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 defense 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 service contracts performed under time and material or fixed-price billing arrangements. For time and material and fixed-price service projects, revenue is generally recognized as the services are performed. For substantially all of our fixed-price service 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 collectability 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 collectability 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 collectability 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 but recognized 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 aging of amounts due. As of December 28, 2012, our accounts receivable balance was $85,361,000, net of an allowance for doubtful accounts of $2,666,000.

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
                                        2012          2011          2010         2012 vs. 2011       2011 vs. 2010

Revenues                                  100.0 %       100.0 %       100.0 %               7.4 %               9.5 %

Operating expenses:
Compensation and related expenses          58.7          57.6          58.2                 9.5                 8.3
Other operating expenses                    8.1           8.5           8.6                 1.4                 8.5
Reimbursable expenses                       8.9           9.5          10.8                 1.2                (4.1 )
General and administrative expenses         4.6           4.8           5.0                 3.4                 6.1
                                           80.3          80.4          82.6                 7.3                 6.6
Operating income                           19.7          19.6          17.4                 7.8                23.6

Other income, net                           1.4           0.5           1.4               203.8               (60.8 )

Income before income taxes                 21.1          20.1          18.8                12.6                17.4

Provision for income taxes                  8.4           8.1           7.7                10.8                15.3

Net income                                 12.7 %        12.0 %        11.1 %              13.9 %              18.8 %

EXECUTIVE SUMMARY

Revenues for fiscal 2012 increased 7% and revenues before reimbursements increased 8% as compared to the prior year. This growth was due to solid overall demand for our consulting services from a diverse set of clients for both reactive and proactive projects and elevated levels of activity on a few major assignments. We continued to work on a steady flow of reactive projects related to litigation, insurance claims and product recalls for a diverse set of clients, with significant projects in the chemical, energy and automotive sectors. We continued to see an increase in proactive projects related to design consulting, regulatory consulting, and engineering management consulting. We assisted consumer electronics and medical device clients in their design and manufacturing efforts. In defense technology development, we continued to work on several projects related to the detection of improvised explosive devices. As a result, utilization increased to 73% as compared to 71% during prior year.

We made progress during fiscal 2012 in several of our strategic growth areas. In energy consulting, we continued to work on projects for several utilities and oil and gas clients to assist them with understanding why certain pipeline failures have occurred as well as the evaluation of their pipeline risk management programs. In design consulting, we continued our work in battery consulting for a broad set of industries including consumer electronics, medical devices, automotive, aerospace, and battery suppliers. In our environmental and health groups, we performed evaluations of the human health exposure from processes and products and environmental risk assessments for historical, existing and future operations.

During fiscal 2012, we assisted clients with several high-profile investigations that engaged consultants across many of our practices. The growth in consulting revenues and the increase in utilization combined with moderate growth in other operating and general and administrative expenses resulted in a 14% increase in net income to $37,225,000 during fiscal 2012 as compared to $32,695,000 during the prior year. Diluted earnings per share increased to $2.60 per share as compared to $2.22 during the prior year due to the increase in net income and our ongoing share repurchase program. We were able to improve profitability and margins by effectively managing headcount over the past year to align our resources with demand and benefited from some major investigations which resulted in improved utilization and increased leverage of our cost structure.

We remain focused on selectively adding top talent and developing the skills necessary to expand upon our market position, providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future, capitalizing on emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases to enhance shareholder value. We expect some of our major assignments to step down from their elevated levels of activity as they move through their project life cycle. We also expect a step down in the level of activity in our defense technology development practice due to the constraints on defense spending and reduction of forces in Afghanistan by the United States federal government.

OVERVIEW OF THE YEAR ENDED DECEMBER 28, 2012

Our revenues consist of professional fees earned on consulting engagements, product sales in our defense technology development practice, fees for use of our equipment and facilities, and 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 years ended December 28, 2012, December 30, 2011 and January 1, 2010 included 52 weeks of activity.

During fiscal 2012, revenues increased 7% as compared to fiscal 2011. The increase in revenues was due to an increase in billable hours in our engineering and other scientific segment and our environmental and health segment. Billable hours increased 7.2% to 1,052,000 during fiscal 2012 as compared to 981,000 during fiscal 2011. The increase in billable hours was due to strong demand for our consulting services across a broad set of practices and elevated levels of activity on several major assignments. Technical full-time equivalent employees increased 4.7% to 692 during fiscal 2012 as compared to 661 during the fiscal 2011 due to our recruiting and retention efforts. Utilization increased to 73% for fiscal 2012 as compared to 71% during fiscal 2011. The increase in utilization was due to elevated levels of activity on several major assignments and our management of headcount to align resources with anticipated demand. Product sales in defense technology development decreased to $9,213,000 during fiscal 2012 as compared to $12,300,000 during fiscal 2011 due to lower sales of surveillance systems to the United States Army. We expect a significant decrease in sales of surveillance systems during fiscal 2013 as a result of the reduction of forces in Afghanistan.

FISCAL YEARS ENDED DECEMBER 28, 2012, AND DECEMBER 30, 2011



Revenues



(In thousands except                    Fiscal Years            Percent
percentages)                         2012          2011         Change

Engineering and other scientific   $ 213,304     $ 199,772           6.8 %
Percentage of total revenues            72.9 %        73.3 %
Environmental and health              79,349        72,674           9.2 %
Percentage of total revenues            27.1 %        26.7 %

Total revenues                     $ 292,653     $ 272,446           7.4 %

The increase in revenues for our engineering and other scientific segment was due to an increase in billable hours. During fiscal 2012, billable hours for this segment increased by 6.5% to 738,000 as compared to 693,000 during fiscal 2011. The increase was due to strong demand for services in our mechanics and materials, electrical, thermal and engineering management consulting practices. Utilization increased to 75% for fiscal 2012 as compared to 73% for fiscal 2011 due in part to elevated levels of activity on a number of major assignments that engage consultants across many of our engineering and other scientific practices and our management of headcount to align resources with anticipated demand. Technical full-time equivalents increased 3.5% to 474 for fiscal 2012 from 458 for fiscal 2011 due to our recruiting and retention efforts. Product sales in defense technology development decreased to $9,213,000 during fiscal 2012 as compared to $12,300,000 during fiscal 2011 due to lower sales of surveillance systems to the United States Army.

The increase in revenues from our environmental and health segment was due to an increase in billable hours. During fiscal 2012, billable hours for this segment increased by 9.0% to 314,000 as compared to 288,000 during fiscal 2011. The increase in billable hours was due to strong demand for services in our environmental sciences, ecological sciences, and chemical regulation and food safety practices. Utilization increased to 69% for fiscal 2012 as compared to 68% for fiscal 2011 due to elevated levels of activity on a number of major assignments that engage consultants across many of our environmental and health practices and centers. Technical full-time equivalents increased by 7.4% to 218 during fiscal 2012 as compared to 203 for fiscal 2011 due to our recruiting and retention efforts.

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)                          2012          2011         Change

Compensation and related expenses   $ 171,809     $ 156,853           9.5 %
Percentage of total revenues             58.7 %        57.6 %

The increase in compensation and related expenses during fiscal 2012 was due to an increase in payroll, bonuses, fringe benefits and a change in the value of assets associated with our deferred compensation plan. Payroll increased $6,387,000 and fringe benefits increased $841,000 due to a 4.7% increase in technical full time equivalent employees and our annual salary increases. Bonuses increased $4,102,000 due to a corresponding increase in profitability. During fiscal 2012, deferred compensation expense increased $2,431,000 with a corresponding increase to other income (expense), net, as compared with prior year due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $2,158,000 during fiscal 2012 and a decrease in the value of the plan assets of $273,000 during fiscal 2011. We will continue to selectively hire key talent but expect headcount growth to slow during fiscal 2013 as we manage our headcount to reduce the impact of the step down in levels of activity on our major assignments.

Other Operating Expenses



(In thousands except               Fiscal Years           Percent
percentages)                     2012         2011        Change

Other operating expenses       $ 23,574     $ 23,238           1.4 %
Percentage of total revenues        8.1 %        8.5 %

Other operating expenses 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 in occupancy expenses of $509,000 partially offset by a decrease in technical materials of $240,000. The increase in occupancy expenses was due to planned maintenance activities for our owned facilities and costs associated with the increase in technical full-time equivalent employees. The decrease in technical materials was due to a decrease in development activities for our defense technology development practice. We expect other operating expense to grow as we selectively add new talent and make investments in our corporate infrastructure.

Reimbursable Expenses



(In thousands except               Fiscal Years           Percent
percentages)                     2012         2011        Change

Reimbursable expenses          $ 26,091     $ 25,779           1.2 %
Percentage of total revenues        8.9 %        9.5 %

Reimbursable expenses for fiscal 2012 remained relatively consistent with fiscal 2011. 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)                            2012         2011        Change

General and administrative expenses   $ 13,559     $ 13,116           3.4 %
Percentage of total revenues               4.6 %        4.8 %

The increase in general and administrative expenses during the fiscal 2012 was primarily due to an increase in travel and meals of $689,000 partially offset by a decrease in legal fees of $336,000. The increase in travel and meals was related to a bi-annual firm-wide managers' meeting that was held at the end of the third quarter of 2012. The decrease in legal fees was primarily due to legal claims in the prior year. We expect general and administrative expenses to increase as we expand our business development efforts, and pursue staff development initiatives.

Other Income (Expense), Net



(In thousands except               Fiscal Years         Percent
percentages)                     2012        2011        Change

Other income and expense, net   $ 4,129     $ 1,359        203.8 %
Percentage of total revenues        1.4 %       0.5 %

Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing excess space in our Silicon Valley facility. During fiscal 2012, other income (expense), net increased $2,431,000 with a corresponding increase to deferred compensation expense as compared to fiscal 2011 due to the change in value of assets associated with our deferred compensation plan. This year-over-year increase consisted of an increase in the value of the plan assets of $2,158,000 during fiscal 2012 and a decrease in the value of the plan assets of $273,000 during fiscal 2011. During fiscal 2012, rental income increased $361,000 as compared to fiscal 2011 due to an increase in the occupancy rate for rental space in our Silicon Valley facility.

Income Taxes



(In thousands except               Fiscal Years           Percent
percentages)                     2012         2011        Change

Income taxes                   $ 24,524     $ 22,124          10.8 %
Percentage of total revenues        8.4 %        8.1 %
Effective tax rate                 39.7 %       40.4 %

The increase in income taxes was due to a corresponding increase in pre-tax income. The decrease in the effective tax rate was primarily due to a change in estimate associated with the Company's apportionment of income between the states.

FISCAL YEARS ENDED DECEMBER 30, 2011, AND DECEMBER 31, 2010



Revenues



(In thousands except                    Fiscal Years            Percent
percentages)                         2011          2010         Change

Engineering and other scientific   $ 199,772     $ 184,146           8.5 %
Percentage of total revenues            73.3 %        74.0 %
Environmental and health              72,674        64,607          12.5 %
Percentage of total revenues            26.7 %        26.0 %

Total revenues                     $ 272,446     $ 248,753           9.5 %

The increase in revenues for our engineering and other scientific segment was due to an increase in billable hours and higher billing rates. During fiscal 2011, billable hours for this segment increased by 8.1% to 693,000 as compared to 641,000 during fiscal 2010. This increase was due to strong demand for our services. Technical full-time equivalent employees increased 3.9% to 458 during fiscal 2011 from 441 during fiscal 2010 due to our recruiting and retention efforts. Utilization increased to 73% for fiscal 2011 as compared to 70% for fiscal 2010 due in part to elevated levels of activity on a number of major assignments and our management of headcount to align resources with anticipated demand. Product sales in defense technology development increased to $12,300,000 during fiscal 2011 as compared to $12,100,000 during fiscal 2010.

The increase in revenues from our environmental and health segment was due to an increase in billable hours and higher billing rates. The increase in billable hours was due to strong demand for our services. During fiscal 2011, billable hours for this segment increased by 11.2% to 288,000 as compared to 259,000 during fiscal 2010. Utilization decreased to 68% for fiscal 2011 as compared to 70% for fiscal 2010. The decrease in utilization was due in part to our investment in hiring experienced consultants during the current year. Technical full-time equivalent employees increased by 13.4% to 203 during fiscal 2011 as compared to 179 during fiscal 2010.

Compensation and Related Expenses



(In thousands except                     Fiscal Years            Percent
percentages)                          2011          2010         Change

Compensation and related expenses   $ 156,853     $ 144,842           8.3 %
Percentage of total revenues             57.6 %        58.2 %

The increase in compensation and related expenses during fiscal 2011 was due to an increase in payroll, bonuses, and fringe benefits partially offset by the change in the value of assets associated with our deferred compensation plan. Payroll increased $7,941,000 and fringe benefits increased $1,996,000 due to a 6.6% increase in technical full time equivalent employees and our annual salary increase on April 2, 2011. Bonuses increased by $4,240,000 due to a corresponding increase in profitability. During fiscal 2011, deferred compensation expense decreased $2,198,000 with a corresponding decrease to other income (expense), net, as compared to fiscal 2010 due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of the plan assets of $273,000 during fiscal 2011 and an increase in the value of the plan assets of $1,925,000 during fiscal 2010.

Other Operating Expenses



(In thousands except               Fiscal Years           Percent
percentages)                     2011         2010        Change

Other operating expenses       $ 23,238     $ 21,413           8.5 %
Percentage of total revenues        8.5 %        8.6 %

Other operating expenses 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 in occupancy expenses of $788,000, an increase in computer expenses of $450,000, and an increase in technical materials of $281,000. The increase in occupancy expenses was due to planned maintenance activities for our owned facilities and costs associated with the increase in technical full-time equivalent employees. The increase in computer expenses and technical materials was associated with the increase in technical full-time equivalent employees and investments in our corporate infrastructure.

Reimbursable Expenses



(In thousands except               Fiscal Years           Percent
percentages)                     2011         2010        Change

Reimbursable expenses          $ 25,779     $ 26,893          (4.1 )%
Percentage of total revenues        9.5 %       10.8 %

Reimbursable expenses for fiscal 2011 remained relatively consistent with fiscal 2010. 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)                            2011         2010        Change

General and administrative expenses   $ 13,116     $ 12,364           6.1 %
Percentage of total revenues               4.8 %        5.0 %

The increase in general and administrative expenses during fiscal 2011 was primarily due to an increase in contributions of $272,000, an increase in travel and meals of $260,000, an increase in marketing and business development of $178,000, an increase in professional development of $169,000 and several individually insignificant increases partially offset by a decrease in legal expenses of $552,000. The increase in travel and meals, marketing and business development, and professional development were due to our continuing investment in employee and business development activities. The decrease in legal fees was due to a decrease in costs associated with legal claims during fiscal 2011 as compared to fiscal 2010.

Other Income and Expense



(In thousands except               Fiscal Years         Percent
percentages)                     2011        2010        Change

Other income and expense, net   $ 1,359     $ 3,467        (60.8 )%
Percentage of total revenues        0.5 %       1.4 %

Other income and expense, net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing excess space in our Silicon Valley facility. During fiscal 2011, other income (expense), net, decreased $2,198,000 with a corresponding decrease to deferred compensation expenses, as compared to fiscal 2010 due to a change in value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of the plan assets of $273,000 during fiscal 2011 and an increase in the value of the plan assets of $1,925,000 during fiscal 2010.

Income Taxes



(In thousands except               Fiscal Years           Percent
percentages)                     2011         2010        Change
. . .