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 June 30, 2008 and December 31, 2008.

                                                                      Change since
                  June 30,   December 31,   June 30,     December 31, 2008        June 30, 2008
                    2009         2008         2008       Number          %       Number       %

Economics
Services               257            287        298           (30 )      -10 %      (41 )     -14 %
Finance and
Accounting
Services               461            496        470           (35 )       -7 %       (9 )      -2 %
Consolidated           718            783        768           (65 )       -8 %      (50 )      -7 %

The decrease in consolidated billable headcount since December 31, 2008 is due to 38 terminations as a result of our second quarter 2009 restructuring actions, including eight terminations in our Economics segment and 30 terminations in our Finance and Accounting Services segment, and 27 voluntary terminations during the six month period ended June 30, 2009.

The decrease in consolidated billable headcount from June 30, 2008 to June 30, 2009 is primarily due to 73 terminations in connection with our fourth quarter 2008 and second quarter 2009 restructuring activities, including 18 terminations in our Economics segment and 55 terminations in our Finance and Accounting Services segment. The Finance and Accounting Services segment terminations were substantially offset by 46 new hires, net of voluntary attrition, in the segment since June 30, 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 six months ended June 30, 2009 and 2008, we paid signing, retention and performance bonuses of $7.0 million and $12.6 million, respectively, which will be amortized over periods ranging from one to seven years. Amortization of signing, retention and performance bonuses expense was $8.7 million and $8.3 million in the six months ended June 30, 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 71% of their individual billings on particular projects in the six months ended June 30, 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 six months ended June 30, 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. 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.

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.

Goodwill and other intangible assets

The addition to goodwill related to accounting for the additional purchase price of a 2007 acquisition. SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), requires that goodwill and intangible assets with indefinite lives not be amortized, but rather tested for impairment at least annually, or whenever events or changes in circumstances indicate the carrying amounts of these assets may not be recoverable. Our annual impairment test is performed during the fourth quarter of each year using an October 1st measurement date.

Factors that we consider important in determining whether to perform an impairment review on a date other than October 1st, include significant underperformance relative to forecasted operating results, significant negative industry or economic trends, and permanent declines in our stock price and related market capitalization. If we determine that the carrying value of goodwill may not be recoverable, we will assess impairment based on a projection of discounted future cash flows for each reporting unit, or some other fair value measurement such as the quoted market price of our stock and the resulting market capitalization, and then measure the amount of impairment, if necessary, based on the difference between the carrying value of our reporting units assigned goodwill and the implied fair value.

Other intangible assets that are separable from goodwill and have determinable useful lives are valued separately and amortized over their expected useful lives. Other intangible assets consist principally of customer relationships and non-compete agreements and are generally amortized over six to nine years. We evaluate the recoverability of its other intangible assets over their remaining useful life when changes in events or circumstances warrant an impairment review. If the carrying value of an intangible asset is determined to be impaired and unrecoverable over its originally estimated useful life, we will record an impairment charge to reduce the asset's carrying value to its fair value and then amortize the remaining value prospectively over the revised remaining useful life. We generally determine the fair value of our intangible asset using a discounted cash flow model as quoted market prices for these types of assets is not readily available.

Recently issued accounting standards

See "Note 1 - Basis of presentation and operation" to the Condensed Consolidated Financial Statements, regarding the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.

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 and six months ended June 30, 2009 and 2008

The following table sets forth the percentage of revenues represented by certain line items in our statement of operations for the three and six months ended June 30, 2009 and 2008, respectively.

                               Three months ended June 30,        Six months ended June 30,
                                 2009              2008             2009             2008

Fee-based revenues, net               96.5 %            95.8 %          96.4 %           96.1 %
Reimbursable revenues                  3.5 %             4.2 %           3.6 %            3.9 %
Revenues                             100.0 %           100.0 %         100.0 %          100.0 %
Direct costs                          71.0 %            64.1 %          72.8 %           63.7 %
Reimbursable costs                     3.9 %             4.2 %           3.9 %            3.9 %
Cost of services                      74.9 %            68.3 %          76.7 %           67.6 %
Gross profit                          25.1 %            31.7 %          23.3 %           32.4 %
Operating expenses:
General and
administrative expenses               27.7 %            24.9 %          28.0 %           24.2 %
Depreciation and
amortization                           1.9 %             1.6 %           2.0 %            1.6 %
Other impairment                       1.8 %             0.0 %           0.9 %            0.0 %
Restructuring charges                  2.1 %             0.0 %           1.1 %            0.0 %
Divestiture charges                    2.5 %             0.0 %           1.3 %            0.0 %
Operating (loss) income              -10.9 %             5.2 %         -10.0 %            6.6 %
Interest income                        0.1 %             0.1 %           0.1 %            0.1 %
Interest expense                      -0.9 %            -0.2 %          -0.7 %           -0.2 %
Other expense, net                    -0.5 %            -0.1 %          -0.3 %           -0.3 %
(Loss) income before
income taxes                         -12.2 %             5.0 %         -10.9 %            6.2 %
Income tax (benefit)
expense                               -2.7 %             2.0 %          -3.3 %            2.5 %
Net (loss) income                     -9.5 %             3.0 %          -7.6 %            3.7 %

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 and six months ended June 30, 2009 and 2008, respectively.

                        Three months ended June 30,                  Six months ended June 30,
                    2009       2008          Change            2009        2008            Change
                                          ($ in thousands, except rate amounts)
Fee-based
revenues, net     $ 65,464   $ 85,359   $ (19,895 ) -23.3 %  $ 129,386   $ 172,530   $ (43,144 )  -25.0 %
Reimbursable
revenues             2,405      3,720      (1,315 ) -35.3 %      4,788       7,051      (2,263 )  -32.1 %
Revenues            67,869     89,079     (21,210 ) -23.8 %    134,174     179,581     (45,407 )  -25.3 %
Direct costs        48,111     57,176      (9,065 ) -15.9 %     97,728     114,348     (16,620 )  -14.5 %
Reimbursable
costs                2,651      3,700      (1,049 ) -28.4 %      5,191       7,011      (1,820 )  -26.0 %
Cost of
services            50,762     60,876     (10,114 ) -16.6 %    102,919     121,359     (18,440 )  -15.2 %
Gross profit      $ 17,107   $ 28,203   $ (11,096 ) -39.3 %  $  31,255   $  58,222   $ (26,967 )  -46.3 %
Gross margin          25.2 %     31.7 %              -6.5 %       23.3 %      32.4 %               -9.1 %

Billable
headcount,
period average         727        771         (44 )  -5.7 %        750         787         (37 )   -4.7 %
Average
billable rate     $    316   $    343   $     (27 )  -7.9 %  $     312   $     340   $     (28 )   -8.2 %
Jr./Sr. staff
paid
utilization
rate                  68.5 %     76.1 %              -7.6 %       67.8 %      74.0 %               -6.2 %

Estimate of
unrealizable
revenue              2,847      4,292      (1,445 ) -33.7 %      5,670       8,106      (2,436 )  -30.1 %
% of gross
fee-based
revenue                4.2 %      4.8 %              -0.6 %        4.2 %       4.5 %               -0.3 %

Revenues

The decrease in fee-based revenues, net for the three months ended June 30, 2009 compared to the same period in 2008 was primarily the result of a 7.9% decrease in average billable rate and a 5.7% decrease in average billable headcount. Average billable headcount decreased by 44 from the second quarter of 2008 to the second quarter of 2009 due primarily to terminations in connection with our 2008 and 2009 restructuring activities and voluntary attrition, net of new hires. The decrease in the average billable rate was caused primarily by decreases of 21% 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.

The decrease in fee-based revenues, net for the six months ended June 30, 2009 compared to the same period in 2008 was primarily the result of an 8.2% decrease in average billable rate and a 4.7% decrease in average billable headcount. Average billable headcount decreased by 37 from the first half of 2008 to the first half of 2009 due primarily to terminations in connection with our 2008 and 2009 restructuring activities and voluntary attrition, net of new hires. The decrease in the average billable rate was caused primarily by decreases of 24% 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 decreased by 0.6% and by 0.3% for the three and six months ended June 30, 2009 compared to the same periods in 2008, respectively, due to a lower trailing 12 month write-off percentage, which is the basis for calculating our estimate of unrealizable revenue.

. . .