Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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, 2009** |
|-------|------------|--------------------------------------------------------|

 

**OR**

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

 

**For the transition period from              to               **

 

**Commission File Number 0-22081**

 

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**EPIQ SYSTEMS, INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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

(Address of principalexecutive office)

 

**913-621-9500**

(Registrant’s telephonenumber)

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the

preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.   See thedefinition of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| 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 mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). Yes o  No **x**

 

The number of shares outstanding of registrant’scommon stock at July 24, 2009:

 

| **Class**                      | ** ** | **Outstanding** |
|--------------------------------|------------|-----------------|
| Common Stock, $0.01 par  value |       | 36,156,629      |

 

 

 

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**EPIQSYSTEMS, INC.**

**FORM 10-Q**

**QUARTERENDED JUNE 30, 2009**

 

**CONTENTS**

 
| ** **                               | ** **                                                                                                                                                          | ** ** | **Page** |
|------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                     |                                                                                                                                                                |       |     |
| **PART I -  FINANCIAL INFORMATION** |                                                                                                                                                                |       |
|                                     |                                                                                                                                                                |       |     |
| Item 1.                                  | Condensed  Consolidated Financial Statements                                                                                                                        |       |     |
|                                     |                                                                                                                                                                |       |     |
|                                     | Condensed  Consolidated Statements of Income — Three and six months ended June 30,  2009 and 2008 (Unaudited)                                             |       | 1        |
|                                     |                                                                                                                                                                |       |     |
|                                     | Condensed Consolidated Balance  Sheets — June 30, 2009 and December 31, 2008 (Unaudited)                                                             |       | 2        |
|                                     |                                                                                                                                                                |       |     |
|                                     | Condensed  Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive  Income — Six months ended June 30, 2009 and 2008 (Unaudited) |       | 3        |
|                                     |                                                                                                                                                                |       |     |
|                                     | Condensed  Consolidated Statements of Cash Flows — Six months ended June 30, 2009  and 2008 (Unaudited)                                                   |       | 4        |
|                                     |                                                                                                                                                                |       |     |
|                                     | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                                   |       | 5        |
|                                     |                                                                                                                                                                |       |     |
| Item 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                         |       | 20       |
|                                     |                                                                                                                                                                |       |     |
| Item 3.                                  | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                         |       | 30       |
|                                     |                                                                                                                                                                |       |     |
| Item 4.                                  | Controls and  Procedures                                                                                                                                            |       | 31       |
|                                     |                                                                                                                                                                |       |     |
| **PART II  - OTHER INFORMATION**    |                                                                                                                                                                |       |
|                                     |                                                                                                                                                                |       |     |
| Item 1.                                  | Legal Proceedings                                                                                                                                                   |       | 32       |
|                                     |                                                                                                                                                                |       |     |
| Item  1A.                                | Risk  Factors                                                                                                                                                       |       | 32       |
|                                     |                                                                                                                                                                |       |     |
| Item 4.                                  | Submission  of Matters to a Vote of Security Holders                                                                                                                |       | 33       |
|                                     |                                                                                                                                                                |       |     |
| Item 5.                                  | Other Information                                                                                                                                                   |       | 33       |
|                                     |                                                                                                                                                                |       |     |
| Item  6.                                 | Exhibits                                                                                                                                                            |       | 34       |
|                                     |                                                                                                                                                                |       |     |
| Signatures                               |                                                                                                                                                                |       | 35       |

 

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** **

**PART I- FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

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

##### **(UNAUDITED)**

**(inthousands, except per share data)**

 
| ** **                                                                                                        | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2009**                                    | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **REVENUE:**                                                                                                      |       |                                        |       |                                      |       |   |   |   |   |
| Case management  services                                                                                         |       | $                                           | 35,812     |                                      | $          | 35,928 |   | $ | 70,346 |   | $ | 64,724 |   |
| Case management  bundled products and services                                                                    |       | 3,476                                       |       | 4,463                                     |       | 6,803 |   | 9,754 |   |
| Document  management services                                                                                     |       | 17,851                                      |       | 16,546                                    |       | 32,603 |   | 26,360 |   |
| Operating  revenue before reimbursed direct costs                                                                 |       | 57,139                                      |       | 56,937                                    |       | 109,752 |   | 100,838 |   |
| Operating  revenue from reimbursed direct costs                                                                   |       | 9,051                                       |       | 7,905                                     |       | 17,266 |   | 13,014 |   |
| Total Revenue                                                                                                     |       | 66,190                                      |       | 64,842                                    |       | 127,018 |   | 113,852 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **OPERATING  EXPENSE:**                                                                                           |       |                                        |       |                                      |       |   |   |   |   |
| Direct cost of  services (exclusive of depreciation and amortization shown separately below)                      |       | 19,723                                      |       | 24,438                                    |       | 39,393 |   | 43,264 |   |
| Direct cost of bundled products and services (exclusive of depreciation  and amortization shown separately below) |       | 855                                         |       | 908                                       |       | 1,710 |   | 1,855 |   |
| Reimbursed  direct costs                                                                                          |       | 9,035                                       |       | 7,880                                     |       | 17,082 |   | 13,002 |   |
| General and  administrative                                                                                       |       | 23,844                                      |       | 18,221                                    |       | 42,151 |   | 33,300 |   |
| Depreciation and  software and leasehold amortization                                                             |       | 4,552                                       |       | 3,853                                     |       | 9,066 |   | 7,563 |   |
| Amortization of  identifiable intangible assets                                                                   |       | 1,818                                       |       | 2,325                                     |       | 3,754 |   | 4,603 |   |
| Other operating  expense (income)                                                                                 |       | 13                                          |       | 859                                       |       | 484 |   | (1,512 | ) |
| Total Operating  Expense                                                                                          |       | 59,840                                      |       | 58,484                                    |       | 113,640 |   | 102,075 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **INCOME  FROM OPERATIONS**                                                                                       |       | 6,350                                       |       | 6,358                                     |       | 13,378 |   | 11,777 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **INTEREST  EXPENSE (INCOME):**                                                                                   |       |                                        |       |                                      |       |   |   |   |   |
| Interest expense                                                                                                  |       | 365                                         |       | 441                                       |       | 738 |   | 932 |   |
| Interest income                                                                                                   |       | (16                                         | )          | (36                                       | )          | (51 | ) | (180 | ) |
| Net Interest  Expense                                                                                             |       | 349                                         |       | 405                                       |       | 687 |   | 752 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**                                                                                   |       | 6,001                                       |       | 5,953                                     |       | 12,691 |   | 11,025 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **PROVISION  FOR INCOME TAXES**                                                                                   |       | 3,115                                       |       | 2,799                                     |       | 6,527 |   | 5,214 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **NET  INCOME**                                                                                                   |       | $                                           | 2,886      |                                      | $          | 3,154 |   | $ | 6,164 |   | $ | 5,811 |   |
|                                                                                                              |       |                                        |       |                                      |       |   |   |   |   |
| **NET  INCOME PER SHARE INFORMATION:**                                                                            |       |                                        |       |                                      |       |   |   |   |   |
| Basic                                                                                                             |       | $                                           | 0.08       |                                      | $          | 0.09 |   | $ | 0.17 |   | $ | 0.16 |   |
| Diluted                                                                                                           |       | $                                           | 0.08       |                                      | $          | 0.08 |   | $ | 0.16 |   | $ | 0.15 |   |
| **WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING:**                                                                  |       |                                        |       |                                      |       |   |   |   |   |
| Basic                                                                                                             |       | 35,776                                      |       | 35,424                                    |       | 35,731 |   | 35,357 |   |
| Diluted                                                                                                           |       | 41,854                                      |       | 41,634                                    |       | 41,895 |   | 41,510 |   |

 

**Seeaccompanying Notes to Condensed Consolidated Financial Statements.**

 

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**EPIQ SYSTEMS, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(in thousands, except share data)**

 
| ** **                                                                                                                     | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                     |       |                   |       |                       |       |
| **ASSETS**                                                                                                                     |       |                   |       |                       |       |
| **CURRENT ASSETS:**                                                                                                            |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                                      |       | $                      | 28,215     |                       | $          | 19,006 |   |
| Trade accounts receivable, less allowance for doubtful  accounts  of $2,540 and $2,600, respectively                           |       | 54,445                 |       | 48,540                     |       |
| Prepaid expenses                                                                                                               |       | 6,188                  |       | 6,015                      |       |
| Other current assets                                                                                                           |       | 2,259                  |       | 2,552                      |       |
| Total Current Assets                                                                                                           |       | 91,107                 |       | 76,113                     |       |
|                                                                                                                           |       |                   |       |                       |       |
| **LONG-TERM  ASSETS:**                                                                                                         |       |                   |       |                       |       |
| Property and equipment, net                                                                                                    |       | 39,419                 |       | 39,951                     |       |
| Internally developed software costs, net                                                                                       |       | 12,501                 |       | 11,024                     |       |
| Goodwill                                                                                                                       |       | 264,405                |       | 263,871                    |       |
| Other intangibles, net of accumulated amortization of  $45,578  and $41,714, respectively                                      |       | 23,200                 |       | 26,851                     |       |
| Other                                                                                                                          |       | 968                    |       | 1,136                      |       |
| Total Long-term Assets, net                                                                                                    |       | 340,493                |       | 342,833                    |       |
| **Total Assets**                                                                                                               |       | $                      | 431,600    |                       | $          | 418,946 |   |
|                                                                                                                           |       |                   |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                  |       |                   |       |                       |       |
| **CURRENT  LIABILITIES:**                                                                                                      |       |                   |       |                       |       |
| Accounts payable                                                                                                               |       | $                      | 14,378     |                       | $          | 12,781 |   |
| Accrued compensation                                                                                                           |       | 6,243                  |       | 7,525                      |       |
| Deposits                                                                                                                       |       | 2,811                  |       | 2,150                      |       |
| Deferred revenue                                                                                                               |       | 2,001                  |       | 2,363                      |       |
| Other accrued expenses                                                                                                         |       | 3,034                  |       | 2,628                      |       |
| Current maturities of long-term obligations                                                                                    |       | 56,626                 |       | 5,912                      |       |
| Total Current Liabilities                                                                                                      |       | 85,093                 |       | 33,359                     |       |
|                                                                                                                           |       |                   |       |                       |       |
| **LONG-TERM  LIABILITIES:**                                                                                                    |       |                   |       |                       |       |
| Deferred income taxes                                                                                                          |       | 21,427                 |       | 20,988                     |       |
| Other long-term liabilities                                                                                                    |       | 10,371                 |       | 8,794                      |       |
| Long-term obligations (excluding current maturities)                                                                           |       | 655                    |       | 55,310                     |       |
| Total Long-term Liabilities                                                                                                    |       | 32,453                 |       | 85,092                     |       |
|                                                                                                                           |       |                   |       |                       |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                             |       |                   |       |                       |       |
| ** **                                                                                                                     |       |                   |       |                       |       |
| **STOCKHOLDERS’  EQUITY:**                                                                                                |       |                   |       |                       |       |
| Preferred stock - $1 par value; 2,000,000 shares authorized;  none  issued and outstanding                                     |       | —                 |       | —                     |       |
| Common stock - $0.01 par value; 100,000,000 shares authorized; issued  and outstanding — 36,147,978 and 35,657,823 shares |       | 361                    |       | 357                        |       |
| Additional paid-in capital                                                                                                     |       | 243,914                |       | 237,644                    |       |
| Accumulated other comprehensive loss                                                                                           |       | (1,562                 | )          | (2,683                     | )          |
| Retained earnings                                                                                                              |       | 71,341                 |       | 65,177                     |       |
| Total Stockholders’ Equity                                                                                                |       | 314,054                |       | 300,495                    |       |
| **Total Liabilities and Stockholders’  Equity**                                                                           |       | $                      | 431,600    |                       | $          | 418,946 |   |

 

**See accompanying Notes to Condensed Consolidated FinancialStatements.**

 

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**EPIQ SYSTEMS, INC.**

**CONDENSED CONSOLIDATED STATEMENTOF CHANGES IN STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME (UNAUDITED)**

**(in thousands)**

 
| ** **                               | ** ** | **Number of  Outstanding  Shares** | ** ** | **Common  Shares** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                                     |       |                               |       |               |       |                             |       |                   |       |                                        |       |      |       |
| Balance at  December 31, 2008       |       | 35,658                             |       | $                  | 357        |                             | $          | 237,644                |       | $                                           | 65,177     |      | $          | (2,683 | ) | $ | 300,495 |   |
|                                     |       |                               |       |               |       |                             |       |                   |       |                                        |       |      |       |
| Comprehensive income:                    |       |                               |       |               |       |                             |       |                   |       |                                        |       |      |       |
|                                     |       |                               |       |               |       |                             |       |                   |       |                                        |       |      |       |
| Net income                               |       | —                             |       | —             |       | —                           |       | 6,164                  |       | —                                      |       | 6,164     |       |
| Foreign currency  translation adjustment |       | —                             |       | —             |       | —                           |       | —                 |       | 1,121                                       |       | 1,121     |       |
| Total comprehensive income               |       | —                             |       | —             |       | —                           |       | —                 |       | —                                      |       | 7,285     |       |
|                                     |       |                               |       |               |       |                             |       |                   |       |                                        |       |      |       |
| Share-based compensation  plans          |       | 490                                |       | 4                  |       | 6,270                            |       | —                 |       | —                                      |       | 6,274     |       |
| Balance at June 30,  2009           |       | 36,148                             |       | $                  | 361        |                             | $          | 243,914                |       | $                                           | 71,341     |      | $          | (1,562 | ) | $ | 314,054 |   |

 
| ** **                               | ** ** | **Number of  Outstanding  Shares** | ** ** | **Common  Shares** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|-----------|------------|
|                                     |       |                               |       |               |       |                             |       |                   |       |                                          |       |      |       |
| Balance at  December 31, 2007       |       | 35,277                             |       | $                  | 353        |                             | $          | 231,984                |       | $                                             | 51,341     |      | $          | 4 |   | $ | 283,682 |   |
|                                     |       |                               |       |               |       |                             |       |                   |       |                                          |       |      |       |
| Comprehensive income:                    |       |                               |       |               |       |                             |       |                   |       |                                          |       |      |       |
|                                     |       |                               |       |               |       |                             |       |                   |       |                                          |       |      |       |
| Net income                               |       | —                             |       | —             |       | —                           |       | 5,811                  |       | —                                        |       | 5,811     |       |
| Foreign currency  translation adjustment |       | —                             |       | —             |       | —                           |       | —                 |       | 35                                            |       | 35        |       |
| Total comprehensive income               |       | —                             |       | —             |       | —                           |       | —                 |       | —                                        |       | 5,846     |       |
|                                     |       |                               |       |               |       |                             |       |                   |       |                                          |       |      |       |
| Share-based compensation  plans          |       | 227                                |       | 2                  |       | 3,000                            |       | —                 |       | —                                        |       | 3,002     |       |
| Balance at June 30,  2008           |       | 35,504                             |       | $                  | 355        |                             | $          | 234,984                |       | $                                             | 57,152     |      | $          | 39 |   | $ | 292,530 |   |

 

**See accompanying Notes to Condensed Consolidated FinancialStatements.**

 

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**EPIQSYSTEMS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Inthousands)**

** **
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                                                         |       |                               |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 6,164      |   | $ | 5,811 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                               |       |   |   |
| Share-based  compensation expense                                                  |       | 4,256                              |       | 1,396 |   |
| Expense for  deferred income taxes                                                 |       | 510                                |       | 419 |   |
| Depreciation and  software amortization                                            |       | 9,066                              |       | 7,563 |   |
| Expense related  to embedded option                                                |       | (805                               | )          | (805 | ) |
| Amortization of  intangible assets                                                 |       | 3,754                              |       | 4,603 |   |
| Other, net                                                                         |       | 1,033                              |       | 467 |   |
| Changes in  operating assets and liabilities:                                      |       |                               |       |   |   |
| Trade accounts  receivable                                                         |       | (6,296                             | )          | (16,543 | ) |
| Prepaid expenses  and other assets                                                 |       | (186                               | )          | 74 |   |
| Accounts payable  and other liabilities                                            |       | 3,867                              |       | 10,811 |   |
| Excess tax  benefit related to share-based compensation                            |       | (304                               | )          | (27 | ) |
| Other                                                                              |       | (69                                | )          | 1,364 |   |
| Net cash  provided by operating activities                                         |       | 20,990                             |       | 15,133 |   |
|                                                                               |       |                               |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                               |       |   |   |
| Purchase of  property and equipment                                                |       | (6,508                             | )          | (8,569 | ) |
| Internally  developed software costs                                               |       | (3,842                             | )          | (2,882 | ) |
| Cash paid for  business acquisition, net of cash acquired                          |       | —                             |       | (4,712 | ) |
| Other investing  activities, net                                                   |       | 57                                 |       | 10 |   |
| Net cash used in  investing activities                                             |       | (10,293                            | )          | (16,153 | ) |
|                                                                               |       |                               |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                               |       |   |   |
| Proceeds from  revolver                                                            |       | —                             |       | 2,000 |   |
| Payments on  revolver                                                              |       | —                             |       | (2,000 | ) |
| Payments under  long-term obligations                                              |       | (3,319                             | )          | (2,622 | ) |
| Excess tax  benefit related to share-based compensation                            |       | 304                                |       | 27 |   |
| Proceeds from  exercise of stock options                                           |       | 1,561                              |       | 1,429 |   |
| Net cash used in  financing activities                                             |       | (1,454                             | )          | (1,166 | ) |
|                                                                               |       |                               |       |   |   |
| Effect of  exchange rate changes on cash                                           |       | (34                                | )          | — |   |
|                                                                               |       |                               |       |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                          |       | 9,209                              |       | (2,186 | ) |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                  |       | 19,006                             |       | 13,415 |   |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD**                                      |       | $                                  | 28,215     |   | $ | 11,229 |   |

 

**Seeaccompanying Notes to Condensed Consolidated Financial Statements.**

 

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**EPIQSYSTEMS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESAND NATURE OF OPERATIONS**

 

The accompanyingCondensed Consolidated Financial Statements have been prepared in accordancewith accounting principles generally accepted in the United States of America,and with the rules and regulations for reporting on Form 10-Q forinterim financial statements. Accordingly, the financial statements do notinclude certain disclosures required for comprehensive annual financialstatements.

 

The unauditedfinancial information reflects all adjustments, which are, in the opinion ofmanagement, necessary to present fairly our results of operations, financialposition, and cash flows for the periods presented. The adjustments consistsolely of normal recurring adjustments. These Condensed Consolidated FinancialStatements should be read in conjunction with the Consolidated FinancialStatements and related Notes included in the Epiq Systems, Inc. (“Epiq,” “we,”“us,” or “our”) Annual Report on Form 10-K for the year ended December 31,2008, filed with the Securities and Exchange Commission on March 4, 2009.

 

In preparing thesefinancial statements, we have evaluated events and transactions for potentialrecognition or disclosure through July 30, 2009, the date the financialstatements were issued.

 

The results of operationsfor any quarter or a partial fiscal year period are not necessarily indicativeof the results to be expected for other periods or the entire year.

 

***Principlesof Consolidation***

 

The CondensedConsolidated Financial Statements include the accounts of Epiq and itswholly-owned subsidiaries. Intercompany transactions and balances have beeneliminated in consolidation.

 

***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.

 

***Revenue Recognition***

 

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

 

Following is a description of significant sources ofrevenue.

 

·                  Fees contingent upon the month-to-monthdelivery of case management services defined by client contracts, such asclaims processing, claims reconciliation, professional services, call centersupport, and conversion of data into an organized, searchable electronicdatabase. The amount we earn varies based primarily on the size and complexityof the engagement.

 

·                  Hosting fees based on the amount of datastored.

 

·                  Deposit-based fees, earned primarilybased on a percentage of Chapter 7 total liquidated assets placed on depositwith a designated financial institution by our trustee clients, to whom weprovide, at no charge, software licenses, limited hardware and hardware maintenance,and postcontract customer support services. The fees we earn are based on totalliquidated assets placed on deposit by our trustee clients and may vary basedon fluctuations in short-term

 

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interest rates.Interest rate fluctuations are somewhat mitigated by pricing arrangements witheach financial institution that set ceilings and floors on the interest ratesthat we earn.

 

·                  Legal noticing services to parties ofinterest in bankruptcy and class action matters, including direct notification,media campaign, and advertising management in which we coordinate notificationthrough various media outlets, such as print, radio and television, topotential parties of interest for a particular client engagement.

 

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

 

*Non-Software Arrangements*

 

Services related toelectronic discovery and settlement administration are billed based on volumeand are evaluated pursuant to Emerging Issues Task Force (“EITF”) 00-21, *Revenue Arrangements with Multiple Deliverables*(“EITF 00-21”).  For these contractualarrangements, 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.

 

*Software Arrangements*

 

For our Chapter 7 bankruptcy trustee arrangements, weprovide our trustee clients with a software license, hardware lease, hardwaremaintenance, and postcontract customer support services, all at no charge tothe 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 relatedto the software license, hardware lease, hardware maintenance, and postcontractcustomer support services.  We accountfor the software license and postcontract customer support elements inaccordance with Statement of Position 97-2, *Software RevenueRecognition* (“SOP 97-2”). Since we have not established vendor specific objective evidence (“VSOE”)of the fair value of the software license, we do not recognize any revenue ondelivery of the software.  The softwareelement is deferred and included with the remaining undelivered element, whichare postcontract customer support services. This revenue, when recognized, is included as a component of “casemanagement services revenue”.  Revenuerelated to postcontract customer support is entirely contingent on theplacement of liquidated estate deposits by the trustee with the financialinstitution.  Accordingly, we recognizethis contingent usage based revenue consistent with the guidance provided bythe American Institute of Certified Public Accountants’ Technical Practice Aid5100.76, *Fair Value in Multiple-Element Arrangements ThatInclude Contingent Usage-Based Fees and Software Revenue Recognition*as the fee becomes fixed or determinable at the time actual usage occurs andcollectibility is probable.  This occursmonthly as a result of the computation, billing and collection of monthlydeposit fees contractually agreed to.  Atthat time, we have also satisfied the other revenue recognition criteriacontained in SOP 97-2 since we have persuasive evidence that an arrangementexists, services have been rendered, the price is fixed and determinable, andcollectability is reasonably 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 withStatement of Financial Accounting Standards (“SFAS”) 13,

 

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*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**SABTopic 13, which requires that we recognize rental income when the changes inthe factor on which the contingent lease payment is based actually occur.  This occurs at the end of each period as weachieve our target when deposits are held at the depository financialinstitution as, at that time, evidence of an arrangement exists, delivery hasoccurred, the amount has become fixed and determinable, and collection isreasonably assured.  This revenue, whichis less than ten percent of our total revenue, is included in the CondensedConsolidated Statements of Income as a component of “case management services”revenue.

 

*Reimbursements*

 

We have revenue related tothe 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 CondensedConsolidated Statements of Income as “Operating revenue from reimbursed directcosts” and as “Reimbursed direct costs”, respectively.

 

***Recently Adopted AccountingPronouncements***

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(revised 2007), *Business Combinations* (“SFAS141(R)”). SFAS 141(R) establishes guidelines for the recognition andmeasurement of assets, liabilities and equity in business combinations. Theprovisions of SFAS 141(R) were effective for us as of January 1,2009. Due to the adoption of SFAS 141(R) we now expense, as incurred,acquisition-related costs for potential and completed acquisitions.Acquisition-related costs expensed in the first six months of 2009 wereapproximately $0.5 million. These costs are included in “Other operatingexpense (income)” in our Condensed Consolidated Statements of Income. SFAS 141(R) alsoamends SFAS No. 109, *Accounting for IncomeTaxes*, and now requires the recognition of changes in an acquirer’sincome tax valuation allowance on deferred taxes and acquired tax contingenciesassociated with acquisitions that closed prior to the effective date of SFAS141(R) to apply the provisions of SFAS 141(R). The provisions of SFAS 141(R) willprimarily apply to all future acquisitions.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interest in Consolidated FinancialStatements* (“SFAS 160”).  SFAS160 changes the way in which noncontrolling interests in subsidiaries are measuredand classified on the balance sheet.  Theprovisions of SFAS 160 were effective for us as of January 1, 2009. Theadoption of SFAS 160 had no impact on our consolidated financial position orresults of operations.

 

In February 2008, the FASB issued FASB StaffPosition (“FSP”) No. FAS 157-2, *Effective Date of FASBStatement No. 157*, (“FSP FAS 157-2”) which, as of February 12,2008, indefinitely delayed the effective date of SFAS No. 157, *Fair Value Measurements,*for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis.  The provisions of FSP FAS 157-2 wereeffective for us as of January 1, 2009. The adoption of FSP FAS 157-2 didnot have a material impact on our financial position, results of operations, orcash flows.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133*(“SFAS161”). SFAS 161 changes the disclosure requirements for derivative instrumentsand hedging activities.  The provisionsof SFAS 161 were effective for us as of January 1, 2009.  The adoption of SFAS 161 had no impact on ourconsolidated financial position or results of operations. Disclosures requiredby this statement are included in Note 3.

 

In April 2008, theFASB issued FSP No. FAS 142-3, *Determination of theUseful Life of Intangible Assets* (“FSP FAS 142-3”).  FSP FAS 142-3 provides guidance ondetermining the useful life of a recognized intangible asset.  The provisions of FSP FAS 142-3 wereeffective for us as of January 1, 2009. The provisions of FSP FAS 142-3had no impact on our consolidated financial position or results of operationsduring the six months ended June 30, 2009 as we did not renew or extendthe useful lives of any of our intangible assets.

 

In June 2008, theFASB issued FSP No. EITF 03-6-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities*(“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies thatshare-based payment awards that entitle their holders to receivenon-forfeitable dividends or dividend equivalents before vesting should beconsidered participating securities, and requires them to be included in the computationof earnings per share pursuant to the two-class

 

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method described in SFAS No. 128,*Earnings per Share* (“SFAS 128”). Theprovisions of FSP EITF 03-6-1 were effective for us as of January 1, 2009,and require all prior period income per share data presented to be adjustedretroactively. We have determined that nonvested share awards that were grantedin the first quarter of 2009 are participating securities as defined by FSPEITF 03-6-1 because they have equivalent common stock dividend rights.  Accordingly, we have included these shares inour basic and diluted share calculations as appropriate.  There is no prior period impact of thisguidance as there were no participating securities outstanding prior to thefirst quarter of 2009. Details of the income per share calculation aredescribed in Note 4.

 

In June 2008, the FASB ratified the consensusreached by the EITF on three issues discussed at its June 12, 2008 meetingpertaining to EITF Issue No. 07-5, *Determining Whether anInstrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock*(“EITF 07-5”). The issues include how an entity should evaluate whether anequity-linked financial instrument (or embedded feature) is indexed to its ownstock, including evaluating the instrument’s contingent exercise and settlementprovisions; how the currency in which the strike price of an equity-linkedfinancial instrument (or embedded feature) is denominated affects thedetermination of whether the instrument is indexed to an entity’s own stock;and how the issuer should account for market-based employee stock optionvaluation. The adoption of EITF 07-5 did not have an impact on our consolidatedfinancial position.

 

In April 2009, the FASB issued FSP No. FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies* (“FSPFAS 141(R)-1”). FSP FAS 141(R)-1 amends and clarifies FASB No. 141(revised 2007), *Business Combinations*, to addressapplication issues raised by preparers, auditors, and members of the legalprofession on initial recognition and measurement, subsequent measurement andaccounting, and disclosure of assets and liabilities arising from contingenciesin a business combination. FSP FAS 141(R)-1 is effective for us for businesscombinations completed on or after January 1, 2009.

 

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*(“FSP FAS 107-1 and APB 28-1”).FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, torequire disclosures about the fair value of financial instruments in interim aswell as in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, to requirethose disclosures in summarized financial information at interim reportingperiods. These standards are effective for periods ending after June 15,2009.  The disclosures required by thisguidance are included in Note 8.

 

In May 2009, the FASB issued SFAS No. 165, *Subsequent Events* (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. SFAS 165 requires the disclosure of the date through which anentity has evaluated subsequent events and the basis for that date. Theprovisions of SFAS 165 are effective for reporting periods ending after June 15,2009. The disclosures required by SFAS 165 are included in Note 1.

 

***Recently Issued AccountingPronouncements***

 

In June 2009, the FASB issued SFAS No. 168, *The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles — a replacement of FASB Statement No. 162*(“SFAS 168”).  SFAS 168 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principlesin the United States. SFAS 168 is effective for periods ending after September 15,2009.  We do not expect the adoption ofSFAS 168 in the third quarter of 2009 will have an impact on our condensedconsolidated financial position, but the adoption will change the format of thereferences to accounting guidance within our regulatory filings.

 

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#### **NOTE 2:   GOODWILL AND INTANGIBLE ASSETS**

#### ** **

Thechange in the carrying amount of goodwill for the first six months of 2009 wasas follows (in thousands):

 
| ** **                              | ** ** | **Electronic********Discovery** | ** **   | **Bankruptcy** | ** ** | **Settlement********Administration** | ** ** | **Total** | ** **   |
|-----------------------------------------|------------|---------------------------------|--------------|----------------|------------|--------------------------------------|------------|-----------|--------------|
| Balance  as of December 31, 2008   |       | $                               |  79,586 |           | $          |  151,438                        |       | $         |  32,847 |   | $ |  263,871 |   |
| Foreign  currency translation and other |       | 534                             |         | —         |       | —                               |       | 534       |         |
| Balance  as of June 30, 2009       |       | $                               |  80,120 |           | $          |  151,438                        |       | $         |  32,847 |   | $ |  264,405 |   |

 

Amortizingidentifiable intangible assets as of June 30, 2009 and December 31,2008 consisted of the following (in thousands):

 
| ** **              | ** ** | **June 30, 2009**     | ** **   | **December 31, 2008**    | ** ** |
|-------------------------|------------|----------------------------|--------------|-------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** **   | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                          |  40,089 |                          | $          |  24,002 |   | $ |  39,986 |   | $ |  22,039 |   |
| Trade  names            |       | 745                        |         | 745                           |       | 745 |   | 745 |   |
| Non-compete  agreements |       | 27,944                     |         | 20,831                        |       | 27,834 |   | 18,930 |   |
|                    |       | $                          |  68,778 |                          | $          |  45,578 |   | $ |  68,565 |   | $ |  41,714 |   |

 

Customerrelationships and non-compete agreements both carry a weighted average life ofeight years. Aggregate amortization expense related to identifiable intangibleassets was $1.8 million and $2.3 million for the three months ended June 30,2009 and 2008, respectively, and was $3.8 million and $4.6 million for the sixmonths ended June 30, 2009 and 2008, respectively.  Amortization expense related to identifiableintangible assets for fiscal year 2009 and the following five years isestimated as follows (in thousands):

 
| **Year Ending  December 31,** | ** ** | **Estimated********Amortization********Expense** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| 2009                               |       | $                                                | 7,601      |   |
| 2010                               |       | 6,692                                            |       |
| 2011                               |       | 4,832                                            |       |
| 2012                               |       | 4,652                                            |       |
| 2013                               |       | 3,070                                            |       |
| 2014                               |       | 192                                              |       |
|                               |       | $                                                | 27,039     |   |

 

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### **NOTE 3:  LONG-TERM OBLIGATIONS**

### ** **

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

 
| ** **                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Contingent  convertible subordinated debt, including embedded option |       | $                 | 51,543     |                  | $          | 52,348 |   |
| Capital  leases                                                      |       | 2,863             |       | 4,682                 |       |
| Deferred  acquisition price                                          |       | 2,875             |       | 4,192                 |       |
| Total  long-term obligations, including current portion              |       | 57,281            |       | 61,222                |       |
| Current  maturities of long-term obligations                         |       | (56,626           | )          | (5,912                | )          |
| Long-term  obligations                                               |       | $                 | 655        |                  | $          | 55,310 |   |

 

***CreditFacilities***

 

During July 2008, weamended and restated our credit facility. The amended credit facility, with KeyBank National Association asadministrative agent, consists of a $100.0 million senior revolving loan.  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 is secured by liens on our real property anda significant portion of our personal property. Interest on the amended credit facility is generally based on a spread,not to exceed 325 basis points, over the LIBOR rate.  There were no amounts due under the seniorrevolving credit loan as of June 30, 2009 or December 31, 2008. Todetermine the amount that we may borrow, the $100.0 million available under therevolving loan is reduced by $1.8 million in outstanding letters of credit asof June 30,2009.

 

Our amended creditfacility contains financial covenants related to earnings before interest,provision for income taxes, depreciation, amortization and other adjustments asdefined in the agreements and total debt. In addition, our credit facility also contains financial covenantsrelated to senior debt, fixed charges, and working capital.  As of June 30, 2009, we were incompliance with all financial covenants.

 

***ContingentConvertible Subordinated Notes***

 

During June 2004, weissued $50.0 million of contingent convertible subordinated notes (“convertiblenotes”) with a fixed 4% per annum interest rate and an original maturity of June 15,2007.  The holders of the convertiblenotes had the right to extend the maturity date by up to three years.  In April 2007, the holders exercisedthis right and the maturity date of the convertible notes was extended to June 15,2010.  If we change our capital structure(for example, through a stock dividend or stock split) while the convertiblenotes are outstanding, the conversion price would be adjusted on a consistentbasis and, accordingly, the number of shares of common stock we would issue onconversion would be adjusted.  Theconvertible notes are convertible into 4.3 million shares of our common stockat a price of approximately $11.67 per share, and do not contain the right toany dividends. We have the right to require that the holders of the convertiblenotes convert to equity if our share price exceeds $23.33 on a weighted averagebasis for 20 consecutive trading days.

 

Under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*(“SFAS 133”), the right to extend the maturity of the convertible notes wasaccounted for as an embedded option subject to bifurcation.  The embedded option was initially valued at$1.2 million and the convertible notes balance was reduced by the sameamount.  During April 2007, theholders of the convertible notes exercised their right to extend and weperformed a final valuation to estimate the fair value of the embedded optionas of the approximate date of the extension. The estimated fair value of the embedded option at this date, includedas a component of the convertible notes, was approximately $4.8 million. The$4.8 million estimated fair value of the embedded option is amortized as acredit to “Interest expense” on the Condensed Consolidated Statements of Incomeover the period to the extended maturity, which is June 15, 2010. Thebalance of this embedded option is included as a component of “Current maturitiesof long-term obligations” on the Condensed Consolidated Balance Sheet at June 30,2009 and is a component of “Long-term obligations (excluding currentmaturities)” at December 31, 2008. If any convertible notes are convertedinto 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 convertible notes, theestimated fair value of the embedded option, and the amortization of the fairvalue of the embedded option do not affect our cash flow.

 

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***CapitalLeases***

 

We lease certain propertyand software under capital leases that expire during various years through2011.

 

***ScheduledPrincipal Payments***

 

Ourlong-term obligations, consisting of convertible notes (including the carryingvalue of the embedded option), deferred acquisition price, and capitalizedleases, mature as follows for each twelve-month period ending June 30 (inthousands):

 
| 2010  |   | $      | 56,626 |   |
|-------|--------|--------|--------|--------|
| 2011  |   | 605    |   |
| 2012  |   | 50     |   |
| 2013  |   | — |   |
| 2014  |   | — |   |
| Total |   | $      | 57,281 |   |

 

**NOTE 4:   NET INCOME PER SHARE**

 

Basic net income pershare is computed on the basis of weighted average outstanding commonshares.  Diluted net income per share iscomputed on the basis of basic weighted average outstanding common sharesadjusted for the dilutive effect of stock options and convertible debt, ifdilutive. The numerator of the diluted net income per share calculation isincreased by the amount of interest expense, net of tax, related to outstandingconvertible debt, and the allocation of net income to nonvested shares, if thenet impact is dilutive.

 

As prescribed in FSP EITF03-6-1, which we adopted in the first quarter of 2009, we have determined thatthe nonvested share awards (also referred to as restricted stock awards) thatwere issued during the quarter are participating securities because they havenon-forfeitable rights to dividends. Accordingly, the basic net income pershare calculation below is calculated under the two-class method calculation,which is discussed in SFAS 128. In determining the number of diluted sharesoutstanding, we are required to disclose the more dilutive earnings per shareresult between the treasury stock method calculation and the two-class methodcalculation. For the three and six months ended June 30, 2009, thetwo-class method calculation was more dilutive; therefore, the diluted netincome per share information below is presented following the two-class method.While FSP EITF 03-6-1 requires retrospective application, there is no impact toour prior year calculation as we did not have any participating securitiesoutstanding during the prior year.

 

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The computation of basicand diluted net income per share for the three and six months ended June 30,2009 is as follows (in thousands, except per share data):

 
| ** **                                               | ** ** | **Three months ended June 30, 2009** | ** ** | **Six months ended June 30, 2009**                                             | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Net Income********(Numerator)**         | ** ** | **Weighted  Average  Common********Shares********Outstanding********(Denominator)** | ** ** | **Per Share  Amount** | ** ** | **Net Income********(Numerator)** | ** ** | **Weighted  Average  Common********Shares********Outstanding********(Denominator)** | ** ** | **Per Share  Amount** | ** ** |
|                                                     |       |                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Net  income                                              |       | $                                         | 2,886      |                                                                                |       |   |   |   | $ | 6,164 |   |   |   |   |   |
| Less:  net income allocated to nonvested shares (1)      |       | (24                                       | )          |                                                                                |       |   |   | (35 | ) |   |   |   |   |
|                                                     |       |                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| **Basic net income available to common  stockholders**   |       | 2,862                                     |       | 35,776                                                                              |       | $ | 0.08 |   | 6,129 |   | 35,731 |   | $ | 0.17 |   |
|                                                     |       |                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Effect  of dilutive securities:                          |       |                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Stock  options                                           |       | —                                    |       | 1,792                                                                               |       |   |   | — |   | 1,878 |   |   |   |
| Convertible  debt                                        |       | 301                                       |       | 4,286                                                                               |       |   |   | 599 |   | 4,286 |   |   |   |
| Add-back:  net income allocated to nonvested shares(1)   |       | 24                                        |       | —                                                                              |       |   |   | 35 |   | — |   |   |   |
| Less:  net income re-allocated to nonvested shares       |       | (23                                       | )          | —                                                                              |       |   |   | (33 | ) | — |   |   |   |
|                                                     |       |                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| **Diluted net income available to common  stockholders** |       | $                                         | 3,164      |                                                                                | 41,854     |   | $ | 0.08 |   | $ | 6,730 |   | 41,895 |   | $ | 0.16 |   |

 

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(1)             Net incomeallocated to holders of nonvested shares is calculated based upon a weightedaverage percentage of nonvested shares in relation to total shares outstanding.

 

The computation ofbasic and diluted net income per share for the three and six months ended June 30,2008, is as follows (in thousands, except per share data):

 
| ** **                         | ** ** | **Three months ended June 30, 2008** | ** ** | **Six months ended June 30, 2008**                        | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                         | ** ** | **Net Income**                            | ** ** | **Weighted  Average  Common********Shares********Outstanding** | ** ** | **Per Share Amount** | ** ** | **Net Income** | ** ** | **Weighted  Average  Common********Shares********Outstanding** | ** ** | **Per Share  Amount** | ** ** |
|                               |       |                                      |       |                                                           |       |   |   |   |   |   |   |   |   |
| Basic  net income per common share |       | $                                         | 3,154      |                                                           | 35,424     |   | $ | 0.09 |   | $ | 5,811 |   | 35,357 |   | $ | 0.16 |   |
| Effect  of dilutive securities:    |       |                                      |       |                                                           |       |   |   |   |   |   |   |   |   |
| Stock  options                     |       | —                                    |       | 1,924                                                          |       |   |   | — |   | 1,867 |   |   |   |
| Convertible  debt                  |       | 301                                       |       | 4,286                                                          |       |   |   | 603 |   | 4,286 |   |   |   |
| Diluted  net income per share      |       | $                                         | 3,455      |                                                           | 41,634     |   | $ | 0.08 |   | $ | 6,414 |   | 41,510 |   | $ | 0.15 |   |

#### ** **

#### **For the three month period ended June 30,2009 and 2008, weighted-average outstanding stock options totalingapproximately 1.9 million for both periods were antidilutive, and therefore notincluded in the computation of diluted net income per share. For the six monthperiod ended June 30, 2009 and 2008, weighted-average outstanding stockoptions totaling approximately 1.8 million and 1.7 million shares of commonstock, respectively, were antidilutive and therefore not included in thecomputation of diluted net income per share.**

#### ** **

**NOTE 5:   SHARE-BASED COMPENSATION**

 

The 2004 Equity Incentive Plan, as amended (the “2004Plan”), limits the combined grant of options to acquire shares of common stock,stock appreciation rights, and nonvested share awards under the 2004 Plan to7,500,000 shares.  Any grant under the2004 Plan that expires or terminates unexercised, becomes unexercisable, or isforfeited will generally be available 

 

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for future grants. At June 30, 2009, there wereapproximately 1,341,000 shares of common stock available for futureequity-related grants under the 2004 Plan.

 

During the six monthsended June 30, 2009, we granted 285,000 nonvested share awards at aweighted-average grant date price of $14.49 per share, which vest six monthsafter the date of grant, 40,000 stock options with a weighted-average exerciseprice of $14.49 per share, which vest 20% per year over five years, and 171,000stock options with a weighted-average exercise price of $16.02, which vest overa seven year period at 20% per year over the five year period beginning on thethird anniversary of the grant.

 

The weighted-averagegrant date fair value of stock options granted during the six months ended June 30,2009 and 2008 was $8.00 per option and $5.88 per option, respectively. Theweighted-average assumptions used for the calculation of these values,utilizing the Black-Scholes methodology, were as follows:

 
| ** **                            | ** ** | **Six  Months Ended**   | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **June 30,  2009** | ** ** | **June 30,  2008** | ** ** |
| Expected volatility (%)               |       | 47.0                    |       | 41.0 |   |
| Dividend yield (%)                    |       | —                  |       | — |   |
| Risk-free interest rate (%)           |       | 2.7                     |       | 2.6 |   |
| Expected life of stock option (years) |       | 6.2                     |       | 5.0 |   |

 

During the three monthsended June 30, 2009 and 2008, we recognized share-based compensationexpense, which is a non-cash charge, for stock option and nonvested shareawards of approximately $2.8 million and $0.9 million, respectively, of which$0.1 million and $0.2 million, respectively, is included under the caption “Directcost of services” and $2.7 million and $0.7 million, respectively, is includedunder the caption “General and administrative” on the accompanying CondensedConsolidated Statements of Income.

 

During the three monthsended June 30, 2009 and 2008, we recognized a net tax benefit ofapproximately $0.6 million and $0.3 million, respectively, related to aggregateshare-based compensation expense recognized during the same period.

 

During the six monthsended June 30, 2009 and 2008, we recognized share-based compensationexpense, which is a non-cash charge, for stock option and nonvested shareawards of approximately $4.3 million and $1.4 million, respectively, of which$0.3 million and $0.5 million, respectively, is included under the caption “Directcost of services” and $4.0 million and $0.9 million, respectively, is includedunder the caption “General and administrative” on the accompanying CondensedConsolidated Statements of Income.

 

During the six monthsended June 30, 2009 and 2008, we recognized a net tax benefit ofapproximately $1.0 million and $0.5 million, respectively, related to aggregateshare-based compensation expense recognized during the same period. As of June 30,2009, there was $10.6 million of total unrecognized compensation cost relatedto nonvested share-based awards, which will be recognized over aweighted-average period of 2.9 years.

 

**NOTE6:   SEGMENT REPORTING**

 

We have three reportingsegments: electronic discovery, bankruptcy, and settlement administration.  Our electronic discovery business providescollections and forensics, processing, and search and review services tocompanies and the litigation departments of law firms.  Produced documents are made availableprimarily through a hosted environment, and our DocuMatrixTM software allows forefficient attorney review and data requests. Our bankruptcy segment provides solutions that address the needs oftrustees to administer bankruptcy proceedings and of debtor corporations thatfile a plan of reorganization.  Oursettlement administration segment provides managed services including legalnotification, claims administration and controlled disbursement.

 

The segment performancemeasure is based on earnings before interest, taxes, depreciation andamortization, other operating expense (income), and share-based compensationexpense.  In management’s evaluation of performance,certain costs, such as compensation for administrative staff and executivemanagement, are not allocated by segment and, accordingly, the followingreporting segment results do not include such unallocated costs.

 

Assets reported within asegment are those assets that can be identified to a segment and primarilyconsist of trade receivables, property, equipment and leasehold improvements,software, identifiable intangible assets and goodwill.  Cash, 

 

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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 charges.

 

Following is a summary ofsegment information for the threemonths ended June 30, 2009. The intersegment revenues in the threemonths ended June 30, 2009 related primarily to call center servicesperformed by the settlement administration segment for the bankruptcy segment.

 
| ** **                                                                | ** ** | **Three Months Ended June 30, 2009** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                | ** ** | **Electronic  Discovery**                 | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in  thousands)**                       | ** ** |
| Revenue:                                                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating  revenue from external customers before reimbursed direct costs |       | $                                         | 14,335     |   | $ | 24,078 |   | $ | 18,726 |   | $ | — |   | $ | 57,139 |   |
| Intersegment  revenue                                                     |       | —                                    |       | 1 |   | 607 |   | (608 | ) | — |   |
|                                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating  revenue before reimbursed direct costs                         |       | 14,335                                    |       | 24,079 |   | 19,333 |   | (608 | ) | 57,139 |   |
| Operating  revenue from reimbursed direct costs                           |       | 37                                        |       | 3,196 |   | 5,818 |   | — |   | 9,051 |   |
| Total  revenue                                                            |       | 14,372                                    |       | 27,275 |   | 25,151 |   | (608 | ) | 66,190 |   |
|                                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Direct  costs, general and administrative costs                           |       | 9,981                                     |       | 14,774 |   | 19,953 |   | (608 | ) | 44,100 |   |
| Segment  performance measure                                              |       | $                                         | 4,391      |   | $ | 12,501 |   | $ | 5,198 |   | $ | — |   | $ | 22,090 |   |

 

Following is a summary ofsegment information for the threemonths ended June 30, 2008. Intersegment revenues for this periodwere not considered material to the segment reporting information.

 
| ** **                                                                | ** ** | **Three Months Ended June 30, 2008** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                | ** ** | **Electronic  Discovery**                 | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in  thousands)**                       | ** ** |
| Revenue:                                                                  |       |                                      |       |   |   |   |   |   |   |
| Operating  revenue from external customers 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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Following is a reconciliation of our segment performance measure toincome before income taxes (in thousands):

 
| ** **                                            | ** ** | **Three  Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                            |       |                                  |       |   |   |
| Segment performance measure                           |       | $                                     | 22,090     |   | $ | 20,255 |   |
| Corporate and unallocated expenses                    |       | (6,574                                | )          | (5,988 | ) |
| Share-based compensation expense                      |       | (2,783                                | )          | (872 | ) |
| Depreciation and software and leasehold  amortization |       | (4,552                                | )          | (3,853 | ) |
| Amortization of intangible assets                     |       | (1,818                                | )          | (2,325 | ) |
| Other operating expense                               |       | (13                                   | )          | (859 | ) |
| Interest expense, net                                 |       | (349                                  | )          | (405 | ) |
| Income before income taxes                            |       | $                                     | 6,001      |   | $ | 5,953 |   |

 

Following is a summary of segment information for the six months ended June 30, 2009. The intersegmentrevenues in the six months ended June 30, 2009 related primarily to callcenter services performed by the settlement administration segment for thebankruptcy segment.

 
| ** **                                                                | ** ** | **Six  Months Ended June 30, 2009** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                | ** ** | **Electronic  Discovery**                | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in  thousands)**                      | ** ** |
| Revenue:                                                                  |       |                                     |       |   |   |   |   |   |   |   |   |
| Operating revenue from external customers  before reimbursed direct costs |       | $                                        | 28,384     |   | $ | 41,406 |   | $ | 39,962 |   | $ | — |   | $ | 109,752 |   |
| Intersegment revenue                                                      |       | —                                   |       | 1 |   | 1,120 |   | (1,121 | ) | — |   |
|                                                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Operating revenue before reimbursed direct  costs                         |       | 28,384                                   |       | 41,407 |   | 41,082 |   | (1,121 | ) | 109,752 |   |
| Operating revenue from reimbursed direct  costs                           |       | 62                                       |       | 4,719 |   | 12,485 |   | — |   | 17,266 |   |
| Total revenue                                                             |       | 28,446                                   |       | 46,126 |   | 53,567 |   | (1,121 | ) | 127,018 |   |
|                                                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Direct costs, general and administrative  costs                           |       | 19,107                                   |       | 25,204 |   | 41,567 |   | (1,121 | ) | 84,757 |   |
| Segment performance measure                                               |       | $                                        | 9,339      |   | $ | 20,922 |   | $ | 12,000 |   | $ | — |   | $ | 42,261 |   |

 

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Following is a summary of segment information for the six months ended June 30, 2008. Intersegmentrevenues for this period were not considered material to the segment reportinginformation.

 
| ** **                                                                | ** ** | **Six  Months Ended June 30, 2008** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                | ** ** | **Electronic  Discovery**                | ** ** | **Bankruptcy** | ** ** | **Settlement  Administration** | ** ** | **Total** | ** ** |
| ** **                                                                | ** ** | **(in  thousands)**                      | ** ** |
| Revenue:                                                                  |       |                                     |       |   |   |   |   |   |   |
| Operating revenue from external customers  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 |   |

 

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

 
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                            |       |                               |       |   |   |
| Segment performance measure                           |       | $                                  | 42,261     |   | $ | 34,657 |   |
| Corporate and unallocated expenses                    |       | (11,323                            | )          | (10,830 | ) |
| Share-based compensation expense                      |       | (4,256                             | )          | (1,396 | ) |
| Depreciation and software and leasehold  amortization |       | (9,066                             | )          | (7,563 | ) |
| Amortization of intangible assets                     |       | (3,754                             | )          | (4,603 | ) |
| Other operating (expense) income                      |       | (484                               | )          | 1,512 |   |
| Interest expense, net                                 |       | (687                               | )          | (752 | ) |
| Income before income taxes                            |       | $                                  | 12,691     |   | $ | 11,025 |   |

 

Following are total assets by segment (in thousands):

 
| ** **                | ** ** | **June 30,********2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| **Assets**                | ** ** | ** **                    | ** ** | ** **                  | ** ** |
| Electronic Discovery      |       | $                             | 141,214    |                        | $          | 139,216 |   |
| Bankruptcy                |       | 188,105                       |       | 184,906                     |       |
| Settlement Administration |       | 58,736                        |       | 60,146                      |       |
| Corporate and unallocated |       | 43,545                        |       | 34,678                      |       |
| Total consolidated assets |       | $                             | 431,600    |                        | $          | 418,946 |   |

 

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**NOTE 7:DERIVATIVES**

 

***Interest Rate Floors***

 

A portion of our bankruptcy trustee revenue is subject to variabilitybased on fluctuations in short-term interest rates. During 2007, in order tolimit our economic exposure to market fluctuations in interest rates, wepurchased one-month LIBOR based interest rate floor options with a totalnotional amount of $800 million and initial contractual maturity of threeyears. We accounted for this transaction pursuant to the guidance contained inSFAS 133 which requires that all derivative instruments be recorded on thebalance 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. In February 2008, we soldthe interest rate floor options and realized a $3.5 million gain. The $2.4million difference between the realized gain of $3.5 million and the previouslyunrealized gain of $1.1 million was included as a component of “Other operatingexpense (income)” for the six months ended June 30, 2008 on theaccompanying Condensed Consolidated Statements of Income. As of June 30,2009 we did not hold any interest rate floor options, other derivatives, orauction rate securities.

 

**NOTE 8:****                        FAIRVALUES OF ASSETS AND LIABILITIES**

 

SFAS No. 157 establishes a three-level fair value hierarchy basedupon the assumptions (inputs) used to price assets or liabilities. Thehierarchy requires us to maximize the use of observable inputs and minimize theuse of unobservable inputs. The three levels of inputs used to measure fairvalue are listed below.

 

Level 1 — Unadjusted quoted prices in active markets for identicalassets or liabilities.

 

Level 2 — Observable inputs other than those included in Level 1, suchas quoted market prices for similar assets and liabilities in active markets orquoted prices for identical assets in inactive markets.

 

Level 3 — Unobservable inputs reflecting our own assumptions and bestestimate of what inputs market participants would use in pricing and asset orliability.

 

***Assets***

 

The carrying value and estimated fair value of our cash equivalents,which consist of short-term money market funds, are classified as Level 1 andare presented in the following table at June 30, 2009 and December 31,2008. As of June 30, 2009 and December 31, 2008, the carrying valueof our trade accounts receivable approximated fair value.

 
| ** **                             | ** ** | ** **   | ** ** | **Estimated  Fair Value Measurements** | ** ** |
|----------------------------------------|------------|--------------|------------|----------------------------------------|------------|
| **Items Measured at Fair Value on  a** | ** ** | **Carrying** | ** ** | **Quoted  Prices in  Active  Markets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Recurring  Basis**                   | ** ** | **Value**    | ** ** | **(Level  1)**                         | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
| **June 30, 2009:**                |       |         |       |                                   |       |   |   |   |   |
| *Financial Assets:*                    |       |         |       |                                   |       |   |   |   |   |
| Money market funds                     |       | $            | 22,410     |                                   | $          | 22,410 |   | $ | — |   | $ | — |   |
|                                   |       |         |       |                                   |       |   |   |   |   |
| **December 31, 2008:**            |       |         |       |                                   |       |   |   |   |   |
| *Financial Assets:*                    |       |         |       |                                   |       |   |   |   |   |
| Money market funds                     |       | $            | 19,340     |                                   | $          | 19,340 |   | $ | — |   | $ | — |   |

 

***Liabilities***

 

As of June 30, 2009 and December 31, 2008, the carrying valueof accounts payable, deferred acquisition price payments, capital leases, andthe embedded option related to our convertible notes approximated fair value.As of both June 30, 2009 and December 31, 2008, the carrying value ofconvertible debt was approximately $50.0 million. The fair value of our convertibledebt was estimated at $65.9 million and $71.6 million as of June 30, 2009and December 31, 2008, respectively. This amount was estimated by takingthe $50.0 million in outstanding debt, divided by the conversion price of$11.67 per

 

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share, to arrive at an estimated number of shares that would be issuedassuming conversion of all of the notes. The estimated number of shares wasthen multiplied by the closing price of our common stock on the last day of therespective reporting period to arrive at an estimate of the fair value of ourconvertible debt.

 

**NOTE 9:****                        SUPPLEMENTALCASH FLOW INFORMATION**

 

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

 
| ** **                                                                   | ** ** | **Six Months Ended********June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
|                                                                         |       |                                      |       |   |   |
| **Cash  paid for:**                                                          |       |                                      |       |   |   |
| Interest                                                                     |       | $                                         | 1,570      |   | $ | 1,489 |   |
| Income taxes paid, net                                                       |       | 4,121                                     |       | 3,427 |   |
| **Non-cash  investing and financing transactions:**                          |       |                                      |       |   |   |
| Property, equipment, and leasehold  improvements accrued in accounts payable |       | 1,047                                     |       | 2,188 |   |
|                                                                              |            |                                           |            |  |  |  |  |

 

**NOTE 10:****                                         ACQUISITIONS**

 

On April 4, 2008, our wholly-owned subsidiary, Epiq SystemsHolding B.V., acquired all of the equity of Uberdevelopments Limited and itswholly-owned operating subsidiary, Pinpoint Global Limited (collectively,“Pinpoint”), an electronic discovery business with operations in the UnitedKingdom. The value of the transaction was $7.1 million, consisting of $4.9million of cash, $1.7 million of deferred payments and $0.5 million ofcapitalized transaction costs. Certain revenue targets were satisfied as of September 30,2008, which required an additional payment of $0.6 million in the fourthquarter of 2008; and the accrual of an additional payment of approximately£545,000 (as of June 30, 2009 approximately $0.9 million, includinginterest) due in 2010. These additional payments were recorded as purchaseprice adjustments. If certain other revenue targets are satisfied prior to thesecond and third anniversary dates of the agreement, we are required to makeadditional payments. We have determined that it is probable that these targetswill be satisfied and have been accruing a liability for total payments ofapproximately £400,000 (as of June 30, 2009 approximately $0.7 million).These amounts are recorded as compensation expense over the contingency period.

 

The allocation of the purchase price was as follows: $0.3 million tonet assets, $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 $5.3 million to goodwill. The purchase price inexcess of the value of the acquired identifiable net assets reflects thestrategic value we placed on Pinpoint as this acquisition facilitated theexpansion of our electronic discovery business in the United Kingdom.

 

The acquisition was accounted for using the purchase method ofaccounting with the operating results included in the accompanying CondensedConsolidated Financial Statements from the date of acquisition. The operatingresults of the acquired entities are included within our electronic discoverysegment. The pro forma results of the acquired entities for the period January 1,2008 through the date of acquisition were not material to our consolidatedresults of operations.

 

**NOTE 11:****                                         LEGALPROCEEDINGS**

 

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

 

The plaintiff complaint asserts, among other things, that the companybackdated certain stock options from July 1997 through January 2006,and that the individual defendants either participated in the backdating orpermitted it to occur, violations of generally accepted accounting principlesas a result of the alleged backdating of options, related claims of false andmisleading proxy statements and annual reports filed by the company under theSecurities Exchange Act of 1934, also as a result of the alleged backdating ofoptions, and various violations of state law, breaches of fiduciary duty ofloyalty and insider trading in company stock. The plaintiff is seeking amongother things, unspecified money damages, an accounting for

 

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profits obtained from the alleged backdating of options, specifiedchanges in our corporate governance policies, punitive damages and rescissionof the allegedly backdated options.

 

In October 2008, the company and the individual defendants filed amotion to dismiss the plaintiff’s complaint on a variety of grounds. The Courtentered a Memorandum and Order on June 3, 2009 with respect to thedismissal motion, which Order: (i) barred certain of plaintiff’s federalsecurities law claims arising before July 29, 2005, leaving only the claimfor the stock option grant dated June 3, 2006; (ii)  held that thestatute of limitations was tolled on those federal securities law claims; (iii) barredplaintiff’s other federal securities law claims arising before December 9,2003; (iv) declined to rule at that time on defendants’ motions todismiss plaintiff’s state law claims based on any statute of repose or statuteof limitations; (v) dismissed plaintiff’s state law claim for constructivefraud; and (vi) held that plaintiff’s complaint stated federal securitieslaw and state law claims with sufficient particularity to avoid dismissal atthis stage in the proceedings.

 

The individual defendants and the company have filed an answer denyingthe plaintiff’s claims. Discovery in this action is just beginning and isexpected to continue until summer 2010.

 

We believe the plaintiff’s claims are without merit and will continueto defend against them vigorously. No amounts have been recorded in theaccompanying Condensed Consolidated Financial Statements associated with thismatter.

 

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**ITEM 2.****          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This discussion and analysis should be read in conjunction with theCondensed Consolidated Financial Statements and the accompanying Notes to theCondensed Consolidated Financial Statements included in this Form 10-Q.

 

**Overview**

 

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

 

We have three reporting segments: electronic discovery, bankruptcy, andsettlement administration.

 

***Electronic Discovery***

 

Our electronic discovery business provides collections and forensics,processing, and search and review services to companies and the litigationdepartments of law firms. Our eDataMatrixTM software analyzes, filters,deduplicates and produces documents for review. Produced documents are madeavailable primarily through a hosted environment, and our DocuMatrixTM softwareallows for efficient attorney review and data requests.

 

Our customers are typically large corporations that use our productsand services cooperatively with their legal counsel to manage the electronicdiscovery process for complex litigation matters. The impacts of currenteconomic conditions for the electronic discovery market have resulted in customersdelaying new litigation or starting-up activities related to new signedprojects due to budgetary constraints, as well as pricing pressures in theindustry, as discussed in more detail below.

 

The substantial increase of electronic documents by businesses haschanged the dynamics of how attorneys support discovery in complex litigationmatters. Due to the complexity of cases, the volume of data that are maintainedelectronically, and the volume of documents that are produced in all types oflitigation, we anticipate that law firms will become increasingly reliant onelectronic evidence management systems to organize and manage the litigationdiscovery process.

 

Following is adescription of the significant sources of revenue in our electronic discoverybusiness.

 

·                  Fees related tothe conversion of data into an organized, searchable electronic database. Theamount we earn varies primarily on the size (number of documents) andcomplexity of the engagement.

 

·                  Hosting feesbased on the amount of data stored.

 

In the first half of 2009, we opened new offices in Brussels and HongKong, established global reach for our data centers in the U.S., Europe andAsia and expanded our offerings to include data forensics and collectionsservices and document review services. We expect industry pricing pressures, aswell as a slower pace in the start-up of litigation matters, both of which canbe attributed to the current economic climate, to continue for the remainder of2009.

 

***Bankruptcy***

 

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

 

·                  Chapter 7 is aliquidation bankruptcy for individuals or businesses that, as measured by thenumber of new cases filed in the fiscal year ended September 30, 2008,accounted for approximately 65% of all bankruptcy filings. In a Chapter 7 case,the debtor’s assets are liquidated and the resulting cash proceeds are used bythe Chapter 7 bankruptcy trustee to pay creditors. Chapter 7 cases typicallylast several years.

 

·                  Chapter 11 is areorganization model of bankruptcy for corporations that, as measured by thenumber of new cases filed in the fiscal year ended September 30, 2008,accounted for approximately 1% of all bankruptcy filings. Chapter 11

 

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generally allows a company, often referred toas 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 generally last severalyears.

 

·                  Chapter 13 is areorganization model of bankruptcy for individuals that, as measured by thenumber of new cases filed in the fiscal year ended September 30, 2008,accounted for approximately 34% of all bankruptcy filings. In a Chapter 13case, debtors make periodic cash payments into a reorganization plan and aChapter 13 bankruptcy trustee uses these cash payments to make monthlydistributions to creditors. Chapter 13 cases typically last between three andfive years.

 

As reported by the Administrative Office of the U.S. Courts, bankruptcyfilings for the 12 month period ended March 31, 2009 increased 33% versusthe same period in 2008. During this period, Chapter 7 filings increased 46%,Chapter 11 filings increased 69%, and Chapter 13 filings increased 11%. Thefrequently long-term, multi-year nature of corporate restructuring bankruptcyengagements provides us visibility into potential revenues in future periods.For the Chapter 7 trustee services component of the bankruptcy segment, theincrease in filings is expected to translate into growth in client depositbalances related to asset liquidations taking place in a higher number of casesand pricing is not expected to change for the remainder of 2009.

 

The end-user customers of our bankruptcy business are debtorcorporations that file a plan of reorganization and professional bankruptcytrustees. The Executive Officefor United States Trustees, a division of the U.S. Department of Justice,appoints all bankruptcy trustees. A United States Trustee is appointed in mostfederal court districts and generally has responsibility for overseeing theintegrity 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. Trusteesmanage an entire caseload of bankruptcy cases simultaneously.

 

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

 

·                  Data hostingfees and volume-based fees.

 

·                  Case managementprofessional service fees and other support service fees related to theadministration of cases, including data conversion, claims processing, claimsreconciliation, professional consulting services, and settlementadministration.

 

·                  Deposit-basedfees, earned primarily on a percentage of Chapter 7 total liquidated assetsplaced on deposit with a designated financial institution by our trusteeclients, to whom we provide, at no charge, software licenses, limited hardwareand hardware maintenance, and postcontract customer support services. The feeswe earn based on total liquidated assets placed on deposit by our trusteeclients may vary based on fluctuations in short-term interest rates. Interestrate fluctuations are somewhat mitigated by pricing arrangements with eachfinancial institution that set ceilings and floors on the fees that thosefinancial institutions pay us.

 

·                  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.

 

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

 

***Settlement Administration***

 

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

 

Class action and mass tort refer to litigation in which classrepresentatives bring a lawsuit against a defendant company or other persons onbehalf of a large group of similarly affected persons. Mass tort refers toclass action cases that are particularly large or prominent. The class actionand mass tort marketplace is significant, with estimated annual tort claimcosts of approximately $250 billion in 2007, according to a study issued in2008 by Towers Perrin. Administrative costs, which include costs, other thandefense costs, incurred by either the insurance company or self-insured entityin the administration of claims, comprise approximately 24% of this total.

 

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

 

The customersof our settlement administration segment are companies that are administeringthe settlement or resolution of class action cases or are administeringprojects. We sell our services directly to those customers and other interestedparties, including legal counsel, which often provide access to these customers.

 

A large Settlement Administration contract with IBM in support of thefederal government’s analog to digital television conversion program, which waslaunched in the fourth quarter of 2007 and contributed 22% of our consolidatedrevenue during the year ended December 31, 2008, was substantiallycompleted in the second quarter of 2009 and will conclude in the third quarterof 2009.

 

Following is adescription of significant sources of revenue in our settlement administrationbusiness.

 

·                  Fees contingentupon the month-to-month delivery of case management services such as claimsprocessing, claims reconciliation, project management, professional services,call center support, and controlled disbursements. The amount we earn variesprimarily on the size and complexity of the engagement.

 

·                  Legal noticingservices to parties of interest in class action matters, including mediacampaign and advertising management, in which we coordinate notificationthrough various media outlets, such as print, radio and television, topotential parties of interest for a particular client engagement.

 

·                  Reimbursementfor costs incurred related to postage on mailing services.

 

**Results of Operations for the Three Months Ended June 30,2009 Compared with the Three Months Ended June 30, 2008**

 

**ConsolidatedResults**

 

***Revenue***

 

Total revenue was $66.2 million for the three months ended June 30,2009, an increase of $1.3 million, or 2%, as compared to the prior year. Aportion of our total revenue consists of reimbursement for direct costs weincur, such as postage related to document management services.  We reflect the operating revenue from thesereimbursed direct costs as a separate line item on our accompanying CondensedConsolidated Statements of Income. Operating revenue from reimbursed direct costs was $9.1 million, anincrease of $1.2 million, or 14%, from $7.9 million in the period year.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 before reimbursed direct costs, was $57.1 million inthe three months ended June 30, 2009, an increase of $0.2 million, ascompared to the prior year. The increase consists of an $11.5 million increasein the bankruptcy segment, largely offset by a $1.9 million decrease in theelectronic discovery segment and a $9.4 million decrease in the settlementadministration segment. Changes by segment are discussed below.

 

***Operating Expense***

 

The direct cost of services, exclusive of depreciation andamortization, was $19.7 million for the three months ended June 30, 2009,a decrease of $4.7 million, or 19%, as compared to $24.4 million in the prioryear. Contributing to this decrease was a $3.9 million decrease in the cost ofoutside services, primarily related to temporary help and mailing; a $2.0million decrease in legal noticing costs; and a $0.5 million decrease inproduction supplies. These decreases were partially offset by a $1.0 millionincrease in compensation related expense; a $0.3 million increase in softwaremaintenance costs related to client service capabilities; a $0.2 millionincrease in equipment expense; and a $0.2 million increase in insuranceexpense. Changes by segment are discussed below.

 

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The direct cost of bundled products and services, exclusive ofdepreciation and amortization, remained flat at $0.9 million for the threemonths ended June 30, 2009 and 2008. Changes by segment are discussedbelow.

 

Reimbursed direct costs increased $1.1 million, or 15%, to $9.0 millionfor the three months ended June 30, 2009, compared with $7.9 millionduring the prior year.  This increasedirectly corresponds to the increase in operating revenue from reimburseddirect costs.  Changes by segment arediscussed below.

 

General and administrative costs increased $5.6 million, or 31%, to$23.8 million for the three months ended June 30, 2009. Contributing tothis increase was a $3.3 million increase in compensation, commission andbenefits expense, a $2.1 million increase in share-based compensation expensefor nonvested share awards granted in February 2009, and a $0.5 millionincrease in outside services. Changes by segment are discussed below.

 

Depreciation and software and leasehold amortization costs for thethree months ended June 30, 2009 were $4.6 million, an increase of $0.7million, or 18%, compared to the prior year. This increase was primarily theresult of increased software amortization expense and increased hardwaredepreciation related to investments in our business segments.

 

Amortization of identifiable intangible assets for the three monthsended June 30, 2009 was $1.8 million, a decrease of $0.5 million, or 22%,compared to the prior year. This decrease was the result of certain non-competeand customer contract intangible assets that were fully amortized in the firstquarter of 2009.

 

Other operating expense for the three months ended June 30, 2009decreased by approximately $0.9 million. For the three months ended June 30,2008, we had other operating expense of $0.9 million which consisted ofacquisition-related expenses.

 

***Interest Expense***

 

We recognized interest expense of approximately $0.4 million for thethree months ended June 30, 2009 and for the three months ended June 30,2008.

 

***Effective Tax Rate***

 

Our effective tax rate for the three months ended June 30, 2009was 51.9% compared with an effective rate of 47.0% for the prior year. Theincrease compared to the prior year is primarily related to non-deductibleequity compensation expense in 2009 for which a comparable expense did notexist in the prior year.  State taxes andnon-deductible equity compensation are the primary reasons our tax rate ishigher than the statutory federal rate of 35%. We have significant operations located in New York City that are subjectto state and local tax rates that are higher than the tax rates assessed byother jurisdictions where we operate.

 

It is reasonably possible that we will recognize approximately $1.0million of previously unrecognized tax benefits as a result of anticipatedlapses in the statute of limitations during 2009 within twelve months of ourreporting date.  If recognized, the $1.0million of tax benefits would affect the effective tax rate in 2009.

 

***Net Income***

 

Our net income was $2.9 million for the threemonths ended June 30, 2009 compared to $3.2 million for the prior year, adecrease of $0.3 million, or 8%. The growth in our bankruptcy segment, whichwas the result of an increase in corporate restructuring retentions; was offsetby a decline in our settlement administration segment, due primarily to thewind-down of the digital conversion contract; and our electronic discoverysegment, driven by lower revenues related to the current economic climate andincreased expenses related to expansion of service offerings and geographicexpansion in this segment; an increase in share based compensation expense; andan increase in our 2009 effective tax rate, resulting in higher tax expense.

 

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**Results of Operations by Segment**

 

The following segment discussion is presentedon a basis consistent with our segment disclosure contained in Note 6 of ourNotes to Condensed Consolidated Financial Statements.

 

***Electronic Discovery Segment***

 

Electronic discovery operating revenue from external customers beforereimbursed direct costs for the three months ended June 30, 2009 was $14.3million, a decrease of $1.9 million, or 12%, compared to the prior year.  The change from the prior year is primarilyrelated to industry pricing pressures, the impact of which was an approximate10% decline in the average price of services, as well as a slower pace in thestart-up of litigation matters, both of which can be attributed to the currenteconomic climate.

 

Electronic discovery direct and administrative expenses were $10.0million for the three months ended June 30, 2009, an increase of $1.7million, or 21%, compared to the prior year. This increase is primarily a result of a $1.1 million increase incompensation, commission and benefits expense related to the expansion ofservice offerings and geographic expansion; a $0.3 million increase in softwaremaintenance costs; a $0.1 million increase in building and equipment leaseexpense, primarily related to data center expansion; and an increase of $0.2million in outside services expense.

 

***Bankruptcy Segment***

 

Bankruptcy operating revenue from external customers before reimburseddirect costs for the three months ended June 30, 2009 was $24.1 million,an increase of $11.5 million, or 93%, compared to $12.5 million in the prioryear. This increase is primarily attributable to an increase in corporaterestructuring engagements. Partially offsetting this increase was a slightdecline in bankruptcy trustee fees, as an increase in average deposit balanceswas more than offset by lower interest rates compared to the prior year period.

 

Bankruptcy direct and administrative expenses increased $7.6 million,or 104%, to $14.8 million for the three months ended June 30, 2009,compared to $7.2 million in prior year. The increase is primarily attributableto a $2.5 million increase in compensation related expense, due primarily toexpanded staffing in support of new client engagements; a $1.5 million increasein outside services expense; a $2.3 million increase in reimbursed directcosts, which directly corresponds to the increase in operating revenue fromreimbursed direct costs; a $0.4 million increase in noticing expense; and a $0.6million increase in call center services.

 

***Settlement Administration Segment***

 

Settlement administration operating revenue from external customersbefore reimbursed direct costs was $18.7 million in the three months ended June 30,2009, a decrease of $9.4 million, or 34%, compared to the prior year. Thisdecrease was primarily related to a decline of $7.6 million related to thedigital conversion contract which was substantially completed during the secondquarter of 2009, and a $2.1 million decrease in legal notification revenue.

 

Settlement administration direct andadministrative expenses, including reimbursed direct costs, for the threemonths ended June 30, 2009 were $20.0 million, a decrease of $9.1 million,or 31%, compared to $29.1 million in the prior year. The decrease in expense isthe result of a decrease in call center, outside services, and mailing suppliescosts of $6.2 million, which supported the digital conversion contractreferenced above in the prior year; a $1.9 million decrease in the cost oflegal noticing, which is directly related to the decrease in legal notificationrevenue; and a $1.2 million decrease in reimbursable expenses.

 

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**Results of Operations for the Six Months Ended June 30,2009 Compared with the Six Months Ended June 30, 2008**

 

### **ConsolidatedResults**

### ** **

### ***Revenue***

### ** **

Total revenue was $127.0million for the six months ended June 30, 2009, an increase of $13.2million, or 12%, as compared to the prior year. 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.  Operating revenue from reimbursed directcosts was $17.3 million, an increase of $4.3 million, or 33%, from $13.0million in the period year. Although operating revenue from reimbursed directcosts may fluctuate significantly from quarter to quarter, these fluctuationshave a minimal effect on our income from operations as we realize little or nomargin from this revenue.

 

Operating revenue beforereimbursed direct costs was $109.8 million in the six months ended June 30,2009, an increase of $8.9 million, or 9%, as compared to the prior year. Theincrease consists of a $15.5 million increase in the bankruptcy segment,partially offset by a $5.5 million decrease in the settlement administrationsegment, and a $1.1 million decrease in the electronic discovery segment.Changes by segment are discussed below.

 

### ***Operating Expense***

### ** **

The direct cost of services,exclusive of depreciation and amortization, was $39.4 million for the sixmonths ended June 30, 2009, a decrease of $3.9 million, or 9%, as comparedto $43.3 million in the prior year. Contributing to this decrease was a $5.1million decrease in legal noticing costs and a $3.1 million decrease in thecost of outside services, primarily related to temporary help and mailing inthe prior year period. These decreases were partially offset by an increase of$2.3 million in compensation related expense; a $1.0 million increase inproduction supplies; a $0.6 million increase in software maintenance costs; a$0.3 million increase in equipment expense; and a $0.2 million increase ininsurance expense.

 

The direct cost ofbundled products and services, exclusive of depreciation and amortization, was$1.7 million for the six months ended June 30, 2009, a decrease of $0.1million, or 8%, compared to the prior year. Changes by segment are discussedbelow.

 

Reimbursed direct costsincreased $4.1 million, or 31%, to $17.1 million for the six months ended June 30,2009, compared with $13.0 million during 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 $8.9 million, or 27%, to $42.2 million for thesix months ended June 30, 2009. Contributing to this increase was a $5.6million increase in compensation, commission and benefits expense, and a $3.1million increase in share-based compensation expense for nonvested share awardsgranted in February 2009. Changes by segment are discussed below.

 

Depreciation and softwareand leasehold amortization costs for the six months ended June 30, 2009were $9.1 million, an increase of $1.5 million, or 20%, compared to the prioryear. This increase was primarily the result of increased software amortizationexpense and increased hardware depreciation related to investments in ourbusiness segments.

 

Amortization ofidentifiable intangible assets for the six months ended June 30, 2009 was$3.8 million, a decrease of $0.8 million, or 18%, compared to the prior year.This decrease was the result of certain non-compete and customer contractintangible assets that were fully amortized in the current year; partly offsetby an increase in non-compete amortization resulting from our acquisition of anelectronic discovery business in the United Kingdom in the second quarter of2008.

 

Other operating expenseof $0.5 million for the six months ended June 30, 2009 primarily consistsof expenses related to potential acquisitions. For the six months ended June 30,2008, we had other operating income of $1.5 million which was comprised of again of $2.4 million that we recognized related to interest rate floor optionspurchased during 2007; partially offset by acquisition-related expenses of $0.9million.

 

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***InterestExpense***

 

We recognized interestexpense of $0.7 million for the six months ended June 30, 2009 comparedwith $0.9 million for the same period in the prior year.  The $0.2 million decrease in interest expenseresulted from a decrease in loan fee amortization.

 

***EffectiveTax Rate***

 

Our effective tax ratefor the six months ended June 30, 2009 was 51.4% compared with aneffective rate of 47.3% for the prior year. The increase compared to the prioryear is primarily related to non-deductible equity compensation in 2009 forwhich a comparable expense did not exist in the prior year. State taxes andnon-deductible equity compensation are the primary reasons our tax rate ishigher than the statutory federal rate of 35%. 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.

 

It is reasonably possiblethat we will recognize approximately $1.0 million of previously unrecognized taxbenefits as a result of anticipated lapses in the statute of limitations during2009 within twelve months of our reporting date.  If recognized, the $1.0 million of taxbenefits would affect the effective tax rate in 2009.

 

***NetIncome***

 

Our net income was$6.2 million for the six months ended June 30, 2009 compared to $5.8million for the prior year, an increase of $0.4 million, or 6%. Growth in ourbankruptcy segment, resulting primarily from an increase in corporaterestructuring retentions, as well as growth in our settlement administrationsegment, contributed to the increase in net income. These increases were offsetin part by increased expenses in the electronic discovery segment related tothe expansion of services and geographic expansion of the business; a declinein other operating income due to the gain on the interest rate floor optionsrecognized in the prior year; and an increase in our 2009 effective tax rate,resulting in higher tax expense.

 

**Resultsof Operations by Segment**

 

Thefollowing segment discussion is presented on a basis consistent with oursegment disclosure contained in Note 6 of our Notes to Condensed ConsolidatedFinancial Statements.

 

***ElectronicDiscovery Segment***

 

Electronic discoveryoperating revenue from external customers before reimbursed direct costsdecreased $1.1 million, or 4%, to $28.4 million for the six months ended June 30,2009, compared to $29.5 million in the prior year.  The change from the prior year is primarilyrelated to industry pricing pressures, the impact of which was an approximate8% decline in the average price of services, as well as a slower pace in thestart-up of litigation matters, both of which can be attributed to the currenteconomic climate.

 

Electronic discoverydirect and administrative expenses increased $3.9 million, or 26%, to $19.1million for the six months ended June 30, 2009, compared with $15.2million in the prior year.  This increaseis primarily a result of a $2.3 million increase in compensation, commissionand benefits expense, and $0.2 million increase in travel and entertainmentexpense, resulting from the expansion of services and geographic expansion ofour business; a $0.5 million increase in the outside services; a $0.5 millionincrease in software maintenance costs; and a $0.3 million increase in buildingand equipment lease expense, primarily related to data center expansion.

 

***BankruptcySegment***

 

Bankruptcy operatingrevenue from external customers before reimbursed direct costs for the sixmonths ended June 30, 2009 was $41.4 million, an increase of $15.5million, or 60%, compared to $25.9 million in the prior year. This increase isprimarily attributable to an increase in corporate restructuring engagements.Partially offsetting this increase was a decline in bankruptcy trustee fees, asan increase in average deposit balances was more than offset by lower interestrates compared to the prior year period.

 

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Bankruptcy direct andadministrative expenses increased $11.1 million, or 78%, to $25.2 million forthe six months ended June 30, 2009, compared to $14.1 million in prioryear.  The increase is primarilyattributable to a $3.5 million increase in compensation related expense, due toexpanded staffing in support of new client engagements; a $2.5 million increasein outside services expense; a $3.0 million increase in reimbursed directcosts, which directly corresponds to the increase in operating revenue fromreimbursed direct costs; a $0.4 million increase in outside services; a $0.2million increase in production supplies; a $0.2 million increase inprofessional fees; and a $1.1 million increase in call center services.

 

***SettlementAdministration Segment***

 

Settlement administrationoperating revenue from external customers before reimbursed direct costs was$40.0 million in the six months ended June 30, 2009, a decrease of $5.5million, or 12%, compared to the prior year. Call center and professionalservices revenue increased $3.3 million compared to the prior year due toseveral new engagements. This increase was offset by a decline of $2.7 millionrelated to the digital conversion contract, which was substantially completedduring the second quarter of 2009; a $5.7 million decrease in legalnotification revenue; and a $0.4 million decrease in legal settlements revenue.

 

Settlementadministration direct and administrative expenses, including reimbursed directcosts, for the six months ended June 30, 2009 were $41.6 million, adecrease of $8.3 million, or 17%, compared to $49.9 million in the prior year.The decrease in expense is the result of a decrease in call center, outsideservices, and mailing supplies costs, which supported the digital conversioncontract referenced above, of $4.2 million, and a $5.0 million decrease in thecost of legal noticing which is directly related to the decrease in legalnotification revenue.  These decreaseswere partially offset by an increase of $1.0 million in call center, outsideservices, and mailing supplies costs related to several new engagements.

 

**Liquidity and Capital Resources**

 

***OperatingActivities***

 

During the six monthsended June 30, 2009, our operating activities provided net cash of $21.0million. Contributing to net cash provided by operating activities was netincome of $6.2 million and increased non-cash expenses, such as depreciationand amortization and share-based compensation expense, of $17.1 million. Theseitems were partially offset by a $3.0 million net use of cash resulting fromchanges in operating assets and liabilities. The most significant change in operating assets and liabilities was a$6.3 million increase in trade accounts receivable, related to several largematters in the bankruptcy and electronic discovery segments. Trade accountsreceivable will fluctuate from period to period depending on the timing ofsales and collections. Partially offsetting the increase in accounts receivablewas an increase in accounts payable and other liabilities of $3.9 million.Accounts payable will fluctuate from period to period depending on timing ofpurchases and payments.

 

***InvestingActivities***

 

During the six monthsended June 30, 2009, we used cash of $6.5 million for the purchase ofproperty and equipment, including computer hardware, purchased softwarelicenses, and purchased computer hardware. Enhancements to our existingsoftware and the development of new software is essential to client retentionand continued growth, and during the six months ended June 30, 2009, weused cash of $3.8 million to fund internal costs related to the development ofsoftware for which technological feasibility had been established. Weanticipate that cash generated from operations will be adequate to fund ouranticipated property, equipment, and software spending for the foreseeablefuture.

 

***FinancingActivities***

 

During the six monthsended June 30, 2009, we used cash to pay approximately $1.8 million forcapital lease payments, and $1.5 million for a deferred acquisition payment.These financing uses of cash were partially offset by $1.6 million of netproceeds from stock issued in connection with the exercise of employee stockoptions. We also recognized a portion of the tax benefit related to the exerciseof stock options as a financing source of cash.

 

As of June 30, 2009,our borrowings consisted of $51.5 million (including the fair value of theembedded option) from the contingent convertible subordinated notes, whichbears interest at 4% per annum based on the $50.0 million principal amount, andapproximately $5.7 million of obligations related to capital leases anddeferred acquisition price payments. During 2007,

 

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the term of ourcontingent convertible subordinated notes was extended to June 2010.  The notes will require the use of $50.0million of cash at the extended maturity date if the note holders do notconvert the notes into shares of our common stock. If the notes are notconverted prior to maturity, we will use a combination of cash on hand and ourrevolving credit facility to fund the payment of these notes. The holders ofthe contingent convertible subordinated notes have the right to convert at aprice of approximately $11.67 per share. If any or all notes are converted into shares of our common stock priorto the scheduled maturity of those notes, then there will be no cashrequirements associated with those converted notes, other than the regularpayment of interest earned prior to the conversion date. One holder of thenotes converted an nominal principal amount of the notes into shares of commonstock in July 2009.

 

As of June 30,2009 we did not have any borrowings outstanding under our $100.0 million seniorrevolving loan.  During the term of thecredit facility, we have the right, subject to compliance with our covenants,to increase the senior revolving loan to $175.0 million. Interest on the creditfacility is generally based on a spread, not to exceed 325 basis points overthe LIBOR rate.  As of June 30,2009, significant financial covenants, all as defined within our creditfacility agreement, include a leverage ratio not to exceed 3.00 to 1.00, afixed charge coverage ratio of not less than 1.25 to 1.00, and a current ratioof not less than 1.50 to 1.00.  As of June 30,2009, we were in compliance with all financial covenants.

 

Covenants contained inour credit facility and in our contingent convertible subordinated notesinclude limitations on acquisitions, should we pursue acquisitions in thefuture. Pursuant to the terms of our credit facility, we generally cannot incurindebtedness outside the credit facility, with the exceptions of capital leasesand subordinated debt, with a limit of $100.0 million of aggregate subordinateddebt. Furthermore, for any acquisition we must be able to demonstrate that, ona pro forma basis, we would be in compliance with our covenants during the fourquarters prior to the acquisition and bank permission must be obtained for anacquisition for which cash consideration exceeds $80.0 million or totalconsideration exceeds $125.0 million.

 

We believe that fundsgenerated from operations, plus our existing cash resources and amountsavailable under our credit facility, will be sufficient over the next 12months, and for the foreseeable future thereafter, to finance currentlyanticipated working capital requirements, internal software developmentexpenditures, property, equipment and third party software expenditures,deferred acquisition price agreements and capital leases, interest payments dueon our outstanding borrowings, and payments for other contractual obligations.

 

**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, 2008.

 

**CriticalAccounting Policies**

 

In our Annual Report on Form 10-Kfor the year ended December 31, 2008, 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, 2008.

 

***Recently Adopted AccountingPronouncements***

 

In December 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 141 (revised 2007), *Business Combinations*(“SFAS 141(R)”). SFAS 141(R) establishes guidelines for the recognitionand measurement of assets, liabilities and equity in business combinations. Theprovisions of SFAS 141(R) were effective for us as of January 1,2009. Due to the adoption of SFAS 141(R) we now expense, as incurred,acquisition-related costs for potential and completed acquisitions.Acquisition-related costs expensed in the first quarter of 2009 wereapproximately $0.5 million. These costs are included in “Other operatingexpense (income)” in our Condensed Consolidated Statements of Income. SFAS 141(R) alsoamends SFAS No. 109, *Accounting for IncomeTaxes*, and now requires the recognition of changes in an acquirer’sincome tax valuation allowance on deferred taxes and acquired tax contingenciesassociated with acquisitions that closed prior to the effective date of SFAS141(R) to apply the provisions of SFAS 141(R). The provisions of SFAS 141(R) willprimarily apply to all future acquisitions.

 

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In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interest in Consolidated FinancialStatements* (“SFAS 160”).  SFAS160 changes the way in which noncontrolling interests in subsidiaries aremeasured and classified on the balance sheet. The provisions of SFAS 160 were effective for us as of January 1,2009. The adoption of SFAS 160 had no impact on our consolidated financialposition or results of operations.

 

In February 2008, the FASB issued FASB StaffPosition (“FSP”) No. FAS 157-2, *Effective Date of FASBStatement No. 157*, (“FSP FAS 157-2”) which, as of February 12,2008, indefinitely delayed the effective date of SFAS No. 157, *Fair Value Measurements,*for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis.  The provisions of FSP FAS 157-2 wereeffective for us as of January 1, 2009. The adoption of FSP FAS 157-2 didnot have a material impact on our financial position, results of operations, orcash flows.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133*(“SFAS161”). SFAS 161 changes the disclosure requirements for derivative instrumentsand hedging activities.  The provisionsof SFAS 161 were effective for us as of January 1, 2009.  The adoption of SFAS 161 had no impact on ourconsolidated financial position or results of operations. Disclosures requiredby this statement are included in Note 3 to our Condensed ConsolidatedFinancial Statements.

 

In April 2008, theFASB issued FSP No. FAS 142-3, *Determination of theUseful Life of Intangible Assets* (“FSP FAS 142-3”).  FSP FAS 142-3 provides guidance ondetermining the useful life of a recognized intangible asset.  The provisions of FSP FAS 142-3 wereeffective for us as of January 1, 2009. The provisions of FSP FAS 142-3had no impact on our consolidated financial position or results of operationsduring the quarter ended June 30, 2009 as we did not renew or extend theuseful lives of any of our intangible assets.

 

In June 2008, theFASB issued FSP No. EITF 03-6-1, *Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities*(“FSPEITF 03-6-1”). FSP EITF 03-6-1 clarifies that share-based payment awards thatentitle their holders to receive non-forfeitable dividends or dividendequivalents before vesting should be considered participating securities, andrequires them to be included in the computation of earnings per share pursuantto the two-class method described in SFAS No. 128, *Earnings perShare* (“SFAS 128”). The provisions of FSP EITF 03-6-1 were effectivefor us as of January 1, 2009, and require all prior period income pershare data presented to be adjusted retroactively. We have determined thatnonvested share awards that were granted in the first quarter of 2009 areparticipating securities as defined by FSP EITF 03-6-1 because they haveequivalent common stock dividend rights. Accordingly, we have included these shares in our basic and dilutedshare calculations as appropriate.  Thereis no prior period impact of this guidance as there were no participatingsecurities outstanding prior to the first quarter of 2009. Details of theincome per share calculation are described in Note 4 to our CondensedConsolidated Financial Statements.

 

In June 2008, the FASB ratified the consensusreached by the EITF on three issues discussed at its June 12, 2008 meetingpertaining to EITF Issue No. 07-5, *Determining Whether anInstrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock*(“EITF 07-5”). The issues include how an entity should evaluate whether anequity-linked financial instrument (or embedded feature) is indexed to its ownstock, including evaluating the instrument’s contingent exercise and settlementprovisions; how the currency in which the strike price of an equity-linkedfinancial instrument (or embedded feature) is denominated affects thedetermination of whether the instrument is indexed to an entity’s own stock;and how the issuer should account for market-based employee stock optionvaluation. The adoption of EITF 07-5 did not have an impact on our consolidatedfinancial position.

 

In April 2009, the FASB issued FSP No. FAS141(R)-1, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies* (“FSPFAS 141(R)-1”). FSP FAS 141(R)-1 amends and clarifies FASB No. 141(revised 2007), *Business Combinations*, to addressapplication issues raised by preparers, auditors, and members of the legalprofession on initial recognition and measurement, subsequent measurement andaccounting, and disclosure of assets and liabilities arising from contingenciesin a business combination. FSP FAS 141(R)-1 is effective for us for businesscombinations completed on or after January 1, 2009.

 

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*(“FSP FAS 107-1 and APB 28-1”).FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, torequire disclosures about the fair value of financial instruments in interim aswell as in annual financial statements. This FSP also amends APB Opinion No. 28,*Interim Financial Reporting*, to

 

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require those disclosures in summarized financialinformation at interim reporting periods. These standards are effective forperiods ending after June 15, 2009. The disclosures required by this guidance are included in Note 8 to ourCondensed Consolidated Financial Statements.

 

In May 2009, the FASB issued SFAS No. 165, *Subsequent Events* (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. SFAS 165 requires the disclosure of the date through which anentity has evaluated subsequent events and the basis for that date. Theprovisions of SFAS 165 are effective for reporting periods ending after June 15,2009. The disclosures required by SFAS 165 are included in Note 1 to ourCondensed Consolidated Financial Statements.

 

***Recently Issued AccountingPronouncements***

 

In June 2009, the FASB issued SFAS No. 168, *The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles — a replacement of FASB Statement No. 162*(“SFAS 168”).  SFAS 168 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principlesin the United States. SFAS 168 is effective for periods ending after September 15,2009.  We do not expect the adoption ofSFAS 168 in the third quarter of 2009 will have an impact on our condensedconsolidated financial position, but the adoption will change the format of thereferences to accounting guidance within our regulatory filings.

 

**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 our indebtedness,(8) risks associated with foreign currency fluctuations, (9) risksassociated with developing and providing software and internet-based technologysolutions to our clients, and (10) 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 not included in our SEC filings that may causeactual results to differ materially from any forward-looking statements. Weundertake no obligation to update publicly or revise any forward-lookingstatements contained herein to reflect future events or developments.

 

**ITEM 3.          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The principal marketrisks to which we are exposed include interest rates under our senior revolvingcredit facility, foreign exchange rates giving rise to translation, andfluctuations in short-term interest rates on a portion of our bankruptcytrustee revenue.

 

Interest on our seniorrevolving credit facility is generally based on a spread, not to exceed 325basis points over the LIBOR rate. There were no amounts due under our seniorrevolving credit facility as of June 30, 2009; therefore, we had no marketrisk exposure.

 

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We have limitedoperations outside of the United States, therefore, a portion of our revenuesand expenses are incurred in a currency other than U.S. dollars.   Wedo not utilize hedge instruments to manage the exposures associated withfluctuating currency exchange rates.  Thecompany’s operating results are exposed to changes in exchange rates betweenthe U.S. dollar and the functional currency of the countries where we haveoperations. When the U.S. dollar weakens against foreign currencies, the dollarvalue of revenues and expenses denominated in foreign currenciesincreases.  When the U.S. dollarstrengthens, the opposite situation occurs.

 

We currently do not holdany interest rate floor options or other derivatives.

 

**ITEM 4.          CONTROLSAND PROCEDURES**

 

***DisclosureControls and Procedures***

 

Anevaluation was carried out by the Epiq Systems, Inc.’s Chief ExecutiveOfficer and Chief Financial Officer of the effectiveness of the design andoperations of the company’s disclosure controls and procedures as defined inExchange Act Rule 13a-15(e).  Basedon this evaluation, our management, including the CEO and CFO, concluded thatour 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 covered by this report that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II- OTHER INFORMATION.**

 

**ITEM 1**.          **LEGAL PROCEEDINGS**

 

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

 

The plaintiff complaintasserts, among other things, that the company backdated certain stock optionsfrom July 1997 through January 2006, and that the individualdefendants either participated in the backdating or permitted it to occur,violations of generally accepted accounting principles as a result of thealleged backdating of options, related claims of false and misleading proxystatements and annual reports filed by the company under the Securities ExchangeAct of 1934, also as a result of the alleged backdating of options, and variousviolations of state law, breaches of fiduciary duty of loyalty and insidertrading in company stock.  The plaintiffis seeking among other things, unspecified money damages, an accounting forprofits obtained from the alleged backdating of options, specified changes inour corporate governance policies, punitive damages and rescission of theallegedly backdated options.

 

In October 2008, thecompany and the individual defendants filed a motion to dismiss the plaintiff’scomplaint on a variety of grounds. The Court entered a Memorandum and Order on June 3,2009 with respect to the dismissal motion, which Order: (i) barred certainof plaintiff’s federal securities law claims arising before July 29, 2005,leaving only the claim for the stock option grant dated June 3, 2006; (ii) held that the statute of limitations was tolled on those federal securities lawclaims; (iii) barred plaintiff’s other federal securities law claims arisingbefore December 9, 2003; (iv) declined to rule at that time ondefendants’ motions to dismiss plaintiff’s state law claims based on anystatute of repose or statute of limitations; (v) dismissed plaintiff’sstate law claim for constructive fraud; and (vi) held that plaintiff’scomplaint stated federal securities law and state law claims with sufficientparticularity to avoid dismissal at this stage in the proceedings.

 

The individual defendantsand the company have filed an answer denying the plaintiff’s claims. Discoveryin this action is just beginning and is expected to continue until summer 2010.

 

We believe the plaintiff’sclaims are without merit and will continue to defend against themvigorously.  No amounts have beenrecorded in the accompanying Condensed Consolidated Financial Statementsassociated with this matter.

 

**ITEM 1A**.       **RISK FACTORS**

 

There have been nomaterial changes in our Risk Factors from those disclosed in our Annual Reporton Form 10-K for the year ended December 31, 2008.

 

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**ITEM 4.          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Ourannual meeting of shareholders was held on June 3, 2009, at which theshareholders elected the directors named below and ratified the appointment ofDeloitte & Touche LLP as independent registered public accounting firmfor the company for the year ending December 31, 2009. The results of thevoting at the annual meeting were as follows:

 
| **Election of Directors**    | ** ** | **For**    | ** ** | **Withhold** | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|
|                         |       |       |       |         |       |
| Tom W. Olofson               |       | 32,836,581 |       | 1,622,251    |       |
| Christopher E. Olofson       |       | 33,026,411 |       | 1,432,421    |       |
| W. Bryan Satterlee           |       | 33,024,175 |       | 1,434,657    |       |
| Edward M. Connolly, Jr. |       | 32,060,317 |       | 2,398,515    |       |
| James A. Byrnes              |       | 33,658,329 |       | 800,503      |       |
| Joel Pelofsky                |       | 33,658,644 |       | 800,188      |       |

 

**Ratificationof auditors**

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
|       |       |        |       |        |       |
| 33,628,546 |       | 820,679     |       | 9,607       |       |

 

**ITEM 5.          OTHER INFORMATION**

 

On July 27, 2009,the Company’s board of directors approved indemnification agreements betweenthe Company and each of its independent directors, its Chairman of the Boardand Chief Executive Officer, its President and Chief Operating Officer and itsExecutive Vice President and Chief Financial Officer.  The indemnification agreements providecertain indemnification rights to the covered persons consistent with theindemnification provisions in the Company’s Restated For Profit Articles ofIncorporation and Bylaws and the Missouri general business and corporation law.  Each indemnification agreement provides,among other things, that the Company will indemnify the counterparty to thatagreement to the fullest extent permitted by Missouri law or the Company’sArticles of Incorporation and Bylaws, as the same now exist or may hereafter beamended (but only to the extent any such amendment permits the Company toprovide broader indemnification rights than the law or the Articles ofIncorporation and Bylaws permitted prior to such amendment), including theadvancement of legal fees and other expenses incurred by the directors orofficers in connection with any threatened, pending or completed action, suitor proceeding, whether of a civil, criminal, administrative, regulatory,investigative or other nature, arising out of the individual’s service as adirector, officer, employee or agent of the Company, subject to certainexclusions and procedures set forth in the indemnification agreement.

 

The foregoing descriptionis qualified in its entirety by reference to the indemnification agreement, theform of which is filed as Exhibit 10.1 to this report.

 

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**ITEM 6**.          **EXHIBITS**

 
| 10.1   |   | Form of Indemnification  Agreement between the Company and each independent director, its Chairman and  Chief Executive Officer, its President and Chief Operating Officer and its  Executive Vice President and Chief Financial Officer. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
| 12.1   |   | Computation of Ratio of  Earnings to Fixed Charges.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                           |
| 31.1   |   | Certifications of Chief  Executive Officer of the Company under Rule 13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                               |
|   |   |                                                                                                                                                                                                                                           |
| 31.2   |   | Certifications of Chief  Financial Officer of the Company under Rule 13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                               |
|   |   |                                                                                                                                                                                                                                           |
| 32.1   |   | Certifications of CEO  and CFO pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                             |

 

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##### **SIGNATURES**

 

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,  2009 | /s/ Tom W. Olofson                                   |
|                                             | Tom W. Olofson                                       |
|                                             | Chairman of the Board                                |
|                                             | Chief Executive Officer                              |
|                                             | Director                                             |
|                                             | (Principal Executive  Officer)                       |
|                                             |                                                 |
|                                             |                                                 |
| Date:    July 30,  2009 | /s/ Elizabeth M. Braham                              |
|                                             | Elizabeth M. Braham                                  |
|                                             | Executive Vice  President, Chief Financial Officer   |
|                                             | (Principal  Financial & Accounting Officer) |

 

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