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 September 30, 2005

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 Exchange Act).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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 4, 2005
Common Stock $.001 par value	8,073,264 shares

EXPONENT, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets September 30, 2005 and December 31, 2004	3
Condensed Consolidated Statements of Income Quarters and Nine Months Ended September 30, 2005 and October 1, 2004	4
Condensed Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended September 30, 2005 and October 1, 2004	5
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2005 and October 1, 2004	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosure About Market Risk	25
Item 4. Controls and Procedures	26
PART II – OTHER INFORMATION
Item 6. Exhibits	26
Signatures	27

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

EXPONENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2005 and December 31, 2004

(in thousands, except share data)

(unaudited)

	September 30, 2005			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	8,367		$	4,680
Short-term investments		56,502			55,366
Accounts receivable, net of allowance for doubtful accounts of $1,477 and $1,503 at September 30, 2005 and December 31, 2004, respectively		45,132			38,586
Prepaid expenses and other assets		4,274			2,674
Deferred income taxes		2,220			2,205
Total current assets		116,495			103,511
Property, equipment and leasehold improvements, net		30,054			30,211
Goodwill		8,607			8,607
Other assets		6,081			1,803
	$	161,237		$	144,132
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	5,671		$	4,330
Accrued payroll and employee benefits		18,505			18,528
Deferred revenues		2,415			1,681
Total current liabilities		26,591			24,539
Other liabilities		3,722			1,484
Deferred rent		1,141			1,087
Total liabilities		31,454			27,110
Stockholders’ equity:
Common stock, $0.001 par value; 20,000,000 shares authorized; 8,071,264 and 8,005,644 shares issued at September 30, 2005 and December 31, 2004, respectively		8			8
Additional paid-in capital		46,307			42,282
Deferred stock-based compensation		(2,098	)		(907	)
Accumulated other comprehensive (loss) income		(46	)		114
Retained earnings		85,612			75,525
Total stockholders’ equity		129,783			117,022
	$	161,237		$	144,132

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

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EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Quarters and Nine Months Ended September 30, 2005 and October 1, 2004

(in thousands, except per share data)

(unaudited)

	Quarters Ended				Nine Months Ended
	September 30, 2005		October 1, 2004		September 30, 2005		October 1, 2004
Revenues:
Revenues before reimbursements	$	34,653	$	35,170	$	108,256	$	106,669
Reimbursements		2,539		2,871		7,982		9,781
Revenues		37,192		38,041		116,238		116,450
Operating expenses:
Compensation and related expenses		22,921		23,022		70,444		69,340
Other operating expenses		4,668		4,690		13,932		13,917
Reimbursable expenses		2,539		2,871		7,982		9,781
General and administrative expenses		2,441		2,346		6,931		7,014
Total operating expenses		32,569		32,929		99,289		100,052
Operating income		4,623		5,112		16,949		16,398
Other income, net:
Interest income, net		309		110		817		299
Miscellaneous income, net		351		156		697		377
Total other income, net		660		266		1,514		676
Income before income taxes		5,283		5,378		18,463		17,074
Income taxes		1,768		2,205		6,987		7,000
Net income	$	3,515	$	3,173	$	11,476	$	10,074
Net income per share:
Basic	$	0.43	$	0.40	$	1.42	$	1.32
Diluted	$	0.40	$	0.37	$	1.31	$	1.19
Shares used in per share computations:
Basic		8,146		7,877		8,083		7,606
Diluted		8,825		8,641		8,747		8,479

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

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EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarters and Nine Months Ended September 30, 2005 and October 1, 2004

(in thousands)

(unaudited)

	Quarters Ended						Nine Months Ended
	September 30, 2005			October 1, 2004			September 30, 2005			October 1, 2004
Net income	$	3,515		$	3,173		$	11,476		$	10,074
Other comprehensive income (loss):
Foreign currency translation adjustments		(1	)		(15	)		(172	)		(8	)
Unrealized gain (loss) on investments, net of tax		10			11			12			(77	)
Comprehensive income	$	3,524		$	3,169		$	11,316		$	9,989

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

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EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2005 and October 1, 2004

(in thousands)

(unaudited)

	Nine Months Ended
	September 30, 2005			October 1, 2004
Cash flows from operating activities:
Net income	$	11,476		$	10,074
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		3,354			3,010
Deferred rent expense		54			52
Provision for doubtful accounts		716			1,304
Stock-based compensation		428			192
Deferred income tax provision		(1,705	)		(1,162	)
Tax benefit for stock option plans		967			2,722
Changes in operating assets and liabilities:
Accounts receivable		(7,262	)		(15,434	)
Prepaid expenses and other assets		(2,083	)		(1,978	)
Accounts payable and accrued liabilities		1,341			(781	)
Accrued payroll and employee benefits		1,318			1,865
Deferred revenues		734			(1,886	)
Net cash provided by (used in) operating activities		9,338			(2,022	)
Cash flows from investing activities:
Capital expenditures		(2,351	)		(1,812	)
Other assets		8			296
Purchase of short-term investments		(59,496	)		(43,762	)
Sale/maturity of short-term investments		57,575			44,736
Net cash used in investing activities		(4,264	)		(542	)
Cash flows from financing activities:
Repayments of borrowings and long-term obligations		(50	)		(50	)
Repurchase of common stock		(4,307	)		—
Issuance of common stock		3,016			4,954
Net cash (used in) provided by financing activities		(1,341	)		4,904
Effect of foreign currency exchange rates on cash and cash equivalents		(46	)		12
Net increase in cash and cash equivalents		3,687			2,352
Cash and cash equivalents at beginning of period		4,680			5,666
Cash and cash equivalents at end of period	$	8,367		$	8,018

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

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EXPONENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Fiscal Quarters and Nine Months Ended

September 30, 2005 and October 1, 2004

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 quarter and nine months ended September 30, 2005 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. The Company reclassified $2,300,000 in variable rate demand obligations from cash and cash equivalents to short-term investments on the fiscal 2004 condensed consolidated balance sheet and condensed consolidated statement of cash flows. Net cash used in investing activities for the nine months ended October 1, 2004, decreased $10.6 million due to this reclassification. The reclassification to short-term investments is based on the latest interpretation of cash equivalents pursuant to Statement of Financial Accounting Standards No. 95 (“SFAS 95”), “Statement of Cash Flows”.

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;

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

• 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 September 30, 2005 and October 1, 2004 are as follows:

	Quarters Ended				Nine Months Ended
(In thousands)	September 30, 2005		October 1, 2004		September 30, 2005		October 1, 2004
Gross revenues	$	40,836	$	39,306	$	127,612	$	121,089
Less: Subcontractor fees		3,644		1,265		11,374		4,639
Revenues		37,192		38,041		116,238		116,450
Reimbursements:
Out-of-pocket travel reimbursements		1,033		870		2,882		2,865
Other outside direct expenses		1,506		2,001		5,100		6,916
		2,539		2,871		7,982		9,781
Revenues before reimbursements	$	34,653	$	35,170	$	108,256	$	106,669

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 creditworthiness 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 issuance of common stock to satisfy outstanding restricted stock units and the exercise of outstanding options to purchase common stock using the treasury stock method.

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

	Quarters Ended		Nine Months Ended
(In thousands)	September 30, 2005	October 1, 2004	September 30, 2005	October 1, 2004
Shares used in basic per share computation	8,146	7,877	8,083	7,606
Effect of dilutive common stock options outstanding	639	750	634	862
Effect of dilutive restricted stock units outstanding	40	14	30	11
Shares used in diluted per share computation	8,825	8,641	8,747	8,479

There were no options excluded from the diluted per share calculation for the fiscal quarters ended September 30, 2005 and October 1, 2004. Common stock options to purchase 2,500 and 8,938 shares were excluded from the diluted per share calculation for the nine months September 30, 2005 and October 1, 2004, respectively, due to their antidilutive effect. Weighted average exercise prices for the antidilutive shares were $27.52 and $24.83 for the nine months ended September 30, 2005 and October 1, 2004, 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. For a select group of employees, up to 30% of their fiscal 2004 and 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. The fair value of restricted stock unit awards is determined based on the number of underlying shares and the quoted price of the Company’s common stock on the date of grant.

On March 11, 2005, fully vested restricted stock unit awards representing 56,437 shares of the Company’s common stock were granted to a select group of employees as a part of their bonus distribution for fiscal 2004. The fair value of these fully vested restricted stock unit awards as measured on March 11, 2005 was $1,341,000 and was recorded as a reduction to accrued bonuses. 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 employees as a part of their bonus distribution for fiscal 2003. The fair value of these fully vested restricted stock unit awards as measured on March 12, 2004 was $984,000 and was recorded as a reduction to accrued bonuses.

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 four years from the date of grant, 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 56,437 shares of the Company’s common stock were granted to a select group of employees on March 11, 2005. The fair value of these unvested restricted stock unit awards as measured on March 11, 2005 was $1,341,000 and was recorded as deferred stock-based compensation. Unvested restricted stock unit awards representing 43,273 shares of the Company’s common stock were granted to a select group of employees on March 12, 2004. The fair 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 on a straight-line basis 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

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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 September 30, 2005 and October 1, 2004:

	Employee Stock Purchase Plan				Stock Option Plan
	2005		2004		2005		2004
Expected life (in years)	0.6		0.6		4.8		4.9
Risk-free interest rate	3.4	%	2.0	%	4.1	%	3.4	%
Volatility	33	%	35	%	42	%	48	%
Dividend yield	0	%	0	%	0	%	0	%

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)	September 30, 2005			October 1, 2004			September 30, 2005			October 1, 2004
Reported net income:	$	3,515		$	3,173		$	11,476		$	10,074
Add back: Intrinsic value stock-based compensation expense, net of tax		109			50			266			113
Deduct: Fair value stock-based compensation expense, net of tax		(503	)		(465	)		(1,469	)		(1,382	)
Adjusted net income:	$	3,121		$	2,758		$	10,273		$	8,805
Net income per share:
As reported:
Basic	$	0.43		$	0.40		$	1.42		$	1.32
Diluted	$	0.40		$	0.37		$	1.31		$	1.19
Pro-forma:
Basic	$	0.38		$	0.35		$	1.27		$	1.16
Diluted	$	0.36		$	0.32		$	1.19		$	1.05
Shares used in per share calculations:
As reported:
Basic		8,146			7,877			8,083			7,606
Diluted		8,825			8,641			8,747			8,479
Pro-forma:
Basic		8,146			7,877			8,083			7,606
Diluted		8,759			8,530			8,669			8,358

Note 5: Repurchase of Common Stock

The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2005. The Company repurchased 181,015 shares of its common stock for $4.3 million during the nine months ended September 30, 2005. There were no repurchases of common stock during the quarter or nine-month period ended October 1, 2004. As of September 30, 2005, the Company had remaining authorization under its stock repurchase plans of $414,000 to repurchase shares of common stock.

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Note 6: Deferred Compensation Plan

The Company maintains a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees. The purpose of the plan is to offer those employees an opportunity to elect to defer the receipt of compensation in order to provide for termination of employment and related benefits. Under this plan participants may elect to defer up to 100% of their compensation. Employee deferrals were $436,000 and $2,064,000 during the quarter and nine months ended September 30, 2005, respectively. Employee deferrals were $463,000 and $691,000 during the quarter and nine months ended October 1, 2004, respectively. Employer contributions to the plan were $32,000 during the quarter and nine months ended September 30, 2005. There were no employer contributions to the plan during fiscal 2004.

Company assets that are earmarked to pay benefits under the plan are held by a rabbi trust and are subject to the claims of the Company’s creditors. As of September 30, 2005 and October 1, 2004, the invested amounts under the plan totaled $3.6 million and $712,000, respectively, and were recorded as a long-term asset on the Company’s condensed consolidated balance sheet. These assets are classified as trading securities and are recorded at fair market value with changes recorded as adjustments to net miscellaneous income. As of September 30, 2005 and October 1, 2004, amounts due under the plan totaled $3.6 million and $712,000, respectively, and were recorded as a long-term other liability on the Company’s condensed consolidated balance sheet. Changes in the liability were recorded as adjustments to compensation expense. During the quarter and nine months ended September 30, 2005, the Company recognized compensation expense of $142,000 and $183,000, respectively, as a result of an increase in the market value of the trust assets. During the quarter and nine months ended October 1, 2004, the Company recognized compensation expense of $19,000 and $21,000, respectively, as a result of an increase in the market value of the trust assets.

Note 7: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:

	Nine Months Ended
(In thousands)	September 30, 2005		October 1, 2004
Cash paid during period:
Interest	$	6	$	11
Income taxes	$	6,882	$	6,219
Non-cash investing and financing activities:
Capital lease for equipment	$	11	$	34
Unrealized gain (loss) on short-term investments	$	12	$	(77	)
Vested stock unit awards issued to settle accrued bonuses	$	1,341	$	984
Deferred stock-based compensation	$	1,619	$	1,134

Note 8: Accounts Receivable, Net

At September 30, 2005 and December 31, 2004, accounts receivable, net was comprised of the following:

(In thousands)	September 30, 2005			December 31, 2004
Billed accounts receivable	$	29,645		$	27,291
Unbilled accounts receivable		16,964			12,798
Allowance for doubtful accounts		(1,477	)		(1,503	)
Total accounts receivable, net	$	45,132		$	38,586

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Note 9: Inventory

At September 30, 2005, the Company had $2.0 million of work-in-process inventory included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

Note 10: 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 September 30, 2005 and October 1, 2004 follows:

Revenues

	Quarters Ended				Nine Months Ended
(In thousands)	September 30, 2005		October 1, 2004		September 30, 2005		October 1, 2004
Other scientific and engineering	$	28,473	$	29,271	$	88,386	$	88,562
Environmental and health		8,719		8,770		27,852		27,888
Total revenues	$	37,192	$	38,041	$	116,238	$	116,450

Operating income

	Quarters Ended						Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004			September 30, 2005			October 1, 2004
Other scientific and engineering	$	6,449		$	7,373		$	21,861		$	22,864
Environmental and health		1,798			1,409			6,287			4,803
Total segment operating income		8,247			8,782			28,148			27,667
Corporate operating expense		(3,624	)		(3,670	)		(11,199	)		(11,269	)
Total operating income	$	4,623		$	5,112		$	16,949		$	16,398

Capital Expenditures

	Quarters Ended				Nine Months Ended
(In thousands)	September 30, 2005		October 1, 2004		September 30, 2005		October 1, 2004
Other scientific and engineering	$	516	$	568	$	1,849	$	1,359
Environmental and health		17		22		68		113
Total segment capital expenditures		533		590		1,917		1,472
Corporate capital expenditures		26		75		434		340
Total capital expenditures	$	559	$	665	$	2,351	$	1,812

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Depreciation and Amortization

	Quarters Ended				Nine Months Ended
(In thousands)	September 30, 2005		October 1, 2004		September 30, 2005		October 1, 2004
Other scientific and engineering	$	729	$	547	$	1,857	$	1,627
Environmental and health		42		44		128		129
Total segment depreciation and amortization		771		591		1,985		1,756
Corporate depreciation and amortization		330		418		1,369		1,254
Total depreciation and amortization	$	1,101	$	1,009	$	3,354	$	3,010

No single customer comprised more than 10% of the Company’s revenues for the quarter and nine months ended September 30, 2005. The Company derived 12% of revenues from agencies of the federal government for the quarter and nine months ended October 1, 2004.

Note 11: Related Party Transactions

The Company has a software licensing contract with an organization owned by the husband of one of Exponent’s Practice Directors. The Company recorded software licensing expenses related to this contract for the quarter and nine months ended September 30, 2005 of $33,750 and $101,250, respectively. For the quarter and nine months ended October 1, 2004, the Company recorded $31,250 and $118,750, respectively, in software licensing expenses related to this contract.

The Company has a health sciences consulting contract with the wife of one of Exponent’s Principals. The Company recorded subcontractor fees related to this contract for the quarter and nine months ended September 30, 2005 of $24,000 and $93,000, respectively. For the quarter and nine months ended October 1, 2004, the Company recorded $31,000 and $111,000 in subcontractor fees related to this contract.

Note 12: Goodwill and Other Intangible Assets

At September 30, 2005 and December 31, 2004, goodwill and other intangible assets were comprised of the following:

(In thousands)	September 30, 2005			December 31, 2004
Intangible assets subject to amortization:
Non-competition agreements	$	136		$	236
Less accumulated amortization		(114	)		(189	)
		22			47
Goodwill		8,607			8,607
Total goodwill and intangible assets	$	8,629		$	8,654

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 September 30, 2005 was $8,000 and $25,000, respectively. Amortization expense for intangible assets for the quarter and nine months ended October 1, 2004 was $15,000 and $44,000, respectively.

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Below is a breakdown of goodwill reported by segment as of September 30, 2005:

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

There were no changes in the carrying amount of goodwill for the quarter ended September 30, 2005.

Note 13: Mortgage Note

The Company has a revolving reducing mortgage note (the “Mortgage Note”) secured by its 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 September 30, 2005, the Company had $0 outstanding and available borrowings of $21.2 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.

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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 included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2004, which are contained in our fiscal 2004 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 timing of engagements for our services, 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 2004 Annual Report on Form 10-K.

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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 creditworthiness 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.

The allowance for doubtful accounts is recorded as a reduction in revenue to the extent the provision relates to fee adjustments. To the extent the provision relates to a client’s inability to make required payments, the provision is recorded in operating expenses.

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, 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 that the estimates are adjusted in future periods, 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 2005, we 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. Our annual goodwill impairment review is completed at the end of the 47^th week of each fiscal year. Factors that we consider when evaluating for possible impairment include the following:

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

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• 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. There were no events or changes in circumstances during the quarters and nine months ended September 30, 2005 and October 1, 2004, indicating that the carrying amount of our goodwill may be impaired.

RESULTS OF CONSOLIDATED OPERATIONS

Overview of the Quarter Ended September 30, 2005

Consolidated revenues for the third quarter of fiscal 2005 decreased by $849,000 as compared to the same period last year. This decline was due primarily to a decrease in activity in our technology development business. Revenues for our technology development business decreased by $2.1 million during the third quarter of 2005 as compared to the same period last year. This decrease was due to a delay in the expected completion and delivery of robots to the United States Army under a contract valued at $2.9 million. None of the robots were completed or delivered during the quarter ended September 30, 2005. As of September 30, 2005, we had $2.0 million of inventory associated with these robots included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheet. Completion and delivery of the robots is expected during the fourth quarter of fiscal 2005. The decrease in revenues for our technology development business was offset by growth in several other practice areas, primarily practice areas in our other scientific and engineering segment.

The decrease in consolidated revenues was due to a 2.3% decrease in billable hours to 173,000 from 177,000 for the same period of fiscal 2004. This decrease was offset by higher billing rates and a 0.6% increase in technical full-time equivalents to 529 during the third quarter of fiscal 2005 as compared to 526 during the same period last year. Utilization decreased to 63% for the third quarter of 2005 compared to 65% for the same period last year.

Fiscal Quarter Ended September 30, 2005 compared to Fiscal Quarter Ended October 1, 2004

Revenues

	Quarters Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Other scientific and engineering	$	28,473		$	29,271		(2.7	)%
Percentage of total revenues		76.6	%		76.9	%
Environmental and health		8,719			8,770		(0.6	)%
Percentage of total revenues		23.4	%		23.1	%
Total revenues	$	37,192		$	38,041		(2.2	)%

The decrease in revenues for our other scientific and engineering segment was primarily the result of a decrease in activity in our technology development business. Revenues for our technology development business decreased by $2.1 million during the third quarter of 2005 as compared to the same period last year. This decrease was partially offset by growth in several other practice areas in our other scientific and engineering segment. This growth was due to higher billing rates and an increase in technical full-time equivalents.

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During the third quarter of fiscal 2005 billable hours for our other scientific and engineering segment decreased by 2.3% to 130,000 as compared to 133,000 during the same period last year. Technical full-time equivalents increased 2.1% to 386 from 378 for the same period last year. Utilization decreased to 65% for the third quarter of 2005 as compared to 68% for the third quarter of 2004.

The decrease in revenues for our environmental and health segment was primarily due a decrease in billable hours and technical full-time equivalents, partially offset by higher billing rates. During the third quarter of fiscal 2005 billable hours for this segment decreased by 2.3% to 43,000 as compared to 44,000 during the same period last year. Technical full-time equivalents for this segment decreased 3.4% to 143 from 148 during same period last year. Utilization increased to 58% for the third quarter of fiscal 2005 as compared to 57% during the same period last year.

Compensation and Related Expenses

	Quarters Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Compensation and related expenses	$	22,921		$	23,022		(0.4	)%
Percentage of total revenues		61.6	%		60.5	%

The decrease in compensation and related expenses was due to $440,000 in labor related to our project to deliver robots to the United States Army being recorded as inventory during the quarter ended September 30, 2005. No labor was recorded as inventory during the quarter ended October 1, 2004. Fringe benefits also decreased $241,000 during the third quarter of 2005 as compared to the same period last year. This decrease was due to a decrease in workers’ compensation expense caused by lower than expected claim activity. These decreases were partially offset by an increase in wages due to increases in headcount and our annual salary increase, which took effect at the beginning of April, 2005. 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
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Other operating expenses	$	4,668		$	4,690		(0.5	)%
Percentage of total revenues		12.6	%		12.3	%

The decrease in other operating expenses was primarily due to decreases in computer and office expenses and equipment related expenses, partially offset by an increase in depreciation. Computer and office expenses decreased $59,000 due to variations in the timing of these expenses. Equipment related expenses decreased $39,000 due primarily to a partial refund of personal property taxes paid. Depreciation increased $61,000 due to the recent purchase of information technology equipment.

Reimbursable Expenses

	Quarters Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Reimbursable expenses	$	2,539		$	2,871		(11.6	)%
Percentage of total revenues		6.8	%		7.5	%

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The decrease in reimbursable expenses was primarily due to lower purchases of project related materials in our technology development practice caused by the decrease in activity in this practice. The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

General and Administrative Expenses

	Quarters Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
General and administrative expenses	$	2,441		$	2,346		4.0	%
Percentage of total revenues		6.6	%		6.2	%

The increase in general and administrative expenses was primarily due to an increase in recruiting of $61,000 and an increase in professional development of $35,000, partially offset by a decrease in bad debt of $56,000. The increase in recruiting and professional development was due to our efforts to attract and develop technical consultants. The decrease in bad debt expense was due to strong collection efforts and an increase in recoveries.

Other Income, Net

	Quarters Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Other income, net	$	660		$	266		148.1	%
Percentage of total revenues		1.8	%		0.7	%

Other income, net, consists primarily of investment income and rental income from leasing excess space in our Silicon Valley facility. The increase in other income, net, was primarily due to a $199,000 increase in interest income, a $123,000 increase in the gain on plan assets held for our non-qualified deferred compensation plan, and a $48,000 increase in rental income. The increase in interest income was the result of higher average balances of short-term investments and cash equivalents and an increase in short-term interest rates. The increase in the gain on plan assets for our non-qualified deferred compensation plan was due to an increase in market value of the underlying securities. The increase in rental income was primarily due to the leasing of additional space in our Silicon Valley facility. We expect other income, net, to continue to increase due to anticipated increases in our average balances of short-term investments and cash equivalents and rising short-term interest rates.

Income Taxes

	Quarters Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Income taxes	$	1,768		$	2,205		(19.8	)%
Percentage of total revenues		4.8	%		5.8	%
Effective tax rate		33.5	%		41.0	%

The decrease in our effective tax rate was due to a $272,000 true up related to differences in estimated versus actual federal and state income taxes for fiscal 2004. An increase in tax-exempt interest income also contributed to the decrease in our effective tax rate.

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Nine Months Ended September 30, 2005 compared to Nine Months Ended October 1, 2004

Revenues

	Nine Month Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Other scientific and engineering	$	88,386		$	88,562		(0.2	)%
Percentage of total revenues		76.0	%		76.1	%
Environmental and health		27,852			27,888		(0.1	)%
Percentage of total revenues		24.0	%		23.9	%
Total revenues	$	116,238		$	116,450		(0.2	)%

The decrease in revenues for our other scientific and engineering segment was primarily the result of a decrease in activity for our technology development business. Revenues for our technology development business decreased by $4.3 million during the nine months ended September 30, 2005 as compared to the same period last year. This decrease was offset by growth in several other practice areas in our other scientific and engineering segment. During the nine months ended September 30, 2005 billable hours for this segment decreased by 2.9% to 399,000 as compared to 411,000 during the same period last year. Technical full-time equivalents increased 1.1% to 376 from 372 for the same period last year. Utilization decreased to 68% during the nine months ended September 30, 2005 as compared to 71% during the same period last year.

The decrease in revenues for our environmental and health segment was primarily due to a decrease in billable hours and technical full-time equivalents, partially offset by higher billing rates. During the nine months ended September 30, 2005 billable hours for this segment decreased by 3.6% to 135,000 as compared to 140,000 during the same period last year. Technical full-time equivalents for this segment decreased 8% to 138 from 150 during same period last year. Utilization increased to 63% for the nine months ended September 30, 2005 as compared to 59% during the same period last year.

Compensation and Related Expenses

	Nine Month Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Compensation and related expenses	$	70,444		$	69,340		1.6	%
Percentage of total revenues		60.6	%		59.5	%

The increase in compensation and related expenses was due to an increase in wages and bonus expense. Wages increased due to our annual salary increase, which took effect at the beginning of April, 2005. The impact of our annual salary increase was partially offset by a decrease in headcount. Bonuses are based on profitability and increased by $925,000 during the first nine months of fiscal 2005 as compared to the same period in fiscal 2004. These increases were partially offset by $531,000 in labor related to our project to deliver robots to the United States Army being recorded as inventory during the first nine months of fiscal 2005. No labor was recorded as inventory during the same period in fiscal 2004. 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.

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Other Operating Expenses

	Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Other operating expenses	$	13,932		$	13,917		0.1	%
Percentage of total revenues		12.0	%		12.0	%

The increase in other operating expenses was primarily due to an increase in occupancy expense of $199,000, and an increase in depreciation of $96,000, offset by the write-off of a foreign real estate investment for $230,000 during the first nine months of fiscal 2004. There was no such write-off during the nine months ended September 30, 2005. Occupancy expenses increased due to expansion in certain offices. The increase in depreciation expense was due to the purchase of information technology equipment.

Reimbursable Expenses

	Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Reimbursable expenses	$	7,982		$	9,781		(18.4	)%
Percentage of total revenues		6.9	%		8.4	%

The decrease in reimbursable expenses was primarily due to lower purchases of project related materials in our technology development practice caused by the decrease in activity in this practice. The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

General and Administrative Expenses

	Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
General and administrative expenses	$	6,931		$	7,014		(1.2	)%
Percentage of total revenues		6.0	%		6.0	%

The decrease in general and administrative expenses was primarily due to a decrease in outside consulting services of $338,000 and a decrease in bad debt expense of $201,000, partially offset by an increase in accounting and other professional fees of $295,000, an increase in recruiting of $73,000, and an increase in professional development of $59,000. During the fourth quarter of fiscal 2004, we expensed $216,000 in sub-contractor fees related to a potential project with the United States government that was not executed by year-end. This project was executed during the first quarter of fiscal 2005 and the sub-contractor fees previously expensed were classified as billable charges, contributing to the period-to-period decrease in outside consulting services. The decrease in bad debt expenses was due to strong collection efforts and an increase in recoveries. Accounting and other professional fees increased due to higher audit and corporate governance related expenses. Recruiting and professional development expenses were higher due to our efforts to attract and develop technical consultants.

Other Income, Net

	Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Other income, net	$	1,514		$	676		124.0	%
Percentage of total revenues		1.3	%		0.6	%

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Other income, net, consists primarily of investment income and rental income from leasing excess space in our Silicon Valley facility. The increase in other income, net, was primarily due to a $518,000 increase in interest income, a $162,000 increase in the gain on plan assets held for our non-qualified deferred compensation plan, and a $108,000 increase in rental income. The increase in interest income was the result of higher average balances of short-term investments and cash equivalents and an increase in short-term interest rates. The increase in the gain on plan assets for our non-qualified deferred compensation plan was due to an increase in market value of the underlying securities. The increase in rental income was primarily due to the leasing of additional space in our Silicon Valley facility. We expect other income, net, to continue to increase due to anticipated increases in our average balances of short-term investments and cash equivalents and rising short-term interest rates.

Income Taxes

	Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004			Percent Change
Income taxes	$	6,987		$	7,000		(0.2	)%
Percentage of total revenues		6.0	%		6.0	%
Effective tax rate		37.8	%		41.0	%

The decrease in our effective tax rate was due to a $272,000 true up related to differences in estimated versus actual federal and state income taxes for fiscal 2004. An increase in tax-exempt interest income also contributed to the decrease in our effective tax rate.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). In March 2005, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin (“SAB”) 107, Share-Based Payment, which expresses views of the SEC Staff about the application of SFAS 123R. We are required to adopt SFAS 123R in the first quarter of fiscal 2006. SFAS 123R will result in the recognition of substantial compensation expense relating to our employee stock option and employee stock purchase plans. We currently use the intrinsic value method to measure compensation expense for stock-based awards to our employees. Under this method, we generally do not recognize any compensation related to stock option grants we issue under our stock option plans or related to the discounts we provide under our employee stock purchase plans. Under the new rules, we are required to adopt a fair value based method for measuring the compensation expense related to employee stock awards. This will lead to substantial additional compensation expense. Note 4 entitled Stock-Based Compensation included in these condensed consolidated financial statements provides the pro-forma net income and earnings per share as if we had used a fair value based method similar to the methods required under SFAS 123R to measure the compensation expense for employee stock awards during the quarters and nine months ended September 30, 2005 and October 1, 2004.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2005, our cash, cash equivalents and short-term investments were $64.9 million compared to $60 million at December 31, 2004. We financed our business for the current period principally through operating cash.

	Nine Months Ended
(In thousands)	September 30, 2005			October 1, 2004
Net cash provided by (used in) operating activities	$	9,338		$	(2,022	)
Net cash used in investing activities		(4,264	)		(542	)
Net cash (used in) provided by financing activities		(1,341	)		4,904

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The increase in net cash provided by operating activities was due to a smaller increase in accounts receivable of $7.3 million during the nine months ended September 30, 2005 as compared to an increase of $15.4 million during the same period last year. The smaller increase in accounts receivable during the nine months ended September 30, 2005 was due to strong collections. Days sales outstanding decreased to 94 days as compared to 119 days during the same period last year. Deferred revenues increased $0.7 million during the nine months ended September 30, 2005 as compared to a decrease of $1.9 million during the same period last year. The increase in deferred revenues during the nine months ended September 30, 2005 was due an increase in pre-billed projects. Accounts payable and accrued liabilities increased $1.3 million during the nine months ended September 30, 2005, as compared to a decrease of $0.8 million during the same period last year. The increase in accounts payable was due to the timing of payments to vendors and an increase in the use of sub-contractors.

The increase in net cash used in investing activities was due to an increase in net purchases of short-term investments of $2.9 million and an increase in capital expenditures of $539,000. The increase in net purchases of short-term investments during the nine months ended September 30, 2005 as compared to the same period last year was due to a larger portion of our excess cash being invested in short-term investments. The increase in capital expenditures was primarily due to the purchase of information technology equipment.

The increase in net cash used in financing activities was due to $4.3 million in repurchases of our common stock under our stock repurchase programs. We did not repurchase any of our common stock during the nine months ended October 1, 2004. The increase in net cash used was also due to a decrease of $1.9 million in proceeds from the issuance of our common stock during the nine months ended September 30, 2005 as compared to the same period last year. This decrease was due to a corresponding decrease in employee stock option exercises.

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 September 30, 2005 we repurchased 181,015 shares of our common stock for $4.3 million. The following table represents the remaining authorization under our stock repurchase plans as of September 30, 2005 (in thousands):

Board Approval Date	Authorized Repurchases		Repurchases To Date		Remaining Authorization
February 2003	$	2,000	$	2,000	$	—
August 2003	$	3,000	$	2,586	$	414

The following schedule summarizes our principal contractual commitments as of September 30, 2005 (in thousands):

Fiscal year	Operating lease commitments		Capital leases		Purchase obligations		Total
2005	$	1,363	$	12	$	216	$	1,591
2006		4,442		59		—		4,501
2007		3,654		49		—		3,703
2008		3,010		8		—		3,018
2009		2,688		2		—		2,690
Thereafter		4,351		—		—		4,351
	$	19,508	$	130	$	216	$	19,854

We have a revolving reducing mortgage note with a total available borrowing amount of $21.2 million and an outstanding balance of $0 as of September 30, 2005. 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.

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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.

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.

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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 predominantly in the U.S., were to experience a prolonged slowdown, demand for our services could be reduced considerably.

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 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 timing of engagements; 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 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 effective maturities in accordance with the Company’s investment policy. The maximum effective maturity of any issue in our portfolio of cash equivalents and short-term investments is 3 years and the maximum average effective maturity of the portfolio cannot exceed 12 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. Currently, we do not employ a foreign currency hedging program to mitigate our foreign currency exchange risk as we believe the risks to date have not been significant.

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 September 30, 2005 we had $0 outstanding and available borrowings of $21.2 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.

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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.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure 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, 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.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter or nine month period ended September 30, 2005, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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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 9, 2005
	/s/ Michael R. Gaulke
	Michael R. Gaulke, President and Chief Executive Officer
	/s/ Richard L. Schlenker
	Richard L. Schlenker, Chief Financial Officer

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