Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D. C. 20549**

 

**FORM 10-Q**

 

**QuarterlyReport Under Section 13 or 15(d)**

**of theSecurities Exchange Act of 1934**

 

**x****  For the Quarterly Period Ended June 30, 2008**

 

**OR**

 

**o**** Transition Report Pursuant to Section 13 or 15(d)**

**of theSecurities 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 ofprincipal executive office)

 

**913-621-9500**

(Registrant’stelephone number)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes **x** No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o | Accelerated filer **x** | Non-accelerated filer o                         | Smaller reporting  company o |
|----------------------------|------------------------------|-------------------------------------------------|-----------------------------------|
|                       |                         | (Do not check if a  smaller  reporting company) |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).

Yes o  No **x**

 

The number of sharesoutstanding of registrant’s common stock at July 21, 2008:

 
| **Class**                    | ** ** | **Outstanding** | ** ** |
|------------------------------|------------|-----------------|------------|
| Common Stock, $.01 par value |       | 35,508,592      |       |

 

 

 

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**EPIQ SYSTEMS, INC.**

**FORM 10-Q**

**QUARTER ENDED JUNE 30, 2008**

 

**CONTENTS**

 
| ** **                               | ** **                                                                                                 | ** ** | **Page** |
|------------------------------------------|------------------------------------------------------------------------------------------------------------|------------|----------|
|                                     |                                                                                                       |       |     |
| **PART I -  FINANCIAL INFORMATION** |                                                                                                       |       |
|                                     |                                                                                                       |       |     |
| Item 1.                                  | Condensed Consolidated  Financial Statements                                                               |       |     |
|                                     |                                                                                                       |       |     |
|                                     | Statements of Income –  Three and six months ended June 30, 2008 and 2007 (Unaudited)            |       | 1        |
|                                     |                                                                                                       |       |     |
|                                     | Balance Sheets –  June 30, 2008 and December 31, 2007 (Unaudited)                           |       | 2        |
|                                     |                                                                                                       |       |     |
|                                     | Statement of Changes in  Stockholders’ Equity –  Six months ended June 30, 2008 (Unaudited) |       | 3        |
|                                     |                                                                                                       |       |     |
|                                     | Statements of Cash Flows –  Six months ended June 30, 2008 and 2007 (Unaudited)                  |       | 4        |
|                                     |                                                                                                       |       |     |
|                                     | Notes to Condensed  Consolidated Financial Statements (Unaudited)                                          |       | 5        |
|                                     |                                                                                                       |       |     |
| Item 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                |       | 18       |
|                                     |                                                                                                       |       |     |
| Item 3.                                  | Quantitative  and Qualitative Disclosures about Market Risk                                                |       | 28       |
|                                     |                                                                                                       |       |     |
| Item 4.                                  | Controls and  Procedures                                                                                   |       | 28       |
|                                     |                                                                                                       |       |     |
| **PART II - OTHER  INFORMATION**    |                                                                                                       |       |
|                                     |                                                                                                       |       |     |
| Item 1A.                                 | Risk Factors                                                                                               |       | 29       |
|                                     |                                                                                                       |       |     |
| Item 4.                                  | Submission  of Matters to a Vote of Security Holders                                                       |       | 29       |
|                                     |                                                                                                       |       |     |
| Item 5.                                  | Other Events                                                                                               |       | 29       |
|                                     |                                                                                                       |       |     |
| Item 6.                                  | Exhibits                                                                                                   |       | 29       |
|                                     |                                                                                                       |       |     |
| Signatures                               |                                                                                                       | 30         |
|                                          |                                                                                                            |            |          |  |  |

 

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**PART I- FINANCIAL INFORMATION**

 

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

 

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

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

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

**(Unaudited)**

** **
| ** **                                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **REVENUE:**                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Case management  services                                                                                         |       | $                                               | 35,928     |                                          | $          | 23,702 |   | $ | 64,724 |   | $ | 44,534 |   |
| Case management  bundled products and services                                                                    |       | 4,463                                           |       | 6,733                                         |       | 9,754 |   | 13,412 |   |
| Document  management services                                                                                     |       | 16,546                                          |       | 7,736                                         |       | 26,360 |   | 15,321 |   |
| Operating  revenue before reimbursed direct costs                                                                 |       | 56,937                                          |       | 38,171                                        |       | 100,838 |   | 73,267 |   |
| Operating  revenue from reimbursed direct costs                                                                   |       | 7,905                                           |       | 6,035                                         |       | 13,014 |   | 12,068 |   |
| Total Revenue                                                                                                     |       | 64,842                                          |       | 44,206                                        |       | 113,852 |   | 85,335 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **OPERATING  EXPENSES:**                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Direct costs of  services (exclusive of depreciation and amortization shown separately below)                     |       | 24,438                                          |       | 10,415                                        |       | 43,264 |   | 20,746 |   |
| Direct cost of bundled products and services (exclusive of depreciation  and amortization shown separately below) |       | 908                                             |       | 898                                           |       | 1,855 |   | 1,784 |   |
| Reimbursed  direct costs                                                                                          |       | 7,880                                           |       | 6,010                                         |       | 13,002 |   | 12,032 |   |
| General and  administrative                                                                                       |       | 18,221                                          |       | 15,252                                        |       | 33,300 |   | 28,177 |   |
| Depreciation and  software and leasehold amortization                                                             |       | 3,853                                           |       | 2,837                                         |       | 7,563 |   | 5,798 |   |
| Amortization of  identifiable intangible assets                                                                   |       | 2,325                                           |       | 2,352                                         |       | 4,603 |   | 4,876 |   |
| Other operating  (income) expense                                                                                 |       | 859                                             |       | —                                        |       | (1,512 | ) | — |   |
| Total Operating  Expenses                                                                                         |       | 58,484                                          |       | 37,764                                        |       | 102,075 |   | 73,413 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **INCOME  FROM OPERATIONS**                                                                                       |       | 6,358                                           |       | 6,442                                         |       | 11,777 |   | 11,922 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **EXPENSE  (INCOME) RELATED TO FINANCING**                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                                                                                   |       | (36                                             | )          | (25                                           | )          | (180 | ) | (32 | ) |
| Interest expense                                                                                                  |       | 441                                             |       | 3,345                                         |       | 932 |   | 8,447 |   |
| Net Expenses  Related To Financing                                                                                |       | 405                                             |       | 3,320                                         |       | 752 |   | 8,415 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**                                                                                   |       | 5,953                                           |       | 3,122                                         |       | 11,025 |   | 3,507 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **PROVISION  FOR INCOME TAXES**                                                                                   |       | 2,799                                           |       | 1,328                                         |       | 5,214 |   | 1,563 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **NET  INCOME**                                                                                                   |       | $                                               | 3,154      |                                          | $          | 1,794 |   | $ | 5,811 |   | $ | 1,944 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **NET  INCOME PER SHARE INFORMATION:**                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                             |       | $                                               | .09        |                                          | $          | .06 |   | $ | .16 |   | $ | .07 |   |
| Diluted                                                                                                           |       | $                                               | .08        |                                          | $          | .06 |   | $ | .15 |   | $ | .06 |   |
|                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| **WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING:**                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                             |       | 35,424                                          |       | 29,848                                        |       | 35,357 |   | 29,559 |   |
| Diluted                                                                                                           |       | 41,634                                          |       | 31,980                                        |       | 41,510 |   | 31,458 |   |

 

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

 

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**EPIQ SYSTEMS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In Thousands, Except ShareData)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                    | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                                          |       |                        |       |                            |       |
| **ASSETS**                                                                                                                                                                                    |       |                        |       |                            |       |
| **CURRENT ASSETS:**                                                                                                                                                                           |       |                        |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                     |       | $                           | 11,229     |                            | $          | 13,415 |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $1,525 and $1,437  respectively                                                                                           |       | 50,483                      |       | 33,925                          |       |
| Prepaid expenses                                                                                                                                                                              |       | 5,174                       |       | 2,888                           |       |
| Other current assets                                                                                                                                                                          |       | 1,927                       |       | 4,571                           |       |
| Total Current Assets                                                                                                                                                                          |       | 68,813                      |       | 54,799                          |       |
|                                                                                                                                                                                          |       |                        |       |                            |       |
| **LONG-TERM ASSETS:**                                                                                                                                                                         |       |                        |       |                            |       |
| Property, equipment and leasehold improvements, net                                                                                                                                           |       | 37,452                      |       | 32,403                          |       |
| Software development costs, net                                                                                                                                                               |       | 10,434                      |       | 9,808                           |       |
| Goodwill                                                                                                                                                                                      |       | 264,330                     |       | 260,684                         |       |
| Identifiable  intangible assets                                                                                                                                                               |       | 31,935                      |       | 34,310                          |       |
| Other                                                                                                                                                                                         |       | 576                         |       | 790                             |       |
| Total Long-term Assets                                                                                                                                                                        |       | 344,727                     |       | 337,995                         |       |
| **Total Assets**                                                                                                                                                                              |       | $                           | 413,540    |                            | $          | 392,794 |   |
|                                                                                                                                                                                          |       |                        |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                |       |                        |       |                            |       |
| **CURRENT LIABILITIES:**                                                                                                                                                                      |       |                        |       |                            |       |
| Accounts payable                                                                                                                                                                              |       | $                           | 18,854     |                            | $          | 7,401 |   |
| Accrued compensation                                                                                                                                                                          |       | 4,081                       |       | 7,430                           |       |
| Deposits                                                                                                                                                                                      |       | 4,281                       |       | 1,618                           |       |
| Deferred revenue                                                                                                                                                                              |       | 1,822                       |       | 1,234                           |       |
| Other accrued expenses                                                                                                                                                                        |       | 4,872                       |       | 2,389                           |       |
| Current maturities of long-term obligations                                                                                                                                                   |       | 2,207                       |       | 3,326                           |       |
| Total Current Liabilities                                                                                                                                                                     |       | 36,117                      |       | 23,398                          |       |
|                                                                                                                                                                                          |       |                        |       |                            |       |
| **LONG-TERM LIABILITIES:**                                                                                                                                                                    |       |                        |       |                            |       |
| Deferred income taxes                                                                                                                                                                         |       | 20,383                      |       | 19,390                          |       |
| Other long-term liabilities                                                                                                                                                                   |       | 8,435                       |       | 8,058                           |       |
| Long-term obligations (excluding current maturities)                                                                                                                                          |       | 56,075                      |       | 58,266                          |       |
| Total Long-term Liabilities                                                                                                                                                                   |       | 84,893                      |       | 85,714                          |       |
|                                                                                                                                                                                          |       |                        |       |                            |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                             |       |                        |       |                            |       |
|                                                                                                                                                                                          |       |                        |       |                            |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                                |       |                        |       |                            |       |
| Common stock -  $0.01 par value; 100,000,000 shares authorized; issued and outstanding –35,504,464  and 35,276,569 shares at June 30, 2008 and December 31, 2007  respectively |       | 355                         |       | 353                             |       |
| Additional paid-in capital                                                                                                                                                                    |       | 234,984                     |       | 231,984                         |       |
| Accumulated other comprehensive income                                                                                                                                                        |       | 39                          |       | 4                               |       |
| Retained earnings                                                                                                                                                                             |       | 57,152                      |       | 51,341                          |       |
| Total Stockholders’ Equity                                                                                                                                                               |       | 292,530                     |       | 283,682                         |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                           |       | $                           | 413,540    |                            | $          | 392,794 |   |

 

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

 

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**EPIQ SYSTEMS, INC.**

**CONDENSED CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(In Thousands)**

**(Unaudited)**

 
| ** **                                     | ** ** | **June 30, 2008** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
|                                           |       |                        |       |
| COMMON SHARES (100,000 authorized):            |       |                        |       |
| Shares, beginning of year                      |       | 35,277                      |       |
| Shares issued upon exercise of options         |       | 227                         |       |
| Shares, end of period                          |       | 35,504                      |       |
|                                           |       |                        |       |
| COMMON STOCK – PAR VALUE $0.01 PER SHARE: |       |                        |       |
| Balance, beginning of year                     |       | $                           | 353        |   |
| Proceeds from exercise of options              |       | 2                           |       |
| Balance, end of period                         |       | 355                         |       |
|                                           |       |                        |       |
| ADDITIONAL PAID-IN CAPITAL:                    |       |                        |       |
| Balance, beginning of year                     |       | 231,984                     |       |
| Proceeds from exercise of options              |       | 1,427                       |       |
| Share-based income tax benefit                 |       | 177                         |       |
| Share-based compensation expense               |       | 1,396                       |       |
| Balance, end of period                         |       | 234,984                     |       |
|                                           |       |                        |       |
| ACCUMULATED OTHER COMPREHENSIVE INCOME:        |       |                        |       |
| Balance, beginning of year                     |       | 4                           |       |
| Foreign currency translation adjustment        |       | 35                          |       |
| Balance, end of period                         |       | 39                          |       |
|                                           |       |                        |       |
| RETAINED EARNINGS:                             |       |                        |       |
| Balance, beginning of year                     |       | 51,341                      |       |
| Net income                                     |       | 5,811                       |       |
| Balance, end of period                         |       | 57,152                      |       |
|                                           |       |                        |       |
| TOTAL STOCKHOLDERS’ EQUITY                |       | $                           | 292,530    |   |

 

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

 

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**EPIQSYSTEMS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(InThousands)**

**(Unaudited)**

 
| ** **                                                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                                                    |       |                                              |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                              |       |                                              |       |   |   |
| Net income                                                                              |       | $                                                 | 5,811      |   | $ | 1,944 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:      |       |                                              |       |   |   |
| Share-based  compensation expense                                                       |       | 1,396                                             |       | 1,014 |   |
| Expense  (benefit) for deferred income taxes                                            |       | 419                                               |       | (1,327 | ) |
| Depreciation and  software and leasehold amortization                                   |       | 7,563                                             |       | 5,798 |   |
| Change in  valuation of embedded option                                                 |       | (805                                              | )          | 2,660 |   |
| Amortization of  identifiable intangible assets                                         |       | 4,603                                             |       | 4,876 |   |
| Other                                                                                   |       | 467                                               |       | 522 |   |
| Changes in  operating assets and liabilities, net of effects from business acquisition: |       |                                              |       |   |   |
| Trade accounts  receivable                                                              |       | (16,543                                           | )          | (4,482 | ) |
| Prepaid expenses  and other assets                                                      |       | 74                                                |       | (452 | ) |
| Accounts payable  and other liabilities                                                 |       | 10,811                                            |       | 2,095 |   |
| Excess tax  benefit related to share-based compensation                                 |       | (27                                               | )          | (441 | ) |
| Income taxes                                                                            |       | 1,364                                             |       | 2,656 |   |
| Net cash  provided by operating activities                                              |       | 15,133                                            |       | 14,863 |   |
|                                                                                    |       |                                              |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                              |       |                                              |       |   |   |
| Purchase of  property and equipment                                                     |       | (8,569                                            | )          | (4,979 | ) |
| Software  development costs                                                             |       | (2,882                                            | )          | (2,354 | ) |
| Cash paid for  business acquisition, net of cash acquired                               |       | (4,712                                            | )          | — |   |
| Other                                                                                   |       | 10                                                |       | 271 |   |
| Net cash used in  investing activities                                                  |       | (16,153                                           | )          | (7,062 | ) |
|                                                                                    |       |                                              |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                              |       |                                              |       |   |   |
| Proceeds from  revolver                                                                 |       | 2,000                                             |       | 29,000 |   |
| Payments on  revolver                                                                   |       | (2,000                                            | )          | (29,000 | ) |
| Principal  payments under long-term debt obligations                                    |       | (2,622                                            | )          | (17,932 | ) |
| Excess tax  benefit related to share-based compensation                                 |       | 27                                                |       | 441 |   |
| Proceeds from  exercise of share options                                                |       | 1,429                                             |       | 8,192 |   |
| Net cash used in  financing activities                                                  |       | (1,166                                            | )          | (9,299 | ) |
|                                                                                    |       |                                              |       |   |   |
| **NET  DECREASE IN CASH AND CASH EQUIVALENTS**                                          |       | (2,186                                            | )          | (1,498 | ) |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                       |       | 13,415                                            |       | 5,274 |   |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD**                                           |       | $                                                 | 11,229     |   | $ | 3,776 |   |

 

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

 

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**EPIQSYSTEMS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

***Principlesof Consolidation***

 

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

 

***Natureof Operations***

 

We are a provider ofintegrated technology solutions for the legal profession.  Our solutions streamline the administrationof bankruptcy, litigation, financial transactions and regulatory compliancematters.  We offer innovative technologysolutions for electronic discovery, document review, legal notification, claimsadministration and controlled disbursement of funds.  Our clients include law firms, corporatelegal departments, bankruptcy trustees and other professional advisors whorequire innovative technology, responsive service and deep subject-matterexpertise.

 

***Common Stock Split***

 

On May 17, 2007, our board of directors approveda 3 for 2 stock split, effected in the form of a 50% stock dividend, payable June 7,2007 to holders of record as of May 24, 2007.  All per share and shares outstanding data inthe condensed consolidated financial statements and the accompanying notes havebeen revised to reflect the stock split.

 

***ComprehensiveIncome***

 

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

 

***Revenue Recognition.***

 

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

 

Significant sources of revenue include:

 

·                  Fees contingent upon themonth-to-month delivery of case management services defined by clientcontracts, such as claims processing, claims reconciliation, professionalservices, call center support, and conversion of data into an organized,searchable electronic database. The amount we earn varies based primarily onthe 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 direct notification and media campaign and advertisingmanagement in which we coordinate notification through various media outlets,such as print, radio and television, to potential parties of interest for aparticular client engagement; and

 

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

 

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*Non-SoftwareArrangements*

 

Servicesrelated to electronic discovery and settlement administration are billed basedon volume and are evaluated pursuant to Emerging Issues Task Force (EITF)00-21, *Revenue Arrangements with MultipleDeliverables*.  For thesecontractual arrangements, we have identified each deliverable service element.  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 similarservices.  Lastly, our arrangements donot include general rights of return. Accordingly, each of the service elements in our multiple element caseand document management arrangements qualifies as a separate unit of accountingunder EITF 00-21.  We allocate revenue tothe various units of accounting in our arrangements based on the fair value ofeach unit of accounting, which is generally consistent with the stated pricesin our arrangements. As we have evidence of an arrangement, revenue for eachseparate unit of accounting is recognized each period in accordance with StaffAccounting Bulletin Topic 13, *RevenueRecognition* (SAB Topic 13). Revenue is recognized as the services are rendered, our fee becomesfixed and determinable, and collectability is reasonably assured.  Payments received in advance of satisfactionof the related revenue recognition criteria are recognized as a customerdeposit until all revenue recognition criteria have been satisfied.

 

*SoftwareArrangements*

 

For our Chapter 7 bankruptcy trustee arrangements, weprovide our trustee clients with a software license, hardware lease, hardwaremaintenance, and postcontract customer support (PCS) services, all at no chargeto the trustee.  The trustees place theirliquidated estate deposits with a financial institution with which we have anarrangement.  We earn contingent monthlyfees from the financial institutions based on the dollar level of averagemonthly deposits held by the trustees with that financial institution, from thefinancial institution related to the software license, hardware lease, hardwaremaintenance, and PCS services.  Weaccount for the software license and PCS elements in accordance with Statementof 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.  This revenue, when recognized, is included asa component of case management services revenue.  Revenue related to PCS is entirely contingenton the placement of liquidated estate deposits by the trustee with thefinancial institution.  Accordingly, werecognize this contingent usage based revenue consistent with the guidanceprovided by the American Institute of Certified Public Accountants’ TechnicalPractice Aid (TPA) 5100.76, *Fair Value inMultiple-Element Arrangements That Include Contingent Usage-Based Fees andSoftware Revenue Recognition* as the fee becomes fixed ordeterminable at the time actual usage occurs and collectability isprobable.  This occurs monthly as aresult of the computation, billing and collection of monthly deposit feescontractually agreed to.  At that time,we have also satisfied the other revenue recognition criteria contained in SOP97-2, since we have persuasive evidence that an arrangement exists, serviceshave been rendered, the price is fixed and determinable, and collectability isreasonably assured.

 

We also provide our trusteeclients with certain hardware, such as desktop computers, monitors, andprinters, and hardware maintenance.  Weretain ownership of all hardware provided and, based on guidance provided inEITF 01-8, *Determining Whether anArrangement Contains a Lease*, we account for this hardware as alease.  As the hardware maintenancearrangement is an executory contract similar to an operating lease, we useguidance related to contingent rentals in operating lease arrangements forhardware maintenance as well as for the hardware lease.  Since the payments under all of ourarrangements are contingent upon the level of trustee deposits and the deliveryof upgrades and other services and there remain important uncertaintiesregarding the amount of unreimbursable costs yet to be incurred by us, weaccount for the hardware lease as an operating lease in accordance with SFAS13, *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 occurs 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 ofincome as a component of “case management services” revenue.

 

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*Reimbursements*

 

We 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 in the consolidatedstatements of income as “Operating revenue from reimbursed direct costs” and as “Reimbursed direct costs,”respectively.

 

***Recent Accounting Pronouncements***

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements*, (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements.  SFAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years.  The adoption of SFAS 157 as of January 1,2008 did not have a material impact on our financial position, results ofoperations, or cash flows.  In February 2008,FASB issued Staff Position 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13* (FSP 157-1).  FSP 157-1 excludes from the scope of SFAS 157accounting pronouncements that address fair value measurements for purposes oflease classification or measurement. This scope exception does not apply to assets acquired and liabilitiesassumed in a business combination that are required to be measured at fairvalue, regardless of whether those assets and liabilities are related toleases.  FSP 157-1 was effective upon theinitial adoption of SFAS 157.  Adoptionof SFAS 157-1 as of January 1, 2008 did not have a material impact on ourfinancial position, results of operations, or cash flows.  In February 2008, FASB issued StaffPosition 157-2, *Effective Date of FASB Statement No. 157*,(FSP 157-2) that, as of February 12, 2008, indefinitely delayed theeffective date of SFAS 157 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis. Management is still evaluating the impact, if any, that the adoption ofFSP 157-2 will have on our financial position, results of operations, or cashflows.

 

In December 2007, FASB issued Statement ofFinancial Accounting Standards No. 141(R), *Business**Combinations* (SFAS 141(R)).  SFAS 141(R) establishes guidelines forthe recognition and measurement of assets, liabilities and equity in business combinations.  SFAS 141(R) is effective for financialstatements issued for fiscal years beginning after December 15, 2008.  Management is still evaluating the impact, ifany, that the adoption of SFAS 141(R) will have on our financial position,results of operations, or cash flows.

 

In December 2007, FASB issued Statement ofFinancial Accounting Standards No, 160, *Noncontrolling Interest InConsolidated Financial Statements*, (SFAS 160).  SFAS 160 changes the way in whichnoncontrolling interests in subsidiaries are measured and classified on thebalance sheet.  SFAS 160 is effective forfinancial statements issued for fiscal years beginning after December 15,2008.  Management anticipates that theadoption of SFAS 160 will not have a material effect on our financial position,results of operations, or cash flows.

 

In March 2008, FASB issued Statement of FinancialAccounting Standards No. 161, *Disclosures AboutInstruments and Hedging Activities* – amendment of FASB Statement No. 133(SFAS 161).  SFAS 161 changes thedisclosure requirements for derivative instruments and hedging activities.  SFAS 161 is effective for financialstatements issued for fiscal years beginning after November 15, 2008.  As SFAS 161 relates only to disclosure,management anticipates that the adoption of SFAS 161 will not have a materialeffect on our financial position, results of operations, or cash flows.

 

In May, 2008, FASB issued Statement of FinancialAccounting Standards No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. SFAS 162 identifies the sources of accounting principals and theframework for selecting the principals used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principals. SFAS 162 is effective 60 days following the SEC’s approval of the PCAOB’samendments to U.S. Auditing Standards (AU) Section 411, *The Meaning**of Present Fairly inConformity With Generally Accepted Accounting Principles*.  Management is still evaluating the impact, ifany, that the adoption of SFAS 162 will have on our financial position, resultsof operations, or cash flows.

 

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**NOTE 2:   INTERIM FINANCIAL STATEMENTS**

 

The accompanyingcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America(GAAP) and with the rules and regulations for reporting on Form 10-Qfor interim financial statements. Accordingly, they do not include certain information and disclosuresrequired for comprehensive annual financial statements.  The interim financial statements have not beenaudited.  The financial statements shouldbe read in conjunction with our audited financial statements and accompanyingnotes, which are included in our Form 10-K for the year ended December 31,2007.

 

In the opinion of ourmanagement, the accompanying condensed consolidated financial statementsreflect all adjustments necessary (consisting solely of normal recurringadjustments) to present fairly our financial position as of June 30, 2008,the changes in stockholders’ equity for the six month period ended June 30,2008, the results of operations for the three and six month periods ended June 30,2008 and 2007, and cash flows for the six month periods ended June 30,2008 and 2007.

 

The results of operationsfor the three and six month periods ended June 30, 2008 are notnecessarily indicative of the results to be expected for the entire year.

 

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

#### ** **

Amortizing identifiableintangible assets at June 30, 2008 and December 31, 2007 consisted ofthe following (in thousands):

 
| ** **              | ** ** | **June 30, 2008**     | ** ** | **December 31, 2007** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  contracts     |       | $                               | 40,362     |                            | $          | 20,157 |   | $ | 39,287 |   | $ | 17,863 |   |
| Trade names             |       | 745                             |       | 745                             |       | 745 |   | 745 |   |
| Non-compete  agreements |       | 28,680                          |       | 16,950                          |       | 27,526 |   | 14,640 |   |
|                    |       | $                               | 69,787     |                            | $          | 37,852 |   | $ | 67,558 |   | $ | 33,248 |   |

 

Aggregate amortizationexpense related to identifiable intangible assets was $2.3 million and $2.4million for the three month periods ended June 30, 2008 and 2007,respectively, and was $4.6 million and $4.9 million for the six month periodsended June 30, 2008 and 2007, respectively.  Amortization expense related to identifiableintangible assets for 2008 and the following five years is estimated as follows(in thousands):

 
| **Year Ending  December 31,** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| 2008                                    |       | $                                    | 9,118      |   |
| 2009                                    |       | 7,709                                |       |
| 2010                                    |       | 6,764                                |       |
| 2011                                    |       | 4,832                                |       |
| 2012                                    |       | 4,652                                |       |
| 2013                                    |       | 3,070                                |       |
|                                    |       | $                                    | 36,145     |   |

 

As of June 30, 2008 andDecember 31, 2007, goodwill had a carrying value of $264.3 million and$260.7 million, respectively.  Asdiscussed in note 10 of the condensed consolidated financial statements, the$3.6 million increase in goodwill results primarily from the acquisition, in April 2008,of an electronic discovery business in the United Kingdom.  Goodwill by segment is disclosed in note 8 ofthe condensed consolidated financial statements.

 

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### **NOTE4:   DERIVATIVES**

 

As discussed under RiskFactors in our Annual Report on Form 10-K for the year ended December 31,2007, a portion of our bankruptcy trustee revenue is subject to variabilitybased on fluctuations in short-term interest rates.  During 2007, in order to limit our economicexposure to market fluctuations in interest rates we purchased one month LIBORbased interest rate floor options with a total notional amount of $800 millionand initial contractual maturity of three years. We accounted for thistransaction pursuant to the guidance contained in Statement of FinancialAccounting Standards No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended and interpreted (SFAS133).  SFAS 133 requires that allderivative instruments be recorded on the balance sheet at fair value.  As the interest rate floor options were notdesignated as an accounting hedge, changes in the fair value of the derivativeswere recorded each period in current earnings. For the year ended December 31, 2007, the change in the fair valueof the interest rate floor options was recognized as an unrealized gain of $1.1million and was included as a component of other operating income.  During February 2008, we sold theinterest rate floor options and realized a $3.5 million gain.  The $2.4 million difference between therealized gain of $3.5 million and the previously recognized gain of $1.1million is included as a component of other operating income on theaccompanying condensed consolidated statements of income.

 

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

 

The following is asummary of indebtedness outstanding (in thousands):

 
| ** **                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Senior revolving  loan                                               |       | $                 | —     |                  | $          | — |   |
| Contingent  convertible subordinated debt, including embedded option |       | 53,153            |       | 53,958                |       |
| Other                                                                |       | 5,129             |       | 7,634                 |       |
| Total  indebtedness                                                  |       | $                 | 58,282     |                  | $          | 61,592 |   |

 

***CreditFacilities***

 

As of June 30, 2008,our credit facility, with KeyBankNational Association as administrative agent, consisted of a $100.0million senior revolving loan.  Therewere no amounts due under the senior revolving loan as of June 30,2008.  We have the right to borrowagainst the senior revolving loan until it matures in November 2008.  During the term of the credit facility, wehave the right, subject to compliance with our covenants, to increase thesenior revolving loan to $175.0 million.

 

The credit facility issecured by liens on our real property and a significant portion of our personalproperty.  Interest on the creditfacility is generally based on a spread, not to exceed 300 basis points, overthe LIBOR rate.

 

Our credit facilitycontains financial covenants related to earnings before interest, provision forincome taxes, depreciation, amortization and other adjustments as defined inthe agreements (EBITDA) and total debt. In addition, our credit facility also contains financial covenantsrelated to senior debt, fixed charges, and working capital.  As of June 30, 2008, we were incompliance with all financial covenants.

 

Subsequent toquarter-end, we amended and restated our credit facility with a new creditfacility.  The amended and restatedcredit facility, with KeyBank National Association as administrative agent,consists of a $100.0 million senior revolving loan and the facility matures in July 2011.  During the term of the credit facility, wehave the right, subject to compliance with our covenants, to increase thesenior revolving loan to $175.0 million. The amended credit facility will be secured by liens on our realproperty and a significant portion of our personal property.  Interest on the amended credit facility isgenerally based on a spread, not to exceed 325 basis points, over the LIBORrate.  Our amended credit facilitycontains financial covenants related to earnings before interest, provision forincome taxes, depreciation, amortization and other adjustments as defined inthe agreements (EBITDA) and total debt. In addition, our credit facility also contains financial covenantsrelated to senior debt, fixed charges, and working capital.  The covenant limits under the amended creditfacility are substantially the same as the covenant limits under the existingcredit facility.

 

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***ContingentConvertible Subordinated Notes***

 

During June 2004, weissued $50.0 million of contingent convertible subordinated notes with a fixed4% per annum interest rate and an original maturity of June 15, 2007.  The holders of the notes had the right toextend the maturity date by up to three years. In April 2007, the holders exercised this right and the notes’maturity date was extended to June 15, 2010.  If we change our capital structure (forexample, through a stock dividend or stock split) while the notes areoutstanding, the conversion price will be adjusted on a consistent basis and,accordingly, the number of shares of common stock we would issue on conversionwill be adjusted.  The notes areconvertible into 4.3 million shares of our common stock at a price ofapproximately $11.67 per share.  We havethe right to require that the holders of the notes convert to equity if ourshare price exceeds the $23.33 on a weighted average basis for 20 consecutivedays.

 

Under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,the right to extend the maturity of the contingent convertible subordinatednotes was accounted for as an embedded option subject to bifurcation.  The embedded option was initially valued at$1.2 million and the contingent convertible subordinated note balance wasreduced by the same amount.  Theconvertible subordinated note was accreted approximately $0.1 million eachquarter such that the contingent convertible subordinated note balance,exclusive of the embedded option value, totaled $50.0 million as of the June 15,2007 original maturity date.  On ouraccompanying condensed consolidated statements of income, this accretion is acomponent of interest expense.  Theembedded option was revalued at each period end based on the probabilityweighted discounted cash flows related to the additional 4% interest ratepayments resulting from the three year extension of the contingent convertiblesubordinated notes maturity.  During April 2007,the holders of the convertible subordinated notes exercised this right toextend and we performed a final valuation to estimate the fair value of the embeddedoption as of the approximate date of the extension.  The estimated fair value of the embeddedoption at this date, included as a component of the contingent convertiblesubordinated note, was approximately $4.8 million.  The $4.8 million estimated fair value of theembedded option is amortized as a credit to interest expense over the period tothe extended maturity, which is June 15, 2010.  If any contingent convertible notes areconverted into shares of our common stock prior to June 15, 2010, the unamortizedembedded option value related to those shares will be recognized as a gain inthe period the conversion occurs.  Theabove changes related to the carrying value of the contingent convertiblesubordinated note, the estimated fair value of the embedded option, and theamortization of the fair value of the embedded option do not affect our cashflow.

 

***ScheduledPrincipal Payments***

 

Ourlong-term obligations, including the convertible debt, mature as follows foreach twelve-month period ending June 30 (in thousands):

 
| 2009  |   | $      | 2,207  |   |
|-------|--------|--------|--------|--------|
| 2010  |   | 55,495 |   |
| 2011  |   | 552    |   |
| 2012  |   | 28     |   |
| 2013  |   | — |   |
| Total |   | $      | 58,282 |   |

 

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**NOTE 6:   SHARE-BASED COMPENSATION**

 

During June 2004, our 2004 Equity Incentive Planwas approved by our shareholders and replaced our 1995 Stock Option Plan, asamended (the “1995 Plan”).  During June 2006,an amendment to the 2004 Equity Incentive Plan was approved by ourshareholders.  The 2004 Equity IncentivePlan, as amended, (the “2004 Plan”) limits the combined grant of options toacquire shares of common stock, stock appreciation rights, and restricted stockunder the 2004 Plan to 7,500,000 shares. Any grant under the 2004 Plan that expires or terminates unexercised,becomes unexercisable or is forfeited will be available for further grantsunless, in the case of options granted, related stock appreciation rights areexercised.  At June 30, 2008, there wereapproximately 1,644,000 shares of common stock available for futureequity-related grants under the 2004 Plan. Although various forms of equity instruments may be issued, to date wehave issued only incentive share options and nonqualified share options underthis Plan.  These share options, whichhave a contractual term of 10 years, are issued with an exercise price equal tothe grant date closing market price of our common stock.  The vesting periods range from immediate to 5years.  Share options which vest over 5years generally vest either 20% per year on the first five anniversaries of thegrant date, or 25% per year on the second through fifth anniversaries of thegrant date.  Shares vesting over ashorter period 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 2008 for the purpose ofsatisfying share option exercises.

 

Following is informationrelated to exercisable share options and share options expected to vest as of June 30,2008 (shares and aggregate intrinsic value in thousands):

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
|                                 |       |       |       |                                   |       |                                                |       |                            |       |
| Options  exercisable                 |       | 5,431      |       | $                                      | 10.26      |                                                | 6.10       |                            | $          | 22,449 |   |
| Options vested  and expected to vest |       | 7,524      |       | $                                      | 11.26      |                                                | 6.77       |                            | $          | 24,928 |   |

 

The aggregate intrinsicvalue was calculated using the difference between the June 30, 2008 marketprice and the grant price for only those awards that have a grant price that isless than the June 30, 2008 market price. The weighted average grant-date fair value of options granted during thethree months ended June 30, 2008 and 2007 were $6.14 and $5.67, respectively.  The total intrinsic value of optionsexercised during the three months ended June 30, 2008 and 2007 were $1.7million and $5.0 million, respectively. During the three months ended June 30, 2008 and 2007, we receivedcash for payment of the grant price of exercised options of approximately $0.9million and $5.6 million, respectively, and we anticipate we will realize a taxbenefit related to these exercised options of approximately $0.1 million and$2.0 million, respectively.

 

During the three monthsended June 30, 2008 and 2007, we recognized share-based compensationexpense, which is a non-cash charge, of approximately $0.9 million and $0.7million, respectively, of which $0.2 million and $0.2 million, respectively, isincluded under the caption “Direct costs of services” and $0.7 million and $0.5million, respectively, is included under the caption “General andadministrative” on the accompanying condensed consolidated statements ofincome.  During the three months ended June 30,2008 and 2007, we recognized a net tax benefit of approximately $0.3 millionand $0.3 million, respectively, related to aggregate share-based compensationexpense recognized during the same period.

 

The weighted averagegrant-date fair value of options granted during the six months ended June 30,2008 and 2007 were $5.88 and $5.30, respectively.  The total intrinsic value of optionsexercised during the six months ended June 30, 2008 and 2007 were $2.1million and $5.5 million, respectively. During the six months ended June 30, 2008 and 2007, we receivedcash for payment of the grant price of exercised options of approximately $1.4million and $8.2 million, respectively, and we anticipate we will realize a taxbenefit related to these exercised options of approximately $0.3 million and$2.2 million, respectively.  The cashreceived for payment of the grant price is included as a component of cash flowfrom financing activities.  The taxbenefit related to the option exercise price in excess of the option fair valueat grant date is separately disclosed as a component of cash flow fromfinancing activities on the consolidated statement of cash flows; the remainderof the tax benefit is included as a component of cash flow from operatingactivities.

 

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During the six months ended June 30, 2008 and2007, we recognized share-based compensation expense, which is a non-cashcharge, of approximately $1.4 million and $1.0 million, respectively, of which$0.5 million and $0.3 million, respectively, is included under the caption “Directcosts of services” and $0.9 million and $0.7 million, respectively, is includedunder the caption “General and administrative” on the accompanying condensedconsolidated statements of income. During the six months ended June 30, 2008 and 2007, we recognized anet tax benefit of approximately $0.5 million and $0.3 million, respectively,related to aggregate share-based compensation expense recognized during thesame period.  As of June 30, 2008,there was $12.1 million of total unrecognized compensation cost related tononvested share-based compensation arrangements, which will be recognized overa weighted-average period of 3.5 years.

 

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**NOTE 7:   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.  When calculatingincremental shares related to outstanding share options, we apply the treasurystock method.  The treasury stock methodassumes that proceeds, consisting of the amount the employee must pay onexercise, 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 treasury stock method is applied only toshare grants for which the effect is dilutive.

 

The computationsof basic and diluted net income per share are as follows (in thousands, exceptper share data):

 
| ** **                      | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Net  Income**                                     | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** |
|                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic net income  per share     |       | $                                                   | 3,154      |   | 35,424 |   | $ | .09 |   | $ | 1,794 |   | 29,848 |   | $ | .06 |   |
|                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities: |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Share options                   |       |                                                |       | 1,924 |   |   |   |   |   | 2,132 |   |   |   |
| Convertible debt                |       | 301                                                 |       | 4,286 |   |   |   | — |   | — |   |   |   |
|                            |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted net  income per share   |       | $                                                   | 3,455      |   | 41,634 |   | $ | .08 |   | $ | 1,794 |   | 31,980 |   | $ | .06 |   |

 

#### **For the three month periods ended June 30,2008 and 2007, weighted-average outstanding share options totalingapproximately 1.9 million and 1.0 million shares of common stock, respectively,were antidilutive and therefore not included in the computation of dilutedearnings per share.  For the three monthsended June 30, 2007, we did not assume conversion of the contingentconvertible subordinated convertible notes as the effect would have beenantidilutive.**

 
| ** **                      | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **Net  Income**                                   | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** | **Net  Income** | ** ** | **Weighted  Average  Shares  Outstanding** | ** ** | **Per  Share  Amount** | ** ** |
|                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Basic net income  per share     |       | $                                                 | 5,811      |   | 35,357 |   | $ | .16 |   | $ | 1,944 |   | 29,559 |   | $ | .07 |   |
|                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities: |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Share options                   |       |                                              |       | 1,867 |   |   |   |   |   | 1,899 |   |   |   |
| Convertible debt                |       | 603                                               |       | 4,286 |   |   |   | — |   | — |   |   |   |
|                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Diluted net  income per share   |       | $                                                 | 6,414      |   | 41,510 |   | $ | .15 |   | $ | 1,944 |   | 31,458 |   | $ | .06 |   |

 

#### **For the six month periods ended June 30,2008 and 2007, weighted-average outstanding share options totalingapproximately 1.7 million and 1.4 million shares of common stock wereantidilutive and, therefore, not included in the computation of dilutedearnings per share.  For the six monthsended June 30, 2007 we did not assume conversion of the contingentconvertible subordinated convertible notes as the effect would have beenantidilutive.**

 

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**NOTE8:   SEGMENT REPORTING**

 

In the first quarter of2008, we revised the structure of our reporting segments to reflect a change inthe nature of the financial information provided to our chief operatingdecision makers resulting from a change in the structure of our internalorganization.  The segment measure ofprofit for the three and six months ended June 30, 2007 has been restatedin accordance with our new organization structure, including the changes incertain internal financial reporting information.  We have three reporting segments: (i) electronicdiscovery, (ii) bankruptcy, and (iii) settlement administration.  Our electronic discovery business provideselectronic discovery services to corporations and the litigation department oflaw firms.  Produced documents are madeavailable primarily through our hosted site, and our DocuMatrixTM softwareallows for efficient plaintiff and defendant counsel review and datarequests.  Our bankruptcy segmentprovides solutions that address the needs of trustees to administer bankruptcyproceedings and of debtor corporations that file a plan of reorganization.  Our settlement administration segmentadministers complex legal proceedings which involve notification of a class ofactual or potential claimants and the administration of funds related to settlementwith the class of claimants.

 

Each segment’sperformance is assessed based on earnings before interest, taxes, depreciationand amortization, other operating income, and share-based compensationexpense.  In management’s evaluation ofperformance, certain costs, such as compensation for administrative staff andexecutive management, are not allocated by segment and, accordingly, thefollowing reporting segment results do not include such unallocated costs.  Intersegment revenues are not considered materialto the segment reporting information. Assets reported within a segment are those assets that can be identifiedto a segment and primarily consist of trade receivables, property, equipmentand leasehold improvements, software, identifiable intangible assets andgoodwill.  Cash, tax-related assets, andcertain prepaids and other assets are not allocated to our segments.  Although we can and do identify long-livedassets such as property, equipment and leasehold improvements, software, andidentifiable intangible assets to reporting segments, we do not allocate therelated depreciation and amortization to the segment as management evaluatessegment performance exclusive of these non-cash expenses.

 

Following is a summary ofsegment information (in thousands):

 
| ** **                                        | ** ** | **Three Months Ended June 30, 2008** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic  Discovery**                                     | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                          |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                             | 16,278     |   | $ | 12,498 |   | $ | 28,161 |   | $ | 56,937 |   |
| Operating  revenue from reimbursed direct costs   |       | 19                                                            |       | 869 |   | 7,017 |   | 7,905 |   |
| Total revenue                                     |       | 16,297                                                        |       | 13,367 |   | 35,178 |   | 64,842 |   |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 8,233                                                         |       | 7,226 |   | 29,128 |   | 44,587 |   |
| Segment  performance measure                      |       | $                                                             | 8,064      |   | $ | 6,141 |   | $ | 6,050 |   | $ | 20,255 |   |

 

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| ** **                                        | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic  Discovery**                                     | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                          |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                             | 12,224     |   | $ | 16,004 |   | $ | 9,943 |   | $ | 38,171 |   |
| Operating  revenue from reimbursed direct costs   |       | 12                                                            |       | 1,359 |   | 4,664 |   | 6,035 |   |
| Total revenue                                     |       | 12,236                                                        |       | 17,363 |   | 14,607 |   | 44,206 |   |
|                                              |       |                                                          |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 5,782                                                         |       | 7,963 |   | 13,182 |   | 26,927 |   |
| Segment  performance measure                      |       | $                                                             | 6,454      |   | $ | 9,400 |   | $ | 1,425 |   | $ | 17,279 |   |

 

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

 
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                                  |       |                                                |       |   |   |
| Segment  performance measure                          |       | $                                                   | 20,255     |   | $ | 17,279 |   |
| Corporate and  unallocated expenses                   |       | (5,988                                              | )          | (4,945 | ) |
| Share-based  compensation expense                     |       | (872                                                | )          | (703 | ) |
| Depreciation and  software and leasehold amortization |       | (3,853                                              | )          | (2,837 | ) |
| Amortization of  intangible assets                    |       | (2,325                                              | )          | (2,352 | ) |
| Other operating  expense                              |       | (859                                                | )          | — |   |
| Interest  expense, net                                |       | (405                                                | )          | (3,320 | ) |
| Income before  income taxes                           |       | $                                                   | 5,953      |   | $ | 3,122 |   |

 
| ** **                                        | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic  Discovery**                                   | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                        |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                           | 29,516     |   | $ | 25,862 |   | $ | 45,460 |   | $ | 100,838 |   |
| Operating  revenue from reimbursed direct costs   |       | 121                                                         |       | 1,701 |   | 11,192 |   | 13,014 |   |
| Total revenue                                     |       | 29,637                                                      |       | 27,563 |   | 56,652 |   | 113,852 |   |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 15,178                                                      |       | 14,124 |   | 49,893 |   | 79,195 |   |
| Segment  performance measure                      |       | $                                                           | 14,459     |   | $ | 13,439 |   | $ | 6,759 |   | $ | 34,657 |   |

 

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| ** **                                        | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Electronic  Discovery**                                   | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Revenue:                                          |       |                                                        |       |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs |       | $                                                           | 22,336     |   | $ | 31,047 |   | $ | 19,884 |   | $ | 73,267 |   |
| Operating  revenue from reimbursed direct costs   |       | 25                                                          |       | 2,550 |   | 9,493 |   | 12,068 |   |
| Total revenue                                     |       | 22,361                                                      |       | 33,597 |   | 29,377 |   | 85,335 |   |
|                                              |       |                                                        |       |   |   |   |   |   |   |
| Direct costs,  general and administrative costs   |       | 10,696                                                      |       | 15,084 |   | 26,343 |   | 52,123 |   |
| Segment  performance measure                      |       | $                                                           | 11,665     |   | $ | 18,513 |   | $ | 3,034 |   | $ | 33,212 |   |

 

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

 
| ** **                                            | ** ** | **Six Months Ended June,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
|                                                  |       |                                      |       |   |   |
| Segment  performance measure                          |       | $                                         | 34,657     |   | $ | 33,212 |   |
| Corporate and  unallocated expenses                   |       | (10,830                                   | )          | (9,602 | ) |
| Share-based  compensation expense                     |       | (1,396                                    | )          | (1,014 | ) |
| Depreciation and  software and leasehold amortization |       | (7,563                                    | )          | (5,798 | ) |
| Amortization of  intangible assets                    |       | (4,603                                    | )          | (4,876 | ) |
| Other operating  income (expense)                     |       | 1,512                                     |       | — |   |
| Interest  expense, net                                |       | (752                                      | )          | (8,415 | ) |
| Income before  income taxes                           |       | $                                         | 11,025     |   | $ | 3,507 |   |

 

Following are totalassets by segment (in thousands):

 
| ** **                 | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                 |       |                    |       |                        |       |
| Electronic  Discovery      |       | $                       | 145,645    |                        | $          | 132,030 |   |
| Bankruptcy                 |       | 177,297                 |       | 178,937                     |       |
| Settlement  Administration |       | 65,431                  |       | 52,724                      |       |
| Corporate and  unallocated |       | 25,167                  |       | 29,103                      |       |
| Total  consolidated assets |       | $                       | 413,540    |                        | $          | 392,794 |   |

 

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Following is goodwill bysegment (in thousands):

 
| ** **                  | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Goodwill**                |       |                    |       |                        |       |
| Electronic  Discovery       |       | $                       | 79,646     |                        | $          | 76,048 |   |
| Bankruptcy                  |       | 151,700                 |       | 151,700                     |       |
| Settlements  Administration |       | 32,984                  |       | 32,936                      |       |
| Total goodwill              |       | $                       | 264,330    |                        | $          | 260,684 |   |

 

**NOTE 9:                SUPPLEMENTAL CASH FLOWINFORMATION**

 

Supplemental cashflow information is as follows (in thousands):

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                                         |       |                                              |       |   |   |
| Cash paid for:                                                               |       |                                              |       |   |   |
| Interest                                                                     |       | $                                                 | 1,489      |   | $ | 4,594 |   |
| Income taxes  paid, net                                                      |       | 3,427                                             |       | 245 |   |
| Non-cash  investing and financing transactions:                              |       |                                              |       |   |   |
| Capitalized  lease obligations incurred                                      |       | —                                            |       | 125 |   |
| Property,  equipment, and leasehold improvements accrued in accounts payable |       | 2,188                                             |       | 5,236 |   |
|                                                                              |            |                                                   |            |  |  |  |  |

 

**NOTE 10:              ACQUISITIONS**

 

On April 4, 2008,our wholly-owned subsidiary, Epiq Systems Holding B.V., acquired all the equityof Uberdevelopments Limited and its wholly-owned operating subsidiary, PinpointGlobal Limited (collectively, “Pinpoint”), an electronic discovery businesswith operations in the United Kingdom. The total value of the transaction was $5.4 million, consisting of $4.9million of cash and $0.5 million of capitalized transaction costs.  If certain revenue targets are satisfiedwithin one year of acquisition, we will be required to make an additional payment.  The amount of such payment, ranging from£200,000 to £1,000,000 (as of June 30, 2008, approximately $0.4 million to$2.0 million), will be recorded as a purchase price adjustment when thecontingency is resolved.  Additionally,if certain other revenue targets are satisfied prior to the second and thirdanniversary dates of the agreement, we will be required to make additionalpayments.  The aggregate amount of suchpayments would be within the range of £160,000 to £400,000 (as of June 30,2008, approximately $0.3 million to $0.8 million) and will be recorded ascompensation expense when the contingency is resolved.  The preliminary allocation of the purchaseprice is as follows:  $0.3 million to netassets, $1.1 million to customer contracts, $1.1 million to non-competeagreements, $0.7 million to establish a deferred tax liability related to theacquired intangible assets, and $3.6 million to goodwill.  The allocation of the purchase price to theassets and liabilities acquired will be finalized as necessary, up to one yearafter the acquisition closing date, when information that is known to beavailable or obtainable is obtained.  Thepurchase price in excess of the value of the acquired identifiable net assetsreflects the strategic value we placed on Pinpoint as this acquisitionfacilitates the expansion of our electronic discovery business in the UnitedKingdom.

 

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 the acquired entities are included within ourelectronic discovery segment.  The proforma results of the acquired entities for the period January 1, 2008through the date of acquisition are not material to our consolidated results ofoperations.

 

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| **ITEM 2.** | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.** |
|-------------|------------|--------------------------------------------------------------------------------------------------|

 

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

 

### **Overview**

### ** **

We are a provider ofintegrated technology solutions for the legal profession.  Our solutions streamline the administrationof bankruptcy, litigation, financial transactions and regulatory compliancematters.  We offer innovative technologysolutions for electronic discovery, document review, legal notification, claimsadministration and controlled disbursement of funds.  Our clients include law firms, corporatelegal departments, bankruptcy trustees and other professional advisors whorequire innovative technology, responsive service and deep subject-matterexpertise.

 

We have three reportingsegments: electronic discovery, bankruptcy, and settlement administration.

 

***Electronic Discovery Segment***

 

Our electronic discoverybusiness provides processing and search and review services to corporations andthe litigation departments of law firms. Our eDataMatrixTM software analyzes, filters, deduplicates and producesdocuments for review.  Produced documentsare made available primarily through a hosted environment, and our DocuMatrixTMsoftware allows for efficient plaintiff and defendant counsel review and datarequests.

 

Our customers aretypically large corporations that use our products and services cooperativelywith their legal counsel to manage the electronic discovery process for complexlitigation matters.

 

The substantial increaseof electronic documents by businesses has changed the dynamics of how attorneyssupport discovery in complex litigation matters.  According to the 2007 Socha-GelbmannElectronic Discovery Survey, the 2006 domestic commercial electronic discoveryrevenues were estimated at $2.0 billion, an approximate 51% increase from2005.  According to this same source, themarket is expected to continue to grow at year over year annual rates of 28%for 2008 and 23% for 2009.  Due to thecomplexity of cases, the volume of data that is maintained electronically, andthe volume of documents that are produced in all types of litigation, it isanticipated that law firms will become increasingly reliant on electronicevidence management systems to organize and manage the litigation discovery process.

 

Significant sources of revenue include:

 

·                  Fees related to the conversion of datainto an organized, searchable electronic database. The amount we earn variesprimarily on the size (number of documents) and complexity of the engagement;and

 

·                  Hosting fees based on the amount of datastored.

 

***BankruptcySegment***

 

Our bankruptcy businessaddresses the needs of Chapter 7, Chapter 11, and Chapter 13 bankruptcytrustees.

 

·                  Chapter 7 is a liquidation bankruptcy forindividuals or businesses that, as measured by the number of new cases filed in2007, accounted for approximately 60% of all bankruptcy filings.  In a Chapter 7 case, the debtor’s assets areliquidated and the resulting cash proceeds are used by the Chapter 7 bankruptcytrustee to pay creditors.  Chapter 7cases typically last several years.

 

·                  Chapter 11 is a reorganization model ofbankruptcy for corporations that, as measured by the number of new cases filedin fiscal 2007, accounted for approximately 1% of all bankruptcy filings.  Chapter 11 generally allows a company, oftenreferred to as the debtor-in-possession, to continue operating under a plan ofreorganization to restructure its business and to modify payment terms of bothsecured and unsecured obligations. Chapter 11 cases may last several years. Key participants include the debtor-in-possession, the debtor’s counsel,the creditors, the creditors’ counsel, and the bankruptcy judge.

 

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·                  Chapter 13 is a reorganization model ofbankruptcy for individuals that, as measured by the number of new cases filedin 2007, accounted for approximately 39% of all bankruptcy filings.  In a Chapter 13 case, debtors make periodiccash payments into a reorganization plan and a Chapter 13 bankruptcy trusteeuses these cash payments to make monthly distributions to creditors.  Chapter 13 cases typically last between threeand five years.

 

Our end-user customers are debtor corporations that file a plan of reorganizationand professional bankruptcy trustees.  The Executive Office for United StatesTrustees, a division of the U.S. Department of Justice, appoints all bankruptcytrustees.  A United States Trustee isappointed in most federal court districts and generally has responsibility foroverseeing the integrity of the bankruptcy system.  The bankruptcy trustee’s primaryresponsibilities include liquidating the debtor’s assets or collecting fundsfrom the debtor, distributing the collected funds to creditors pursuant to theorders of the bankruptcy court and preparing regular status reports for theExecutive Office for United States Trustees and for the bankruptcy court.  Trustees manage an entire caseload ofbankruptcy cases simultaneously.

 

Significant sources of revenue include:

 

·                  Data hosting fees and volume-based feesrelated to the management of large volumes of electronic data in support of alegal proceeding;

 

·                  Case management professional service feesand other support service fees related to the administration of cases,including data conversion, claims processing, claims reconciliation,professional consulting services, and settlement administration;

 

·                  Deposit-based fees, earned primarily on apercentage of Chapter 7 total liquidated assets placed on deposit with adesignated financial institution by our trustee clients, to whom we provide, atno charge, software licenses, limited hardware and hardware maintenance, andpostcontract customer support (PCS) services. The fees we earn based on total liquidated assets placed on deposit byour trustee clients may vary based on fluctuations in short-term interestrates;

 

·                  Document management legal noticingservices to parties of interest in bankruptcy matters, including directnotification and media campaign and advertising management in which wecoordinate notification, primarily through print media outlets, to potentialparties of interest for a particular client engagement; and

 

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

 

***SettlementAdministration Segment***

 

Our settlementadministration segment supports the administration of complex legal proceedingswhich involve notification of a class of claimants.

 

Class action andmass tort refer to litigation in which class representatives bring a lawsuitagainst a defendant company or other persons on behalf of a large group ofsimilarly affected persons (the class). Mass tort refers to class action cases that are particularly large orprominent.  The class action and masstort marketplace is significant, with estimated annual tort claim costs ofapproximately $250 billion in 2006, according to an update study issued in 2007by Towers Perrin.  Administrative costs,which include costs, other than defense costs, incurred by either the insurancecompany or self-insured entity in the administration of claims, compriseapproximately 20% of this total.  Keyparticipants in this marketplace include law firms that specialize inrepresenting class action and mass tort plaintiffs and other law firms thatspecialize in representing defendants.  Class actionand mass tort litigation is often complex and the cases, includingadministration of any settlement, may last several years.

 

Our customers are corporations that are administeringthe settlement or resolution of class action cases.  We sell our services directly to thosecustomers and other interested parties, including legal counsel, which oftenprovide access to these customers.

 

Significant sources of revenue include:

 

·                  Fees contingent upon the month-to-monthdelivery of case management services such as claims processing, claimsreconciliation, professional services, call center support, and controlleddisbursements.  The amount we earn variesprimarily on the size and complexity of the engagement;

 

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·                  Legal noticing services to parties ofinterest in class action matters, including media campaign and advertisingmanagement, in which we coordinate notification through various media outlets,such as print, radio and television, to potential parties of interest for aparticular client engagement; and

 

·                Reimbursement for costs incurredrelated to postage on mailing services.

 

**CriticalAccounting Policies**

 

In our Annual Report on Form 10-Kfor the year ended December 31, 2007, we disclose accounting policies,referred to as critical accounting policies, that require management to usesignificant judgment or that require significant estimates.  Management regularly reviews the selectionand application of our critical accounting policies.  There have been no updates to the criticalaccounting policies contained in our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

**Resultsof Operations for the Three Months Ended June 30, 2008 Compared with theThree Months Ended June 30, 2007**

 

### **ConsolidatedResults**

### ** **

### ***Revenue***

### ** **

Total revenue of $64.8million for the three months ended June 30, 2008 increased approximately$20.6 million, or 47%, compared to $44.2 million of revenue for the same periodin the prior year.  A portion 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 operating revenue from reimbursed direct costs may fluctuatesignificantly from quarter to quarter, these fluctuations have a minimal effecton our income from operations as we realize little or no margin from thisrevenue.  Operating revenue exclusive ofoperating revenue from reimbursed direct costs, which we refer to as operatingrevenue before reimbursed direct costs, increased approximately 49% to $56.9million for the three months ended June 30, 2008 compared to $38.2 millionfor the same period in the prior year. The increase primarily relates to a $4.1 million increase in electronicdiscovery operating revenue before reimbursed direct costs combined with an$18.2 million increase in settlements administration operating revenue beforereimbursed direct costs, partly offset by a $3.5 million decrease in bankruptcyoperating revenue before reimbursed direct costs.  Changes by segment are discussed below.

 

### ***Operating Expenses***

### ** **

Direct costs of services,exclusive of depreciation and amortization, increased by approximately $14.0million to approximately $24.4 million for the three months ended June 30,2008 compared with $10.4 million during the same period in the prior year.  This increase primarily results from a $8.8million increase in the cost of outside services, primarily related totelephone, mailing and temporary help services, a $2.6 million increase inlegal noticing, and a $1.6 million increase in production supplies.  Changes by segment are discussed below.

 

Direct cost of bundledproducts and services, exclusive of depreciation and amortization, totaledapproximately $0.9 million for both the three months ended June 30, 2008and the three months ended June 30, 2007. Changes by segment are discussed below.

 

Reimbursed direct costsincreased by approximately $1.9 million, or 31%, to $7.9 million for the threemonths ended June 30, 2008 compared with $6.0 million during the sameperiod in the prior year.  This increasedirectly corresponds to the increase in operating revenue from reimburseddirect costs.  Changes by segment arediscussed below.

 

General and administrativecosts increased approximately 19% to $18.2 million for the three months ended June 30,2008 compared with $15.3 million for the same period in the prior year.  The increase is primarily due to a $1.1million increase in compensation, commission and benefits expense primarilyresulting from expanded staffing to support increased operating revenue, a $0.8million increase related to travel expense, a $0.3 million increase related toprofessional services, and a $0.1 million increase in  share-based compensation.  Changes by segment are discussed below.

 

Depreciation and softwareand leasehold amortization costs increased approximately 36% to $3.9 millionfor the three months ended June 30, 2008 compared with $2.8 million forthe same period in the prior year primarily as a result of increased 

 

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software amortizationexpense and increased hardware depreciation largely related to increasedcapital expenditures within our electronic discovery segment.

 

Amortization ofidentifiable intangible assets, compared with the same period in the prioryear, decreased to $2.3 million for the three months ended June 30, 2008 comparedwith $2.4 million for the same period in the prior year.  Certain customer contracts and tradenamesbecame fully amortized, which were partly offset by an increase in non-competeamortization resulting from our second quarter acquisition.

 

Other operating expenses,consisting of non-capitalized acquisition related expenses for, legal services,indirect and general costs, accounting services, and valuation services,totaled $0.9 million for the three months ended June 20, 2008.  We did not have other operating expensesduring the same period in the prior year.

 

***InterestExpense***

 

We recognized interestexpense of $0.4 million for the three months ended June 30, 2008 comparedwith $3.3 million for the same period in the prior year.  The $2.9 million decrease is primarilyrelated to a $1.8 million decrease in interest expense related to our creditfacility, a $0.8 million decrease in expense related to the value of oursubordinated convertible note holders’ option to extend the maturity of thesubordinated convertible notes from June 15, 2007 to June 15, 2010,and a $0.2 million decrease in loan fee amortization.  The fair value of the option to extendmaturity was derived primarily from the estimated future cash flows related tothe payment of the 4% interest for an additional three years.  Accordingly, during the three months ended June 30,2007, the adjustment to the fair value of the option resulted in recognition of$0.4 million of interest expense.  DuringApril 2007, the holders of the contingent convertible subordinated notesexercised their right to extend the maturity of the convertible notes.  As a result, we will continue to payinterest, at a rate of 4% per annum, during the extension period on anyconvertible notes that remain outstanding (the holders of the convertible notesmay chose at any time to convert some or all of the notes into our commonshares – see note 5 of the notes to the condensed consolidated financialstatements for additional information regarding this conversion right).  We estimated the fair value of the optionimmediately prior to the note holders’ vote to extend and recorded a finaladjustment to the fair value of the option to extend the subordinatedconvertible notes’ maturity.  We arecurrently amortizing the exercise date fair value of the option as a reductionto interest expense over the term of the extension.  During the three months ended June 30,2008, we recognized a reduction to interest expense of approximately $0.4million related to the amortization of the carrying value of the option toextend the maturity term subsequent to the extension date.  The $1.8 million decrease in credit facilityinterest expense results from our repayment and termination of the creditfacility term loan and the repayment in full of the credit facility revolvingloan during 2007 with the proceeds of a common stock offering in November 2007.  The $0.3 million decrease in loanamortization expense is primarily the result of the completion of theamortization of fees related to the contingent convertible subordinated debtand the credit facility term loan during 2007.

 

***IncomeTaxes***

 

Our tax expense as apercent of pre-tax income was 47.0% during the three months ended June 30,2008 compared with tax expense as a percent of pre-tax income of 42.5% for thesame period in the prior year.  Theincrease in our effective tax rate compared with the same period in the prioryear is due primarily to recording in 2008 additional uncertain tax positionsrelated to FIN 48 state taxes and to reduced tax benefits realized on theexercise of incentive stock options.  Ourtax 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 tax ratesthat are higher than the tax rates assessed by other jurisdictions where weoperate.

 

***NetIncome***

 

Our net income wasapproximately $3.2 million for the three months ended June 30, 2008compared with net income of approximately $1.8 million for the same period inthe prior year. The $1.4 million increase is primarily the result of an $18.8million increase in operating revenue before reimbursed direct costs and a $2.9million decrease in interest expense during the three months ended June 30,2008 compared with the same period in the prior year, partly offset by an $14.0million increase in direct cost of services, a $3.0 million increase in generaland administrative expenses, a $1.5 million increase in income tax expense, a$1.0 million increase in depreciation and software amortization, and a $0.9million increase in other operating expenses during the three months ended June 30,2008 compared with the same period in the prior year.

 

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***ElectronicDiscovery Segment***

 

Electronic discoveryoperating revenue before reimbursed direct costs increased $4.1 million, orapproximately 33%, to $16.3 million for the three months ended June 30,2008 compared to $12.2 million for the same period in the prior year.  This increase is primarily attributable toadditional projects from existing clients as well as an expansion of our clientbase, resulting in an increase in hosting and processing revenue ofapproximately $4.0 million.

 

Electronic discoverydirect and administrative expenses increased approximately 42% to $8.2 millionfor the three months ended June 30, 2008 compared with approximately $5.8million for the same period in the prior year. This increase is primarily a result of a $1.3 million increase incompensation, commission and benefits expense resulting from expanded staffingto support increased operating revenue, a $0.3 million increase in building andequipment lease expense, primarily related to data center expansion, a $0.2million increase in professional services, a $0.1 million increase inpromotional expense, and a $0.1 million increase in bad debt expense.

 

***BankruptcySegment***

 

Bankruptcy operatingrevenue before reimbursed direct costs decreased approximately $3.5 million, or22%, to $12.5 million for the three months ended June 30, 2008 compared to$16.0 million for the same period in the prior year.  This decrease is primarily the result of $2.3million decrease in our bankruptcy trustee deposit-based fees combined with a$1.1 million decrease in noticing and claims preference services.  The bankruptcy trustee deposit fees declineof $2.3 million results primarily from a decline in short-term interest ratescombined with lower bankruptcy deposits. Revenue from our bankruptcy trustee business could continue to be lowerwith comparable periods in the prior year if short-term interest rates remainat current levels.  This effect could bepartly mitigated by an increase in bankruptcy filings which could result in anincrease in the bankruptcy trustee deposit portfolio.  Noticing services depend on the timing of acase and will fluctuate from period to period.

 

Bankruptcy direct andadministrative expenses decreased approximately 9% to $7.2 million for thethree months ended June 30, 2008 compared with approximately $8.0 millionin the same period in the prior year. This decrease is primarily attributable to a $0.5 million decrease inreimbursed expenses and a $0.2 million decrease in compensation costs.

 

***SettlementAdministration Segment***

 

Settlement administrationoperating revenue before reimbursed direct costs increased approximately 183%,to $28.2 million for the three months ended June 30, 2008 compared to $9.9million for the same period in the prior year. This increase is primarily the result of a $14.8 million increase incall center revenue and direct mailing revenue, primarily related to a largecontract, and a $2.8 million increase in legal notification revenue resultingfrom several large cases.  Legalnotification revenue tends to be variable, as an individual noticing campaignmay have a short duration and generate significant revenue during that time.

 

Settlementadministration direct and administrative expenses, including reimbursed directcosts, increased $15.9 million, or approximately 121%, to $29.1 million for thethree months ended June 30, 2008 compared to $13.2 million for the sameperiod in the prior year.  This increaseis primarily the result of a $10.6 million increase in call center, outsideservice, and mailing supplies costs to support the large contract referencedabove, a $2.6 million increase in the cost of legal noticing that is directlyrelated to the increase in legal noticing revenue, and a $2.4 million increasein reimbursable expenses.  Legalnotification revenue tends to be variable, as an individual noticing campaignmay have a short duration and generate significant revenue during that time.

 

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**Resultsof Operations for the Six Months Ended June 30, 2008 Compared with the SixMonths Ended June 30, 2007**

 

### **ConsolidatedResults**

### ** **

### ***Revenue***

### ** **

Total revenue of $113.9million for the six months ended June 30, 2008 increased approximately 33%compared to $85.3 million of revenue for the same period in the prioryear.  A portion of our total revenueconsists of reimbursement for direct costs we incur, such as postage related todocument management services.  We reflectthe operating revenue from these reimbursed direct costs as a separate lineitem on our accompanying condensed consolidated statements of income.  Although reimbursed operating revenue mayfluctuate significantly from quarter to quarter, these fluctuations have aminimal effect on our income from operations as we realize little or no marginfrom this revenue.  Operating revenueexclusive of operating revenue from reimbursed direct costs, which we refer toas operating revenue before reimbursed direct costs, increased approximately38% to $100.8 million for the six months ended June 30, 2008 compared to$73.3 million for the same period in the prior year.  The increase primarily relates to a $7.2million increase in electronic discovery operating revenue before reimburseddirect costs combined with an $25.6 million increase in settlementsadministration operating revenue before reimbursed direct costs, partly offsetby a $5.2 million decrease in bankruptcy operating revenue before reimburseddirect costs.  Changes by segment arediscussed below.

 

### ***Operating Expenses***

### ** **

Direct costs of services,exclusive of depreciation and amortization, increased by approximately 109% to$43.3 million for the six months ended June 30, 2008 compared with $20.7million during the same period in the prior year.  This increase primarily results from a $14.1million increase in the cost of outside services, primarily related totelephone, mailing and temporary help services, a $4.5 million increase inlegal noticing, and a $2.1 million increase in production supplies.  Changes by segment are discussed below.

 

Direct cost of bundledproducts and services, exclusive of depreciation and amortization, increased byapproximately $0.1 million, or 4%, to approximately $1.9 million for the sixmonths ended June 30, 2008 compared with $1.8 million for the same periodin the prior year primarily as a result of an increase in compensation andbenefits expense.  Changes by segment arediscussed below.

 

Reimbursed direct costsincreased to $13.0 million for the six months ended June 30, 2008 comparedwith $12.0 million during the same period in the prior year.  This increase directly corresponds to theincrease in operating revenue from reimbursed direct costs.  Changes by segment are discussed below.

 

General andadministrative costs increased by approximately $5.1 million, or 18%, to $33.3million for the six months ended June 30, 2008 compared with $28.2 millionfor the same period in the prior year. The increase is primarily due to a $1.0 million increase incompensation, commission and benefits expense primarily resulting from expandedstaffing to support increased operating revenue, a $1.4 million increaserelated to travel expense, a $0.9 million increase related to professionalservices, a $0.7 million increase in bad debt expense, and a $0.3 millionincrease in share-based compensation. Changes by segment are discussed below.

 

Depreciation and softwareand leasehold amortization costs increased approximately $1.8 million, or 30%,to $7.6 million for the six months ended June 30, 2008 compared with $5.8million for the same period in the prior year primarily as a result ofincreased software amortization expense and increased hardware depreciationlargely related to our electronic discovery segment.

 

Amortization ofidentifiable intangible assets decreased by approximately $0.3 million, or 6%,to $4.6 million for the six months ended June 30, 2008 compared with $4.9million for the same period in the prior year, primarily as a result of certaincustomer contracts and tradenames that became fully amortized, partly offset byan increase in non-compete amortization resulting from our second quarteracquisition of an electronic discovery business in the United Kingdom.

 

Other operating income of$1.5 million includes a $2.4 million gain related to interest rate flooroptions purchased during 2007, partly offset by $0.9 million of acquisitionrelated expenses consisting of non-capitalized acquisition related expenses forlegal services, indirect and general costs, accounting services, and valuationservices.  A portion of our bankruptcytrustee 

 

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pricing is tied toshort-term interest rates, and an increase or decrease in the short-terminterest rate may result in corresponding changes in bankruptcy trusteerevenue.  To mitigate our interest raterisk, during the third quarter of 2007 we purchased, for $1.6 million, LIBORbased interest rate floors with strike prices ranging from 1.75% to 2.75% and anotional value of $800 million.  Theseinstruments were not designated as accounting hedges.  At the end of each period, we estimate thefair value of these instruments and the change in market value is recognized asa component of other operating income. The adjustment for the year ended December 31, 2007 resulted in therecognition of $1.1 million of income. During the three months ended March 31, 2008, we terminated these interest rate flooroptions in order to lock in the unrealized gain and, as a result, received cashof approximately $5.1 million and recognized an incremental gain during the quarterof $2.4 million.  Acquisitionrelated expenses totaled $0.9 million for the three months ended June 20,2008.  We did not have other operatingexpenses during the same period in the prior year.

 

***InterestExpense***

 

We recognized interestexpense of $0.9 million for the six months ended June 30, 2008 comparedwith $8.4 million for the same period in the prior year.  The $7.5 million decrease is primarilyrelated to a $3.6 million decrease in interest expense related to our creditfacility, a $3.3 million decrease in expense related to the value of oursubordinated convertible note holders’ option to extend the maturity of thesubordinated convertible notes from June 15, 2007 to June 15, 2010,and a $0.5 million decrease in loan fee amortization.  The fair value of the option to extendmaturity was derived primarily from the estimated future cash flows related tothe payment of the 4% interest for an additional three years.  Accordingly, during the six months ended June 30,2007, the adjustment to the fair value of the option resulted in recognition of$2.5 million of interest expense.  DuringApril 2007, the holders of the contingent convertible subordinated notesexercised their right to extend the maturity of the convertible notes.  As a result, we will continue to payinterest, at a rate of 4% per annum, during the extension period on anyconvertible notes that remain outstanding (the holders of the convertible notesmay chose at any time to convert some or all of the notes into our commonshares – see note 5 of the notes to the condensed consolidated financialstatements for additional information regarding this conversion right).  We estimated the fair value of the optionimmediately prior to the note holders’ vote to extend and recorded a finaladjustment to the fair value of the option to extend the subordinatedconvertible notes’ maturity.  We arecurrently amortizing the exercise date fair value of the option as a reductionto interest expense over the term of the extension.  During the three months ended June 30,2008, we recognized a reduction to interest expense of approximately $0.8million related to the amortization of the carrying value of the option toextend the maturity term subsequent to the extension date.  The $3.6 million decrease in credit facilityinterest expense results from our repayment and termination of the creditfacility term loan and the repayment in full of the credit facility revolvingloan during 2007 with the proceeds of a common stock offering in November 2007.  The $0.5 million decrease in loanamortization expense is primarily the result of the completion of theamortization of fees related to the contingent convertible subordinated debtand the credit facility term loan during 2007.

 

***IncomeTaxes***

 

Our tax expense as a percentof pre-tax income was 47.3% during the six months ended June 30, 2008compared with tax expense as a percent of pre-tax income of 44.6% for the sameperiod in the prior year.  The increasein our effective tax rate compared with the same period in the prior year isdue primarily to recording in 2008 additional uncertain tax positions relatedto FIN 48 state taxes and to reduced tax benefits realized on the exercise ofincentive stock options.  Our tax rate ishigher than the statutory federal rate of 35% primarily due to statetaxes.  We have significant operationslocated in New York City that are subject to state and local tax rates that arehigher than the tax rates assessed by other jurisdictions where we operate.

 

***NetIncome***

 

Our net income was approximately$5.8 million for the six months ended June 30, 2008 compared with netincome of approximately $1.9 million for the same period in the prioryear.  The $3.9 million increase isprimarily the result of a $27.6 million increase in operating revenue beforereimbursed direct costs, a $7.7 million decrease in net interest expense, andthe recognition of a $2.4 million gain on the termination of the interest ratefloor instruments, partly offset by an $22.6 million increase in direct cost ofservices, a $5.1 million increase in general and administrative expenses, a$3.7 million increase in income tax expense, a $1.8 million increase indepreciation and software amortization, and a $0.9 million increase in otheroperating expenses during the six months ended June 30, 2008 compared withthe same period in the prior year.

 

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***Electronic Discovery Segment***

 

Electronic discoveryoperating revenue before reimbursed direct costs increased $7.2 million, orapproximately 32%, to $29.5 million for the six months ended June 30, 2008compared to $22.3 million for the same period in the prior year.  This increase is primarily attributable toadditional projects from existing clients as well as an expansion of our clientbase, resulting in an increase in hosting and processing revenue ofapproximately $6.9 million.

 

Electronic discoverydirect and administrative expenses increased approximately 42% to $15.2 millionfor the six months ended June 30, 2008 compared with $10.7 million for thesame period in the prior year.  Thisincrease is primarily a result of a $2.3 million increase in compensation,commission and benefits expense resulting from expanded staffing to supportincreased operating revenue, a $0.5 million increase in building and equipmentlease expense, primarily related to data center expansion, a $0.4 millionincrease in professional services, a $0.2 million increase in promotionalexpense, a $0.2 million increase in bad debt expense, and a $0.1 millionincrease in reimbursed expenses.

 

***Bankruptcy Segment***

 

Bankruptcyoperating revenue before reimbursed direct costs decreased 17% to $25.9 millionfor the six months ended June 30, 2008 compared to $31.0 million for thesame period in the prior year.  Thisdecrease is primarily the result of $3.7 million decrease in our bankruptcytrustee deposit-based fees combined with a $1.2 million decrease in noticingservices.  The $3.7 million decrease inbankruptcy trustee deposit fees results primarily from a decline in short-terminterest rates combined with lower bankruptcy deposits.  Revenue from our bankruptcy trustee businesscould continue to be lower with comparable periods in the prior year ifshort-term interest rates do not increase. This effect could be partly mitigated by an increase in bankruptcytrustee revenue as an increase in bankruptcy filings which could result in anincrease in the bankruptcy trustee deposit portfolio.  Noticing services depend on the timing of acase and will fluctuate from period to period.

 

Bankruptcy direct andadministrative expenses decreased approximately $1.0 million, or approximately6%, to approximately $14.1 million for the six months ended June 30, 2008compared with approximately $15.1 million in the same period in the prior year.This decrease is primarily attributable to a $0.9 million decrease inreimbursed expenses and a $0.7 million decrease in compensation costs, partlyoffset by a $0.7 million increase in bad debt expense.

 

***Settlement Administration Segment***

 

Settlementadministration operating revenue before reimbursed direct costs increased $25.6million, or approximately 129%, to $45.5 million for the six months ended June 30,2008 compared to $19.9 million for the same period in the prior year. Thisincrease is primarily the result of a $20.5 million increase in call centerrevenue and direct mailing revenue, primarily related to a large contract, anda $5.1 million increase in legal notification revenue resulting from severallarge cases.

 

Settlement administrationdirect and administrative expenses, including reimbursed direct costs,increased approximately $23.6 million, or 89%, to $49.9 million for the sixmonths ended June 30, 2008 compared to $26.3 million for the same periodin the prior year.  This increase isprimarily the result of a $16.4 million increase in call center, outsideservice, and mailing supplies costs to support the large contract referencedabove, a $4.5 million increase in the cost of legal noticing that is directlyrelated to the increase in legal noticing revenue, and a $1.7 million increasein reimbursable expenses.

 

**Liquidity and Capital Resources**

 

***OperatingActivities***

 

During the six monthsended June 30, 2008, our operating activities provided net cash ofapproximately $15.1 million.  The primarysources of cash from operating activities was net income of $5.8 million,adjusted for non-cash charges and credits, primarily depreciation andamortization, of $13.6 million, and changes in operating assets and liabilitiesthat decreased our operating cash flow by $4.3 million, primarily as a resultof an increase in accounts receivable, which is a use of cash, partly offset byincreases in accounts payable and income taxes, which represent sources ofcash.  Trade accounts receivableincreased approximately $16.5 million, primarily related to an increase relatedto a large settlements administration customer. Trade accounts receivable will fluctuate from period to period dependingon the timing of sales and collections. Accounts payable and other liabilities increased approximately $10.8million, primarily related to costs associated with servicing a largesettlements administration customer. Accounts payable will fluctuate from period to period depending on thetiming of 

 

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purchases andpayments.  The effect of income taxeswill fluctuate from period to period depending on the accrual related to thecurrent tax expense and the timing of estimated tax payments made or refundsreceived.

 

***InvestingActivities***

 

During the six monthsended June 30, 2008, we used cash of approximately $8.6 million forpurchases of property and equipment, primarily computer hardware and purchasedsoftware licenses for our electronic discovery business and purchased computerhardware for our bankruptcy trustee business. Enhancements to our existing software and development of new software isessential to our continued growth and, during the six months ended June 30,2008, we used cash of approximately $2.9 million to fund internal costs relatedto development of software for which technological feasibility has beenestablished.  We also used cash of $4.7million to fund the acquisition of an electronic discovery business located inthe United Kingdom.  We anticipate thatcash generated from operations will be adequate to fund our anticipated property,equipment and software spending for the foreseeable future.

 

***Financing Activities***

 

During the sixmonths ended June 30, 2008, we used cash to pay approximately $2.6 millionas a principal reduction on our deferred acquisition notes.  This financing use of cash was partly offsetby $1.4 million of net proceeds from stock issued in connection with theexercise of employee stock options.  Wealso recognized a portion of the tax benefit related to the exercise of stockoptions as a financing source of cash.

 

As of June 30, 2008,our indebtedness consisted of $53.2 million (including the fair value of theembedded option) from the contingent convertible subordinated notes, whichbears interest at 4% based on the $50.0 million principal amount, and approximately$5.1 million of obligations related to capitalized leases and deferredacquisition price.  During 2007, the termof our contingent convertible subordinated notes was extended to June 2010.  The notes will require use of $50.0 millionof cash at the extended maturity date if the note holders do not convert thenotes into shares of our common stock. The holders of the contingent convertible subordinated notes have theright to convert at a price of approximately $11.67 per share.  If any or all the notes are converted intoshares of our common stock prior to the scheduled maturity of those notes, thenthere will be no cash requirements associated with those converted notes, otherthan the regular payment of interest earned prior to the conversion date.

 

As of June 30, 2008,we did not have any borrowings under our $100.0 million senior revolvingloan.  We have the right to borrowagainst the senior revolving loan until in matures in November 2008.  During the term of the credit facility, wehave the right, subject to compliance with our covenants, to increase thesenior revolving loan to $175.0 million. Interest on the credit facility is generally based on a spread, not toexceed 300 basis points, over the LIBOR rate. As of June 30, 2008, significant covenants, all as defined withinour credit facility agreement, include a leverage ratio not to exceed 3.00 to1.00, a senior leverage ratio not to exceed 2.00 to 1.00, a fixed chargecoverage ratio of not less than 1.25 to 1.00, and a current ratio of not lessthan 1.50 to 1.00.  As of June 30,2008, we were in compliance with all financial covenants.

 

Subsequent toquarter-end, we amended and restated our current credit facility.  The amended credit facility, with KeyBankNational Association as administrative agent, consists of a $100.0 seniorrevolving loan and the facility matures in July 2011.  The terms and covenants of the amended creditfacility are substantially similar to those of the existing creditfacility.  See note 5 of the notes to theaccompanying condensed consolidated financial statements for additionalinformation.

 

Covenants contained in our credit facility and in ourcontingent convertible subordinated notes include limitations to consummate anacquisition should we pursue acquisitions in the future.  Pursuant to the terms of our credit facility,we generally cannot incur indebtedness outside the credit facility, with theexceptions of capital leases and subordinated debt, with a limit of $100.0 millionof aggregate subordinated debt.  Furthermore,for any acquisition we must be able to demonstrate that, on a pro forma basis,we would be in compliance with our covenants during the four quarters prior tothe acquisition and bank permission must be obtained for any acquisition forwhich cash consideration exceeds $80.0 million or total consideration exceeds$125.0 million.

 

**Off-balance Sheet Arrangements**

 

We generally do not utilize off-balance sheetarrangements in our operations; however, we enter into operating leases in thenormal course of business.  Our operatinglease obligations are disclosed in note 6 of the notes to consolidatedfinancial statements contained in our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

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**Recent Accounting Pronouncements**

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements*, (SFAS 157).  SFAS157 defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  SFAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years.  The adoption of SFAS 157 as of January 1,2008 did not have a material impact on our financial position, results ofoperations, or cash flows.  In February 2008,FASB issued Staff Position 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13* (FSP 157-1).  FSP 157-1 excludes from the scope of SFAS 157accounting pronouncements that address fair value measurements for purposes oflease classification or measurement. This scope exception does not apply to assets acquired and liabilitiesassumed in a business combination that are required to be measured at fairvalue, regardless of whether those assets and liabilities are related toleases.  FSP 157-1 was effective upon theinitial adoption of SFAS 157.  Adoptionof SFAS 157-1 as of January 1, 2008 did not have a material impact on ourfinancial position, results of operations, or cash flows.  In February 2008, FASB issued StaffPosition 157-2, *Effective Date of FASB Statement No. 157*,(FSP 157-2) that, as of February 12, 2008, indefinitely delayed theeffective date of SFAS 157 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis. Management is still evaluating the impact, if any, that the adoption ofFSP 157-2 will have on our financial position, results of operations, or cashflows.

 

In December 2007, FASB issued Statement ofFinancial Accounting Standards No. 141(R), *Business**Combinations* (SFAS 141(R)).  SFAS 141(R) establishes guidelines forthe recognition and measurement of assets, liabilities and equity in businesscombinations.  SFAS 141(R) iseffective for financial statements issued for fiscal years beginning after December 15,2008.  Management is still evaluating theimpact, if any, that the adoption of SFAS 141(R) will have on ourfinancial position, results of operations, or cash flows.

 

In December 2007, FASB issued Statement ofFinancial Accounting Standards No, 160, *Noncontrolling Interest InConsolidated Financial Statements*, (SFAS 160).  SFAS 160 changes the way in whichnoncontrolling interests in subsidiaries are measured and classified on thebalance sheet.  SFAS 160 is effective forfinancial statements issued for fiscal years beginning after December 15,2008.  Management anticipates that theadoption of SFAS 160 will not have a material effect on our financial position,results of operations, or cash flows.

 

In March 2008, FASB issued Statement of FinancialAccounting Standards No. 161, *Disclosures AboutInstruments and Hedging Activities* – amendment of FASB Statement No. 133(SFAS 161).  SFAS 161 changes thedisclosure requirements for derivative instruments and hedging activities.  SFAS 161 is effective for financialstatements issued for fiscal years beginning after November 15, 2008.  As SFAS 161 relates only to disclosure,management anticipates that the adoption of SFAS 161 will not have a materialeffect on our financial position, results of operations, or cash flows.

 

In May, 2008, FASB issued Statement of FinancialAccounting Standards No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. SFAS 162 identifies the sources of accounting principals and theframework for selecting the principals used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principals. SFAS 162 is effective 60 days following the SEC’s approval of the PCAOB’samendments to U.S. Auditing Standards (AU) Section 411, *The Meaning**of Present Fairly inConformity With Generally Accepted Accounting Principles*.  Management is still evaluating the impact, ifany, that the adoption of SFAS 162 will have on our financial position, resultsof operations, or cash flows.

 

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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,we make statements that plan for or anticipate the future.  Many of these statements are found in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section of this report.

 

Forward-lookingstatements may be identified by words or phrases such as “believe,” “expect,” “anticipate,”“should,” “planned,” “may,” “estimated,” “goal,” “objective” and “potential.”  Section 27A of the Securities Act of1933, as amended, 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) anymaterial changes in our total number of client engagements and the volumeassociated with each engagement, (2) any material changes in our client’sdeposit portfolio or the services required or selected by our clients inengagements, (3) material changes in the number of bankruptcy filings,class action filings or mass tort actions each year, (4) risks associatedwith handling of confidential data and compliance with information privacylaws, (5) changes in or the effects of pricing structures andarrangements, (6) risks associated with the integration of acquisitionsinto our existing business operations, (7) risks associated with ourindebtedness, (8) risks associated with the application of complexaccounting rules to unique transactions, including the risk that goodfaith application of those rules and audits of those results may be laterreversed by new interpretations of those rules or new views regarding theapplication of those rules, and (9) other risks detailed from time to timein our SEC filings, including our annual report on Form 10-K.  In addition, there may be other factors notincluded in our SEC filings that may cause actual results to differ materiallyfrom any forward-looking statements. We undertake no obligations to update anyforward-looking statements contained herein to reflect future events ordevelopments.

 

**ITEM 3.          Quantitativeand Qualitative Disclosures About Market Risk.**

 

Marketrisk refers to the risk that a change in the level of one or more marketprices, interest rates, indices, volatilities, correlations or other market factors,such as liquidity, will result in losses for a certain financial instrument orgroup of financial instruments.  As of December 31,2007, we had market risk exposure to interest rates as we held interest ratefloor options with a notional value of $800 million.  In February 2008, we terminated theseinterest rate floor options, thereby eliminating our market risk exposurerelated to these instruments.

 

**ITEM 4.          Controlsand Procedures.**

 

***DisclosureControls and Procedures***

 

Anevaluation was carried out by the Epiq Systems, Inc.’s (the Company’s)Chief Executive 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). Based on this evaluation, our management, including the CEO and CFO,concluded that our disclosure controls and procedures are effective.  Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by the Company inits periodic filings with the SEC is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by the Company in the reportsthat it files or submits to the SEC is accumulated and communicated to Company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

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

 

Therehave been no changes in our internal controls over financial reporting duringthe quarter ended June  30, 2008, that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II- OTHER INFORMATION**

 

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

 

There have been nomaterial changes in our Risk Factors from those disclosed in our 2007 AnnualReport on Form 10-K.

 

**ITEM 4.          Submission of Matters to a Vote ofSecurity Holders.**

 

Our annual meeting of theshareholders was held on June 4, 2008, at which the shareholders electedthe directors named below.  The resultsof the voting at the annual meeting were as follows:

 
| **Election of Directors** | ** ** | **For**    | ** ** | **Withhold  Authority** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------|------------|
|                                |       |       |       |                    |       |
| Tom W. Olofson                      |       | 33,780,160 |       | 444,382                 |       |
| Christopher E.  Olofson             |       | 33,661,899 |       | 562,643                 |       |
| W. Bryan  Satterlee                 |       | 32,271,204 |       | 1,953,338               |       |
| Edward M.  Connolly, Jr.       |       | 32,344,334 |       | 1,880,208               |       |
| James A. Byrnes                     |       | 33,196,499 |       | 1,028,043               |       |
| Joel Pelofsky                       |       | 33,192,419 |       | 1,032,123               |       |

 

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

 

**ITEM 5.          Other Events.**

 

On November 15,2005, we entered into an Amended and Restated Credit and Security Agreementwith the Lenders named therein and KeyBank National Association, as leadarranger, sole book runner and administrative agent (the “2005 Credit Agreement”).  On July 30, 2008, we, the Lenders namedtherein, and KeyBank National Association, executed an Amended and RestatedCredit and Security Agreement dated and effective as of July 30, 2008 (the“2008 Credit Agreement”), which amends and restates the 2005 Credit Agreementin its entirety, and which extends the maturity of the credit facility to July 29,2011, includes certain financial covenants, and includes other technicalamendments to the 2005 Credit Agreement. The credit facility consists of a $100.0 million revolving creditfacility, which we have the right, subject to compliance with our covenants, toincrease to $175.0 million.  The creditfacility is secured by liens on substantially all of our real and personalproperty and contains financial covenants related to EBITDA (earnings beforeinterest, provision for income taxes, depreciation and amortization), totaldebt, fixed charges and working capital.

 

Interest on the amendedcredit facility is generally based on a spread, not to exceed 325 basis points,over the LIBOR rate.  Significantfinancial covenants, all as defined within our amended credit facility agreement,include a total leverage ratio not to exceed 3.00 to 1.00, a fixed chargecoverage ratio of not less than 1.25 to 1.00, and a current ratio of not lessthan 1.50 to 1.00.

 

**ITEM 6**.          **Exhibits.**

 

10.1         Amended and Restated Credit and SecurityAgreement dated as of July 30, 2008, among Epiq Systems, Inc., theLenders named therein, and KeyBank National Association, as lead arranger, solebook runner and administrative agent.

 

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

 

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

 

32.1         Certifications of CEO and CFO pursuant to18 U.S.C. Section 1350.

 

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##### **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| ** ** | ** **         | **Epiq Systems, Inc.**                        |
|------------|--------------------|----------------------------------------------------|
| ** ** | ** **         | ** **                                         |
| Date:      | July 30, 2008 |                                               | /s/ Tom W. Olofson |
|       |               | Tom W. Olofson                                     |
|       |               | Chairman of the Board                              |
|       |               | Chief Executive Officer                            |
|       |               | Director                                           |
|       |               | (Principal Executive  Officer)                     |
|       |               |                                               |
|       |               |                                               |
| Date:      | July 30, 2008 | /s/ Elizabeth M. Braham                            |
|       |               | Elizabeth M. Braham                                |
|       |               | Executive Vice  President, Chief Financial Officer |
|       |               | (Principal Financial  Officer)                     |
|       |               |                                               |
|       |               |                                               |
| Date:      | July 30, 2008 | /s/ Douglas W. Fleming                             |
|       |               | Douglas W. Fleming                                 |
|       |               | Director of Finance                                |
|       |               | (Principal Accounting  Officer)                    |
|            |                    |                                                    |  |

 

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