LECG CORP - 10-Q Quarterly Report

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

	Quarter ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues	$	53,671		$	41,432		$	96,781		$	80,232
Cost of services:
Compensation and project costs	(35,775		)	(28,385		)	(64,272		)	(54,596		)
Equity-based compensation	53			(107		)	224			(169		)
Total cost of services	(35,722		)	(28,492		)	(64,048		)	(54,765		)
Gross profit	17,949			12,940			32,733			25,467
Operating expenses:
General and administrative expenses	(10,008		)	(6,775		)	(18,601		)	(14,485		)
Depreciation and amortization	(1,058		)	(1,285		)	(1,813		)	(2,516		)
Operating income	6,883			4,880			12,319			8,466
Interest income	71			6			182			21
Interest expense	(55		)	(569		)	(122		)	(1,426		)
Other income (expense), net	(26		)	148			(53		)	243
Income before income tax	6,873			4,465			12,326			7,304
Provision for income taxes	(2,803		)	—			(5,005		)	—
Net income	4,070			4,465			7,321			7,304
Accrued preferred dividends and accretion of preferred shares	—			(1,045		)	—			(2,059		)
Net income available to common shares	$	4,070		$	3,420		$	7,321		$	5,245
Net income per share:
Basic	$	0.19		$	0.27		$	0.34		$	0.42
Diluted	$	0.17		$	0.23		$	0.32		$	0.35
Share amounts:
Basic	21,717			12,466			21,561			12,466
Diluted	23,324			14,984			23,241			14,957

See notes to interim condensed consolidated financial statements

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

	June 30,			December 31,
	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	33,578			$	67,177
Accounts receivable, net of allowance of $519 and $482	65,765				46,708
Prepaid expenses	2,702				2,708
Deferred taxes	9,059				9,802
Current portion of signing bonuses and other	8,919				3,868
Total current assets	120,023				130,263
Property and equipment, net	6,055				4,506
Goodwill	43,596				23,976
Other intangible assets	1,117				533
Signing bonuses and other assets	14,526				3,864
Total assets	$	185,317			$	163,142
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and other accrued liabilities.	$	13,030			$	5,733
Accrued compensation	34,098				29,270
Deferred revenue	862				732
Distributions payable	—				3,398
Total current liabilities	47,990				39,133
Other long-term liabilities	849				22
Shareholders’ equity:
Common stock, $.001 par value, 200,000,000 shares authorized, 22,256,232 and 21,693,156 shares outstanding at June 30, 2004 and December 31, 2003, respectively	22				22
Additional paid-in capital	117,853				113,326
Receivable from shareholder	—				(290		)
Deferred equity compensation	(1,881		)		(2,193		)
Accumulated other comprehensive income	551				510
Retained earnings	19,933				12,612
Total shareholders’ equity .	136,478				123,987
Total liabilities and shareholders’ equity	$	185,317			$	163,142

See notes to interim condensed consolidated financial statements

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

	Six months ended
	June 30,			June 30,
	2004			2003
Cash flows from operating activities
Net income	$	7,321		$	7,304
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense	107			—
Depreciation and amortization of property and equipment	1,173			1,535
Amortization of deferred lease credits and other intangibles	640			981
Amortization of signing bonuses	1,507			774
Equity-based compensation	(224		)	169
Other	69			(110		)
Changes in assets and liabilities:
Accounts receivable	(17,951		)	(5,678		)
Prepaid and other current assets	(2,266		)	(1,208		)
Accounts payable and other accrued liabilities	7,090			(982		)
Accrued compensation	445			1,017
Deferred revenue	81			290
Signing bonuses and other assets	(10,403		)	(992		)
Other liabilities	827			37
Net cash provided by (used in) operating activities	(11,584		)	3,137
Cash flows from investing activities
Business acquisitions	(19,141		)	—
Purchase of property and equipment	(2,063		)	(772		)
Deposits	(34		)	(39		)
Net cash used in investing activities	(21,238		)	(811		)
Cash flows from financing activities
Proceeds from issuance of common stock	1,109			—
Exercise of options	2,019			—
Receivable from shareholder	295			14
Borrowings under revolving credit facility	—			23,500
Repayments of long term debt	—			(2,050		)
Repayments under revolving credit facility	—			(18,900		)
Payment of loan fees	—			(751		)
Distributions to common shareholders	(4,235		)	(2,973		)
Other	—			(2		)
Net cash used in financing activities	(812		)	(1,162		)
Effect of exchange rates on changes in cash	35			7
Increase (decrease) in cash and cash equivalents	(33,599		)	1,171
Cash and cash equivalents, beginning of period	67,177			2,576
Cash and cash equivalents, end of period	$	33,578		$	3,747
Supplemental disclosure:
Cash paid for interest	$	272		$	1,386
Cash paid for income taxes	$	102		$	85

See notes to interim condensed consolidated financial statements

LECG CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of presentation and operations

The accompanying condensed 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 17 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.

Reclassifications

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

2. Significant accounting policies

The consolidated statements of income for the quarters and six months ended June 30, 2004 and 2003, the consolidated balance sheet as of June 30, 2004 and the consolidated statements of cashflows for the six months ended June 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 cashflows. 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 six months ended June 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for the entire year. The interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Revenue recognition

Revenue includes all amounts earned that are billed or billable to clients, including reimbursable expenses.

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 for 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 are not 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.

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 taxable income, expiration periods for net operating losses and the Company’s projections. No valuation allowance was recorded at December 31, 2003 and June 30, 2004. We expect that our 2004 effective income tax rate will be the combined federal and state statutory rate of approximately 40.6%. 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 six months ended June 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. 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 shareholders 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 shareholders for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, comprised of common shares issuable upon the exercise of options and restricted stock, 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 six months ended June 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, we incurred preferred stock accretion and dividend charges in conjunction with our 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 six months ended June 30, 2004 include the effect of selling 8,625,000 shares in our initial public offering on November 13, 2003.

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).

	Quarter ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
	2004		2003		2004		2003
Net income available to common shares—as reported	$	4,070	$	3,420	$	7,321	$	5,245
Weighted average shares outstanding:
Basic	21,717		12,466		21,561		12,466
Effect of dilutive stock options and restricted stock	1,607		2,518		1,680		2,491
Diluted	23,324		14,984		23,241		14,957
Net income per share:
Basic	$	0.19	$	0.27	$	0.34	$	0.42
Diluted	$	0.17	$	0.23	$	0.32	$	0.35

The following shares were excluded from the calculation of diluted net income per share, as these shares were antidilutive: 1.6 million, for the quarter and six months ended June 30, 2004, and 900,000 for the quarter and six months ended June 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 units 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 expense over the vesting period of the awards, net loss would have been the following (in thousands, except per share information):

	Quarter ended						Six months ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income available to common shares—as reported	$	4,070		$	3,420		$	7,321		$	5,245
Add (subtract): equity-based employee compensation expense (income) included in net income	(53		)	107			(224		)	169
Deduct: total equity-based employee compensation expense determined under fair value based method for all awards	(1,042		)	(599		)	(1,950		)	(1,106		)
Pro forma net income	$	2,975		$	2,928		$	5,147		$	4,308
Basic earnings per share:
Net income available to common shares—as reported	$	0.19		$	0.27		$	0.34		$	0.42
Net adjustment for fair value based method	(0.05		)	(0.04		)	(0.10		)	(0.08		)
Net income available to common shares—pro forma	$	0.14		$	0.23		$	0.24		$	0.34
Diluted earnings per share:
Net income available to common shares—as reported	$	0.17		$	0.23		$	0.32		$	0.35
Net adjustment for fair value based method	(0.05		)	(0.03		)	(0.09		)	(0.06		)
Net income available to common shares—pro forma	$	0.12		$	0.20		$	0.23		$	0.29

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 and restricted shares issued to employees:

	Quarters ended					Six months ended
	June 30,		June 30,			June 30,		June 30,
	2004		2003			2004		2003
Dividend yield	0	%		0	%	0	%		0	%
Volatility	51	%		70	%	51	%		70	%
Risk-free interest rate	4.2	%		2.8	%	3.9	%		2.8	%
Expected term, in years	6.0			5.0		6.0			5.0

The Company granted 1,761,100 and 1,876,100 non-qualified options to purchase common shares in the quarter and six months ended June 30, 2004, respectively. Included in these grants were 750,000 non-qualified options to purchase common shares, at an exercise price of $21.85 per share, issued to each of Dr. David Teece, Chairman and Mr. David Kaplan, President. The options cliff-vest 8 2/3 years following the date of grant and expire in May 2013.

5. Comprehensive income

Comprehensive income represents net income plus other comprehensive income resulting from changes in foreign currency translation. The reconciliation of LECG’s comprehensive income for the quarters and six months ended June 30, 2004 and 2003 is as follows (in thousands):

	Quarter ended						Six months ended
	June 30,			June 30,			June 30,		June 30,
	2004			2003			2004		2003
Net income	$	4,070		$	4,465		$	7,321	$	7,304
Foreign currency translation adjustment	(73		)	(32		)	41		7
Comprehensive income	$	3,997		$	4,433		$	7,362	$	7,311

6. Business acquisitions

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 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 was allocated primarily to property and equipment and other assets. In addition, if specified revenue and profitability targets are achieved, we will make earn out payments of up to $2.6 million per year for three years and additional aggregate payments of up to $2.0 million if certain revenue targets are met. Additional purchase price 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, an expert services firm located in Toronto, Canada, providing expert services in the areas of business valuation and damages quantification. The purchase price was $3.7 million paid in cash, of which $3.0 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 earn out payments of up to $4.2 million over a four-year period. Additional purchase price will be recorded in subsequent years if the performance targets are met.

In accordance with the terms of the CFES Purchase Agreement (the “Agreement”) dated August 1, 2003, and as a result of achieving certain performance targets set forth in the Agreement, the Company recognized $1.6 million of additional goodwill as of June 30, 2004.

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. The business acquisitions have been integrated within the structure of the organization, are not separately distinguishable and do not represent separate reporting units. The Company performs its goodwill impairment test annually as of October 1 by using both a discounted cash flow approach as well as a market valuation based approach applying certain multiples derived from enterprise values of publicly traded comparable companies. It 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, 2003, the Company concluded that goodwill was not impaired.

Other intangible assets generally represent contracts rights acquired. The balances in goodwill and other intangible assets as of June 30, 2004 were as follows (in thousands):

	For the six months
	ended
Goodwill	June 30, 2004
Balance at December 31, 2003		$	23,976
Goodwill acquired:
Economic Analysis, LLC		15,032
Low Rosen Taylor Soriano		3,014
CFES		1,574
Balance at June 30, 2004		$	43,596
Other intangible assets
Balance at December 31, 2003 ⁽¹⁾		$	533
Intangibles acquired		1,045
Amortization expense		(461		)
Balance at June 30, 2004 ⁽¹⁾		$	1,117

(1) Includes $100,000 of rights to license software under development, for which amortization will begin when the software is available for general release to customers.

Estimated annual amortization expense:
2004	$	1,184
2005	294
Total	$	1,478

8. Employee benefit plans

Employee Stock Purchase Plan

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. There are 873,229 shares available for issuance under the plan.

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 and project origination fees. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. Each plan participant is fully vested in all compensation deferred under the plan, other than signing bonuses, 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. The employee deferrals are invested through a trust.

9. Commitments and contingencies

In June 2004, National Economic Research Associates, Inc., or 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 relationship, 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.

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.

LECG currently has outstanding letters of credit for $1.0 million under its revolving credit facility, which expires in March 2006, at which time all outstanding borrowings, if any, are required to be repaid.

10. Subsequent events

In August 2004, the Company acquired all of the outstanding shares of Silicon Valley Expert Witness Group, Inc., a firm specializing in complex technology 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, the issuance of 56,850 shares of common stock with a fair market value of $1.0 million, and deferred payments totaling $3.0 million to be paid no later than 2009, only the timing of which are dependent upon performance. In addition, if specified annual performance targets are met, we will make earn out payments of up to $3.0 million over a five-year period.

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 “Risk Factors.” 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 are a provider of expert services. We provide independent testimony, original authoritative studies and strategic advice to help resolve commercial disputes and inform legislative, judicial and regulatory decision makers. Our experts and professional staff conduct sophisticated economic, financial and statistical analyses for our clients. Our experts are renowned academics, former high-level government officials, experienced industry leaders, technical analysts 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.

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 first six months of 2004, primarily in Spain, Belgium and France.

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 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 was allocated primarily to property and equipment and other assets. In addition, if specified revenue and profitability targets are achieved, we will make earn out payments of up to $2.6 million per year for three years and additional aggregate payments of up to $2.0 million if certain revenue targets are met. Additional purchase price 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, an expert services firm located in Toronto, Canada, providing expert services in the areas of business valuation and damages quantification. The purchase price was $3.7 million paid in cash, of which $3.0 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 earn out payments of up to $4.2 million over a four-year period. Additional purchase price will be recorded in subsequent years if the performance targets are met.

In March 2004, we hired two experts and other professional staff in connection with the opening of three new offices in Europe. In connection with our hiring efforts in the United States and Europe during the six months ended June 30, 2004, we paid $9.5 million in signing bonuses and have agreed to pay additional signing bonuses of approximately $5.2 million, primarily in the third quarter of 2004. Such amounts will be amortized over periods ranging from two to seven years. In addition, we have agreed to pay significant performance bonuses in 2005 and 2006 provided certain substantial revenue and gross margin targets are achieved.

In August 2004, we acquired all of the outstanding shares of Silicon Valley Expert Witness Group, Inc., a firm specializing in complex technology 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, the issuance of 56,850 shares of common stock with a fair market value of $1.0 million, and deferred payments totaling $3.0 million to be paid no later than 2009, only the timing of which are dependent upon performance. In addition, if specified annual performance targets are met, we will make earn out payments of up to $3.0 million over a five-year period.

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 have performed under the contract. Since July 1, 2002, these performance-based expert fees have ranged from 0% to 11% of our quarterly total revenues. For the six months ended June 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 costs 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).

	Sept 30,		Dec 31,		Mar 31,		June 30,		Sept 30,		Dec 31,		Mar 31,		June 30,
	2002		2002		2003		2003		2003		2003		2004		2004
Expert and professional staff revenues	$	32,871	$	33,140	$	35,331	$	37,076	$	39,848	$	37,199	$	41,100	$	49,167
Performance-based expert fees	248		3,465		1,990		2,146		—		4,856		315		1,492
Reimbursable expenses	1,639		1,487		1,479		2,210		1,703		1,756		1,695		3,012
Revenues	$	34,758	$	38,092	$	38,800	$	41,432	$	41,551	$	43,811	$	43,110	$	53,671

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 services. The number of professional staff assigned to a project will vary depending on the size, nature and duration of each engagement. We manage our personnel costs by monitoring engagement requirements and utilization of the 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 within the company. In these instances we engage outside individual or firm-based consultants, who are typically compensated on an hourly basis. Both the revenue and the 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. 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 revenues 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 June 30, 2004. We expect that our 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 June 30, 2004. 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 under performance 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.

We use a discounted cash flow model derived from internal budgets in assessing fair values for our goodwill impairment testing. Factors that could change the result of our goodwill impairment test include, but are not limited to, different assumptions used to forecast future revenues, expenses, capital expenditures and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. At December 31, 2003 we concluded that there was no impairment in our goodwill.

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 12 to 18 months.

We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As part of our assessment, we review the discounted expected future cash flows to be generated by the assets. At December 31, 2002 and 2003, we concluded that there was no impairment in our intangible assets.

RESULTS OF OPERATIONS

Comparability of financial results

The following items impact the comparability of our financial results for the quarter and six months ended June 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 a limited liability company, 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 six months ended June 30, 2004 include the effect of selling 8,625,000 shares in our initial public offering on November 13, 2003.

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

Revenues

Revenues for the second quarter of 2004 increased $12.2 million, or 30%, to $53.7 million from $41.4 million for the same quarter in 2003. The increase included a $12.1 million, or 33%, increase in expert and professional staff revenues, excluding performance-based services. The increase in expert and professional staff revenues resulted from a 19% increase in the number of expert and professional staff billable hours. Underlying this growth is the addition of 64 experts and 62 professional staff members since June 30, 2003 as a result of our recruitment efforts, acquisitions and our European expansion. In addition, there was a 13% increase in the average hourly billing rate due to rate increases and changes in the expert and staff mix. Offsetting this increase was a decrease in expert revenues from our performance-based services of $654,000, or 30%, to $1.5 million in the second quarter of 2004 from $2.1 million for the same quarter in 2003. The decrease was due primarily 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 second quarter of 2004 increased $7.4 million, or 26%, to $35.8 million from $28.4 million for the same quarter of 2003.

Compensation and project costs increased as a consequence of our growth in revenues, as we added 64 experts, and most of our experts are paid a percentage of their own billings plus a percentage of professional staff billings. In addition, the number of salaried professional staff increased by 62 from 295 as of June 30, 2003 to 357 as of June 30, 2004. The increase in cost of services also reflects increases in professional staff compensation rates and the increased amortization of signing bonuses of $1.1 million for the quarter ended June 30, 2004, an increase of $700,000 from $428,000 for the same quarter of 2003, resulting from our effort to recruit expert and professional staff. Compensation and project costs also include project origination fees of $3.4 million for the second quarter of 2004, or an increase of $720,000 over the same period of 2003, consistent with the growth in revenues.

· Equity-based compensation. Equity-based compensation in the second quarter of 2004 contributed $53,000 to gross margin due primarily to the lower share price of our stock at June 30, 2004 as compared to March 31, 2004 and the associated variable accounting effect of certain restricted shares and options subject to performance based vesting. 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.

Operating expenses

Operating expenses in the second quarter of 2004 increased $3.0 million, or 37%, to $11.1 million from $8.1 million for the same quarter of 2003. The increase was due in part to additions to our administrative and support staff and related payroll costs of $614,000. Our facilities costs increased $883,000 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 since June 30, 2003. The use of outside professional services increased by $745,000 over the same period in 2003 resulting from increased legal fees, which were due in part to start up services performed for our European operations and general corporate matters, costs associated with our public company status including our Sarbanes-Oxley compliance costs and tax consulting and compliance services.

Interest expense

Interest expense for the second quarter of 2004 decreased $514,000 to $55,000 from $569,000 for the second 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 first 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.

Income tax provision

From September 29, 2000 to November 13, 2003, we operated as a limited liability company and were taxed as a partnership. Accordingly, LECG paid no significant income taxes on its 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%. 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 $2.1 million for options exercised in the quarter ended

June 30, 2004 and have reduced deferred tax assets and increased additional paid in capital by $700,000 and $1.4 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 second quarter of 2003, we accrued preferred dividends and accretion of $1.0 million, thereby reducing net income available to common shareholders.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

Revenues

Revenues for the six months ended June 30, 2004 increased $16.5 million, or 21%, to $96.8 million from $80.2 million for the same period in 2003. This increase included a $17.9 million, or 25% increase in expert and professional staff revenues, excluding performance-based services. The increase in expert and professional staff revenues resulted from a 12% increase in the number of expert and professional staff billable hours, in addition to a 13% 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 64 experts and 62 professional staff members since June 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 our European expansion. Offsetting this increase was a decrease in expert revenues from our performance-based services of $2.3 million to $1.8 million for the six months ended June 30, 2004 from $4.1 million for the same period in 2003.

Cost of services

· Compensation and project costs. Compensation and project costs in the six months ended June 30,2004 increased $9.7 million, or 18%, to $64.3 million from $54.6 million for the same period in 2003. Compensation and project costs increased as a consequence of our growth in revenues, as we added 64 experts since June 30, 2003, 46 of which were added in the six months ended June 30, 2004, and most of our experts are paid a percentage of their own billings plus a percentage of professional staff billings. In addition, the number of salaried professional staff increased by 62 from 295 as of June 30, 2003 to 357 as of June 30, 2004, 59 of which were added in the six months ended June 30, 2004. The increase in cost of services also reflects increases in professional staff compensation rates and the increased amortization of signing bonuses of $1.6 million for the six months ended June 30, 2004, an increase of $800,000 from $800,000 for the same period of 2003, resulting from our effort to recruit expert and professional staff. Compensation and project costs also include project origination fees of $6.2 million for the six months ended June 30, 2004, or an increase of $1.0 million over the same period of 2003, consistent with the growth in revenues.

· Equity-based compensation. Equity-based compensation in the six months ended June 30, 2004 contributed $224,000 to gross margin due primarily to the lower share price of our stock at June 30, 2004 as compared to December 31, 2003 and the associated variable accounting effect of certain restricted shares and options subject to performance based vesting. 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.

Operating expenses

Operating expenses in the six months ended June 30, 2004 increased $3.4 million, or 20%, to $20.4 million from $17.0 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 $790,000 and facilities costs increases of $1.1 million in connection with the expansion of existing offices and the opening of five new offices since June 30, 2003. The use of outside professional services increased by $810,000 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, 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 $400,000 for computer related and supply costs due to the increased workforce and administrative related activity, and increases in personnel and recruitment costs of $590,000 primarily due to our ongoing efforts to recruit experts and staff. Offsetting these increases was a $700,000 decrease in depreciation and amortization expense due to the full amortization by December 2003 of certain intangible assets acquired in July 2002.

Interest expense

Interest expense decreased $1.3 million to $122,000 in the six months ended June 30, 2004 from $1.4 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 quarter of 2004 as the result of repaying the outstanding balances in mid-November 2003.

Income tax provision

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 same period of 2003, we accrued preferred dividends and accretion of $2.1 million, thereby reducing net income available to common stockholders.

LIQUIDITY AND CAPITAL RESOURCES

Our financial condition remains strong following our initial public offering on November 13, 2003, 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 June 30, 2004, we had $33.6 million in cash, primarily in money market accounts and no outstanding bank borrowing under our revolving credit facility. 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 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 the initial public offering and cash generated by operations, which have been augmented by the proceeds from option exercises and the sale of common shares through our Employee Stock Purchase Plan.

Net cash used by operations in the six months ended June 30, 2004 was $11.6 million as compared to $3.1 million provided by operations in the same period in 2003. The primary sources and uses of cash from operations in the first six months of 2004 were net income of $7.3 million, which included non-cash expenses of $3.3 million, offset by an increase in accounts receivable of $18.0 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 certain large project balances. Signing bonuses increased by $9.5 million related to our recruitment effort including our European expansion. Prepaid expenses and advances to experts increased $2.3 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 $7.1 million, due in part to the timing of vendor payments and an increase in federal and states taxes payable. Other assets increased $906,000 due to contributions to our deferred compensation plan. We have recognized a liability to participants in this plan consistent with the level of plan assets.

Net cash used by investing activities in the six months ended June 30, 2004 was $21.2 million as compared to $811,000 for the same period in 2003. Investing activities in the six months ended June 30, 2004 were comprised of the acquisitions of Economic Analysis LLC for $15.4 million and Low Rosen Taylor Soriano for $3.7 million and investment in property and equipment of $2.1 million, due in part to our new London office space.

Net cash used in financing activities was $800,000, due to $2.0 million of proceeds from the exercise of options to purchase common stock and $1.1 million from the issuance of 77,000 shares of common stock in connection with our Employee Stock Purchase Plan, offset by payments for accrued distributions to shareholders of $4.2 million for previously taxed but undistributed earnings and estimated taxes of the LLC. We do not anticipate that there will be any additional distributions to shareholders relating to the prior LLC status. Net cash used in financing activities for the six months ended June 30, 2003 was $1.2 million due to $1.8 million of bank borrowings offset by $3.0 million of tax distributions to LLC members.

In connection with the acquisition of Economic Analysis LLC, we have agreed to make earn out payments of up to $2.6 million per year for three years if specified revenue and profitability targets are achieved, and additional payments of up to $2.0 million if certain revenue targets are met. Additional purchase price will be recorded in subsequent years, if the performance targets are met.

In connection with the acquisition of Low Rosen Taylor Soriano, we have agreed to make earn out payments of up to $4.2 million over a four-year period if specified profitability targets are achieved. Additional purchase price will be recorded in subsequent years if the performance targets are met.

We have also agreed to pay additional signing bonuses of approximately $5.2 million, primarily in connection with our European expansion, most of which will be paid in the third quarter of 2004. In addition, we have agreed to pay substantial performance bonuses in 2005 and 2006 provided certain revenue and gross margin targets are achieved.

On August 2, 2004, we acquired all of the outstanding shares of Silicon Valley Expert Witness Group, a firm specializing in complex technology 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, the issuance of 56,850 shares of common stock with a fair market value of $1.0 million, and deferred payments totaling $3.0 million to be paid no later than 2009, only the timing of which are dependent upon performance. In addition, if specified annual performance targets are met, we will make earn out payments of up to $3.0 million over a five-year period.

In accordance with the terms of the CFES Purchase Agreement (the “Agreement’’) dated August 1, 2003, we will pay a total of $2.1 million in the third quarter of 2004 to the former principals of CFES, who are currently our experts, as a result of achieving certain performance targets set forth in the Agreement. The $2.1 million is comprised of a $1.6 million payment representing additional purchase price and a $520,000 payment representing accrued compensation.

The Company’s 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. We currently have no outstanding borrowings on the revolving credit facility and have outstanding letters of credit for $1.0 million. Our 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 our operations, the remaining 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 related 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.

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 you may lose all or part of your 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 six 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;

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

· conditions affecting the industries in which we practice as well as general economic conditions.

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 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 other 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 will arise in complying with existing and new regulatory requirements. We must be able to prepare accurate and timely financial information, particularly as it relates to the on-going obligations of a public company. 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 six months ended June 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 damages practice area accounted for 26% and 23% of our billings in 2003 and the first six months of 2004, respectively. Projects in our competition policy/antitrust practice area, including mergers and acquisitions, accounted for 19% and 22% of our billings in 2003 and the first six months of 2004, respectively, and projects in our environmental claims practice area accounted for 22% and 17% of our billings in 2003 and the first six 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. For example, Senate Bill 1125 provides for the creation of a trust fund as the exclusive remedy to resolve the claims of victims for bodily injury caused by asbestos exposure which, if enacted into law, would negatively impact our environmental claims practice area. 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 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.

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 six months of 2003 and 2004, 8% and 12%, 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; and

· greater difficulties in collecting accounts receivable.

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

Our dispute 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 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 we interfered with NERA’s contractual relations and advantageous business relationship, 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 us and contains a demand for a jury trial. A decision against us in this case could harm our financial results and financial position.

Our financial results could suffer if we are unable to retain certain experts whose options and restricted stock vesting was accelerated.

In December 2002, we accelerated the vesting of 846,792 stock options held by 45 experts and the acceleration of the vesting of 1,025,679 shares of restricted stock held by 17 experts. These accelerated options and restricted shares are subject to a lock-up agreement under which the shares issuable upon exercise of the options and the restricted shares cannot be sold until such time as the options and restricted shares would have otherwise vested absent the acceleration. The restricted shares and most of the options would have vested on September 30, 2004. The acceleration of the vesting of such stock options and shares of restricted stock could make it more difficult for us to retain the services of experts holding them as such experts may have less incentive to continue their relationship with us. Furthermore, if an expert terminates employment prior to the time that such options or restricted stock would have vested, we would incur significant additional compensation expense for the period in which the expert left, in the amount of the fair market value of the options or stock at the time of acceleration minus the amounts previously expensed.

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 imposes new 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 will need to invest more in the function of investor relations 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:

· 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.

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 beneficially own approximately 40% of our outstanding shares of common stock. As a result, our executive officers and directors 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

The Company has established cash investment guidelines consistent with the objectives of preservation and safety of funds invested, ensuring 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 June 30, 2004, our cash and cash equivalents consisted primarily of money market funds. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities.

Currency risk

We currently have international 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 by 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.

Part II. Other Information

Item 1. Legal Proceedings

In June 2004, National Economic Research Associates, Inc., or NERA, and its parent company, Marsh & McLennan Companies, Inc., filed a complaint against LECG Corporation and LECG, LLC (collectively, “LECG”) and one of LECG’s 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 relationship, 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. 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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Recent Sales of Unregistered Securities

On March 1, 2004, we sold 50,891 shares of our common stock at an effective purchase price of $19.65 per share to 5 accredited experts in connection with our acquisition of the business and certain assets of Economic Analysis, LLC. 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

The Company’s registration statement (Securities and Exchange Commission file number 333-108189) was declared effective on November 13, 2003, under which it sold 8,625,000 shares of its Common Stock (par value $.001) at $17.00 per share for total proceeds of $146,625,000. The Company’s managing underwriter was UBS Securities LLC.

As of March 31, 2003, $119.4 million from the proceeds of the offering were used as reported in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2003 and its quarterly report for the first quarter of 2004 filed on Form 10-Q filed with the Securities and Exchange Commission on May 13, 2004. Proceeds from the Company’s offering used in the second quarter of 2004 were as follows (in millions):

· Signing bonuses	$	4.1
· Other working capital requirements	5.4
· Distributions to unitholders of LECG Holding Company, LLC for previously taxed butundistributed earnings paid to:
· officers, directors and owners of more than 10% of the Company’s stock	1.1
· all others	—
Proceeds of offering used in the second quarter of 2004	10.6
Previously reported use of proceeds	119.4
Total proceeds of offering used through June 30, 2004	$	130.0

Issuer Purchases of Equity Securities

The following table provides the information with respect to purchases made by the Company of shares of its common stock during each of the months in the second quarter of 2004.

Period	Total Number of Shares Purchased			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
April 1 to April 30		5,859	⁽¹⁾		$	0.01		—		—
May 1 to May 31		-			—			—		—
June 1 to June 30		—			—			—		—

⁽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 Company and the employee.

Item 6. Exhibits and Report on Form 8-K

(a) Exhibits

Exhibit Number		Description of Exhibit
**2.1		Asset Purchase Agreement entered into as of March 1, 2004 by and among LECG Corporation, LECG, LLC, Economic Analysis, LLC, the members of Economic Analysis, LLC, and other related parties identified therein
**2.2		First Amendment to Asset Purchase Agreement dated as of March 17, 2004 by and among LECG Corporation, LECG, LLC, Economic Analysis, LLC, the members of Economic Analysis, LLC and other related parties identified therein
*3.1(a	)	Amended and Restated Certificate of Incorporation of LECG Corporation, as currently in effect
*3.2		Bylaws of LECG Corporation
*3.3		Articles of Organization of LECG Holding Company, LLC, a California limited liability company, as currently in effect
*3.4		Articles of Organization of LECG, LLC, a California limited liability company, as currently in effect

Exhibit Number		Description of Exhibit
*3.5		Limited Liability Company Agreement of LECG Holding Company, LLC, a California limited liability company, as currently in effect
*3.5(a	)	First Amendment to Limited Liability Company Agreement of LECG Holding Company, LLC, a California limited liability company, between LECG Holding Company, LLC, TCEP/LECG Funding Corporation, David J. Teece and David Kaplan dated October 29, 2001
*3.5(b	)	Second Amendment to Limited Liability Company Agreement of LECG Holding Company, LLC, a California limited liability company, between LECG Holding Company, LLC, TCEP/LECG Funding Corporation, David J. Teece and David Kaplan dated December 7, 2001
*3.5(c	)	Third Amendment to Limited Liability Company Agreement of LECG Holding Company, LLC, a California limited liability company, between LECG Holding Company, LLC, TCEP/LECG Funding Corporation, David J. Teece and David Kaplan dated March 27, 2003
*3.5(d	)	Fourth Amendment to Limited Liability Company Agreement of LECG Holding Company, LLC, a California limited liability company, between LECG Holding Company, LLC, TCEP/LECG Funding Corporation, David J. Teece and David Kaplan dated August 1, 2003
*3.5(e	)	Fifth Amendment to Limited Liability Company Agreement of LECG Holding Company, LLC, a California limited liability company, between LECG Holding Company, LLC, TCEP/LECG Funding Corporation, David J. Teece and David Kaplan dated October 14, 2003.
*3.6		Operating Agreement of LECG, LLC, a California limited liability company, as currently in effect
*4.1		Form of the Registrant's Common Stock Certificate
31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities and Exchange Act of 1934 for principal executive officer
31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities and Exchange Act of 1934 for principal financial officer
32.1		Certifications pursuant to 18 U.S.C. Section 1350

* 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.

(b) Reports on Form 8-K

i. On April 1, 2004, the registrant filed a Current Report on Form 8-K furnishing under Item 2 of Form 8-K announcing its completion of the acquisition of Economic Analysis, LLC.

ii. On May 13, 2004, the registrant filed a Current Report on Form 8-K furnishing under Item 12 of Form 8-K its Press Release, dated May 5, 2004 announcing results for the 2004 first quarter.

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2004
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		81-0569994
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification Number)
2000 Powell Street, Suite 600
Emeryville, California 94608		(510) 985-6700
(Address of principal executive offices		(Registrant’s telephone number,
including zip code)		including area code)

		LECG CORPORATION
		(Registrant)
Date: August 3, 2004
		/s/ David J. Teece
		David J. Teece Chairman of the Board of Directors (Principal Executive Officer)
		/s/ John C. Burke
		John C. Burke Chief Financial Officer (Principal Financial Officr)

Exhibit Number		Description of Exhibit
31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities and Exchange Act of 1934 for principal executive officer
31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities and Exchange Act of 1934 for principal financial officer
32.1		Certifications pursuant to 18 U.S.C. Section 1350