  software license, software upgrade and postcontract customer support services                                               |       | 68,922                                            |       | 80,511 |   |   |   |   |   |
| Direct costs of  services (exclusive of depreciation and amortization)                                                                               |       | 36,403                                            |       | 33,427 |   | 24,778 |   | 21,941 |   |
| Direct costs of bundled software license, software upgrade and  postcontract customer support services (exclusive of depreciation and  amortization) |       | —                                            |       | 2,976 |   | — |   | 2,837 |   |
|                                                                                                                                                      |            |                                                   |            |  |  |  |  |  |  |  |  |

 

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

### **Overview**

***BusinessSolutions***

EpiqSystems, Inc. is a provider of technology-based solutions for the legal andfiduciary services industries.  Our twooperating segments, case management and document management, assist clientswith the administration of complex legal proceedings, including electronicdiscovery, bankruptcy administration and class action administration. Ourclients include leading law firms, corporations, bankruptcy trustees, and otherprofessional advisors who require sophisticated case administration anddocument management capabilities, extensive subject matter expertise and a highservice capacity.

Our case and documentmanagement segments provide our clients with a broad range of technology andservice offerings to meet the unique needs and requirements of each clientmatter.  For example, a particular classaction matter may require professional services, call center support, claimsprocessing and settlement processing from our case management segment and auniquely developed media campaign to provide notice to a class of unknownclaimants and document custody services from our document management segment,while another class action matter may only require claims processing services fromour case management segment and a simple mailing notification to a class ofknown claimants from our document management segment.  Not all cases have the same businessrequirements, and our expanded technology and service offerings allow clientsto procure services from our broad range of case management and documentmanagement solutions.

Our case management anddocument management technology and service offerings provide solutionsprimarily for the bankruptcy, class action and mass tort, and electronicdiscovery markets. These technology and service offerings can cross the variousmarkets and clients we serve.  Forexample, our legal notification expert may develop a document management noticeprogram for either a bankruptcy matter or a class action matter.  Our proprietary search technology solution,which may be used for an electronic discovery, class action, or bankruptcymatter, supports a unique set of case management and document managementrequirements.

***Marketplace Information***

The substantial increase of electronic documents in thebusiness community has changed the dynamics of how attorneys support discoveryin complex litigation matters.  Accordingto the 2005 Socha-Gelbmann Electronic Discovery Survey, 2004 domesticcommercial electronic discovery revenues were estimated at $832 million, anapproximate 94% increase from 2003. According to this same source, the market is expected to continue togrow 50% to 60% each year from 2005 to 2007. Due to the increasing complexity of cases, the increasing volume of datathat are maintained electronically, and the increasing volume of documents thatare produced in all types of litigation, law firms are increasingly reliant onelectronic evidence management systems to organize and manage the litigation discoveryprocess.

The number of newbankruptcy filings each year may vary based on the level of consumer andbusiness debt, the general economy, interest rate levels and otherfactors.  We believe the level ofconsumer and business debt are important indicators of future bankruptcyfilings.  The most recent availableFederal Reserve *Flow of Funds Accounts of the United States*,dated September 19, 2006, reported increases in both consumer and business debtoutstanding as compared with the same period of the prior year.  The increase in consumer debt was the resultof a significant increase in home mortgage debt, partly offset by a slightdecline in consumer credit debt.

Theclass action and mass tort marketplace is significant, with estimated annualtort claim costs in excess of $250 billion according to an update study issuedin 2004 by Towers Perrin.  Administrativecosts, which include costs, other than defense costs, incurred by either theinsurance company or self-insured entity in the administration of claims,comprise approximately 20% of this total.

We have acquired a numberof businesses during the past several years. In January 2003, we acquired Bankruptcy Services, which expanded ourofferings to include an integrated solution of a proprietary technologyplatform and professional services for Chapter 11 corporate restructurings. InJanuary 2004, we acquired Poorman-Douglas and expanded our offerings to includeclass action, mass tort, and other similar legal proceedings.  In October 2005, we acquired Hilsoft,enhancing our expert legal notification. In November 2005, we acquired nMatrix which expanded our serviceofferings to include electronic 

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discovery and in August2005 and May 2006, we acquired Novare and Epiq Advisory Services, respectively,to further expand our bankruptcy case management service offerings.

***CaseManagement Segment***

Case management supportfor client engagements may last several years and has a revenue profile thattypically includes a recurring component. Our case management segment generates revenue primarily through thefollowing services.

·                  Professionaland support services, including case management, claims processing, specialtybankruptcy consulting, claims administration, and customized programming andtechnology services.

·                  Datahosting fees, volume-based fees, and professional services fees related to themanagement of large volumes of electronic data in support of a legalproceeding.

·                  Proprietaryelectronic discovery software to sort, cleanse, organize and perform searcheson large databases in support of a legal proceeding.

·                  Software installed in bankruptcy trusteeoffices and provided over the internet that facilitates the administration ofChapter 7 and Chapter 13 bankruptcy cases.

·                  Databasemaintenance and processing, such as for creditor and class action claims, andconversion of that data into an organized, searchable, electronic database thatwe maintain on our servers and use, with our client, to manage the particularcase.

·                  Callcenter support to process and respond to telephone inquiries related tocreditor and class action claims.

***DocumentManagement Segment***

Document managementrevenue is generally non-recurring due to the unpredictable nature of thefrequency, timing and magnitude of the clients’ business requirements.  Our document management segment generatesrevenue primarily through the following services.

·                  Legalnoticing services to parties of interest in bankruptcy and class actionmatters, including media campaign and advertising management in which wecoordinate notification through various media outlets, such as print, radio andtelevision, to potential parties of interest for a particular clientengagement.

·                  Reimbursementfor costs incurred related to postage on mailing services.

**CriticalAccounting Policies**

We consider ouraccounting policies related to revenue recognition, share-based compensation,business combinations, goodwill, and identifiable intangible assets to becritical policies in understanding our historical and future performance.

***Revenue recognition***.  We have agreements with clients pursuant towhich we deliver various case management and document management services eachmonth.

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;

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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 to parties of interest in bankruptcy and class actionmatters, including media campaign and advertising management in which wecoordinate notification through various media outlets, such as print, radio andtelevision, to potential parties of interest for a particular clientengagement; and

·                  Reimbursementfor costs incurred related to postage on mailing services.

*Non-Software Arrangements*

Case and document management servicesrelated to electronic discovery, corporate restructuring, and class actionrevenue, which are billed based on volume, are evaluated pursuant to EmergingIssues Task Force (EITF) 00-21, *RevenueArrangements with Multiple Deliverables*.  For each of these contractual arrangements,we have identified the following deliverables and/or services:

·                  Electronic Discovery

·               Data processing

·               Hosting

·                  Corporate Restructuring

·               Consulting

·               Claims management

·               Printing and reproduction

·               Mailing and noticing

·               Document management

·                  Class Action

·               Consulting

·               Notice campaigns

·               Toll free customer support

·               Web site design/hosting

·               Claims administration

·               Distribution

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).  Asthe services are rendered, our fee becomes fixed and determinable, andcollectibility 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.

*Software Arrangements*

For our Chapter 7 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 Chapter 7 related arrangements with financialinstitutions, we earn contingent monthly fees from the financial institutionrelated to the software license, hardware lease, hardware maintenance, and PCSservices.  We account for the softwarelicense and PCS service elements in accordance with Statement of Position 97-2,*Software Revenue Recognition* (SOP97-2).  Since we have not establishedvendor specific objective evidence (VSOE) of the fair value of the softwarelicense, we do not recognize any revenue on delivery of the software.  The software element is deferred and includedwith the remaining 

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undelivered element, which is PCS services.  This revenue, when recognized, is included onour condensed consolidated statements of operations as a component of “Casemanagement bundled software license, software upgrade and postcontract customersupport services” revenue.  Revenuerelated to PCS services is entirely contingent on the placement of liquidatedestate deposits by the trustee with the financial institution.  Accordingly, we recognize this contingentusage based revenue consistent with the guidance provided by the AmericanInstitute of Certified Public Accountants’ Technical Practice Aid (TPA)5100.76, *Fair Value in Multiple-Element Arrangements ThatInclude Contingent Usage-Based Fees and Software Revenue Recognition*as the fee becomes fixed or determinable at the time actual usage occurs andcollectibility is probable.  This occursmonthly as a result of the computation, billing and collection of monthlydeposit fees contractually agreed to.  Atthat time, we have also satisfied the other revenue recognition criteriacontained in SOP 97-2, since we have persuasive evidence that an arrangementexists, services have been rendered, the price is fixed and determinable, andcollectibility is reasonably assured.

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 use guidancerelated to contingent rentals in operating lease arrangements for hardwaremaintenance as well as for the hardware lease. Since all of the payments under all of our arrangements are contingentupon the level of trustee deposits and the delivery of upgrades and otherservices and there remain important uncertainties regarding the amount ofunreimbursable costs yet to be incurred by us, we account for the hardwarelease as an operating lease in accordance with SFAS 13, *Accounting for Leases*.  Therefore, all lease payments, based on theestimated fair value of hardware provided, were accounted for as contingentrentals under EITF Issue No. 98-9, *Accountingfor Contingent Rent* and SAB Topic 13, which requires that werecognize rental income when the changes in the factor on which the contingentlease payment is based actually occur. This occurred at the end of each period as we achieve our target whendeposits are held at the depository financial institution as, at that time,evidence of an arrangement exists, delivery has occurred, the amount has becomefixed and determinable, and collection is reasonably assured.  This revenue, which is less than ten percentof our total revenue, is included in our condensed consolidated statements ofoperations as a component of “Case management services” revenue.

Effective October 1, 2003, we entered into anarrangement with our primary depository financial institution under which wedelivered two specified upgrades annually with the last specified upgradeoccurring in the second quarter of 2006. This arrangement included specific pricing for each software upgrade andcertain special projects in addition to the contingent deposit-based pricingrelated to the software license, hardware, hardware maintenance, and PCS to eachtrustee client.  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 selleach software upgrade on a standalone basis, we were unable to establish VSOEof the fair value of the software upgrades. As a result, the licensed software, software upgrade, special projectsand PCS are a combined unit of accounting. Revenue for this combined unit of accounting, when recognized, isincluded as a component of case management services revenue.  Since we did not have VSOE of the fairvalue of each separate upgrade, we deferred recognition of substantially allrevenue under this arrangement until the final upgrade was delivered.  The ongoing costs related to this arrangementwere recognized as expense when incurred. On delivery of the final upgrade during the second quarter of 2006, theonly 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.

*Reimbursements*

Our case and document management businesses both haverevenue related to the reimbursement of certain costs, primarily postage.  Consistent with guidance provided by EITF No.01-14, *Income Statement Characterization of ReimbursementsReceived for “Out-of-Pocket” Expenses Incurred*, reimbursed postageand other reimbursable direct costs are recorded gross as revenue fromreimbursed direct costs and as reimbursed direct costs.

***Share-basedcompensation.*** Effective January 1, 2006, we began accounting for share-basedcompensation under SFAS No. 123R.  SFASNo. 123R requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award and to recognize that cost over the period during whichan employee is required to provide service in exchange for the award.  We recognize this expense on a straight-linebasis over the requisite service period of the last separately vesting portionof the award.  Recognition of share-basedcompensation expense had, and will likely continue to have, a material affecton our direct costs and general and administrative line items within ourcondensed consolidated statements of income and also may have a material affecton our deferred income taxes 

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and additionalpaid-in capital line items within our condensed consolidated balancesheets.  Adoption of SFAS No. 123Raffects the classification within our condensed consolidated statement of cashflows of certain tax benefits as certain tax benefits formerly classified as anoperating cash flow are now classified as a financing cash flow.  To date, the only share-based compensation wehave issued is share options.

Determining thefair value of a share option grant at the date of the award requires the use ofestimates related to expected volatility, expected term of share optionsgranted, expected risk-free interest rate, and the expected dividend rate.  We estimate our expected volatility based onimplied volatilities from traded options on our stock and on our stock’shistorical volatility.  We have estimatedthe expected term of our share options based on the historical exercise patternof groups of employees that have similar historical exercise behavior.  The expected risk-free interest rate is basedon the U.S. Treasury yield curve in effect at the time of the grant.  Historically, we have not paid dividends andwe do not anticipate paying dividends in the foreseeable future; accordingly,our expected dividend rate is zero.  Theestimate of fair value at grant date is not revised based on subsequent experience.  Net share-based compensation expenserecognized is also affected by our estimate of the number of stock optiongrants that will be forfeited prior to vesting and the tax benefit that will berealized if the stock option grants are exercised.  We use historical information to estimateemployee termination and the resulting option forfeiture rate.  These factors are revised based on subsequentexperience, and such revised estimates may have a material impact on ourexpense recognition and adjustments to additional paid-in capital in futureperiods.

***Business combination**accounting****. *We have acquired anumber of businesses during the last several years, and we may acquireadditional businesses in the future. Business combination accounting, often referred to as purchaseaccounting, requires us to determine the fair value of all assets acquired,including identifiable intangible assets, and liabilities assumed.  The cost of the acquisition is allocated tothe assets acquired and liabilities assumed in amounts equal to the fair valueof each asset and liability, and any remaining acquisition cost is classifiedas goodwill.  This allocation processrequires extensive use of estimates and assumptions, including estimates offuture cash flows to be generated by the acquired assets.  Certain identifiable intangible assets, suchas customer lists and covenants not to compete, are amortized on astraight-line basis over the intangible asset’s estimated useful life.  The estimated useful lives of amortizableidentifiable intangible assets range from 1 to 14 years.  Goodwill is not amortized.  Accordingly, the acquisition cost allocationhas had, and will continue to have, a significant impact on our currentoperating results.

***Goodwill****.* We assess goodwill, which is not subject to amortization, for impairmentas of each July 31 and also at any other date when events or changes incircumstances indicate that the carrying value of these assets may exceed theirfair value.  This assessment is performedat a reporting unit level.  A reportingunit is a component of a segment that constitutes a business, for whichdiscrete financial information is available, and for which the operatingresults are regularly reviewed by management. We develop an estimate of the fair value of each reporting unit, usingboth a market approach and an income approach.

A change in events orcircumstances, including a decision to hold an asset or group of assets forsale, a change in strategic direction, or a change in the competitiveenvironment, could adversely affect the fair value of one or more reportingunits.  The estimate of fair value ishighly subjective and requires significant judgment.  If we determine that the fair value of anyreporting unit is less than the reporting unit’s carrying value, then we willrecognize an impairment charge.  Ifgoodwill on our balance sheet becomes impaired during a future period, theresulting impairment charge could have a material impact on our results ofoperations and financial condition.  Ourgoodwill totaled $260.8 million as of September 30, 2006.

***Identifiableintangible assets****.** ***Each period we evaluatewhether events and circumstances warrant a revision to the remaining estimateduseful life of each identifiable intangible asset.  If events and circumstances warrant a changeto the estimate of an identifiable intangible asset’s remaining useful life,then the remaining carrying amount of the identifiable intangible asset wouldbe amortized prospectively over that revised remaining useful life.  Furthermore, information developed during ourannual assessment, or other events and circumstances, may indicate that thecarrying value of one or more identifiable intangible assets is not recoverableand its fair value is less than the identifiable intangible asset’s carryingvalue and would result in recognition of an impairment charge.

A change in the estimateof the remaining life of one or more identifiable intangible assets or theimpairment of one or more identifiable intangible assets could have a materialimpact on our results of operations and financial condition.  Our identifiable intangible assets’ carryingvalue, net of amortization, was $46.8 million as of September 30, 2006.

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**Resultsof Operations for the Three Months Ended September 30, 2006 Compared with theThree Months Ended September 30, 2005**

To enhance comparabilityto prior periods, throughout our management discussion and analysis weseparately identify the operating results of the recently acquired entities,nMatrix, Hilsoft, Epiq Advisory Services (collectively, the recently acquiredentities), which were not included in our operating results for the same periodin the prior year.

Certain amounts relatedto our results for the three months ended September 30, 2005 have been restated(see note 10 to the condensed consolidated financial statements).  As applicable, all references below are tothe restated amounts.

### **Consolidated Results**

### ***Revenue***

Total revenue of $39.0million for the three months ended September 30, 2006 represents an increase of$12.7 million, or approximately 48%, compared to $26.3 million of revenueduring the same period in the prior year. A significant part of our total revenue consists of reimbursement fordirect costs we incur, such as postage related to document managementservices.  We reflect the operatingrevenue from these reimbursed direct costs as a separate line item on ouraccompanying condensed consolidated statements of income.  Although reimbursed operating revenue andexpenses may fluctuate significantly from quarter to quarter, thesefluctuations have a minimal effect on our operating income as we realize littleor no margin from this revenue. Operating revenue exclusive of revenue from reimbursed direct costs,which we refer to as operating revenue before reimbursed direct costs,increased approximately $14.3 million, or approximately 71%, to $34.4 millionfor the three months ended September 30, 2006 compared to $20.1 million for thesame period in the prior year.  Exclusiveof the results of recently acquired entities, operating revenue beforereimbursed direct costs increased approximately $6.0 million, or approximately30%, to approximately $26.1 million for the three months ended September 30,2006 compared to approximately $20.1 million for the same period in the prioryear primarily as a result of an approximate $9.2 million increase in casemanagement revenue combined with a $3.2 million decrease in document managementrevenue.  Operating revenue exclusive ofrevenue from reimbursed direct costs may fluctuate considerably from period toperiod based on clients’ business requirements. All revenue is directly related to a segment, and changes in revenue bysegment are discussed below.

### ***Costs and Expenses***

Direct cost of services,exclusive of depreciation and amortization, increased approximately $0.7million, or approximately 9%, to $8.3 million for the three months endedSeptember 30, 2006 compared with $7.6 million during the same period in theprior year.  Exclusive of direct costsrelated to recently acquired entities, direct costs decreased approximately$1.2 million, or approximately 15%, to approximately $6.4 million for the threemonths ended September 30, 2006 compared with approximately $7.6 million forthe same period in the prior year.  Thisdecrease is primarily attributable to a $0.9 million decrease in outsideservices as lower class action sales reduced the need for such services.  Changes in segment costs are discussed, bysegment, below.

Direct cost of bundledsoftware license, software upgrade and postcontract customer support services,exclusive of depreciation and amortization, was approximately $1.0 million forboth the three months ended September 30, 2006 and for the same period in theprior year.  Changes in our segment coststructure are discussed below.

Reimbursed direct costsdecreased approximately $1.5 million, or approximately 24%, to $4.7 million forthe three months ended September 30, 2006 compared with $6.2 million during thesame period in the prior year.  Exclusiveof reimbursed direct costs related to recently acquired entities, direct costsdecreased approximately $1.7 million, or approximately 27%, to approximately$4.5 million for the three months ended September 30, 2006, compared withapproximately $6.2 million for the same period in the prior year.  This decrease is directly attributable to thedecrease in operating revenue from reimbursed direct costs.

General andadministrative costs increased approximately $5.4 million, or approximately76%, to $12.4 million for the three months ended September 30, 2006 compared to$7.0 million for the same period in the prior year.  Exclusive of general and administrative costsrelated to recently acquired entities, these costs increased $2.3 million, orapproximately 32%, to approximately $9.3 million for the three months endedSeptember 30, 2006 compared with approximately $7.0 million for the same periodin the prior year.  This increase isprimarily attributable to an increase in administrative expenses to support theexpansion of our business, including a $1.0 million increase in travel andpromotional expense and a $0.8 million increase in professional fees.  In addition, we also recognized share-basedexpense of $0.4 million resulting from adoption of SFAS 123R.  Changes in segment costs are discussed, bysegment, below.

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Depreciation and softwareand leasehold amortization costs increased approximately $0.9 million, orapproximately 52%, to $2.6 million for the three months ended September 30,2006 compared with $1.7 million during the same period in the prior year.  Exclusive of depreciation and software andleasehold amortization costs related to recently acquired entities, these costsincreased $0.3 million to approximately $2.0 million for the three months endedSeptember 30, 2006 compared with approximately $1.7 million for the same periodin the prior year.  Changes in segmentcosts are discussed, by segment, below.

Amortization ofidentifiable intangible assets, compared with the same period in the prioryear, increased $1.6 million to $3.0 million for the three months endedSeptember 30, 2006.  All identifiableintangible assets are directly related to a segment, and changes inamortization of identifiable intangible assets by segment are discussed below.

We did not recognize anyacquisition related expense during the three months ended September 30,2006.  During the three months endedSeptember 30, 2005, we recognized acquisition related expense of $0.1 millionresulting from incremental third party expenses incurred in connection withpotential transactions that were not completed.

***InterestExpense***

We incurred interestexpense of $2.5 million for the three months ended September 30, 2006 comparedwith interest expense of $1.6 million during the same period in the prior year.  The increase in interest expense during thethree months ended September 30, 2006 compared with the same period in theprior year resulted primarily from a $1.8 million increase in interest expenserelated to increased borrowings under our credit facility in support of theacquisition of our electronic discovery business in November 2005.  Also contributing to the increase in interestexpense was an increase of $0.3 million in loan fee amortization and accretion expense.  These increases were partly offset by a $1.2million decrease in interest expense related to the change in value of theembedded option related to the outstanding convertible debt.

***EffectiveTax Rate***

Our effective tax rate torecord the tax expense related to our net income was 40.6% for the three monthsended September 30, 2006 compared with a 224% effective tax benefit rate torecord the tax benefit related to our pre-tax loss for the three months endedSeptember 30, 2005.  The effective taxrate for the three months ended September 30, 2005 was unusually high as theestimated aggregate annual expenses not deductible for tax purposes weresignificant in relation to income.  The2006 tax rate is higher than the statutory federal rate of 35% primarily due tostate 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.

***NetIncome***

During the three monthsended September 30, 2006, we had net income of $2.7 million compared with netincome of $0.5 million for the same period in the prior year.  This change is attributable to a combinationof factors.  As a result of our 2003 Arrangementdiscussed above, during the three months ended September 30, 2006, we recognized$6.0 million of previously deferred revenue; during the same period in theprior year, we had deferred $5.7 million of revenue related to the 2003Arrangement.  This increase was partlyoffset by a decline in class action revenue as a result of fewer new clientretentions, a $2.7 million increase in our tax expense, a $1.6 million increasein intangible amortization as a result of our recent acquisitions, a $0.9million increase in interest expense primarily resulting from the increase inaverage borrowings outstanding under our credit facility as a result of ouracquisition of our electronic discovery business in November 2005, and a $0.6million increase in recognized share-based compensation expense as a result ofthe adoption of SFAS 123R.

**BusinessSegments**

The followingmanagement discussion and analysis is presented on a basis consistent with oursegment disclosure contained in note 9 of our notes to the condensedconsolidated financial statements.

***Case Management Segment***

Case management operatingrevenue before reimbursed direct costs increased $17.1 million, orapproximately 134%, to $29.8 million for the three months ended September 30,2006 compared to $12.7 million during the same period in the prior year.  During the three months ended September 30,2006, operating revenue before reimbursed direct costs from recently acquiredentities totaled $7.8 million.  Theremainder of the increase is primarily due to an increase in bankruptcyoperating revenue.  As a result of our2003 Arrangement discussed above, during the three months ended September 30,2006, we recognized $6.0 million of previously deferred revenue; during thesame period in the prior year, we had deferred $5.7 million of revenue relatedto the 2003 Arrangement.  This increase waspartly offset by an approximate $2.3 million decrease in class action casemanagement revenue.

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Case management directand administrative expenses, including depreciation and software and leaseholdamortization, of $12.8 million increased $5.2 million, or approximately 68%,for the three months ended September 30, 2006 compared with $7.6 million duringthe same period in the prior year. During the three months ended September 30, 2006, direct andadministrative expenses, including depreciation and software and leaseholdamortization, from recently acquired entities totaled $5.2 million.  Exclusive of these recently acquiredbusinesses, our direct and administrative expenses, including depreciation andsoftware and leasehold amortization, totaled approximately $7.6 million forboth the three months ended September 30, 2006 and 2005.

Amortization of casemanagement’s identifiable intangible assets increased to $2.5 million for thethree months ended September 30, 2006 compared with $1.1 million for the sameperiod in the prior year.  This increaseis primarily the result of amortization of additional identifiable intangibleassets, resulting primarily from the acquisition in November 2005 of ourelectronic discovery business.

***DocumentManagement Segment***

Document managementoperating revenue before reimbursed direct costs decreased $2.8 million, orapproximately 38%, to $4.6 million for the three months ended September 30,2006 compared to $7.4 million during the same period in the prior year.  For the three months ended September 30,2006, operating revenue before reimbursed direct costs from recently acquiredentities totaled $0.4 million.  Exclusiveof this recently acquired business, operating revenue before reimbursed directcosts decreased $3.2 million.  Thisdecrease primarily relates to noticing activity resulting from fewer clientretentions in our class action business. Additionally, even large notices are completed in a short time frameand, therefore, this revenue tends to be volatile.  During the three months ended September 30,2005 we had several large corporate restructuring and class action noticingactivities, while during the three months ended September 30, 2006 our client’sdid not have any large notice requirements. Document management revenues can fluctuate considerably from period toperiod based on clients’ business requirements.

Document managementdirect and administrative expenses, including depreciation and software andleasehold amortization, of $7.4 million decreased $2.3 million, orapproximately 24%, for the three months ended September 30, 2006 compared with$9.7 million for the same period in the prior year.  For the three months ended September 30,2006, such expenses included $0.6 million of direct and administrativeexpenses, including depreciation and software and leasehold amortization,related to recently acquired entities. Exclusive of this recently acquired business, direct and administrativeexpenses, including depreciation and software and leasehold amortization, decreased$2.9 million, or 30%, primarily as a result of a decreases in reimbursabledirect costs and outside services, both of which are primarily attributable tothe decrease in operating revenue. Document management expenses can fluctuate from quarter to quarter basedon document management business requirements delivered during each quarter.

Amortization of documentmanagement’s identifiable intangible assets increased to $0.5 million for thethree months ended September 30, 2006 compared with $0.4 million for the sameperiod in the prior year.  This increaseis primarily the result of amortization of other intangible assets, resultingfrom the acquisition of our legal notification business.

**Resultsof Operations for the Nine Months Ended September 30, 2006 Compared with theNine Months Ended September 30, 2005**

To enhance comparabilityto prior periods, throughout our management discussion and analysis weseparately identify the operating results of the recently acquired entities,nMatrix, Hilsoft, Epiq Advisory Services (collectively, the recently acquiredentities), which were not included in our operating results for the same periodin the prior year.

Certain amounts relatedto our results for the nine months ended September 30, 2005 have been restated(see note 10 to the condensed consolidated financial statements).  As applicable, all references below are tothe restated amounts.

### **Consolidated Results**

### ***Revenue***

Total revenue of $177.7million for the nine months ended September 30, 2006 increased approximately133% compared with $76.3 million of total revenue for the same period in theprior year.  A significant part of ourtotal revenue consists of reimbursement for direct costs we incur, such aspostage 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 and the related direct costs may fluctuatesignificantly from period to period, 

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these fluctuations have aminimal effect on our operating income as we realize little or no margin fromthis revenue.  Revenue exclusive ofreimbursed direct costs, which we refer to as operating revenue before reimburseddirect costs, increased approximately $101.9 million, or approximately 172%, to$161.1 million for the nine months ended September 30, 2006 compared to $59.2million for the same period in the prior year. Exclusive of the results of recently acquired entities, operatingrevenue before reimbursed direct costs increased approximately $68.3 million,or approximately 115%, to approximately $127.5 million for the nine monthsended September 30, 2006 compared to approximately $59.2 million for the sameperiod in the prior year.  This increaseis primarily as a result of an approximate $71.1 million increase in casemanagement revenue partly offset by a $2.8 million decrease in documentmanagement revenue.  Operating revenueexclusive of revenue from reimbursed direct costs may fluctuate considerablyfrom period to period based on clients’ business requirements.  All revenue is directly related to a segment,and changes in revenue by segment are discussed below.

### ***Costs and Expenses***

Direct cost of services,exclusive of depreciation and amortization, increased $11.5 million, orapproximately 52%, to $33.4 million for the nine months ended September 30,2006 compared with $21.9 million for the same period in the prior year.  Exclusive of direct costs related to recentlyacquired entities, direct cost of services decreased $0.3 million, orapproximately 2%, to $21.6 million for the nine months ended September 30, 2006compared with $21.9 million for the same period in the prior year.  This decrease is primarily attributable to a$0.9 million decrease in outside service costs, partly offset by a $0.4 millionincrease in share-based compensation expense resulting from adoption of SFAS123R. Changes in segment costs are discussed, by segment, below.

Direct cost of bundledsoftware license, software upgrade and postcontract customer support services,exclusive of depreciation and amortization, increased to $3.0 million for ninemonths ended September 30, 2006 compared with $2.8 million for the same periodin the prior year primarily as a result of increased compensation costs.  Changes in our segment cost structure arediscussed below.

Reimbursed direct costsdecreased approximately $0.4 million, or approximately 3%, to $16.9 million forthe nine months ended September 30, 2006 compared with $17.3 million during thesame period in the prior year.  Exclusiveof direct costs related to recently acquired entities, direct costs decreasedapproximately $1.2 million, or approximately 7%, to approximately $16.1 millionfor the nine months ended September 30, 2006 compared with approximately $17.3million for the same period in the prior year. This decrease is directly attributable to the decrease in operatingrevenue from reimbursed direct costs.

General andadministrative costs increased approximately $13.4 million, or approximately58%, to $36.5 million for the nine months ended September 30, 2006 comparedwith $23.1 million for the same period in the prior year.  Exclusive of general and administrative costsrelated to recently acquired entities, these costs increased approximately $4.0million, or approximately 17%, to $27.1 million for the nine months endedSeptember 30, 2006 compared with $23.1 million for the same period in the prioryear.  This increase is primarilyattributable to an increase in administrative expenses to support the expansionof our business, including a $1.8 million increase in travel and promotionalexpense related to the expansion of our business and a $1.9 million increase incompensation expense, primarily related to the recognition of share-basedexpense resulting from adoption of SFAS 123R. Changes in segment costs are discussed, by segment, below.

Depreciation and softwareand leasehold amortization costs increased approximately $2.1 million, orapproximately 41%, to $7.4 million for the nine months ended September 30, 2006compared with $5.3 million for the same period in the prior year.  Exclusive of depreciation and software andleasehold amortization costs related to recently acquired entities, these costsincreased approximately $0.4 million, or approximately 8%, to $5.7 million forthe nine months ended September 30, 2006 compared with $5.3 million for thesame period in the prior year.  Changesin segment costs are discussed, by segment, below.

Amortization ofidentifiable intangible assets, compared with the same period in the prioryear, increased $4.2 million to $8.7 million for the nine months endedSeptember 30, 2006 compared with $4.5 million for the same period in the prioryear.  All identifiable intangible assetsare directly related to a segment, and changes in amortization of identifiableintangible assets by segment are discussed below.

Acquisition relatedexpenses were $0.3 million for the nine months ended September 30, 2006compared with $0.1 million for the same period in the prior year.  These expenses result from non-capitalizedexpenses incurred in connection with completed transactions and fromincremental third party expenses incurred in connection with potential transactionswhich were not completed.

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***InterestExpense***

We incurred interestexpense of $9.2 million for the nine months ended September 30, 2006 comparedwith interest expense of $4.3 million for the same period in the prioryear.  This increase primarily is theresult of a $5.4 million increase in interest expense related to our creditfacility, primarily resulting from the increase in average borrowingsoutstanding under our credit facility as a result of our acquisition of ourelectronic discovery business in November 2005. Also contributing to the increase in interest expense was an increase of$0.5 million in loan fee amortization and accretion expense.  These increases were partly offset by a $1.0million decrease in interest expense related to the change in value of theembedded option related to the outstanding convertible debt.

***EffectiveTax Rate***

Our effective tax rate torecord the tax expense related to our net income was 40.5% for the nine monthsended September 30, 2006 compared with a 107% effective tax benefit rate torecord the tax benefit related to our pre-tax loss for the nine months endedSeptember 30, 2005. The effective tax rate for the nine months ended September30, 2005 was unusually high as the estimated aggregate annual expenses notdeductible for tax purposes were significant in relation to income.   The 2006 tax rate is higher than thestatutory federal 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 which are higher thanthe tax rates assessed by other jurisdictions where we operate.

***NetIncome***

Net income increasedapproximately $37.0 million to $37.2 million for the nine months endedSeptember 30, 2006 compared with $0.2 million for the same period in the prioryear.  This change is attributable to acombination of factors.  As a result ofour 2003 Arrangement discussed above, during the nine months ended September30, 2006, we recognized $59.7 million of previously deferred revenue; duringthe same period in the prior year, we had deferred $18.8 million of revenuerelated to the 2003 Arrangement.  Thisincrease was partly offset by a decline in class action revenue as a result offewer new client retentions, a $28.5 million increase in our tax expense, a$4.9 million increase in interest expense primarily resulting from the increasein average borrowings outstanding under our credit facility as a result of ouracquisition of our electronic discovery business in November 2005, a $4.2million increase in intangible amortization as a result of our recentacquisitions, and a $1.7 million increase in recognized share-basedcompensation expense as a result of the adoption of SFAS 123R.

**BusinessSegments**

The followingmanagement discussion and analysis is presented on a basis consistent with oursegment disclosure contained in note 9 of our notes to the condensedconsolidated financial statements.

***Case Management Segment***

Case management operatingrevenue before reimbursed direct costs increased $95.3 million, orapproximately 243%, to $134.6 million for the nine months ended September 30,2006 compared to $39.3 million for the same period in the prior year.  During the nine months ended September 30,2006, operating revenue before reimbursed direct costs from recently acquiredentities totaled $24.3 million. Exclusive of the recently acquired entities revenues, operating revenuebefore reimbursed direct costs increased by $71.1 million compared to the sameperiod in the prior year.  This increaseis primarily due to an increase in bankruptcy operating revenue.  As a result of our 2003 Arrangement discussedabove, during the nine months ended September 30, 2006, we recognized $59.7million of previously deferred revenue; during the same period in the prioryear, we had deferred $18.8 million of revenue related to the 2003Arrangement.  This increase was partlyoffset by an approximate $9.0 million decrease in class action case managementrevenue.

Case management directand administrative expenses, including depreciation and software and leaseholdamortization, increased approximately 61% to $37.7 million for the nine monthsended September 30, 2006 compared with $23.4 million for the same period in theprior year.  During the nine months endedSeptember 30, 2006, direct and administrative expenses, including depreciationand software and leasehold amortization, from recently acquired entitiestotaled $14.7 million.  Exclusive ofthese recently acquired entities expenses, our direct and administrativeexpenses, including depreciation and software leasehold amortization, decreasedby approximately $0.4 million.  Thisdecrease in direct and administrative expenses, including depreciation andsoftware and leasehold amortization, is primarily attributable to a $0.9million decrease in class action outside services expenses.

Amortization of casemanagement’s identifiable intangible assets increased to $7.2 million for thenine months ended September 30, 2006 compared with $3.3 million for the sameperiod in the prior year.  This increaseis primarily the result of amortization of additional other intangible assets,resulting primarily from the acquisition of our electronic discovery business.

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***DocumentManagement Segment***

Document managementoperating revenue before reimbursed direct costs increased $6.6 million, orapproximately 33%, to $26.5 million for the nine months ended September 30,2006 compared to $19.9 million for the same period in the prior year.  For the nine months ended September 30, 2006,operating revenue before reimbursed direct costs from recently acquiredentities totaled $9.4 million.  Exclusiveof these recently acquired entities revenues, operating revenue beforereimbursed direct costs decreased $2.8 million. This decrease is primarily attributable to fewer client retentions inour class action business.  Documentmanagement revenue can fluctuate from period to period based on clients’business requirements.

Document managementdirect and administrative expenses, including depreciation and software andleasehold amortization, of $34.1 million increased $7.7 million, orapproximately 29%, for the nine months ended September 30, 2006 compared to$26.4 million for the same period in the prior year.  This increase is primarily attributable tothe inclusion of $9.0 million of direct and administrative expenses, includingdepreciation and software and leasehold amortization, related to recentlyacquired entities.  Exclusive of theserecently acquired entities expenses, direct and administrative expenses,including depreciation and software and leasehold amortization, decreased $1.3million primarily from decreases in reimbursable direct costs and outsideservices.  Outside service costs willvary depending on the nature and complexity of services provided.  Document management expenses will fluctuatefrom period to period based on document management business requirementsdelivered during each period.

Amortization of documentmanagement’s identifiable intangible assets increased to $1.5 million, for thenine months ended September 30, 2006 compared to $1.2 million for the sameperiod in the prior year.  This increaseis primarily the result of amortization of additional other intangible assets,resulting from the acquisition of our acquired legal notification business.

**Liquidity and Capital Resources**

***Operating Activities***

During the nine monthsended September 30, 2006, the primary source of cash from operating activitieswas net income of $37.2 million, adjusted for $40.8 million of non-cash chargesand credits, primarily depreciation and amortization.  Changes in net operating assets, primarily asa result of a decrease in deferred revenue, partly offset by decreases in tradeaccounts receivable and income taxes refundable, resulted in a $54.4 millionuse of cash.  Deferred revenue decreasedby approximately $59.4 million, primarily as a result of recognition ofpreviously deferred amounts on delivery in the second quarter 2006 of our finalsoftware upgrade under our 2003 Arrangement. Trade accounts receivable, which will fluctuate from period to perioddepending on the timing of collections, decreased primarily as a result ofincreased collections related to our electronic discovery business.  Income taxes refundable decreased primarilyas a result of the receipt of refunds due to us.  As a result, our operating activitiesgenerated net cash of $23.6 million for the nine months ended September 30,2006.

***Investing Activities***

During the nine monthsended September 30, 2006, we used cash of approximately $5.2 million topurchase property and equipment.  Ourproperty and equipment purchases consisted primarily of computer relatedhardware to support our electronic discovery and bankruptcy businesses.  Enhancements to our existing software anddevelopment of new software is essential to our continued growth and we usedcash of approximately $3.3 million to fund internal costs related todevelopment of software for which technological feasibility has beenestablished.  We also used approximately$3.6 million of cash to partly fund an acquisition.  We believe that cash generated fromoperations will be adequate to fund our anticipated property, equipment andsoftware spending over the next year.

***FinancingActivities***

During the nine monthsended September 30, 2006, we paid approximately $10.0 million as a principalreduction on our senior term loan, $1.7 million as a principal reduction ondeferred acquisition debt, and $0.9 million due on capital leases, and werepaid, net of borrowings, $14.0 million of our senior revolving loan.  This financing use of cash was partly offsetby $2.6 million of net proceeds from stock issued in connection with theexercise of employee share options.  As aresult of adoption of SFAS 123R, we also classify a portion of the tax benefit,referred to as excess tax benefit, that we realize on exercise of employeeshare options as a financing cash flow. The effect of this accounting change was to recognize $0.2 million ofexcess tax benefit as a financing cash flow rather than as an operating cashflow.

As of September 30, 2006,our borrowings consisted of $51.0 million from the contingent convertiblesubordinated notes (including the fair value of the embedded option), $15.0million under our senior term loan, $82.0 million under our senior revolvingloan, and approximately $12.1 million of obligations related to capitalizedleases and deferred acquisition price. Our convertible debt of $50.0 millionmatures on June 15, 2007.  Theconvertible notes will require the use of cash at their 

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scheduled maturity inJune 2007 if the note holders do not extend the maturity of the notes, at theiroption, and do not convert the notes into shares of our common stock.  If the maturity of the notes is extended orif they are converted into shares of our common stock prior to the scheduledmaturity of those notes, then there will be no cash requirements associatedwith those convertible notes, other than the regular payment of interest on theoutstanding notes.  We anticipatecontinuing to pay interest on the notes from cash flow from operations, and weanticipate paying the principal of any maturing notes from the sourcesdiscussed below.

As of September30, 2006, significant financial covenants, all as defined within our creditfacility agreement, include a leverage ratio not to exceed 3.50 to 1.00, asenior leverage ratio not to exceed 2.50 to 1.00, a fixed charge coverage ratioof not less than 1.25 to 1.00, and a current ratio of not less than 1.50 to1.00.  As of September 30, 2006, we werein compliance with all covenants in our credit facility, including allfinancial covenants.  However, as aresult of the restatement that resulted in the deferral of a substantialportion of revenue related to our primary Chapter 7 depository institution, we werenot in compliance with these financial covenants through March 31, 2006.  The deferral of revenue through March 31,2006, and the recognition of the deferred revenue during the second and thirdquarter of 2006, were not anticipated by us or the banks at the time weestablished the current financial covenants in the credit facility.  On December 14, 2006, we obtained a waiverregarding this event of noncompliance from our credit facility syndicate.  Accordingly, we have classified this debt ascurrent or long-term based on the debt’s original scheduled maturity.

We may pursue acquisitions in the future.  Covenants contained in our credit facilityand in our convertible notes may limit our ability to consummate anacquisition.  Pursuant to the terms ofour credit facility, we generally cannot incur indebtedness outside the creditfacility with the exception of capital leases and additional subordinated debt,with a limit of $100.0 million of aggregate subordinated debt.  Furthermore, for any acquisition we must beable to demonstrate that, on a pro forma basis, we would be in compliance withour covenants during the four quarters prior to the acquisition and we mustobtain bank permission for any acquisition for which cash consideration exceeds$65.0 million or total consideration exceeds $125.0 million.

We believe that the funds generated from operationsplus our existing cash resources and amounts available under our seniorrevolving loan facility will be sufficient over the next 12 months to financecurrently anticipated working capital requirements, software expenditures,property and equipment expenditures, common share price protection payments, ifany, related to common shares issued in conjunction with the acquisition of ourelectronic discovery business, principal payments due under the creditfacility, deferred acquisition price agreements and capital leases, interestpayments due on our outstanding borrowings, and payments for other contractualobligations.  As noted above, if theholders of our outstanding convertible notes do not either (i) extend thematurity of those notes, at the option of the note holders, or (ii) convert thenotes into shares of our common stock in accordance with the terms of thenotes, those notes, in the outstanding principal amount of $50.0 million, willmature on June 15, 2007.  If those notesmature at that time, our cash flow from operations from the date of this reportthrough that maturity date is not anticipated to be sufficient to pay thosenotes (after the uses of anticipated cash flow from operations to meet ourother normal uses of cash described above). We could increase liquiditythrough a restructuring our credit facility, through the disposition ofnon-strategic assets, or through the issuance of debt or equity securities.

**Off-balance Sheet Arrangements**

As a part of the purchase price consideration toacquire nMatrix, we issued 1.2 million shares of our common stock to theseller.  As explained in note 4 to thecondensed consolidated financial statements, under certain circumstances we maybe required to pay the difference between $20.35 per share and the price atwhich the seller sells the shares. Payments, if any, made under this arrangement will result in cashoutflows.  Based on our September 30,2006 closing price of $14.71 per share, as of September 30, 2006, the guaranteeamount was approximately $6.9 million. As discussed under the caption “Liquidity and Capital Resources –Financing Activities” above, we believe cash generated from operations plusamounts available under our senior revolving loan facility will provideadequate liquidity to make any required payments under this arrangement.  The shares subject to this arrangement arecurrently unregistered; however, we anticipate these shares will be registeredand available for sale in the future.

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**Contractual Obligations**

The following table setsforth a summary of our contractual obligations and commitments, excludingperiodic interest payments, for each twelve month period ending September 30(in thousands):
| ** **                               | ** ** | **Payments Due By Period** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation**          | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 – 3 Years** | ** ** | **3 – 5 Years** | ** ** | **More Than  5 Years** | ** ** |
|                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  and future accretion (1) |       | $                                         | 159,513    |   | $ | 70,892 |   | $ | 86,621 |   | $ | 2,000 |   | $ | — |   |
| Employment  agreements (2)               |       | 9,216                                     |       | 3,397 |   | 4,206 |   | 1,613 |   | — |   |
| Capital lease  obligations               |       | 31                                        |       | 31 |   | — |   | — |   | — |   |
| Operating leases                         |       | 35,262                                    |       | 5,356 |   | 9,073 |   | 7,965 |   | 12,868 |   |
| Total                                    |       | $                                         | 204,022    |   | $ | 79,676 |   | $ | 99,900 |   | $ | 11,578 |   | $ | 12,868 |   |

 

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(1)         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 ourSeptember 30, 2006 condensed consolidated balance sheet, and all futureaccretion.  If certain financialobjectives are satisfied, we will make additional payments over the next fiveyears related to our acquisition of Hilsoft and Epiq Advisory Services.  Such payments, if any, are not included inthe above contractual obligation table. To date, no such payments have been made or accrued.  Convertible debt is included at the statedvalue of the principal redemption and excludes adjustments related to theembedded option, which will not be paid in cash.  Any conversion to our common stock of part orall of the convertible debt will reduce our cash obligation related to theconvertible debt.

(2)       In conjunction withacquisitions, we have entered into employment agreements with certain keyemployees of the acquired companies.

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**RecentAccounting Pronouncements**

In September 2006, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 157, *Fair Value Measurements*(SFAS 157).  SFAS 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. We do not anticipate that adoption of this statement will have amaterial impact on our consolidated financial statements.

In June 2006, FASB issuedInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48).  FIN48 applies to tax positions accounted for under Statement of FinancialAccounting Standard No. 109, *Accounting for IncomeTaxes*.  A tax positionincludes a current or future reduction in taxable income reported or expectedto be reported on a tax return, the decision not to report a transaction in atax return, and an assertion that a company is not subject to taxation.  FIN 48 requires that a tax position berecognized only if it is more-likely-than-not to be sustained based solely onits technical merits as of the reporting date. A recognized tax benefit is measured based on the largest benefit thatis more than 50 percent likely to be realized. FIN 48 is effective for an entity’s first fiscal year that begins afterDecember 15, 2006.  At adoption, anynecessary adjustment to our financial statements will be recorded directly tothe beginning balance of retained earnings in the period of adoption andreported as a change in accounting principle. At this time, we are unable to predict the impact, if any, that adoptionof FIN 48 will have on our consolidated financial statements.

In June 2006, the EITFreached a consensus regarding EITF 05-1, *Accounting for theConversion of an Instrument That Becomes Convertible Upon the Issuer’s Exerciseof a Call Option*.  EITF 05-1pertains only to debt instruments that become convertible at the time theissuer calls the debt, but are not convertible before the call isexercised.  Conversions of theseinstruments triggered by the call option would be accounted for as debtconversions and recognized as debt extinguishments if the debt instrument did notcontain a substantive conversion feature at issuance.  EITF 05-1 will be effective for conversionsthat occur as a result of the issuer’s exercise of a call option in the interimor annual period beginning after September 28, 2006. We do not anticipate thatadoption of this statement will have a material impact on our consolidatedfinancial statements.

In February 2006, theFASB issued Statement of Financial Accounting Standard No. 155, *Accounting for Certain Hybrid Financial Instruments—an amendment of FASBStatements No. 133 and 140* (SFAS 155).  SFAS 155 allows an entity to make anirrevocable election to measure a financial instrument with an embeddedderivative, referred to as a hybrid financial instrument, at fair value in itsentirety rather than bifurcating and separately valuing the embedded derivativeinstrument.  SFAS 155 is effective forall financial instruments acquired, issued, or subject to a remeasurement (newbasis) event occurring after the beginning of an entity’s first fiscal yearthat begins after September 15, 2006.  Wedo not anticipate that adoption of this statement will have a material impacton our consolidated financial statements.

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**Forward-Looking Statements**

In this report, in otherfilings with the SEC, and in press releases and other public statements by ourofficers 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’s Discussion and Analysis of Financial Condition andResults 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)risks associated with the application of complex accounting rules to uniquetransactions, including the risk that good faith application of those rules andaudits of those results may be later reversed by new interpretations of thoserules or new views regarding the application of those rules, (2) any materialchanges in our total number of client engagements and the volume associatedwith each engagement, including the results for 2006 to date in our classaction client engagements, (3) any material changes in our Chapter 7 depositportfolio, the services required or selected by our electronic discovery,Chapter 11, Chapter 13, class action or mass tort engagements, or the number ofcases processed by our Chapter 13 bankruptcy trustee clients, (4) materialchanges in the number of bankruptcy filings, class action filings or mass tortactions each year, (5) our reliance on our marketing and pricing arrangementswith Bank of America and other depository banks (6) risks associated with theintegration of acquisitions into our existing business operations, (7) risksassociated without indebtedness, and (8) other risks detailed from time to timein our SEC filings, including our annual report on Form 10-K/A.  In addition, there may be other factors notincluded in our SEC filings that may cause actual results to differ materiallyfrom any forward-looking statements.  Weundertake no obligations to update any forward-looking statements containedherein to reflect future events or developments.

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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, 2005.

**ITEM 4.          Controlsand Procedures.**

***DisclosureControls and Procedures***

Anevaluation was carried out by the Epiq Systems, Inc.’s (the Company’s) ChiefExecutive Officer and Chief Financial Officer of the effectiveness of thedesign and operations of the Company’s disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by the Company in its periodic filingswith the SEC is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits to the SEC is accumulatedand communicated to Company’s management, including its principal executive andprincipal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

Duringfiscal year 2006, management identified an accounting error in its consolidatedfinancial statements related to determination of the appropriate accountingtreatment for certain complex aspects of revenue recognition, specifically theevaluation of vendor specific objective evidence of fair value for specifiedsoftware upgrades provided within a bundled arrangement as required byStatement of Position 97-2 (SOP 97-2), *Software RevenueRecognition*.  On November 14,2006, our audit committee determined that our previously issued financial statementsfor the fiscal years ended December 31, 2005, 2004 and 2003, included in ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2005, for thequarterly information included in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2005, and for the quarterly information included in ourQuarterly Report on Form 10-Q for the quarters ended March 31, 2006 andJune 30, 2006, should be restated.  Therestatement is further discussed in note 10 to the accompanying condensed consolidatedfinancial statements.  Public CompanyAccounting Oversight Board’s Auditing Standard No. 2, *An Audit ofInternal Control over Financial Reporting Performed in Conjunction with anAudit of Financial Statements*, provides that a restatement of previouslyissued financial statements is a strong indicator of the existence of amaterial weakness in the design or operation of internal control over financialreporting.  Management of the company,under the direction of our CEO and CFO, has reevaluated the effectiveness ofour disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) asof September 30, 2006.  Based upon thisevaluation, management has concluded that the control deficiency surroundingmanagement’s oversight of the determination of the appropriate accountingtreatment for certain complex aspects of revenue recognition, specifically theevaluation of vendor specific objective evidence of fair value for specifiedsoftware upgrades provided within a bundled arrangement as required by SOP 97-2represented a material weakness in internal control over financialreporting.  Our management, including ourCEO and CFO, concluded that our disclosure controls and procedures were noteffective as of September 30, 2006.

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

Therehave been no changes in our internal controls over financial reporting duringthe quarter ended September 30, 2006, that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

Afteridentifying the material weakness subsequent to the original issuance of ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2005,management initiated changes to remediate the material weakness describedabove.  We believe that, prior toDecember 31, 2006, we completed our remediation of the aforementioned materialweakness in our internal control over financial reporting.  The completed remediation measures includethe implementation of appropriate controls related to contracts or otherarrangements that are within the scope of SOP 97-2 to provide a writtenanalysis of the appropriate accounting for these contracts or other arrangementand the review of our conclusions with qualified internal accounting personnelor third party accounting experts.  Inaddition, we have provided our accounting staff with additional trainingrelated to generally accepted accounting principles and financial statement reportingmatters.

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**PART II -OTHER INFORMATION**

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

There have been nomaterial changes from the risk factors disclosed under the heading “RiskFactors” in Item 1A of our Annual Report on Form 10-K/A for the year endedDecember 31, 2005.

**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:      | February 8, 2007       | /s/ Tom W. Olofson |   |
|       |                   | Tom W. Olofson |
|       |                   | Chairman of the  Board |
|       |                   | Chief Executive  Officer |
|       |                   | Director |
|       |                   | (Principal  Executive Officer) |
|       |                   |   |
|       |                   |   |
| Date:      | February 8, 2007       | /s/ Elizabeth M. Braham |   |
|       |                   | Elizabeth M.  Braham |
|       |                   | Executive Vice  President, Chief Financial Officer |
|       |                   | (Principal  Financial Officer) |
|       |                   |   |
|       |                   |   |
| Date:      | February 8, 2007       | /s/ Douglas W. Fleming |   |
|       |                   | Douglas W.  Fleming |
|       |                   | Director of  Finance |
|       |                   | (Principal  Accounting Officer) |
|            |                        |  |  |  |  |

 

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