UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

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

For the transition period from to

Commission file number 0-22081

EPIQ SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Missouri	48-1056429
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
501 Kansas Avenue, Kansas City, Kansas	66105-1300
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code (913) 621-9500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of voting common stock held by non-affiliates of the registrant (based upon the last reported sale price on the Nasdaq National Market), as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2004) was approximately $259,000,000.

There were 17,887,593 shares of common stock of the registrant outstanding as of February 4, 2005.

Documents incorporated by reference: The information required by Part III of Form 10-K is incorporated herein by reference to the registrant’s definitive Proxy Statement relating to its 2005 Annual Meeting of Shareholders, which will be filed with the Commission within 120 days after the end of the registrant’s fiscal year.

EPIQ SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

PART I
ITEM 1.	Business	1
ITEM 2.	Properties	13
ITEM 3.	Legal Proceedings	13
ITEM 4.	Submission of Matters to a Vote of Security Holders	13
PART II
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
ITEM 6.	Selected Financial Data	15
ITEM 7.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	16
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
ITEM 8.	Financial Statements and Supplementary Data	26
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26
ITEM 9A.	Controls and Procedures	26
ITEM 9B.	Other Information	29
PART III
ITEM 10.	Directors and Executive Officers of the Registrant	29
ITEM 11.	Executive Compensation	29
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management	29
ITEM 13.	Certain Relationships and Related Transactions	29
ITEM 14.	Principal Accountant Fees and Services	29
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	30

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated,” “potential,” “goal,” and “objective.” Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward-looking statements. In order to comply with the terms of the safe harbor, and because forward-looking statements involve future risks and uncertainties, listed herein 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 the “Risk Factors” section of this report. We undertake no obligation to update any forward-looking statements contained herein or in future communications to reflect future events or developments.

PART I

ITEM 1. BUSINESS

General

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

Acquisitions have been a part of our business expansion. During 2003, we acquired Bankruptcy Services LLC to enter the market for Chapter 11 administrative services. During 2004, we acquired the Poorman-Douglas Corporation to enter the market for class action and mass tort administrative services.

In November 2003, we determined that our infrastructure software business, which operated in the automated data exchange software market, was no longer aligned with our long-term strategic objectives. On April 30, 2004, we completed the sale of this business.

During 2004, we changed the structure of our operating segments to reflect changes in our business operations. Performance is now assessed for our case management and document management operating segments. Case management solutions provide clients with integrated technology-based products and services for the automation of various administrative tasks. Document management solutions include proprietary technology and production services to ensure timely, accurate and complete administration of the many documents associated with multi-faceted legal cases and communications applications.

We were incorporated in the State of Missouri on July 13, 1988, and on July 15, 1988 acquired all of the assets of an unrelated predecessor corporation, including the name, Electronic Processing, Inc. Our shareholders approved an amendment to our Articles of Incorporation on June 7, 2000 to change our name from Electronic Processing, Inc. to EPIQ Systems, Inc.

Our principal executive office is located at 501 Kansas Avenue, Kansas City, Kansas 66105. The telephone number at that address is (913) 621-9500, and our website address is www.epiqsystems.com. We make available free of charge through our Internet website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC as soon as reasonably practicable after we electronically file those reports with or furnish them to the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20459. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this report. Further, our references to the URLs for these websites are intended to be inactive textual references only.

Industry Environment

Both our case management segment and our document management segment provide products and services primarily to the bankruptcy and the class action/mass tort industries.

Bankruptcy is an integral part of the United States’ economy, and bankruptcy filings have remained near record levels for the past several years. As reported by the Administrative Office of the U.S. Courts for the government fiscal years ended September 30, 2002, 2003, and 2004, there were approximately 1.55 million, 1.66 million, and 1.62 million new bankruptcy filings, respectively.

There are five chapters of the U.S. Bankruptcy Code that serve different purposes and require various types of services and information. Our products and services are designed for cases filed under the following three chapters:

· Chapter 7 is a liquidation bankruptcy for individuals or businesses that, as measured by the number of new cases filed in 2004, accounted for approximately 71% of all bankruptcy filings. In a Chapter 7 case, the debtor’s assets are liquidated and the resulting cash proceeds are used 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 2004, accounted for approximately 1% of all bankruptcy filings. Chapter 11 generally allows a company 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 may last several years.

· Chapter 13 is a reorganization model of bankruptcy for individuals that, as measured by the number of new cases filed in 2004, accounted for approximately 28% of all bankruptcy filings. In a Chapter 13 case, debtors make periodic cash payments into a reorganization plan and a trustee uses these cash payments to make monthly distributions to creditors. Chapter 13 cases typically last between three and five years.

The participants in a bankruptcy proceeding include the debtor, the debtor’s counsel, the creditors, and the bankruptcy judge. Chapter 7 and Chapter 13 cases also have a professional bankruptcy trustee. The trustee acts as an intermediary between the debtor and creditors and is responsible for administering the bankruptcy case. For Chapter 7 and 13 bankruptcy products and services, our customers are professional bankruptcy trustees. For Chapter 11 bankruptcy products and services, our customers are the debtor companies that file a plan of reorganization, often referred to as a debtor-in-possession.

Class action and mass tort litigation have become a discrete component within the United States’ economy. Class action and mass tort refer to litigation in which class representatives bring a lawsuit against a defendant company or other persons on behalf of a large group of similarly affected persons (the class). Mass action or mass tort refers to class action cases that are particularly large or prominent.

The class action and mass tort marketplace is significant, with estimated annual tort claim costs in excess of $250 billion according to an update study issued in 2004 by Towers Perrin. Administrative costs, which include costs, other than defense costs, incurred by either the insurance company or self-insured entity in the administration of claims, comprise approximately 20% of this total. Key participants in this marketplace include law firms that specialize in representing class action and mass tort plaintiffs and other law firms that specialize in representing defendants. Class action and mass tort litigation is often complicated and the cases, including administration of the settlement, if any, may last several years.

Products and Services

Case Management Segment

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

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

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

· TCMS®, an integrated solution comprised of a proprietary software product, computer hardware, and support services, installed in Chapter 7 bankruptcy trustee offices to facilitate the efficient management of asset liquidations, creditor distributions, and government reporting.

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

· Database conversions, maintenance and processing.

· Professional and support services, including case management, claims processing, claims reconciliation, and customized programming and technology services.

· Call center support.

Document Management Segment

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

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

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

· Media campaign and advertising management.

· Document custody services.

Customers

The end-user customers of our TCMS® (Chapter 7) and CasePower® (Chapter 13) products and services are professional bankruptcy trustees. Bankruptcy trustees are appointed by the Executive Office for United States 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 (Chapter 7) or collecting funds from the debtor (Chapter 13), 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 typically manage an entire caseload of bankruptcy cases simultaneously.

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 trustee customers at no direct charge, and our trustee customers agree to maintain deposit accounts for bankruptcy cases under their administration at a designated banking institution. We have marketing arrangements with various banks under which we provide trustee case management software and related services and the bank provides the trustee with deposit-related banking services. Under these Chapter 7 deposit relationships, we receive revenues based on factors such as the aggregate amount of trustee deposits maintained at the bank, the number of customers using our product, software upgrades, and ancillary professional services.

Prior to April 1, 2004, we had an exclusive marketing arrangement with Bank of America for Chapter 7 trustee products and services. Effective April 1, 2004, this relationship became a non-exclusive marketing arrangement that extends through September 30, 2006. Since April 1, 2004, we have established new deposit relationships with additional financial institutions. At December 31, 2004, substantially all Chapter 7 deposits were maintained at Bank of America.

Our customers for Chapter 11 solutions are debtors filing a plan of reorganization. Law firms representing these companies are a key conduit through which both we and our competitors gain access to the debtor companies prior to their filing for bankruptcy. Debtors’ counsel often use our services and products directly on behalf of their client, and we have developed relationships with the bankruptcy departments at various law firms.

Our customers for class action and mass tort solutions are primarily large corporations. We sell our services directly to those customers; however, our relationships with other interested parties, including plaintiff and defense law firms, often provides access to these customers.

Sales and Marketing

Our sales department markets our case management and document management products and services directly to bankruptcy trustees, Chapter 11 debtors, bankruptcy and class action and mass tort legal counsel, class action and mass tort defendants, and government entities through on-site sales calls. We focus on attracting and retaining customers by providing integrated technology solutions with leading edge features and by providing exceptional customer service. Our account executives, case managers and relationship managers are responsible for providing ongoing support services for existing customers. Various relationship managers, case managers and sales representatives attend bankruptcy and class action and mass tort trade shows. We also conduct direct mail campaigns and we advertise in trade journals.

Competition

There are a variety of companies competing for the finite number of available bankruptcy trustee engagements as well as the corporate reorganizations, class action and mass tort lawsuits filed each year. Selected competitors include BMC Group, Inc., Bankruptcy Management Solutions, Inc., The Garden City Group Inc., Rust Consulting Inc., The Trumbull Group and others. Additionally, certain law firms, accounting firms, management consultant firms, turnaround specialists and crisis management firms offer certain products and services that compete with ours.

Government Regulation

Our products and services are not directly regulated by the government. Our bankruptcy trustee customers and Chapter 11 debtors are, however, subject to significant regulation. Our bankruptcy trustee customers and Chapter 11 debtor customers are subject to the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. The Executive Office for United States Trustees, a division of the United States Department of Justice, oversees the bankruptcy industry and establishes administrative rules governing our clients’ activities. The success of our bankruptcy product lines has been, and will continue to be, dependent in part on our ability to develop and maintain products and provide services that allow trustees to perform their duties within applicable regulatory and judicial rules and procedures and that allow Chapter 11 debtors to make required filings and to provide required notices to creditors on a timely and accurate basis. Our class action and mass tort cases are subject to various federal and state laws as well as rules and procedures established by the courts. In February 2005, new federal class action and tort reform legislation was passed and signed by President Bush. The primary impact of the new federal legislation is to require that certain types of class action lawsuits be brought in federal court rather than state courts. We believe the new federal legislation will likely result in fewer class action lawsuits in state courts. The slower processing of class action lawsuits in federal courts could delay the ultimate settlement of those cases, which could adversely affect the timing of services we provide in those cases. Similar to this recent federal experience, there have been various efforts at the state level to modify and reform the laws and procedures related to class action and mass tort. We cannot predict the effect, if any, that state legislative action would have on the number or size of class action and mass tort lawsuits filed, or on the claims administration process.

Employees

As of December 31, 2004, we employed approximately 400 full-time employees, none of whom is covered by a collective bargaining agreement. We believe the relationship with our employees is good.

Risk Factors

This report, other reports to be filed by us with the SEC, press releases made by us and other public statements by our officers, oral and written, contain or will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including those relating to the possible or assumed future results of operations and financial condition. Because those statements are subject to a number of uncertainties and risks, actual results may differ materially from those expressed or implied by the forward-looking statements. Listed below are certain risks associated with an investment in our securities that could cause actual results to differ from those expressed or implied.

A significant reduction in the amount of Chapter 7 liquidated asset proceeds on deposit by our Chapter 7 bankruptcy trustee customers or in the number of pending bankruptcy cases would cause our revenues and earnings to drop significantly.

Our bankruptcy deposit based fees are highly dependent on the amount of liquidated asset proceeds deposited by Chapter 7 bankruptcy trustees and the number of bankruptcy filings in the United States. Consumer and business debt combined with economic fluctuations in the United States affect the number of bankruptcy filings and the dollar volume flowing through the federal bankruptcy system. A significant reduction in Chapter 7 liquidated asset proceeds on deposit by our bankruptcy trustee customers with our Chapter 7 depository banks would likely have a material adverse effect on our results of operations.

Substantially all of our Chapter 7 revenues are collected through a single financial institution, and our change from an exclusive to a non-exclusive arrangement and establishing new arrangements with additional financial institutions could cause uncertainty and adversely affect our future revenue and earnings.

The application of Chapter 7 bankruptcy regulations discourages Chapter 7 trustees from incurring direct administrative costs for computer system expenses. As a result, we provide our products and services to Chapter 7 trustee customers at no direct charge, and our Chapter 7 trustee customers agree to deposit the cash proceeds from liquidations of debtors’ assets with a designated financial institution with which we have a Chapter 7 marketing arrangement. We have arrangements with several financial institutions under which our Chapter 7 trustees place their liquidated assets on deposit. Under these arrangements:

· we license our proprietary software to the trustee and furnish hardware, conversion services, training and customer support, all at no cost to the trustee;

· the financial institution provides certain banking services to the joint trustee customers; and

· we collect from the financial institution monthly revenues based primarily upon a percentage of the total liquidated assets on deposit.

Previously we promoted our Chapter 7 product exclusively through a marketing arrangement established with Bank of America in November 1993. Substantially all of our Chapter 7 revenues are collected through this relationship. On April 1, 2004, this exclusive marketing arrangement became a non-exclusive arrangement with pricing established through September 30, 2006. The business terms after September 30, 2006, if the agreement is extended, could be less favorable to us than our current terms which could adversely affect our case management revenue and earnings after that date.

In 2004 we formed marketing arrangements with additional financial institutions. The addition of new banking relationships could create uncertainty with current and prospective trustee customers or operational difficulties for trustees, which could adversely affect our relationships with those joint customers and our case management revenues and earnings. Additionally, we may seek to establish additional Chapter 7 depository bank relationships in the future. The business terms with new Chapter 7 depository banks and renegotiations of the business terms of our existing Chapter 7 depository bank relationships could result in less favorable terms than our historic arrangements. A change in pricing affecting a material portion of our Chapter 7 deposits could adversely affect our case management revenues and our results of operations.

If a financial institution with which we have a marketing arrangement for Chapter 7 products and services is perceived negatively by current or prospective trustee clients, our case management revenue and earnings could be adversely affected.

The Chapter 7 depository banks with which we have joint marketing arrangements provide banking products and services directly to our trustee clients. If the financial institution provides ineffective or below market banking products or services to the joint customers, or if the financial institution has errors or omissions in its processing, we could experience collateral damage to our reputation. We cannot control the quality of products and services provided by the Chapter 7 depository banks to the joint customers. Additionally, if a depository bank arrangement is discontinued, it could disrupt the effective delivery of banking services to trustees. If the migration to a successor depository bank is not completed smoothly or we were unable to move the trustee customer’s deposits to a different banking arrangement prior to the expiration, we could lose trustee customers which would adversely affect our case management revenues and our results of operations.

We have historically lacked product and business diversification. If we are unable to expand our primary business, our future revenues and earnings may not grow and could decline.

Prior to 1992, our sole line of business activity was the provision of automation services to Chapter 13 trustees. In 1992, we entered the Chapter 7 market. In 2003, we entered the Chapter 11 market through an acquisition, and in 2004 we entered the class action and mass tort market through an acquisition. While acquisitions have increased our business diversification, we are limited to fiduciary management and claims administration operations. If we are unable to maintain and grow the operating revenues from our case management and document management operations, our future revenues and earnings may not grow and could decline. Our lack of product and business diversification could inhibit the opportunities for growth of our business, revenues and earnings.

Bankruptcy reform legislation could alter the market for our products and services, which could cause a reduction in our revenues and earnings.

Bankruptcy reform legislation has been introduced in Congress in each of the last few years but has not been passed. We believe proposed legislation will be reintroduced annually and will ultimately be enacted. The recently proposed bankruptcy legislation could restrict debtors’ choices of how to file bankruptcy, making the bankruptcy process more cumbersome for some debtors. For example, new legislation could force certain debtors to file bankruptcy under Chapter 13 instead of Chapter 7, thereby causing the debtor to file a plan of reorganization to repay creditors over time rather than liquidating the debtor’s assets. Although we do not think the recent proposals would materially affect the aggregate Chapter 7 deposits held by our trustee customers in the foreseeable future, this legislation, if passed, could affect the number of bankruptcy filings. Future bankruptcy reform proposals could differ materially from past proposed legislation and could be more adverse to our bankruptcy management business than recent legislative proposals.

Tort reform legislation could reduce the number and scope of class action and mass action cases, thus reducing our business prospects in the class action market.

In February 2005, new federal class action and tort reform legislation was passed and signed by President Bush. The primary impact of the new federal legislation is to require that certain types of class action lawsuits be brought in federal court rather than state courts. We believe the new federal legislation will likely result in fewer class action lawsuits in state courts, which are generally perceived as faster and more plaintiff-friendly than federal courts. The slower processing of class action lawsuits in federal courts could delay the ultimate settlement of those cases, which could adversely affect the timing of services we provide in those cases. Likewise, the new federal legislation could have the effect of lowering the overall number of class action cases, whether filed in federal or state courts. Similar to this recent federal experience, there have been various efforts at the state level to modify and reform the laws and procedures related to class action and mass tort. The goal of certain state tort reform proposals has been to reduce the number and scope of class action and mass action cases. While we cannot predict whether any tort reform legislation will pass at the state levels or the substance of any future changes, any legislative efforts that are successful in reducing the number or scope of class action or mass action cases would likely have an adverse effect on our results of operations.

We have a limited number of bankruptcy trustee clients and a limited number of significant referral sources for Chapter 11 and class action and mass tort engagements. The loss of even a limited number of our trustee customers or referral sources could result in a loss of revenue and earnings.

A single bankruptcy trustee customer can comprise an important portion of our operating revenues, although we did not have revenues related to any single bankruptcy trustee customer in excess of 1% of our operating revenues during 2004. Additionally, we rely heavily on a limited number of Chapter 11 and class action referral sources to earn new business engagements. Our future financial performance will depend on our ability to maintain existing trustee customer accounts, to attract business from trustees that are currently using a competitor’s software product, to maintain our existing referral relationships, and to develop new referral relationships. The loss of even a limited number of trustee customers or a reduction in referral sources could result in a material loss of revenue and earnings.

The fluctuations in quarterly projects for clients have affected and may affect in the future the timing of quarterly revenues and earnings and are likely to affect future quarterly results.

The initiation or termination of a large Chapter 11, class action or mass tort engagement can directly affect our revenues and earnings for a particular quarter, and the levels of services, particularly services related to document management, required for an ongoing Chapter 11, class action or mass tort engagement can fluctuate quarter to quarter during the time that the debtor is in Chapter 11 reorganization or the class action or mass tort lawsuit is active.

Our quarterly results have fluctuated in the past and may fluctuate in the future. If they do, our operating results may not meet the expectations of securities analysts or investors. This could cause fluctuations in the market price of our common stock.

Our quarterly results have fluctuated during the last year and may fluctuate in the future. As a result, our quarterly revenues and operating results are increasingly difficult to forecast. It is possible that our future quarterly results from operations from time to time will not meet the expectations of securities analysts or investors. This could cause a material drop in the market price of our common stock.

Our business will continue to be affected by a number of factors, any one of which could substantially affect our results of operations for a particular fiscal quarter. Specifically, our quarterly results from operations can vary due to:

· fluctuations in trustees’ deposit balances or caseloads;

· unanticipated expenses related to software maintenance or customer service;

· the timing, size, cancellation or rescheduling of customer orders; and

· the timing and market acceptance of new software versions or support services.

Our stock price may be volatile even if our quarterly results do not fluctuate significantly.

If our quarterly results fluctuate, the market price for our common stock may fluctuate as well and those fluctuations may be significant. Even if we report stable or increased earnings, the market price of our common stock may be volatile. There are a number of factors, beyond earnings fluctuations, that can affect the market price of our common stock, including the following:

· a decrease in market demand for our stock;

· downward revisions in securities analysts’ estimates;

· announcements of technological innovations or new products developed by us or our competitors;

· the degree of customer acceptance of new products or enhancements offered by us;

· general market conditions and other economic factors; and

· the perception that the economy is improving and the corresponding assumption that our bankruptcy business will decline when the economy improves.

In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of stocks of technology companies and that have often been unrelated to the operating performance of particular companies. The market price of our common stock has been volatile, and this is likely to continue.

If Chapter 11 cases on which we are retained convert to Chapter 7, we may not be paid for the products and services we have provided.

In Chapter 11 engagements we provide services directly to the debtor and we are paid directly by the debtor. If a debtor’s Chapter 11 case converts to Chapter 7 liquidation, we might not be paid for products and services previously provided and we would most likely lose all future revenue from the case. We have had Chapter 11 cases convert to Chapter 7 cases in the past. The conversion of a major Chapter 11 case to Chapter 7 could have a material adverse effect on our results of operations.

If the bankruptcy court reduces or eliminates our fees in major Chapter 11 cases, our results of operations could be impaired.

In Chapter 11, the bankruptcy court may reduce or eliminate fees paid for administrative services such as those we provide. If the court reduced or eliminated fees due to us in a major Chapter 11 case, our results of operations could be materially affected.

If we are unable to develop new technologies, we could lose existing customers and fail to attract new business.

We regularly undertake new projects and initiatives in order to meet the changing needs of our customers. In doing so, we invest substantial resources with no assurance of the ultimate success of the project or initiative. We believe our future success will depend, in part, upon our ability to:

· enhance our existing products;

· design and introduce new solutions that address the increasingly sophisticated and varied needs of our current and prospective customers;

· maintain our technology skills; and

· respond to technological advances and emerging industry standards on a timely and cost-effective basis.

We may not be able to incorporate future technological advances into our business, and future advances in technology may not be beneficial to or compatible with our business. In addition, keeping abreast of technological advances in our business may require substantial expenditures and lead-time. We may not be successful in using new technologies, adapting our solutions to emerging industry standards, or developing, introducing and marketing software products or enhancements. Furthermore, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these products. If we incur increased costs or are unable, for technical or other reasons, to develop and introduce new products or enhancements in a timely manner in response to changing market conditions or customer requirements, we could lose existing customers and fail to attract new business.

New releases of our software products may have undetected errors, which could cause litigation claims against us or damage to our reputation.

We intend to continue to issue new releases of our software products periodically. Complex software products, such as those we offer, can contain undetected errors when first introduced or as new versions are released. Any introduction of new products and future releases has a risk of undetected errors. Despite extensive pre-release testing of our software, these undetected errors may be discovered only after a product has been installed and used by our customers. Likewise, the software products we acquire in business acquisitions have a risk of undetected errors.

Errors may be found in our software products in the future. Any undetected errors, as well as any difficulties in installing and maintaining our new software and releases or difficulties training customers and their staffs on the utilization of new products and releases, may result in a delay or loss of revenue, diversion of development resources, damage to our reputation, increased service costs, increased expense for litigation and impaired market acceptance of our products.

Security problems with, or product liability claims arising from, our software products and business processes could cause increased expense for litigation, increased service costs and damage to our reputation.

We have included security features in our products that are intended to protect the privacy and integrity of data. Security for our products is critical given the highly confidential nature of the information our software processes. Our software products and the servers on which the products are used may not be impervious to intentional break-ins (“hacking”) or other disruptive problems caused by the Internet or by other users. Hacking or other disruptive problems could result in the diversion of development resources, damage to our reputation, increased service costs or impaired market acceptance of our products, any of which could result in higher expenses or lower revenues. Additionally, we could be exposed to potential

liability related to hacking or other disruptive problems. Defending these liability claims could result in increased expenses for litigation and a significant diversion of our management’s attention.

Furthermore, we administer claims for third parties. Errors or fraud related to the processing or payment of these claims could result in the diversion of management resources, damage to our reputation, increased service costs or impaired market acceptance of our services, any of which could result in higher expenses and/or lower revenues. Additionally, such errors or fraud related to the processing or payment of claims could result in lawsuits alleging damages. Defending such claims could result in increased expenses for litigation and a significant diversion of our management’s attention.

Our intellectual property is not protected through patents or formal copyright registration. Therefore, we do not have the full benefit of patent or copyright laws to prevent others from replicating our software.

Our intellectual property rights are not protected through patents or formal copyright registration. We may not be able to protect our trade secrets or prevent others from independently developing substantially equivalent proprietary information and techniques or from otherwise gaining access to our trade secrets. In addition, foreign intellectual property laws may not protect our intellectual property rights. Moreover, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringements. Litigation of this nature could result in substantial expense for us and diversion of management and other resources, which could result in a loss of revenue and profits.

Our failure to develop and maintain products and services that assist our customers in complying with significant government regulation could result in decreased demand for our products and services.

Our products and services are not directly regulated by the government. Our bankruptcy customers are, however, subject to significant regulation, including the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and local rules and procedures established by bankruptcy courts. The Executive Office for United States Trustees, a division of the United States Department of Justice, oversees bankruptcy trustees and establishes administrative rules governing trustees’ activities. Additionally, the process of administering the settlement of class action or mass tort cases is subject to court supervision and review by opposing plaintiffs’ and defendants’ counsel. The success of our business has been, and will continue to be, partly dependent on our ability to develop and maintain products and provide services that allow clients to perform their duties within applicable regulatory and judicial rules and procedures and that allow Chapter 11 debtors to make filings and send required notices on a timely and accurate basis. Future regulation and court practices or procedures may limit or eliminate the ability of clients to utilize the types of products and services that we currently provide. Our failure to adapt our products and services to changes in the Bankruptcy Code and applicable legislative and judicial rules and procedures could cause us to lose existing customers or fail to attract new customers.

The integration of acquired businesses is time consuming, may distract our management from our other operations, and can be expensive, all of which could reduce or eliminate our expected earnings.

During January 2004, we acquired Poorman-Douglas for approximately $116 million. Over the prior five years, we acquired five other businesses at a combined cost of approximately $100 million. We may consider additional opportunities to acquire other companies, assets or product lines that complement or expand our business. If we are unsuccessful in integrating these companies or product lines with our existing operations, or if integration is more difficult than anticipated, we may experience disruptions to our operations. A difficult or unsuccessful integration of an acquired business would likely have a material adverse effect on our results of operations.

Some of the risks that may affect our ability to integrate or realize any anticipated benefits from companies we acquire include those associated with:

· unexpected losses of key employees or customers of the acquired company;

· conforming the acquired company’s standards, processes, procedures and controls with our operations;

· increasing the scope, geographic diversity and complexity of our operations;

· difficulties in transferring processes and know-how;

· difficulties in the assimilation of acquired operations, technologies or products;

· diversion of management’s attention from other business concerns; and

· adverse effects on existing business relationships with customers.

The use of our common stock to fund acquisitions or to refinance debt incurred for acquisitions could dilute existing shares.

We have used our common stock to refinance debt incurred for several prior acquisitions. Most recently, we issued $50 million of convertible notes, which are convertible into approximately 2,857,000 shares of common stock, to refinance a portion of the purchase price for the Poorman-Douglas acquisition. We may consider further opportunities to acquire companies, assets or product lines that complement or expand our business. We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and shares. If the consideration for an acquisition is paid in common stock, existing shareholders’ investments could be diluted. Furthermore, we may decide to issue convertible debt or additional shares of common stock and use part or all of the proceeds to finance or refinance the costs of any future acquisitions.

We depend upon our key personnel and we may not be able to retain them or to attract, assimilate and retain new, highly qualified employees in the future.

Our future success will depend in significant part upon the continued service of our senior management and certain of our key technical personnel and our continuing ability to attract, assimilate and retain highly qualified technical, managerial and sales and marketing personnel. While we have non-disclosure agreements and non-compete agreements with substantially all of our employees, we do not have employment agreements with our Chief Executive Officer, our President, or our Chief Financial Officer. We do have employment agreements with our Chief Executive Officer—Poorman-Douglas Corporation and our President—Bankruptcy Services LLC. We maintain key-man life insurance policies on our Chief Executive Officer and our President. The loss of the services of any of these executives or other key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse impact on our results of operations.

We do not pay cash dividends on our common stock and our common stock may not appreciate in value or even maintain the price at which you purchased your shares.

We presently do not intend to pay any cash dividends on our common stock and, under the terms of our convertible notes, cannot pay any dividends on our common stock until January 1, 2006. On and after January 1, 2006, the payment of dividends is within the discretion of our board of directors and will depend upon our future earnings, if any, our capital requirements, our financial condition and any other factors that the board of directors may consider. In addition, certain other terms of our convertible notes and certain provisions in our credit agreement may restrict our ability to pay dividends in the future. We currently intend to retain all earnings to reduce our debt and for use in the operation and expansion of our

business. As a result, the success of your investment in our common stock will depend entirely upon its future appreciation. Our common stock may not appreciate in value or even maintain the price at which you purchased your shares.

Our articles of incorporation contain a provision that could be used by us, without shareholder approval, to discourage or prevent a takeover of our company.

Our articles of incorporation authorize our board of directors to issue preferred stock in one or more series, without shareholder approval, and to fix the designation, rights and preferences of each series of preferred stock. Our board of directors could issue a series of preferred stock in a manner designed to prevent or discourage a takeover of our company.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

Past changes and future changes in financial accounting standards or practices or taxation rules or practices have had and in the future could have a significant effect on our reported financial results. For example, recent accounting changes now require us to include shares issuable upon the exercise of the $50 million of convertible notes we have outstanding in our fully diluted earnings per share computations. Similarly, new accounting rules for expensing of stock option grants will directly affect our reported results of operations in 2005. Future accounting changes may even affect our reporting of previously completed transactions. Numerous new accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and are likely to occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Compliance with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules, are time consuming and expensive. Since 2002, we have spent substantial amounts of management time and have incurred substantial legal and accounting expense in complying with the Sarbanes-Oxley Act and regulatory initiatives resulting from that Act. Complying with these new laws and regulations also creates uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ certification of that assessment have required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

SEC rules implementing Section 404 of Sarbanes-Oxley require disclosure of the remediation of significant deficiencies or material weaknesses in internal controls over financial reporting and the

existence, at year-end, of material weaknesses related to our internal control over financial reporting. If we are required to make any of these types of disclosures in the future, it could adversely affect the price of our common stock.

ITEM 2. PROPERTIES

Our corporate offices are located in a 49,000-square-foot facility in Kansas City, Kansas. This owned property serves as collateral under our credit facility. Significant leased properties include:

· approximately 16,000 square feet of office space in New York, New York, through August 31, 2013; and

· approximately 88,000 square feet of office and document processing space in Beaverton, Oregon, through September 30, 2015.

ITEM 3. LEGAL PROCEEDINGS

We occasionally become involved in litigation arising in the normal course of business. There is no currently pending or, to the knowledge of management, threatened material litigation against us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted in the fourth quarter of 2004 to a vote of security holders.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded under the symbol “EPIQ” on the Nasdaq National Market. The following table shows the reported high and low sales prices for the common stock for the calendar quarters of 2004 and 2003 as reported by Nasdaq:

	2004				2003
	High		Low		High		Low
First Quarter	$	20.90	$	15.50	$	20.50	$	14.87
Second Quarter	17.80		13.24		22.95		15.91
Third Quarter	16.65		12.63		20.00		16.20
Fourth Quarter	17.03		13.81		18.74		14.78

Holders

As of February 11, 2005, there were approximately 110 owners of record of our common stock and approximately 5,000 beneficial owners of our common stock.

Dividends

At this time, we intend to retain our earnings to reduce our debt and for use in the operation and expansion of our business. Accordingly, we do not expect to declare or pay any cash dividends in the foreseeable future. Under the terms of our convertible notes, we cannot pay dividends, other than stock dividends, on our capital stock until January 1, 2006. Commencing January 1, 2006, the payment of dividends is within the discretion of our board of directors and will depend upon various factors, including future earnings, capital requirements, financial condition, the terms of our credit agreement, the terms of our convertible notes, and other factors deemed relevant by the board of directors. There is no restriction

on the ability of our subsidiaries to transfer funds to EPIQ in the form of cash dividends, loans or advances.

Equity Compensation Plan Information

The following table sets forth as of December 31, 2004 (a) the number of securities to be issued upon exercise of outstanding options, warrants and rights, (b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)).

	(a)		(b)			(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		2,950,000		$	13.25		2,321,000
Equity compensation plans not approved by security holders		280,000		$	17.89		0
Total		3,230,000		$	13.65		2,321,000

As of December 31, 2004, equity compensation plans approved by security holders consist of our 1995 Stock Option Plan and our 2004 Equity Incentive Plan. Securities remaining available for future issuance under equity compensation plans approved by security holders consist solely of shares available under the 2004 Equity Incentive Plan. Securities remaining available for future issuance under our 2004 Equity Incentive Plan may be issued, in any combination, as incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock.

As of December 31, 2004, equity compensation plans not approved by security shareholders consist solely of stock options issued in conjunction with our acquisitions of BSI and Poorman-Douglas. The stock options issued to key executives of BSI and Poorman-Douglas were inducement stock options issued in conjunction with the execution of employment agreements by each of those executives to become officers of our newly acquired subsidiaries. In accordance with the Nasdaq corporate governance rules, shareholder approval of these inducement stock option grants was not required.

The stock options granted under equity compensation plans not approved by security holders were granted at an option exercise price equal to fair market value of the common stock on the date of grant, are non-qualified options, are exercisable for up to 10 years from the date of grant and otherwise have terms substantially identical to the material terms of the 1995 Stock Option Plan and the 2004 Equity Incentive Plan. Stock options granted in conjunction with the acquisition of BSI vested 20% on January 31, 2003, the grant date thereof, and continue to vest 20% per year on each anniversary of the grant date until fully vested on January 31, 2007. Stock options granted in conjunction with the acquisition of Poorman-Douglas vest 20% per year, with the initial vesting having occurred January 31, 2005, over five years.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6. SELECTED FINANCIAL DATA

	Years Ended December 31,
	2004		2003			2002			2001			2000
	(In Thousands, Except Per Share Data)
INCOME STATEMENT DATA:
Revenues from continuing operations	$	125,420	$	67,936		$	36,256		$	28,149		$	19,906
Income from continuing operations	9,063		14,525			9,766			6,253			1,980
Income (loss) from discontinued operations	667		(5,818		)	(1,533		)	(1,311		)	152
Net income	9,730		8,707			8,233			4,942			2,132
Income (loss) per share—Diluted
from continuing operations	$	0.49	$	0.80		$	0.64		$	0.44		$	0.18
from discontinued operations	$	0.03	$	(0.32	)	$	(0.10	)	$	(0.09	)	$	0.02
Net income per share—Diluted	$	0.52	$	0.48		$	0.54		$	0.35		$	0.20
BALANCE SHEET DATA:
Working capital related to continuing operations	$	22,979	$	38,856		$	63,503		$	27,286		$	13,374
Total assets	240,088		141,927			108,037			70,648			44,938
Long-term debt	74,499		3,066			289			594			924
Stockholders’ equity	139,883		129,255			102,375			65,144			35,923

During March 2000, we acquired substantially all of the business assets of PHiTECH. These assets and corresponding operations constituted our infrastructure software business. The acquisition was accounted for using the purchase method of accounting with the operating results of PHiTECH included in our statement of income since the date of acquisition. During November 2003, the decision was made to dispose of our infrastructure software business and the business was sold in April 2004. Accordingly, all revenues, cost of sales, operating expenses, assets and liabilities related to infrastructure software have been reclassified as discontinued operations for all periods presented. See Note 14 of Notes to Consolidated Financial Statements.

During December 2000, we completed a private placement of 2,025,000 shares of common stock and received net proceeds of $12.5 million.

During June 2001, we completed a follow-on offering of 1,537,500 shares of common stock and received net proceeds of $22.7 million.

During October 2001, we acquired certain assets from ROC Technologies. The acquisition was accounted for using the purchase method of accounting with the operating results of ROC Technologies included in our statements of income since the date of acquisition.

During July 2002, we acquired the Chapter 7 trustee business of CPT Group, Inc. The acquisition was accounted for using the purchase method of accounting with the operating results of CPT Group included in our statements of income since the date of acquisition. See Note 13 of Notes to Consolidated Financial Statements.

During November 2002, we completed a private placement of 2,000,000 shares of common stock and received net proceeds of $28.1 million.

During January 2003, we acquired the member interests of BSI. The acquisition was accounted for using the purchase method of accounting with the operating results of BSI included in our statements of income since the date of acquisition. See Note 13 of Notes to Consolidated Financial Statements.

During January 2004, we acquired the equity of P-D Holding Corp. and its wholly-owned operating subsidiary, Poorman-Douglas Company (Poorman-Douglas). The acquisition was accounted for using the

purchase method of accounting with the operating results of Poorman-Douglas included in our statement of income since the date of acquisition. See Note 13 of Notes to Consolidated Financial Statements.

All per share amounts have been adjusted to reflect the two 3-for-2 stock splits effected as 50% stock dividends paid on February 23, 2001 and November 30, 2001.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Management’s Overview

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

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

The number of new bankruptcy filings each year may vary based on the level of consumer and business debt, the general economy, interest rate levels and other factors. For the government fiscal years ended September 30, 2002, 2003, and 2004, the Administrative Office of the U.S. Courts reported approximately 1.55 million, 1.66 million, and 1.62 million new bankruptcy filings, respectively. We believe an important indicator of future bankruptcy filings is the level of consumer and business debt outstanding. The most recent available Federal Reserve Flow of Funds Accounts of the United States, dated December 9, 2004, reported increases in both consumer and business debt outstanding as compared with the same period of the prior year.

During 2003, we determined that our infrastructure software segment was no longer aligned with our long-term strategic objectives, and we developed a plan to sell this segment within a year. Accordingly, our infrastructure software results for 2004, 2003, and 2002, including our gain on disposition of the infrastructure software business, are included entirely within the discontinued operations section of our income statement. We believe this disposition will enhance long-term shareholder value by enabling us to focus our management and financial resources on the operations of our case management and document management operations.

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

As discussed under the caption “Results of Operations for the Year Ended December 31, 2004 Compared with the Year Ended December 31, 2003” below, the increase in both our revenue and our costs during 2004 is primarily attributable to our acquisition of Poorman-Douglas.

Poorman-Douglas has significant reimbursed revenue, primarily related to postage, on which we realize little or no profit. As a result, we now separately report revenue before reimbursed revenue, which we refer to as operating revenue, and which management believes is a more relevant measure of our

performance. The acquisitions of Poorman-Douglas and BSI have also affected our operating revenue mix. For the year ended December 31, 2002, which was prior to our acquisition of either Poorman-Douglas or BSI, document management operating revenue represented 3% of our total operating revenue. For the year ended December 31, 2003, during which we acquired BSI, our document management operating revenue represented 20% of our total operating revenue. For the year ended December 31, 2004, during which we acquired Poorman-Douglas, our document management operating revenue represented 35% of our total operating revenue. This increase in the mix of document management revenue versus case management revenue may result in increased revenue fluctuations from period to period based on our clients’ business requirements.

Also during 2004, we had notable changes to our capital structure. During June 2004, we issued $50.0 million of convertible notes. Net proceeds of approximately $47.4 million were used to repay and terminate our subordinated term loan and to pay in full our revolving loan. During July 2004, we entered into a new credit facility with KeyBank National Association as administrative agent. This facility consists of a $25.0 million senior term loan, with amortizing quarterly principal payments of $1.6 million beginning September 30, 2004, and a $50.0 million senior revolving loan. During the term of the loan we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $75.0 million. The senior term loan and the senior revolving loan mature June 30, 2008.

Critical Accounting Policies

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

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

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

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

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

· fees based on the number of claims in a case; and

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

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

identifiable intangible assets are not amortized. Accordingly, the acquisition cost allocation has had, and will continue to have, a significant impact on our current operating results.

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

A change in events or circumstances, including a decision to hold an asset or group of assets for sale, a change in strategic direction, or a change in the competitive environment could adversely affect the fair value of one or more reporting units. During November 2003, we determined that our infrastructure software segment was no longer aligned with our long-term strategic objectives and we developed a plan to sell this segment within a year. As a result, we recognized a pre-tax impairment charge of approximately $3.8 million related to goodwill during the year ended December 31, 2003.

The estimate of fair value is highly subjective and requires significant judgment. If we determine that the fair value of any reporting unit is less than the reporting unit’s carrying value, then we will recognize an impairment charge. If goodwill on our balance sheet becomes impaired during a future period, the resulting impairment charge could have a material impact on our results of operations and financial condition. Our unimpaired, recognized goodwill totaled $147.7 million as of December 31, 2004.

Identifiable intangible assets. Each period we evaluate whether events and circumstances warrant a revision to the remaining estimated useful life of each identifiable intangible asset. If events and circumstances warrant a change to the estimate of an identifiable intangible asset’s remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life. Furthermore, information developed during our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable and its fair value is less than the identifiable intangible asset’s carrying value and would result in recognition of an impairment charge. During November 2003, we determined that our infrastructure software segment was no longer aligned with our long-term strategic objectives and we developed a plan to sell this segment within a year. As a result, we recognized a pre-tax impairment charge of approximately $0.9 million related to identifiable intangible assets during the year ended December 31, 2003.

A change in the estimate of the remaining life of one or more identifiable intangible assets or the impairment of one or more identifiable intangible assets could have a material impact on our results of operations and financial condition. Our identifiable intangible assets’ carrying value, net of amortization, was $24.1 million as of December 31, 2004.

Results of Operations for the Year Ended December 31, 2004 Compared with the Year Ended December 31, 2003

Consolidated Results

Revenue

Total revenue of $125.4 million for the year ended December 31, 2004 represents an approximate 85% increase compared with $67.9 million of revenue for the same period in the prior year. With our acquisition of Poorman-Douglas, revenue related to reimbursed expenses, such as postage pertaining to document management services, increased significantly. We reflect the revenue from these reimbursed expenses as a separate line item on our Consolidated Statements of Income. While revenues from reimbursed expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue. Revenue exclusive of

revenue related to reimbursed expenses, which we refer to as operating revenue, increased $42.7 million, or approximately 68%, to $105.1 million for the year ended December 31, 2004 compared with $62.4 million for the same period in the prior year. All revenue is directly related to a segment and changes in revenue by segment are discussed below.

Operating Expenses

Direct costs, general and administrative expenses, and depreciation and software amortization increased $54.9 million, or approximately 145%, to $92.8 million for the year ended December 31, 2004 compared with $37.9 million for the same period in the prior year. This increase primarily results from the inclusion of Poorman-Douglas’ expenses subsequent to the acquisition date. As a result of the Poorman-Douglas acquisition, we realized a higher ratio of document management revenue relative to case management revenue than during the same period in the prior year, which resulted in an increase in reimbursed expenses. In addition, corporate administrative costs not attributable to segment operations increased primarily due to significant increased expenses related to compliance with regulations and standards imposed by Section 404 of the Sarbanes-Oxley Act of 2002, increased amortization expense primarily resulting from our acquisition of additional operating software licenses, increased travel expense primarily related to additional locations, and increased insurance coverage due to business expansion.

Amortization of identifiable intangible assets increased $4.2 million to $7.8 million for the year ended December 31, 2004 compared with $3.6 million for the same period in the prior year. All identifiable intangible assets are directly related to a segment and changes in amortization of identifiable intangible assets by segment are discussed below.

Acquisition related expenses of $2.2 million for the year ended December 31, 2004 and $1.8 million for the year ended December 31, 2003 result from non-capitalized expenses for executive bonuses, legal, accounting and valuation services, and travel incurred in connection with potential and completed transactions.

Expenses Related to Financing

Expenses related to financing totaled $7.2 million during the year ended December 31, 2004 compared with $0.1 million of interest income during the same period in the prior year. This increase related to various financing components. During the year ended December 31, 2004, we recognized a $1.0 million charge for the write-off of loan fees related to a credit facility we terminated. Variable interest expense related to our credit facilities, fixed interest expense related to our convertible debt, and interest accreted on debt with no stated interest rate totaled $3.9 million during the year ended December 31, 2004. Amortization of loan fees related to our credit facilities and related to our convertible debt offering totaled $2.1 million during the year ended December 31, 2004. Our convertible debt facility includes a provision allowing the convertible debt holders to extend the debt maturity from three years to six years. Under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, this provision is accounted for as an embedded option. At inception, the embedded option was valued at $1.2 million and the convertible debt balance was reduced by the same amount. The convertible debt accretes approximately $0.1 million each quarter such that, at the end of three years, the convertible debt balance will total $50.0 million. The embedded option must be revalued at each period end based on the probability weighted discounted cash flows related to the additional 4% interest rate payments which would be made if the convertible debt maturity is extended an additional three years. While the changes in fair value of the embedded option and carrying value of the convertible debt do not affect our current cash flow, the aggregate of these changes in value, totaling $0.3 million of expense for the year ended December 31, 2004, is accounted for as a current income or expense item and is included on our accompanying Consolidated Statements of Income as a component of interest expense. If the embedded option is eventually exercised, the value assigned to the embedded option will be amortized to income as a reduction to our 4% convertible debt interest expense

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

Effective Tax Rate

Our effective tax rate related to income from continuing operations increased slightly from 41.2% for the year ended December 31, 2003 to 41.3% for the year ended December 31, 2004. Our tax rate is higher than the statutory federal rate of 35% primarily due to state taxes, including taxes related to our New York operations which are subject to relatively high state and local New York tax rates.

Discontinued Operations

Our infrastructure software results are included entirely within the discontinued operations section of our income statement. Pre-tax income from discontinued operations of $1.1 million for the year ended December 31, 2004 resulted primarily from our gain on sale of the business, partly offset by operating losses through the date of sale. Pre-tax loss from discontinued operations of $9.6 million for the year ended December 31, 2003 was primarily the result of a $7.6 million impairment charge to reduce goodwill, other intangible assets, software and other long-lived assets to their estimated fair value.

Business Segments

Revenue

Case management operating revenue increased $18.8 million, or approximately 38%, to $68.5 million for the year ended December 31, 2004 compared with $49.7 million for the year ended December 31, 2003. This increase is a result of the inclusion of operating revenue related to the Poorman-Douglas acquisition subsequent to the acquisition date. Exclusive of Poorman-Douglas operating revenue, operating revenue declined by $3.5 million due primarily to a decrease in non-recurring bankruptcy case management professional service revenue, partly offset by an increase in bankruptcy deposit based revenue.

Document management operating revenue increased $23.8 million, or approximately 187%, to $36.5 million for the year ended December 31, 2004 compared with $12.7 million for the year ended December 31, 2003. Document management revenue for reimbursed expenses of $17.9 million for the year ended December 31, 2004 increased approximately 243% compared with the same period in the prior year. The increases in both operating revenue and reimbursed revenue for the document management segment were primarily the result of the acquisition of Poorman-Douglas. Exclusive of Poorman-Douglas revenue, our document management operating revenue declined $3.4 million due primarily to a decrease in bankruptcy noticing services. Document management revenues can fluctuate materially from period to period based on clients’ business requirements.

Operating Expenses

Case management direct costs, general and administrative expenses, and depreciation and software amortization increased $15.1 million, or approximately 115%, to $28.2 million for the year ended December 31, 2004 compared with $13.1 million for the same period in the prior year. This increase primarily results from the inclusion of Poorman-Douglas’ expenses subsequent to the acquisition date. Exclusive of Poorman-Douglas expenses, case management’s direct and administrative expenses, including depreciation and software amortization, increased $0.9 million due primarily to increases in operating software amortization and wage related expense. Our case management cost structure is relatively stable and generally does not fluctuate materially with changes in operating revenues.

Document management direct costs, general and administrative expenses, and depreciation and software amortization increased $31.8 million to $41.5 million for the year ended December 31, 2004

compared with $9.7 million for the prior year. This increase primarily results from the inclusion of Poorman-Douglas’ expenses, including reimbursed expenses, subsequent to the acquisition date. Exclusive of Poorman-Douglas’ expenses, our document management expenses declined $2.4 million due primarily to a decline in postage and print expense related to a decrease in noticing services. Document management direct expenses include reimbursed expenses and other operating expenses which are more variable than case management direct expenses and will fluctuate based on document management business requirements delivered.

Both the case management and document management segments have identifiable intangible assets. Amortization of case management’s identifiable intangible assets increased $3.1 million to $5.2 million for the year ended December 31, 2004 compared with $2.1 million for the prior year. Amortization of document management’s identifiable intangible assets increased $1.0 million to $2.5 million for the year ended December 31, 2004 compared with $1.5 million for the prior year. For both segments, this increase is due primarily to the amortization expense related to the acquired intangible assets resulting from the Poorman-Douglas transaction and the February 2004 commencement of amortization related to the BSI trade name. Note 4 to the accompanying Consolidated Financial Statements provides a summary of the total identified intangible assets, the scheduled amortization expense and the scheduled amortization periods for intangible assets acquired through the Poorman-Douglas and BSI acquisitions.

Results of Operations for the Year Ended December 31, 2003 Compared with the Year Ended December 31, 2002

Consolidated Results

Revenue

Total revenue of $67.9 million for the year ended December 31, 2003 represents an approximate 87% increase compared with $36.3 million of revenue during the prior year. Our segment reporting reflects the revenue from reimbursed expenses as a separate line item. Although reimbursed revenues and expenses may fluctuate significantly from quarter to quarter, these fluctuations have a minimal effect on our operating income as we realize little or no margin from this revenue. Revenue exclusive of reimbursed expenses, which we refer to as operating revenue, increased $26.8 million, or approximately 75%, to $62.4 million for the year ended December 31, 2003 compared with $35.6 million during the prior year. All revenue is directly related to a segment and changes in revenue by segment are discussed below.

Operating Expenses

Direct costs, general and administrative expenses, and depreciation and software amortization increased $17.8 million, or approximately 89%, to $37.9 million for the year ended December 31, 2003 compared to $20.1 million during the prior year. This increase results primarily from the inclusion of BSI’s expenses subsequent to the BSI acquisition date. In addition, corporate administrative costs not attributable to segment operations also increased as a result of our growth, including increases in administrative and compensation expense and travel expense to support integration of the operations of BSI into our consolidated operations.

Amortization of identifiable intangible assets increased $3.2 million to $3.6 million for the year ended December 31, 2003 compared with $0.4 million for the same period in the prior year. All identifiable intangible assets are directly related to a segment and changes in amortization of identifiable intangible assets by segment are discussed below.

Acquisition related expenses, consisting of executive bonuses, legal, accounting and valuation services, and travel, increased $1.2 million, to $1.8 million for the year ended December 31, 2003, due to the investigation of potential acquisitions and non-capitalized expenses related to completed acquisitions.

Effective Tax Rate

Our effective tax rate related to income from continuing operations increased to 41.2% for the year ended December 31, 2003 compared with 37.8% for the year ended December 31, 2002. This increase is primarily due to the acquisition of BSI. BSI primarily generates revenue in the city and state of New York, both of which have relatively high corporate tax rates.

Discontinued Operations

Our infrastructure software results are included entirely within the discontinued operations section of our income statement. The $7.1 million increase in infrastructure software’s loss before income tax benefit, to a $9.6 million loss during the year ended December 31, 2003 as compared with $2.5 million loss during the year ended December 31, 2002, is primarily the result of a $7.6 million impairment charge to reduce goodwill, other intangible assets, software and other long-lived assets to their estimated fair value.

Business Segments

Revenue

Case management operating revenue increased $15.1 million, or approximately 44%, to $49.7 million for the year ended December 31, 2003 compared to $34.6 million for the year ended December 31, 2002. This increase primarily results from the inclusion of BSI’s operating revenue subsequent to the acquisition of BSI on January 30, 2003. The remainder of the increase in our case management operating revenue resulted primarily from an increase in fees related to bankruptcy trustee deposits.

Document management operating revenue increased $11.7 million to $12.7 million for the year ended December 31, 2003 compared to $1.0 million during the prior year. Document management revenue for reimbursed expenses increased $4.5 million to $5.2 million for the year ended December 31, 2003 compared to $0.7 million during the prior year. Both the increase in operating revenue and the increase in revenue from reimbursed expenses result primarily from the inclusion of BSI’s operating revenue and reimbursed revenue subsequent to the BSI acquisition date.

Operating Expenses

Case management’s direct costs, general and administrative expenses, and depreciation and software amortization increased $1.6 million, or approximately 14%, to $13.1 million for the year ended December 31, 2003 compared to $11.5 million during the prior year. This increase is attributable primarily to the inclusion of BSI’s expenses subsequent to the BSI acquisition date.

Document management’s direct costs, general and administrative expenses, and depreciation and software amortization increased $8.5 million to $9.7 million for the year ended December 31, 2003 compared to $1.2 million during the prior year. This increase is attributable primarily to the inclusion of BSI’s expenses subsequent to the BSI acquisition date.

Liquidity and Capital Resources

Operating Activities

During the year ended December 31, 2004, our operating activities provided net cash of $31.6 million. The primary sources of cash from operating activities were net income of $9.7 million and adjustments for non-cash charges and credits, primarily depreciation and amortization and deferred tax charges, of $24.7 million.

Changes in operating assets and liabilities as a direct result of assets acquired or liabilities assumed have been excluded from our Consolidated Statements of Cash Flows. However, subsequent to the Poorman-Douglas acquisition, cash flows related to these acquired assets and assumed liabilities are reflected in our Consolidated Statements of Cash Flows. For example, accounts payable and accrued expenses assumed as a part of the transaction are not reflected as a source of cash. The subsequent payment of assumed accounts payable and accrued expenses are, however, reflected as an operating use of cash.

Changes in operating assets and liabilities used net cash of $2.8 million. The most significant use of cash related to changes in operating assets and liabilities was our payment of approximately $8.0 million of liabilities assumed in our acquisition of Poorman-Douglas that were the direct result of acquisition-related transactions, primarily withholding taxes resulting from the vesting of restricted Poorman-Douglas stock concurrent with the acquisition, and that were due and payable shortly after the transaction closed. In addition, a reduction in trade payables and accrued expenses, exclusive of the liabilities acquired in the Poorman-Douglas acquisition, used $3.1 million of cash. The most significant source of cash from changes in operating assets and liabilities was a reduction in accounts receivable of $8.0 million.

Investing Activities

Our most significant use of cash for investing activities was the acquisition of Poorman-Douglas. Net of $2.8 million cash acquired in the acquisition, we used cash of approximately $113.1 million related to this transaction. During the year ended December 31, 2004, we used cash of approximately $5.4 million to purchase property and equipment. Enhancements to our existing software and development of new software is essential to our continued growth and, during the year ended December 31, 2004, we used cash of approximately $1.7 million to fund internal costs related to development of software for which technological feasibility has been established. During April 2004, we completed the sale of our infrastructure software business for cash and a note receivable payable in monthly installments over 15 months. During the year ended December 31, 2004, we realized cash proceeds of $1.1 million related to this transaction.

Financing Activities

In conjunction with our acquisition of Poorman-Douglas, we replaced our $25.0 million line of credit with a $100.0 million credit facility. The credit facility consisted of a $45.0 million senior term loan, with amortizing quarterly principal payments of $4.5 million beginning April 30, 2004, a $25.0 million senior revolving loan, and a $30.0 million subordinated term loan. At inception of this facility, we borrowed approximately $92.0 million that, in combination with available cash on hand, was used to finance our acquisition of Poorman-Douglas.

During June 2004, we issued $50.0 million of contingent convertible subordinated notes. Net proceeds of approximately $47.4 million were used to repay and terminate our subordinated term loan and to pay in full our revolving loan.

During July 2004, we entered into a new credit facility with KeyBank National Association as administrative agent. This facility consists of a $25.0 million senior term loan, with amortizing quarterly

principal payments of $1.6 million beginning September 30, 2004, and a $50.0 million senior revolving loan. During the term of the loan, we have the right, subject to compliance with our covenants, to increase the senior revolving loan to $75.0 million. The senior term loan and the senior revolving loan mature June 30, 2008.

At inception of the new credit facility, we borrowed the $25.0 million term loan and $8.0 million of the revolving loan. We used these proceeds plus available cash on hand to pay in full the borrowings outstanding under our prior credit facility and that credit facility was terminated.

As of December 31, 2004, our borrowings consisted of $50.3 million from the contingent convertible subordinated notes (including the fair value of the embedded option), $21.9 million under the new credit facility’s senior term loan, $5.0 million under the new credit facility’s senior revolving loan, and approximately $5.0 million of obligations related to capitalized leases and deferred acquisition price.

We believe that the funds generated from operations plus amounts available under our new credit facility’s senior revolving loan will be sufficient over the next year to finance currently anticipated working capital requirements, software expenditures, property and equipment expenditures, payments for contractual obligations, interest payments due on our credit facility borrowings, and the required quarterly principal payments of $1.6 million on our senior term loan.

We may pursue an acquisition in the future and we may use the availability under our revolving loan and cash on hand to finance a future acquisition. If the acquisition price exceeds the capacity of these sources of financing, we may decide to issue equity, restructure our credit facility, partly finance the acquisition with a note payable, or some combination of the preceding. Covenants contained in our credit facility may limit our ability to consummate an acquisition.

Contractual Obligations

The following table sets forth a summary of our contractual obligations as of December 31, 2004.

	Payments Due By Period
Contractual Obligation	Total		Less than 1 Year		1–3 Years			3–5 Years			More Than 5 Years
	(In Thousands)
Long-term debt and future accretion(1)	$	80,320	$	6,806		$	64,796		$	8,718		$	—
Employment agreements	5,634		1,999			3,148			487			—
Capital lease obligations	1,773		858			915			—			—
Operating leases	18,961		2,699			4,765			3,411			8,086
Total	$	106,688	$	12,362		$	73,624		$	12,616		$	8,086

(1) A portion of the BSI purchase price was paid in the form of a non-interest bearing note, which was discounted using an imputed rate of 5% per annum. The discount is accreted over the life of the note and each period’s accretion is added to the note’s principal. The amount in the above contractual obligation table includes both the note’s principal, as reflected on our December 31, 2004 Consolidated Balance Sheet, and all future accretion. Convertible debt is included at stated value of the principal redemption and excludes adjustments related to the embedded option, which will not be paid in cash. Any conversion to our common stock of part or all of the convertible debt will reduce our cash obligation related to the convertible debt.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standard No. 153 (SFAS 153), Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS 153 expanded the scope of APB Opinion No. 29 to require that the

nonmonetary exchange of similar productive assets should be measured based on the fair value of the assets exchanged. EPIQ is required and plans to adopt the provisions of SFAS 153 for our quarter ending September 30, 2005. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. We are required and plan to adopt the provisions of SFAS 123R, likely using the modified version of prospective application, for our quarter ending September 30, 2005. Adoption of SFAS 123R will materially increase our recognized compensation expense and will have a material impact on our consolidated income statements and balance sheets. We are unable to estimate the impact of adoption of this statement on our consolidated financial statements as the impact will depend, in part, on stock awards and stock option awards made prior to the adoption date, whether awards granted were qualified or non-qualified, the vesting period of those awards, and forfeitures related to both existing awards and new awards. Subsequent to December 31, 2004, our Compensation Committee approved acceleration of the vesting of certain unvested options for employees, including an executive officer and non-employee directors. This action will reduce the impact of adoption of SFAS 123R on our consolidated financial statements. If, subsequent to December 31, 2004, no new awards were issued and no existing awards were forfeited, we estimate that adoption of SFAS 123R would increase our pre-tax compensation expense, on an annualized basis, by approximately $1.3 million. We do not anticipate that adoption of SFAS 123R will have a material impact on our consolidated statements of cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. During the year ended December 31, 2004, certain transactions created an exposure to market risk related to other than trading instruments. We do not actively manage these market risks.

During 2004, we issued $50.0 million of convertible notes with a 4% fixed interest rate. While we do not have cash flow risk related to this instrument, the instrument does contain an embedded option related to the right of security holders to extend the maturity of the convertible notes which creates an earnings risk. A 10% increase in our stock value would result in a $0.2 million increase in the fair value of the embedded option and a corresponding decrease in earnings. A 10% decrease in our stock value would result in a $0.1 million decrease in the fair value of the embedded option and a corresponding increase in earnings. The estimated changes in fair value were calculated using a pricing model that incorporates assumptions regarding future volatility, interest rates and credit risk.

At December 31, 2004, we have borrowings outstanding under a credit facility. Interest on borrowings under our credit facility is computed at a variable rate based on the LIBOR rate and the prime rate and results in a market risk related to interest rates. A 1% increase or decrease in the LIBOR rate and the prime rate would have increased or decreased, respectively, our annual interest expense on variable rate borrowings outstanding as of December 31, 2004 by approximately $0.3 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements appear following Item 15 of this Report.

Supplementary Data—Quarterly Financial Information

The following table sets forth quarterly unaudited financial data for the quarters of the years ended December 31, 2004 and 2003 (in thousands, except per share data):

	Quarters
	1st			2nd			3rd			4th
Year end December 31, 2004
Revenues from continuing operations	$	26,012		$	34,908		$	35,694		$	28,806
Income from continuing operations	2,001			2,983			2,161			1,918
Income (loss) from discontinued operations	(264		)	1,008			(77		)	—
Net income	1,737			3,991			2,084			1,918
Income per share—Diluted
Income from continuing operations	$	0.11		$	0.16		$	0.12		$	0.10
Income (loss) from discontinued operations	(0.01		)	0.06			(0.01		)	—
Net income per share—Diluted	$	0.10		$	0.22		$	0.11		$	0.10
Year ended December 31, 2003
Revenues from continuing operations	$	14,075		$	17,084		$	18,375		$	18,402
Income from continuing operations	2,676			3,875			4,205			3,769
Loss from discontinued operations	(364		)	(267		)	(279		)	(4,908		)
Net income (loss)	2,312			3,608			3,926			(1,139		)
Income (loss) per share—Diluted
Income from continuing operations	$	0.15		$	0.21		$	0.23		$	0.21
Loss from discontinued operations	(0.02		)	(0.01		)	(0.02		)	(0.27		)
Net income (loss) per share—Diluted	$	0.13		$	0.20		$	0.21		$	(0.06	)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on their evaluation as of December 31, 2004, the end of the period covered by this Annual Report on 10-K, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were sufficiently effective at a reasonable assurance level to ensure that the information required to be disclosed in this Annual Report was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms for Form 10-K, and was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

(a) Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

· Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.

Based on our assessment, management believes that, as of December 31, 2004, EPIQ’s internal control over financial reporting is effective based on those criteria.

(b) Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears on page 34.

(c) There have been no changes in our internal controls over financial reporting during our fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
EPIQ Systems, Inc.
Kansas City, Kansas

We have audited management’s assessment, included as section (a) in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of this Annual Report on Form 10-K, that EPIQ Systems, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements and financial statement schedule as of and for the year ended December 31, 2004 of the Company and our report dated February 22, 2005 expressed an unqualified opinion on these financial statements and the financial statement schedule.

DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 22, 2005

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to our Proxy Statement for our Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2004.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as a part of this report:

(1) Financial Statements. The following financial statements, contained on pages F-1 through F-32 of this report, are filed as part of this report under Item 8 “Financial Statements and Supplementary Data.”

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets—December 31, 2004 and 2003	F-2
Consolidated Statements of Income—Years Ended December 31, 2004, 2003 and 2002	F-3
Consolidated Statements of Changes in Stockholders’ Equity—Years Ended December 31, 2004, 2003 and 2002	F-4
Consolidated Statements of Cash Flows—Years Ended December 31, 2004, 2003 and 2002	F-5
Notes to Consolidated Financial Statements	F-6

(2) Financial Statement Schedules. EPIQ Systems, Inc. and subsidiaries for each of the years in the three-year period ended December 31, 2004.

Schedule II—Valuation and qualifying accounts

(3) Exhibits. Exhibits are listed on the Exhibit Index at the end of this report.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 1, 2005	Epiq SYSTEMS, INC.
	By:	/s/ TOM W. OLOFSON
		Tom W. Olofson
		Chairman of the Board, Chief Executive
		Officer and Director

In accordance with the Exchange Act this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.

	Signature		Name and Title		Date
/s/ TOM W. OLOFSON		Tom W. Olofson		March 1, 2005
		Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
/s/ CHRISTOPHER E. OLOFSON		Christopher E. Olofson		March 1, 2005
		President, Chief Operating Officer and Director
/s/ ELIZABETH M. BRAHAM		Elizabeth M. Braham		March 1, 2005
		Senior Vice President, Chief Financial Officer (Principal Financial Officer)
/s/ DOUGLAS W. FLEMING		Douglas W. Fleming		March 1, 2005
		Director of Finance, Chief Accounting Officer (Principal Accounting Officer)
/s/ W. BRYAN SATTERLEE		W. Bryan Satterlee		March 1, 2005
		Director
/s/ EDWARD M. CONNOLLY, JR.		Edward M. Connolly, Jr.		March 1, 2005
		Director
/s/ JAMES A. BYRNES		James A. Byrnes		March 1, 2005
		Director
/s/ JOEL PELOFSKY		Joel Pelofsky		March 1, 2005
		Director

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
EPIQ Systems, Inc.
Kansas City, Kansas

We have audited the accompanying consolidated balance sheets of EPIQ Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the schedule of valuation and qualifying accounts listed in the Index at Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of EPIQ Systems, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Kansas City, Missouri
February 22, 2005

F-1

EPIQ SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)

	As of December 31,
	2004		2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	13,330	$	30,347
Trade accounts receivable, less allowance for doubtful accounts of $1,069 and $340, respectively	18,690		11,337
Prepaid expenses	2,052		996
Income taxes refundable	3,477		—
Deferred income taxes	754		1,736
Other current assets	736		942
Current assets held for sale	—		1,304
Total Current Assets	39,039		46,662
LONG-TERM ASSETS:
Property and equipment, net	20,431		11,886
Software development costs, net	5,838		2,799
Goodwill	147,728		64,188
Other intangibles, net of accumulated amortization of $11,707 and $4,250, respectively	24,057		16,325
Other	2,995		67
Total Long-term Assets, net	201,049		95,265
Total Assets	$	240,088	$	141,927
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,263	$	1,998
Customer deposits	2,375		1,712
Accrued compensation	873		1,353
Other accrued expenses	899		590
Current maturities of long-term obligations	7,650		849
Current liabilities held for sale	—		1,137
Total Current Liabilities	16,060		7,639
LONG-TERM LIABILITIES:
Deferred income taxes	9,696		1,967
Deferred acquisition price (excluding current portion)	2,667		3,066
Long-term obligations (excluding current maturities)	71,832		—
Total Long-term Liabilities	84,195		5,033
STOCKHOLDERS’ EQUITY:
Preferred stock—$1 par value; 2,000,000 shares authorized; none issued and outstanding	—		—
Common stock—$0.01 par value; 50,000,000 shares authorized; issued and outstanding—17,883,917 and 17,780,854 shares at 2004 and 2003, respectively	179		178
Additional paid-in capital	102,738		101,891
Retained earnings	36,916		27,186
Total Stockholders’ Equity	139,833		129,255
Total Liabilities and Stockholders’ Equity	$	240,088	$	141,927

See accompanying notes to consolidated financial statements.

F-2

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

	Years Ended December 31,
	2004		2003		2002
REVENUE:
Case management	$	68,526	$	49,688	$	34,600
Document management	36,549		12,730		984
Operating revenue	105,075		62,418		35,584
Reimbursed expenses	20,345		5,518		672
Total Revenue	125,420		67,936		36,256
OPERATING EXPENSES:
Direct costs	60,384		16,490		6,363
General and administrative	25,886		16,868		9,443
Depreciation and software amortization	6,527		4,568		4,249
Amortization of intangibles	7,767		3,610		350
Acquisition related	2,197		1,793		575
Total Operating Expenses	102,761		43,329		20,980
INCOME FROM OPERATIONS	22,659		24,607		15,276
EXPENSES (INCOME) RELATED TO FINANCING: