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

FORM 10-Q

Commission File Number 000-50464

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

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

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

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

LECG CORPORATION
FORM 10-Q
TABLE OF CONTENTS

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PART I    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

See notes to condensed consolidated financial statements

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

See notes to condensed consolidated financial statements

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

See notes to condensed consolidated financial statements

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LECG CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.     Basis of presentation and operations

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

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

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

Reclassifications

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

2.     Significant accounting policies

Revenue recognition

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

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

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

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Income taxes

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

Use of estimates

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

3.     Net income per share and share amounts

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

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

•

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



•

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



•

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

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

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

4.     Equity-based compensation

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

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

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

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

5.     Comprehensive income

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