Overview

Exponent, Inc. is a science and engineering consulting firm that provides solutions to complex problems. Our multidisciplinary team of scientists, physicians, engineers, business and regulatory consultants brings together more than 90 different technical disciplines to solve complicated issues facing industry and government today. Our services include analysis of products, people, property, processes and finances related to litigation, product recall, regulatory compliance, research, development and design.

CRITICAL ACCOUNTING ESTIMATES

In preparing our 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 and estimating the allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the assumptions, judgments and 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 our critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.

Revenue recognition. We derive our revenues primarily from professional fees earned on consulting engagements, product sales in our technology development practice, 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. Our estimate of total labor hours we expect to incur over the term of the contract is based on the nature of the project and our past experience on similar projects. 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 revenues 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 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 in those situations would generally be upon receipt of cash. We assess collectibility based on a number of factors, including past transaction history with the client, 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, aging of amounts due and changes in customer payment terms. As of January 2, 2009, our accounts receivable balance was $62.2 million, net of an allowance for doubtful accounts of $2.4 million.

The following table sets forth, for the periods indicated, the percentage of revenues of certain items in our consolidated statements of income and the percentage increase (decrease) in the dollar amount of such items year to year:

                                            PERCENTAGE OF REVENUES                     PERIOD TO
                                               FOR FISCAL YEARS                      PERIOD CHANGE
                                          2008        2007       2006       2008 vs. 2007      2007 vs. 2006
Revenues                                  100.0 %     100.0 %    100.0 %             11.5 %             21.8 %

Operating expenses:
Compensation and related expenses          58.3        58.2       62.8               11.7               12.9
Other operating expenses                    9.9        10.6       11.8                4.4                8.9
Reimbursable expenses                       9.9        10.7        7.0                2.9               87.2
General and administrative expenses         5.9         5.9        6.4               11.2               11.4

                                           84.0        85.4       88.0                9.7               18.1

Operating income                           16.0        14.6       12.0               22.6               48.3

Other income, net                           0.8         1.8        2.0              (51.9 )              8.6

Income before income taxes                 16.8        16.4       14.0               14.5               42.6

Provision for income taxes                  6.7         6.5        5.6               15.4               41.6

Net income                                 10.1 %       9.9 %      8.4 %             13.9 %             43.3 %

OVERVIEW OF THE YEAR ENDED JANUARY 2, 2009

Our revenues consist of professional fees earned on consulting engagements, product sales in our technology development practice, fees for use of our equipment and facilities, as well as reimbursements for outside direct expenses associated with the services performed that are billed to our clients.

We operate on a 52-53 week fiscal year with each year ending on the Friday closest to December 31st. The fiscal year ended January 2, 2009 included 53 weeks of activity. The fiscal years ended December 28, 2007 and December 29, 2006 included 52 weeks of activity.

During fiscal 2008, we had an 11.5% increase in revenues as compared to fiscal 2007. This growth was driven by a broad set of practices including mechanical engineering & materials science, technology development, biomechanics, electrical & semiconductors and our center for chemical registration & food safety. Our mechanical engineering & materials science practice continued to expand our portfolio of projects in the energy sector

and product design consulting work for consumer electronics companies. Our technology development practice had a strong year as we continued to support the United States Army's efforts in Afghanistan and Iraq. In our center for chemical registration & food safety, we continued to assist clients with the registration, evaluation and authorization of chemicals regulation that was implemented in the European Union.

Our revenue growth was driven primarily by an increase in billable hours, higher billing rates and an increase in product sales in our technology development practice. Total billable hours increased 7.6% to 888,000 during fiscal 2008 as compared to 825,000 during fiscal 2007. The increase in billable hours was due to an increase in technical full-time equivalent employees and fiscal 2008 having one additional week of activity than fiscal 2007. Total billable hours during the 53rd week of fiscal 2008 were 7,791, which contributed approximately $1.8 million to the increase in revenue. Utilization decreased to 67% for fiscal 2008 as compared to 68% for fiscal 2007. Technical full-time equivalent employees increased by 7.3% to 624 during fiscal 2008 as compared to 581 during fiscal 2007. This increase in technical full time equivalent employees was due to our continued recruiting and retention efforts. Product sales in our

technology development practice increased 18% to $14.1 million for fiscal 2008 as compared to $11.9 million for fiscal 2007. This increase in product sales was primarily due to an increase in sales of surveillance systems to the United States Army.

The increase in billable hours, product sales and the management of our operating expenses, allowed us to leverage this revenue growth to improve operating income by 22.6% and net income by 13.9%.

FISCAL YEARS ENDED JANUARY 2, 2009, AND DECEMBER 28, 2007

Revenues



         (In thousands except                    Fiscal Years           Percent
         percentages)                         2008          2007        Change
         Engineering and other scientific   $ 176,879     $ 157,987        12.0 %
         Percentage of total revenues            77.3 %        77.0 %
         Environmental and health              51,959        47,161        10.2 %
         Percentage of total revenues            22.7 %        23.0 %

         Total revenues                     $ 228,838     $ 205,148        11.5 %

The increase in revenues for our engineering and other scientific segment during fiscal 2008 was the result of an increase in billable hours, higher billing rates and an increase in product sales in our technology development practice. During fiscal 2008, billable hours for this segment increased by 7.9% to 666,000 as compared to 617,000 during fiscal 2007. The increase in billable hours was due to an increase in technical full-time equivalent employees and fiscal 2008 having one additional week of activity than fiscal 2007. Utilization for this segment decreased to 68% for fiscal 2008 as compared to 69% for fiscal 2007. Technical full-time equivalent employees for this segment increased by 7.2% to 463 during fiscal 2008 as compared to 432 during fiscal 2007. Product sales in our technology development practice increased 18.0% to $14.1 million for fiscal 2008 as compared to $11.9 million for fiscal 2007.

The increase in revenues for our environmental and health segment during fiscal 2008 was the result of an increase in billable hours and higher billing rates. During fiscal 2008 billable hours for this segment increased by 6.7% to 222,000 as compared to 208,000 during fiscal 2007. This increase in billable hours was due to an increase in technical full-time equivalent employees and fiscal 2008 having one additional week of activity than fiscal 2007.

Utilization for this segment decreased to 65% for fiscal 2008 as compared to 67% for fiscal 2007. Technical full-time equivalent employees for this segment increased by 8.1% to 161 during fiscal 2008 as compared to 149 during fiscal 2007.

Revenues are primarily derived from services provided in response to client requests or events that occur without notice and engagements are generally terminable or subject to postponement or delay at any time by our 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.

Compensation and Related Expenses



         (In thousands except                     Fiscal Years           Percent
         percentages)                          2008          2007        Change
         Compensation and related expenses   $ 133,469     $ 119,496        11.7 %
         Percentage of total revenues             58.3 %        58.2 %

The net increase in compensation and related expenses during fiscal 2008 was due to an increase in wages, fringe benefits and bonus expense partially offset by the change in value of assets associated with our deferred compensation plan. Wages increased by $11.0 million and fringe benefits increased by $2.5 million due to an increase in technical full-time equivalent employees, the impact of our annual salary increase and fiscal 2008 having one additional week of activity than fiscal 2007. The additional week of activity during fiscal 2008 contributed approximately $1.3 million to the increase in wages. Bonus expense increased by $1.7 million due to a corresponding increase in profitability. During fiscal 2008, we recorded a decrease to compensation expense of $2.1 million and a corresponding decrease to other income of $2.1 million associated with a decline in the value of assets associated with our deferred compensation plan. During fiscal 2007 we recorded an increase in compensation expense of $356,000 and a corresponding increase to other income of $356,000 associated with a gain in the value of plan assets during fiscal 2007. We expect compensation and related expenses, excluding the change in value of assets associated with our deferred compensation plan, to increase due to the anticipated hiring of additional staff and the impact of future annual salary increases.

Other Operating Expenses



            (In thousands except               Fiscal Years          Percent
            percentages)                     2008         2007       Change
            Other operating expenses       $ 22,614     $ 21,662         4.4 %
            Percentage of total revenues        9.9 %       10.6 %

Other operating expenses primarily include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The net increase in other operating expenses was primarily due to an increase of $732,000 in occupancy expense and an increase of $285,000 in depreciation and amortization. The increase in occupancy expense and depreciation and amortization were due to expansion in certain offices to support our increase in technical-full time equivalent employees.

Reimbursable Expenses



            (In thousands except               Fiscal Years          Percent
            percentages)                     2008         2007       Change
            Reimbursable expenses          $ 22,644     $ 22,009         2.9 %
            Percentage of total revenues        9.9 %       10.7 %

The increase in reimbursable expenses during fiscal 2008 was due to a corresponding increase in revenues. The amount of reimbursable expenses will vary from year to year depending on the nature of our projects.

General and Administrative Expenses



         (In thousands except                      Fiscal Years          Percent
         percentages)                            2008         2007       Change
         General and administrative expenses   $ 13,389     $ 12,037        11.2 %
         Percentage of total revenues               5.9 %        5.9 %

The increase in general and administrative expenses during fiscal 2008 was primarily due to an increase in personnel expenses of $548,000, travel and meals of $489,000 and an increase in bad debt expense of $182,000. The increase in personnel expense was primarily due to the costs associated with professional development and recruiting. The increase in travel and meals was primarily due to an increase in technical full-time equivalent employees as well as an increase in fuel costs. The increase in bad debt expense was due to an increase in write-offs and an increase in our allowance for doubtful accounts.

Other Income and Expense



            (In thousands except               Fiscal Years         Percent
            percentages)                     2008        2007       Change
            Other income and expense, net   $ 1,772     $ 3,681       (51.9 )%
            Percentage of total revenues        0.8 %       1.8 %

Other income and expense, net, consists primarily of investment income earned on available cash, cash equivalents and short-term investments, rental income from leasing excess space in our Silicon Valley facility, and changes in the value of assets associated with our deferred compensation plan.

The decrease in other income and expense, net, during fiscal 2008 was primarily due to a decrease in the fair value of deferred compensation assets of $2.1 million with a corresponding decrease of $2.1 million to compensation and related expenses during fiscal 2008 as compared to an increase in the fair value of deferred compensation assets of $356,000 with a corresponding increase of $356,000 to compensation and related expenses during fiscal 2007. The decrease in valuation of deferred compensation investments was partially offset by an increase in rental income of $404,000 and an increase in gain on foreign exchange of $347,000. Rental income increased due to the addition of a new tenant in our Silicon Valley facility in mid 2007.

Income Taxes



            (In thousands except               Fiscal Years          Percent
            percentages)                     2008         2007       Change
            Income taxes                   $ 15,334     $ 13,284        15.4 %
            Percentage of total revenues        6.7 %        6.5 %
            Effective tax rate                 39.8 %       39.5 %

The increase in income tax expense was due to a corresponding increase in pre-tax income.

FISCAL YEARS ENDED DECEMBER 28, 2007, AND DECEMBER 29, 2006

Revenues



         (In thousands except                    Fiscal Years           Percent
         percentages)                         2007          2006        Change
         Engineering and other scientific   $ 157,987     $ 130,960        20.6 %
         Percentage of total revenues            77.0 %        77.7 %
         Environmental and health              47,161        37,536        25.6 %
         Percentage of total revenues            23.0 %        22.3 %

         Total revenues                     $ 205,148     $ 168,496        21.8 %

The increase in revenues for our engineering and other scientific segment during fiscal 2007 was the result of an increase in billable hours, higher billing rates and an increase in product sales in our technology development practice. During fiscal 2007, billable hours for this segment increased by 6.0% to 617,000 as compared to 582,000 during fiscal 2006. The increase in billable hours was supported by an increase in utilization and technical full-time equivalent employees. Utilization for this segment increased to 69% for fiscal 2007 as compared to 67% for fiscal 2006. Technical full-time equivalents for this segment increased by 3.1% to 432 during fiscal 2007, as compared to 419 during fiscal 2006. Product sales in our technology development practice increased 272% to $11.9 million for fiscal 2007 as compared to $3.2 million for fiscal 2006.

The increase in revenues for our environmental and health segment during fiscal 2007 was the result of an increase in billable hours and higher billing rates. During fiscal 2007, billable hours for this segment increased by 18.9% to 208,000 as compared to 175,000 during fiscal 2006. This increase in billable hours was supported by an increase in utilization. Utilization for this segment increased to 67% for fiscal 2007 as compared to 57% for fiscal 2006. Technical full-time equivalents for this segment were 149 for fiscal 2007 and 2006.

Compensation and Related Expenses



         (In thousands except                     Fiscal Years           Percent
         percentages)                          2007          2006        Change
         Compensation and related expenses   $ 119,496     $ 105,860        12.9 %
         Percentage of total revenues             58.2 %        62.8 %

The increase in compensation and related expenses during fiscal 2007 was due to an increase in wages, bonus expense and stock-based compensation. Wages increased by $6.8 million due to an increase in technical full-time equivalent employees and the impact of our annual salary increase. Bonus expense increased by $6.2 million due to a corresponding increase in profitability. Stock-based compensation increased by $401,000 due to additional restricted stock unit grants during 2007.

Other Operating Expenses



            (In thousands except               Fiscal Years          Percent
            percentages)                     2007         2006       Change
            Other operating expenses       $ 21,662     $ 19,886         8.9 %
            Percentage of total revenues       10.6 %       11.8 %

Other operating expenses primarily include facilities- related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses was primarily due to an increase of $961,000 in occupancy expense, an increase of $273,000 in computer-related expenses and a $236,000 increase in depreciation and amortization. The increase in occupancy expense, computer-related expenses, and depreciation and amortization were due to expansion in certain offices to support our increase in technical-full time equivalent employees.

Reimbursable Expenses



            (In thousands except               Fiscal Years          Percent
            percentages)                     2007         2006       Change
            Reimbursable expenses          $ 22,009     $ 11,754        87.2 %
            Percentage of total revenues       10.7 %        7.0 %

The increase in reimbursable expenses during fiscal 2007 was primarily due to a $6.0 million increase in project related costs associated with product sales in our technology development practice.

General and Administrative Expenses



         (In thousands except                      Fiscal Years          Percent
         percentages)                            2007         2006       Change
         General and administrative expenses   $ 12,037     $ 10,807        11.4 %
         Percentage of total revenues               5.9 %        6.4 %

The increase in general and administrative expenses during fiscal 2007 was primarily due to an increase in travel and meals of $560,000 and an increase in bad debt of $300,000. The increase in travel and meals was primarily due to the costs associated with a manager's meeting held during 2007 and an increase in technical full-time equivalent employees. The increase in bad debt expense was due to an increase in write-offs and an increase in our allowance for doubtful accounts.

Other Income and Expense



             (In thousands except               Fiscal Years         Percent
             percentages)                     2007        2006       Change
             Other income and expense, net   $ 3,681     $ 3,389         8.6 %
             Percentage of total revenues        1.8 %       2.0 %

Other income and expense, net, consists primarily of investment income earned on available cash, cash equivalents and short-term investments, rental income from leasing excess space in our Silicon Valley facility, and changes in the value of assets associated with our deferred compensation plan. The increase in other income and expense during fiscal 2007 was primarily due to an increase in rental income of $421,000 due to the addition of a new tenant in our Silicon Valley facility during fiscal 2007. The increase in rental income was partially offset by a smaller increase in the fair value of deferred compensation plan assets. The fair value of deferred compensation plan assets increased by $356,000 during fiscal 2007 as compared to an increase of $581,000 during fiscal 2006.

Income Taxes



             (In thousands except               Fiscal Years         Percent
             percentages)                     2007        2006       Change
             Income taxes                   $ 13,284     $ 9,384        41.6 %
             Percentage of total revenues        6.5 %       5.6 %
             Effective tax rate                 39.5 %      39.8 %

The increase in income tax expense was due to a corresponding increase in pre-tax income.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations" and SFAS No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin, No. 51." SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for fiscal years beginning after November 15, 2008. We intend to adopt SFAS 141R and SFAS 160 in fiscal 2009 and do not expect it to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at . . .