10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

ý Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2005

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

EPIQ SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

501 Kansas Avenue, Kansas City, Kansas 66105-1300

(Address of principal executive office)

913-621-9500

(Registrant’s telephone number)

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

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

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

No  ý

The number of shares outstanding of registrant’s common stock at October 12, 2005:

Class	Outstanding
Common Stock, $.01 par value	18,008,699

EPIQ SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2005

CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income — Three and nine months ended September 30, 2005 and 2004 (Unaudited)	1
	Condensed Consolidated Balance Sheets — September 30, 2005 and December 31, 2004 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2005 and 2004 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 6.	Exhibits	29
Signatures		30

PART I - FINANCIAL INFORMATION

ITEM 1.   Condensed Consolidated Financial Statements.

EPIQ SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

(Unaudited)

	Three months ended September 30,							Nine months ended September 30,
	2005			2004				2005				2004
REVENUE:
Case management	$	18,469		$	16,980			$	58,100			$	51,278
Document management	7,373			11,671				19,895				29,961
Operating revenue	25,842			28,651				77,995				81,239
Reimbursed expenses	6,174			7,043				17,118				15,375
Total Revenue	32,016			35,694				95,113				96,614
COSTS AND EXPENSES:
Direct costs	14,775			18,533				42,074				46,509
General and administrative	7,035			6,998				23,071				19,209
Depreciation and software amortization	1,732			1,804				5,281				4,763
Amortization of identifiable intangible assets	1,442			2,032				4,492				5,744
Acquisition related	114			16				114				2,197
Total Operating Expenses	25,098			29,383				75,032				78,422
INCOME FROM OPERATIONS	6,918			6,311				20,081				18,192
EXPENSES RELATED TO FINANCING:
Interest income	(28		)	(32			)	(106			)	(98		)
Interest expense	1,623			1,653				4,309				5,182
Debt extinguishment	—			995				—				995
Net Expenses Related to Financing	1,595			2,616				4,203				6,079
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	5,323			3,695				15,878				12,113
PROVISION FOR INCOME TAXES	2,236			1,534				6,637				4,968
NET INCOME FROM CONTINUING OPERATIONS	3,087			2,161				9,241				7,145
DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued infrastructure software segment (including  gain on disposal of $1,616)	—			(127			)	—				1,104
Income tax expense (benefit) related to discontinued infrastructure software  segment	—			50				—				(436		)
TOTAL DISCONTINUED OPERATIONS	—			(77			)	—				668
NET INCOME	$	3,087		$		2,084		$		9,241		$	7,813

1

EPIQ SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 (In Thousands, Except Per Share Data)

(Unaudited)

(Continued)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005		2004			2005		2004
NET INCOME PER SHARE INFORMATION:
Income per share — Basic
Income from continuing operations	$	0.17	$	0.12		$	0.52	$	0.40
Income from discontinued operations	—		(0.01		)	—		0.04
Net income per share — Basic	$	0.17	$	0.11		$	0.52	$	0.44
Income per share — Diluted
Income from continuing operations	$	0.16	$	0.12		$	0.48	$	0.39
Income from discontinued operations	—		(0.01		)	—		0.03
Net income per share — Diluted	$	0.16	$	0.11		$	0.48	$	0.42
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	17,942		17,867			17,911		17,837
Diluted	21,718		21,135			21,259		19,388

See accompanying notes to condensed consolidated financial statements.

2

EPIQ SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

(Unaudited)

	September 30, 2005		December 31, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	13,203	$	13,330
Trade accounts receivable, less allowance for doubtful accounts of $1,738 and $1,069, respectively	26,653		18,690
Prepaid expenses	2,638		2,052
Income taxes refundable	3,617		3,477
Other current assets	1,228		1,490
Total Current Assets	47,339		39,039
LONG-TERM ASSETS:
Property and equipment, net	19,663		20,431
Software development costs, net	5,861		5,838
Goodwill	147,585		147,728
Other intangibles, net of accumulated amortization of $11,499 and $11,707, respectively	20,195		24,057
Other	2,170		2,995
Total Long-term Assets, net	195,474		201,049
Total Assets	$	242,813	$	240,088
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,911	$	4,263
Customer deposits	2,605		2,375
Accrued compensation	1,630		873
Other accrued expenses	2,195		899
Current maturities of long-term obligations	8,822		7,650
Total Current Liabilities	19,163		16,060
LONG-TERM LIABILITIES:
Deferred income taxes	9,158		9,696
Long-term obligations (excluding current maturities)	64,093		74,499
Total Long-term Liabilities	73,251		84,195
STOCKHOLDERS’ EQUITY:
Common stockholders’ equity	150,399		139,833
Total Stockholders’ Equity	150,399		139,833
Total Liabilities and Stockholders’ Equity	$	242,813	$	240,088

See accompanying notes to condensed consolidated financial statements.

3

EPIQ SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	9,241		$	7,813
Adjustments to reconcile net income to net cash from operating activities:
Provision (benefit) for deferred income taxes	16			2,962
Depreciation and software amortization	5,281			4,763
Loan fee amortization and debt extinguishment	833			2,830
Amortization of other intangible assets	4,492			5,744
Change in valuation of embedded option and convertible debt	763			331
Gain on disposal of discontinued operations	—			(1,616		)
Other, net	972			151
Changes in operating assets and liabilities, net of effects from business acquisition:
Trade accounts receivable	(8,632		)	4,630
Prepaid expenses and other current assets	(1,374		)	614
Accounts payable, customer deposits and accrued expenses	1,870			(2,738		)
Withholding and related liabilities assumed in the acquisition of a business and subsequently paid	—			(7,973		)
Income taxes, including tax benefit from exercise of stock options	275			2,610
Other, net	—			266
Net cash provided by operating activities	13,737			20,387
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(3,035		)	(4,660		)
Software development costs	(1,480		)	(1,223		)
Business combinations, net of cash acquired	(650		)	(113,111		)
Purchase of short-term investments	(6,000		)	—
Sale of short-term investments	6,000			—
Other, net	502			967
Net cash used in investing activities	(4,663		)	(118,027		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings	6,000			188,500
Debt issuance costs	—			(6,054		)
Principal payments under long-term debt and capital lease obligations	(16,104		)	(105,894		)
Proceeds from exercise of stock options and warrants	903			553
Net cash provided by (used in) financing activities	(9,201		)	77,105
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(127		)	(20,535		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	13,330			30,347
Decrease in cash classified as held for sale	—			714
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	13,203		$	10,526
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	2,649		$	2,833
Income taxes paid (received)	$	6,339		$	(505	)

See accompanying notes to condensed consolidated financial statements.

4

EPIQ SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Nature of Operations

EPIQ Systems, Inc. is a national provider of integrated technology-based products and services for fiduciary management and claims administration applications used by attorneys, trustees, and corporations primarily engaged in bankruptcy, class action, mass tort, and other similarly complex legal proceedings.  Our solutions combine advanced technology with in-depth subject matter expertise to offer customers an efficient environment in which to comprehensively manage the complexities of case administration and document management.

Stock-Based Compensation

We account for stock-based compensation awards under the intrinsic method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which requires compensation cost to be recognized based on the excess, if any, between the quoted market price at the date of grant and the amount an employee must pay to acquire stock. Options awarded under our option plans are granted with an exercise price equal to the fair market value on the date of the grant. Had the compensation cost been determined based on the fair value at the grant dates based on the guidance provided by Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation, our net income and net income per share for the three and nine months ended September 30, 2005 and 2004 would have been adjusted to the following pro forma amounts (in thousands, except per share data):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
Net income, as reported		$		3,087		$	2,084			$		9,241		$		7,813
Add: stock-based employee compensation included in reported net earnings, net of tax		—				—				—				—
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax		(216			)	(785			)	(5,482			)	(2,215			)
Net income, pro forma		$		2,871		$	1,299			$	3,759			$		5,598
Net income per share — Basic	As reported	$	0.17			$		0.11		$	0.52			$		0.44
	Pro forma	$	0.16			$		0.07		$	0.21			$		0.31
Net income per share — Diluted	As reported	$	0.16			$	0.11			$	0.48			$		0.42
	Pro forma	$	0.15			$	0.07			$	0.21			$	0.31

Pro forma amounts presented here are based on actual earnings and consider only the effects of estimated fair values of stock options.  For the nine month period ended September 30, 2005 and the three and nine month periods ended September 30, 2004, we did not assume conversion of the convertible notes as the effect was antidilutive.

5

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.  SFAS No. 154 requires retrospective application for reporting a change in accounting principle unless such application is impracticable or unless transition requirements specific to a newly adopted accounting principle require otherwise.  SFAS No. 154 also requires the reporting of a correction of an error by restating previously issued financial statements.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment.  SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.  SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award.  SFAS No. 123R is effective for EPIQ beginning January 1, 2006.  Accordingly, we will adopt SFAS No. 123R, likely using the modified version of prospective application, beginning with our quarter ending March 31, 2006.  Under the modified version of prospective application, compensation costs related to share-based compensation will be recognized in our financial statements for all periods beginning after December 31, 2005.  For comparative periods ending on or before December 31, 2005, which are presented in our 2006 and subsequent financial statements, share-based compensation costs will continue to be excluded from the financial statements, but we will disclose these share-based compensation costs on a pro forma basis in a note to the consolidated financial statements.  Adoption of SFAS No. 123R will materially increase our recognized compensation expense and will have a material impact on our consolidated income statement and balance sheet.  We are unable to estimate the impact of adoption of this statement on our consolidated financial statements as the impact will depend, in part, on future stock awards and stock option awards made prior to the adoption date, whether any such awards are qualified or non-qualified, the vesting period of those awards, and forfeitures related to both existing awards and new awards.  During February 2005, our compensation committee approved acceleration of the vesting of certain unvested options for employees, including an executive officer, and non-employee directors.  The decision to accelerate the vesting of these options and eliminate future compensation expense was based primarily on a review of our long-term incentive programs considering the effect on our financial statements of changes in accounting rules that we must adopt in the future.  This action, which had an immaterial effect on our financial statements for the three month and nine month periods ended September 30, 2005, will reduce the impact of adoption of SFAS No. 123R on our future consolidated financial statements. If, subsequent to September 30, 2005, no new awards were issued and no existing awards were forfeited, we estimate that adoption of SFAS No. 123R would decrease our net income for the year ending December 31, 2006 by approximately $1.0 million.  We do not anticipate that adoption of SFAS No. 123R will have a material impact on our consolidated statement of cash flows.

6

NOTE 2:   INTERIM FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial statements, and do not include all the information and notes required by GAAP for complete financial statements.  The financial statements should be read in conjunction with our audited financial statements and accompanying notes, which are included in our Form 10-K for the year ended December 31, 2004.

In the opinion of our management, the accompanying financial statements reflect all adjustments necessary (consisting solely of normal recurring adjustments) to present fairly our financial position as of September 30, 2005, the results of operations for the three month and nine month periods ended September 30, 2005 and 2004, and the results of cash flows for the nine months ended September 30, 2005 and 2004.

The results of operations for the three month and nine month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for the entire year.

7

NOTE 3:   NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted net income per share is computed by dividing net income available to common shareholders, increased by the amount of interest expense, net of tax, related to outstanding convertible debt, by the weighted average number of outstanding common shares and shares that may be issued in future periods relating to outstanding stock options and convertible debt, if dilutive.

The Emerging Issues Task Force (EITF) reached a consensus regarding EITF Issue No. 04-08, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share, that the dilutive effect of contingently convertible debt instruments should be included in the diluted earnings per share calculations in all periods, regardless of whether the contingency was met, unless the effect of such inclusion would be antidilutive.  This consensus, which was effective for reporting periods ending on or after December 15, 2004, also required that comparative prior periods be presented in conformity with EITF Issue No. 04-08.  Accordingly, the shares issuable on conversion have been included in our diluted shares calculation for both the three month and nine month periods ended September 30, 2005 and 2004.  The effect of this retroactive application of EITF Issue No. 04-08 was to reduce, for the nine months ended September 30, 2004, diluted income per share from discontinued operations and diluted net income per share, as disclosed on the face of the income statement, by $0.01 per share.

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

	Three Months Ended September 30,
	2005					2004
	Net Income		Weighted Average Shares Outstanding	Per Share Amount		Net Income		Weighted Average Shares Outstanding	Per Share Amount
Basic net income per share from continuing operations	$	3,087	17,942	$	0.17	$	2,161	17,867	$	0.12
Effect of dilutive securities:
Stock options			919					411
Convertible debt	292		2,857			295		2,857
Diluted net income per share from continuing operations	$	3,379	21,718	$	0.16	$	2,456	21,135	$	0.12

Options to purchase approximately 65,000 and 1,607,000 shares of common stock for the three month periods ended September 30, 2005 and 2004, respectively, were antidilutive and therefore not included in the computation of diluted net income per share from continuing operations.

8

	Nine Months Ended September 30,
	2005					2004
	Net Income		Weighted Average Shares Outstanding	Per Share Amount		Net Income		Weighted Average Shares Outstanding	Per Share Amount
Basic net income per share from continuing operations	$	9,241	17,911	$	0.52	$	7,145	17,837	$	0.40
Effect of dilutive securities:
Stock options			491					414
Convertible debt	871		2,857			352		1,137
Diluted net income per share from continuing operations	$	10,112	21,259	$	0.48	$	7,497	19,388	$	0.39

Options to purchase approximately 1,478,000 and 1,468,000 shares of common stock for the nine month periods ended September 30, 2005 and 2004, respectively, were antidilutive and therefore not included in the computation of diluted net income per share from continuing operations.

9

NOTE 4:   GOODWILL AND INTANGIBLE ASSETS

Amortizing identifiable intangible assets at September 30, 2005 and December 31, 2004 consisted of the following (in thousands):

	September 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer contracts	$	11,950	$	5,083	$	16,560	$	7,656
Trade names	1,574		1,312		1,574		721
Non-compete agreements	18,170		5,104		17,630		3,330
	$	31,694	$	11,499	$	35,764	$	11,707

During the nine months ended September 30, 2005, $4.7 million of identifiable intangible assets related to certain customer contracts became fully amortized.  Accordingly, we wrote off both the identifiable intangible assets and the related accumulated amortization.

Aggregate amortization expense related to identifiable intangible assets was $1.4 million and $2.0 million for the three month periods ended September 30, 2005 and 2004, respectively and was $4.5 million and $5.7 million for the nine month periods ended September 30, 2005 and 2004, respectively.  Amortization expense related to identifiable intangible assets for 2005 and the following five years is estimated as follows (in thousands):

Year Ending December 31,
2005	$		5,963
2006	5,163
2007	3,135
2008	2,963
2009	1,881
2010	1,747
	$	20,852

At September 30, 2005 and December 31, 2004, intangible assets not subject to amortization, consisting solely of goodwill, had a carrying value of $147.6 million and $147.7 million, respectively.

During our quarter ended September 30, 2005, we completed our annual impairment testing of goodwill.  Based on the results of this annual impairment testing, we concluded that the fair value of each reporting unit exceeds the carrying value of each reporting unit and that there is no indication of impairment of either goodwill or other identifiable assets.

10

NOTE 5:   BUSINESS ACQUISITION

On January 30, 2004, we acquired for cash 100% of the equity of P-D Holding Corp. and its wholly-owned subsidiary, Poorman-Douglas Corporation (collectively, “Poorman-Douglas”).  We believe this acquisition provides complementary diversification to our legal services business as Poorman-Douglas is a provider of technology-based products and services for class action, mass tort and bankruptcy case administration.  During the quarter ended September 30, 2005, we received a payment of $0.2 million related to certain contractual purchase price adjustments and we adjusted our tax related assets and liabilities based on our filed tax return.  The total value of the transaction, including capitalized acquisition costs, was approximately $115.7 million.  Based on our valuation, the purchase price has been allocated as follows (in thousands):

Current assets	$	21,986
Deferred tax assets	6,044
Property and software	8,391
Trade names	1,100
Customer backlog	6,200
Customer relationships	2,300
Non-compete agreements	5,900
Goodwill	83,141
Current liabilities	(12,920		)
Deferred tax liabilities	(6,476		)
Total purchase price	$	115,666

All acquired identifiable intangible assets amortize on a straight-line basis as follows:  the trade names over two years, the customer backlog over three years, the customer relationships over twelve years, and the non-compete agreements over five years.  The remainder of the purchase price was allocated to goodwill and, in accordance with SFAS No. 142 Goodwill and Other Intangible Assets, is not being amortized but is reviewed annually for impairment and between annual tests if events or changes in circumstances indicate that the asset might be impaired.  The purchase price in excess of the tax basis of the assets, primarily allocated to identifiable intangible assets and goodwill, is not deductible for tax purposes.

The acquisition was accounted for using the purchase method of accounting, with the operating results included in the accompanying condensed consolidated financial statements from the date of acquisition.

Unaudited pro forma results of operations, assuming the purchase acquisition was made at the beginning of 2004, are shown below (in thousands, except per share data):

	Nine Months Ended September 30, 2004
Revenue	$	103,297
Net income from continuing operations	$	7,637
Net income per share from continuing operations:
Basic	$	0.43
Diluted	$	0.41

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

11

NOTE 6:   SEGMENT REPORTING

We have two operating segments: (i) case management and (ii) document management.  Case management solutions provide clients with integrated technology-based products and services for the automation of administrative tasks to address their business requirements.  Document management solutions include proprietary technology and production services to ensure timely, accurate and complete execution of documents related to a case.

Each segment’s performance is assessed based on segment revenues less costs directly attributable to each segment.  In management’s evaluation of performance, certain costs, such as shared services, administrative staff, and executive management, are not allocated by segment and, accordingly, the following operating segment results do not include such unallocated costs.  All other assets are classified as unallocated.  Infrastructure software was held for sale and is presented as a discontinued operation for the three and nine months ended September 30, 2004.  Consistent with guidance provided related to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, we have not presented segment information related to our discontinued operation.

During the current year, we determined that certain revenues from reimbursed expenses and certain expenses, including reimbursed expenses, related to our Poorman-Douglas subsidiary acquired in January 2004 had not been recorded in the correct segment.  These classification errors did not affect our Consolidated Statements of Income, Balance Sheets, Statements of Cash Flows, or Statement of Changes in Stockholders’ Equity for any period previously reported.  Additionally, these errors did not affect net cash flows or compliance with any debt covenants.  However, the classification errors did affect our previously reported segment information disclosed in our 2004 quarterly reports filed on Form 10-Q and on our annual report filed on Form 10-K for the year ended December 31, 2004.  We have not amended our previously filed 2004 quarterly reports filed on Form 10-Q or our 2004 annual report filed on Form 10-K, but are restating our comparative 2004 quarterly segment information to correct these classification errors in our 2005 quarterly reports filed on Form 10-Q and our 2005 annual report filed on Form 10-K.  See Item 5 contained in Part II of our quarterly report on Form 10-Q for the three months ended March 31, 2005 for additional information regarding this restatement.

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

	Three Months Ended September 30, 2005
	Case		Document
	Management		Management		Unallocated			Consolidated
Revenue:
Operating revenue	$	18,469	$	7,373	$	—		$	25,842
Reimbursed expenses	622		5,552		—			6,174
Total revenue	19,091		12,925		—			32,016
Costs and expenses:
Direct and administrative costs and depreciation and software amortization	7,613		9,692		6,237			23,542
Amortization of identifiable intangible assets	1,069		373		—			1,442
Acquisition related	—		—		114			114
Total operating expenses	8,682		10,065		6,351			25,098
Operating income	$	10,409	$	2,860	$	(6,351	)	6,918
Expenses related to financing								1,595
Income from continuing operations before income taxes								5,323
Provision for income taxes								2,236
Net income from continuing operations								$	3,087
Provisions for depreciation and amortization	$	2,168	$	464	$	542		$	3,174

12

	Three Months Ended September 30, 2004 (as restated)
	Case		Document
	Management		Management		Unallocated			Consolidated
Revenue:
Operating revenue	$	16,980	$	11,671	$	—		$	28,651
Reimbursed expenses	569		6,474		—			7,043
Total revenue	17,549		18,145		—			35,694
Costs and expenses:
Direct and administrative costs and depreciation and software amortization	7,513		13,714		6,108			27,335
Amortization of identifiable intangible assets	1,381		651		—			2,032
Acquisition related	—		—		16			16
Total operating expenses	8,894		14,365		6,124			29,383
Operating income	$	8,655	$	3,780	$	(6,124	)	6,311
Expenses related to financing								2,616
Income from continuing operations before income taxes								3,695
Provision for income taxes								1,534
Net income from continuing operations								$	2,161
Provisions for depreciation and amortization	$	2,537	$	781	$	518		$	3,836

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	Nine Months Ended September 30, 2005
	Case			Document
	Management			Management			Unallocated				Consolidated
Revenue:
Operating revenue	$	58,100		$	19,895		$		—		$	77,995
Reimbursed expenses	2,266			14,852			—				17,118
Total revenue	60,366			34,747			—				95,113
Costs and expenses:
Direct and administrative costs and depreciation and software amortization	23,436			26,355			20,635				70,426
Amortization of identifiable intangible assets	3,280			1,212			—				4,492
Acquisition related	—			—			114				114
Total operating expenses	26,716			27,567			20,749				75,032
Operating income	$	33,650		$	7,180		$	(20,749		)	20,081
Expenses related to financing											4,203
Income from continuing operations before income taxes											15,878
Provision for income taxes											6,637
Net income from continuing operations											$		9,241
Provisions for depreciation and amortization	$		6,557	$		1,553	$	1,663			$		9,773

	Nine Months Ended September 30, 2004 (as restated)
	Case			Document
	Management			Management		Unallocated			Consolidated
Revenue:
Operating revenue	$		51,278	$	29,961	$	—		$	81,239
Reimbursed expenses	1,900			13,475		—			15,375
Total revenue	53,178			43,436		—			96,614
Costs and expenses:
Direct and administrative costs and depreciation and software amortization	21,092			32,378		17,011			70,481
Amortization of identifiable intangible assets	3,871			1,873		—			5,744
Acquisition related	—			—		2,197			2,197
Total operating expenses	24,963			34,251		19,208			78,422
Operating income	$	28,215		$	9,185	$	(19,208	)	18,192
Expenses related to financing									6,079
Income from continuing operations before income taxes									12,113
Provision for income taxes									4,968
Net income from continuing operations									$	7,145
Provisions for depreciation and amortization	$	7,032		$	2,221	$	1,254		$	10,507

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NOTE 7:   LONG-TERM OBLIGATIONS

The following is a summary of indebtedness outstanding (in thousands):

	September 30,		December 31,
	2005		2004
Senior term loan	$	17,188	$	21,875
Senior revolving loan	1,000		5,000
Contingent convertible subordinated debt, including embedded option	51,055		50,292
Capital leases	914		1,773
Deferred acquisition price	2,758		3,209
Total indebtedness	$	72,915	$	82,149

Credit Facilities

We have a credit facility with KeyBank National Association as administrative agent.  This facility consists of a $25.0 million senior term loan, with amortizing quarterly principal payments of $1.6 million, and a $50.0 million senior revolving loan.  Both the senior term loan and the senior revolving loan mature June 30, 2008.  During the term of the loan we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $75.0 million.

The credit facility is secured by liens on our real property and a significant portion of our personal property and contains financial covenants related to earnings before interest, provision for income taxes, depreciation and amortization (“EBITDA”), total debt, senior debt, fixed charges and working capital.  We were in compliance with all financial covenants as of September 30, 2005.  As calculated at September 30, 2005, additional availability under the senior revolving loan was approximately $35.7 million.  Interest on the credit facility is generally based on a spread over the LIBOR rate.  As of September 30, 2005, the interest rate charged on outstanding borrowings under the senior term loan was 6.4% and the interest rate charged on outstanding borrowings under the senior revolving loan was 7.5%.

Contingent Convertible Subordinated Debt

During June 2004, we issued $50.0 million of contingent convertible subordinated notes.  These contingent convertible subordinated notes:

•bear interest at a fixed rate of 4%, payable quarterly;

•under certain circumstances are convertible into shares of our common stock at a price of $17.50 per share; and

•mature on June 15, 2007, subject to extension of maturity to June 15, 2010 at the option of the note holders.

The note holders’ right to convert the notes is contingent on the market price of our common stock.  The shares are convertible only if the weighted average of the price of our common stock equals or exceeds $19.25 on any five consecutive trading days or if the weighted average price of our common stock is less than $10.75 on any five consecutive trading days.

During the three months ended September 30, 2005, the weighted average price of our common stock exceeded $19.25 on five consecutive trading days.  Accordingly, the contingency has been satisfied and the contingent convertible subordinated notes are convertible.  As of September 30, 2005, none of the contingent convertible subordinated notes has been converted to common stock.  If all notes were converted, the notes would convert into approximately 2,857,000 shares of our common stock.  If we change our capital structure (for example, through a stock dividend or stock split) while the notes are outstanding, the conversion price will be adjusted on a consistent basis and, accordingly, the number of shares of common stock we would issue on conversion would be adjusted.

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The note holders have the right to extend the maturity of the contingent convertible subordinated notes for a period not to exceed three years.  Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the right to extend the maturity of the notes represents an embedded option subject to bifurcation.  The embedded option was initially valued at $1.2 million and the convertible debt balance was reduced by the same amount.  The convertible debt is accreted approximately $0.1 million each quarter such that, at the end of three years, the convertible debt balance will total $50.0 million.  On our accompanying Condensed Consolidated Statements of Income, this accretion is a component of interest expense.  The embedded option must be revalued at each period end based on the probability weighted discounted cash flows related to the additional 4% interest rate payments that will be made if the convertible debt maturity is extended an additional three years.  Under this methodology, the embedded option has a current value of approximately $1.8 million.  On our accompanying Condensed Consolidated Balance Sheet, our obligation related to the embedded option has been included as a component of the convertible note payable.  During the three month and nine month periods ended September 30, 2005, the value of the embedded option increased by approximately $0.3 million and $0.5 million, respectively.  These increases are included as a component of interest expense on our accompanying Condensed Consolidated Statements of Income for the three month and nine month periods ended September 30, 2005.  The changes in carrying value of the convertible debt and fair value of the embedded option do not affect our cash flow and, if the embedded option is exercised, the value assigned to the embedded option will be amortized as a reduction to our 4% convertible debt interest expense over the periods payments are made.  If the option is not exercised by some or all note holders, any remaining related value assigned to the embedded option will be recognized as a gain during that period.

The notes evidencing the contingent convertible subordinated debt contains financial covenants related to EBITDA, total debt, and senior debt.  We were in compliance with all financial covenants as of September 30, 2005.

Capital Lease

On June 30, 2004, we entered into a capital lease to finance the purchase of operating software.  At inception of the capital lease, we recorded this transaction as a debt obligation in the amount of $2.7 million and as purchased software, also in the amount of $2.7 million, included on the balance sheet as a component of property and equipment.  As this was a non-cash investing and financing activity, these initial amounts were not included on our Condensed Consolidated Statement of Cash Flows.  Subsequent payments on the capital lease are included in our statement of cash flows during the period in which they are made.  As of September 30, 2005, our debt obligation related to this capital lease, classified entirely as a current liability, was approximately $0.9 million.

Deferred Acquisition Price

On January 31, 2003, we acquired 100% of the membership interests of BSI, a provider of technology-based case management, consulting and administrative services for Chapter 11 bankruptcy restructurings, for a purchase price of $67.0 million.  A portion of the purchase price was deferred which consists of a $4.0 million non-interest bearing note, payable in five annual installments, discounted using an imputed interest rate of 5% per annum.  At September 30, 2005, the discounted value of the remaining note payments was approximately $2.8 million of which approximately $1.7 million was classified as a current liability.

Scheduled Principal Payments

Our long-term obligations, including credit facility debt, convertible debt (including embedded option), deferred acquisition costs, and capitalized leases, mature as follows for each twelve month period ending September 30 (in thousands):

2006	$		8,822
2007	57,869
2008	6,224
Total	$	72,915

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NOTE 8:   DISCONTINUED OPERATIONS

The primary offering of our former infrastructure software business was DataExpress®, a software product line that automates the exchange of data files between a company’s customers and their business partners.  During November 2003 (the “Measurement Date”), we determined that the infrastructure software segment was no longer aligned with our long-term strategic objectives.  Accordingly, we developed a plan to sell, within one year, the infrastructure software business.

On April 30, 2004, we sold our infrastructure software business to a private company with expertise in file transfer technology.  As consideration, we received $0.5 million in cash and a $1.1 million note receivable bearing 6.5% interest and due July 31, 2005.  The note receivable has been collected in full.  The buyer also acquired certain assets and assumed certain liabilities related to our infrastructure business.

The disposal of the infrastructure business represents a discontinued operation.  Accordingly, for the three month and nine month periods ended September 30, 2004, revenues, cost of sales, and operating expenses related to this segment have been presented on the accompanying Condensed Consolidated Statements of Income under the caption “Discontinued Operations.”

The following table summarizes financial information for discontinued operations (in thousands):

Net revenue and pre-tax income from discontinued operations:

	Three Months Ended September 30,
	2005		2004
Net revenue from discontinued operations	$	—	$	—
Pre-tax income from discontinued operations	$	—	$	(127	)

Net revenue and pre-tax income from discontinued operations:

	Nine Months Ended September 30,
	2005		2004
Net revenue from discontinued operations	$	—	$	661
Pre-tax income from discontinued operations	$	—	$	1,104

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NOTE 9:   SUBSEQUENT EVENT

Subsequent to September 30, 2005, we acquired 100% of the equity of Hilsoft, Inc. in a transaction which will be accounted for under the purchase method of accounting.  Hilsoft provides legal notification services primarily in the class action market, and we believe this acquisition will complement our existing class action services.  The initial cash purchase price of approximately $9 million was financed using available cash on hand.  If Hilsoft meets certain financial objectives, additional payments of up to $3 million, payable over a period not to exceed five years, will be paid to the prior equity owners of Hilsoft.  The purchase price will be allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on the fair value of such assets acquired and liabilities assumed.  The purchase price in excess of the fair value of assets acquired less the fair value of liabilities assumed will be recorded as goodwill.  We have not completed the process of identifying and valuing all assets acquired and liabilities assumed.

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

Overview

We provide technology-based products and services for fiduciary management and claims administration applications. Our solutions enable clients to optimize the administration of large and complex bankruptcy, class action, mass tort, and other similar legal proceedings.  Our clients include corporations, attorneys, bankruptcy trustees and administrative professionals who require sophisticated case administration and document management capabilities, extensive subject matter expertise and a high service capacity. We provide clients with an integrated offering of both proprietary technology and value-added services that comprehensively address their extensive business requirements.

Subsequent to September 30, 2005, we acquired 100% of the equity of Hilsoft, Inc. in a transaction which will be accounted for under the purchase method of accounting.  Hilsoft provides legal notification services primarily in the class action market, and we believe this acquisition will complement our existing class action services.  Hilsoft’s operating results will primarily be included as a component of our document management segment.  The initial cash purchase price of approximately $9 million was financed using available cash on hand.  If Hilsoft meets certain financial objectives, additional payments of up to $3 million, payable over a period not to exceed five years, will be paid to the prior equity owners of Hilsoft.  The purchase price will be allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on the fair value of such assets acquired and liabilities assumed.  The purchase price in excess of the fair value of assets acquired less the fair value of liabilities assumed will be recorded as goodwill.  We have not completed the process of identifying and valuing all assets acquired and liabilities assumed.

We have two operating segments: case management and document management.  In future periods, the operating results of Hilsoft will primarily be included in our document management segment.

Case Management Segment

Case management support for client engagements generally lasts several years and has a revenue profile that typically includes a recurring component.  Our case management segment generates revenue primarily through the following integrated technology-based products and services.

•An integrated solution of a proprietary technology platform and related professional services that facilitates case administration of class action, mass tort and Chapter 11 client engagements.

•Comprehensive support for the balloting and voting activities that accompany Chapter 11 bankruptcy restructurings.

•TCMS®, an integrated solution comprised of a proprietary software product, computer hardware, and support services, which may either be installed in Chapter 7 bankruptcy trustee offices or accessed by Chapter 7 bankruptcy trustee offices through a hosted server, to facilitate the efficient management of asset liquidations, creditor distributions, and government reporting.

•CasePower®, proprietary software designed to enable Chapter 13 bankruptcy trustees to manage efficiently debtor payments, creditor distributions and government reporting.

•Database conversions, maintenance and processing.

•Professional and support services, including case management, claims processing, claims reconciliation, claims preference analysis and collection, and customized programming and technology services.

•Call center support.

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Document Management Segment

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

•Legal noticing services to parties of interest in bankruptcy and class action and mass tort matters.

•Reimbursement for costs incurred related to postage on mailing services.

•Media campaign and advertising management.

•Document custody services.

Critical Accounting Policies

We consider our accounting policies related to revenue recognition, business combinations, goodwill, and identifiable intangible assets to be critical policies in understanding our historical and future performance.

Revenue recognition.  We have agreements with customers obligating us to deliver various products and services each month.  Case management fees paid are contingent upon the month-to-month delivery of the products and services defined by the contracts and are related primarily to the size and complexity of the ongoing engagement.  The formula-based fees earned each month become fixed and determinable on a monthly basis as a result of our completion of all contractually required performance obligations related to products delivered and services rendered by us during the month.  Document management revenues are recognized in the period the services are provided.  Significant sources of revenue include:

•a monthly fee from financial institutions based on a percentage of total liquidated assets on deposit and on the number of trustees;

•fees for database conversions, database processing, maintenance and software upgrades;

•monthly revenue based on the number of cases in a database;

•fees based on the number of claims in a case;

•fees for services, including technology services, claims reconciliation, document printing, noticing, balloting, voting tabulation and other professional services; and

•reimbursement for costs incurred related to postage on mailing services.

Business combination accounting.  We have acquired a number of businesses during the last several years, and we may acquire additional businesses in the future.  Business combination accounting, often referred to as purchase accounting, requires us to determine the fair value of all assets acquired, including identifiable intangible assets, and liabilities assumed.  The cost of the acquisition is allocated to the assets acquired and liabilities assumed in amounts equal to the fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill.  This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.  Certain identifiable intangible assets, such as customer lists and covenants not to compete, are amortized on a straight-line basis over the intangible asset’s estimated useful life.  The estimated useful life of amortizable identifiable intangible assets range from two to 14 years.  Goodwill is not amortized.  Accordingly, the acquisition cost allocation has had, and will continue to have, a significant impact on our current operating results.

Goodwill.  We assess goodwill, which is not subject to amortization, for impairment as of each July 31, and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  This assessment is performed at a reporting unit level.  A reporting unit is a component of a segment that constitutes a business, for which discrete financial information is available, and for which the operating results are regularly reviewed by management.

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A change in events or circumstances, including a decision to hold an asset or group of assets for sale, a change in strategic direction, or a change in the competitive environment could adversely affect the fair value of one or more reporting units.  The estimate of fair value is highly subjective and requires significant judgment.  If we determine that the fair value of any reporting unit is less than the reporting unit’s carrying value, then we will recognize an impairment charge.  If goodwill on our balance sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and financial condition.  Our goodwill totaled $147.6 million as of September 30, 2005 and $148.2 million as of September 30, 2004.

Identifiable intangible assets.Each period we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each identifiable intangible asset.  If events and circumstances warrant a change to the estimate of an identifiable intangible asset’s remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life.  Furthermore, information developed during our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable and its fair value is less than the identifiable intangible asset’s carrying value and would result in recognition of an impairment charge.

A change in the estimate of the remaining life of one or more identifiable intangible assets or the impairment of one or more identifiable intangible assets could have a material impact on our results of operations and financial condition.  Our identifiable intangible assets’ carrying value, net of amortization, was $20.2 million as of September 30, 2005 and $26.1 million as of September 30, 2004.

Results of Operations

Management Overview

Our operations consist primarily of integrated technology-based products and services for fiduciary management and claims administration applications. Our solutions enable clients to optimize the administration of large and complex bankruptcy, class action, mass tort, and other similar legal proceedings.  We have two operating segments: case management and document management.

Our case management segment generates revenue primarily through integrated technology-based products and services for class action, mass tort and bankruptcy proceedings that support client engagements that generally last several years and has a revenue profile that typically includes a recurring component.  Our document management segment generates revenue primarily through legal noticing services, reimbursement for costs incurred related to postage on mailing services, media campaign and advertising management and document custody services.  Document management revenue is generally less recurring due to the less predictable nature of the frequency, timing and magnitude of the clients’ business requirements.

The number of new bankruptcy filings each year may vary based on the level of consumer and business debt, the general economy, interest rate levels and other factors.  We believe the level of consumer and business debt is among the most important indicators of future bankruptcy filings.  The most recent available Federal Reserve Flow of Funds Accounts of the United States, dated September 21, 2005, reported increases in both consumer and business debt outstanding as compared with the same period of the prior year.

In February 2005, The Class Action Fairness Act of 2005 was passed and signed by President Bush.  The primary impact of the new federal legislation is to require that certain types of class action lawsuits be brought in federal court rather than state courts.  We believe the new federal legislation will likely result in fewer class action lawsuits in state courts.  The slower processing of class action lawsuits in federal courts could delay the ultimate settlement of those cases, which could adversely affect the timing of services we provide in those cases.  Similar to this recent federal experience, there have been various efforts at the state level to modify and reform the laws and procedures related to class action and mass tort.  We cannot predict the effect, if any, that state legislative action would have on the number or size of class action and mass tort lawsuits filed, or on the claims administration process.

In April 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed and signed by President Bush.  The intent of this legislation, which is effective October 2005, is to move certain individual bankruptcy filings from Chapter 7, which liquidates most of the assets of the debtor and discharges most of the debtor’s liabilities, to Chapter 13 bankruptcy filings, which do not liquidate the debtor’s assets but which requires a debtor to pay disposable income to their creditors.  The legislation also affects Chapter 11 bankruptcy filings, in part by placing more strict limits on the period of time in which the debtor has an exclusive right to propose a reorganization plan, accelerating the time frame in which a debtor must

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determine whether to reject a lease, and potentially increasing certain priority claims.  The legislation appears to have had the effect of increasing bankruptcy filings prior to the legislation’s effective date.  It is unclear what impact the legislation will have on bankruptcy filings subsequent to the legislation’s effective date.  As a result, we cannot predict the effect, if any, that this legislation will have on our business.

We have acquired a number of businesses during the past several years.  In January 2003, we acquired Bankruptcy Services LLC (BSI) to expand our offerings to include an integrated solution of a proprietary technology platform and professional services for Chapter 11 bankruptcy restructurings. In January 2004, we acquired Poorman-Douglas and expanded our product and service offerings to include class action, mass tort, and other similar legal proceedings.

Results of Operations for the Nine Months Ended September 30, 2005 Compared with the Nine Months Ended September 30, 2004

Consolidated Results

Revenue

Total revenue of $95.1 million for the nine months ended September 30, 2005 represents an approximate 2% decrease compared to $96.6 million of revenue for the same period in the prior year.  A significant part of our total revenue consists of reimbursement for certain expenses we incur, such as postage related to document management services.  We reflect the revenue from these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income.  Although reimbursed revenue and expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue.  Revenue exclusive of reimbursed expenses, which we refer to as operating revenue, decreased 4% to $78.0 million for the nine months ended September 30, 2005 compared to $81.2 million for the same period in the prior year.  All revenue is directly related to a segment, and changes in revenue by segment are discussed below.

Costs and Expenses

Direct and administrative costs, including depreciation and software amortization, decreased $0.1 million to $70.4 million for the nine months ended September 30, 2005 compared with $70.5 million for the same period in the prior year.

Direct and administrative costs, including depreciation and software amortization, not allocated to a segment increased $3.6 million, or 21%, to $20.6 million for the nine months ended September 30, 2005 compared with $17.0 million for the nine months ended September 30, 2004.  Unallocated direct and administrative costs, including depreciation and software amortization, increased due to a combination of factors, including increases in estimated expense related to compensation, professional fees, travel, and operating software amortization expense.

Amortization of identifiable intangible assets decreased $1.2 million to $4.5 million for the nine months ended September 30, 2005 compared with $5.7 million for the same period in the prior year.  All identifiable intangible assets are directly related to a segment, and changes in amortization of identifiable intangible assets by segment are discussed below.

During the nine months ended September 30, 2005, we had $0.1 million of acquisition related expenses compared with acquisition related expenses of $2.2 million for the nine months ended September 30, 2004.  Acquisition related expenses result from non-capitalizable expenses consisting of legal, accounting and valuation services, and travel incurred in connection with potential transactions which were not completed and executive bonuses related to completed transactions.

Expenses Related to Financing

We incurred net expenses related to financing of $4.2 million for the nine months ended September 30, 2005 compared with net financing expense of $6.1 million for the nine months ended September 30, 2004.  This decrease in expenses related to financing consists of various components.  The most significant components of the decrease were a $1.0 million decrease in amortization of loan fee expenses and a $1.0 million charge we incurred during the nine months ended September 30, 2004 related to termination of a credit facility.  Also, variable interest expense related to our credit facilities and fixed interest expense related to our convertible debt decreased by approximately $0.3 million during the nine months ended September 30, 2005 compared with the comparable period in the prior year.  The primary reason for this decrease is the decrease in outstanding borrowings.  Partly offsetting these decreases in expenses related to financing was a $0.4 million increase in non-cash charges related to our convertible debt, primarily as a result of an increase in the fair value of the embedded option to extend the maturity of the debt by three years.  Changes in the fair value of this embedded options do not affect our current cash flow.  Furthermore, if the embedded option is eventually exercised, the value assigned to the embedded option will be amortized to income as a reduction to our 4% convertible debt interest expense over the periods payments are made.  If the

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option is not exercised by some or all convertible debt holders, any remaining related value assigned to the embedded option will be recognized as a gain during that period.

Effective Tax Rate

Our effective tax rate related to income from continuing operations increased from 41.0% for the nine months ended September 30, 2004 to 41.8% for the nine months ended September 30, 2005.  Our tax rate is higher than the statutory federal rate of 35% primarily due to state taxes, including taxes related to our New York operations that are subject to relatively high state and local New York tax rates, which have a combined 17.88% tax rate.

Business Segments

Revenue

Case management operating revenue increased $6.8 million, or approximately 13%, to $58.1 million for the nine months ended September 30, 2005 compared to $51.3 million for the nine months ended September 30, 2004.  This increase is primarily attributable to an increase in both processing and professional services revenue resulting from the timing of several large cases as well as the expansion of bankruptcy services to include balloting services.

Document management operating revenue declined $10.1 million, or approximately 34%, to $19.9 million for the nine months ended September 30, 2005 compared to $30.0 million for the nine months ended September 30, 2004.  This decrease is primarily attributable to a decline in advertising services.  The level, if any, of advertising services provided varies significantly depending on the characteristics of an individual case.  During the nine months ended September 30, 2004, we had several large cases which required advertising services.  During the nine months ended September 30, 2005, our case mix did not require significant advertising services.

Operating Expense

Case management direct and administrative expenses, including depreciation and software amortization, of $23.4 million increased $2.3 million, or approximately 11%, for the nine months ended September 30, 2005 compared with $21.1 million for the same period in the prior year.  This increase primarily results from increased reimbursed costs and operating costs, mainly temporary labor and compensation and other expenses related to balloting service professionals, to support the increase in case management’s class action operating revenues.

Document management direct and administrative expenses, including depreciation and software amortization, of $26.4 million decreased $6.0 million, or approximately 19%, for the nine months ended September 30, 2005 compared with $32.4 million for the same period in the prior year.  This decrease primarily results from decreased costs related to advertising revenue, partly offset by an increase in reimbursed expenses.  Document management direct expenses include reimbursed expenses and other operating expenses which are more variable in nature than case management direct expenses.  Document management expenses will fluctuate from quarter to quarter based on document management business requirements delivered during each quarter.

Both the case management and document management segments have identifiable intangible assets.  Certain intangible assets acquired in the BSI acquisition became fully amortized during 2005.  As a result, amortization of case management identifiable intangible assets decreased $0.6 million to $3.3 million for the nine months ended September 30, 2005 compared with $3.9 million for the same period in the prior year and amortization of document management identifiable intangible assets decreased $0.7 million to $1.2 million for the nine months ended September 30, 2005 compared with $1.9 million for the same period in the prior year.

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Results of Operations for the Three Months Ended September 30, 2005 Compared with the Three Months Ended September 30, 2004

Consolidated Results

Revenue

Total revenue of $32.0 million for the three months ended September 30, 2005 represents an approximate 10% decrease compared to $35.7 million of revenue for the same period in the prior year.  A significant part of our total revenue consists of reimbursement for certain expenses we incur, such as postage related to document management services.  We reflect the revenue from these reimbursed expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income.  Although reimbursed revenue and expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue.  Revenue exclusive of reimbursed expenses, which we refer to as operating revenue, decreased approximately $2.9 million, or approximately 10%, to $25.8 million for the three months ended September 30, 2005 compared to $28.7 million for the same period in the prior year.  All revenue is directly related to a segment, and changes in revenue by segment are discussed below.

Costs and Expenses

Direct and administrative costs, including depreciation and software amortization, decreased $3.8 million, or approximately 14%, to $23.5 million for the three months ended September 30, 2005 compared with $27.3 million for the same period in the prior year.

Direct and administrative costs, including depreciation and software amortization not allocated to a segment, was stable, increasing $0.1 million, or 2%, to $6.2 million for the three months ended September 30, 2005 compared with $6.1 million for the three months ended September 30, 2004.

Amortization of identifiable intangible assets decreased $0.6 million to $1.4 million for the three months ended September 30, 2005 compared with $2.0 million for the same period in the prior year.  All identifiable intangible assets are directly related to a segment, and changes in amortization of identifiable intangible assets by segment are discussed below.

Expenses Related to Financing

We incurred net expenses related to financing of $1.6 million for the three months ended September 30, 2005 compared with net expenses related to financing of $2.6 million for the three months ended September 30, 2004.  The decrease in net expenses related to financing primarily results from a $1.0 million charge related to termination of a credit facility during the three months ended September 30, 2004.

Effective Tax Rate

Our effective tax rate related to income from continuing operations increased from 41.5% for the three months ended September 30, 2004 to 42.0% for the three months ended September 30, 2005.  Our tax rate is higher than the statutory federal rate of 35% primarily due to state taxes, including taxes related to our New York operations that are subject to relatively high state and local New York tax rates, which have a combined 17.88% tax rate.

Business Segments

Revenue

Case management operating revenue increased approximately $1.5 million, or 9%, to $18.5 million for the three months ended September 30, 2005 compared to $17.0 million for the three months ended September 30, 2004.  This increase is primarily attributable to an increase in processing services revenue combined with a slight increase in bankruptcy deposit based revenue.

Document management operating revenue decreased by $4.3 million, or approximately 37%, to $7.4 million for the three months ended September 30, 2005 compared to $11.7 million for the three months ended September 30, 2004.  This decrease is primarily attributable to a decline in advertising services.  The level, if any, of advertising services provided varies significantly depending on the characteristics of an individual case.  During the three months ended September 30, 2004, we had several large cases which required advertising services.  During the three months ended September 30, 2005, our case mix did not require significant advertising services.

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Operating Expense

Case management direct and administrative expenses, including depreciation and software amortization, of $7.6 million increased $0.1 million, or approximately 1%, for the three months ended September 30, 2005 compared with $7.5 million for the same period in the prior year.  This increase primarily results from an increase in expense for temporary labor.

Document management direct and administrative expenses, including depreciation and software amortization, of $9.7 million decreased $4.0 million, or approximately 29%, for the three months ended September 30, 2005 compared with $13.7 million for the same period in the prior year.  This decrease was primarily due to decreased costs related to advertising-related revenue combined with decreases in reimbursed expense and outside services due to a case mix which did not have a significant noticing component.  Document management direct expenses include reimbursed expenses and other operating expenses which are more variable in nature than case management direct expenses.  Document management expenses will fluctuate from quarter to quarter based on document management business requirements delivered during each quarter.

Both the case management and document management segments have identifiable intangible assets.  Certain intangible assets acquired in the BSI acquisition became fully amortized during 2005.  As a result, amortization of case management’s identifiable intangible assets decreased $0.3 million to $1.1 million for the three months ended September 30, 2005 compared with $1.4 million for the same period in the prior year and amortization of document management’s identifiable intangible assets decreased $0.3 million to $0.4 million for the three months ended September 30, 2005 compared with $0.7 million for the same period in the prior year.

Liquidity and Capital Resources

Operating Activities

During the nine months ended September 30, 2005, the primary sources of cash from operating activities were from net income of $9.2 million and adjustments of $12.4 million for non-cash charges and credits, primarily depreciation and amortization.  These operating sources of cash were largely offset by a $8.6 million use of cash related to an increase in trade accounts receivable.  Trade accounts receivable increased primarily as the result of the timing of collections.  As a result, our operating activities generated net cash of $13.7 million for the nine months ended September 30, 2005.

Investing Activities

During the nine months ended September 30, 2005, we used approximately $3.0 million of cash to purchase property and equipment and $1.5 million of cash to fund internal costs related to development of computer software for which technological feasibility has been established.

Financing Activities

During the nine months ended September 30, 2005, we paid approximately $4.0 million, net, related to our revolving loan, $4.7 million related to our senior term loan, $0.9 million related to our capital lease, and $0.6 million related to the BSI deferred acquisition price.

As of September 30, 2005, our borrowings consisted of $51.1 million from the contingent convertible subordinated notes (including the fair value of the embedded option), $17.2 million under our senior term loan, $1.0 million under our senior revolving loan, and approximately $3.7 million of obligations related to capitalized leases and deferred acquisition price.

We believe that the funds generated from operations plus amounts available under our senior revolving loan will be sufficient over the next year to finance currently anticipated working capital requirements, software expenditures, property and equipment expenditures, payments for contractual obligations, interest payments due on our credit facility borrowings, and the required quarterly principal payments of $1.6 million on our senior term loan.  As calculated at September 30, 2005, additional availability under the senior revolving loan was approximately $35.7 million.

Subsequent to September 30, 2005, we completed an acquisition.  The acquisition was financed using available cash on hand.  We may pursue acquisitions in the future, and we may use the availability under our revolving loan and cash on hand to finance a future acquisition.  If the acquisition price exceeds the capacity of these sources of financing, we may decide to issue equity, restructure our credit facility, partly finance the acquisition with a note payable, or some combination of the preceding.  Covenants contained in our credit facility and our convertible debt agreement may limit our ability to consummate an acquisition.

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Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.  SFAS No. 154 requires retrospective application for reporting a change in accounting principle unless such application is impracticable or unless transition requirements specific to a newly adopted accounting principle require otherwise.  SFAS No. 154 also requires the reporting of a correction of an error by restating previously issued financial statements.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment.  SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.  SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award.  SFAS No. 123R is effective for EPIQ beginning January 1, 2006.  Accordingly, we will adopt SFAS No. 123R, likely using the modified version of prospective application, beginning with our quarter ending March 31, 2006.  Under the modified version of prospective application, compensation costs related to share-based compensation will be recognized in our financial statements for all periods beginning after December 31, 2005.  For comparative periods ending on or before December 31, 2005, which are presented in our 2006 and subsequent financial statements, share-based compensation costs will continue to be excluded from the financial statements, but we will disclose these share-based compensation costs on a pro forma basis in a note to the consolidated financial statements.  Adoption of SFAS No. 123R will materially increase our recognized compensation expense and will have a material impact on our consolidated income statement and balance sheet.  We are unable to estimate the impact of adoption of this statement on our consolidated financial statements as the impact will depend, in part, on future stock awards and stock option awards made prior to the adoption date, whether any such awards are qualified or non-qualified, the vesting period of those awards, and forfeitures related to both existing awards and new awards.  During February 2005, our compensation committee approved acceleration of the vesting of certain unvested options for employees, including an executive officer, and non-employee directors.  The decision to accelerate the vesting of these options and eliminate future compensation expense was based primarily on a review of our long-term incentive programs considering the effect on our financial statements of changes in accounting rules that we must adopt in the future.  This action, which had an immaterial affect on our financial statements for the three month and nine month periods ended September 30, 2005, will reduce the impact of adoption of SFAS No. 123R on our future consolidated financial statements. If, subsequent to September 30, 2005, no new awards were issued and no existing awards were forfeited, we estimate that adoption of SFAS No. 123R would decrease our net income for the year ending December 31, 2006 by approximately $1.0 million.  We do not anticipate that adoption of SFAS No. 123R will have a material impact on our consolidated statement of cash flows.

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Forward-Looking Statements

In this report, in other filings with the SEC and in press releases and other public statements by our officers throughout the year, EPIQ Systems, Inc. makes or will make statements that plan for or anticipate the future.  These forward-looking statements include statements about our future business plans and strategies, and other statements that are not historical in nature.  These forward-looking statements are based on our current expectations.  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’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report.

Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated,” “goal,” “objective” and “potential.”  Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward-looking statements.  Because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements.  These factors include (1) any material changes in our total number of client engagements and the volume associated with each engagement, (2) any material changes in our Chapter 7 deposit portfolio, the services required or selected by our Chapter 11, Chapter 13, class action or mass tort engagements, or the number of cases processed by our Chapter 13 bankruptcy trustee clients, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, (4) our reliance on and future changes in our marketing arrangement and pricing arrangements with Bank of America for Chapter 7 revenue, (5) the marketing and pricing arrangements with other Chapter 7 depository banks,  (6) the impact of recently enacted tort reform and bankruptcy reform legislation on the volume and timing of disposition of client engagements, (7) risks associated with the integration of acquisitions into our existing business operations, (8) risks associated with our indebtedness, and (9) other risks detailed from time to time in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2004.  In addition, there may be other factors not included in our SEC filings that may cause actual results to differ materially from any forward-looking statements.  We undertake no obligations to update any forward-looking statements contained herein to reflect future events or developments.

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ITEM 3.          Quantitative and Qualitative Disclosures About Market Risk.

Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments.  Our exposure to market risk has not changed significantly since December 31, 2004.

ITEM 4.          Controls and Procedures.

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

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 6.          Exhibits.

31.1	Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350.

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SIGNATURES

                Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		EPIQ Systems, Inc.
Date:	October 28, 2005	/s/ Tom W. Olofson
		Tom W. Olofson
		Chairman of the Board
		Chief Executive Officer
		Director
		(Principal Executive Officer)
Date:	October 28, 2005	/s/ Elizabeth M. Braham
		Elizabeth M. Braham
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)
Date:	October 28, 2005	/s/ Douglas W. Fleming
		Douglas W. Fleming
		Director of Finance
		(Principal Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

                I, Tom W. Olofson, certify that:

                1.             I have reviewed this quarterly report on Form 10-Q of EPIQ Systems, Inc.;

                2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

                3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

                4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

                (a)           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

                (b)           designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

                (c)           evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

                (d)           disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

                5.             The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

                (a)           all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

                (b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:       October 28, 2005

/s/ Tom W. Olofson

Tom W. Olofson

Chairman of the Board

Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATIONS

                I, Elizabeth M. Braham, certify that:

                1.             I have reviewed this quarterly report on Form 10-Q of EPIQ Systems, Inc.;

                2.             Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

                3.             Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

                4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

                (a)           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

                (b)           designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

                (c)           evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

                (d)           disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

                5.             The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

                (a)           all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

                (b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:       October 28, 2005

 /s/  Elizabeth M. Braham

Elizabeth M. Braham

Executive Vice President, Chief Financial Officer

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EX-32.1

Exhibit 32.1

CERFIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350.

I, Tom W. Olofson, Chief Executive Officer of EPIQ Systems, Inc. (the “Company”), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes — Oxley Act of 2002, that, to the best of my knowledge, (1) the quarterly report on Form 10-Q of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of section 13a-14(b) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tom W. Olofson

Tom W. Olofson

Dated:    October 28, 2005

I, Elizabeth M. Braham, Chief Financial Officer of EPIQ Systems, Inc. (the “Company”), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes — Oxley Act of 2002, that, to the best of my knowledge, (1) the quarterly report on Form 10-Q of the Company to which this Exhibit is attached (the “Report”) fully complies with the requirements of section 13a-14(b) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Elizabeth M. Braham

Elizabeth M. Braham

Dated:    October 28, 2005

1