FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended October 3, 2003April 2, 2004

OR

For the transition period from ____________ to ____________

Commission File Number0-18655

EXPONENT, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EXPONENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

October 3, 2003April 2, 2004 and January 3, 20032, 2004

(in thousands, except share data)

(unaudited)

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 Ended April 2, 2004 and Nine Months Ended October 3,April 4, 2003 and September 27, 2002

(in thousands, except per share data)

(unaudited)

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 Ended April 2, 2004 and Nine Months Ended October 3,April 4, 2003 and September 27, 2002

(in thousands)

(unaudited)

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 MonthsQuarters Ended October 3,April 2, 2004 and April 4, 2003 and September 27, 2002

(in thousands)

(unaudited)

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 Ended April 2, 2004 and Nine Months EndedApril 4, 2003

October 3, 2003 and September 27, 2002

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 calendar year ending on the Friday closest to the last day of December.

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments which are necessary for the fair presentation of the condensed consolidated financial statements have been included and all such adjustments are of a normal and recurring nature. The operating results for the fiscal quarters ended April 2, 2004 and nine months ended October 3,April 4, 2003, and September 27, 2002, are not necessarily representative of the results of future quarterly or annual periods.

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

Note 2: Revenue Recognition

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

In accordance with EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, Exponent reports revenues net of subcontractor fees. The Company has determined that it is not the primary obligor with respect to its subcontractors because:

In accordance with EITF 01-14, “Income Statement Characterization of Reimbursements, Received for Out-of-Pocket Expenses Incurred”, reimbursements, including those related to travel and other out-of-pocket expenses, and other similar third partythird-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.

The majoritySubstantially 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 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:

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Gross revenues and reimbursements for the quarters ended April 2, 2004 and nine months ended October 3,April 4, 2003 and September 27, 2002 are as follows:

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.

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

Note 3: Net Income Per Share

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

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

Common stock options to purchase 305,732 shares were excluded from the diluted per share calculation for the fiscal quarter ended September 27, 2002, due to their antidilutive effect. There were no options excluded from the diluted per share calculation for the fiscal quarter ended October 3, 2003. The weighted average exercise price for the antidilutive shares was $12.94 for the quarter ended September 27, 2002.April 2, 2004. Common stock options to purchase 8,663 and 215,15898,877 shares were excluded from the diluted per share calculation for the nine monthsfiscal quarter ended October 3,April 4, 2003, and September 27, 2002, respectively, due to their antidilutive effect. Weighted averageThe weighted-average exercise pricesprice for the antidilutive shares were $15.34 and $12.91was $14.02 for the nine monthsquarter ended October 3, 2003 and September 27, 2002, respectively.April 4, 2003.

Note 4: Stock BasedStock-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 the best employees, and to better align employee interests with those of the Company’s stockholders. Up to 30% of a select group of principals’ and officers’ fiscal 2003 bonus was settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. On March 12, 2004, fully vested restricted stock unit awards representing 43,273 shares of the Company’s common stock were granted to a select group of principals and officers as a part of their bonus distribution for fiscal 2003. The value of these fully vested restricted stock unit awards as measured on March 12, 2004 was $984,000.

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

The Company uses the intrinsic value method of accounting for its Employee Stock Purchase Plan and Stock Option Plans, collectively called “Options”.“Options.” The Options are generally 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”,Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Compensation - Transition and Disclosure”,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 Optionsoptions under the fair value method. Under the fair value method, compensation expense is calculated for options granted using a defined valuation technique. The Company uses the Black-Scholes option-pricing model to calculate the fair value of its options.

In calculating the fair value of an option at the date of grant, the Black-Scholes option-pricing model requires the input of highly subjective assumptions. The Company used the following weighted-average assumptions for the quarters ended April 2, 2004 and April 4, 2003:

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

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Note 5: Short-Term Investments

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

Note 6: Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that asset retirement obligations that are identifiable upon acquisition, construction or development and during the operating life of a long-lived asset be recorded as a liability using the present value of the estimated cash flows. A corresponding amount would be capitalized as part of the asset’s carrying amount and amortized to expense over the asset’s useful life. The Company adopted the provisions of SFAS No. 143 effective January 4, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

In July 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. SFAS No. 146 addresses financial accounting and reporting associated with exit or disposal activities. Under SFAS No. 146, costs associated with an exit or disposal activity shall be recognized and measured at their fair value in the period in which the liability is incurred rather than at the date of a commitment to an exit or disposal

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plan. The Company adopted the provisions of SFAS No. 146 effective January 4, 2003. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The interpretation elaborates on existing disclosure requirements related to certain guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of FIN No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in the interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company generally does not offer guarantees or indemnification to its clients or other third parties and the adoption of the recognition and measurement provisions of FIN No. 45 during the nine months ended October 3, 2003 did not have a material impact on its financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities”. FIN No. 46 is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN No. 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003. The Company does not currently have any ownership in any variable interest entities.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company generally does not enter into derivative instruments or hedging activities and the adoption of SFAS No. 149 did not have a material impact on its financial position or results of operations for the quarter and nine months ended October 3, 2003.

In November 2002, the EITF reached a consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables”, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery or performance of any undelivered item is considered probable and substantially in the control of the vendor. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus is applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The Company adopted the provisions of this consensus effective July 5, 2003. The adoption of this consensus did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 effective July 5, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

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Note 7:6: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:

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Note 8:7: Accounts Receivable, Net

At October 3, 2003April 2, 2004 and January 3, 2003,2, 2004, accounts receivable, net was comprised of the following:

Note 9:8: Segment Reporting

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

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Segment information for the quarters ended April 2, 2004 and nine months ended October 3,April 4, 2003 and September 27, 2002 follows:

Revenues

Operating income

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Capital Expenditures

Note 10: Acquisition of Novigen Sciences, Inc.Depreciation and Amortization

On May 20, 2002, the Company acquired all of the outstanding capital stock of Novigen Sciences, Inc. (“Novigen”) for $2.2 million in cash and Company common stock valued at $725,000. Novigen provides services that address complex safety and regulatory issues regarding food and pesticides. Exponent acquired Novigen in continuation of its strategic focus of growing consulting services related to health issues. Following the acquisition, the net assets and staff of Novigen became a new practice, called Food and Chemicals, within the Company’s environmental and health segment. The results of operations for Novigen have been included in the Company’s condensed consolidated financial statements since the date of acquisition.

The following pro-forma results of operations reflect the combined results of Exponent and Novigen for the quarters and nine months ended October 3, 2003 and September 27, 2002, as if the business combination occurred as of the beginning of Exponent’s fiscal year ended January 3, 2003. The information used for this pro-forma disclosure was obtained from unaudited internal financial reports prepared by Novigen from January 1, 2002 through the date of acquisition, May 20, 2002. Although Novigen’s fiscal quarters do not coincide with Exponent’s fiscal quarters, their monthly financial reports were used to combine their results of operations with Exponent’s quarterly financial statements to arrive at the pro-forma amounts disclosed in the following schedule. The pro-forma amounts do not include $412,812 in non-recurring bonus payments made by Novigen prior to the acquisition.

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Note 11:9: Related Party Transactions

NovigenThe Company has a contract for software licensing from Durango Software LLC. The husband of Dr. Barbara Peterson, the former president of Novigen, owns Durango Software. Dr. Peterson is now a practice director in the Exponent organization.organization, owns Durango Software. Exponent recorded software licensing expenses related to this contract for the quarter and nine months ended October 3, 2003April 2, 2004 of approximately $24,000 and $72,000, respectively.$25,000. For the quarter and nine months ended September 27, 2002,April 4, 2003, Exponent recorded approximately $22,000 and $29,000, respectively,$24,000, in software licensing expenses related to this contract.

Note 12:10: Goodwill and Other Intangible Assets

At October 3, 2003April 2, 2004 and January 3, 2003,2, 2004, goodwill and other intangible assets were comprised of the following:

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

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Amortization expense for intangible assets for the quarter and nine months ended October 3, 2003April 2, 2004 was approximately $15,000 and $45,000, respectively.$14,000. Amortization expense for the quarter and nine months ended September 27, 2002April 4, 2003 was approximately $15,000 and $30,000, respectively. Amortization expense for intangible assets is projected to be approximately $59,000, $53,000, $34,000 and $14,000 in fiscal 2003 through fiscal 2006, respectively.$15,000.

ChangesBelow is a breakdown of goodwill, net of amortization, reported by segment as of April 2, 2004:

There were no changes in the carrying amount of goodwill by operating segment for the nine monthsquarter ended October 3, 2003 (in thousands):

During the nine months ended October 3, 2003, there was an increase of $6,000 in goodwill due to an adjustment to the acquisition balance sheet for the Novigen acquisition.April 2, 2004. There were no goodwill impairments or gains or losses on disposals for any portion of the Company’s reporting units during the nine monthsquarter ended October 3, 2003.April 2, 2004.

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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 and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 2, 2004, which are contained in our fiscal 2003 Annual Report on Form 10-K.

Forward LookingForward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as thesuch 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)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. Forward-lookingSuch 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 thosethe possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the effects of competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed elsewhere in thisour Annual Report includingon Form 10-K under the captionheading “Factors AffectingThat 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 that may reflect events or circumstances occurring after the date of this Report.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 or 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 POLICIES AND ESTIMATES

The preparation ofIn preparing our consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America requires that we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and judgments, which affectnet income, as well as on the reported amountsvalue of assets, liabilities, revenues and expenses, and related disclosures of contingentcertain assets and liabilities. On an on-going basis, we evaluateliabilities on our estimates, including those related to revenue recognition, bad debts, income taxes, and contingencies such as litigation.consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other assumptionsfactors that we believe areto be reasonable under the circumstances. Actual results maycould 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 have identifiedbelieve that the following as our criticalassumptions, judgments and estimates involved in the accounting policies:

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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.

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In accordance with EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, we report revenue net of subcontractor fees. We have determined that we are not the primary obligors with respect to our subcontractors because:

In accordance with EITF 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,” 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.

The majoritySubstantially 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 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 given the nature of the consulting services we provide and the following additional considerations: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.

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

AllowanceEstimating the allowance for doubtful accounts.We must make estimates of our ability to collect accounts receivable and our unbilled work-in-process. Specifically,In circumstances where we analyze billedare 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 receivable and unbilled work-in-process based upon historical write-offs,bad debts, customer concentration, customer credit-worthiness, current economic conditions and changes in customer payment terms when determining the allowance for doubtful accounts. As of October 3, 2003, our accounts receivable balance was $42.9 million, net of an allowance for doubtful accounts of $2.0 million.terms.

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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. To the extent we establish a valuation allowance, we must include an expense within the tax provision of the statement of income in each period in which the allowance is increased.

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.assets, such as current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. In the event that actual results differ from these estimates or the estimates are adjusted in future periods, then we may need to establish an additionala valuation allowance, which could materially impact our financial position and results of operations. Based on our current financial projections and operating plan for fiscal 2003,2004, we currently believe that we will be able to utilize our deferred tax asset. As of October 3, 2003, we had net deferred tax assets of $1,928,000 and net long-term deferred tax liabilities of $860,000 for a net deferred tax asset of $1.1 million and a valuation allowance of $0.assets.

Valuing long-lived assets under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Long-lived assets are reviewed whenever indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the carrying amount of the related asset. For long-lived assets to be held and used, an impairment loss is recognized if the carrying amount of an asset is not recoverable from its undiscounted cash flows. The loss is measured as the difference between the carrying amount and the fair value of the assets. For long-lived assets to be disposed of other than by sale, an impairment loss is recognized at the date the long-lived asset is exchanged. Long-lived assets that are to be disposed of by sale are classified as held for sale, depreciation ceases and such assets are valued at the lower of carrying amount or fair value less cost to sell. As of October 3, 2003, we did not have any long-lived assets to be disposed of by sale or other than by sale and there has been no indication of impairments to our long-lived assets. Our long-lived assets, consisting primarily of net property, equipment and leasehold improvements, totaled $31.1 million at October 3, 2003.

Valuing goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets”.goodwill. We assess the impairment of goodwill annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. Factors that we consider when evaluating for possible impairment include the following:

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When evaluating the Company’sour 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. As of October 3, 2003, goodwill totaled $8.6 million.

Accounting for Stock-Based Compensation. SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” amends SFAS No. 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board

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Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” to account for employee stock options. See Note 4 to the Condensed Consolidated Financial Statements for a disclosure of pro-forma net income as if we had adopted the fair value method under SFAS No. 123.

RESULTS OF CONSOLIDATED OPERATIONS

The following discussion should be read in conjunction withOverview of the unaudited condensed consolidated financial statements and notes thereto and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 3, 2003, which are contained in our fiscal 2002 Annual Report on Form 10-K.

Fiscal Quarter Ended October 3, 2003 compared to Fiscal Quarter Ended September 27, 2002April 2, 2004

Revenues forDuring the thirdfirst quarter of fiscal 2003 were $35.7 million, an increase of $4.7 million or 15% over the same quarter in fiscal 2002. This revenue increase was the result of2004 we demonstrated growth in bothseveral of our business segments. Our environmental and health segment contributed $1.2 million to the increase andkey technical disciplines primarily in our other scientific and engineering segment contributed $3.5 million. Growthresulting in our environmental and health segmentan 11% growth in revenue as compared to the same period in fiscal 2003. Our revenue growth was primarily the result of an increase in total billable hours and higher billing rates. Billable hours in our environmental and health segment increased to 48,795 forDuring the thirdfirst quarter of fiscal 20032004 total billable hours increased 7.8% to 180,000 as compared to 46,167167,000 during the first quarter of fiscal 2003. This increase in billable hours was due to an increase in technical full time equivalents to 490 as compared to 459 during the first quarter of fiscal 2003. Utilization was 70% for the samefirst quarter of fiscal 2004 and 2003. Through the management of costs we were able to leverage this revenue growth during the first quarter of fiscal 2004 to improve operating income by 40% and net income by 43% as compared to the first quarter of fiscal 2003.

Fiscal Quarter Ended April 2, 2004 compared to Fiscal Quarter Ended April 4, 2003

Revenues