Exponent (EXPO) 10-Q 2005 Q3 Quarterly report

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2004

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number 0-18655

EXPONENT, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	77-0218904
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)

149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA	94025
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code (650) 326-9400

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  x    No  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 5, 2004
Common Stock $.001 par value	7,974,809 shares

EXPONENT, INC.

FORM 10-Q

TABLE OF CONTENTS

			Page
PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets October 1, 2004 and January 2, 2004	3
		Condensed Consolidated Statements of Income Three and Nine Months Ended October 1, 2004 and October 3, 2003	4
		Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended October 1, 2004 and October 3, 2003	5
		Condensed Consolidated Statements of Cash Flows Nine Months Ended October 1, 2004 and October 3, 2003	6
		Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		23
Item 4.	Controls and Procedures		24
PART II – OTHER INFORMATION
Item 6.	Exhibits		24
Signatures			25

- 2 -

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EXPONENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

October 1, 2004 and January 2, 2004

(in thousands, except share data)

(unaudited)

	October 1, 2004			January 2, 2004
Assets
Current assets:
Cash and cash equivalents	$	11,224		$	19,490
Short-term investments		31,434			22,268
Accounts receivable, net of allowance for doubtful accounts of $1,631 and $1,248 at October 1, 2004 and January 2, 2004, respectively		49,974			35,844
Prepaid expenses and other assets		3,912			2,095
Deferred income taxes		2,222			2,052
Total current assets		98,766			81,749
Property, equipment and leasehold improvements, net		30,215			30,793
Goodwill		8,607			8,607
Other assets		1,065			693
	$	138,653		$	121,842
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	4,062		$	4,838
Accrued payroll and employee benefits		17,409			16,528
Deferred revenues		978			2,864
Total current liabilities		22,449			24,230
Other liabilities		860			169
Deferred income taxes		219			1,211
Deferred rent		1,083			1,031
Total liabilities		24,611			26,641
Stockholders’ equity:
Common stock, $.001 par value; 20,000,000 shares authorized; 7,993,937 shares issued at October 1, 2004 and January 2, 2004, respectively		8			8
Additional paid-in capital		38,797			34,153
Deferred stock-based compensation		(1,011	)		(69	)
Accumulated other comprehensive income		9			94
Retained earnings		76,538			66,464
Treasury stock, at cost, 57,574 and 694,988 shares held at October 1, 2004 and January 2, 2004, respectively		(299	)		(5,449	)
Total stockholders’ equity		114,042			95,201
	$	138,653		$	121,842

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 3 -

EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Quarters and Nine Months Ended October 1, 2004 and October 3, 2003

(in thousands, except per share data)

(unaudited)

	Quarters Ended				Nine Months Ended
	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Revenues:
Revenues before reimbursements	$	35,170	$	31,950	$	106,669	$	95,229
Reimbursements		2,871	��	3,707		9,781		10,165
Revenues		38,041		35,657		116,450		105,394
Operating expenses:
Compensation and related expenses		23,022		20,573		69,340		61,888
Other operating expenses		4,690		4,383		13,917		13,434
Reimbursable expenses		2,871		3,707		9,781		10,165
General and administrative expenses		2,346		2,283		7,014		6,469
Total operating expenses		32,929		30,946		100,052		91,956
Operating income		5,112		4,711		16,398		13,438
Other income:
Interest income, net		110		35		299		59
Miscellaneous income, net		156		128		377		478
Total other income		266		163		676		537
Income before income taxes		5,378		4,874		17,074		13,975
Income taxes		2,205		2,026		7,000		5,984
Net income	$	3,173	$	2,848	$	10,074	$	7,991
Net income per share:
Basic	$	0.41	$	0.39	$	1.33	$	1.11
Diluted	$	0.37	$	0.36	$	1.19	$	1.01
Shares used in per share computations:
Basic		7,834		7,212		7,574		7,180
Diluted		8,645		7,986		8,469		7,907

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 4 -

EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarters and Nine Months Ended October 1, 2004 and October 3, 2003

(in thousands)

(unaudited)

	Quarters Ended						Nine Months Ended
	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Net income	$	3,173		$	2,848		$	10,074		$	7,991
Other comprehensive income (loss):
Foreign currency translation adjustments		(15	)		3			(8	)		62
Unrealized gain (loss) on investments		11			(10	)		(77	)		(4	)
Comprehensive income	$	3,169		$	2,841		$	9,989		$	8,049

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 5 -

EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended October 1, 2004 and October 3, 2003

(in thousands)

(unaudited)

	Nine Months Ended
	October 1, 2004			October 3, 2003
Cash flows from operating activities:
Net income	$	10,074		$	7,991
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		3,010			2,538
Deferred rent expense		52			137
Provision for doubtful accounts		1,304			1,232
Stock-based compensation		192			69
Deferred income tax provision		(1,162	)		—
Tax benefit for stock option plans		2,722			—
Changes in operating assets and liabilities:
Accounts receivable		(15,434	)		(5,722	)
Prepaid expenses and other assets		(1,972	)		1,288
Accounts payable and accrued liabilities		(781	)		207
Accrued payroll and employee benefits		1,865			246
Deferred revenues		(1,886	)		212
Net cash (used in) provided by operating activities		(2,016	)		8,198
Cash flows from investing activities:
Purchases of short-term investments		(19,567	)		(10,961	)
Sales and maturities of short-term investments		9,917			—
Capital expenditures		(1,812	)		(1,773	)
Other assets		296			(124	)
Net cash used in investing activities		(11,166	)		(12,858	)
Cash flows from financing activities:
Repayments of borrowings and long-term obligations		(50	)		(60	)
Repurchase of common stock		—			(2,454	)
Proceeds from issuance of common stock		4,954			1,907
Net cash provided by (used in) financing activities		4,904			(607	)
Effect of foreign currency exchange rates on cash and cash equivalents		12			15
Net decrease in cash and cash equivalents		(8,266	)		(5,252	)
Cash and cash equivalents at beginning of period		19,490			22,480
Cash and cash equivalents at end of period	$	11,224		$	17,228

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

- 6 -

EXPONENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Fiscal Quarters and Nine Months Ended

October 1, 2004 and October 3, 2003

Note 1: Basis of Presentation

Exponent, Inc. (referred to as the “Company” or “Exponent”) is an engineering and scientific consulting firm that provides solutions to complex problems. The Company operates on a 52-53 week fiscal year ending on the Friday closest to the last day of December.

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments which are necessary for the fair presentation of the condensed consolidated financial statements have been included and all such adjustments are of a normal and recurring nature. The operating results for the fiscal quarters and nine months ended October 1, 2004 and October 3, 2003, are not necessarily representative of the results of future quarterly or annual periods.

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

Note 2: Revenue Recognition

The Company derives its revenues primarily from professional fees earned on consulting engagements and fees earned for the use of its equipment and facilities, as well as reimbursements for outside direct expenses associated with the services that are billed to its clients.

Exponent reports revenues net of subcontractor fees. The Company has determined that it is not the primary obligor with respect to its subcontractors because:

• its clients are directly involved in the subcontractor selection process;

• the subcontractor is responsible for fulfilling the scope of work; and

• the Company passes through the costs of subcontractor agreements with only a minimal fixed percentage mark-up to compensate it for processing the transactions.

Reimbursements, including those related to travel and other out-of-pocket expenses, and other similar third-party costs such as the cost of materials, are included in revenues, and an equivalent amount of reimbursable expenses are included in operating expenses. Any mark-up on reimbursable expenses is included in revenues.

Substantially all of the Company’s engagements are performed under time and material or fixed-price billing arrangements. On time and material and fixed-price projects, revenue is generally recognized as the services are performed. For substantially all of the Company’s fixed-price engagements, it recognizes revenue based on the relationship of incurred labor hours at standard rates to its estimate of the total labor hours at standard rates it expects to incur over the term of the contract. The Company believes this methodology achieves a reliable measure of the revenue from the consulting services it provides to its customers under fixed-price contracts given the nature of the consulting services the Company provides and the following additional considerations:

• the Company considers labor hours at standard rates and expenses to be incurred when pricing its contracts;

• the Company generally does not incur set-up costs on its contracts;

- 7 -

• the Company does not believe that there are reliable milestones to measure progress toward completion;

• if either party terminates the contract early, the customer is required to pay the Company for time at standard rates plus materials incurred to date;

• the Company does not recognize revenue for award fees or bonuses until specific contractual criteria are met;

• the Company does not include revenue for unpriced change orders until the customer agrees with the changes;

• historically the Company has not had significant accounts receivable write-offs or cost overruns; and

• its contracts are typically progress billed on a monthly basis.

Gross revenues and reimbursements for the quarters and nine months ended October 1, 2004 and October 3, 2003 are as follows:

	Quarters Ended				Nine Months Ended
(In thousands)	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Gross revenues	$	39,443	$	37,184	$	121,488	$	112,342
Less: Subcontractor fees		1,402		1,527		5,038		6,948
Revenues		38,041		35,657		116,450		105,394
Reimbursements:
Out-of-pocket travel reimbursements		870		928		2,865		3,002
Other outside direct expenses		2,001		2,779		6,916		7,163
		2,871		3,707		9,781		10,165
Revenues before reimbursements	$	35,170	$	31,950	$	106,669	$	95,229

Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. These judgments and estimates include an assessment of collectibility and, for fixed-price engagements, an estimate as to the total effort required to complete the project. If the Company made different judgments or utilized different estimates, the amount and timing of its revenue for any period could be materially different.

All consulting contracts are subject to review by management, which requires a positive assessment of the collectibility of contract amounts. If, during the course of the contract, the Company determines that collection of revenue is not reasonably assured, it does not recognize the revenue until its collection becomes reasonably assured, which is generally upon receipt of cash. The Company assesses collectibility based on a number of factors, including past transaction history with the client and project manager, as well as the credit worthiness of the client. Losses on fixed-price contracts are recognized during the period in which the loss first becomes evident. Contract losses are determined to be the amount by which the estimated total costs of the contract exceeds the total fixed price of the contract.

Note 3: Net Income Per Share

Basic per share amounts are computed using the weighted-average number of common shares outstanding during the period. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the exercise of outstanding options to purchase common stock using the treasury stock method.

- 8 -

The following schedule reconciles the shares used to calculate basic and diluted net income per share:

	Quarters Ended		Nine Months Ended
(In thousands)	October 1, 2004	October 3, 2003	October 1, 2004	October 3, 2003
Shares used in basic per share computation	7,834	7,212	7,574	7,180
Effect of dilutive common stock options outstanding	750	774	862	727
Effect of dilutive restricted stock units outstanding	61	—	33	—
Shares used in diluted per share computation	8,645	7,986	8,469	7,907

There were no options excluded from the diluted per share calculation for the fiscal quarters ended October 1, 2004 and October 3, 2003. Common stock options to purchase 8,938 and 8,663 shares were excluded from the diluted per share calculation for the nine months ended October 1, 2004 and October 3, 2003, respectively, due to their antidilutive effect. Weighted average exercise prices for the antidilutive shares were $24.83 and $15.34 for the nine months ended October 1, 2004 and October 3, 2003, respectively.

Note 4: Stock-Based Compensation

During the first quarter of fiscal 2004, the Company implemented certain changes to its employee compensation designed to continue to attract and retain employees, and to better align employee interests with those of the Company’s stockholders. Up to 30% of a select group of principals’ and officers’ fiscal 2003 bonus was settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. On March 12, 2004, fully vested restricted stock unit awards representing 43,273 shares of the Company’s common stock were granted to a select group of principals and officers as a part of their bonus distribution for fiscal 2003. The value of these fully vested restricted stock unit awards as measured on March 12, 2004 was $984,000.

Each individual who received a fully vested restricted stock unit award was also granted a matching number of unvested restricted stock unit awards. These unvested restricted stock unit awards will vest on March 12, 2008, at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award provided the holder of each award has met certain employment conditions. Unvested restricted stock unit awards representing 43,273 shares of the Company’s common stock were granted to a select group of principals and officers on March 12, 2004. The value of these unvested restricted stock unit awards as measured on March 12, 2004 was $984,000 and was recorded as deferred stock-based compensation. This deferred stock-based compensation is being amortized over the four-year vesting period of the awards.

The Company uses the intrinsic value method of accounting for its Employee Stock Purchase Plan and Stock Option Plans, collectively called “Options.” The Options are granted at exercise prices equal to the fair value of the Company’s common stock on the date of the grant. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” requires the Company to disclose pro forma information regarding net income and net income per share as if the Company had accounted for its options under the fair value method. Under the fair value method, compensation expense is calculated for options granted using a defined valuation technique. The Company uses the Black-Scholes option pricing model to calculate the fair value of its options. In calculating the fair value of an option at the date of grant, the Black-Scholes option pricing model requires the input of highly subjective assumptions. The Company used the following weighted-average assumptions for the periods ended October 1, 2004 and October 3, 2003:

	Employee Stock Purchase Plan				Stock Option Plan
	2004		2003		2004		2003
Expected life (in years)	0.6		0.6		4.9		5.7
Risk-free interest rate	2.0	%	1.0	%	3.4	%	2.9	%
Volatility	35	%	35	%	48	%	54	%
Dividend yield	0	%	0	%	0	%	0	%

- 9 -

Had the Company determined compensation cost based on the estimated fair value at the grant date for its options under SFAS No. 123, the Company’s net income would have been adjusted to the pro forma amounts indicated in the following table:

	Quarters Ended						Nine Months Ended
(In thousands, except per share data)	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Reported net income:	$	3,173		$	2,848		$	10,074		$	7,991
Add back: Intrinsic value stock-based compensation expense, net of tax		50			11			113			39
Deduct: Fair value stock-based compensation expense, net of tax		(465	)		(512	)		(1,382	)		(1,566	)
Adjusted net income:	$	2,758		$	2,347		$	8,805		$	6,464
Net income per share:
As reported:
Basic	$	0.41		$	0.39		$	1.33		$	1.11
Diluted	$	0.37		$	0.36		$	1.19		$	1.01
Adjusted:
Basic	$	0.35		$	0.33		$	1.16		$	0.90
Diluted	$	0.32		$	0.30		$	1.05		$	0.84
Shares used in per share calculations:
As reported:
Basic		7,834			7,212			7,574			7,180
Diluted		8,645			7,986			8,469			7,907
Adjusted:
Basic		7,834			7,212			7,574			7,180
Diluted		8,534			7,731			8,348			7,721

Note 5: Short-Term Investments

Short-term investments consist of debt securities classified as available for sale and are carried at their fair value as of the balance sheet date. Short-term investments generally mature between three months and three years from the purchase date. Investments with maturities beyond one year are classified as short-term based on their highly liquid nature and because such marketable securities represent investment of cash that is available for current operations. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains or losses are determined on the specific identification method and are reflected in miscellaneous income. Net unrealized gains and losses are recorded directly in stockholders’ equity except for unrealized losses that are deemed to be other than temporary, which are reflected in net income.

- 10 -

Note 6: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:

	Nine Months Ended
(In thousands)	October 1, 2004		October 3, 2003
Cash paid during period:
Interest	$	11	$	33
Income taxes	$	6,219	$	3,183
Non-cash investing and financing activities:
Capital lease for equipment	$	34	$	72
Unrealized loss on short-term investments	$	77	$	4
Vested stock unit awards issued to settle accrued bonuses	$	984	$	—
Deferred stock-based compensation	$	984	$	—

Note 7: Accounts Receivable, Net

At October 1, 2004 and January 2, 2004, accounts receivable, net was comprised of the following:

(In thousands)	October 1, 2004			January 2, 2004
Billed accounts receivable	$	37,188		$	25,498
Unbilled accounts receivable		14,417			11,594
Allowance for doubtful accounts		(1,631	)		(1,248	)
Total accounts receivable, net	$	49,974		$	35,844

Note 8: Segment Reporting

The Company has two operating segments based on two primary areas of service. One operating segment is a broad service group providing technical consulting in different practices primarily in the areas of impending litigation and technology development. The Company’s other operating segment provides services in the area of environmental, epidemiology and health risk analysis. This operating segment provides a wide range of consulting services relating to environmental hazards and risks and the impact on both human health and the environment.

Segment information for the quarters and nine months ended October 1, 2004 and October 3, 2003 follows:

Revenues

	Quarters Ended				Nine Months Ended
(In thousands)	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Other scientific and engineering	$	29,271	$	26,080	$	88,562	$	77,268
Environmental and health		8,770		9,577		27,888		28,126
Total revenues	$	38,041	$	35,657	$	116,450	$	105,394

- 11 -

Operating income

	Quarters Ended						Nine Months Ended
(In thousands)	October 1, 2004			October 3, 2003			October 1, 2004			October 3, 2003
Other scientific and engineering	$	7,373		$	5,274		$	22,864		$	15,530
Environmental and health		1,409			2,447			4,803			6,780
Total segment operating income		8,782			7,721			27,667			22,310
Corporate operating expense		(3,670	)		(3,010	)		(11,269	)		(8,872	)
Total operating income	$	5,112		$	4,711		$	16,398		$	13,438

Capital Expenditures
	Quarters Ended				Nine Months Ended
(In thousands)	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Other scientific and engineering	$	568	$	462	$	1,359	$	1,495
Environmental and health		22		47		113		107
Total segment capital expenditures		590		509		1,472		1,602
Corporate capital expenditures		75		45		340		171
Total capital expenditures	$	665	$	554	$	1,812	$	1,773
Depreciation and Amortization
	Quarters Ended				Nine Months Ended
(In thousands)	October 1, 2004		October 3, 2003		October 1, 2004		October 3, 2003
Other scientific and engineering	$	547	$	545	$	1,627	$	1,658
Environmental and health		44		44		129		153
Total segment depreciation and amortization		591		589		1,756		1,811
Corporate depreciation and amortization		418		247		1,254		727
Total depreciation and amortization	$	1,009	$	836	$	3,010	$	2,538

The Company derived 12% of revenues from agencies of the federal government for the quarter and nine months ended October 1, 2004. No single customer comprised more than 10% of the Company’s revenues for the quarter and nine months ended October 3, 2003.

- 12 -

Note 9: Related Party Transactions

The Company has a contract for software licensing from Durango Software LLC. The husband of Dr. Barbara Peterson, a practice director in the Exponent organization, owns Durango Software. Exponent recorded software licensing expenses related to this contract for the quarter and nine months ended October 1, 2004 of approximately $25,000 and $75,000, respectively. For the quarter and nine months ended October 3, 2003, Exponent recorded approximately $24,000 and $72,000, respectively, in software licensing expenses related to this contract.

Note 10: Goodwill and Other Intangible Assets

At October 1, 2004 and January 2, 2004, goodwill and other intangible assets were comprised of the following:

(In thousands)	October 1, 2004			January 2, 2004
Intangible assets subject to amortization:
Non-competition agreements	$	236		$	236
Less accumulated amortization		(180	)		(136	)
		56			100
Goodwill		8,607			8,607
Total goodwill and intangible assets	$	8,663		$	8,707

Intangible assets subject to amortization are included in other assets in the accompanying condensed consolidated balance sheets.

Amortization expense for intangible assets for the quarter and nine months ended October 1, 2004 was $15,000 and $44,000, respectively. Amortization expense for the quarter and nine months ended October 3, 2003 was approximately $15,000 and $45,000, respectively.

Below is a breakdown of goodwill, net of amortization, reported by segment as of October 1, 2004:

(In thousands)	Environmental and health		Other scientific and engineering		Total
Goodwill, net of amortization	$	8,099	$	508	$	8,607

There were no changes in the carrying amount of goodwill for the quarter ended October 1, 2004.

- 13 -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 2, 2004, which are contained in our fiscal 2003 Annual Report on Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, and the rules promulgated pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended thereto) that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. When used in this document and in the documents incorporated herein by reference, the words “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to the Company or its management, identify such forward-looking statements. Such statements reflect the current views of the Company or its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Factors that could cause or contribute to such material differences include the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the effects of competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed in our Annual Report on Form 10-K under the heading “Factors That May Affect Future Operating Results and Market Price of Stock” and elsewhere in the report. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans, or expectations contemplated by the Company will be achieved. The Company undertakes no obligation to release publicly any updates or revisions to any such forward-looking statements.

Business Overview

Exponent, Inc. is an engineering and scientific consulting firm that provides solutions to complex problems. Our multidisciplinary team of scientists, physicians, engineers and business consultants brings together more than 70 different technical disciplines to solve complicated issues facing industry and business today. Our services include analysis of product development, product recall, regulatory compliance, discovery of potential problems related to products, people or property and impending litigation, as well as the development of highly technical new products.

CRITICAL ACCOUNTING ESTIMATES

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, estimating the allowance for doubtful accounts, accounting for income taxes and valuing goodwill have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on the critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements contained in our fiscal 2003 Annual Report on Form 10-K.

- 14 -

Revenue recognition.We derive our revenues primarily from professional fees earned on consulting engagements and fees earned for the use of our equipment and facilities, as well as reimbursements for outside direct expenses associated with the services that are billed to our clients.

Substantially all of our engagements are performed under time and material or fixed-price billing arrangements. On time and material and fixed-price projects, revenue is generally recognized as the services are performed. For substantially all of our fixed-price engagements we recognize revenue based on the relationship of incurred labor hours at standard rates to our estimate of the total labor hours at standard rates we expect to incur over the term of the contract. We believe this methodology achieves a reliable measure of the revenue from the consulting services we provide to our customers under fixed-price contracts.

Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. These judgments and estimates include an assessment of collectibility and, for fixed-price engagements, an estimate as to the total effort required to complete the project. If we made different judgments or utilized different estimates, the amount and timing of our revenue for any period could be materially different.

All consulting contracts are subject to review by management, which requires a positive assessment of the collectibility of contract amounts. If, during the course of the contract, we determine that collection of revenue is not reasonably assured, we do not recognize the revenue until its collection becomes reasonably assured, which is generally upon receipt of cash. We assess collectibility based on a number of factors, including past transaction history with the client and project manager, as well as the credit worthiness of the client. Losses on fixed-price contracts are recognized during the period in which the loss first becomes evident. Contract losses are determined to be the amount by which the estimated total costs of the contract exceeds the total fixed price of the contract.

Estimating the allowance for doubtful accounts.We must make estimates of our ability to collect accounts receivable and our unbilled work-in-process. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers we recognize allowances for doubtful accounts based upon historical bad debts, customer concentration, customer credit worthiness, current economic conditions and changes in customer payment terms.

Accounting for income taxes.In preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our condensed consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we must establish a valuation allowance.

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance against our deferred tax assets, such as current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. In the event that actual results differ from these estimates or the estimates are adjusted in future periods, then we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Based on our current financial projections and operating plan for fiscal 2004, we currently believe that we will be able to utilize our deferred tax assets.

Valuing goodwill. We assess goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may be impaired. Factors that we consider when evaluating for possible impairment include the following:

• significant under performance relative to expected historical or projected future operating results;

- 15 -

• significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

• significant negative economic trends.

When evaluating our goodwill for impairment, based upon the existence of one or more of the above factors, we determine the existence of an impairment by assessing the fair value of the applicable reporting unit, including goodwill, using expected future cash flows to be generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then an impairment loss is recognized.

RESULTS OF CONSOLIDATED OPERATIONS

Overview of the Quarter Ended October 1, 2004

During the third quarter of fiscal 2004 we had growth in several of our practice areas, resulting in a 6.7% growth in revenue as compared to the same period in fiscal 2003. Total billable hours were 168,000 for the third quarter of fiscal 2004 and 2003. Our revenue growth was the result of higher billing rates and an increase in billable hours for our other scientific and engineering segment. This segment has a higher average billing rate than our environmental and health segment. Technical full-time equivalents increased 6.1% to 503 for the third quarter of fiscal 2004 as compared to 474 during the same period last year. Utilization was 64% for the third quarter of fiscal 2004 as compared to 68% during the same period last year. Through the management of our operating expenses we were able to leverage this revenue growth to improve operating income by 8.5% and net income by 11.4% as compared to the third quarter of fiscal 2003.

Fiscal Quarter Ended October 1, 2004 compared to Fiscal Quarter Ended October 3, 2003

Revenues

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Other scientific and engineering	$	29,271		$	26,080		12.2	%
Percentage of total revenues		76.9	%		73.1	%
Environmental and health		8,770			9,577		(8.4	)%
Percentage of total revenues		23.1	%		26.9	%
Total revenues	$	38,041		$	35,657		6.7	%

The increase in revenues for our other scientific and engineering segment was the result of an increase in billable hours and higher billing rates. During the third quarter of fiscal 2004 billable hours for this segment increased by 6.7% to 127,000 as compared to 119,000 during the same period last year. This increase in billable hours was due to an increase in technical full-time equivalents to 363 during the third quarter of fiscal 2004 as compared to 332 during the same period last year. Utilization was 67% for the third quarter of fiscal 2004 as compared to 69% during the same period last year. The decrease in utilization for this segment was primarily due to the timing of the 4^th of July holiday, which fell in our third fiscal quarter during 2004 versus our second fiscal quarter during 2003.

The decrease in revenues for our environmental and health segment was primarily due to a decrease in billable hours partially offset by higher billing rates. During the third quarter of fiscal 2004 billable hours for this segment decreased by 16.3% to 41,000 as compared to 49,000 during the same period last year. Technical full-time equivalents for this segment during the third quarter of fiscal 2004 were 140 as compared to 142 for the same period last year. Utilization was 57% for the third quarter of fiscal 2004 as compared to 66% during the same period last year. The decrease in utilization for this segment was due to a decrease in demand for our services and the timing of the 4^th of July holiday.

- 16 -

Compensation and Related Expenses

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Compensation and related expenses	$	23,022		$	20,573		11.9	%
Percentage of total revenues		60.5	%		57.7	%

The increase in compensation and related expenses was due to the effects of our annual salary increase, an increase in full-time equivalents, higher fringe benefits and an increase in bonuses. Our annual salary increase, which was approximately 5%, took effect at the beginning of April 2004. Technical full-time equivalents increased 6.1% during the third quarter of fiscal 2004 as compared to the same period in fiscal 2003. Fringe benefits increased $583,000, due primarily to increases in workers compensation, payroll taxes, health insurance and employer 401(k) contributions. Bonuses are based on profitability and increased by $244,000 during the third quarter of fiscal 2004 as compared to the same period in fiscal 2003. We expect compensation and related expenses to continue to increase due to the anticipated hiring of additional staff, the impact of our annual salary increases, and an increase in bonuses, which are based on profitability.

Other Operating Expenses

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Other operating expenses	$	4,690		$	4,383		7.0	%
Percentage of total revenues		12.3	%		12.3	%

The increase in other operating expenses was primarily due to an increase in the purchase of technical supplies of $83,000, an increase in miscellaneous occupancy costs of $73,000, an increase in office supplies and expenses of $50,000, and an increase in computer supplies and equipment of $32,000. These increases were due to an increase in full-time equivalents. We expect other operating expenses to continue to increase due to the support associated with the anticipated hiring of additional staff and the anticipated expansion of our offices.

Reimbursable Expenses

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Reimbursable expenses	$	2,871		$	3,707		(22.6	)%
Percentage of total revenues		7.5	%		10.4	%

The decrease in reimbursable expenses was primarily due to lower purchases of direct technical materials and reimbursable vehicle procurements. Direct technical materials decreased $364,000 and vehicle procurements decreased $245,000. The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

General and Administrative Expenses

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
General and administrative expenses	$	2,346		$	2,283		2.8	%
Percentage of total revenues		6.2	%		6.4	%

- 17 -

The increase in general and administrative expenses was due to an increase in accounting and other professional fees of $156,000 partially offset by a reduction in bad debt of $114,000. The increase in accounting and other professional fees was due to higher audit and corporate governance related expenses. The decrease in bad debt expense was primarily due to an increase of $74,000 in recoveries of receivables previously written off. We expect general and administrative expenses to increase slightly.

Other Income and Expense

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Other income and expense	$	266		$	163		63.2	%
Percentage of total revenues		0.7	%		0.5	%

Other income and expense consists primarily of investment income and rental income from leasing excess space in our Silicon Valley facility. The increase in other income and expense was primarily due to a $75,000 increase in interest income resulting from higher balances of short-term investments and cash equivalents. We expect other income to continue to increase due to anticipated increases in our average balances of cash and cash equivalents and rising interest rates.

Income Taxes

	Quarters Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Income taxes	$	2,205		$	2,026		8.8	%
Percentage of total revenues		5.8	%		5.7	%
Effective tax rate		41.0	%		41.6	%

The increase in income tax expense during the third quarter of fiscal 2004 was primarily due to the increase in pre-tax income. The lower effective tax rate in the third quarter of fiscal 2004 compared to 2003 was primarily due to an increase in tax-exempt interest income.

Nine Months Ended October 1, 2004 compared to Nine Months Ended October 3, 2003

Revenues

	Nine Months Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Other scientific and engineering	$	88,562		$	77,268		14.6	%
Percentage of total revenues		76.1	%		73.3	%
Environmental and health		27,888			28,126		(0.8	)%
Percentage of total revenues		23.9	%		26.7	%
Total revenues	$	116,450		$	105,394		10.5	%

The increase in revenues for our other scientific and engineering segment was the result of an increase in total billable hours and higher billing rates. During the nine months ended October 1, 2004, billable hours for this segment increased by 13.9% to 393,000 as compared to 345,000 during the same period last year. This increase in billable hours was due to an increase in technical full-time equivalents to 358 as compared to 318 during the same period last year and an increase in utilization to 71% as compared to 70% during the same period last year.

- 18 -

The decrease in revenues for our environmental and health segment was primarily due to a decrease in billable hours partially offset by higher billing rates. Billable hours declined 8.3% to 133,000 from 145,000 and utilization declined to 60% from 64% during the same period last year. Technical full-time equivalents decreased to 143 for the nine months ending October 1, 2004, as compared to 144 for the same period last year. The decrease in utilization for this segment was due to a decrease in the demand for our services.

Compensation and Related Expenses

	Nine Month Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Compensation and related expenses	$	69,340		$	61,888		12.0	%
Percentage of total revenues		59.5	%		58.7	%

The increase in compensation and related expenses was due to the effects of our annual salary increase, an increase in full-time equivalents, higher fringe benefits and an increase in bonuses. Our annual salary increase, which was approximately 5%, took effect at the beginning of April 2004. Technical full-time equivalents increased 8.4% during the nine months ended October 1, 2004 as compared to the same period last year. Fringe benefits increased $1,292,000, due primarily to increases in payroll taxes, health insurance, workers compensation and employer 401K contributions. Bonuses are based on profitability and increased by $1,264,000 during the nine months ended October 1, 2004 as compared to the same period last year.

Other Operating Expenses

	Nine Months Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Other operating expenses	$	13,917		$	13,434		3.6	%
Percentage of total revenues		12.0	%		12.7	%

The increase in other operating expenses was primarily due to the write-off of a foreign real estate investment for $230,000 during the nine months ended October 1, 2004 and a $151,000 increase in computer expenses caused by increased hardware purchases and higher broadband fees.

Reimbursable Expenses

	Nine Months Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Reimbursable expenses	$	9,781		$	10,165		(3.8	)%
Percentage of total revenues		8.4	%		9.6	%

The decrease in reimbursable expenses was primarily due to a decrease in purchases of technical materials related to projects in our technology development practice.

General and Administrative Expenses

	Nine Months Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
General and administrative expenses	$	7,014		$	6,469		8.4	%
Percentage of total revenues		6.0	%		6.1	%

- 19 -

The increase in general and administrative expenses was primarily due to an increase in marketing expenses, other professional fees, bad debt expense and recruiting. Marketing expenses increased by $167,000 due to our efforts to drive revenue growth. Other professional fees increased $121,000 due to higher audit and corporate governance related expenses. Bad debt expense increased $142,000 primarily due to a corresponding increase in revenues during the nine months ended October 1, 2004. Recruiting increased by $60,000 due to our efforts to increase technical full-time equivalents.

Other Income and Expense

	Nine Months Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Other income and expense	$	676		$	537		25.9	%
Percentage of total revenues		0.6	%		0.5	%

Other income and expense consists primarily of investment income and rental income from leasing excess space in our Silicon Valley facility. The increase in other income and expense was due to an increase of $240,000 in interest income resulting from higher balances of short-term investments and cash. This increase was partially offset by a decrease in miscellaneous income due to $50,000 received during the first nine months of fiscal 2003 for an insurance claim and the write-off of a note receivable for $30,000 during the first quarter of fiscal 2004.

Income Taxes

	Nine Months Ended						Percent Change
(In thousands)	October 1, 2004			October 3, 2003
Income taxes	$	7,000		$	5,984		17.0	%
Percentage of total revenues		6.0	%		5.7	%
Effective tax rate		41.0	%		42.8	%

The lower effective tax rate during the nine months ended October 1, 2004, was primarily due to an increase in tax-exempt interest income and a change in our apportionment to state’s with lower statutory income tax rates.

LIQUIDITY AND CAPITAL RESOURCES

As of October 1, 2004, our cash, cash equivalents and short-term investments were $42.7 million compared to $41.8 million at January 2, 2004. We financed our business for the current period principally through operating cash.

	Nine Months Ended
(In thousands)	October 1, 2004			October 3, 2003
Net cash (used in)/provided by operating activities	$	(2,016	)	$	8,198
Net cash used in investing activities		(11,166	)		(12,858	)
Net cash provided by/(used in) financing activities		4,904			(607	)

The decrease in cash provided by operating activities was primarily due to an increase in accounts receivable of $15.4 million during the nine months ended October 1, 2004 as compared to an increase in accounts receivable of $5.7 million during the same period in fiscal 2003. The increase in accounts receivable during the nine months ended October 1, 2004, was due to increases in revenues and days sales outstanding. Gross revenues, which

- 20 -

include sub-contractors, for the nine months ended October 1, 2004, increased by $9.1 million or 8.1%. Days sales outstanding increased to 119 days from 108 days. The increase in days sales outstanding was due to slower collections on several of our largest projects in our technology development practice during the nine months ended October 1, 2004, as compared to the same period in fiscal 2003.

The decrease in net cash used in investing activities was primarily due to a decrease in purchase of short-term investments, net of sales/maturities. This decrease was due to the decrease in cash provided by operations during the nine months ended October 1, 2004.

The increase in net cash provided by financing activities was due primarily to an increase in proceeds from the issuance of our common stock upon the exercise of options. We did not repurchase any of our common stock during the nine months ended October 1, 2004. During the nine months ended October 3, 2003 we repurchased $2.5 million of common stock under our stock repurchase programs.

We expect to continue our investing activities, including purchases of short-term investments and capital expenditures. Furthermore, cash reserves may be used to repurchase common stock under our stock repurchase programs, strategically acquire professional services firms that are complementary to our business or pay dividends.

During the nine months ended October 1, 2004 we did not repurchase any of our common stock. The following table represents the remaining authorization under our stock repurchase plans as of October 1, 2004 (in thousands):

Board Approval Date	Authorized Repurchases		Repurchases To Date		Remaining Authorization
February 2003	$	2,000	$	289	$	1,711
August 2003	$	3,000	$	—	$	3,000

The following schedule summarizes our principal contractual commitments as of October 1, 2004 (in thousands):

Fiscal year	Operating lease commitments		Capital Leases		Purchase obligations		Total
2004	$	1,392	$	12	$	1,249	$	2,653
2005		4,782		64		—		4,846
2006		3,732		54		—		3,786
2007		3,027		45		—		3,072
2008		2,399		5		—		2,404
Thereafter		5,829		27		—		5,856
	$	21,161	$	207	$	1,249	$	22,617

We have a revolving reducing mortgage note with a total available borrowing amount of $22.9 million and an outstanding balance of $0 as of October 1, 2004. We believe that our existing revolving note, together with funds generated from operations, will provide adequate cash to fund our anticipated operating cash needs through at least the next twelve-month period.

In addition, we believe that the funds available under the revolving reducing mortgage note, together with funds generated from operations, will provide adequate cash to fund our anticipated long-term cash needs beyond the next twelve-month period; however, we intend to grow our business by pursuing potential acquisitions, which could increase the need for additional sources of funds over the long term.

- 21 -

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the exposure related to these indemnification agreements in excess of applicable insurance coverage is minimal.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

Exponent operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control. These uncertainties include, but are not limited to, those mentioned elsewhere in this report and the following:

Absence of Backlog

Revenues are primarily derived from services provided in response to client requests or events that occur without notice, and engagements, generally billed as services are performed, are terminable or subject to postponement or delay at any time by clients. As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods. Revenues and operating margins for any particular quarter are generally affected by staffing mix, resource requirements and timing and size of engagements.

Attraction and Retention of Key Employees

Exponent’s business involves the delivery of professional services and is labor intensive. Our success depends in large part upon our ability to attract, retain and motivate highly qualified technical and managerial personnel. Qualified personnel are in great demand and are likely to remain a limited resource for the foreseeable future. We cannot provide any assurance that we can continue to attract sufficient numbers of highly qualified technical and managerial personnel and to retain existing employees. The loss of a significant number of our employees could have a material adverse impact on our business, including our ability to secure and complete engagements.

Competition

The markets for our services are highly competitive. In addition, there are relatively low barriers to entry into our markets and we have faced, and expect to continue to face, additional competition from new entrants into our markets. Competitive pressure could reduce the market acceptance of our services and result in price reductions that could have a material adverse effect on our business, financial condition or results of operations.

Customer Concentration

We currently derive, and believe that we will continue to derive, a significant portion of our revenues from clients, organizations and insurers related to the transportation industry and the government sector. The loss of any large client, organization or insurer could have a material adverse effect on our business, financial condition or results of operations.

Economic Uncertainty

The markets that we serve are cyclical and subject to general economic conditions, particularly in light of the labor-intensive nature of our business and our relatively high compensation expenses. If the economy in which we operate, which is predominately in the U.S., were to experience a prolonged slowdown, demand for our services could be reduced considerably.

- 22 -

Regulation

Public concern over health, safety and preservation of the environment has resulted in the enactment of a broad range of environmental and/or other laws and regulations by local, state and federal lawmakers and agencies. These laws and the implementing regulations affect nearly every industry, as well as the agencies of federal, state and local governments charged with their enforcement. To the extent changes in such laws, regulations and enforcement or other factors significantly reduce the exposures of manufacturers, owners, service providers and others to liability; the demand for our services may be significantly reduced.

Tort Reform

Several of our practices have a significant concentration in litigation support consulting services. To the extent tort reform reduces the exposure of manufacturers, owners, service providers and others to liability, the demand for our litigation support consulting services may be significantly reduced.

Variability of Quarterly Financial Results

Variations in our revenues and operating results occur from time to time, as a result of a number of factors, such as the significance of client engagements commenced and completed during a quarter; the number of working days in a quarter; employee hiring and utilization rates; and integration of companies acquired. Because a high percentage of our expenses, particularly personnel and facilities related, are relatively fixed in advance of any particular quarter, a variation in the timing of the initiation or the completion of our client assignments, at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Exponent is exposed to interest rate risk associated with our balances of cash, cash equivalents and short-term investments. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments with high credit quality and relatively short average maturities in accordance with the Company’s investment policy. The maximum maturity of any issue in our portfolio of cash equivalents and short-term investments is 3 years and the maximum average maturity of the portfolio cannot exceed 18 months. Our exposure to market rate risk for changes in interest rates relates primarily to our short-term investments. We do not use derivative financial instruments in our short-term investment portfolio. Notwithstanding our efforts to manage interest rate risk, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.

We are exposed to some foreign currency exchange rate risk associated with our foreign operations. Given the limited nature of these operations, we believe that any exposure would be minimal.

Exponent has a revolving reducing mortgage note (the “Mortgage Note”) secured by our Silicon Valley headquarters building. The Mortgage Note had an initial borrowing amount up to $30.0 million and is subject to automatic annual reductions in the amount available to be borrowed of between $1.3 million to $2.1 million approximately per year until January 31, 2008. As of October 1, 2004 we had $0 outstanding and available borrowings of $22.9 million. The Mortgage Note is subject to two interest rate options of either prime less 1.5% or the fixed LIBOR plus 1.25% with a term of one month, two months, three months, nine months, or twelve months.

Any borrowings under the Mortgage Note would expose us to some interest rate risk. Our general policy for selecting among interest rate options and related terms will be to minimize interest expense. However, given the risk of interest rate fluctuations, we cannot be certain that the lowest rate option will always be obtained, thereby consistently minimizing our interest expense. No sensitivity analysis was performed on our exposure to interest rate fluctuations; however, given the historical low volatility of both the prime and LIBOR interest rates, we believe that any exposure would be minimal.

- 23 -

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer, and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer, and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

PART II - OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.
Exhibit 32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
Exhibit 32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

- 24 -

SIGNATURES

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

	EXPONENT, INC. (Registrant)
Date: November 10, 2004
	/s/ Michael R. Gaulke
	Michael R. Gaulke, President and Chief Executive Officer
	/s/ Richard L. Schlenker
	Richard L. Schlenker, Chief Financial Officer

- 25 -