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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 000-50464

LECG CORPORATION
(Exact name of registrant as specified in its charter)

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

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

        As of October 19, 2004, there were 22,447,044 shares of the registrant's common stock outstanding.

LECG CORPORATION
FORM 10-Q
TABLE OF CONTENTS

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PART I    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

LECG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Nine Months Ended September 30, 2004 and 2003
(in thousands, except per share data)
(unaudited)

See notes to condensed consolidated financial statements

3

LECG CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
(in thousands, except share data)
(unaudited)

See notes to condensed consolidated financial statements

4

LECG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(in thousands)
(unaudited)

See notes to condensed consolidated financial statements

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LECG CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.     Basis of presentation and operations

        The accompanying consolidated financial statements include the accounts of LECG Corporation and its wholly owned subsidiary, LECG, LLC, (collectively, the "Company", "Companies" or "LECG").

        The Company provides expert services, including economic and financial analysis, expert testimony, litigation support and strategic management consulting to a broad range of public and private enterprises. The Company's experts may be either employees of the Company or independent contractors. Services are provided by academics, recognized industry leaders and former high-level government officials (collectively, "experts") with the assistance of a professional support staff. These services are provided primarily in the United States from the Company's headquarters in Emeryville, California and its 18 other offices across the country. The Company also has international offices in Argentina, Australia, Canada, New Zealand, South Korea, Spain, Belgium, France and the United Kingdom.

        The consolidated statements of income for the quarters and nine months ended September 30, 2004 and 2003, the consolidated balance sheet as of September 30, 2004 and the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 are unaudited. In the opinion of management, these statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of LECG's consolidated financial position, results of operations and cash flows. The December 31, 2003 balance sheet is derived from LECG's audited financial statements included in its Annual Report on Form 10-K as of that date. The results of operations for the quarter and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year.

Reclassifications

        Certain prior period amounts have been reclassified to conform to the current period presentation.

2.     Significant accounting policies

Revenue recognition

        Revenue includes all amounts earned that are billed or billable to clients, including out-of-pocket costs such as travel and subsistence, and have been reduced for amounts related to work performed that are estimated to be uncollectible.

        Revenues primarily arise from time and material contracts, which are recognized in the period in which the services are performed. The Company also enters into certain performance-based contracts for which performance fees are dependent upon a successful outcome, as defined by the consulting engagement. Revenues related to performance-based fee contracts are recognized in the period when the earnings process is complete, generally when we have received payment as a result of services we performed under the contract. Costs incurred on performance-based contracts are expensed in the period incurred. Revenues are also generated from fixed price contracts, which are recognized as the agreed upon services are performed. Such revenues do not represent a material component of total revenues.

        Expert revenues consist of revenues generated by experts who are our employees and revenues generated by experts who are independent contractors. There is no operating, business or other substantive distinction between our employee experts and our exclusive independent contractor experts.

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Income taxes

        The Company accounts for income taxes in accordance with SFAS 109 Accounting for Income Taxes, under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. In accordance with SFAS 109, a valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized. Significant management judgment is required in determining if it is more likely than not that the Company will be able to utilize the potential tax benefit represented by its deferred tax assets. Consideration is given to evidence such as the history of prior year taxable income, expiration periods for net operating losses and the Company's projections. No valuation allowance was recorded at September 30, 2004 and December 31, 2003. We expect that our 2004 effective income tax rate will be approximately 40.6%. The Company's effective tax rate is determined based on estimated worldwide pre-tax income, permanent differences and credits, and is reviewed quarterly to determine if actual results require modifying the effective tax rate. Prior to November 13, 2003, the Company operated as a limited liability company and income taxes were passed through to and were the responsibility of the owners. Accordingly, no income taxes are provided for the quarter and nine months ended September 30, 2003.

Use of estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's financial statements contain various estimates including, but not limited to, estimates for unrealizable revenue, valuation allowance on deferred tax assets, bonus compensation, contingent payments for businesses acquired and costs recoverable from non-salaried experts. Actual results could differ from those estimates.

3.     Net income per share and share amounts

        Basic net income per common share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, comprised of unvested restricted stock and common shares issuable upon the exercise of options, are included in the diluted net income per common share calculation to the extent these shares are dilutive.

        The following items impact the comparability of our financial results for the quarter and nine months ended September 30, 2004 as compared to the same periods in 2003.

•

Prior to November 13, 2003, no income taxes were recorded or paid at the corporate level. In prior periods as an LLC, taxes were paid at the individual shareholder level, not by the Company.



•

Prior to November 13, 2003, the Company incurred preferred stock accretion and dividend charges in conjunction with its outstanding preferred units, which were redeemed due to the initial public offering; however they impacted the calculation of earnings per share.



•

Basic and diluted earnings per share for the quarter and nine months ended September 30, 2004 include the effect of selling 8,625,000 shares in our initial public offering on November 13, 2003.

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        The following is a reconciliation of net income and the number of shares used in the basic and diluted earnings per share computations (in thousands, except per share amounts).

        The following common stock equivalents were excluded from the calculation of diluted net income per share, as these shares were antidilutive: 1.8 million and 1.6 million options, for the quarter and nine months ended September 30, 2004, respectively, and 1.2 million options for the quarter and nine months ended September 30, 2003.

4.     Equity-based compensation

        The Company uses the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for options granted to employees. Accordingly, compensation cost related to option grants to employees is measured as the excess, if any, of the fair value of the Company's common stock at the date of the grant over the option exercise price and such cost is charged to operations over the related option vesting period. SFAS No. 123, Accounting for Stock-Based Compensation, requires that companies record compensation cost for equity-based compensation to non-employees based on fair values. Accordingly, the Company records compensation cost for options granted to non-employees using a fair value based method over the related option vesting period.

        SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method since the Company's inception. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. If the computed values of the Company's stock-based awards to employees had been amortized to

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expense over the vesting period of the awards, net income would have been the following (in thousands, except per share information):

        The following weighted average assumptions are used in conjunction with the Black-Scholes method to determine compensation expense for the pro forma effect of applying FAS 123 to measure compensation expense for options issued to employees:

5.     Comprehensive income

        Comprehensive income represents net income plus other comprehensive income resulting from changes in foreign currency translation and amortization of interest rate swap transition adjustment. The reconciliation of LECG's comprehensive income for the quarters and nine months ended September 30, 2004 and 2003 is as follows (in thousands):

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6.     Business acquisitions

        In August 2004, the Company acquired all of the outstanding shares of Silicon Valley Expert Witness Group, Inc. ("SVEWG"), a company providing expert services involving complex technologies and intellectual property disputes. The purchase price of $9.0 million was comprised of $5.0 million paid in cash at closing, the issuance of 56,850 unregistered shares of common stock with a fair market value of $958,000, and $3.0 million of additional payments to be made no later than 2009. The purchase price was allocated as follows: $7.7 million to goodwill, $100,000 to contract rights (10-month amortization) and $1.2 million to net current assets and property and equipment. The allocation of the purchase price to assets acquired and liabilities assumed is based on preliminary estimates and certain assumptions that the Company believes are reasonable. In addition, if specified revenue and operating margin targets are achieved, the Company will make additional payments of up to $3.0 million over a five-year-period. Additional goodwill will be recorded in subsequent years if these performance targets are met.

        In March 2004, the Company acquired the business (including certain assets and liabilities, five experts, who were equity owners, and professional staff) of Economic Analysis, LLC, a company providing expert services involving complex business litigation and regulatory matters. The purchase price was comprised of $15.4 million paid in cash, and the issuance of 50,891 unregistered shares of common stock with a fair market value of $1.0 million, of which $15.0 million was allocated to goodwill, $900,000 was allocated to contract rights (12-month amortization) and $500,000 to property and equipment and other assets. In addition, if specified revenue and profitability targets are achieved, the Company will make additional payments of up to $2.6 million per year for three years, and additional payments of up to $2.0 million if certain revenue targets are met. Additional goodwill will be recorded in subsequent years, if the performance targets are met. .

        In March 2004, the Company acquired the business (including certain assets and liabilities, five experts, four of whom were equity owners and professional staff) of Low Rosen Taylor Soriano ("LRTS"), an expert services firm located in Toronto, Canada, providing expert services in the areas of business valuation and damages quantification. The purchase price was $3.8 million paid in cash, of which $3.1 million was allocated to goodwill, $145,000 was allocated to contract rights (12-month amortization) and $570,000 was allocated primarily to property and equipment and other assets. In addition, if specified profitability targets are achieved, the Company will make additional payments of up to $4.2 million over a four-year period. As a result of achieving certain profitability targets through September 30, 2004, the Company recorded additional goodwill of $245,000 as of September 30, 2004. Additional goodwill will be recorded in subsequent years, if the performance targets are met.

        In accordance with the terms of the Center for Forensic Economic Studies ("CFES") Purchase Agreement dated August 1, 2003, and as a result of achieving certain performance targets set forth in the agreement, the Company recognized $1.6 and $1.7 million of additional goodwill as of June 30, 2004 and September 30, 2004, respectively, of which $1.6 million has been paid and $1.7 million is payable in August 2005.

7.     Goodwill and identifiable intangible assets

        Goodwill relates to the Company's business acquisitions, reflecting the excess of purchase price over fair value of identifiable net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but are required to be tested at least annually for impairment.

        The Company determined that it has one reporting unit based on the similarity of operations throughout its individual offices. Business acquisitions have been integrated within the structure of the organization and all the individual offices share similar economic characteristics and do not represent separate reporting units. The Company performs its goodwill impairment test annually as of October 1 by using the quoted market price of LECG's common stock and comparing the fair value of the

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Company to its recorded book value. The Company adopted October 1 as its date for performing its annual goodwill impairment test to allow sufficient time to schedule and perform the required valuation analysis and record any necessary goodwill impairment charges prior to its year-end. Based on the results of the test performed as of October 1, 2004, the Company concluded that goodwill was not impaired. The balance in goodwill as of September 30, 2004 and changes in goodwill for the nine months ended September 30, 2004 are as follows:

        Other intangible assets include customer contracts with useful lives of 10 to 12 months, and rights to license software under development, for which amortization will begin when the software is available for general release to customers. These intangible assets continue to be amortized on a straight-line basis over their useful lives.

        As of September 30, 2004, other intangible assets consisted of the following (in thousands):

        The estimated future amortization expense of other intangible assets as of September 30, 2004 is as follows (in thousands):

8.     Deferred compensation plan

        In March 2004, the Company adopted a deferred compensation plan under which highly compensated employees are eligible to defer up to 15% of their bonuses, salary, expert fees, project origination fees and qualifying stock option gains. The cash compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. The qualifying stock option gains deferred under this plan are credited or debited based on changes in an LECG stock measurement fund. Each plan participant is fully vested in all compensation deferred under the plan, other than signing bonuses and other employer contributions subject to vesting, and the earnings credited to his or her account. Signing bonuses and other employer contributions deferred under the plan vest ratably over a specified forfeiture period. Employee deferrals are invested through a trust.

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9.     Common Stock, Restricted Stock and Stock Options

Common stock

        On August 2, 2004, the Company issued 56,850 unregistered shares of LECG common stock in connection with its acquisition of all of the outstanding shares of Silicon Valley Expert Witness Group, Inc. See Note 6.

        On March 1, 2004, the Company issued 50,891 unregistered shares of LECG common stock in connection with its acquisition of Economic Analysis, LLC. See Note 6.

        In November 2003, the Company adopted an Employee Stock Purchase Plan ("ESPP") under which eligible United States and New Zealand employees may purchase newly issued shares of common stock of the Company at 85% of the lower of the closing price of the Company's common stock on the first and last day of the six-month offering periods, which end in April and November 2004. Employees pay for their shares through payroll deductions at a rate equal to any whole percentage from 1% to 15% of their gross wages. There were 76,771 common shares issued under the ESPP in April 2004 at $14.45 per share.

        The Board of Directors authorized 950,000 shares of common stock for issuance under the ESPP, which also provides for annual increases in the number of shares available for issuance on the first day of each fiscal year, equal to the lesser of: (1) 1.5% of the outstanding shares of our common stock on the first day of the fiscal year; (2) 500,000 shares; or (3) a lesser amount as determined by the board of directors. The Board of Directors determined not to provide for this annual increase to the ESPP for fiscal 2004. As of September 30, 2004, there are 873,229 shares available for issuance under the plan.

Restricted stock

        The following table shows the activity under the restricted stock program:

        The Company has a total of 157,031 shares of outstanding common stock that are subject to a right of repurchase or cancellation in favor of the Company under certain circumstances. The fair value of all unvested restricted shares is included in the financial statements as deferred compensation and is being amortized ratably over the applicable vesting periods. Of these 157,031 restricted shares, there are 16,406 restricted shares that were issued in 2000 and that are subject to repurchase at $0.01 in the event of the termination of the stockholder' employment or consulting relationship with the Company for any reason prior to January 16, 2005. The right of repurchase of these 16,406 restricted shares will expire on either (i) December 31, 2004 if each of the stockholder achieve certain individual performance criteria, or (ii) January 16, 2005 regardless of performance. The remaining 140,625 restricted shares were issued in August 2003 and are subject to vesting over time. Of these restricted shares, 112,500 will vest on August 1, 2007, and the remaining 28,125 will vest on August 1, 2008, provided that the stockholder have not resigned or been terminated for cause as of those vesting dates.

Stock option plans

        The Company granted 231,250 and 2,107,350 non-qualified options to purchase common shares in the quarter and nine months ended September 30, 2004, respectively. Included in the 2004 option

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grants were 750,000 non-qualified options to purchase shares of common stock, at an exercise price of $21.85 per share, issued to each of Dr. David Teece, Chairman and Mr. David Kaplan, President. The options issued to Dr. Teece and Mr. Kaplan cliff-vest 8²/3 years following the date of grant and expire in May 2013. The Company issued 22,500 options to three independent members of its Board of Directors that will vest in August 2005. During their tenure as members of the Board of Directors, independent directors receive annual grants of options to purchase common stock on or after the date of the Company's annual stockholder meeting, subject to approval by the Compensation Committee. The remaining options were granted to employees, have five to seven year vesting periods and were issued at exercise prices equal to the fair market value of the Company's stock on the date of grant.

        During the nine months ended September 30, 2004, pursuant to terms of the Company's 2000 Stock Option Plan, the Company cancelled unvested options to purchase 28,824 shares of common stock.

        At September 30, 2004, there were 383,275 options available for future grants under the 2003 Stock Option Plan.

10.   Commitments and contingencies

Legal proceedings

        In June 2004, National Economic Research Associates, Inc. (NERA) and its parent company, Marsh & McLennan Companies, Inc. filed a complaint against LECG and one of its experts in the Superior Court Department of the Trial Court Business Litigation Session, Suffolk County, Commonwealth of Massachusetts. This action arises out of LECG's hiring of professionals in March 2004 who were formerly employed by NERA in the United States and Europe. The complaint alleges that during and after his employment with NERA, this expert violated contractual commitments and fiduciary duties to NERA. The complaint further alleges that LECG interfered with NERA's contractual relations and advantageous business relationships, misappropriated confidential business information and goodwill, and engaged in unfair and deceptive trade practices. The complaint asks for unspecified damages and disgorgement of wrongful gain, invalidation of an indemnification agreement provided to this expert by LECG and contains a demand for a jury trial.

        In August 2004, we served a motion to dismiss the complaint with respect to the breach of contract, tortious interference with contractual relations and the unfair and deceptive trade practices counts, which motion the parties are currently briefing. We also filed our answer to the complaint.

        LECG is not able to determine the outcome or resolution of the complaint, or to estimate the amount or potential range of loss with respect to this complaint.

        LECG is also a party to certain legal proceedings arising out of the ordinary course of business, the outcomes of which individually or in the aggregate, in the opinion of LECG's management, would not have a material adverse effect on LECG's business, financial position or results of operations.

Business acquisitions and expert hires

        We have made commitments in connection with our acquisitions and certain expert agreements that will require us to make additional payments and bonus compensation payments if various performance goals are met.

        In August 2004, LECG purchased the business of Silicon Valley Expert Witness Group, Inc. The initial purchase price of $9.0 million included $3.0 million of additional payments to be made no later than September 2009. In addition, if specified revenue and operating margin targets are achieved, LECG will make additional payments of up to $3.0 million over a five-year period. See Note 6.

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        In March 2004, LECG acquired the business of Economic Analysis, LLC. In addition to the initial purchase price of $16.4 million paid in cash and shares of LECG common stock, if specified revenue and profitability targets are achieved, LECG will make additional payments of up to $2.6 million per year for three years. Additional payments of up to $2.0 million will also be made if certain revenue targets are met. See Note 6.

        In March 2004, LECG acquired the business of Low Rosen Taylor Soriano. In addition to the initial purchase price of $3.8 million paid in cash, if specified profitability targets are achieved, LECG will make additional payments of up to $4.2 million over a four-year period (see Note 6).

        In connection with the acquisition in August 2003 of CFES, if certain specified revenue and profitability targets are met, LECG will make additional payments ranging from $1.7 to $1.9 million per year for four years. In August 2004, LECG made the first of such payments in the amount of $1.7 million that was recorded to goodwill. In addition, based on an evaluation of results through September 2004, the Company estimated that the performance targets for 2004 will be met, and consequently has recognized additional goodwill of $1.7 million to be paid in August 2005. In addition, if certain performance targets are met, the Company will also pay bonus compensation ranging from $520,000 to $580,000 per year. The Company recognizes compensation expense on a quarterly basis since it believes it is probable that the performance targets will be achieved.

        In August 2004, LECG entered into employment agreements with certain experts, whereby if certain performance targets are met, LECG will make payments of up to $500,000 per year for the next four years. Payments will be subject to amortization over five years.

        In connection with the hiring of certain experts and professional staff in March 2004, LECG has agreed to pay performance bonuses of up to $5.7 million per year in 2006 and 2007 provided certain significant revenue and gross margin targets are achieved. Bonus payments will be subject to amortization over a seven-year period.

        LECG currently has outstanding letters of credit for $1.0 million under our revolving credit facility, which expires in March 2006, at which time all outstanding borrowings, if any, are required to be repaid. In August 2004, the Company's lender agreed to amend the Company's credit agreement, effective as of July 30, 2004, to allow the Company to make business acquisitions without the lender's prior consent, provided certain financial conditions are met.

11.   Subsequent Events

        On October 8, 2004, the Company acquired substantially all of the assets of Washington Advisory Group, LLC, a privately held expert services firm specializing in technology assessment and policy, and research development strategy. The purchase price consists of an initial payment of approximately $660,000 and a minimum guaranteed payment of $400,000 payable by February 15, 2007. Additional payments of up to $2.1 million will be made if specific growth and profitability targets are met.

        Effective October 31, 2004, the Company issued 68,979 shares of its common stock at a weighted average price of $14.54 in connection with its Employee Stock Purchase Plan for proceeds of $1,003,246.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and other parts of this Quarterly Report on Form 10-Q concerning our future business, operating and financial condition and statements using the terms "believes," "expects," "will," "could," "plans," "anticipates," "estimates," "predicts," "intends," "potential," "continue," "should," "may," or the negative of these terms or similar expressions are "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations as of the date of this Report. There may be events in the future that we are not able to accurately predict or control that may cause actual results to differ materially from expectations. Information contained in these forward-looking statements is inherently uncertain, and actual performance is subject to a number of risks, including but not limited to, (1) our ability to successfully attract, integrate and retain our experts and professional staff, (2) dependence on key personnel, (3) successful management of professional staff, (4) dependence on growth of our service offerings, (5) our ability to maintain and attract new business, (6) successful management of additional hiring and acquisitions, (7) potential professional liability, (8) intense competition and (9) risks inherent in international operations. Further information on these and other potential risk factors that could affect our financial results may be described from time to time in our periodic filings with the Securities and Exchange Commission and include those set forth in this Report under Factors Affecting Future Performance and Market Price of Common Stock." We cannot guarantee any future results, levels of activity, performance or achievement. We undertake no obligation to update any of these forward-looking statements after the date of this Report.

Overview

        We provide expert services. Our highly credentialed experts and professional staff address complex, unstructured business and public policy problems. We deliver independent expert testimony and original authoritative studies in both adversarial and non-adversarial environments. We conduct economic, financial and statistical analyses to provide objective opinions and strategic advice to legislative, judicial, regulatory and business decision makers. Our experts are renowned academics, former high-level government officials, experienced industry leaders and seasoned consultants. We are organized and operate in a manner that is attractive to our experts by providing them with autonomy, flexibility and the support of a highly capable professional staff.

Initial public offering

        On November 13, 2003 we completed our initial public offering in which we issued 8,625,000 shares of our Common Stock at $17.00 per share and received net proceeds of $134.1 million. In connection with this offering:

(i)

holders of common units of LECG Holding Company, LLC became holders of shares of common stock of LECG Corporation, a Delaware C corporation;



(ii)

such holders received $14.1 million in previously taxed but undistributed earnings of LECG retained during the period beginning September 29, 2000 and ending November 13, 2003, and approximately $1.3 million to cover their additional income tax liabilities for 2003; and



(iii)

we redeemed all of the outstanding Redeemable Class A preferred units of LECG Holding Company, LLC for approximately $40.7 million, which was equal to their original issuance price plus cumulative dividends that had accrued at a rate of 8% per annum, compounded quarterly.

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2004 acquisitions and recruitment of experts

        An important element of our growth strategy is the hiring of additional experts. Such hiring is designed to deepen our existing service offerings and to add new experts and related professional staff to new practice areas. While recruiting and hiring of experts occurs on a regular basis, we have added several large groups of experts and related professional staff in the United States, Canada and Europe in the first nine months of 2004.

        In August 2004, we acquired all of the outstanding shares of Silicon Valley Expert Witness Group, Inc., a firm specializing in complex technologies and intellectual property disputes, with a network of over 400 affiliated scientific and engineering experts. The purchase price of $9.0 million was comprised of $5.0 million paid in cash at closing, the issuance of 56,850 unregistered shares of our common stock with a fair market value of $958,000, and $3.0 million of additional payments to be made no later than 2009. The purchase price was allocated as follows: $7.7 million was allocated to goodwill, $100,000 was allocated to contract rights (10-month amortization) and $1.2 million was allocated primarily to net current assets, property and equipment. In addition, if specified revenue and operating margin targets are achieved, we will make additional payments of up to $3.0 million over a five-year period. Additional goodwill will be recorded in subsequent years if the performance targets are met.

        In March 2004, we acquired the business (including certain assets and liabilities, five experts, who were equity owners, and professional staff) of Economic Analysis, LLC, a company providing expert services involving complex business litigation and regulatory matters. The purchase price was comprised of $15.4 million paid in cash, and the issuance of 50,891 unregistered shares of our common stock with a fair market value of $1.0 million, of which $15.0 million was allocated to goodwill, $900,000 was allocated to contract rights (12-month amortization) and $500,000 was allocated primarily to property and equipment and other assets. In addition, if specified revenue and profitability targets are achieved, we will make additional payments of up to $2.6 million per year for three years and additional payments of up to $2.0 million if certain revenue targets are met. Additional goodwill will be recorded in subsequent years, if the performance targets are met.

        In March 2004, we acquired the business (including certain assets and liabilities, five experts, four of whom were equity owners and professional staff) of Low Rosen Taylor Soriano ("LRTS"), an expert services firm located in Toronto, Canada, providing expert services in the areas of business valuation and damages quantification. The purchase price was $3.8 million paid in cash, of which $3.1 million was allocated to goodwill, $145,000 was allocated to contract rights (12-month amortization) and $570,000 was allocated primarily to property and equipment and other assets. In addition, if specified profitability targets are achieved, we will make additional payments of up to $4.2 million over a four-year period. As a result of achieving certain profitability targets through September 30, 2004, we recorded additional goodwill of $245,000 as of September 30, 2004. Additional goodwill will be recorded in subsequent years if the performance targets are met.

        In 2004, we hired experts and other professional staff in connection with the opening of three new offices in Europe as well as experts and staff in the United States. In connection with our hiring efforts for the nine months ended September 30, 2004, we paid $16.4 million in signing bonuses and have agreed to pay additional signing bonuses of $2.3 million, which will be paid in the fourth quarter of 2004 and first quarter of 2005. Such amounts will be amortized over periods ranging from five to seven years. In addition, we have agreed to pay performance bonuses of up to $5.7 million per year in 2006 and 2007 and $500,000 per year in 2005 to 2008, provided certain revenue and gross margin targets are achieved. If paid, the bonuses would be subject to amortization over a seven-year period.

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Operations

        Historically, we have derived our revenues almost exclusively from professional service fees that are billed at standard hourly rates on a time and expense basis. Revenues related to these services are recognized when the earnings process is complete and collectibility is reasonably assured. We also offer services related to large environmental claims for which our fee includes a significant performance-based component. Due to the uncertainty regarding the amount and timing of performance-based compensation, revenues from this service offering are recognized in the period when the earnings process is complete, generally when we have received payment for the services we performed under the contract. Since October 1, 2002, performance-based expert fees have ranged from 0% to 11% of our quarterly revenues. For the nine months ended September 30, 2004, performance-based expert fees comprised approximately 2% of our revenues.

        Revenues are comprised of:

•

Fees for the services of our professional staff;



•

Fees for the services of our experts;



•

Performance-based expert fees relating to environmental claims; and



•

Amounts we charge for services provided by others and reimbursable by clients, including travel, document reproduction, messenger services and other costs.

        The following table summarizes our revenues from these sources by quarter for the last 8 quarters (in thousands).

        Compensation and project costs are comprised of:

•

Salary, bonuses, taxes and benefits of all professional staff and a limited number of experts;



•

Compensation to experts based on a percentage of their individual professional fees;



•

Compensation to experts based on specified revenue and gross margin performance targets;



•

Fees paid or payable to experts as project origination fees;



•

Costs that are reimbursable by clients, including travel, document reproduction, messenger services and other costs; and



•

Signing bonuses including amortization expense associated with signing bonuses subject to vesting over time.

        Hourly fees charged by the professional staff that supports our experts, rather than the hourly fees charged by our experts, generate a majority of our gross profit. Under our business model, most of our experts are compensated based on a percentage of their billings from 30% to 100%, averaging approximately 76% of their individual billings on particular projects. Experts are paid when we have received payment from our clients. Any outstanding advances previously paid to experts are deducted from such payments.

        Because of the manner in which we pay our experts, our gross profit is significantly dependent on the margin on our professional staff revenue. The number of professional staff assigned to a project

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will vary depending on the size, nature and duration of each engagement. We manage our personnel costs by monitoring engagement requirements and utilization of our professional staff. As an inducement to encourage experts to utilize our professional staff, experts generally receive project origination fees. These fees are based primarily on a percentage of the collected professional staff fees. Historically, these fees have averaged 13% of professional staff revenues. Experts are required, with some exceptions approved by us, to use our professional staff unless the skills required to perform the work are not available through us. In these instances we engage outside individual or firm-based consultants, who are typically compensated on an hourly basis. Both the revenue and cost resulting from the services provided by these outside consultants are recognized in the period in which the services are performed. Such services constitute a small portion of our revenue and cost.

        Hiring of additional experts sometimes involves the payment of cash signing bonuses. Signing bonuses are generally amortized over the term defined in the employment agreement for the period during which they could be recovered from the employee if he or she were to leave us prior to a specified date. Most of our agreements allow us to recover signing bonuses over periods generally ranging from two to seven years.

CRITICAL ACCOUNTING POLICIES

Revenue recognition

        Revenues include all amounts earned that are billed or billable, including reimbursable expenses, and have been reduced for amounts related to work performed that are estimated to be uncollectible. Expert revenues consist of revenues generated by experts who are our employees and revenues generated by experts who are independent contractors. There is no operating, business or other substantive distinction between our employee experts and our exclusive independent contractor experts.

        Revenues primarily arise from time and material contracts, which are recognized in the period the services are performed. We also enter into certain performance-based contracts for which performance fees are dependent upon a successful outcome, as defined by the consulting engagement. Revenues related to performance-based fee contracts are recognized in the period when the earnings process is complete and we have received payment for the services we performed under the contract. Revenues are also generated from fixed price contracts, which are recognized as the agreed upon services are performed. Such fixed price contract fees are not a material component of total revenues.

Provision for income taxes

        From September 29, 2000 to November 13, 2003, we operated as a limited liability company and were taxed as a partnership. Accordingly, we paid no significant income taxes on our own behalf during that period and there is no provision for income tax during the periods from September 29, 2000 to November 13, 2003 in our consolidated financial statements.

        In connection with our November 2003 initial public offering, we became a C corporation subject to federal and state income taxes. We account for income taxes in accordance with SFAS 109 Accounting for Income Taxes, under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. In accordance with SFAS 109, a valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized. Significant management judgment is required in determining if it is more likely than not that we will be able to utilize the potential tax benefit represented by our deferred tax assets. Consideration is given to evidence such as the history of prior year taxable income, expiration periods for net operating losses and our projections. No valuation allowance was recorded at December 31, 2003 and September 30, 2004. Our effective tax rate is determined based on estimated worldwide pre-tax income, permanent differences and credits, and

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reviewed quarterly to determine if actual results require modifying the effective tax rate. We expect that our estimated 2004 effective income tax rate will be approximately 40.6%.

Goodwill and identifiable intangibles

        Goodwill was recorded at the time of the management buyout in September 2000. Additional goodwill and identifiable intangibles were recorded related to acquisitions made through September 30, 2004. We determined that we have one reporting unit based on the similarity of operations throughout its individual offices. Business acquisitions have been integrated within the structure of the organization and all the individual offices share similar economic characteristics and do not represent separate reporting units. We assess the impairment of goodwill at least annually, and whenever events or significant changes in circumstance indicate that the carrying value may not be recoverable. Factors that we consider important in determining whether to perform an impairment review include significant underperformance relative to forecasted operating results and significant negative industry or economic trends. If we determine that the carrying value of goodwill may not be recoverable, then we will assess impairment based on a projection of undiscounted future cash flows and measure the amount of impairment based on fair value.

        For the 2004 annual impairment test, we have used the quoted market price of LECG's common stock and compared our fair value to our book value. Based on the results of our test performed as of October 1, 2004, we concluded that goodwill was not impaired.

        Intangible assets that are separable from goodwill and have determinable useful lives are valued separately and amortized over their expected useful lives. Intangible assets consist principally of customer-related intangibles and are generally amortized over 10 to 18 months.

Use of estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our financial statements contain various estimates including, but not limited to, estimates for unrealizable revenue, valuation allowance on deferred tax assets, bonus compensation, contingent purchase price payments for businesses acquired and costs recoverable from non-salaried experts. Actual results could differ from those estimates.

RESULTS OF OPERATIONS

Comparability of financial results

        The following items impact the comparability of our financial results for the quarter and nine months ended September 30, 2004 as compared to the same periods in 2003.

•

Prior to November 13, 2003, no income taxes were recorded or paid at the corporate level. In prior periods we operated as a limited liability company and taxes were paid at the individual shareholder level, not by us.



•

Prior to November 13, 2003, we incurred preferred stock accretion and dividend charges in conjunction with our outstanding preferred units, which were redeemed due to our initial public offering; however, they impacted the calculation of earnings per share.



•

Basic and diluted earnings per share for the quarter and nine months ended September 30, 2004 include the effect of selling 8,625,000 shares in our initial public offering on November 13, 2003.

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Quarter ended September 30, 2004 compared to quarter ended September 30, 2003

Revenues

        Revenues for the third quarter of 2004 increased $14.5 million, or 35%, to $56.1 million from $41.6 million for the same quarter in 2003. The increase included a $12.0 million, or 30% increase in expert and professional staff revenues, excluding performance-based services. The increase in expert and professional staff revenues resulted from a 27% increase in the number of expert and professional staff billable hours. Underlying this growth is the addition of 68 experts and 78 professional staff members since September 30, 2003 as a result of our recruitment efforts, acquisitions and European expansion. Our international operations contributed $2.3 million to the overall growth in revenue in the third quarter of 2004, and revenues from our international operations represent 13% of revenue as compared to 11% for the third quarter of 2003. In addition, there was a 4% increase in the average hourly billing rate for the quarter ended September 30, 2004 as compared to the same period in 2003 due to rate increases and changes in the expert and staff mix. There was also an increase in expert revenues from our performance-based services of $1.8 million in the third quarter of 2004 as compared to no revenue for performance-based services in the same quarter in 2003. The increase was due to the timing of collections for performance-based engagements. Revenue on these engagements is recognized when payment is received.

Cost of services

•

Compensation and project costs.    Compensation and project costs in the third quarter of 2004 increased $9.7 million, or 36%, to $36.9 million from $27.1 million for the same quarter of 2003. Expert and professional staff compensation increased $6.9 million as we added 68 experts and 78 professional staff since September 30, 2003. Our growth in revenues contributed directly to the increase in expert compensation as most of our experts are paid a percentage of their own billings plus a percentage of professional staff billings. Due to increases in base salaries in 2004, and to align bonus compensation with our performance for 2004 based on lower 2004 utilization rates and the impact on profitability from our investment in new hires, we reduced bonus compensation for professional staff by $773,000, as compared to the quarter ended September 30, 2003. Compensation and project costs have also increased as the result of increased amortization of signing bonuses of $1.3 million for the quarter ended September 30, 2004, an increase of $935,000 from $407,000 for the same quarter of 2003, as a consequence of our successful recruiting efforts. Project origination fees increased $663,000, consistent with the growth in revenues, to $3.6 million for the third quarter of 2004, from $2.9 million in the same period of 2003. Certain overhead costs incurred by us are reimbursable by our non-salaried experts who are compensated based on a percentage of their individual professional fees. We have recognized a reduction to compensation and project costs of $226,000 in the third quarter of 2004 for reimbursable costs due from experts.



•

Equity-based compensation.    Equity-based compensation of $151,000 in the third quarter of 2004 represented the amortization of deferred equity compensation from options and restricted stock issued to employees during the period prior to the Company's IPO with exercise prices less than the fair market value on the grant date. The primary sources of equity-based expense or benefit subject to variable accounting measurement have fully vested, and consequently no longer have an effect on the Company's equity-based compensation. Equity-based compensation in the third quarter of 2003 was $229,000, which included $79,000 of equity-based compensation from options and restricted stock subject to variable accounting.

Operating expenses

        Operating expenses in the third quarter of 2004 increased $2.7 million, or 31%, to $11.3 million from $8.6 million for the same quarter of 2003. The increase was due in part to costs associated with approximately 30 additional administrative staff and related payroll costs of $880,000. Operating expenses for the quarter ended September 30, 2004 include a reduction in bonus compensation of

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$567,000, as compared to the same period in 2003, to reflect increases in base salaries in 2004 and to align bonus compensation with our performance for 2004. Corresponding personnel costs, and recruiting fees in connection with hiring experts and professional staff increased $625,000. We anticipate we will continue to incur fees for recruiting as we pursue our growth strategy of attracting high-level experts and professional staff in practice areas where we are well established, as well as practice areas new to LECG. Our facilities costs increased $762,000 in connection with the expansion of existing offices, moving into our new London location and the opening of five new offices including our three new European offices. The use of outside professional services increased by $679,000 over the same period in 2003 resulting from increased legal fees, which were due in part to the NERA litigation and general corporate matters, costs associated with our public company status including our Sarbanes-Oxley compliance costs and tax consulting and compliance services. Marketing and related costs increased $280,000 as the result of increased business development efforts. Insurance and other costs increased $349,000 due in part to our status as a public company and increased property taxes associated with our expansion. Certain administrative costs incurred by us are reimbursable by our non-salaried experts who are compensated based on a percentage of their individual professional fees. We reduced operating expense of $410,000 in the third quarter of 2004 for such reimbursable costs due from experts.

Interest expense

        Interest expense for the third quarter of 2004 decreased $456,000 to $60,000 from $516,000 for the third quarter of 2003. The decrease was due to the absence of outstanding borrowings on both the revolving credit facility and the term loan throughout the third quarter of 2004 as the result of repaying the outstanding balances in mid-November 2003. Interest expense includes the amortization of fees paid in connection with our credit facility.

Provision for Income Taxes

        From September 29, 2000 to November 13, 2003, we operated as a limited liability company and were taxed as a partnership. Accordingly, we paid no significant income taxes on our own behalf during that period and there is no provision for income tax during the periods from September 29, 2000 to November 13, 2003 in our consolidated financial statements.

        In connection with our initial public offering, we became a C corporation subject to federal and state income taxes. We account for income taxes in accordance with SFAS 109 Accounting for Income Taxes. We estimate that our annual effective tax rate for 2004 will be approximately 40.6% and have recognized income tax expense of $3.2 million for the third quarter of 2004. Our effective tax rate is determined based on estimated worldwide pre-tax income, permanent differences and credits, and reviewed quarterly to determine if actual results require modifying the effective tax rate. We are entitled to a deduction for federal and state income taxes when non-qualified stock options are exercised. We have recognized a reduction of current taxes payable of $616,000 for options exercised in the quarter ended September 30, 2004 and have reduced deferred tax assets by $257,000 and increased additional paid in capital by $359,000.

Accrued preferred dividends and accretion of preferred units

        In 2004, we no longer had an obligation to pay or accrue preferred Class A dividends or recognize accretion on preferred shares as a consequence of having redeemed all outstanding shares of our preferred Class A stock in November 2003. In the third quarter of 2003, we accrued preferred dividends and accretion of $1.1 million, thereby reducing net income available to common stockholders.

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Nine months ended September 30, 2004 compared to nine months ended September 30, 2003

Revenues

        Revenues for the nine months ended September 30, 2004 increased $31.0 million, or 26%, to $152.9 million from $121.8 million for the same period in 2003. This increase included a $29.8 million, or 27% increase in expert and professional staff revenues, excluding performance-based services. The increase in expert and professional staff revenues resulted from a 17% increase in the number of expert and professional staff billable hours, in addition to a 10% increase in the average hourly billing rate due to rate increases and changes in the expert and staff mix. Underlying this growth is the addition of 68 experts and 78 professional staff members since September 30, 2003 as a result of our recruitment efforts, acquisitions of the businesses of the Center for Forensic Economic Studies in August 2003, Low Rosen Taylor Soriano and Economic Analysis, LLC in March 2004, and Silicon Valley Expert Witness Group, Inc. in August 2004, and our European expansion. Our international operations contributed $7.6 million to the overall growth in revenues for the nine months ended September 30, 2004 and revenues from our international operations represent 12% of total revenue as compared to 9% for the same period in 2003. Offsetting this increase was a decrease in expert revenues from our performance-based services of $549,000, or a 13% decrease to $3.6 million from $4.1 million for the same period in 2003.

Cost of services

•

Compensation and project costs.    Compensation and project costs in the nine months ended September 30, 2004 increased $19.4 million, or 24%, to $101.1 million from $81.7 million for the same period in 2003. Expert and professional staff compensation increased $15.5 million, as we added 68 experts since September 30, 2003, 59 of which were added in the nine months ended September 30, 2004, and 78 professional staff since September 30, 2003. Our growth in revenues contributed to the increase in expert compensation, as most of our experts are paid a percentage of their own billings plus a percentage of professional staff billings. Due to increases in base salaries in 2004, and to align bonus compensation with our performance for 2004 based on lower 2004 utilization rates and the impact on profitability from our investment in new hires, we reduced bonus compensation for professional staff by $1.3 million. Also contributing to the increase in cost of services is the amortization of signing bonuses of $2.9 million for the nine months ended September 30, 2004, representing an increase of $1.7 million from $1.2 million for the same period of 2003 as a consequence of our successful recruiting efforts. Compensation and project costs also include project origination fees of $9.8 million for the nine months ended September 30, 2004. Project origination fees increased $1.7 million over the same period of 2003, consistent with the growth in revenues.



•

Equity-based compensation.    Equity-based compensation in the nine months ended September 30, 2004 contributed $73,000 to gross margin due primarily to the associated variable accounting effect of certain restricted shares and options subject to performance based vesting combined with lower prices for our stock in 2004 as compared to December 31, 2003. The primary source of our variable accounting benefit in 2004 has been restricted shares subject to a non-recourse note. The note was repaid in May 2004, thereby eliminating the impact of variable accounting resulting from these restricted shares in the future. Offsetting the benefit of shares and options subject to variable accounting is approximately $464,000 of amortization expense associated with options and restricted stock issued with exercise prices less than the fair market value on the grant. Such options and restricted stock were issued to employees prior to the Company's IPO in November 2003.

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Operating expenses

        Operating expenses in the nine months ended September 30, 2004 increased $6.1 million, or 24%, to $31.7 million from $25.6 million for the same period of 2003. The increase was due in part to increases in administrative and support personnel and related payroll costs of $1.8 million. Operating expenses for the nine months ended September 30, 2004 include a reduction in bonus compensation of $722,000, as compared to the same period in 2003, to reflect increases in base salaries in 2004 and to align bonus compensation with our performance for 2004. Corresponding personnel costs, and recruiting fees in connection with hiring experts and professional staff, increased $1.2 million, due in part to our successful recruiting efforts in the nine months ended September 30, 2004. We anticipate we will continue to incur fees for recruiting as we pursue our growth strategy of attracting high-level experts and professional staff. Also contributing to the increase in operating expenses is an increase in facilities costs of $1.7 million in connection with the expansion of existing offices and the opening of six new offices since September 30, 2003. The use of outside professional services increased by $1.5 million over the same period in 2003 resulting from increased legal, accounting and tax consulting fees, which were due in part to start up services performed for our European operations, the NERA litigation, general corporate matters and costs associated with our public company status including our Sarbanes-Oxley compliance effort and tax consulting and compliance services. Contributing to the overall increase in operating expenses was an increase of $626,000 for computer related and supplies costs due to the increased workforce and administrative related activity. Marketing and related costs increased $561,000 as the result of increased business development efforts. Insurance and other costs increased $894,000 due in part to our status as a public company and increased property taxes associated with our expansion.

Interest expense

        Interest expense decreased $1.8 million to $182,000 in the nine months ended September 30, 2004 from $1.9 million for the same period in 2003. The decrease was due to the absence of outstanding borrowings on both the revolving credit facility and the term loan throughout the first nine months of 2004 as the result of repaying the outstanding balances in mid-November 2003. Interest expense is comprised primarily of amortization of fees paid in connection with our credit facility.

Provision for Income Taxes

        From September 29, 2000 to November 13, 2003, we operated as a limited liability company and were taxed as a partnership. Accordingly, we paid no significant income taxes on our own behalf during that period and there is no provision for income tax during the periods from September 29, 2000 to November 13, 2003 in our consolidated financial statements.

        In connection with our initial public offering, we became a C corporation subject to federal and state income taxes. We account for income taxes in accordance with SFAS 109 Accounting for Income Taxes. We estimate that our annual effective tax rate for 2004 will be approximately 40.6%, and have recognized income tax expense of $8.2 million for the nine months ended September 30, 2004. We are entitled to a deduction for federal and state income taxes when non-qualified stock options are exercised. We have recognized a reduction of current taxes payable of $2.7 million for options exercised in the nine months ended September 30, 2004 and have reduced deferred tax assets and increased additional paid in capital by $1.0 million and $1.7 million, respectively.

Accrued preferred dividends and accretion of preferred units

        In 2004, we no longer had an obligation to pay or accrue preferred Class A dividends or recognize accretion on preferred shares as a consequence of having redeemed all outstanding shares of our preferred Class A stock in November 2003. In the nine months ended September 30, 2003, we accrued

23

preferred dividends and accretion of $3.1 million, thereby reducing net income available to common stockholders.

LIQUIDITY AND CAPITAL RESOURCES

        On November 13, 2003, we had an initial public offering, in which we sold 8,625,000 shares of our Common Stock at $17.00 per share for net proceeds of $134.1 million, after underwriters' discount and costs of offering. As of September 30, 2004, we had $24.1 million in cash and cash equivalents, primarily in money market accounts, and no outstanding bank borrowing. Our primary financing need will continue to be to fund our growth. An important element of our growth strategy is the recruitment of additional experts and our expansion into new geographical areas and consulting practice areas. We expect to continue to search for and acquire top-level experts in order to deepen our existing service offerings and to add new experts and related professional staff to new practice areas. Prior to our initial public offering, our primary source of liquidity had been borrowings under our revolving credit and term loan facilities, supplemented by cash flows from operating activities. Our current sources of cash are the remaining proceeds from our initial public offering and cash generated by operations, which have been augmented by the proceeds from option exercises and the sale of common stock through our Employee Stock Purchase Plan.

        Net cash used by operations in the nine months ended September 30, 2004 was $14.9 million as compared to $5.1 million provided by operations in the same period in 2003. The primary sources and uses of cash from operations in the first nine months of 2004 were net income of $12.0 million, which included non-cash expenses of $6.4 million, offset by an increase in accounts receivable of $23.3 million due to an increase in expert and professional staff revenue and longer billing and collection periods, due in part to billing activities associated with new clients, new experts and our expansion into Europe. Cash paid for signing bonuses was $16.4 million for the nine months ended September 30, 2004. Signing bonuses are an integral part of our recruitment effort, and the significant investment for the nine months ended September 30, 2004 reflects our hiring activities and expansion into Europe. We will likely continue to use signing bonuses in our efforts to recruit experts and professional staff. Substantially all of the signing bonuses issued have vesting periods, which range from two to seven years, whereby we are entitled to receive any unearned amounts in the event the recipient leaves prior to the end of the vesting period. Prepaid expenses and advances to experts increased $3.3 million primarily due to differences in the timing of payments to experts for advances as compared to payments for fees earned. Accounts payable and accrued liabilities increased by $7.5 million, due primarily to an increase in accrued federal and states taxes and in part to the timing of vendor payments.

        Net cash used by investing activities was $27.8 million for the nine months ended September 30, 2004 as compared to $3.3 million for the same period in 2003. Investing activities in the nine months ended September 30, 2004 were comprised of investment in property and equipment of $2.8 million, due in part to our new London office space and $25.0 million of cash paid for the following acquisitions (in millions):

        Net cash used in financing activities was $227,000, as the result of payments for accrued distributions to stockholders of $4.2 million for previously taxed but undistributed earnings and

24

estimated taxes of the LLC, offset by $2.6 million of proceeds from the exercise of options to purchase common stock and $1.1 million from the issuance of 76,771 shares of our common stock in connection with our Employee Stock Purchase Plan. We do not anticipate that there will be any additional distributions to stockholders relating to the prior LLC status. Subsequent to September 30, 2004, we have issued 68,979 shares in connection with our Employee Stock Purchase Plan, for proceeds of approximately $1.0 million. Net cash used in financing activities for the nine months ended September 30, 2003 was $1.4 million due to $7.0 million of bank borrowings net of repayment and $400,000 of proceeds from the exercise of options offset by $8.0 million of tax distributions to LLC members and $871,000 of fees for our revolving credit and term loan facilities.

        We have made commitments in connection with our acquisitions and certain expert agreements that will require us to make additional payments and bonus compensation payments if various performance goals are met.

        In August 2004, we purchased the business of Silicon Valley Expert Witness Group, Inc. ("SVEWG"). The initial purchase price of $9.0 million included $3.0 million of additional payments to be made no later than September 2009. In addition, if specified revenue and operating margin targets are achieved, we will make additional payments of up to $3.0 million over a five year-period.

        In March 2004, we acquired the business of Economic Analysis, LLC. In addition to the initial payment of $16.4 million paid in cash and shares of common stock, if specified revenue and profitability targets are achieved, we will make additional payments of up to $2.6 million per year for three years. Additional payments of up to $2.0 million will also be made if certain revenue targets are met.

        In March 2004, we acquired the business of Low Rosen Taylor Soriano. In addition to the initial purchase price of $3.8 million paid in cash, if specified profitability targets are achieved, we will make additional payments of up to $4.2 million in total over a four-year period. Based on an evaluation of results through September 2004, we estimate that the performance targets for 2004 will be met, and consequently have recognized additional goodwill of $245,000 to be paid in February 2005.

        In August 2003, we acquired the business of the Center for Forensic Economic Studies. If certain specified revenue and profitability targets are met, we will make additional payments ranging from $1.7 to $1.9 million per year for four years. In August 2004, we made the first of such payments in the amount of $1.7 million. In addition, based on an evaluation of results through September 2004, we estimate that the performance targets for 2004 will be met, and consequently have recognized additional goodwill of $1.7 million to be paid in August 2005. In addition, if certain performance targets are met, we will also pay bonus compensation ranging from $520,000 to $580,000 per year. We recognize compensation expense on a quarterly basis since we believe it is probable that the performance targets will be achieved.

        In August 2004, we entered into employment agreements with certain experts, whereby if certain performance targets are met, we will make payments of up to $500,000 per year for the next four years. If such payments are made, they would be subject to amortization over five years.

        In connection with the hiring of certain experts and professional staff in March 2004, we have agreed to pay performance bonuses of up to $5.7 million per year in 2006 and 2007 provided certain significant revenue and gross margin targets are achieved. If paid, the bonuses would be subject to amortization over a seven-year period.

        Our revolving credit facility provides for a maximum borrowing capacity of $18.0 million, $2.0 million of which can be used to secure letters of credit. At September 30, 2004, we had no outstanding borrowings on the revolving credit facility, and we had outstanding letters of credit for $1.0 million. In August 2004, our lender agreed to amend our credit facility to allow us to make business acquisitions without the lender's prior consent, provided certain conditions are met. Our

25

revolving credit facility expires in March 2006, at which time all outstanding borrowings, if any, are required to be repaid.

Future needs

        We believe funds generated by operations, the remaining net proceeds from our initial public offering and the amounts available to us under our revolving credit facility will provide adequate cash to fund our anticipated cash needs, at least through the next twelve months. Thereafter, we anticipate that our cash requirements relating to future operations will be funded with cash generated from operations and short-term borrowings. Cash payments for signing bonuses and acquisitions could affect our anticipated cash needs. We currently anticipate that we will retain all of our earnings, if any, for development of our business and do not anticipate paying any cash dividends in the foreseeable future.

        Inflation has not had a material impact on our operating results or financial position to date, nor do we expect inflation to have an impact in the short-term; however there can no assurance that inflation will not have an adverse effect on our financial results and position in the future.

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FACTORS AFFECTING FUTURE PERFORMANCE AND MARKET PRICE OF COMMON STOCK

        Set forth below and elsewhere in this Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. The following risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In that case, the market price of our common stock could decline, and stockholder may lose all or part of their investment.

Our financial results could suffer if we are unable to successfully attract, integrate and retain our experts and professional staff.

        Similar to other professional service firms, many of our clients are attracted to LECG by their desire to engage individual experts, and the ongoing relationship with our clients is often managed primarily by our individual experts. If an expert terminates his or her relationship with us, it is probable that most of the clients and projects for which that expert is responsible will continue with the expert, and the clients will terminate their relationship with us. We generally do not have non-competition agreements with any of our experts and as a result, experts can terminate their relationship with us at any time and immediately begin to compete against us. The top five experts accounted for 19% of our revenues during the first nine months of 2004. If any of these individuals or our other experts terminate their relationship with us or compete against us, it could materially harm our business and financial results.

        In addition, if we are unable to attract, develop, motivate and retain highly qualified experts, professional staff and administrative personnel, our ability to adequately manage and staff our existing projects and obtain new projects could be impaired, which would adversely affect our business and its prospects for growth. Qualified professionals are in great demand, and we face significant competition for both senior and junior professionals with the requisite credentials and experience. Our competition comes from other consulting firms, research firms, governments, universities and other similar enterprises. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do. Increasing competition for these professionals may also significantly increase our labor costs, which could negatively affect our margins and results of operations. The loss of the services of, or the failure to recruit, a significant number of experts, professional staff or administrative personnel could harm our business, including our ability to secure and complete new projects.

Our financial results could suffer if we are unable to achieve or maintain high utilization and billing rates for our professional staff.

        Our profitability depends to a large extent on the utilization and billing rates of our professional staff. Utilization of our professional staff is affected by a number of factors, including:

•

the number and size of client engagements;



•

our experts' use of professional staff to perform the projects they obtain from clients and the nature of specific client engagements, some of which require greater professional staff involvement than others;



•

the timing of the commencement, completion and termination of projects, which in many cases is unpredictable;



•

our ability to transition our professional staff efficiently from completed projects to new engagements;

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•

our ability to forecast demand for our services and thereby maintain an appropriate level of professional staff;



•

conditions affecting the industries in which we practice as well as general economic conditions; and



•

our ability to recruit professional staff with the requisite skill level to effectively work on our engagements.

        The billing rates of our professional staff that we are able to charge are also affected by a number of additional factors, including:

•

the quality of our expert services;



•

the market demand for the expert services we provide;



•

our competition and the pricing policies of our competitors; and



•

general economic conditions.

        If we are unable to achieve and maintain high utilization as well as maintain or increase the billing rates for our professional staff, our financial results could suffer materially.

If we are unable to manage the growth of our business successfully, our financial results and business prospects could suffer.

        Since the management buyout in 2000, we have experienced significant growth in the number of our experts and professional staff. We have also expanded our practice areas and have opened offices in new locations in the United States and overseas. We may not be able to successfully manage a significantly larger and more geographically diverse workforce as we increase the number of our experts and professional staff and expand our practice areas. Additionally, growth increases the demands on our management, our internal systems, procedures and controls. To successfully manage growth, we must add administrative staff and periodically update and strengthen our operating, financial and management information systems, procedures and controls, which will increase our costs and may reduce our profitability. This need to augment our support infrastructure due to growth is compounded by our decision to become a public reporting company, and the increased expense that have incurred in complying with existing and new regulatory requirements. We may be unable to successfully implement improvements to our information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. Any failure to successfully manage growth could harm our financial results and business prospects.

Expert revenue from our performance-based fee service offering is difficult to predict and recovery is uncertain.

        Performance-based expert fees comprised 2% of our total revenue for the nine months ended September 30, 2004. Because these fees are contingent on the amounts recovered by our clients, revenue on such cases, which is recognized generally on receipt, is not certain, the timing of recovery is difficult to predict, and revenue may not arrive evenly through the year, thereby affecting our quarter by quarter results.

We depend on the complex damages, competition policy/antitrust and environmental claims consulting practice areas, which could be adversely affected by changes in the legal, regulatory and economic environment.

        Our business is heavily concentrated in the practice areas of complex damages, competition policy/antitrust, including mergers and acquisitions and environmental claims. Projects in our complex

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damages practice area accounted for 26% and 23% of our billings in 2003 and the first nine months of 2004, respectively. Projects in our competition policy/antitrust practice area, including mergers and acquisitions, accounted for 19% and 25% of our billings in 2003 and the first nine months of 2004, respectively, and projects in our environmental claims practice area accounted for 22% and 16% of our billings in 2003 and the first nine months of 2004, respectively. Changes in the federal antitrust laws or the federal regulatory environment, changes in environmental laws or changes in judicial interpretations of these laws could substantially reduce the need for expert consulting services in these areas. This would reduce our revenues and the number of future projects in these practice areas. In addition, adverse changes in general economic conditions, particularly conditions influencing the merger and acquisition activity of larger companies, could also negatively impact the number and scope of our projects in proceedings before the Department of Justice and the Federal Trade Commission.

Additional hiring and acquisitions could disrupt our operations, increase our costs or otherwise harm our business.

        Our business strategy is dependent in part upon our ability to grow by hiring individuals or groups of experts and by acquiring other expert services firms. However, we may be unable to identify, hire, acquire or successfully integrate new experts and consulting practices without substantial expense, delay or other operational or financial problems. And, we may be unable to achieve the financial, operational and other benefits we anticipate from any hiring or acquisition. Hiring additional experts or acquiring other expert services firms could also involve a number of additional risks, including:

•

the diversion of management's time, attention and resources, especially since Dr. Teece, our Chairman, and Mr. Kaplan, our President, also provide consulting services that account for a significant amount of our revenues;



•

loss of key acquired personnel;



•

potential impairment of existing relationships with our experts, professionals and clients;



•

the creation of conflicts of interest that require us to decline engagements that we otherwise could have accepted;



•

increased costs to improve, coordinate or integrate managerial, operational, financial and administrative systems;



•

dilution of our stock as a result of issuing equity securities in connection with hiring new experts or acquiring other expert services firms; and



•

difficulties in integrating diverse corporate cultures.

        We have encountered these risks after hiring individuals and groups of experts and acquiring expert practices, and we anticipate that we will encounter these risks in connection with future hiring and acquisitions.

        Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential experts or the price we pay for businesses we wish to acquire. In addition, this increased competition could make it more difficult to retain our experts. The occurrence of any of these events could harm our business, financial condition and results of operations.

Projects may be terminated suddenly, which may negatively impact our financial results.

        Our projects generally center on decisions, disputes, proceedings or transactions in which clients are seeking expert advice and opinions. Our projects can terminate suddenly and without advance notice to us. Our clients may decide at any time to settle their disputes or proceedings, to abandon their transactions or to take other actions that result in the early termination of a project. Our clients

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are under no contractual obligation to continue using our services. If an engagement is terminated unexpectedly, or even upon the completion of a project, our professionals working on the engagement may be underutilized until we assign them to other projects. The termination or significant reduction in the scope of a single large engagement could negatively impact our results of operations.

Conflicts of interest could preclude us from accepting projects.

        We provide our services primarily in connection with significant or complex decisions, disputes and regulatory proceedings that are usually adversarial or involve sensitive client information. Our engagement by a client may preclude us from accepting projects with our clients' competitors or adversaries because of conflicts of interest or other business reasons. As we increase the size of our operations, the number of conflict situations can be expected to increase. Moreover, in many industries in which we provide services, for example the petroleum industry, there has been a continuing trend toward business consolidations and strategic alliances. These consolidations and alliances reduce the number of companies that may seek our services and increase the chances that we will be unable to accept new projects as a result of conflicts of interest. If we are unable to accept new assignments for any reason, our professional staff may become underutilized, which would adversely affect our revenues and results of operations in future periods.

Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our experts and the quality of our services on client projects.

        Our ability to secure new projects depends heavily upon our reputation and the individual reputations of our experts. Any factor that diminishes our reputation or that of our experts could make it substantially more difficult for us to attract new projects and clients. Similarly, because we obtain many of our new projects from clients that we have worked with in the past or from referrals by those clients, any client that questions the quality of our work or that of our experts could seriously impair our ability to secure additional new projects and clients.

        In litigation, we believe that there has been an increase in the frequency of challenges made by opposing parties to the qualifications of experts. In the event a court or other decision-maker determines that an expert is not qualified to serve as an expert witness in a particular matter, then this determination could harm the expert's reputation and ability to act as an expert in other engagements which could in turn harm our business reputation and our ability to obtain new engagements.

Our engagements could result in professional liability, which could be very costly and hurt our reputation.

        Our projects typically involve complex analysis and the exercise of professional judgment. As a result, we are subject to the risk of professional liability. Many of our projects involve matters that could have a severe impact on a client's business, cause a client to gain or lose significant amounts of money or assist or prevent a client from pursuing desirable business opportunities. If a client questions the quality of our work, the client could threaten or bring a lawsuit to recover damages or contest its obligation to pay our fees. Litigation alleging that we performed negligently or breached any other obligations to a client could expose us to significant liabilities and damage our reputation. We carry professional liability insurance to cover most of these types of claims, but the policy limits and the breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of legal defense. For example, we provide services on engagements in which the amounts in controversy or the impact on a client may substantially exceed the limits of our errors and omissions insurance coverage. If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability. Litigation, regardless of the outcome, is often very costly, could result in distractions to our management and experts and could harm our business and our reputation.

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Intense competition from economic, business and financial consulting firms could hurt our business.

        The market for expert consulting services is intensely competitive, highly fragmented and subject to rapid change. Many of our competitors are national and international in scope and have significantly greater personnel, financial, technical and marketing resources. In addition, these competitors may generate greater revenues and have greater name recognition than we do. We may be unable to compete successfully with our existing competitors or with any new competitors. There are relatively low barriers to entry, and we have faced and expect to continue to face additional competition from new entrants into the economic, business and financial consulting industries. In the litigation and regulatory expert services markets, we compete primarily with economic, business and financial consulting firms and individual academics. Expert services are also available from a variety of participants in the business consulting market, including general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms, small "niche" consulting companies and the internal professional resources of companies.

We are subject to additional risks associated with international operations.

        We currently have operations in Argentina, Australia, Belgium, Canada, France, New Zealand, Spain, South Korea and the United Kingdom. In the first nine months of 2003 and 2004, 9.3% and 12.3%, respectively, of our revenues was attributable to activities outside of the United States. We may continue to expand internationally and our international revenues may account for an increasing portion of our revenues in the future. Our international operations carry special financial and business risks, including:

•

greater difficulties in managing and staffing foreign operations;



•

less stable political and economic environments;



•

cultural differences that adversely affect utilization;



•

currency fluctuations that adversely affect our financial position and operating results;



•

unexpected changes in regulatory requirements, tariffs and other barriers;



•

civil disturbances or other catastrophic events that reduce business activity;



•

greater difficulties in collecting accounts receivable; and



•

labor regulations that increase the cost of hiring, maintaining and terminating employees.

        The occurrence of any one of these factors could have an adverse effect on our operating results.

Our disputes with Navigant Consulting, Inc. and National Economic Research Associates, Inc. could harm our business and financial results.

        We have a dispute with Navigant Consulting, Inc. arising out of our management led buyout of certain of the assets and liabilities of LECG, Inc. from Navigant Consulting and LECG, Inc. In the management led buyout, we acquired substantially all of the assets and assumed certain liabilities of LECG, Inc. pursuant to an asset purchase agreement with Navigant Consulting and LECG, Inc. dated September 29, 2000. Under the asset purchase agreement, up to $5.0 million of the purchase price was deferred contingent upon whether specific individuals listed on a schedule to the asset purchase agreement had an employment, consulting, contracting or other relationship with us on September 29, 2001.

        Navigant Consulting contends that it is entitled to a payment of approximately $4.9 million plus interest with respect to the contingent purchase price amount. On several occasions before and after

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September 29, 2001, we notified Navigant Consulting that several of the individuals listed on the schedule to the asset purchase agreement did not have an employment, consulting, contracting or other relationship with us on September 29, 2001. If Navigant Consulting initiates legal proceedings against us, a decision against us could harm our financial results and financial position.

        In June 2004, National Economic Research Associates, Inc., or NERA, and its parent company Marsh & McLennan Companies, Inc. filed a complaint against us and one of our experts. This action arises out of our hiring of professionals in March 2004 who were formerly employed by NERA in the United States and Europe. The complaint alleges that during and after his employment with NERA, this expert violated contractual commitments and fiduciary duties to NERA. The complaint further alleges that LECG interfered with NERA's contractual relations and advantageous business relationships, misappropriated confidential business information and goodwill, and engaged in unfair and deceptive trade practices. The complaint asks for unspecified damages and disgorgement of wrongful gain, invalidation of an indemnification agreement provided this expert by us and contains a demand for a jury trial. In August 2004, we served a motion to dismiss the complaint with respect to the breach of contract, tortious interference with contractual relations and the unfair and deceptive trade practices counts, which motion the parties are currently briefing. We also filed our answer to the complaint. A decision against us in this case could harm our financial results and financial position.

We operate as a publicly traded corporation rather than as a privately held limited liability company, which could make it more costly for us to operate our business.

        Prior to November 13, 2003, we operated as a privately held limited liability company since the management buyout. Operating as a publicly traded C corporation has imposed costs and challenges on us. These include the preparation and filing of federal and state income tax returns, the filing of quarterly and annual reports with the SEC, the need for more expensive directors and officers liability insurance and the need for more services from our outside auditors in connection with periodic public filings, earnings announcements and tax filings. In addition, we have invested and will continue to invest more in our investor relations function to communicate with investors and the general public.

Our stock price may be volatile.

        The price of our common stock after the offering may fluctuate widely, depending upon many factors, including but not limited to the risk factors listed above and the following:

•

the limited trading volume of our common stock on the Nasdaq National Market;



•

variations in our quarterly results of operations;



•

the hiring or departure of key personnel, including experts;



•

our ability to maintain high utilization of our professional staff;



•

announcements by us or our competitors;



•

the loss of significant clients;



•

changes in our reputation or the reputations of our experts;



•

acquisitions or strategic alliances involving us or our competitors;



•

changes in the legal and regulatory environment affecting businesses to which we provide services;



•

changes in estimates of our performance or recommendations by securities analysts;



•

inability to meet quarterly or yearly estimates or targets of our performance; and



•

market conditions in the industry and the economy as a whole.

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We will continue to be controlled by our management and members of our board of directors, who will be able to influence significant corporate events.

        Our executive officers and members of our board of directors and their affiliates beneficially own approximately 40% of our outstanding shares of common stock. As a result, our executive officers and directors and their affiliates will be able to influence the outcome of matters requiring a stockholder vote, including the election of directors and the approval of significant transactions.

The issuance of preferred stock could discourage or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders.

        Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may make it more difficult for a person to acquire a majority of our outstanding voting stock, and thereby delay or prevent a change in control of us, discourage bids for our common stock over the market price and adversely affect the market price and the relative voting and other rights of the holders of our common stock.

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

        Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. For example, our charter documents prohibit stockholder actions by written consent.

        In addition, the provisions of Section 203 of Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Cash investment policy

        We have established cash investment guidelines consistent with the objectives of preservation and safety of funds invested, insuring liquidity and optimizing yield on investment. Eligible investments include money market accounts, US Treasuries, US Agency securities, commercial paper, municipal bonds, AAA rated asset-backed securities, certificates of deposit and agency backed mortgage securities. We seek the highest quality credit rating available for each type of security used for investment purposes. Maturities are not to exceed 18 months.

Interest rate risk

        Our interest income and expense is sensitive to changes in the general level of interest rates in the United States, particularly since the majority of our investments are short-term in nature. Due to the nature of our short-term investments, we have concluded that we do not have material market risk exposure.

        Our investment policy requires us to invest funds in excess of current operating requirements. As of September 30, 2004, our cash and cash equivalents consisted primarily of money market funds. The

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recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities.

Currency risk

        We currently have operations in Argentina, Australia, Canada, New Zealand, South Korea, France, Belgium, Spain and the United Kingdom. Commercial bank accounts denominated in the local currency for operating purposes are maintained in each area. Fluctuations in exchange rates of the U.S. dollar against foreign currencies may result in foreign exchange gains and losses. If exchange rates on such currencies were to fluctuate 10%, we believe that our results from operations and cash flows would not be materially affected.

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures

Our management evaluated, with the participation of our Chairman of the Board and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chairman of the Board and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)

Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        In June 2004, National Economic Research Associates, Inc. (NERA) and its parent company, Marsh & McLennan Companies, Inc. filed a complaint against LECG and one of its experts in the Superior Court Department of the Trial Court Business Litigation Session, Suffolk County, Commonwealth of Massachusetts. This action arises out of LECG's hiring of professionals in March 2004 who were formerly employed by NERA in the United States and Europe. The complaint alleges that during and after his employment with NERA, this expert violated contractual commitments and fiduciary duties to NERA. The complaint further alleges that LECG interfered with NERA's contractual relations and advantageous business relationships, misappropriated confidential business information and goodwill, and engaged in unfair and deceptive trade practices. The complaint asks for unspecified damages and disgorgement of wrongful gain, invalidation of an indemnification agreement provided to this expert by LECG and contains a demand for a jury trial.

        On August 27, 2004, we served a motion to dismiss the complaint with respect to the breach of contract, tortious interference with contractual relations and the unfair and deceptive trade practices counts, which motion the parties are currently briefing. We also filed our answer.

        The parties have served initial discovery requests, including interrogatories and documents requests. LECG and our expert have served responses and objections to NERA and MMC's discovery requests, and they have commenced production of documents.

        LECG is not able to determine the outcome or resolution of the complaint, or to estimate the amount or potential range of loss with respect to this complaint.

        In addition, LECG is a party to certain other legal proceedings arising out of the ordinary course of business, the outcomes of which individually or in the aggregate, in the opinion of LECG's management, would not have a material adverse effect on LECG's business, financial position or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

        On August 2, 2004, we issued 56,850 shares of our common stock to certain accredited investors at an effective purchase price of $17.59 per share in connection with our acquisition of Silicon Valley Expert Witness Group, Inc. The foregoing purchase and sale was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof on the basis that the transaction did not involve a public offering.

Use of Proceeds from Initial Public Offering

        The effective date of the Securities Act registration statement for which the use of proceeds information is being disclosed was November 13, 2003 and the Commission file number is 333-108189.

        From November 13, 2003 to September 30, 2004, the amount of expenses incurred by us in connection with the issuance and distribution of the securities in the offering totaled $12.5 million, which consisted of (i) $10.3 million of underwriting discounts and commissions, and $2.2 million in legal, accounting, printing and miscellaneous fees.

        Our net offering proceeds after deducting our total estimated expenses were $134.1 million.

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        As of September 30, 2004, 2004, $119.4 million from the net proceeds of the offering were used for the following (in millions):

Issuer Purchases of Equity Securities

        The following table provides information with respect to purchases we made of our common stock during each of the months in the third quarter of 2004.

(1)

Represents shares of unvested restricted common stock repurchased from an employee at the original purchase price in accordance with the terms of the buy-sell agreement between the employee and us.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None

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

        Our annual meeting of stockholders was held on July 29, 2004 to consider and vote upon two matters. The first matter related to the election of nine director nominees, David J. Teece, David P. Kaplan, Michael R. Gaulke, Michael J. Jeffery, William W. Liebeck Ruth M. Richardson, David T. Scheffman, William J. Spencer and Walter H.A. Vandaele, to serve a one-year term or until their

36

respective successors are duly elected and qualified. The votes cast and withheld for such nominees were as follows:

        The second matter related to the ratification of the appointment of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2004. 13,320,389 votes were cast for ratification, 365,095 votes were cast against, and there were 77,263 abstentions and no broker non-votes.

        Based on these voting results, each of the directors nominated was elected and the second matter was passed.

ITEM 5. OTHER INFORMATION—RULE 10b5-1 TRADING PLANS

        Certain of our insiders, including David Kaplan, our President, have entered into trading plans in accordance with Rule 10b5-1 under the Exchange Act of 1934. These plans allow insiders to gradually diversify their investment portfolios, spread stock trades out over an extended period of time to reduce any market impact and avoid concerns about whether they had material, non-public information when they sold their stock. Rule 10b5-1 allows individuals to set up plans governing future purchases and sales of a company's stock at a time when they are not aware of material nonpublic information even though the individual may be aware of such information when these trades are completed. The plans adopted by these LECG individuals were adopted during an authorized trading period when the individuals were not in possession of material, non-public information. The plans established by these LECG individuals, commonly referred to 10(b)5-1 plans, provide for the sale of securities over the ensuing 12 months. The number of shares subject to these plans is approximately 333,000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

37

38

*

Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-108189), as amended.

**

Incorporated by reference to the same number exhibit filed with Registrant's Current Report on Form 8-K filed April 1, 2004.

***

Incorporated by reference to the same number exhibit filed with Registrant's Current Report on Form 8-K filed October 6, 2004.

****

Incorporated by reference to the same number exhibit filed with Registrant's Current Report on Form 8-K filed November 3, 2004.

†

Confidential treatment has been requested for portions of this exhibit.

(b)   Reports on Form 8-K

i.

On August 3, 2004, the registrant filed a Current Report on Form 8-K to announce the hiring of certain new experts and the acquisition of the Silicon Valley Expert Witness Group, Inc. under Item 5 thereof, and to furnish its press release, dated August 3, 2004, announcing its financial results for the second quarter ended June 30, 2004 under Item 12 thereof.

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SIGNATURES

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

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QuickLinks

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION—RULE 10b5-1 TRADING PLANS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K