UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 000-22081

EPIQ SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Missouri		48-1056429
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

501 Kansas Avenue, Kansas City, Kansas		66105-1300
(Address of principal executive offices)		(Zip Code)

913-621-9500

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 19, 2012
Common Stock, $0.01 par value per share		35,898,066 shares

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
REVENUE:
Case management services	$	72,746		$	56,385		$	212,524		$	156,588
Case management bundled products and services	2,906			4,224			9,054			13,083
Document management services	8,213			9,143			34,951			22,985
Operating revenue	83,865			69,752			256,529			192,656
Reimbursable expenses	7,122			6,359			20,825			17,031
Total Revenue	90,987			76,111			277,354			209,687

OPERATING EXPENSE:
Direct cost of services (exclusive of depreciation and amortization shown separately below)	33,546			23,888			105,121			64,526
Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)	800			778			2,304			2,391
Reimbursed direct costs	6,891			6,289			20,179			16,778
General and administrative expense	26,988			26,395			87,252			72,763
Depreciation and software and leasehold amortization	6,755			5,795			20,006			16,808
Amortization of identifiable intangible assets	6,804			6,146			20,325			16,107
Fair value adjustment to contingent consideration	(11,717		)	(1,691		)	(17,188		)	(4,466		)
Intangible asset impairment expense	—			—			1,777			—
Other operating expense (income)	—			70			(225		)	3,980
Total Operating Expense	70,067			67,670			239,551			188,887

INCOME FROM OPERATIONS	20,920			8,441			37,803			20,800

INTEREST EXPENSE (INCOME):
Interest expense	1,926			1,555			7,365			4,122
Interest income	(5		)	(96		)	(12		)	(112		)
Net Interest Expense	1,921			1,459			7,353			4,010

INCOME BEFORE INCOME TAXES	18,999			6,982			30,450			16,790

PROVISION FOR INCOME TAXES	7,733			2,696			11,988			6,649

NET INCOME	$	11,266		$	4,286		$	18,462		$	10,141

NET INCOME PER SHARE INFORMATION:
Basic	$	0.31		$	0.12		$	0.51		$	0.29
Diluted	$	0.31		$	0.12		$	0.50		$	0.28
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	35,438			35,268			35,505			35,145
Diluted	36,344			36,629			36,427			36,550

Cash dividends declared per common share	$	0.09		$	0.05		$	0.205		$	0.155

See accompanying Notes to Condensed Consolidated Financial Statements.

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EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

	September 30, 2012			December 31, 2011

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,345		$	2,838
Trade accounts receivable, less allowance for doubtful accounts of $5,052 and $4,514, respectively	104,472			89,619
Prepaid expenses	8,584			7,768
Other current assets	4,049			9,999
Total Current Assets	120,450			110,224

LONG-TERM ASSETS:
Property and equipment, net	44,230			46,773
Internally developed software costs, net	19,705			21,195
Goodwill	404,212			402,736
Other intangibles, net of accumulated amortization of $83,836 and $63,511, respectively	66,214			88,087
Other	7,310			9,649
Total Long-term Assets, net	541,671			568,440
Total Assets	$	662,121		$	678,664

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations	$	10,371		$	15,484
Accounts payable	12,679			12,048
Accrued compensation	5,077			10,293
Customer deposits	4,247			1,972
Deferred revenue	3,519			3,214
Other accrued liabilities	8,353			6,979
Total Current Liabilities	44,246			49,990

LONG-TERM LIABILITIES:
Deferred income taxes	44,964			42,557
Other long-term liabilities	6,178			5,204
Long-term obligations, excluding current maturities	222,674			247,994
Total Long-term Liabilities	273,816			295,755

COMMITMENTS AND CONTINGENCIES
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 2012 – 39,923,852 and 35,891,691 shares Issued and outstanding 2011 – 39,493,852 and 35,754,074 shares	399			395
Additional paid-in capital	289,637			286,869
Accumulated other comprehensive loss	(1,415		)	(1,987		)
Retained earnings	106,939			95,849
Treasury stock, at cost – 4,032,161 and 3,739,778 shares	(51,501		)	(48,207		)
Total Equity	344,059			332,919
Total Liabilities and Equity	$	662,121		$	678,664

See accompanying Notes to Condensed Consolidated Financial Statements.

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EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

(in thousands)

	Common Stock	Treasury Stock		Common Stock		Additional Paid-In Capital			AOCI (1)			Retained Earnings			Treasury Stock			Total

Balance at January 1, 2012	39,494	(3,740	)	$	395	$	286,869		$	(1,987	)	$	95,849		$	(48,207	)	$	332,919
Net income	—	—		—		—			—			18,462			—			18,462
Foreign currency translation adjustment	—	—		—		—			572			—			—			572
Tax benefit from share-based compensation	—	—		—		(334		)	—			—			—			(334		)
Restricted common stock issued under share-based compensation plans	430	—		4		—			—			—			—			4
Stock option exercises		206				(2,032		)	—						2,645			613
Common stock repurchased under share-based compensation plans	—	(214	)	—		—			—			—			(2,640		)	(2,640		)
Share repurchases (Note 9)	—	(284	)												(3,299		)	(3,299		)
Dividends declared ($0.205) per share) (Note 9)	—	—		—		—			—			(7,372		)	—			(7,372		)
Share-based compensation expense	—	—		—		5,134			—			—			—			5,134
Balance at September 30, 2012	39,924	4,032		$	399	$	289,637		$	(1,415	)	$	106,939		$	(51,501	)	$	344,059

(1) AOCI — Accumulated Other Comprehensive Income (Loss)

	Common Stock	Treasury Stock		Common Stock		Additional Paid-In Capital			AOCI (1)			Retained Earnings			Treasury Stock			Total

Balance at January 1, 2011	39,063	(3,295	)	$	391	$	281,119		$	(1,971	)	$	91,069		$	(42,085	)	$	328,523
Net income	—	—		—		—			—			10,141			—			10,141
Foreign currency translation adjustment	—	—		—		—			88			—			—			88
Tax benefit from share-based compensation	—	—		—		312			—			—			—			312
Restricted common stock issued under share-based compensation plans	431	—		4					—			—			—			4
Stock option exercises		319		—		(1,664		)							4,085			2,421
Common stock repurchased under share-based compensation plans	—	(66	)	—		—			—			—			(900		)	(900		)
Share repurchases (Note 9)	—	(745	)	—		—			—						(9,958		)	(9,958		)
Dividends declared ($0.155 per share)	—	—		—		—			—			(5,513		)	—			(5,513		)
Share-based compensation expense	—	—		—		5,589			—						—			5,589
Balance at September 30, 2011	39,494	(3,787	)	$	395	$	285,356		$	(1,883	)	$	95,697		$	(48,858	)	$	330,707

(1) AOCI — Accumulated Other Comprehensive Income (Loss)

See accompanying Notes to Condensed Consolidated Financial Statements.

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EPIQ SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,462		$	10,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and software and leasehold amortization	20,006			16,808
Amortization of identifiable intangible assets	20,325			16,107
Fair value adjustment to contingent consideration	(17,188		)	(4,466		)
Intangible asset impairment expense	1,777			—
Share-based compensation expense	5,134			5,589
Provision for doubtful accounts	1,776			2,045
Accretion of discount	1,138			160
Deferred income tax expense	4,614			910
Other, net	425			817
Changes in operating assets and liabilities:
Trade accounts receivable	(16,698		)	(14,187		)
Prepaid expenses and other assets	3,448			310
Accounts payable and other liabilities	(471		)	(8,789		)
Excess tax benefit related to share-based compensation	—			(111		)
Other	(171		)	1,805
Net cash provided by operating activities	42,577			27,139

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(12,591		)	(10,732		)
Internally developed software costs	(4,843		)	(4,836		)
Payment of deferred acquisition consideration	(8,400		)	—
Cash paid for business acquisition, net of cash acquired	—			(99,330		)
Proceeds from sale of assets	491
Other investing activities, net	187			106
Net cash used in investing activities	(25,156		)	(114,792		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolver borrowings	59,000			148,000
Payments to reduce revolver borrowings	(59,000		)	(45,000		)
Payments under long-term obligations	(5,736		)	(2,621		)
Excess tax benefit related to share-based compensation	—			111
Common stock repurchases (Note 9)	(5,939		)	(10,858		)
Cash dividends paid (Note 9)	(5,925		)	(3,728		)
Debt issuance costs	—			(1,940		)
Proceeds from issuance of common stock under share-based compensation plans	617			2,425
Net cash (used in) provided by financing activities	(16,983		)	86,389

Effect of exchange rate changes on cash	69			505

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	507			(759		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	2,838			5,439
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,345		$	4,680

See accompanying Notes to Condensed Consolidated Financial Statements.

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

· Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® (Automated Access to Court Electronic Records) (“AACER®”) software product.

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

Non-Software Arrangements

Services related to eDiscovery and settlement administration are billed based on volume. For these contractual arrangements, we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has standalone value to our customers because we or other vendors sell such services separately from any other services/deliverables. We have also obtained objective and reliable evidence of the fair value of each element based either on the price we charge when we sell an element on a standalone basis or on third-party evidence of fair value of such similar services. For elements where evidence cannot be established we have used our best estimate of sales price. Lastly, our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting. We allocate revenue to the various units of accounting in our arrangements based on the fair value or best estimated selling price of each unit of accounting, which is generally consistent with the stated prices in our arrangements. In instances when revenue has been required to be deferred, we utilize the relative selling price method to calculate the revenue recognized. As we have evidence of an arrangement, revenue for each separate unit of accounting is recognized each period. Revenue is recognized as the services are rendered, our fee becomes fixed and determinable, and collectability is reasonably assured. Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a customer deposit until all revenue recognition criteria have been satisfied.

Software Arrangements

For our Chapter 7 bankruptcy trustee arrangements, we provide our trustee clients with a software license, hardware lease, hardware maintenance, and postcontract customer support services, all at no charge to the trustee. Provided that the trustees place their liquidated estate deposits with a financial institution with which we have an arrangement we earn contingent monthly fees from the financial institutions based on the average dollar amount of deposits held by the trustees with that financial institution related to the software license, hardware lease, hardware maintenance, and postcontract customer support services provided to our trustee clients. The monthly fees have two components consisting of an interest-based component and a non-interest based service fee. Since we have not established vendor specific objective evidence of the fair value of the software license, we do not recognize any revenue on delivery of the software. The software element is deferred and included with the remaining undelivered elements, which are postcontract customer support services. This revenue, when recognized, is included as a component of “Case management services” revenue in the Condensed Consolidated Statements of Income. Revenue related to postcontract customer support is entirely contingent on the placement of liquidated estate deposits by the trustee with the financial institution. Accordingly, we recognize this contingent usage based revenue as the fee becomes fixed or determinable at the time actual usage occurs and collectability is probable. This occurs monthly as a result of the computation, billing and collection of monthly deposit fees contractually agreed to. At that time, we have also satisfied the other applicable revenue recognition criteria since we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.

We also provide our trustee clients with certain hardware, such as desktop computers, monitors, and printers as well as hardware maintenance. We retain ownership of all hardware provided and we account for this hardware as a lease. As the hardware maintenance arrangement is an executory contract similar to an operating lease, we use guidance related to contingent rentals in operating lease arrangements for hardware maintenance as well as for the hardware lease. Since the payments under all of our arrangements are contingent upon the level of trustee deposits and the delivery of upgrades and other services, and there remain important uncertainties regarding the amount of unreimbursable costs yet to be incurred by us, we account for the hardware lease as an operating lease. Therefore, all lease payments, based on the estimated fair value of hardware provided, were accounted for as contingent rentals; which requires that we recognize rental income when the

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changes in the factor on which the contingent lease payment is based actually occur. This occurs at the end of each period as we achieve our target when deposits are held at the financial institution as, at that time, evidence of an arrangement exists, delivery has occurred, the amount has become fixed and determinable, and collection is reasonably assured.

This revenue, which was less than ten percent of our total revenue for the three and nine months ended September 30, 2012 and 2011, is included in the Condensed Consolidated Statements of Income as a component of “Case management services” revenue.

Reimbursements

We have revenue related to the reimbursement of certain costs, primarily postage. Reimbursed postage and other reimbursable direct costs are recorded gross in the Condensed Consolidated Statements of Income as “Reimbursable expenses” and as “Reimbursed direct costs”, respectively.

Goodwill

Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. We assess goodwill for impairment on an annual basis 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. We have identified our operating segments (eDiscovery, bankruptcy and settlement administration) as our reporting units for purposes of testing for goodwill impairment. Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units. Our annual test is performed as of July 31 each year, and there have been no events since our last annual test to indicate that it is more likely than not that the recorded goodwill balance had become impaired. Our consolidated goodwill totaled $404.2 million as of September 30, 2012. As of July 31, 2012, which is the date of our most recent impairment test, the fair value of each of our reporting units was substantially in excess of the carrying value of the reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We considered both a market approach and an income approach in order to develop an estimate of the fair value of each reporting unit for purposes of our annual impairment test. When available, and as appropriate, we use market multiples derived from a set of competitors or companies with comparable market characteristics to establish fair values for a particular reporting unit (market approach). We also estimate fair value using discounted projected cash flow analysis (income approach). Potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its estimated fair value. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, which is used to determine our discount rate, and through our stock price, which is used to determine our market capitalization. We may be required to recognize impairment of goodwill based on future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units.

If we determine that the estimated fair value of any reporting unit is less than the reporting unit’s carrying value, then we proceed to the second step of the goodwill impairment analysis to measure the potential impairment charge. An impairment loss is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value. If goodwill on our Condensed Consolidated Balance Sheet or Consolidated 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.

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Due to the current economic environment and the uncertainties regarding the impact that future economic impacts will have on our reporting units, there can be no assurances that our estimates and assumptions regarding the duration of the economic recession, or the period or strength of recovery, made for purposes of our annual goodwill impairment test, will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenues or margins of certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would occur, and if it does occur, whether such charge would be material.

Recently Issued and Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued a new standard related to comprehensive income. This new standard requires companies to present comprehensive income in a single statement below net income or in a separate statement of comprehensive income immediately following the income statement. In both options, companies must present the components of net income, total net income, the components of other comprehensive income, total other comprehensive income and total comprehensive income. This new standard does not change which items are reported in other comprehensive income or the requirement to report reclassifications of items from other comprehensive income to net income. The new standard eliminates the option to present comprehensive income on the statement of changes in shareholders’ equity. This requirement was effective for us beginning with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and required retrospective application for all periods presented. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued new standards to provide guidance about fair value measurement and disclosure requirements. These standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it is already required or permitted under generally accepted accounting principles. A majority of the changes include clarifications of existing guidance and new disclosure requirements related to changes in valuation technique and related inputs that result from applying the standard. We adopted this guidance and applied the new standard prospectively for interim and annual periods beginning January 1, 2012. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued guidance that amends the existing standards related to annual and interim goodwill impairment tests. Current guidance requires companies to test goodwill for impairment, at least annually, using a two-step process. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this option, companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on that qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. The new guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment. The amendments were effective for us for annual and interim goodwill tests performed on or after January 1, 2012. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations or cash flows.

In July 2012, the FASB issued guidance that amends the existing standards related to annual and interim impairment tests for indefinite-lived intangible assets other than goodwill. Current guidance requires companies to test indefinite-lived intangible assets other than goodwill for impairment, at least annually, by comparing the fair value of the asset with its carrying amount. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to calculate the indefinite-lived intangible asset’s fair value. Under this option, companies are no longer required to calculate the fair value of the indefinite-lived intangible asset unless they determine, based on that qualitative assessment, that it is more likely than not that the asset’s fair value is less than its carrying amount. The amendment will be effective for us beginning with annual and interim impairment tests of indefinite-lived intangible assets performed after January 1, 2013. We do not expect the adoption of this guidance to have a material effect on our consolidated financial position, results of operations or cash flows.

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NOTE 2: GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill for the first nine months of 2012 was as follows:

	eDiscovery		Bankruptcy		Settlement Administration		Total
	(in thousands)
Balance as of December 31, 2011	$	187,773	$	182,116	$	32,847	$	402,736
Purchase price adjustments	1,276		—		—		1,276
Foreign currency translation	200		—		—		200
Balance as of September 30, 2012	$	189,249	$	182,116	$	32,847	$	404,212

During the first quarter of 2012, we increased goodwill recorded in connection with our acquisition of De Novo Legal LLC (“De Novo”) by $1.3 million. This adjustment was based on information obtained since December 31, 2011, related to the results of an independent valuation of the fair value of De Novo’s property, plant and equipment. See Note 11 of our Notes to Condensed Consolidated Financial Statements for further detail.

Identifiable intangible assets as of September 30, 2012 and December 31, 2011 consisted of the following:

	September 30, 2012				December 31, 2011
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Amortizing intangible assets:
Customer relationships	$	124,512	$	68,418	$	124,283	$	50,813
Trade names	6,591		1,442		3,212		987
Non-compete agreements	18,947		13,976		18,947		11,711
Non-amortizing intangible assets:
Trade names	—		—		5,156		—
Total	$	150,050	$	83,836	$	151,598	$	63,511

During the first quarter of 2012, we increased our customer relationships intangible asset recorded in connection with our acquisition of De Novo by $0.2 million. This adjustment was based on information obtained since December 31, 2011, related to the results of an independent valuation of the fair value of De Novo’s property, plant and equipment which also impacted the valuation model used for customer relationships. See Note 11 of our Notes to Condensed Consolidated Financial Statements for further detail. Customer relationships, non-compete agreements and trade names carry a weighted average life of seven years, five years and eight years, respectively. The AACER® trade name acquired in 2010 was originally determined to have an indefinite life and was therefore not amortized from its October 2010 acquisition date through June 30, 2012.

During the second quarter of 2012, the remaining useful life of the AACER® trade name was evaluated to determine whether events and circumstances continue to support an indefinite useful life and it was determined that an indefinite life is no longer appropriate. This conclusion was based on our plans to market current and potential future products or services under the Epiq trade name and we expect the useful life of the AACER® trade name to be ten years. Accordingly, we began amortizing this trade name beginning on July 1, 2012.

Due to the change from an indefinite life to a ten-year useful life, we tested the AACER® trade name for impairment as of June 30, 2012, based on current financial forecasts and the expected useful life of ten years. Per the results of this valuation analysis, the carrying value of the trade name exceeded its fair value by $1.8 million and accordingly we recorded this amount in the second quarter of 2012 as intangible asset impairment expense in the accompanying Condensed Consolidated Statements of Income.

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Amortization expense related to identifiable intangible assets was $6.8 million and $6.1 million for the three months ended September 30, 2012 and 2011, respectively, and $20.3 million and $16.1 million for the nine months ended September 30, 2012 and 2011, respectively. The following table outlines the estimated future amortization expense related to intangible assets at September 30, 2012:

(in thousands)
Year Ending December 31,
2012 (from October 1, 2012 to December 31, 2012)	$	6,360
2013	18,988
2014	12,493
2015	9,835
2016	6,224
2017 and thereafter	12,314
Total	$	66,214

NOTE 3: LONG-TERM OBLIGATIONS

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

	Final Maturity Date	Weighted- Average Interest Rate		September 30, 2012			December 31, 2011
				(in thousands)
Senior revolving loan	December 2015	3.1	%	$	217,000		$	217,000
Capital leases	April 2017	6.5	%	3,319			6,025
Note payable	September 2014	2.2	%	8,069			11,004
Acquisition-related liabilities	December 2013	3.5	%	4,657			29,449
Total long-term obligations, including current portion				233,045			263,478
Current maturities of long-term obligations
Capital leases				(1,724		)	(3,213		)
Notes payable				(3,990		)	(3,924		)
Acquisition-related liabilities				(4,657		)	(8,347		)
Total current maturities of long-term obligations				(10,371		)	(15,484		)
Total Long-term obligations				$	222,674		$	247,994

Credit Facilities

We have a $325.0 million revolving loan senior credit facility with a maturity date of December 2015. We have the right, subject to compliance with the covenants as set forth in the credit facility agreement, to increase the facility up to a maximum of $375.0 million. The credit facility is secured by liens on our land and buildings and substantially all of our personal property.

Borrowings under the senior credit facility bear interest at various rates based on our leverage ratio with two rate options at the discretion of management as follows: (1) for base rate advances, borrowings bear interest at prime rate plus 75 to 175 basis points; and (2) for LIBOR rate advances, borrowings bear interest at LIBOR rate plus 175 to 275 basis points. At September 30, 2012, borrowings of $217.0 million under this facility had a weighted average interest rate of 3.1%. The average amount of borrowings under this facility during the third quarter of 2012 was $215.7 million, at a weighted average interest rate of 3.1%. The maximum month-end amount outstanding during the third quarter of 2012 was $217.0 million.

The financial covenants contained in the credit facility include a total debt leverage ratio and a fixed charge coverage ratio (all as defined in our credit facility agreement). The leverage ratio is not permitted to exceed 3.00 to 1.00 and the fixed charge coverage ratio is not permitted to be less than 1.25 to 1.00. As of September 30, 2012, we were in compliance with all

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financial covenants and the amount available for additional borrowings under the credit facility under the most restrictive financial covenant was approximately $35.7 million.

Other restrictive covenants contained in our credit facility include limitations on incurring additional indebtedness and completing acquisitions. We generally cannot incur indebtedness outside the credit facility, with the exception of capital leases, up to $15.0 million, and subordinated debt, up to $100 million. In addition, for acquisitions we must be able to demonstrate that, on a pro forma basis, we would be in compliance with our covenants during the four quarters prior to the acquisition, and bank permission must be obtained for acquisitions in which cash consideration exceeds $125.0 million or total consideration exceeds $175.0 million. The total consideration for all acquisitions consummated during the term of our credit facility may not exceed $300.0 million in the aggregate without lender permission.

Capital Leases

We lease certain equipment under capital leases that generally require monthly payments with final maturity dates during various periods through 2017. As of September 30, 2012, our capital leases had a weighted-average interest rate of approximately 6.5%.

Note Payable

During the fourth quarter of 2011 we entered into a note payable related to a software license agreement that bears interest of approximately 2.2% and is payable quarterly through September 2014.

Acquisition-related Liabilities

In connection with the acquisitions of Jupiter eSources LLC (“Jupiter eSources”) on October 1, 2010, and De Novo on December 28, 2011, we established liabilities related to potential contingent consideration based on future revenue growth. We estimated the fair value of the contingent consideration using probability assessments of projected revenue over the measurement period, and applied an appropriate discount rate based upon the weighted average cost of capital. This fair value is based on significant level 3 inputs that are not observable in the market.

Amounts recorded in connection with acquisition-related liabilities as of September 30, 2012 and December 31, 2012 are as follows:

	September 30, 2012		December 31, 2011
	(in thousands)
De Novo contingent consideration:
Current portion	$	—	$	—
Long-term portion	—		16,226
Total De Novo contingent consideration	—		16,226
De Novo deferred acquisition price
Current portion	4,657		—
Long-term portion	—		4,876
Total De Novo deferred acquisition price	4,657		4,876
Jupiter eSources deferred acquisition price
Current portion	—		8,347
Total acquisition-related liabilities	$	4,657	$	29,449

Jupiter eSources

The undiscounted amount of all potential future payments that we could be required to make under the Jupiter eSources contingent consideration is between $0 and $20 million over a four-year measurement period following the October 1, 2010 date of acquisition. During the three and nine months ended September 30, 2011, adjustments to reduce the fair value of the Jupiter eSources potential contingent consideration were recorded in the amounts of $1.7 million and $4.5 million, respectively. During the fourth quarter of 2011, based on our probability assessments over the remainder of the measurement period, we determined that it was not likely that any contingent consideration for Jupiter eSources would be realized and

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The computation of basic and diluted net income per share for the three and nine months ended September 30, 2012 is as follows:

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount		Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
	(in thousands, except per share data)

Net income	$	11,266					$	18,462
Less: amounts allocated to nonvested shares	(135		)				(221		)

Basic net income available to common stockholders	11,131			35,438	$	0.31	18,241			35,505	$	0.51

Effect of dilutive securities:
Stock options	—			906			—			922
Add back: amounts allocated to nonvested shares	135			—			221			—
Less: amounts re-allocated to nonvested shares	(135		)	—			(221		)	—
Diluted net income available to common stockholders	$	11,131		36,344	$	0.31	18,241			36,427	$	0.50

The computation of basic and diluted net income per share for the three and nine months ended September 30, 2011 is as follows:

	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Net Income (Numerator)		Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount		Net Income (Numerator)			Weighted Average Common Shares Outstanding (Denominator)	Per Share Amount
	(in thousands, except per share data)

Net income	$	4,286				$	10,141
Less: amounts allocated to nonvested shares	—					(5		)

Basic net income available to common stockholders	4,286		35,268	$	0.12	10,136			35,145	$	0.29

Effect of dilutive securities:
Stock options	—		1,361			—			1,364
Nonvested shares	—		—			5			41
Diluted net income available to common stockholders	$	4,286	36,629	$	0.12	$	10,141		36,550	$	0.28

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For the three months ended September 30, 2012 and 2011, weighted-average outstanding stock options totaling approximately 3.1 million and 2.7 million, respectively, were anti-dilutive and for the nine months ended September 30, 2012 and 2011, weighted-average outstanding stock options totaling approximately 3.1 million and 2.3 million, respectively, were antidilutive, and therefore not included in the computation of diluted net income per share.

NOTE 5: SHARE-BASED COMPENSATION

The fair value of the share-based awards is measured at grant date and the resulting compensation expense is recognized on a straight-line basis over the requisite service period. The following table presents share-based compensation expense, which is a non-cash charge, included in the below noted captions within the Condensed Consolidated Statements of Income:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

Direct cost of services	$	65		$	103		$	186		$	229
General and administrative	1,666			1,969			4,948			5,360
Share-based compensation expense	1,731			2,072			5,134			$	5,589
Income tax benefit	(762		)	(897		)	(2,249		)	(2,420		)
Total share-based compensation expense, net of tax	$	969		$	1,175		$	2,885		$	3,169

The 2004 Equity Incentive Plan, as amended (the “2004 Plan”), limits the grant of options to acquire shares of common stock, stock appreciation rights, and restricted stock awards under the 2004 Plan to an aggregate of 7,500,000 shares. Any grant under the 2004 Plan that expires or terminates unexercised, becomes unexercisable, or is forfeited will be available for future grants. At September 30, 2012, there were approximately 417,000 shares of common stock available for future equity-related grants under the 2004 Plan.

During the nine months ended September 30, 2012, we granted 430,000 nonvested share awards at a weighted-average grant date price of $11.85 per share. These awards vest 12 months after the date of grant upon achievement of a performance condition for the calendar year ending December 31, 2012. As of September 30, 2012 we have assessed the likelihood that the performance condition will be met and have recorded the related expense based on the estimated outcome. We also granted 140,000 stock options during the nine months ended September 30, 2012, with a weighted-average exercise price of $11.69 per share, all of which vest 20% per year over five years.

We settle stock option exercises and nonvested share awards with newly issued common shares or treasury stock.

The fair value of each stock option grant was estimated at the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used and the weighted-average fair value per option granted.

	Nine Months Ended September 30,
	2012			2011
Expected life of stock option (years)	6.6			6.6
Expected volatility	38		%	30		%
Risk-free interest rate	1.2		%	2.5		%
Dividend yield	1.8		%	1.1		%
Weighted average grant-date fair value	$	3.72		$	4.49

As of September 30, 2012 there was $5.1 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based awards, which will be recognized over a weighted-average period of 2.3 years.

NOTE 6: SEGMENT REPORTING

We have three reporting segments: eDiscovery, bankruptcy, and settlement administration. Our eDiscovery business provides collections and forensics, processing, search and review, and document review and staffing services to companies and the litigation departments of law firms. Produced documents are made available primarily through a hosted environment utilizing our proprietary software DocuMatrix™, and third-party software which allows for efficient attorney review and data requests. Our bankruptcy business provides solutions that address the needs of trustees to administer bankruptcy proceedings and of debtor

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corporations that file a plan of reorganization and provides software to monitor bankruptcy cases for creditors. Our settlement administration business provides managed services including legal notification, claims administration, project administration and controlled disbursement.

The segment performance measure is based on earnings before interest, taxes, depreciation and amortization, other operating expense, and share-based compensation expense. In management’s evaluation of performance, certain costs, such as compensation for administrative staff and executive management, are not allocated by segment and, accordingly, the following reporting segment results do not include such unallocated costs.

Assets reported within a segment are those assets that can be identified to a segment and primarily consist of trade receivables, property, equipment and leasehold improvements, software, identifiable intangible assets and goodwill. Cash, certain tax-related assets, and certain prepaid assets and other assets are not allocated to our segments. Although we can and do identify long-lived assets such as property, equipment and leasehold improvements, software, and identifiable intangible assets to reporting segments, we do not allocate the related depreciation and amortization to the segment as management evaluates segment performance exclusive of these non-cash charges.

Following is a summary of segment information for the three months ended September 30, 2012. The intersegment revenues in the three months ended September 30, 2012 related primarily to call center and legal notification services performed by the settlement administration segment for the bankruptcy segment.

	Three Months Ended September 30, 2012
	eDiscovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenues:
Third-party operating revenues	$	50,896	$	21,248	$	11,721	$	—		$	83,865
Intersegment revenues	42		27		614		(683		)	—

Operating revenues	50,938		21,275		12,335		(683		)	83,865
Reimbursable expenses	441		1,978		4,703		—			7,122
Total revenues	51,379		23,253		17,038		(683		)	90,987

Direct costs, general and administrative costs	31,584		13,623		15,438		(683		)	59,962
Segment performance measure	$	19,795	$	9,630	$	1,600	$	—		$	31,025

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Following is a summary of segment information for the three months ended September 30, 2011. The intersegment revenues in the three months ended September 30, 2011 related primarily to call center services performed by the settlement administration segment for the bankruptcy segment.

	Three Months Ended September 30, 2011
	eDiscovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenues:
Third-party operating revenues	$	36,626	$	23,842	$	9,284	$	—		$	69,752
Intersegment revenues	25		—		564		(589		)	—

Operating revenues	36,651		23,842		9,848		(589		)	69,752
Reimbursable expenses	193		2,447		3,719		—			6,359
Total revenues	36,844		26,289		13,567		(589		)	76,111

Direct costs, general and administrative costs	22,043		14,665		11,630		(589		)	47,749
Segment performance measure	$	14,801	$	11,624	$	1,937	$	—		$	28,362

Following is a reconciliation of our segment performance measure to income before income taxes.

	Three Months Ended September 30,
	2012			2011
	(in thousands)
Segment performance measure	$	31,025		$	28,362
Corporate and unallocated expenses	(6,532		)	(7,529		)
Share-based compensation expense	(1,731		)	(2,072		)
Depreciation and software and leasehold amortization	(6,755		)	(5,795		)
Amortization of intangible assets	(6,804		)	(6,146		)
Fair value adjustment to contingent consideration	11,717			1,691
Other operating expense	—			(70		)
Interest expense, net	(1,921		)	(1,459		)
Income before income taxes	$	18,999		$	6,982

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Following is a summary of segment information for the nine months ended September 30, 2012. The intersegment revenues in the nine months ended September 30, 2012, related primarily to call center and legal notification services performed by the settlement administration segment for the bankruptcy segment.

	Nine Months Ended September 30, 2012
	eDiscovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenues:
Third-party operating revenues	$	142,455	$	66,943	$	47,131	$	—		$	256,529
Intersegment revenues	194		27		2,773		(2,994		)	—

Operating revenues	142,649		66,970		49,904		(2,994		)	256,529
Reimbursable expenses	1,163		5,129		14,533		—			20,825
Total revenues	143,812		72,099		64,437		(2,994		)	277,354

Direct costs, general and administrative costs	90,402		40,300		55,310		(2,994		)	183,018
Segment performance measure	$	53,410	$	31,799	$	9,127	$	—		$	94,336

Following is a summary of segment information for the nine months ended September 30, 2011. The intersegment revenues in the nine months ended September 30, 2011, related primarily to call center and legal notification services performed by the settlement administration segment for the bankruptcy segment.

	Nine Months Ended September 30, 2011
	eDiscovery		Bankruptcy		Settlement Administration		Eliminations			Total
	(in thousands)
Revenues:
Third-party operating revenues	$	96,314	$	68,148	$	28,194	$	—		$	192,656
Intersegment revenues	33		—		1,470		(1,503		)	—

Operating revenues	96,347		68,148		29,664		(1,503		)	192,656
Reimbursable expenses	404		4,601		12,026		—			17,031
Total revenues	96,751		72,749		41,690		(1,503		)	209,687

Direct costs, general and administrative costs	55,823		37,200		37,545		(1,503		)	129,065
Segment performance measure	$	40,928	$	35,549	$	4,145	$	—		$	80,622

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Following is a reconciliation of our segment performance measure to income before income taxes.

	Nine Months Ended September 30,
	2012			2011
	(in thousands)
Segment performance measure	$	94,336		$	80,622
Corporate and unallocated expenses	(26,704		)	(21,804		)
Share-based compensation expense	(5,134		)	(5,589		)
Depreciation and software and leasehold amortization	(20,006		)	(16,808		)
Amortization of intangible assets	(20,325		)	(16,107		)
Fair value adjustment to contingent consideration	17,188			4,466
Intangible asset impairment expense	(1,777		)	—
Other operating expense	225			(3,980		)
Interest expense, net	(7,353		)	(4,010		)
Income before income taxes	$	30,450		$	16,790

Following are total assets by segment.

	September 30, 2012		December 31, 2011
	(in thousands)
Assets
eDiscovery	$	348,111	$	343,868
Bankruptcy	238,081		246,203
Settlement Administration	55,561		52,911
Corporate and unallocated	20,368		35,682
Total consolidated assets	$	662,121	$	678,664

NOTE 7: FAIR VALUES OF ASSETS AND LIABILITIES

Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are listed below.

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

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

Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying value and estimated fair value of our cash equivalents, which consist of short-term money market funds, are classified as Level 1. There have been no transfers between Level 1 and Level 2 during the nine months ended September 30, 2012. Our Level 3 liability is valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the contingent consideration.

For fair value measurements categorized within Level 3 of the fair value hierarchy, our accounting and finance management, who report to the chief financial officer, determine our valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of our accounting and finance management and are approved by the chief financial officer. Fair value calculations are

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generally prepared by third-party valuation experts who rely on discussions with management in addition to the use of management’s assumptions and estimates as they related to the assets or liabilities in Level 3. Such assumptions and estimates include such inputs as estimates of future cash flows, projected profit and loss information, discount rates, and assumptions as they relate to future pertinent events. Through regular interaction with the third-party valuation experts, finance and accounting management determine that the valuation techniques used and inputs and outputs of the models reflect the requirements of accounting standards as they relate to fair value measurements. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

As of September 30, 2012 and December 31, 2011, our assets and liabilities that are measured and recorded at fair value on a recurring basis were as follows:

			Estimated Fair Value Measurements
			Quoted Prices in Active		Significant Other Observable		Significant Unobservable
Items Measured at Fair Value on a	Carrying		Markets		Inputs		Inputs
Recurring Basis	Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
September 30, 2012:
Assets:
Money market funds	$	34	$	34	$	—	$	—

December 31, 2011:
Assets:
Money market funds	$	34	$	34	$	—	$	—
Liabilities:
Contingent consideration (1)	$	16,226	$	—	$	—	$	16,226

(1) The contingent consideration represents the estimated fair value of the potential contingent consideration opportunity payable in connection with the De Novo acquisition that is contingent upon achieving performance hurdles based on operating revenue objectives. The carrying value at December 31, 2011, was based on management’s estimate of projected revenue over the measurement period as well as the probability of contingent consideration achievement. We applied a discount rate to the projected contingent consideration payments that approximated the weighted average cost of capital. As discussed in Note 3 the carrying value was adjusted to zero during the third quarter of 2012.

As of September 30, 2012 and December 31, 2011, the carrying value of our trade accounts receivable, accounts payable, certain other liabilities, deferred acquisition price payments and capital leases approximated fair value. The amount outstanding under our credit facility was $217.0 million at September 30, 2012 and December 31, 2011, which approximated fair value due to the borrowing rates currently available to us for debt with similar terms and is classified as Level 2.

The following table represents the change in the acquisition-related contingent consideration obligation during the nine months ended September 30, 2012:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (in thousands)

Beginning balance December 31, 2011	$	16,226
Increase in fair value related to accretion	962
Decrease in fair value of contingent consideration obligation	(17,188		)
Ending balance September 30, 2012	$	—

The decrease in fair value of $17.2 million during the nine months ended September 30, 2012, is attributable to the change in fair value of the contingent consideration for the De Novo acquisition which is reflected in “Fair value adjustment to contingent consideration” on the Condensed Consolidated Statements of Income. See Note 11 of our Notes to Condensed Consolidated Financial Statements for further detail related to the De Novo contingent consideration amounts.

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NOTE 8: SUPPLEMENTAL CASH FLOW INFORMATION

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

	Nine Months Ended September 30,
	2012		2011

Cash paid for:
Interest	$	5,677	$	3,628
Income taxes paid, net	4,959		3,359
Non-cash investing and financing transactions:
Property, equipment, and leasehold improvements accrued in accounts payable and other long-term liabilities	1,191		1,267
Capitalized lease obligations incurred	176		196
Dividends declared but not yet paid	3,233		1,785
Obligations incurred in acquisition	—		844

NOTE 9: EQUITY

Share Repurchases

On June 1, 2012, our board of directors (the “Board”) authorized the repurchase, through December 31, 2013, of up to an aggregate of $35.0 million of our outstanding shares of common stock (the “2012 Share Repurchase Program”). Repurchases may be made pursuant to the 2012 Share Repurchase Program from time to time at prevailing market prices in the open market, in block trades or in privately negotiated purchases, or any combination thereof. Epiq may utilize one or more plans with its brokers or banks for pre-authorized purchases within defined limits pursuant to applicable laws to effect all or a portion of the repurchases. The timing, manner, price and amount of any share repurchases under the 2012 Share Repurchase Program will be determined by the Company in its discretion and will be subject to market and economic conditions, prevailing stock prices, loan covenants, leverage objectives, applicable legal and regulatory requirements, and other factors. On June 1, 2012, the Board also approved the termination of our previous share repurchase program authorized by the Board in October 2010 (the “2010 Share Repurchase Program”). There were no share repurchases under the 2010 Share Repurchase Program during the third quarter of 2011.

As of September 30, 2012, we had purchased 283,980 shares of common stock under the 2012 Share Repurchase Program for approximately $3.3 million, at an average cost of $11.62 per share. During the nine months ended September 30, 2011, we purchased 745,414 shares of common stock under the 2010 Share Repurchase Program for approximately $10.0 million, at an average cost of $13.37 per share.

We also have a policy that requires us to repurchase shares from employees to satisfy their tax withholding obligations to us triggered by the vesting of their restricted stock awards or the exercise of their stock options. During the three months and nine months ended September 30, 2012, we repurchased 44,588 shares for approximately $0.6 million and 213,681 shares for approximately $2.6 million, respectively, to satisfy employee tax withholding obligations. During the nine months ended September 30, 2011, we repurchased 66,290 shares for approximately $0.9 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards.

Dividends

Date Declared	Per Share Amount		Record Date	Payment Date
March 1, 2012	$	0.05	April 16, 2012	May 18, 2012
May 29, 2012	$	0.065	July 16, 2012	August 17, 2012
September 5, 2012	$	0.09	November 9, 2012	November 27, 2012

On March 1, 2012, the Board declared a cash dividend of $0.05 per outstanding share of common stock, which was paid on May 18, 2012 to shareholders of record as of the close of business on April 16, 2012.

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The total purchase price transferred to effect the acquisition was as follows (in thousands):

	(in thousands)
Cash paid at closing	$	103,385
Other consideration	844
Working capital adjustment	98
Total purchase price	$	104,327

Transaction related costs, which were expensed during the period in which they were incurred, are reflected in “Other operating expense” in the Condensed Consolidated Statements of Income, and totaled $0.1 million and $3.9 million for the three and nine months ended September 30, 2011, respectively, for this acquisition.

Total purchase consideration has been allocated to the tangible and identifiable intangible assets and to liabilities assumed based on their respective fair values on the acquisition date. The purchase price allocations are summarized in the following table:

	(in thousands)
Tangible assets and liabilities
Current assets, including cash acquired	$	20,044
Non-current assets	2,669
Current liabilities	(6,646		)
Non-current liabilities	(15,115		)
Intangible assets	32,578
Software	2,498
Goodwill	68,299
Net assets acquired	$	104,327

Included in the total liabilities assumed is a net deferred tax liability balance of $16.0 million, primarily comprised of the difference between the assigned values of the intangible assets acquired and the tax basis of those assets.

Based on the results of an independent valuation, we allocated approximately $32.6 million of the purchase price to acquired intangible assets, and $2.5 million of the purchase price to software. The following table summarizes the major classes of acquired intangible assets and software, as well as the respective weighted-average amortization periods:

	Amount (in thousands)		Weighted Average Amortization Period (Years)
Identifiable Intangible Assets
Trade name	$	1,617	5.0
Non-compete agreement	1,362		2.0
Customer relationships	29,599		7.0
Total identifiable intangible assets	$	32,578

Software internally developed	$	2,498	5.0

The Encore transaction was structured as a stock purchase and therefore, the goodwill and acquired intangible assets are not amortizable for tax purposes.

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to Encore, including the expected benefits from the synergies resulting from the transaction, as well as the knowledge and experience of the workforce in place.

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De Novo Legal LLC

On December 28, 2011, we completed the acquisition of De Novo for approximately $86.6 million and $5.0 million is being held by us as security for potential indemnification claims payable 18 months following the closing date of the acquisition. De Novo has document review centers in key strategic locations in the United States and is among the largest providers of managed review and staffing services and also offers clients eDiscovery processing and hosted review. This transaction augments our capacity for eDiscovery and document review services and broadens our eDiscovery customer base. The transaction was funded from our credit facility.

During the first quarter of 2012, we adjusted the purchase price and the holdback to reflect a reduction related to an uncollected account receivable indemnified by the sellers. This holdback has been discounted using a discount rate of 11%. At September 30, 2012, $4.7 million was recorded in “Current maturities of long-term obligations and at December 31, 2011, $4.9 million was recorded in “Long-term obligations” on the Condensed Consolidated Balance Sheets related to this holdback. Also during the first quarter of 2012, we finalized the calculation of the working capital adjustment to the purchase price as reflected in the table above.

The total adjusted purchase price transferred to effect the acquisition was as follows (in thousands):

	(in thousands)
Cash paid at closing	$	67,866
Fair value of deferred cash consideration at closing	4,417
Fair value of contingent consideration at closing	16,226
Working capital adjustment	(1,861		)
Total purchase price	$	86,648

De Novo contingent consideration obligation

In connection with the De Novo acquisition contingent consideration may be payable to the sellers if performance hurdles based on operating revenue objectives are achieved which significantly exceed market expectations. The portion of the contingent consideration tied to certain sellers’ continued employment is recognized as compensation expense over the two-year post-acquisition measurement period. The portion of the contingent consideration that is not tied to continued employment was considered to be part of the total consideration transferred for the purchase of De Novo and was measured as of the acquisition date and recognized at fair value as shown in the above table. The fair value of potential contingent consideration was determined using a present value calculation combined with the probability of the potential payouts based on projected revenue. Subsequent changes in fair value, measured quarterly, up to the end of the final measurement period will be recognized in earnings.

During the second quarter of 2012, the employment ended for a De Novo employee entitled to a portion of the potential contingent consideration. According to the terms of the purchase agreement with De Novo, the portion of the contingent consideration subject to the continued employment for this employee was forfeited and will not be allocated to the remaining sellers. As adjusted for this forfeiture the amount of the remaining potential future cash payments under the contingent consideration opportunity ranges from $0 and $29.1 million. Approximately one-quarter of the remaining contingent consideration opportunity is also contingent upon the continued employment of certain sellers.

During the third quarter of 2012, based upon projected revenue over the remainder of the measurement period, we determined that it is not likely that any contingent consideration for De Novo will be achieved and based on this assessment, we recorded a decrease in the fair value of the contingent consideration obligation of $11.7 million for the three months ended September 30, 2012 and $17.2 million for the nine months ended September 30, 2012, which is included in “Fair value adjustment to contingent consideration” in the Condensed Consolidated Statements of Income. As of September 30, 2012, no amounts related to this obligation are recorded on the Condensed Consolidated Balance Sheet. As of December 31, 2011, $ 16.2 million was included in “Long-term Obligations” on the Condensed Consolidated Balance Sheet.

Also, in conjunction with the quarterly fair value assessment of the compensation-related contingent consideration, approximately $1.7 million and $3.4 million, respectively, of previously accrued compensation expense was reversed during the three and nine months ended September 30, 2012 which is included in “General and administrative” expense on the

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Condensed Consolidated Statements of Income. As of September 30, 2012, no amounts related to this obligation are recorded on the Condensed Consolidated Balance Sheet. Compensation expense related to this portion of the contingent consideration is reflected in “General and administrative expense” on the Condensed Consolidated Statements of Income and included a credit of $1.3 million for the three months ended September 30, 2012. For the nine months ended September 30, 2012, no compensation expense related to this obligation has been recognized. As of December 31, 2011, no amounts related to the acquisition-related compensation had been accrued for the period December 28, 2011 through December 31, 2011 as the amount was immaterial.

The change in fair value of the De Novo contingent consideration also includes increases of $0.2 million and $1.1 million related to accretion expense, which is included in “Interest expense” in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2012, respectively.

Allocation of De Novo purchase consideration

	(in thousands)
Tangible assets and liabilities
Current assets, including cash acquired	$	11,214
Non-current assets	2,738
Current liabilities	(2,361		)
Non-current liabilities	(500		)
Intangible assets	34,629
Goodwill	40,928
Net assets acquired	$	86,648

Based on the results of an independent valuation, we initially allocated approximately $34.4 million of the purchase price to acquired intangible assets. During the first quarter of 2012, based on new information obtained since December 31, 2011, related to the results of an independent valuation of the fair value of property, plant and equipment acquired in connection with the De Novo acquisition, we adjusted the preliminary purchase price allocation to reflect a $1.5 million reduction in property, plant and equipment along with a corresponding increase of $1.3 million to goodwill and a $0.2 million increase to the customer relationship intangible asset.

The following table summarizes the major classes of acquired intangible assets, as well as the respective weighted-average amortization periods:

	Amount (in thousands)		Weighted Average Amortization Period (Years)
Identifiable Intangible Assets
Trade name	$	850	5.0
Non-compete agreement	2,900		5.0
Customer relationships	30,879		8.0
Total identifiable intangible assets	$	34,629

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to De Novo, including the expected benefits from the synergies resulting from the transaction, as well as the knowledge and experience of the workforce in place. The goodwill and intangible assets related to this acquisition are deductible for tax purposes.

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

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, but are not limited to any projection or expectation of earnings, revenue or other financial items; the plans, strategies and objectives of management for future operations; factors that may affect our operating results; new products or services; the demand for our products and services; our ability to consummate acquisitions and successfully integrate them into our operations; future capital expenditures; effects of current or future economic conditions or performance; industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. 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” “seeks,” and “potential” and variations of these words and similar expressions or negatives of these words. Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 clients’ deposit portfolio or the services required or selected by our clients in engagements, (3) material changes in the number of bankruptcy filings, class action filings or mass tort actions each year, or changes in government legislation or court rules affecting these filings, (4) overall strength and stability of general economic conditions, both in the United States and in the global markets, (5) significant changes in the competitive environment, (6) risks associated with handling of confidential data and compliance with information privacy laws, (7) changes in or the effects of pricing structures and arrangements, (8) risks associated with the integration of acquisitions into our existing business operations, (9) risks associated with indebtedness, (10) risks associated with foreign currency fluctuations, (11) risks associated with developing and providing software and internet-based technology solutions to our clients, (12) risks associated with interruptions or delays in services at data centers, (13) risks of errors or failures of software or services, (14) risks associated with our international operations, (15) risks of litigation against us, and (16) other risks detailed from time to time in our SEC filings, including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. 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 obligation to update publicly or revise any forward-looking statements contained herein to reflect future events or developments, except as required by law.

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

Overview

We are a leading global provider of technology-enabled solutions for electronic discovery, bankruptcy and class action administration. We offer full-service capabilities, which include eDiscovery for litigation, investigations, financial transactions, regulatory, compliance and other legal matters. Our innovative technology and services, combined with deep subject-matter expertise, provide reliable solutions for the professionals we serve.

We have three reporting segments: eDiscovery, bankruptcy, and settlement administration.

eDiscovery

Our eDiscovery segment provides collections and forensics, processing, search and review, and document review and staffing services to companies and the litigation departments of law firms. We process data which analyzes, filters, deduplicates and produces documents for review. Produced documents are made available primarily through a hosted environment utilizing our proprietary software, DocuMatrix™, and third-party software which allows for efficient attorney review and data

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requests. Our customers are typically large corporations that use our products and services cooperatively with their legal counsel to manage the eDiscovery process for litigation, financial transactions, investigations and regulatory matters.

The substantial number of electronic documents and amount of other electronic data has changed the dynamics of how attorneys support discovery in complex matters. Due to the complexity of cases, the volume of data that are maintained electronically, and the volume of documents that are produced in all types of discovery matters, law firms have become increasingly reliant on electronic evidence management systems to organize and manage the discovery process.

Following is a description of the significant sources of revenue in our eDiscovery business.

· Consulting, forensics and collection service fees based on the number of hours during which services are provided.

· Fees related to the conversion of data into an organized, searchable electronic database. The amount earned varies primarily on the number of documents.

· Hosting fees based on the amount of data stored.

· Document review fees based on the number of hours spent reviewing documents, the number of pages reviewed, or the amount of data reviewed.

Our primary offices are in New York, Phoenix, London and Hong Kong and we operate data centers in the United States, Europe and Asia. IQ Review™ is our combination of intelligent technology and expert services which incorporates new prioritization technology into DocuMatrix™, our flagship document management platform. Epiq Portal™ is a web-based platform that provides clients real-time visibility into discovery projects with connectors to both our proprietary products and to third party tools. Key benefits include cost-based reporting and budgeting tools, activity tracking, trend analysis and a project management console.

On December 28, 2011, we acquired De Novo Legal LLC (“De Novo”) for approximately $86.6 million and $5.0 million is being held by us and deferred for eighteen months following the closing as security for potential indemnification claims. In addition to the net closing consideration, there is contingent consideration based on the achievement of substantial future operating revenue growth which exceeds market expectations. The potential undiscounted amount of all future payments that we could be required to make under the contingent consideration opportunity is between $0 and $29.1 million over a two-year period. The transaction was funded from our credit facility. See Note 11 of our Notes to Condensed Consolidated Financial Statements for further detail.

On April 4, 2011, we completed the acquisition of Encore Discovery Solutions (“Encore”) for $104.3 million cash, $10.0 million of which was placed in escrow as security for potential indemnification claims. Encore provides market-proven products and services for electronic evidence processing, document review platforms, and professional services for project management, data collection and forensic consulting. With this transaction, we further strengthened our worldwide e-discovery franchise providing corporate legal departments and law firms with a broad range of capabilities to manage electronic information for discovery, investigations, compliance and related legal matters.

Both the De Novo and the Encore acquisitions further augment and accelerate growth opportunities for our global eDiscovery business. Each of these companies has strong customer bases that expand our market share. By continuing the availability of both businesses’ products, services and technologies, we will continue to offer an industry leading combination of resources, experience and subject matter expertise.

Bankruptcy

Bankruptcy is an integral part of the United States’ economy. As of the most recently reported data by the Administrative Office of the U.S. Courts for the twelve-month period ended June 30, 2012 and 2011, there were approximately 1.31 million and 1.53 million new bankruptcy filings, respectively. Bankruptcy filings for the twelve-month period ended June 30, 2012 decreased 14% versus the twelve-month period ended June 30, 2011. During this period, Chapter 7 filings decreased 16%, Chapter 11 filings fell 14%, and Chapter 13 filings decreased 11%.

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

· Chapter 7 is a liquidation bankruptcy for individuals or businesses that, as measured by the number of new cases filed in the twelve-month period ended June 30, 2012, accounted for approximately 70% of all bankruptcy filings. In a Chapter 7 case, the debtor’s assets are liquidated and the resulting cash proceeds are used by the Chapter 7 bankruptcy trustee to pay creditors. Chapter 7 cases typically last several years.

· Chapter 11 is a reorganization model of bankruptcy for corporations that, as measured by the number of new cases filed in the twelve-month period ended June 30, 2012, accounted for approximately 1% of all bankruptcy filings. Chapter 11 generally allows a company, often referred to as the debtor-in-possession, to continue operating under a plan of reorganization to restructure its business and to modify payment terms of both secured and unsecured obligations. Chapter 11 cases generally last several years.

· Chapter 13 is a reorganization model of bankruptcy for individuals that, as measured by the number of new cases filed in the twelve-month period ended June 30, 2012, accounted for approximately 29% of all bankruptcy filings. In a Chapter 13 case, debtors make periodic cash payments into a reorganization plan and a Chapter 13 bankruptcy trustee uses these cash payments to make monthly distributions to creditors. Chapter 13 cases typically last between three and five years.

Chapter 11 bankruptcy engagements are generally long-term, multi-year assignments that provide revenue visibility into future periods. Our trustee services deposit portfolio averaged approximately $2.0 billion during the nine months ended September 30, 2012, while pricing continued at floor pricing levels under our agreements due to the low short-term interest rate environment.

The application of Chapter 7 bankruptcy regulations has the practical effect of discouraging trustee customers from incurring direct administrative costs for computer system expenses. As a result, we provide our Chapter 7 products and services to our trustee customers at no direct charge, and they maintain deposit accounts for bankruptcy cases under their administration at a designated banking institution. We have arrangements with various banks under which we provide the bankruptcy trustee case management software and related services, and the bank provides the bankruptcy trustee with deposit-related banking services.

The key participants in a bankruptcy proceeding include the debtor-in-possession, the debtor’s legal counsel, the creditors, the creditors’ legal counsel, and the bankruptcy judge. Chapter 7 and Chapter 13 cases also include a professional bankruptcy trustee, who is responsible for administering the bankruptcy case. The end-user customers of our Chapter 7, Chapter 11, and Chapter 13 bankruptcy businesses are debtor corporations that file a plan of reorganization and professional bankruptcy trustees. The Executive Office for United States Trustees, a division of the United States Department of Justice, appoints all bankruptcy trustees. A United States Trustee is appointed in most federal court districts and generally has responsibility for overseeing the integrity of the bankruptcy system. The bankruptcy trustee’s primary responsibilities include liquidating the debtor’s assets or collecting funds from the debtor, distributing the collected funds to creditors pursuant to the orders of the bankruptcy court and preparing regular status reports for the Executive Office for United States Trustees and for the bankruptcy court. Trustees manage an entire caseload of bankruptcy cases simultaneously.

Our proprietary software product, AACER® (Automated Access to Court Electronic Records) (“AACER®”), assists creditors including banks, mortgage processors, and their administrative services professionals to streamline processing of their portfolios of loans in bankruptcy cases. AACER® electronically monitors developments in all United States bankruptcy courts and applies sophisticated algorithms to classify docket filings automatically in each case to facilitate the management of large bankruptcy claims operations. By implementing AACER®, clients achieve greater accuracy in faster timeframes, with a significant cost savings compared to manual attorney review of each case in the portfolio. Banking PortalTM, a centralized hub for processing online banking transactions across Epiq’s family of Chapter 7 products, facilitates the rapid on boarding of new banks and provides ebanking capabilities.

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

· Data hosting fees and volume-based fees.

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Results of Operations for the Three Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011

The discussion that follows provides information which we believe is relevant to an understanding of our consolidated results of operations. Also see discussion of segment results in Results of Operations by Segment section below.

Consolidated Results

	Three Months Ended September 30,						$ Change Increase /
Amounts in thousands	2012			2011			(Decrease)			% Change
Operating revenue	$	83,865		$	69,752		$	14,113		20	%
Reimbursable expenses	7,122			6,359			763			12	%
Total Revenue	90,987			76,111			14,876			20	%

Direct cost of services (exclusive of depreciation and amortization shown separately below)	33,546			23,888			9,658			40	%
Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)	800			778			22			3	%
Reimbursed direct costs	6,891			6,289			602			10	%
General and administrative	26,988			26,395			593			2	%
Depreciation and software and leasehold amortization	6,755			5,795			960			17	%
Amortization of identifiable intangible assets	6,804			6,146			658			11	%
Fair value adjustment to contingent consideration	(11,717		)	(1,691		)	(10,026		)	N/M
Other operating (income) expense	—			70			(70		)	N/M
Total Operating Expense	70,067			67,670			2,397			4	%

Income From Operations	20,920			8,441			12,479			148	%

Interest Expense (Income)
Interest expense	1,926			1,555			371			24	%
Interest income	(5		)	(96		)	91			-95	%
Net Interest Expense	1,921			1,459			462			32	%

Income Before Income Taxes	18,999			6,982			12,017			172	%

Provision for Income Taxes	7,733			2,696			5,037			N/M

Net Income	$	11,266		$	4,286		$	6,980		163	%

N/M — not meaningful

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Revenue

The increase in operating revenue exclusive of revenue originating from reimbursable expenses was driven by a $14.3 million increase in the eDiscovery segment and a $2.4 million increase in the settlement administration segment, offset by a $2.6 million decrease in the bankruptcy segment.

A portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services. We reflect the revenue from these reimbursable expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating Expense

The increase in direct cost of services, exclusive of depreciation and amortization, was primarily the result of a $7.3 million increase in compensation related expense, primarily related to the De Novo acquisition in the fourth quarter of 2011, a $1.1 million increase related to costs for legal notification and advertising services a $0.8 million increase in costs related to data hosting, a $0.4 million increase in software maintenance costs, a $0.8 million increase in other production costs and a $0.7 million increase related to outside services, offset by a $0.7 million decrease in general office expense and a $1.0 million decrease in third party material costs.

Direct cost of bundled products and services, exclusive of depreciation and amortization, was consistent with the prior year period.

The increase in reimbursed direct costs for the three months ended September 30, 2012 as compared to the same period of 2011 corresponds to the increase in revenue from reimbursable expenses.

The increase in general and administrative costs was primarily due to an increase of $0.2 million in compensation and related expense which is primarily related to the De Novo acquisition, a $0.2 million increase in lease expense related to the De Novo acquisition, and a $0.4 million increase in professional services expense, partially offset by a $0.3 million decrease in maintenance service contracts. General and administrative costs for the three months ended September 30, 2012 also included a $1.7 million reversal of previously accrued compensation expense related to the De Novo compensation —related contingent consideration. See Note 11 of our Notes to Condense Consolidated Financial Statements for further detail.

Depreciation and software and leasehold amortization costs increased primarily as a result of increased depreciation on equipment and software related to investments in our business segments and depreciation on the equipment acquired from the De Novo acquisition.

Amortization of identifiable intangible assets increased due to the acquisition of intangible assets associated with the acquisition of De Novo.

The fair value adjustment to contingent consideration of $11.7 million of income during the three months ended September 30, 2012 resulted from a fair value adjustment to the contingent consideration related to the De Novo acquisition. The fair value adjustment to contingent consideration of $1.7 million of income during the three months ended September 30, 2011 resulted from a fair value adjustment to the contingent consideration related to the Jupiter eSources acquisition. See Notes 7 and 11 of our Notes to Condensed Consolidated Financial Statements for further detail.

Interest Expense, Net

Income Taxes

Our effective tax rate for the three months ended September 30, 2012 was 40.7% compared to 38.6% in the prior year. The year-over-year increased tax rate is primarily due to the change in expected mix of taxable income by jurisdictions.

In January 2012, we were notified that our 2009 United States federal income tax return will be examined by the Internal Revenue Service. At this time we have no reason to believe that an assessment, if any, will be material.

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On December 31, 2011, the federal research credit expired. Although extending the credit beyond 2011 has been introduced into legislation, it has not been passed by Congress or signed into law. If the credit is extended, this would decrease our effective tax rate in future tax periods.

Results of Operations by Segment

The following segment discussion is presented on a basis consistent with our segment disclosure contained in Note 6 of our Notes to Condensed Consolidated Financial Statements. The table below presents operating revenue, direct and administrative costs (including reimbursed costs) and segment performance measure for each of our reportable segments and a reconciliation of the segment performance measure to consolidated income before income taxes.

	Three Months Ended September 30,						$ Change Increase /			%
Amounts in thousands	2012			2011			(Decrease)			Change
Third-party operating revenue
eDiscovery	$	50,896		$	36,626		$	14,270		39	%
Bankruptcy	21,248			23,842			(2,594		)	-11	%
Settlement Administration	11,721			9,284			2,437			26	%
Total operating revenue	$	83,865		$	69,752		$	14,113		20	%

Reimbursable expenses
eDiscovery	$	441		$	193		$	248		128	%
Bankruptcy	1,978			2,447			(469		)	-19	%
Settlement Administration	4,703			3,719			984			26	%
Total reimbursable expenses	$	7,122		$	6,359		$	763		12	%

Direct costs, general and administrative costs
eDiscovery	$	31,584		$	22,043		$	9,541		43	%
Bankruptcy	13,623			14,665			(1,042		)	-7	%
Settlement Administration	15,438			11,630			3,808			33	%
Intercompany eliminations	(683		)	(589		)	(94		)	16	%
Total direct costs, general and administrative costs	$	59,962		$	47,749		$	12,213		26	%

Segment performance measure
eDiscovery	$	19,795		$	14,801		$	4,994		34	%
Bankruptcy	9,630			11,624			(1,994		)	-17	%
Settlement Administration	1,600			1,937			(337		)	-17	%
Total segment performance measure	$	31,025		$	28,362		$	2,663		9	%

Segment performance measure	$	31,025		$	28,362		$	2,663		9	%
Corporate and unallocated expenses	(6,532		)	(7,529		)	997			-13	%
Share-based compensation expense	(1,731		)	(2,072		)	341			-16	%
Depreciation and software and leasehold amortization	(6,755		)	(5,795		)	(960		)	17	%
Amortization of intangible assets	(6,804		)	(6,146		)	(658		)	11	%
Fair value adjustment to contingent consideration	11,717			1,691			10,026			N/M
Other operating expense	—			(70		)	70			N/M
Interest expense, net	(1,921		)	(1,459		)	(462		)	32	%
Income before income taxes	$	18,999		$	6,982		$	12,017		172	%

N/M — not meaningful

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Results of Operations for the Nine Months Ended September 30, 2012 Compared with the Nine Months Ended September 30, 2011

Consolidated Results

	Nine Months Ended September 30,						$ Change Increase /
Amounts in thousands	2012			2011			(Decrease)			% Change
Operating revenue	$	256,529		$	192,656		$	63,873		33	%
Reimbursable expenses	20,825			17,031			3,794			22	%
Total Revenue	277,354			209,687			67,667			32	%

Direct cost of services (exclusive of depreciation and amortization shown separately below)	105,121			64,526			40,595			63	%
Direct cost of bundled products and services (exclusive of depreciation and amortization shown separately below)	2,304			2,391			(87		)	-4	%
Reimbursed direct costs	20,179			16,778			3,401			20	%
General and administrative	87,252			72,763			14,489			20	%
Depreciation and software and leasehold amortization	20,006			16,808			3,198			19	%
Amortization of identifiable intangible assets	20,325			16,107			4,218			26	%
Fair value adjustment to contingent consideration	(17,188		)	(4,466		)	(12,722		)	N/M
Intangible asset impairment expense	1,777			—			1,777			N/M
Other operating (income) expense	(225		)	3,980			(4,205		)	-106	%
Total Operating Expense	239,551			188,887			50,664			27	%

Income From Operations	37,803			20,800			17,003			82	%

Interest Expense (Income)
Interest expense	7,365			4,122			3,243			79	%
Interest income	(12		)	(112		)	100			-89	%
Net Interest Expense	7,353			4,010			3,343			83	%

Income Before Income Taxes	30,450			16,790			13,660			81	%

Provision for Income Taxes	11,988			6,649			5,339			80	%

Net Income	$	18,462		$	10,141		$	8,321		82	%

N/M — not meaningful

Revenue

The increase in operating revenue exclusive of revenue originating from reimbursable expenses was driven by a $46.1 million increase in the eDiscovery segment, an $18.9 million increase in the settlement administration segment related to a large legal notification engagement, which was principally completed in the second quarter of 2012, offset by a $1.2 million decrease in the bankruptcy segment.

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A portion of our total revenue consists of reimbursement for direct costs we incur, such as postage related to document management services. We reflect the revenue from these reimbursable expenses as a separate line item on our accompanying Condensed Consolidated Statements of Income. Although revenue from reimbursable expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our income from operations as we realize little or no margin from this revenue.

Operating Expense

The increase in direct cost of services, exclusive of depreciation and amortization, was primarily the result of an $23.8 million increase in compensation related expense primarily related to the Encore and De Novo acquisitions, in the second and fourth quarters of 2011, respectively, together with a $12.0 million increase in costs related primarily to a large legal notification engagement, which increased legal notification and advertising services, a $1.9 million increase in outside services, a $1.0 million increase in software maintenance costs and a $1.0 million increase in expense related to claims management under a services agreement, offset by a $1.5 million decrease in general office expense.

The increase in direct cost of bundled products and services, exclusive of depreciation and amortization, was consistent with the same period in the prior year.

The increase in reimbursed direct costs for the three months ended September 30, 2012 as compared to the same period of 2011 corresponds to the increase in revenue from reimbursable expenses.

The increase in general and administrative costs was primarily due to an increase of $9.8 million in compensation related expense which is primarily related to the Encore and De Novo acquisitions. In addition to the increase in compensation expense, a $1.4 million increase in travel related expense, a $1.0 million increase in office and equipment lease expense, a $1.0 million increase in legal settlement expense, a $0.7 million increase in telephone and utilities expense and a $0.8 million increase in general office expense, substantially all of which are related to the Encore and De Novo acquisitions, also contributed to the increase in general and administrative costs in 2012. General and administrative costs for the nine months ended September 30, 2012 also included a $3.4 million reversal of previously accrued compensation expense related to the De Novo compensation —related contingent consideration. See Note 11 of our Notes to Condense Consolidated Financial Statements for further detail.

Amortization of identifiable intangible assets increased due to the acquisition of intangible assets associated with the acquisitions of Encore and De Novo.

The fair value adjustment to contingent consideration of income of $17.2 million during the nine months ended September 30, 2012 resulted from a fair value adjustment to the contingent consideration related to the De Novo acquisition. The fair value adjustment to contingent consideration of income of $4.5 million during the nine months ended September 30, 2011 resulted from a fair value adjustment to the contingent consideration related to the Jupiter eSources acquisition. See Notes 7 and 11 of our Notes to Condensed Consolidated Financial Statements for further detail.

Intangible asset impairment expense was $1.8 million for the nine months ended September 30, 2012 related to an impairment of the AACER® trade name acquired in 2010 as part of the Jupiter eSources acquisition which was recorded in the second quarter of 2012. See Note 2 of our Notes to Condensed Consolidated Financial Statements for further detail.

Other operating (income) expense decreased in the nine months ended September 30, 2012 as compared to the prior year primarily as a result of acquisition-related expenses in the nine months ended September 30, 2011 related to the Encore and De Novo acquisitions.

Interest Expense, Net

The increase in net interest expense was primarily due to interest expense resulting from increased borrowings on our senior revolving loan to fund the Encore and De Novo acquisitions in April 2011 and December 2011, respectively, in addition to $1.1 million of accretion expense related primarily to acquisition related obligations in connection with the De Novo acquisition.

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Income Taxes

Our effective tax rate for the nine months ended September 30, 2012 was 39.4 % compared to 39.6% in the prior year.

Results of Operations by Segment

	Nine Months Ended September 30,						$ Change Increase /
Amounts in thousands	2012			2011			(Decrease)			% Change
Third-party operating revenue
eDiscovery	$	142,455		$	96,314		$	46,141		48	%
Bankruptcy	66,943			68,148			(1,205		)	-2	%
Settlement Administration	47,131			28,194			18,937			67	%
Total operating revenue	$	256,529		$	192,656		$	63,873		33	%

Reimbursable expenses
eDiscovery	$	1,163		$	404		$	759		188	%
Bankruptcy	5,129			4,601			528			11	%
Settlement Administration	14,533			12,026			2,507			21	%
Total reimbursable expenses	$	20,825		$	17,031		$	3,794		22	%

Direct costs, general and administrative costs
eDiscovery	$	90,402		$	55,823		$	34,579		62	%
Bankruptcy	40,300			37,200			3,100			8	%
Settlement Administration	55,310			37,545			17,765			47	%
Intercompany eliminations	(2,994		)	(1,503		)	(1,491		)	99	%
Total direct costs, general and administrative costs	$	183,018		$	129,065		$	53,953		42	%

Segment performance measure
eDiscovery	$	53,410		$	40,928		$	12,482		30	%
Bankruptcy	31,799			35,549			(3,750		)	-11	%
Settlement Administration	9,127			4,145			4,982			120	%
Total segment performance measure	$	94,336		$	80,622		$	13,714		17	%

Segment performance measure	$	94,336		$	80,622		$	13,714		17	%
Corporate and unallocated expenses	(26,704		)	(21,804		)	(4,900		)	22	%
Share-based compensation expense	(5,134		)	(5,589		)	455			-8	%
Depreciation and software and leasehold amortization	(20,006		)	(16,808		)	(3,198		)	19	%
Amortization of intangible assets	(20,325		)	(16,107		)	(4,218		)	26	%
Fair value adjustment to contingent consideration	17,188			4,466			12,722			285	%
Intangible asset impairment expense	(1,777		)	—			(1,777		)	N/M
Other operating expense	225			(3,980		)	4,205			-106	%
Interest expense, net	$	(7,353	)	(4,010		)	(3,343		)	83	%
Income before income taxes	$	30,450		$	16,790		$	13,660		81	%

N/M — not meaningful

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In addition, we believe we could fund any future acquisitions, dividend payments, or common stock repurchases with our internally available cash, cash generated from operations, our existing credit facilities, or from the issuance of additional securities.

Foreign Cash

As of September 30, 2012 and December 31, 2011, our foreign subsidiaries had $2.1 million and $2.4 million, respectively, in cash located in financial institutions located outside of the United States. All of this cash represents undistributed earnings of our foreign subsidiaries which are indefinitely reinvested. In the event of a distribution to the United States, those earnings could be subject to United States federal and state income taxes, net of foreign tax credits.

Off-balance Sheet Arrangements

We generally do not utilize off-balance sheet arrangements in our operations; however, we enter into operating leases in the normal course of business. Our operating lease obligations are disclosed below under “Contractual Obligations”.

Contractual Obligations

There have been no significant developments with respect to our contractual obligations since December 31, 2011.

Critical Accounting Policies

In our Annual Report on Form 10-K for the year ended December 31, 2011 that was filed with the SEC on March 1, 2012, we disclose accounting policies, referred to as critical accounting policies, that require management to use significant judgment or that require significant estimates. Management regularly reviews the selection and application of our critical accounting policies. Other than the updates described below there have been no updates to the critical accounting policies contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

Goodwill

Our recognized goodwill totaled $404.2 million as of September 30, 2012. As of July 31, 2012, which is the date of our most recent impairment test, the fair value of each of our reporting units was substantially in excess of the carrying value of the reporting unit. As of September 30, 2012, $189.3 million of goodwill is allocated to the eDiscovery segment, $182.1 million of goodwill is allocated to the bankruptcy segment and $32.8 million of goodwill is allocated to the settlement administration segment.

Due to the current economic environment and the uncertainties regarding potential future economic impacts on our reporting units, there can be no assurances that estimates and assumptions made for purposes of our annual goodwill impairment test, will prove to be accurate predictions of the future. If assumptions regarding forecasted revenues or margins of certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment loss would occur, and if it did occur, whether such charge would be material.

The following table illustrates the percentages by which each reporting unit’s fair value exceeded its carrying value as of July 31, 2012, the date of the most recent impairment test. In addition the table includes sensitivity analyses related to changes in certain key assumptions for each reporting unit. The impact of each assumption change within the sensitivity analyses was calculated independently and excludes the impact of other assumed changes.

	eDiscovery		Bankruptcy		Settlement Administration
Percentage by which fair value exceeds carrying value as of July 31, 2012 as reported	48	%	23	%	21	%
Sensitivity Analysis - Assumed 1% Changes in Certain Key Assumptions
Percentage by which fair value would exceed carrying value assuming a 1% increase in discount rate (1)	25	%	13	%	8	%
Percentage by which fair value would exceed carrying value assuming a 1% decrease in long-term growth assumptions(1)	33	%	19	%	15	%
Percentage by which fair value would exceed carrying value assuming a 1% increase in discount rate and a 1% decrease in long-term growth assumptions (1)	16	%	5	%	0	%

(1) Assumes all other variables remain the same

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Identifiable intangible assets

Recently Adopted Accounting Pronouncements

In September 2011, the FASB issued guidance that amends the existing standards related to annual and interim goodwill impairment tests. Current guidance requires companies to test goodwill for impairment, at least annually, using a two-step process. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this option, companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on that qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. The new guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment. The amendments were effective for us for annual and interim goodwill impairment tests performed on or after January 1, 2012, including our most recent goodwill impairment test conducted as of July 31, 2012. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations or cash flows.

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Item 4. Controls and Procedures

An evaluation was carried out by Epiq Systems, Inc.’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operations of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

During the second quarter of 2011, we initiated a company-wide implementation of SAP, which provides certain enhancements, efficiencies, and increased security features to the financial reporting process and surrounding internal controls. As of the end of the third quarter of 2012, all of our business units were using the new system. We reviewed affected internal controls as part of this implementation, and made changes where appropriate. There have been no other changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION.

Item 1. Legal Proceedings

Employee Arbitration

On January 18, 2012, hearings concluded in a consolidated arbitration proceeding commenced in 2009 before the American Arbitration Association in New York, New York, which was filed by four former employees of Epiq and its indirect, wholly owned subsidiary, Epiq eDiscovery Solutions, Inc. (“EDS”) alleging claims of wrongful employment termination. In April 2012, the parties completed post-trial briefing to the arbitration panel. In May 2012, the matter concluded and approximately $0.1 million was paid in June 2012.

Purported Software License Complaint

On or about June 24, 2011, EDS filed a lawsuit against Sybase, Inc. (“Sybase”) and Does 1 to 50, et al. in the Superior Court of the State of California, Alameda County (the “Superior Court”), alleging breach of contract and requesting a declaratory judgment against Sybase. EDS’s complaint against Sybase related to a dispute that arose under a software license agreement between EDS and Sybase (the “Agreement”) and encompassed a request by EDS for the Superior Court to issue an order: (a) declaring that EDS owed Sybase nothing under the Agreement, and (b) requiring Sybase to provide EDS with certain license keys to software licenses that EDS purchased from Sybase under the Agreement. On or about July 29, 2011, Sybase filed an answer to the complaint and a cross-complaint, which Sybase subsequently amended, against EDS and Does 51-60 relating to that same dispute and Agreement, alleging that, among other things, EDS owed Sybase additional amounts under the Agreement totaling at least $7.0 million, plus interest and costs of the lawsuit.

In June 2012, EDS and Sybase reached an agreement related to this matter pursuant to which the lawsuit was dismissed with prejudice on July 11, 2012. EDS acquired certain perpetual software licenses valued at $2.6 million which was paid in two installments. The first installment of $1.5 million was paid in June 2012 and the remainder was paid in September 2012. EDS has capitalized the cost of the software licenses and is currently using the licensed software in its operations and plans to continue doing so for the foreseeable future. The cost of the licenses is recorded in the accompanying Condensed Consolidated Balance Sheets included in Property, Plant & Equipment and will be amortized over their remaining useful lives of three years.

Item 1A. Risk Factors

There have been no material changes in our Risk Factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 that was filed with the SEC on March 1, 2012.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 26, 2010, we announced that our board of directors authorized $35.0 million for share repurchases (the “2010 Share Repurchase Program”). The 2010 program had no stated expiration date. We did not repurchase any shares under this program during the nine months ended September 30, 2012. On June 1, 2012 we announced that our board of directors terminated the 2010 Share Repurchase Program and authorized the repurchase, on or prior to December 31, 2013, of our outstanding shares of common stock up to an aggregate of $35.0 million (the “2012 Share Repurchase Program”).

During the three months ended September 30, 2012, we repurchased 163,980 shares under the 2012 Share Repurchase Program at an average share price of $11.32 per share for a total of approximately $1.9 million. During the nine months ended September 30, 2012, we repurchased 283,980 shares under the 2012 Share Repurchase Plan at an average share price of $11.62 per share for a total of approximately $3.3 million.

We also have a policy that requires shares to be repurchased by us to satisfy employee tax withholding obligations upon the vesting of restricted stock awards. During the three months ended September 30, 2012 we repurchased 44,588 shares at an average share price of $12.82 per share for a total of approximately $0.6 million from employees upon stock option exercises which satisfied the employees’ tax withholding obligation. During the nine months ended September 30, 2012, we repurchased 213,681 shares at an average share price of $12.48 per share for a total of approximately $2.6 million to satisfy employee tax withholding obligations upon the vesting of restricted stock awards and the exercise of stock options.

The following table presents the total number of shares repurchased during each month of the quarter ended September 30, 2012, the average price paid per share (including brokerage commissions paid by the Company), the number of shares that were repurchased as part of the 2012 Share Repurchase Program, and the approximate dollar value of shares that may yet be repurchased under the 2012 Share Repurchase Program.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

July 1 — July 31	48,384	$	11.76	48,384	$	32,990,000
August 1 — August 31	116,400	$	11.13	115,596	$	31,700,000
September 1 — September 30	43,784	$	13.37	—	$	31,700,000
Total Activity for the Quarter Ended September 30, 2012	208,568	$	11.61	163,980	$	31,700,000

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Item 6. Exhibits

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.

101.INS	†	XBRL Instance Document.

101.SCH	†	XBRL Taxonomy Extension Schema Document.

101.CAL	†	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	†	XBRL Taxonomy Definition Linkbase Document.

101.LAB	†	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	†	XBRL Taxonomy Extension Presentation Linkbase Document.

†

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

	Three Months Ended September 30, 2011		Nine Months Ended September 30, 2011
Total revenue	$	95,397	$	268,586
Operating revenue	$	89,038	$	251,555
Net income	$	9,970	$	25,072

		Epiq Systems, Inc.

Date: November 1, 2012		/s/ Tom W. Olofson
		Tom W. Olofson
		Chairman of the Board
		Chief Executive Officer
		Director
		(Principal Executive Officer)


Date: November 1, 2012		/s/ Elizabeth M. Braham
		Elizabeth M. Braham
		Executive Vice President Operations, Chief Financial Officer
		(Principal Financial & Accounting Officer)

			Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)			2

Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)			3

Condensed Consolidated Balance Sheets — September 30, 2012 and December 31, 2011 (Unaudited)			4

Condensed Consolidated Statements of Changes in Equity— Nine Months ended September 30, 2012 and 2011 (Unaudited)			5

Condensed Consolidated Statements of Cash Flows — Nine Months ended September 30, 2012 and 2011 (Unaudited)			6

Notes to Condensed Consolidated Financial Statements (Unaudited)			7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		43

Item 4.	Controls and Procedures		44

PART II - OTHER INFORMATION

Item 1.		Legal Proceedings	44

Item 1A.		Risk Factors	44

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.		Exhibits	46

Signatures			47