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 and utilization of professional staff, (4) dependence on growth of our service offerings, (5) our ability to maintain and attract new business, (6) our ability to maintain our credit facility, (7) the cost and contribution of additional hires and acquisitions, (8) successful administration of our business and financial reporting capabilities including maintaining effective internal control over financial reporting, (9) potential professional liability, (10) intense competition, (11) risks inherent in international operations, and (12) risks inherent in successfully transitioning and managing our restructured business. 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 Item 1A. "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 provide expert services through our highly credentialed experts and professional staff, whose skills and qualifications provide us the opportunity to address complex, unstructured business and public policy problems. We deliver independent expert testimony and original authoritative studies in both adversarial and non-adversarial situations. We conduct economic, financial, accounting and statistical analyses to provide objective opinions and strategic advice to legislative, judicial, regulatory and business decision makers. Our skills include electronic discovery, forensic accounting, data collection, econometric modeling and other types of statistical analyses, report preparation and oral presentation at depositions. Our experts are renowned academics, former senior government officials, experienced industry leaders, technical analysts and seasoned consultants. Our clients include Fortune Global 500 corporations, major law firms, and local, state and federal governments and agencies in the United States and other countries throughout the world.

We manage our business in two operating segments: Economics Services and Finance and Accounting Services. See Note 16 of Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for 2008 for a description of our two operating segments.

2009 Billable headcount

The following table summarizes the change in the period-end billable headcount since March 31, 2008 and December 31, 2008.

                                                                             Change since
                      March 31,   December 31,   March 31,     December 31, 2008        March 31, 2008
                        2009          2008         2008         Number         %       Number        %

Economics Services          268            287         305            (19 )      -7 %       (37 )     -12 %
Finance and
Accounting Services         496            496         493              -         0 %         3         1 %
Consolidated                764            783         798            (19 )      -2 %       (34 )      -4 %

The decrease in consolidated billable headcount since December 31, 2008 is primarily due to voluntary terminations partially offset by ongoing recruiting efforts.

The decrease in billable headcount from March 31, 2008 to March 31, 2009 is primarily due to 35 terminations in connection with our fourth quarter 2008 restructuring activities, including 10 terminations in our Economics segment and 25 terminations in our Finance and Accounting Services segment. The Finance and Accounting Services segment terminations were fully offset by 28 new hires, net of voluntary attrition, in the segment since March 31, 2008.

The retention of key experts and the recruitment and hiring of additional experts and professional staff, both through direct hiring and through acquisitions, contributes to the success of our business. Our retention and hiring strategy is designed to promote our competitive advantage, to deepen our existing service offerings and to enter into new service areas when strategic opportunities arise. In connection with our retention and hiring efforts in the three months ended March 31, 2009 and 2008, we paid signing, retention and performance bonuses of $5.0 million and $6.3 million, respectively, which will be amortized over periods ranging from one to seven years. Amortization of signing, retention and performance bonuses expense was $4.2 million and $4.1 million in the three months ended March 31, 2009 and 2008, respectively.

Operations

Revenues

We derive our revenue primarily from professional service fees that are billed at hourly rates on a time and expense basis. Revenue related to these services is recognized when the earnings process is complete and collection is reasonably assured. Revenues are recognized net of amounts estimated to be unrealizable based on several factors, including the historical percentage of write-offs due to fee adjustments for both unbilled and billed receivables.

Fee-based revenues, net are comprised of:

†                      fees for the services of our professional staff and
subcontractors;

†                      fees for the services of our experts and affiliates; and

†                      realization allowance.

Reimbursable revenues are comprised of amounts we charge for services provided by others, and costs that are reimbursable by clients, including travel, document reproduction, subscription data services and other costs.

Cost of services

Direct costs are comprised of:

† salary, bonuses, employer taxes and benefits of all professional staff and salaried 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;

†                      compensation to subcontractors and affiliates;

†                      fees earned by experts and other business generators as
project origination fees;

†                      amortization of signing, retention and performance
bonuses that are subject to vesting over time; and

†                      equity-based compensation.

Reimbursable costs are costs incurred for services provided by others, and costs that are reimbursable by clients, including travel, document reproduction and subscription data services.

Hourly fees charged by the professional staff that support our experts, rather than the hourly fees charged by our experts, generate a majority of our gross profit. Most of our experts are compensated based on a percentage of their billings from 30% to 100%, and averaging approximately 73% and 70% of their individual billings on particular projects in the three months ended March 31, 2009 and 2008, respectively. Such experts are paid when we have received payment from our clients. We refer to these experts as "at-risk" experts. Some of our experts are compensated based on a percentage of performance targets such as revenue or gross margin associated with engagements generated by an expert or a group of experts. Experts not on either of these compensation models are compensated under a salary plus performance-based bonus model. We make advance payments, or draws, to many of our non-salaried experts, and any outstanding draws previously paid to experts are deducted from the experts' fee payments. We recognize an estimate of compensation expense for expert advances that we consider may ultimately be unrecoverable. In some cases, we guarantee an expert's draw at the inception of their employment for a period of time, which is typically one year or less. In such cases, if the expert's earnings do not exceed their draws within a reasonable period of time prior to the end of the guarantee period, we recognize an estimate of the compensation expense we will ultimately incur by the end of the guarantee period.

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 and the level of experience 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. Such fees are based primarily on a percentage of the collected professional staff fees. Project origination fees can also include a percentage of the collected expert fees for those experts acting in a support role on an engagement. These fees have averaged 10% and 12% of professional staff revenues in the three months ended March 31, 2009 and 2008, respectively. Experts are generally required to use our professional staff unless the skills required to perform the work are not available through us. In these instances we engage outside individual or firm-based consultants, who are typically compensated on an hourly basis. Both the revenue and the cost resulting from the services provided by these outside consultants are recognized in the period in which the services are performed.

Hiring and/or retaining experts sometimes involve the payment of upfront cash amounts. In some cases, the payment of a portion of an upfront amount is due at a future date. These types of upfront payments are recognized when the payment is made, the obligation to pay such amount is incurred, or on the execution date of the retention agreement, and are generally amortized over the period for which they are recoverable from the individual expert up to a maximum period of seven years.

We have also paid or are obligated to pay certain performance bonuses that are subject to recovery of unearned amounts if the expert were to voluntarily leave us, be terminated for cause, or fail to meet certain performance criteria prior to a specified date. Like signing and retention payments, these performance bonuses are amortized over the period for which unearned amounts are recoverable from the individual expert up to a maximum period of seven years, and we recognize such

performance bonuses at the time we determine it to be more likely than not that the performance criteria will be met.

Most of our agreements allow us to recover signing, retention and performance bonuses from the employee if he or she were to voluntarily leave us or be terminated for cause prior to a specified date, over periods ranging from one to 15 years. However, for the purpose of recognizing expense, we amortize such signing, retention and performance bonuses over the shorter of the contractual recovery period or seven years. If an employee is involuntarily terminated, we generally cannot recover the unearned amount and we write off the unearned amount at the time of termination.

CRITICAL ACCOUNTING POLICIES

Revenue recognition

Revenue includes all amounts earned that are billed or billable to clients, including reimbursable expenses, and are reduced for amounts related to work performed that are estimated to be unrealizable. Expert revenues consist of revenues generated by experts who are our employees as well as 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 expense contracts, which are recognized in the period in which 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 performed under the contract. Revenues are also generated from fixed price contracts, which are recognized as the agreed upon services are performed. Fixed price and performance-based contracts revenues are not a material component of total revenues.

We recognize revenue net of an estimate for amounts that will not be collected from the client due to fee adjustments. This estimate is based on several factors, including our historical percentage of fee adjustments and review of unbilled and billed receivables. These estimates are reviewed by management on a regular basis.

Equity-based compensation

Stock-based compensation arrangements covered by Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment ("SFAS No. 123R") currently include stock option grants and restricted stock awards under our 2003 Stock Option Plan and purchases of common stock by our employees at a discount to the market price under our Employee Stock Purchase Plan ("ESPP"). Under SFAS No. 123R, the value of the portion of the option or award that is ultimately expected to vest is recognized as expense on a straight line basis over the requisite service periods in our Condensed Consolidated Statements of Operations. Stock-based compensation expense for purchases under the ESPP are recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount.

We use the Black-Scholes option valuation model adjusted for the estimated historical forfeiture rate for the respective grant to determine the estimated fair value of our stock-based compensation arrangements on the date of grant ("grant date fair value"), and we expense this value ratably over the service period of the option or performance period of the restricted stock award. Expense amounts are allocated among cost of revenue and general and administrative expenses based on the function of the employee receiving the grant. The Black-Scholes option pricing model requires the input of subjective assumptions. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not provide a reliable single measure of the fair value of our employee stock options or common stock purchased under the ESPP. In addition, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of our stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and which could materially impact our fair value determination.

Income taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"). The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's

consolidated financial statements or tax returns. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or cash flows. As of March 31, 2009, we have a total valuation allowance against our deferred tax assets of $4.6 million, which is primarily comprised of $3.7 million recorded in 2008 as a result of our assessment of the likelihood of using our foreign tax credits prior to their expiration, and $0.9 million, which was recognized in 2007 in connection with the capital loss incurred from the sale of subsidiary. We believe the remainder of our deferred tax assets as of March 31, 2009 will ultimately be realized.

We adopted FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 ("FIN 48") on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No
109. This interpretation contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement.

Our annual effective tax rate is determined based on estimated worldwide pre-tax income, permanent differences and credits, and is reviewed quarterly to determine if actual results require modification of the effective tax rate. We estimate our 2009 annual effective income tax rate to be 41.0%.

RESULTS OF OPERATIONS

We manage our business in two operating segments: Economics Services and Finance and Accounting Services. The Chief Operating Decision Maker (our CEO) considers the key profit/loss measurement of the two segments to be gross profit and gross margin. As such, only revenue, costs of services and gross margin are presented and discussed at the segment level.

Three months ended March 31, 2009 and 2008

The following table sets forth the amounts and the percentage of revenues represented by certain line items in our statement of operations for the three months ended March 31, 2009 and 2008, respectively.

                                          Three months ended March 31,
                                            2009                2008
                                                ($ in thousands)
Fee-based revenues, net               $  63,922    96.4 % $ 87,171    96.3 %
Reimbursable revenues                     2,383     3.6 %    3,331     3.7 %
Revenues                                 66,305   100.0 %   90,502   100.0 %
Direct costs                             49,617    74.9 %   57,172    63.1 %
Reimbursable costs                        2,540     3.8 %    3,311     3.7 %
Cost of services                         52,157    78.7 %   60,483    66.8 %
Gross profit                             14,148    21.3 %   30,019    33.2 %
Operating expenses:
General and administrative expenses      18,895    28.5 %   21,301    23.5 %
Depreciation and amortization             1,330     2.0 %    1,535     1.7 %
Operating (loss) income                  (6,077 )  -9.2 %    7,183     8.0 %
Interest income                              48     0.1 %      143     0.2 %
Interest expense                           (315 )  -0.5 %     (197 )  -0.2 %
Other expense, net                          (90 )  -0.1 %     (420 )  -0.5 %
(Loss) income before income taxes        (6,434 )  -9.7 %    6,709     7.5 %
Income tax (benefit) expense             (2,638 )  -4.0 %    2,724     3.0 %
Net (loss) income                     $  (3,796 )  -5.7 % $  3,985     4.5 %

Revenues and cost of services

The following table sets forth the consolidated revenues, cost of services, gross profit and gross margin and certain operating metrics for LECG for the three months ended March 31, 2009 and 2008.

                                                   Three months ended March 31,
                                             2009           2008            Change
                                              ($ in thousands, except rate amounts)
Fee-based revenues, net                   $    63,922    $    87,171   $ (23,249 ) -26.7 %
Reimbursable revenues                           2,383          3,331        (948 ) -28.5 %
Revenues                                       66,305         90,502     (24,197 ) -26.7 %
Direct costs                                   49,617         57,172      (7,555 ) -13.2 %
Reimbursable costs                              2,540          3,311        (771 ) -23.3 %
Cost of services                               52,157         60,483      (8,326 ) -13.8 %
Gross profit                              $    14,148    $    30,019   $ (15,871 ) -52.9 %
Gross margin                                     21.3 %         33.2 %             -11.9 %

Billable headcount, period average                773            802         (29 )  -3.6 %
Average billable rate                     $       308    $       337   $     (29 )  -8.6 %
Jr./Sr. staff paid utilization rate              67.1 %         72.1 %              -5.0 %

Estimate of unrealizable revenue                2,823          3,814        (991 ) -26.0 %
% of gross fee-based revenue recognized           4.2 %          4.2 %               0.0 %

Revenues

The decrease in fee-based revenues, net for the three months ended March 31, 2009 compared to the same period in 2008 was primarily the result of an 8.6% decrease in average billable rate and a 3.6% decrease in average billable headcount. Average billable headcount decreased by 29 from the first quarter of 2008 to the first quarter of 2009 due primarily to terminations in connection with our 2008 restructuring activities and voluntary attrition. The decrease in the average billable rate was caused primarily by decreases of 27% and 13% in the average exchange rates of the British pound sterling and the Euro, respectively. Also contributing to the decrease was a shift in our revenue mix from high rate billable headcount to lower rate billable headcount.

Our estimate of unrealizable revenue as a percentage of gross fee-based revenue recognized remained flat at 4.2% period over period.

Reimbursable revenues decreased primarily due to lower out-of-pocket expenses for matters worked on during the three months ended March 31, 2009 compared to the same period in 2008.

Revenues from our international operations were $13.0 million in the three months ended March 31, 2009, which represents 19.6% of total revenue as compared to 21.0% of total revenue in the same period of 2008. In the three months ended March 31, 2009 our international operations revenue decreased by $6.0 million, or 31.6% as compared to the same period in 2008, primarily due to the decrease in the average exchange rates, the divestiture of a portion of our Italian operations effective December 31, 2008 and a decrease in business activity in our other European subsidiaries partially offset by an increase in business activity in Asia-Pacific period over period.

Cost of services

The decrease in direct costs for the three months ended March 31, 2009 compared to the same period in 2008 resulted from a 3.6% reduction in headcount in connection with our 2008 restructuring activities and voluntary attrition. Decreased salary costs for professional staff and decreased compensation earned by at-risk and gross margin model experts were offset by increased salary and related costs for newly hired experts on the salary/bonus compensation model. Also offsetting the decrease in direct costs was an increase in signing, retention and performance bonus amortization of $0.2 million which was due to the capitalization and the resulting additional amortization of bonuses since March 31, 2008.

We granted approximately 1.2 million restricted stock units and/or shares to certain experts on May 15, 2008 under a new equity initiative implemented during the second quarter of 2008, which has resulted in a $0.4 million increase in equity compensation expense for the three months ended March 31, 2009 compared to March 31, 2008.

Gross margin

The 11.9% decrease in our gross margin to 21.3% in the first quarter of 2009 compared to 33.2% in the same period in 2008 was primarily due to a 26.7% decrease in fee-based revenues, net without a proportional decrease in our direct costs. The decrease in direct costs included an $8.2 million decrease in expert and professional staff compensation, which includes the decreased costs related to the 35 terminations as a result of our fourth quarter 2008 restructuring activities and the increased costs associated with 28 new hires, net of voluntary attrition, in the Finance and Accounting Services segment since March 31, 2008. Also partially offsetting the net decrease was a $0.6 million increase in signing, retention and performance bonus amortization and equity-based compensation.

Segment results

Economics Services



The following table sets forth the revenues, cost of services, gross profit and
gross margins, and certain operating metrics for our Economic Services segment
for the three months ended March 31, 2009 and 2008.



                                                   Three months ended March 31,
                                             2009           2008            Change
                                              ($ in thousands, except rate amounts)
Fee-based revenues, net                   $    28,079    $    39,934   $ (11,855 ) -29.7 %
Reimbursable revenues                             827          1,032        (205 ) -19.9 %
Revenues                                       28,906         40,966     (12,060 ) -29.4 %
Direct costs                                   20,293         26,547      (6,254 ) -23.6 %
. . .