EXPONENT INC (Form: 10-K, Received: 04/03/2003 15:59:32)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 3, 2003.

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 or organization)		(IRS employer identification no.)

149 Commonwealth Drive, Menlo Park, California 94025

(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of Class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sale price of the Common Stock as reported on the NASDAQ National Market on June 28, 2002, the last business day of the registrant’s most recently completed second quarter, was $72,550,624.

The number of shares of the issuer’s Common Stock outstanding as of March 21, 2003 was 7,149,180.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2003 Annual Meeting of Stockholders to be held on May 29, 2003, are incorporated by reference into Part III of this Form 10-K.

EXPONENT, INC.

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED JANUARY 3, 2003

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Submission of Matters to a Vote of Security Holders	8

PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	8
Item 6.	Selected Consolidated Financial Data	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	19
Item 8.	Financial Statements and Supplementary Data	19
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	19

PART III
Item 10.	Directors and Executive Officers of the Registrant	19
Item 11.	Executive Compensation	19
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	19
Item 13.	Certain Relationships and Related Transactions	19
Item 14.	Controls and Procedures	19

PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	21

Signatures		43
Certifications		44
Exhibits		47

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains, and incorporates by reference, 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 under) 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 those discussed in this Report under the heading “Factors That May Affect Future Operating Results and Market Price of Stock” and elsewhere. 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.

PART I

Item 1. Business

GENERAL

Exponent, Inc., incorporated in Delaware in 1989 (“Exponent”, and, together with its operating groups, the “Company”), is a science and engineering 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 professional staff can perform in-depth scientific research and analysis, or very rapid-response evaluations to provide our clients with the critical information they need.

CLIENTS

General

Exponent serves clients in automotive, aviation, chemical, construction, energy, government, health, insurance, manufacturing, technology and other sectors of the economy. Many of our engagements are initiated by lawyers or insurance companies, whose clients anticipate, or are engaged in, litigation over an alleged failure of their products, equipment or services. We have seen our services in failure prevention and technology evaluation grow as the technological complexity of products has increased over the years. We had gross revenues from continuing operations of approximately $134 million, $124 million and $132 million for fiscal years 2002, 2001 and 2000, respectively. During 2002, 2001 and 2000 approximately 19%, 21% and 21%, respectively, of our gross revenues from continuing operations were derived from professional services provided to clients, organizations and insurers related to the transportation industry. Additionally, during 2002, 2001 and 2000 we derived approximately 10%, 14% and 24%, respectively, of gross revenues from continuing operations from professional services provided to government agencies and contractors.

Pricing and Terms of Engagements

We provide our services on either a fixed-price basis or on a “time and expenses” basis, charging hourly rates for each staff member involved in a project, based on his or her skills and experience. Our standard rates for professionals range from $80 to $750 per hour. Our engagement agreements typically provide for monthly billing, require payment of our invoices within 30 days of receipt and permit clients to terminate an engagement at any time. Clients normally agree to indemnify our work and our personnel against liabilities arising out of the use or application of the results of our work or recommendations.

SERVICES

Recent events have heightened corporate awareness of the need to protect workers, facilities and operations. In 2002, we continued to work on high-profile investigations (such as the September 11, 2001 tragedy) as well as public health, environmental and product safety issues. Product recalls related to vehicle components, medical devices, food and other consumer products continue to make headlines. We are pleased that over the past year Exponent’s consultants have been engaged to provide solutions to many of these emerging and challenging technical issues.

Exponent’s service offerings are provided through a practice-focused format. Many projects require support from multiple practice areas. We currently operate 14 practice areas.

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Biomechanics

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Civil Engineering

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Data/Risk Analysis

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EcoSciences

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Electrical Engineering

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Environmental Science

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Food & Chemicals

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Health and Epidemiology

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Human Factors

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Human Health Risk Assessment

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Mechanical Engineering & Materials Science

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Technology Development

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Thermal Sciences

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Vehicle Analysis

Biomechanics

Our Biomechanics staff uses engineering and biomedical science to explore the cause, nature and severity of injuries. The type and distribution of injuries, combined with our extensive experience in human injury tolerance, allows us to determine forces and motions that must have occurred to produce the injuries. Using medical records, injury analysis can frequently provide information about human dynamics that is not directly available by other means. Through close interaction with our Accident Reconstruction and Human Factors service areas, our

consultants analyze the human’s overall role in an accident, including likelihood, causation and severity. We are also actively involved in assessing potential injury or medical risk to individuals that utilize medical devices, such as cardiac stents and orthopedic implants.

Civil Engineering

We have over 30 years of experience investigating all types of structural, hydrological, geotechnical, geological, geomechanical, construction and building problems, from major catastrophes to simple performance failures. The scientific investigation of these events provides our clients with a thorough assessment of damage, as well as expert analysis of causation to be used for purposes of retrofit, repair, claims adjustment or litigation. Furthermore, we use our experience to help clients before failures occur, to determine the vulnerability of their facilities to damage and to develop appropriate mitigation measures.

As a result of the September 11, 2001 attack on the World Trade Center, we are consulting with interested parties to study the collapse of the twin towers. We continue to provide testimony in major litigations alleging construction design defects and in assessing construction delay claims. In addition, we assist clients with the investigation and resolution of damage claims and litigation arising from earthquakes, landslides and other natural disasters and have worked with the California Earthquake Authority to improve response to future earthquake insurance claims.

Data/Risk Analysis

Our expertise in risk analysis helps quantify how machines, vehicles, consumer products and components behave in the real world—a direct measurement of risk. We advise our clients on whether design changes may increase or decrease risk, or whether overall safety justifies a particular design. Using the largest collection of accident and incident data in the world, our Data/Risk Analysis group reviews real-world performance of consumer products, transportation and other human activity. In 2002, our staff provided statistical analysis for a number of consumer product and transportation-related litigations, including the Ford Explorer/Firestone Tire rollover litigation.

EcoSciences

Our ecological scientists provide proven, cost-effective, and scientifically defensible solutions to complex environmental issues. This multidisciplinary team includes terrestrial and aquatic ecologists, toxicologists, fishery scientists, and resource management specialists. Our services include ecological risk assessment, natural resource damage assessment, toxicological reviews and analysis, water quality management, and design/monitoring of ecological restoration programs.

Our staff has worked on more than 30 natural resource damage cases nationwide. Through this work, we have gained valuable insights into the natural resource damage assessment process and a thorough understanding of the trustees’ perspectives. Our experience includes a wide variety of habitats (freshwater, estuarine, marine, and terrestrial) and substances of concern (PCBs, dioxins, PAH, metals, and petroleum hydrocarbons).

Electrical Engineering

We continue to be a highly sought-after resource for understanding current and potential risks involving electrical and electronic components. Our team of electrical engineers performs a wide array of investigations ranging from electric power systems to semiconductor devices. We operate laboratories for testing both heavy equipment and light electronic equipment. Computers and specialized software are used to analyze electric power systems, circuits and other equipment configurations. For a large electric utility client, we have conducted power flow studies, tested for network transfer capability, transmission congestion, voltage support and reactive requirements and made recommendations for improvement to client systems. In the electronics and semiconductor area, our consultants work with manufacturers and suppliers to assure product quality.

Environmental Science

Our environmental scientists and engineers provide proven, cost-effective, scientifically defensible and realistic assessments and solutions to complex environmental issues. We offer technical, regulatory and litigation support to industries that include mining and minerals, petrochemicals, forest products, shipbuilding, railroads, aerospace and defense and trade associations. Our consultants also address hydrological issues related to new housing and office complex developments around the country.

Food & Chemicals

Exponent added a Food and Chemical practice through its acquisition of Novigen Sciences, Inc. in May 2002. Our staff includes both technical and regulatory specialists who are experienced in dealing with foods, and with pesticide and non-pesticide products including conventional chemicals,

biochemicals, microbials, and products of biotechnology. We provide practical, creative scientific and regulatory support to meet global business objectives at every stage of the product cycle, from R&D to retail. In 2002, we completed a project for the U.S. military where we designed and conducted a clinical study to evaluate performance-enhancing supplements. In addition, we assessed risks to determine the advisability and extent of food and supplement product recalls due to chemical or microbiological contaminants and evaluated potential exposures associated with foods, dietary supplements and consumer products for compliance with California’s Proposition 65, which requires the State of California to publish a list of chemicals known by the State to cause cancer.

Health and Epidemiology

We have one of the foremost health sciences consulting practices in the United States. Our Health and Epidemiology practice combines the expertise and experience of both M.D.s and Ph.D.s to provide a comprehensive perspective on human health issues such as occupational and environmental health, pharmaceuticals, medical devices and the quality of health care. The practice utilizes our consultants’ expertise in occupational epidemiology to examine possible work-related diseases and injuries. In 2002, we undertook studies of the effects of Endocrine Disrupting Chemicals (EDC) on the population, as well as reviews of how certain medical devices, pharmaceuticals and other medical products impact human health.

Human Factors

Our Human Factors practice analyzes human cognition and behavior to guide product design decisions to provide better safety and usability. Working in conjunction with other Exponent practices, our scientists look at ways to improve product design, as well as review safety information and training to help change human behavior and reduce accidents. In 2002, our consultants conducted a study for Six Flags theme parks regarding the potential risk of brain injury while riding roller coasters. We evaluated data and information on roller coaster incidents, assessed potential risks and conducted new measurements related to g-forces and roller coasters. We found that the speeds on roller coasters may be high, but the g-forces of roller coaster rides take place in a short period of time and can be similar to everyday disturbances that people experience.

Human Health Risk Assessment

Our team of toxicologists study and analyze industry and regulatory issues relating to products and processes and their effect on humans and their environment. We provide solutions for potential environmental liabilities and communicate those results with industry, regulatory personnel and the public. In 2002, we participated in extensive studies of the effect of asbestos on automotive brakes and are currently responding to the increase in mold and indoor air quality claims being raised throughout the country by utilizing a multidisciplinary team of health risk, health and civil engineering professionals to meet the needs of our clients.

Mechanical Engineering and Materials Science

Our mechanical engineers and materials scientists have both an academic and “real-world” understanding of all areas of mechanical and materials engineering, including reliability and hazard evaluation, design assessment, fluid and thermal analysis and materials life prediction. We routinely work with manufacturers to assess risks to their products during their design and manufacturing phases of product development. In addition, we help manufacturers respond to allegations of defective design by the federal regulatory agencies such as the Consumer Product Safety Commission. In 2002, we continued to expand our work for a particular client in the computer industry in assessing potential risk in products under development. We used our experience to provide the client with a thorough comprehension of their current or potential designs to determine vulnerabilities before failures occurred and to develop appropriate mitigation methods. We also provided similar design review services in 2000 for a major manufacturer of household consumer products as part of their response to several significant product safety recalls, which the manufacturer voluntarily implemented in 2001.

Technology Development

Drawing on our multidisciplinary engineering, testing and failure analysis and prevention expertise, our Technology Development practice specializes in harnessing commercial technologies to develop effective military and industrial equipment and systems.

In August 2002, we were awarded one of two Phase I agreements for the U.S. Army’s Objective Force Warrior (OFW) program to develop revolutionary capabilities for the Objective Force soldier systems. OFW is an initiative to create a lightweight, fully integrated individual combat system, including weapon, head-to-toe individual protection, netted

communication systems, soldier-worn power sources, and enhanced human performance capabilities. In July of 2002, we provided the U.S. Army units in Afghanistan with M-7’s: wearable computer/radio systems with the capability of controlling small robots. The Exponent-integrated land traversing robotic systems are the first ever used in combat situations. The main missions for the robots are checking buildings and clearing caves in order to reduce the risk to soldiers during exploration. Also in 2002, we were awarded a follow-on contract to provide materials assessment and design analysis for the Advanced Combat Uniform for the U.S. Army as well as continued our effort with the Defense Manpower Agency to perform reliability characterization and testing on Smart Cards used throughout the Department of Defense.

Thermal Sciences

We have investigated and analyzed thousands of fires and explosions ranging from high loss disasters at manufacturing facilities to small insurance claims. Information gained from these analyses has assisted clients in evaluating failures when they occur and in assessing preventative measures related to the design of their products. In 2002, our Thermal Sciences practice was tasked to investigate fire/smoke/debris spread to the local area surrounding the September 11th collapse of the twin towers of the World Trade Center. The Thermal Sciences practice has expanded its capabilities in the areas of fire protection engineering and chemical engineering, and developed a strong presence in Chicago and the Midwest.

Vehicle Analysis

Our Vehicle Analysis practice provides design analysis, vehicle crash testing, component testing and accident reconstruction services to clients developing new automotive products, facing unexpected performance issues, or seeking information about how an accident occurred. At our 147-acre Test and Engineering Center in Phoenix, we develop unique test protocols using proprietary tests developed by our consulting staff. In 2002, we continued to work on the Ford/Firestone litigation and submitted our repeatable test technique for evaluating a roof-to-ground impact in a vehicle rollover event (developed with Ford Motor Company) to the National Highway Traffic Safety Administration’s (NHTSA) docket on rollover safety. The system is well suited to developmental testing of rollover occupant protection systems and investigation of roof strength issues.

COMPETITION

The marketplace for our services is fragmented and we face different sources of competition in providing various services. In addition, the services that we provide to some of our clients can be performed in-house by those clients. However, because of liability and independence concerns, clients that have the capability to perform such services themselves often retain Exponent or other independent consultants.

In each of the foregoing areas, we believe that the principal competitive factors are: technical capability and breadth of services, ability to deliver services on a timely basis, professional reputation and knowledge of the litigation process. Although we believe that we generally compete favorably in each of these areas, some of our competitors may be able to provide services acceptable to our clients at lower prices.

We believe that the barriers to entry in particular areas of engineering expertise are low and that for many of our technical disciplines, competition is increasing. In response to competitive forces in the marketplace, we continue to explore new markets for our various technical disciplines.

EMPLOYEES

As of January 3, 2003, we employed 631 full-time and part-time employees, including 395 engineering and scientific staff, 101 technical support staff and 135 administrative and support staff. Our highly skilled staff includes 332 employees with advanced degrees, of which 192 employees have achieved the level of Ph.D.

ADDITIONAL INFORMATION

The address of our Internet website is www.exponent.com . We make available, free of charge through our website, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other periodic SEC reports, along with amendments to all of those reports, as soon as reasonably practicable after we file the reports with the SEC.

EXECUTIVE OFFICERS

The executive officers of Exponent and their ages as of April 3, 2003 are as follows:

Name	Age	Position
Michael R. Gaulke	57	President, Chief Executive Officer and Director
Subbaiah V. Malladi, Ph.D.	56	Chief Technical Officer and Director
Roger L. McCarthy, Ph.D.	54	Chairman of the Board of Directors
Richard L. Schlenker, Jr.	37	Chief Financial Officer and Corporate Secretary

Executive officers of Exponent are appointed by the Board of Directors and serve at the discretion of the Board or until the appointment of their successors. There is no family relationship between any of the directors and officers of the Company.

Michael R. Gaulke joined the Company in September 1992, as Executive Vice President and Chief Financial Officer. He was named President in March 1993 and he was appointed as a member of the Board of Directors of the Company in January 1994. He assumed his current role of President and Chief Executive Officer in June 1996. From November 1988 to September 1992, Mr. Gaulke served as Executive Vice President and Chief Financial Officer at Raynet Corporation, a subsidiary of Raychem Corporation. Prior to joining Raynet, Mr. Gaulke was Executive Vice President and Chief Financial Officer of Spectra Physics, Inc., where he was employed from 1979 to 1988. From 1972 to 1979, Mr. Gaulke served as a consultant with McKinsey & Company. Mr. Gaulke is a member of the Board of Directors of Cymer, Inc and serves on the Board of Trustees of the Palo Alto Medical Foundation. Mr. Gaulke received a M.B.A. (1972) in Marketing and Operations from the Stanford University Graduate School of Business and a B.S. (1968) in Electrical Engineering from Oregon State University.

Subbaiah V. Malladi, Ph.D. , joined the Company in 1982 as a Senior Engineer, becoming a Senior Vice President in January 1988 and a Corporate Vice President of Exponent Failure Analysis Associates, Inc. (“FaAA”) in September 1993. In October 1998, Dr. Malladi was appointed Chief Technical Officer of the Company. Dr. Malladi also served as a director of the Company from March 1991 through September 1993. He was re-appointed as a director in April 1996 and has remained on the Board since that date. He received a Ph.D. (1980) in Mechanical Engineering from the California Institute of Technology, M.Tech (1972) in Mechanical Engineering from the Indian Institute of Technology, B.E. (1970) in Mechanical Engineering from SRI Venkateswara University, India and B.S. (1966) in Physics, Chemistry and Mathematics from Osmania University, India. Dr. Malladi is a Registered Professional Mechanical Engineer in the State of California, and a member of the following professional organizations: American Institute of Aeronautics and Astronautics; American Association for the Advancement of Science; Combustion Institute; and National Fire Protection Association.

Roger L. McCarthy, Ph.D. , joined the Company in August 1978. Currently, Dr. McCarthy is Chairman of the Board of Directors and a director of the Company. From June 1996 to October 1998, he served as Chief Technical Officer of the Company and a director of the Company. He was Chairman of FaAA from 1986 until its dissolution in December 2000. He has been a director of the Company since 1989 and a director of FaAA since 1980. He was Chief Executive Officer of the Company and FaAA from 1982 to June 1996. He also served as Chairman and President of the Company from 1986 to March 1993. Dr. McCarthy received his Ph.D. (1977), Mech.E. (1975) and S.M. (1973) from Massachusetts Institute of Technology and his B.S.E. (1972) in Mechanical Engineering and A.B. (1972) in Philosophy from the University of Michigan. Dr. McCarthy is a Registered Professional Engineer in the states of California, Georgia and Arizona and a member of the following professional organizations: American Society of Metals; American Society of Mechanical Engineers (ASME); Safety Engineering and Risk Analysis Division of ASME; Society of Automotive Engineers; American Society for Testing and Materials; Human Factors and Ergonomics Society; National Society of Professional Engineers; American Society of Heating, Refrigeration and Air-

Conditioning Engineers; National Fire Protection Association; American Welding Society; National Safety Council; Society for Risk Analysis; and American Statistical Association.

Richard L. Schlenker, Jr. joined the Company in October 1990. Mr. Schlenker is the Chief Financial Officer and Corporate Secretary of the Company. He was appointed Chief Financial Officer in July 1999 and was appointed Secretary of the Company in November 1997. Mr. Schlenker was the Director of Corporate Development from 1998 until his appointment as CFO. He was the Manager of Corporate Development from 1996 until 1998. From 1993 to 1996, Mr. Schlenker was a Business Manager at FaAA, where he managed the business activities for multiple consulting practices within FaAA. Prior to 1993 he held several different positions in finance and accounting within the Company. Mr. Schlenker holds a B.S. in Finance from the University of Southern California.

Item 2. Properties

Exponent’s Silicon Valley office facilities consist of a 153,738 square foot building, with office and laboratory space located on a 6.3-acre tract of land we own in Menlo Park, California and an adjacent 27,000 square feet of leased warehouse storage space.

Our Test and Engineering Center (“TEC”) occupies 147 acres in Maricopa County, Arizona. We lease this land from the state of Arizona under a 30-year lease agreement that expires in January 2028 and have an option to renew for two fifteen-year periods. In September 1999, we completed construction of a new indoor test facility at the TEC. In October 2000, we completed construction of an engineering and test preparation building at the TEC.

In addition, we lease office, warehouse and laboratory space in 24 other locations in 16 states and the District of Columbia, as well as in Germany and England. Leases for these offices, warehouse and laboratory facilities have terms generally ranging between one to ten years. Aggregate lease expense in fiscal 2002 for all leased properties was approximately $4,344,000.

Item 3. Legal Proceedings

Exponent is not engaged in any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Exponent’s common stock is traded on the NASDAQ National Market under the symbol “EXPO”. The following table sets forth for the fiscal periods indicated the high and low closing sales prices for our common stock.

Stock prices by quarter	High		Low
Fiscal Year Ended January 2, 2004:
First Quarter (through March 21, 2003)	$	15.25	$	13.11
Fiscal Year Ended January 3, 2003:
First Quarter	$	14.00	$	12.32
Second Quarter	$	13.90	$	12.60
Third Quarter	$	15.00	$	11.11
Fourth Quarter	$	15.01	$	12.40
Fiscal Year Ended December 28, 2001:
First Quarter	$	13.50	$	9.13
Second Quarter	$	13.00	$	10.25
Third Quarter	$	12.00	$	9.05
Fourth Quarter	$	13.00	$	9.25

As of March 21, 2003, there were 353 holders of record of our common stock. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe that there are considerably more beneficial holders of our common stock than record holders.

We have never paid cash dividends. We currently intend to retain future earnings for reinvestment in our business and, therefore, do not anticipate paying cash dividends in the foreseeable future.

Item 6. Selected Consolidated Financial Data

	Fiscal Years
(In thousands, except per share data)	2002		2001		2000		1999		1998
Consolidated Statements of Income Data:
Revenues before reimbursements	$	115,298	$	104,497	$	101,598	$	93,271	$	80,412
Revenues	$	126,055	$	114,461	$	113,027	$	102,270	$	89,687
Operating income	$	13,920	$	9,617	$	10,662	$	7,983	$	4,029
Income from continuing operations	$	7,924	$	6,122	$	7,428	$	5,411	$	3,920
Net income	$	7,924	$	6,122	$	7,782	$	5,188	$	4,080

Income per share from continuing operations:
Basic	$	1.16	$	0.94	$	$1.12	$	0.80	$	0.53
Diluted	$	1.05	$	0.85	$	$1.05	$	0.78	$	0.51

Net income per share:
Basic	$	1.16	$	0.94	$	1.17	$	0.77	$	0.55
Diluted	$	1.05	$	0.85	$	1.10	$	0.75	$	0.53

Consolidated Balance Sheet Data:
Cash and equivalents	$	22,480	$	7,815	$	6,379	$	—	$	6,082
Working capital	$	44,696	$	31,747	$	24,033	$	26,672	$	32,571
Total assets	$	107,216	$	91,034	$	85,626	$	80,452	$	86,985
Long-term liabilities	$	1,864	$	1,192	$	886	$	4,748	$	16,144
Total equity	$	83,786	$	70,531	$	65,337	$	60,148	$	58,315

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward looking statements

The statements in this report that are not statements of historical fact are “forward-looking statements” and are based on current expectations and actual results may differ materially. These forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including but not limited to, the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions and the effects of competitive services and pricing; one or more current or future claims made against us may result in substantial liabilities; and such other risks and uncertainties as are described in reports and other documents we file from time to time with the Securities and Exchange Commission.

Overview

Exponent, Inc. is a science and engineering 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 government 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 of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, income taxes, and contingencies such as litigation. We base our estimates on historical experience and other assumptions that we believe are

reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following as our critical accounting policies:

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revenue recognition;

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estimating the allowance for doubtful accounts;

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accounting for income taxes;

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valuing long-lived assets under SFAS No. 144;

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valuing goodwill under SFAS No. 142; and

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accounting for stock-based compensation.

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

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:

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our clients are directly involved in the subcontractor selection process;

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

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we pass through the costs of subcontractor agreements with only a minimal fixed percentage mark-up to compensate us for processing the transactions.

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 majority 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:

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we consider labor hours at standard rates and expenses to be incurred when pricing our contracts;

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we generally do not incur set up costs on our contracts;

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we do not believe that there are reliable milestones to measure progress toward completion;

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

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we do not recognize revenue for award fees or bonuses until specific contractual criteria are met;

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we do not include revenue for un-priced change orders until the customer agrees with the changes;

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historically we have not had significant accounts receivable write-offs or cost overruns; and

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our contracts are typically progress billed on a monthly basis.

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 senior 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.

Allowance for doubtful accounts. We must make estimates of our ability to collect accounts receivable

and our unbilled work-in-process. Specifically, we analyze billed accounts receivable and unbilled work-in-process based upon historical 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 January 3, 2003, our accounts receivable balance was $38.4 million, net of an allowance for doubtful accounts of $1.5 million.

Accounting for income taxes. In preparing our 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 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. 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 additional 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, we currently believe that we will be able to utilize our deferred tax asset. As of January 3, 2003, we had net deferred tax assets of $1.9 million 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.

Valuing long-lived assets under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, requires that 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 January 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 $31.7 million at January 3, 2003.

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

•

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

•

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 the Company’s 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 January 3, 2003, goodwill totaled $8.6 million.

We adopted SFAS No. 142 effective December 29, 2001. As a result we ceased amortizing goodwill, which had a balance of approximately $8.6 million and $6.6 million at January 3, 2003 and December 28, 2001, respectively. In place of amortization, this statement requires an annual impairment review beginning in fiscal 2002. We completed our impairment review and determined that we had no impairment of our goodwill and therefore did not record an impairment charge. During the first quarter of fiscal 2002, there was an increase of $40,000 in goodwill due to a payout related to a prior acquisition. In addition, we acquired Novigen

Sciences, Inc. (“Novigen”) on May 20, 2002. As required by SFAS No. 141, we allocated the purchase price to the assets, liabilities and goodwill acquired, based on the fair value at the date of acquisition. We recorded $1.9 million in goodwill associated with this acquisition, which will not be amortized but rather tested annually for impairment in accordance with SFAS No. 142.

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 Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” to account for employee stock options.

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 income from continuing operations would have been adjusted to the pro forma amounts indicated in the following schedule:

	Fiscal Years
(In thousands, except per share data)	2002			2001			2000
Reported income from continuing operations:	$	7,924		$	6,122		$	7,428
Add back:
Intrinsic value stock-based compensation expense		44			132			67
Deduct:
Fair value stock-based compensation expense		(1,886	)		(1,777	)		(1,759	)

Adjusted income from continuing operations:	$	6,082		$	4,477		$	5,736

Income per share from continuing operations:
As reported:
Basic	$	1.16		$	0.94		$	1.12
Diluted	$	1.05		$	0.85		$	1.05
Adjusted:
Basic	$	0.89		$	0.69		$	0.87
Diluted	$	0.83		$	0.65		$	0.84
Shares used in per share calculations:
As reported:
Basic		6,802			6,506			6,631
Diluted		7,538			7,176			7,089
Adjusted:
Basic		6,802			6,506			6,631
Diluted		7,345			6,918			6,862

CONSOLIDATED RESULTS OF OPERATIONS

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

	PERCENTAGE OF REVENUES FOR FISCAL YEARS						PERIOD TO PERIOD CHANGE
	2002		2001		2000		2002 vs. 2001		2001 vs. 2000
Revenues	100.0	%	100.0	%	100.0	%	10.1	%	1.3	%

Operating expenses:
Compensation and related expenses	60.1		59.6		57.0		11.0		5.8
Other operating expenses	14.0		15.2		15.0		1.5		2.7
Reimbursable expenses	8.5		8.7		10.1		8.0		(12.8	)
General and administrative expenses	6.4		8.1		8.5		(13.6	)	(2.5	)

	89.0		91.6		90.6		7.0		2.4

Operating income	11.0		8.4		9.4		44.7		(9.8	)

Other income, net	0.6		0.9		1.9		(28.9	)	(50.8	)

Income from continuing operations before income taxes	11.6		9.3		11.3		37.7		(16.4	)

Income taxes	5.3		4.0		4.7		49.0		(14.8	)

Income from continuing operations	6.3		5.3		6.6		29.4		(17.6	)
Discontinued operations, net of taxes	0.0		0.0		0.3		0.0		(100.0	)

Net income	6.3	%	5.3	%	6.9	%	29.4	%	(21.3	)%

FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000

Revenues

Exponent’s revenues consist of professional fee services, fees for use of our equipment and facilities, as well as third party expenses directly associated with the services performed that are billed to our clients. Third party expenses are included in revenues net of the related costs.

Our fiscal 2002 revenues were $126.1 million, an increase of $11.6 million or 10.1% over the prior year. Fiscal 2002 was a 53-week year in which we earned approximately $1.2 million in revenues before reimbursements during this extra week. Our revenue increase over last year was the result of growth in both of our business segments. Our environmental and health segment contributed $6.3 million of the increase and our other scientific and engineering segment contributed $5.3 million. Growth in our environmental and health segment was primarily the result of increased billable hours, billing rates and the acquisition of Novigen Sciences, Inc. (“Novigen”) on May 20, 2002. The Novigen acquisition contributed $3.1 million to this segment’s revenue growth. Also in our environmental and health segment, the health and epidemiology and human health risk assessment practices grew by $4.9 million or 41.7% over the prior year, which was partially offset by decreased revenues of $1.7 million from our environmental practices. Growth in our other scientific and engineering segment was the result of increased billable hours and billing rates. Within our other scientific and engineering segment, our civil engineering, mechanical engineering and materials science, biomechanics and thermal sciences practices grew a combined $6.1 million or 13.8%, which was partially offset by decreased revenues of $2.0 million or 21.8% in our technology development business. We continued to see a decline in revenues in 2002 related to the Land Warrior projects for the U.S. Army as it continued in its pre-production phase.

This contract was concluded in the first quarter of fiscal 2003. In August 2002, we were awarded the Phase I Objective Force Warrior agreement and we anticipate that we will realize revenues before reimbursements of approximately $1.0 million related to this contract during the first half of fiscal 2003.

Fiscal 2001 revenues were $114.5 million, an increase of $1.4 million or 1.3% over the prior year. The increase was the result of growth in our environmental and health segment during the year. Revenues for our environmental and health segment increased $2.2 million during the year. Our other scientific and engineering segment’s revenues decreased in fiscal 2001 by $803,000. Growth in our environmental and health segment was primarily the result of increases in bill rates and billed hours. Compared with the prior fiscal year, the health and epidemiology practice within our environmental and health segment, experienced growth of $2.8 million or 45.5%. In 2001, our other scientific and engineering segment had lower revenues from our technology development practice’s Land Warrior program as compared to the prior year. The Land Warrior project experienced lower revenues due to our entering the pre-production phase of the program, which required a reduced effort by Exponent compared to last year. In addition, this segment’s vehicle analysis practice, which derives most of its business from the automotive industry, also experienced a decline compared to fiscal 2000, due to the weakened economy.

Compensation and Related Expenses

During fiscal 2002, total compensation and related expenses were $75.7 million, an increase of $7.5 million or 11.0% over the prior year. The increase was primarily due to the effect of annual salary increases, the Novigen acquisition and increased bonus expense. The Novigen acquisition increased our staff by 34 full-time employees and compensation expense by $2.2 million or 3.0%. We expect an additional $1.3 million in compensation expense in fiscal 2003 as a result of this acquisition. Bonus expense increased by $1.7 million or 28.5%, as a result of our increased profitability. These increases over last year were partially offset by a staff reduction, primarily in the vehicle analysis and technology development practices, by 15 full-time employees in the first quarter of fiscal 2002. As a percentage of revenue, compensation and related expenses increased to 60.1% as compared to 59.6% in fiscal 2001.

Fiscal 2001 compensation and related expense was $68.2 million, which increased by $3.7 million or 5.8% over the prior year. The increase was primarily due to the effect of annual salary increases and increased employee health insurance costs over the prior year. The increase was partially offset by decreased bonus expense, which is based on our profitability. Additionally, on June 1, 2001, we reduced our staff by seventeen full-time employees and nine contract employees, most of whom were located at our Test and Engineering Center in Phoenix. As a percentage of revenue, compensation and related expenses increased to 59.6% as compared to 57.0% in fiscal 2000.

Other Operating Expenses

Fiscal 2002 other operating expenses were $17.6 million, which increased by $255,000 or 1.5% over the prior year, as a result of increased rent expense of $682,000, partially offset by reduced depreciation of $257,000 and other occupancy expenses of $151,000. Rent increased as a result of three newly acquired Novigen offices, the relocation of three existing offices and new lease agreements in several other locations. Depreciation decreased due to personal computer and software assets becoming fully depreciated and fewer assets capitalized as a result of lower unit acquisition costs. Other occupancy costs decreased due primarily to lower repair and maintenance costs in fiscal 2002 compared to last year. We anticipate incremental other operating expense increases related to the Novigen acquisition of approximately $301,000 in fiscal 2003. As a percentage of revenues, other operating expenses decreased to 14.0% in fiscal 2002 from 15.2% in fiscal 2001.

Fiscal 2001 other operating expenses were $17.4 million, which increased by $456,000 or 2.7% over the prior year as a result of increased facilities and occupancy costs, partially offset by reduced office expenses. We relocated our Orange County office to a larger facility in Irvine and added additional space in our Seattle and San Diego locations. Additionally, we experienced increases in our utility costs, primarily in our Silicon Valley and Phoenix locations. These increases were partially offset by decreased office expenses, as a result of our reduced spending in the areas of office furniture, supplies and shipping. Additionally, our engineering and test preparation building located in Phoenix was completed at the end of fiscal 2000, which increased depreciation in fiscal 2001 over the prior year. As a percentage of revenues, other operating expense increased to 15.2% in fiscal 2001 from 15.0% in fiscal 2000.

Reimbursable Expenses

Fiscal 2002 reimbursable expenses were $10.8 million, which increased by $793,000 or 8.0% over the prior year due primarily to increases in outside direct expenses for vehicle procurements related to services performed on projects primarily in our vehicle analysis practice. As a percentage of revenues, reimbursable expenses decreased to 8.5% from 8.7% in fiscal 2001.

Fiscal 2001 reimbursable expenses were $10.0 million, which decreased by $1.5 million or 12.8% over fiscal 2000. The decrease was primarily in materials and technical supplies expense and was due to reduced effort on the Land Warrior program compared to the prior year. In fiscal 2001, reimbursable expenses decreased as a percentage of revenues to 8.7% from 10.1% in fiscal 2000.

General and Administrative Expenses

Fiscal 2002 general and administrative expenses were $8.1 million, which decreased by $1.3 million or 13.6% over the prior year due to decreases in goodwill amortization of $843,000, taxes and licenses of $222,000, outside consulting of $157,000 and employee relocation expenses of $138,000. These decreases were partially offset by an increase in marketing expense of $142,000. With the adoption of SFAS No. 142, at the beginning of fiscal 2002, we are no longer amortizing goodwill. The decrease in tax and licenses expense resulted from a favorable settlement of a sales tax assessment, which we had previously recorded as an expense. Our outside consulting expenses decreased primarily due to the reduced effort on the Land Warrior program compared to the prior year. The Novigen acquisition is expected to incrementally increase general and administrative expenses by approximately $145,000 in fiscal 2003. As a percentage of revenues, general and administrative expenses decreased to 6.4% in fiscal 2002 from 8.1% in fiscal 2001.

Fiscal 2001 general and administrative expenses were $9.3 million, which decreased by $244,000 or 2.5% over the prior year due to decreases in bad debt expense of $821,000, sales tax of $207,000 and temporary employee expenses of $155,000. The decreases were partially offset by increases in travel costs of $251,000, outside consulting of $250,000 and amortization of goodwill and other intangibles of $170,000. Bad debt expense decreased primarily as a result of improved accounts receivable collections. Additionally, we recovered approximately $125,000 in previously written-off accounts in the second quarter of 2001. The decrease in sales tax is related to a lower accrual for this expense in fiscal 2001 as compared to the prior year. The decreases were partially offset by increased travel and outside consulting costs resulting from business development efforts. Additionally, we incurred increased amortization of goodwill and other intangibles related to the acquisition of Lockwood-Singh & Associates, Inc. (“Lockwood-Singh”) in September 2000. In fiscal 2001, general and administrative expenses decreased as a percentage of revenues, to 8.1% from 8.5% in fiscal 2000.

Other Income and Expense

Other income, net, consists primarily of investment income earned on available cash and cash equivalents and rental income from leasing excess space, primarily in our Silicon Valley facility, net of interest expense on our revolving reducing mortgage note.

Fiscal 2002 other income, net was $720,000, which decreased by $292,000 or 28.9% as compared to fiscal 2001. The decrease was primarily due to a reduction in rental income of $390,000 from our Silicon Valley facility, partially offset by other miscellaneous income. To date, only a portion of our Silicon Valley space has been rented. If we are not able to lease our remaining available space, we anticipate that the rental income will continue at this reduced level in 2003.

Fiscal 2001 other income, net was $1.0 million, which decreased by $1.0 million or 50.8% as compared to fiscal 2000. The decrease was primarily due to a reduction in rental income from our headquarters facility in Silicon Valley partially offset by lower borrowings on our revolving reducing mortgage note. In early 2001, our largest lease, consisting of 24,000 square feet in our Silicon Valley building, was not renewed.

Income Taxes

During fiscal 2002, our provision for income taxes was $6.7 million compared to $4.5 million in the prior year. As a percentage of income, our tax provision was 45.9% compared to 42.4% in the prior year. The increase in our effective tax rate was primarily due to the write-off of an expiring capital loss carry-forward of $349,000 in the first quarter of fiscal 2002. In addition, as a result of our increasing income, a portion of our income will be subject to a higher tax rate. We anticipate that our effective tax rate will be 43.5% in fiscal 2003.

During fiscal 2001, our provision for income taxes as a percentage of income was 42.4% or an increase of 0.8% over the prior year. The increase in our

effective tax rate was the result of changes in other permanent differences from the prior year.

In fiscal year 2000 our provision for income taxes as a percentage of income from continuing operations was 41.6%.

Discontinued Operations

In May 2000, Exponent sold certain assets of its wholly owned subsidiary, BCS Wireless, Inc. (“BCS”). We committed to a formal plan to divest BCS effective April 2, 1999. Accordingly, the results of operations for BCS for fiscal year 2000 have been recorded as a discontinued operation, net of taxes.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” was issued. Among other provisions, SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board Opinion No. 30 (“APB No. 30”). Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We adopted the provisions of SFAS No. 145 in our fiscal year beginning January 4, 2003. The adoption of SFAS No. 145 is not expected to have a material impact on our financial position or results of operations in 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 plan. We adopted SFAS No. 146 for all exit and disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our financial position or results of operations.

In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” was issued. SFAS No. 148 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. We have elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” to account for employee stock options.

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. We generally do not offer guarantees or indemnification to our clients or other third parties and we do not believe that FIN No. 45 will have an impact on our financial position and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Exponent financed its business in fiscal 2002 principally through cash available and cash flows from operating activities. We invest our excess cash in cash equivalents. At the end of fiscal 2002, we had $22.5 million in cash and cash equivalents compared to $7.8 million at the end of the prior year. We also maintain a revolving reducing mortgage note, secured by our headquarters building. As of January 3, 2003, our available borrowings under this mortgage note were $26.0 million and the outstanding balance was $0.

Net cash provided by operating activities was $16.3 million in fiscal 2002, compared to $5.1 million in fiscal 2001. The increase in cash provided by operating activities over the prior year was largely due to increased net income and improved collections in accounts receivable. Accounts receivable related cash flow improved as a result of lowered days sales outstanding, which were reduced to 102 days in fiscal 2002 compared to 118 days in the prior year. Net cash provided by operating activities was $5.1 million in fiscal 2001 compared to $21.1 million in fiscal 2000. The decrease in cash provided by operating activities in fiscal 2001 relative to fiscal 2000 was largely due to decreased net income and changes in operating assets and liabilities, particularly the increase in accounts receivable. The increase in accounts receivable was primarily due to revenue growth in fiscal 2001 and the longer billing cycle on U.S. government contracts compared to the prior year. In addition, accrued payroll and employee benefits decreased as compared to an increase in the prior year. This decrease resulted from a reduced bonus, which is calculated based on profitability, which was lower in fiscal 2001 as compared to fiscal 2000. Deferred revenues increased in fiscal 2001, but not to the same extent as the increase in fiscal 2000, which resulted in reduced cash flow in the current year as compared to fiscal 2000.

In fiscal 2002, net cash used in investing activities was $4.3 million compared to $2.3 million in the prior year. The increase in cash used in investing activities is primarily the result of cash paid for Novigen in the amount of $2.1 million. In fiscal 2001, net cash used in investing activities was $2.3 million compared to $8.3 million in the prior year. The decrease in cash used in investing activities is primarily the result of reduced capital expenditures related to the completion, in October 2000, of our engineering and test preparation building at our Test and Engineering Center in Phoenix. In addition, we sold the assets of BCS Wireless, Inc. in fiscal 2000, which resulted in net proceeds of approximately $1.9 million, which was partially offset by cash used to acquire Lockwood-Singh on September 30, 2000.

In fiscal 2002, net cash provided by financing activities was $2.7 million compared to net cash used of $1.4 million in the prior year. This change was the result of a net issuance of common stock of $3.0 million compared to net repurchases of $1.3 million in the prior year. Net issuance of common stock was primarily related to the exercise of stock options and the Employee Stock Purchase Plan. In fiscal 2001, net cash used in financing activities was $1.4 million compared to $6.4 million in the prior year. The decrease in net cash used in financing activities was due to a reduction in repayments on long-term borrowings and reduced repurchases of common stock, net of proceeds from issuance of common stock. The reduction in borrowings on our revolving reducing mortgage note resulted from our ability to use existing cash at the end of fiscal 2000 and cash flows generated by fiscal 2001 operating activities to finance current operations.

At January 3, 2003, our long-term obligations were $372,000 compared to $504,000 in the prior year. The fiscal 2002 and 2001 balances consisted of the following:

	Fiscal Years
(In thousands)	2002		2001
Insurance financing	$	142	$	316
Capital leases		203		124
Deferred compensation		27		64

		372		504
Less current installments		205		359


Long-term obligations, net of current portion	$	167	$	145

As discussed in Note 9 of the Notes to Consolidated Financial Statements, the following is a summary of our commitments to make future payments under contracts. The following table summarizes our future minimum payments, net of rental income, required under non-cancelable operating leases, with terms in excess of one year as of January 3, 2003:

(In thousands) Year ending	Lease commitments		Rental income			Net future payments
2003	$	5,258	$	(655	)	$	4,603
2004		4,316		(510	)		3,806
2005		3,401		(487	)		2,914
2006		2,481		(475	)		2,006
2007		2,410		(197	)		2,213
Thereafter		7,849		(39	)		7,810

	$	25,715	$	(2,363	)	$	23,352

We have a revolving reducing mortgage note with a total available borrowing amount of $24.5 million and an outstanding balance of $0 as of March 31, 2003. We believe that our existing revolving note, together with funds generated from operations, will provide adequate cash to fund our anticipated cash needs through at least the next twelve-month period.

Additionally, 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.

FACTORS THAT MAY AFFECT FUTURE 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 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. Transportation industry related engagements accounted for approximately 19% of our gross revenues for the fiscal year ended January 3, 2003. In addition, we performed engagements for the government sector, which accounted for approximately 10% of our gross revenues for the fiscal year ended January 3, 2003. The loss of any large client, organization or insurer related to either the transportation industry or government sector could have a material adverse effect on our business, financial condition or results of operations.

Economic Uncertainty

The markets that we serve are cyclical and subject to general economic conditions. If the economy in which we operate, which is predominately in the U.S., were to experience a prolonged slowdown, demand for our services could be reduced considerably.

Regulation

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

Variability of Quarterly Financial Results

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

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Exponent has a revolving reducing mortgage note (the “Mortgage Note”) secured by our Silicon Valley headquarters building. The Mortgage Note, which had an initial borrowing amount up to $30.0 million, 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 January 3, 2003, we had $0 outstanding balance and available borrowings of $26.0 million. Any outstanding amounts on the Mortgage Note are due and payable in full on January 31, 2009. We may from time to time during the term of the Mortgage Note borrow, partially or wholly repay our outstanding borrowings and re-borrow up to the maximum principal amounts, subject to the reductions in availability contained in the note. The Mortgage Note is also subject to two interest rate options of either prime less 1.5% or the fixed LIBOR plus 1.25% with a term option of one month, two months, three months, six months, nine months, or twelve months. Interest will be paid on a monthly basis. Principal amounts subject to the prime interest rate may be repaid at any time without penalty. Principal amounts subject to the fixed LIBOR rate may also be repaid at any time but are subject to a prepayment penalty if paid before the fixed rate term, or additional interest if paid after the fixed rate term.

We are exposed to some interest rate risk associated with the Mortgage Note. Our general policy for selecting among the 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.

We are exposed to some interest rate risk associated with our balances of cash and cash equivalents. Given the historical low volatility of interest rates on these balances, we believe that any exposure would be minimal.

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

Item 8. Financial Statements and Supplementary Data

See Item 15 of this Form 10-K for required financial statements and supplementary data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item with respect to directors is incorporated by reference to the sections of the Company’s definitive Proxy Statement for its 2003 Annual Meeting of Stockholders (the “Proxy Statement”) entitled “Proposal No. 1: Election of Directors” and “Compliance with Section 16(a) of the Exchange Act.” See Item 1 for information regarding the executive officers of the Company.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the section of the Proxy Statement entitled “Executive Officer Compensation”.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the section of the Proxy Statement entitled “Stock Ownership”.

Item 13. Certain Relationships and Related Transactions

Not applicable.

Item 14. 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 within

the 90 days before the filing date of this annual 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. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

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

(b)

Changes in internal controls.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as part of this Annual Report on Form 10-K.

Financial Statements

The following consolidated financial statements of Exponent, Inc. and subsidiaries and the Independent Auditors’ Report are included herewith:

		Page

Consolidated Statements of Income for the years ended January 3, 2003, December 28, 2001 and December 29, 2000		22

Consolidated Statements of Comprehensive Income for the years ended January 3, 2003, December 28, 2001 and December 29, 2000		23

Consolidated Balance Sheets as of January 3, 2003 and December 28, 2001		24

Consolidated Statements of Stockholders’ Equity for the years ended January 3, 2003, December 28, 2001 and December 29, 2000		25

Consolidated Statements of Cash Flows for the years ended January 3, 2003, December 28, 2001 and December 29, 2000		26

Notes to Consolidated Financial Statements		27

Independent Auditors’ Report		42

Financial Statement Schedules

The following financial statement schedule of Exponent, Inc. for the years ended January 3, 2003, December 28, 2001 and December 29, 2000 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Exponent, Inc.

		Page

Schedule II—Valuation and qualifying accounts		46

Schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is otherwise included elsewhere in the report.

Exhibits

		Page

(a) Exhibit Index		47

(b) Reports on Form 8-K

None

Exponent, Inc. and Subsidiaries

Consolidated Statements of Income

	Fiscal Years
(In thousands, except per share data)	2002		2001		2000
Revenues before reimbursements	$	115,298	$	104,497	$	101,598
Reimbursements		10,757		9,964		11,429

Revenues		126,055		114,461		113,027


Operating expenses:
Compensation and related expenses		75,699		68,191		64,459
Other operating expenses		17,617		17,362		16,906
Reimbursable expenses		10,757		9,964		11,429
General and administrative expenses		8,062		9,327		9,571

		112,135		104,844		102,365

Operating income		13,920		9,617		10,662

Other income:
Interest income, net		118		51		18
Miscellaneous income, net		602		961		2,037

Income from continuing operations before income taxes		14,640		10,629		12,717

Income taxes		6,716		4,507		5,289

Income from continuing operations		7,924		6,122		7,428

Discontinued operations:
Loss from operations of BCS Wireless, Inc. (net of tax benefit of $70)		—		—		(97	)
Gain on disposition of BCS Wireless, Inc. (net of taxes of $320)		—		—		451

Net income	$	7,924	$	6,122	$	7,782

Income per share from continuing operations:
Basic	$	1.16	$	0.94	$	1.12
Diluted	$	1.05	$	0.85	$	1.05
Income per share from discontinued operations:
Basic	$	—	$	—	$	0.05
Diluted	$	—	$	—	$	0.05
Net income per share:
Basic	$	1.16	$	0.94	$	1.17
Diluted	$	1.05	$	0.85	$	1.10
Shares used in per share computations:
Basic		6,802		6,506		6,631
Diluted		7,538		7,176		7,089

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

Exponent, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

	Fiscal Years
(In thousands)	2002		2001			2000
Net income	$	7,924	$	6,122		$	7,782


Other comprehensive income (losses):
Foreign currency translation adjustments		77		(19	)		(31	)

Comprehensive income	$	8,001	$	6,103		$	7,751

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

Exponent, Inc. and Subsidiaries

Consolidated Balance Sheets

	Fiscal Years
(In thousands, except per share data)	2002			2001
Assets
Current assets:
Cash and cash equivalents	$	22,480		$	7,815
Accounts receivable, net of allowance for doubtful accounts of $1,493 and $1,865, respectively		38,404			38,607
Prepaid expenses and other assets		3,450			2,471
Deferred income taxes		1,928			2,165

Total current assets		66,262			51,058

Property, equipment and leasehold improvements, net		31,712			32,640
Goodwill		8,567			6,643
Other assets		675			693

	$	107,216		$	91,034

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	5,183		$	4,646
Current installment of long-term obligations		205			359
Accrued payroll and employee benefits		14,667			12,897
Deferred revenues		1,511			1,409

Total current liabilities		21,566			19,311

Long-term obligations, net of current installments		167			145
Deferred income taxes		860			414
Deferred rent		837			633

Total liabilities		23,430			20,503


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.001 par value; 2,000 shares authorized; no shares outstanding		—			—
Common stock, $.001 par value; 20,000 shares authorized; 7,992 and 7,923 shares issued, respectively		8			8
Additional paid in capital		33,898			32,509
Accumulated other comprehensive losses		(39	)		(116	)
Retained earnings		56,298			48,374
Treasury stock, at cost: 888 and 1,435 shares held, respectively		(6,379	)		(10,244	)

Total stockholders’ equity		83,786			70,531

	$	107,216		$	91,034

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

Exponent, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

	Common Stock			Additional paid-in capital			Accumulated other comprehensive losses			Retained earnings		Treasury Stock					Total
(In thousands)	Shares	Amount		Additional paid-in capital			Accumulated other comprehensive losses			Retained earnings		Shares		Amount			Total
Balance at December 31, 1999	7,902	$	8	$	33,406		$	(66	)	$	34,470	(1,223	)	$	(7,670	)	$	60,148

Employee stock purchase plan	—		—		(240	)		—			—	91			726			486
Sale of stock pursuant to other stock plans	—		—		(256	)		—			—	158			1,260			1,004
Stock based compensation	8		—		67			—			—	—			—			67
Purchase of treasury shares	—		—		—			—			—	(480	)		(4,158	)		(4,158	)
Foreign currency translation adjustments	—		—		—			(31	)		—	—			—			(31	)
Other	—		—		39			—			—	—			—			39
Net income	—		—		—			—			7,782	—			—			7,782

Balance at December 29, 2000	7,910		8		33,016			(97	)		42,252	(1,454	)		(9,842	)		65,337

Employee stock purchase plan	—		—		(103	)		—			—	80			759			656
Sale of stock pursuant to other stock plans	—		—		(754	)		—			—	305			2,654			1,900
Tax benefit for stock option plans			—		218			—			—	—			—			218
Stock based compensation	13		—		132			—			—	—			—			132
Purchase of treasury shares	—		—		—			—			—	(366	)		(3,815	)		(3,815	)
Foreign currency translation adjustments	—		—		—			(19	)		—	—			—			(19	)
Net income	—		—		—			—			6,122	—			—			6,122

Balance at December 28, 2001	7,923		8		32,509			(116	)		48,374	(1,435	)		(10,244	)		70,531

Employee stock purchase plan	—		—		201			—			—	83			614			815
Sale of stock pursuant to other stock plans	—		—		(1,029	)		—			—	591			4,874			3,845
Tax benefit for stock option plans	—		—		1,464			—			—	—			—			1,464
Stock based compensation	14		—		44			—			—	—			—			44
Acquisition of Novigen (Note 12)	55		—		725			—			—	—			—			725
Purchase of treasury shares	—		—		—			—			—	(127	)		(1,623	)		(1,623	)
Foreign currency translation adjustments	—		—		—			77			—	—			—			77
Other	—		—		(16	)		—			—	—			—			(16	)
Net income	—		—		—			—			7,924	—			—			7,924

Balance at January 3, 2003	7,992	$	8	$	33,898		$	(39	)	$	56,298	(888	)	$	(6,379	)	$	83,786

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

Exponent, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Fiscal Years
(In thousands)	2002			2001			2000
Cash flows from operating activities:
Net income	$	7,924		$	6,122		$	7,782
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,420			4,519			4,318
Deferred rent expense		205			164			116
Gain on disposition of BCS Wireless, Inc.		—			—			(451	)
Provision for doubtful accounts		771			1,593			2,024
Stock based compensation		44			132			67
Deferred income tax provision		683			101			(98	)
Tax benefit for stock option plans		1,464			218			—
Changes in operating assets and liabilities:
Accounts receivable		952			(7,943	)		3,169
Prepaid expenses and other assets		(922	)		324			(159	)
Accounts payable and accrued liabilities		224			(147	)		346
Accrued payroll and employee benefits		1,432			(378	)		2,191
Deferred revenues		69			352			1,057
Net operating activities of discontinued operations		—			—			693

Net cash provided by operating activities		16,266			5,057			21,055


Cash flows from investing activities:
Business acquisitions, net		(2,134	)		—			(780	)
Capital expenditures		(2,137	)		(2,192	)		(8,661	)
Proceeds from disposition of BCS Wireless, Inc., net		—			—			1,870
Other assets		(17	)		(59	)		(666	)
Net investing activities of discontinued operations		—			—			(34	)

Net cash used in investing activities		(4,288	)		(2,251	)		(8,271	)


Cash flows from financing activities:
Repayments of borrowings and long-term obligations		(91	)		(111	)		(3,752	)
Repayments of acquired long-term obligations		(259	)		—			—
Repurchase of common stock		(1,623	)		(3,815	)		(4,158	)
Issuance of common stock		4,660			2,556			1,490
Net financing activities of discontinued operations		—			—			15

Net cash provided by (used in) financing activities		2,687			(1,370	)		(6,405	)


Net increase in cash and cash equivalents		14,665			1,436			6,379
Cash and cash equivalents at beginning of year		7,815			6,379			—

Cash and cash equivalents at end of year	$	22,480		$	7,815		$	6,379

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

Exponent, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1: Summary of Significant Accounting Policies

Basis of Presentation

Exponent, Inc. together with its subsidiaries (referred to as the “Company”) is a science and engineering consulting firm that provides solutions to complex problems. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

The Company operates on a 52-53 week fiscal calendar year with each year ending on the Friday closest to December 31 ^st . Fiscal periods 2002, 2001 and 2000 ended on January 3, 2003, December 28, 2001 and December 29, 2000, respectively.

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:

•

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.

The majority 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:

•

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

•

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

•

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 un-priced 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 fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000, respectively, were:

	Fiscal Years
(In thousands)	2002		2001		2000
Gross revenues	$	134,307	$	123,559	$	131,830
Less: Subcontractor fees		8,252		9,098		18,803

Revenues		126,055		114,461		113,027
Reimbursements:
Out-of-pocket travel reimbursements		3,841		3,909		3,910
Other outside direct expenses		6,916		6,055		7,519

		10,757		9,964		11,429

Revenues before reimbursements	$	115,298	$	104,497	$	101,598

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 senior 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Reclassifications

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

Cash Equivalents

Cash equivalents consist of highly liquid investments such as money market mutual funds and commercial paper with original maturities of three months or less.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. Buildings are depreciated over their estimated useful lives ranging from thirty to forty years. Equipment is depreciated over its estimated useful life, which generally ranges from two to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives, generally seven years, or over the term of the related lease.

Impairment of Long-Lived Assets and Assets to be Disposed Of

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not recognized impairment losses on any long-lived assets in fiscal 2002, 2001 or 2000. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell.

Goodwill

Goodwill represents the excess of the purchase price over the fair market value of the net assets of various entities acquired by the Company, which is accounted for under the purchase method of accounting. During fiscal 2002 the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only method. The Company has recorded no impairment losses for goodwill.

Deferred Revenues

Deferred revenues represent amounts billed to clients in advance of services provided, primarily on fixed-price projects. The Company had $1.5 million and $1.4 million in deferred revenues as of January 3, 2003 and December 28, 2001, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and the financial reporting basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The effect on

deferred tax assets and liabilities from changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying amount of the Company’s cash and cash equivalents, accounts receivable, accounts payable and debt obligations approximates their fair values, which for debt is based upon current rates available to the Company.

Stock Based Compensation

The Company uses the intrinsic value method in accounting for its Employee Stock Purchase Plan and Stock Option Plans, collectively called “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. SFAS No. 123, “Accounting for Stock-Based Compensation”, requires the Company to disclose pro forma information regarding net income and net income per share as if the Company had accounted for its Options under the fair value method. Under the fair value method, compensation expense is calculated for options granted using a defined valuation technique. The Company uses the Black-Scholes option-pricing model to calculate the fair value of its options. In calculating the fair value of an option at the date of grant, the Black-Scholes option-pricing model requires the input of highly subjective assumptions. The Company used the following weighted average assumptions for 2002, 2001 and 2000:

	Employee Purchase Plan						Stock Option Plan
	2002		2001		2000		2002		2001		2000
Expected life (in years)	0.6		0.6		0.6		5.6		6.9		6.7
Risk-free interest rate	2.0	%	3.1	%	5.9	%	4.2	%	5.1	%	6.4	%
Volatility	37	%	58	%	61	%	62	%	73	%	75	%
Dividend yield	0	%	0	%	0	%	0	%	0	%	0	%

Using the above assumptions, the weighted average fair value of options granted during 2002, 2001 and 2000 was $7.60, $7.68 and $5.84, respectively.

	Fiscal Years
(In thousands, except per share data)	2002			2001			2000
Reported income from continuing operations:	$	7,924		$	6,122		$	7,428
Add back:
Intrinsic value stock-based compensation expense		44			132			67
Deduct:
Fair value stock-based compensation expense		(1,886	)		(1,777	)		(1,759	)

Adjusted income from continuing operations:	$	6,082		$	4,477		$	5,736

Income per share from continuing operations:
As reported:
Basic	$	1.16		$	0.94		$	1.12
Diluted	$	1.05		$	0.85		$	1.05
Adjusted:
Basic	$	0.89		$	0.69		$	0.87
Diluted	$	0.83		$	0.65		$	0.84
Shares used in per share calculations:
As reported:
Basic		6,802			6,506			6,631
Diluted		7,538			7,176			7,089
Adjusted:
Basic		6,802			6,506			6,631
Diluted		7,345			6,918			6,862

Net Income Per Share

Basic per share amounts are computed using the weighted-average number of common shares outstanding during the period. Dilutive per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury stock method if their effect would be dilutive on the per share amount of income from continuing operations.

The following schedule reconciles the denominators of the Company’s calculation for basic and dilutive net income per share:

	Fiscal Years
(In thousands)	2002	2001	2000

Shares used in basic per share computation	6,802	6,506	6,631
Effect of dilutive common stock options outstanding	736	670	458

Shares used in diluted per share computation	7,538	7,176	7,089

Common stock options to purchase 29,010, 145,791 and 221,354 shares were excluded from the diluted per share calculation for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000, respectively, due to their antidilutive effect.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 applies to all long-lived assets (including discontinued operations). SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets, that are to be disposed of by sale, be measured at the lower of book value or fair value less the costs to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company adopted the provisions of SFAS No. 144 as of December 29, 2001. There has been no impact on the Company’s consolidated financial statements as a result of the adoption of SFAS No. 144.

In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” was issued. Among other provisions, SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board Opinion No. 30 (“APB No. 30”). Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Exponent will adopt the provisions of SFAS No. 145 in its fiscal year beginning January 4, 2003. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its financial position or results of operations.

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 plan. Exponent is required to adopt SFAS No. 146 for all exit and disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its financial position or results of operations.

In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 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 Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” to account for employee stock options. See the “Stock Based Compensation” portion of Note 1 for the disclosures required by SFAS No. 148.

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 it does not believe that FIN No. 45 will have an impact on its financial position and results of operations.

Note 2: Property, Equipment and Leasehold Improvements

	Fiscal Years
(In thousands)	2002		2001
Property:
Land	$	4,450	$	4,450
Buildings		32,372		32,207
Construction in progress		496		162
Equipment:
Machinery and equipment		24,491		23,720
Office furniture and equipment		5,393		5,099
Leasehold improvements		4,915		4,717

		72,117		70,355

Less accumulated depreciation and amortization		40,405		37,715


Property, equipment and leasehold improvements, net	$	31,712	$	32,640

Construction in progress relates to improvements to leased facilities and the Company’s Silicon Valley headquarters.

Note 3: Goodwill and Other Intangible Assets

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. Under the provisions of SFAS No. 142, goodwill and other intangible assets with indefinite lives will no longer be amortized, but will instead be reviewed annually for impairment. The amortization provisions of SFAS No. 142 applied immediately to goodwill and other intangible assets acquired after June 30, 2001. For goodwill and other intangible assets with indefinite lives, acquired before June 30, 2001, the statement requires that amortization cease for fiscal years beginning after December 15, 2001. Exponent adopted SFAS No. 142 and ceased amortization of its goodwill and other intangible assets with indefinite lives, beginning on December 29, 2001.

The Company assesses the impairment of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may be impaired. The Company assesses the impairment of intangible assets that are subject to amortization in accordance with SFAS No. 144, whenever events or changes in circumstances indicate that the carrying value may be impaired. Factors that the Company considers when evaluating for possible impairment include the following:

•

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

•

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

•

significant negative economic trends.

When evaluating the Company’s goodwill for impairment, based upon the existence of one or more of the above factors, the Company determines 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.

When determining whether the carrying value of amortizable intangible assets is impaired, based upon the existence of one or more of the above factors, the Company determines the existence of an impairment by comparing the carrying amount of the asset to the undiscounted future cash flows to be generated by the asset. If such cash flows are less than the carrying amount, the assets are considered impaired and the impairment is measured and recognized as the amount by which the carrying value of the assets exceeds the fair value of the assets.

As of January 3, 2003 and December 28, 2001, the Company had $8.6 million and $6.6 million, respectively in goodwill. As of January 3, 2003 and December 28, 2001, the Company also had $160,000 and $69,000, respectively, of other intangible assets that it will continue to amortize over the remaining useful lives. The Company completed its initial impairment review in the second quarter of fiscal 2002 and its annual impairment review in the fourth quarter of fiscal 2002 and determined that it had no impairment of its goodwill.

The following table presents comparative earnings and earnings per share data as if the non-amortization provisions of SFAS No. 142 had been adopted for all periods presented:

	Fiscal Years
(In thousands, except per share data)	2002		2001		2000
Reported income from continuing operations	$	7,924	$	6,122	$	7,428
Add: Goodwill amortization, net of tax		—		498		416

Adjusted income from continuing operations	$	7,924	$	6,620	$	7,844

Reported basic income per share from continuing operations	$	1.16	$	0.94	$	1.12
Add: Goodwill amortization, net of tax		—		0.08		0.06

Adjusted basic income per share from continuing operations	$	1.16	$	1.02	$	1.18

Reported diluted income per share from continuing operations	$	1.05	$	0.85	$	1.05
Add: Goodwill amortization, net of tax		—		0.07		0.06

Adjusted diluted income per share from continuing operations	$	1.05	$	0.92	$	1.11

At January 3, 2003 and December 28, 2001, goodwill and intangible assets were comprised of the following:

	Fiscal Years
(In thousands)	2002			2001
Intangible assets subject to amortization:
Non-competition agreements	$	236		$	100
Less accumulated amortization		(76	)		(31	)

		160			69
Goodwill		8,567			6,643

Total goodwill and intangible assets	$	8,727		$	6,712

Amortization of intangible assets was approximately $45,000 for fiscal 2002. Amortization expense for these intangible assets is projected to be approximately $59,000, $53,000, $34,000 and $14,000 in fiscal 2003 through fiscal 2006, respectively. Prior to the adoption of SFAS No. 142 on December 29, 2001, amortization of goodwill and intangible assets included the amortization of goodwill. Amortization of intangible assets and goodwill, which was included in general and administrative expenses, was approximately $888,000 and $717,000 for fiscal years 2001 and 2000, respectively.

Changes in the carrying amount of goodwill by operating segment for the period ended January 3, 2003 were as follows (in thousands):

	Environmental and health		Other scientific and engineering		Total
Balance at December 28, 2001	$	6,175	$	468	$	6,643
Goodwill acquired:
Novigen acquisition		1,884		—		1,884
Additional payout for prior acquisition		—		40		40

Balance at January 3, 2003	$	8,059	$	508	$	8,567

Note 4: Long-term Obligations

	Fiscal Years
(In thousands)	2002		2001
Insurance financing	$	142	$	316
Capital leases		203		124
Deferred compensation		27		64

		372		504
Less current installments		205		359

Long-term obligations, net of current portion	$	167	$	145

Long-term obligations were $372,000 and $504,000 at January 3, 2003 and December 28, 2001, respectively. Principal payments due on long-term obligations are $205,000, $61,000, $39,000, $24,000 and $16,000 in fiscal 2003 through fiscal 2007, respectively, and $27,000 thereafter.

The Company has a revolving reducing mortgage note (the “Mortgage Note”) secured by its Silicon Valley headquarters building. The Mortgage Note, which had an initial borrowing amount up to $30.0 million, 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 scheduled in the Mortgage Note agreement. As of January 3, 2003, $26.0 million was available to be borrowed and the outstanding balance was $0. Any outstanding amounts on the Mortgage Note are due and payable in full on January 31, 2009. The Company may from time to time during the term of the Mortgage Note borrow, partially or wholly repay its outstanding borrowings and re-borrow up to the maximum principal amounts, subject to the reductions in availability contained in the note. The Mortgage Note is also subject to two interest rate options of either prime less 1.5% or the fixed LIBOR plus 1.25% with a term option of one month, two months, three months, six months, nine months, or twelve months. Interest will be paid on a monthly basis. Principal amounts subject to the prime interest rate may be repaid at any time without penalty. Principal amounts subject to the fixed LIBOR rate may also be repaid at any time but are subject to a prepayment penalty if paid before the fixed rate term, or additional interest if paid after the fixed rate term.

Note 5: Other Significant Balance Sheet Components

Account receivable, net

	Fiscal Years
(In thousands)	2002			2001
Billed accounts receivable	$	26,867		$	29,207
Unbilled accounts receivable		13,030			11,265

Allowance for doubtful accounts		(1,493	)		(1,865	)

Total accounts receivable, net	$	38,404		$	38,607

Accounts payable and accrued liabilities

	Fiscal Years
(In thousands)	2002		2001
Accounts payable	$	4,287	$	3,671
Other accrued liabilities		896		975

Total accounts payable and other accrued liabilities	$	5,183	$	4,646

Other accrued liabilities consist primarily of accruals for known expenditures and commitments for which the Company has not yet been invoiced.

Accrued payroll and employee benefits

	Fiscal Years
(In thousands)	2002		2001
Accrued bonuses payable	$	7,235	$	5,274
Accrued 401(k) contributions		3,708		3,291
Accrued vacation		3,086		2,854
Other accrued payroll and employee benefits		638		1,478

Total accrued payroll and employee benefits	$	14,667	$	12,897

Other accrued payroll and employee benefits consist primarily of accrued wages, payroll taxes, employee Section 125 plans and disability insurance programs.

Note 6: Income Taxes

Total income tax expense for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000 was allocated as follows:

	Fiscal Years
(In thousands)	2002		2001		2000
Income from continuing operations	$	6,716	$	4,507	$	5,289
Discontinued operations – BCS		—		—		250

Total	$	6,716	$	4,507	$	5,539

Income tax expense attributable to income from continuing operations consists of the following:

	Fiscal Years
(In thousands)	2002		2001			2000
Current
Federal	$	4,926	$	3,571		$	4,303
State		1,107		835			1,084

		6,033		4,406			5,387
Deferred
Federal		554		116			(200	)
State		129		(15	)		102

		683		101			(98	)

Total	$	6,716	$	4,507		$	5,289

The Company’s effective tax rate differs from the statutory federal tax rate of 35%, 34% and 35% for fiscal years 2002, 2001 and 2000, respectively, as shown in the following schedule:

	Fiscal Years
(In thousands)	2002			2001			2000
Tax at federal statutory rate	$	5,124		$	3,614		$	4,451
State taxes, net of federal benefit		763			541			771
Amortization of goodwill non-deductible for tax		—			135			135
Foreign rate difference		14			15			30
Non-deductible expenses		396			202			(98	)
Expiration of capital loss carryforward		288			—			—
Other		131			—			—

Tax expense from continuing operations	$	6,716		$	4,507		$	5,289

Effective tax rate		45.9	%		42.4	%		41.6	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 3, 2003 and December 28, 2001 are presented below:

	Fiscal Years
(In thousands)	2002			2001
Deferred tax assets:
Compensated absences	$	821		$	1,321
Accrued liabilities and reserves		1,177			986
Capital loss carryforward		—			349

Total deferred tax assets		1,998			2,656

Deferred tax liabilities:
State taxes		(70	)		(141	)
Deductible goodwill		(345	)		(188	)
Property, equipment and leasehold improvements		(505	)		(566	)
Other		(10	)		(10	)

Total deferred tax liabilities		(930	)		(905	)

Net deferred tax assets	$	1,068		$	1,751

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred assets.

The company is entitled to a deduction for federal and state tax purposes with respect to employees’ stock option activity. The net deduction in taxes otherwise payable arising from that deduction has been credited to additional paid-in-capital. For fiscal 2002, the net deduction in tax payable arising from employees’ stock option activity is $1,464,000.

Note 7: Stockholders’ Equity

Preferred Stock

The Board of Directors has the authority to issue up to 2,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of the shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. There are no shares of preferred stock outstanding.

Accumulated Other Comprehensive Losses

Accumulated other comprehensive losses consist of cumulative foreign translation adjustments.

Employee Stock Purchase Plan

The Company authorized 400,000 shares of common stock for issuance under the original 1992 Employee Stock Purchase Plan (The “Purchase Plan”). All shares initially authorized under the Purchase Plan were distributed by the second quarter of fiscal 1999. At the 1999 Stockholders’ Meeting an amendment to the Purchase Plan was approved. This amendment authorized an additional 400,000 shares for distribution and also inserted a clause in the Purchase Plan that states “that an annual increase can be added on each anniversary date of the adoption of the Plan equal to the lesser of: 200,000 shares, 3% of outstanding shares on such date or an amount determined by the Board of Directors.” The Board of Directors approved increases to this plan of 195,000 shares and 195,000 shares in 2002 and 2001, respectively.

Qualified employees may elect to have a certain percentage (not to exceed 15%) of their salary withheld for purchase of stock pursuant to this plan. The Purchase Plan allows employees to purchase Company shares at 85% of the lower of the fair market value of the common stock at the beginning or ending of the offering period of up to one year. As of January 3, 2003, 741,103 shares have been sold under the Purchase Plan. Weighted average purchase prices for shares sold under the plan in fiscal 2002, 2001 and 2000 were $9.84, $7.80 and $5.31, respectively.

Restricted Stock Plan

The Restricted Stock Plan was approved at the 1999 Stockholders’ Meeting. The terms of the restrictions are to be determined by the Board of Directors upon grant. This plan initially provided for 100,000 shares to be available for grant and includes a clause that states “that an annual increase can be added on each anniversary date of the adoption of the plan equal to the lesser of: 200,000 shares, 2% of outstanding shares on such date or a lesser amount determined by the Board of Directors.” The Board of Directors approved increases of 130,000 shares, 130,000 shares and 133,000 shares in 2002, 2001 and 2000, respectively. As of January 3, 2003, no shares have been granted under the 1999 Restricted Stock Plan.

Stock Option Plans

The 1999 Stock Option Plan is an incentive stock option plan, which provided initially for 400,000 shares to be available for grant. The plan includes a clause that states “that an annual increase can be added on each anniversary date of the adoption of the plan equal to the lesser of: 300,000 shares, 3% of outstanding shares on such date or an amount determined by the Board of Directors.” The Board of Directors approved increases of 195,000 shares, 195,000 shares and 200,000 shares in 2002, 2001 and 2000, respectively. The plan provides for a grant of incentive stock options, non-statutory stock options and stock purchase rights at an exercise price equal to the fair market value of the shares at the date of grant. Options are granted for terms of up to ten years and generally vest ratably over a four-year period from the grant date. As of January 3, 2003, the Company has granted 795,000 shares under the 1999 Stock Option Plan, 793,900 of which are outstanding.

The 1998 Stock Option Plan is a non-statutory stock option plan, which initially covered up to an aggregate of 300,000 shares of common stock. The Board of Directors approved increases of 202,000 shares, 300,000 shares and 55,000 shares in 2002, 2001 and 2000, respectively. The 1998 Stock Option Plan provides for the grant of restricted stock or of non-qualified options. The non-qualified options are exercisable at a price not less than 85% of the fair market value of the shares at the date of grant. Options are granted for terms of up to ten years and generally vest ratably over a four-year period from the grant date. As of January 3, 2003, the Company has granted 726,925 shares under the 1998 Stock Option Plan, of which 34,789 were restricted shares. There were 462,348 shares outstanding under this plan at January 3, 2003. The Company recognized $44,000, $132,000 and $67,000 in stock-based compensation expense related to the 1998 Stock Option Plan in fiscal 2002, 2001 and 2000, respectively.

The 1990 Stock Option Plan is an incentive stock option plan, which covers up to an aggregate of 2,000,000 shares of common stock. This plan expired in 2000. The 1990 Stock Option Plan provided for the grant of either incentive stock options,

exercisable at a price equal to the fair market value of the shares at the date of grant, or non-qualified options, exercisable at a price not less than 85% of the fair market value of the shares at the date of grant. All 2,000,000 shares have been granted, of which 901,209 shares remained outstanding as of January 3, 2003.

In addition, the Company had a stock option plan for one officer covering up to 119,000 shares of common stock, all of which have been granted and 97,660 shares were exercised as of December 29, 2000. The remaining 21,340 options expired in 2000. Also, under a 1991 plan, which has since expired, the Company granted non-qualified options to purchase shares of common stock to two non-employee directors. As of January 3, 2003, all options granted under this plan have been exercised and no shares remain outstanding.

Option activity under the stock option plans is as follows ¹ :

	Options available for grant		Number of shares outstanding		Weighted-average exercise price
Balance as of December 31, 1999	415,782		2,160,145		$	6.35
Options granted	(588,318	)	588,318			7.91
Options cancelled	172,320		(172,320	)		7.25
Options exercised	—		(158,075	)		6.36
Options expired	(82,613	)	—			—
Additional shares reserved	500,000		—			—

Balance as of December 29, 2000	417,171		2,418,068		$	6.67
Options granted	(329,679	)	329,679			10.99
Options cancelled	14,525		(14,525	)		7.11
Options exercised	—		(304,488	)		6.32
Options expired	(11,525	)	—			—
Additional shares reserved	195,000		—			—

Balance as of December 28, 2001	285,492		2,428,734		$	7.29
Options granted	(341,792	)	341,792			12.85
Options cancelled	22,125		(22,125	)		9.69
Options exercised	—		(590,944	)		6.51
Options expired	(3,500	)	—			—
Additional shares reserved	397,000		—			—

Balance as of January 3, 2003	359,325		2,157,457		$	8.37

¹ Does not include restricted stock or employee stock purchase plans.

Information regarding options outstanding at January 3, 2003 is summarized below:

	Outstanding			Exercisable
Range of exercise price	Number Of shares	Weighted- average remaining life in years	Weighted- average exercise price	Number of shares	Weighted average exercise price
$4.75-$5.75	456,393	2.91	$5.15	437,843	$5.13
$5.88-$7.22	633,575	6.39	$6.81	421,075	$6.70
$7.50-$10.19	517,530	6.80	$8.92	306,261	$8.73
$10.40-$13.03	500,759	8.83	$12.21	54,017	$11.50
$13.12-$14.56	49,200	9.46	$13.34	—	—

	2,157,457	6.39	$8.37	1,219,196	$6.85

Note 8: Retirement Plans

The Company provides a 401(k) plan for its employees whereby the Company contributes to each eligible employee’s 401(k) account, 7% of the employee’s base salary plus overtime, regardless of the amount contributed by the employee. The employee does not need to make a contribution to the plan to be eligible for the Company’s 7% contribution. To be eligible under the plan, an employee must be at least 21 years of age and be either a full-time or part-time salaried employee. The 7% Company contribution will vest 20% per year for the first 5 years of employment and then immediately thereafter for employees hired after January 1, 1999 and immediately for employees hired as of December 31, 1998. The Company’s expenses related to this plan were $3,539,000, $3,161,000 and $2,941,000 in fiscal 2002, 2001 and 2000, respectively.

Note 9: Commitments and Contingencies

The following is a summary of the future minimum payments, net of rental income, required under non-cancelable operating leases, with terms in excess of one year, as of January 3, 2003:

(In thousands) Year ending	Lease commitments		Rental income			Net future payments
2003	$	5,258	$	(655	)	$	4,603
2004		4,316		(510	)		3,806
2005		3,401		(487	)		2,914
2006		2,481		(475	)		2,006
2007		2,410		(197	)		2,213
Thereafter		7,849		(39	)		7,810

	$	25,715	$	(2,363	)	$	23,352

Total rent expense from property leases in 2002, 2001 and 2000 was $4,344,000, $3,742,000 and $3,425,000, respectively. Total expense from other operating leases and commitments in 2002, 2001 and 2000 was $764,000, $793,000 and $877,000, respectively.

From time to time, the Company may be subject to legal and other claims that arise in the ordinary course of business. In the opinion of management, there are currently no matters that would have a material adverse effect on the Company’s consolidated financial position, if unfavorably resolved.

Note 10: Other Income, Net

Interest and other income, net, consisted of the following:

	Fiscal Years
(In thousands)	2002			2001			2000
Interest income	$	141		$	117		$	132
Interest expense		(23	)		(66	)		(114	)
Rental income		481			871			1,526
Other		121			90			511

Total	$	720		$	1,012		$	2,055

Note 11: Client and Industry Credit Risk

The Company serves clients in various segments of the economy. During 2002, 2001 and 2000 the Company provided services representing approximately 19%, 21% and 21%, respectively, of gross revenues from continuing operations to clients and to organizations and insurers acting on behalf of clients in the transportation industry. Additionally, during 2002, 2001 and 2000 the Company derived approximately 10%, 14% and 24%, respectively, of gross revenues from professional services provided to government agencies and contractors.

Gross revenues of $11,880,000, $8,505,000 and $12,608,000 in fiscal 2002, 2001 and 2000, respectively, were earned on engagements for a single client or for organizations insuring or providing services to such client in the transportation industry. As of January 3, 2003 and December 28, 2001, accounts receivable included $1,829,000 and $2,131,000, respectively, related to a single client.

Additionally, in fiscal years 2002, 2001 and 2000, gross revenues of approximately $11,345,000, $13,266,000 and $28,082,000, respectively, were earned on an engagement for a client or for organizations providing services to such client in the government sector. As of January 3, 2003 and December 28, 2001, accounts receivable included $3,117,000 and $4,955,000, respectively, related to this client.

The majority of the Company’s clients are Fortune 500 companies or government agencies that pose minimal credit risk. The Company maintains reserves for potential credit losses.

Note 12: Acquisitions

On May 20, 2002, the Company acquired all of the outstanding capital stock of Novigen Sciences, Inc. (“Novigen”) for $2.1 million in cash and 55,443 shares of the 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. The purchase price was determined by analysis of the expected future cash flows of the business. Contributing factors used to determine the purchase price included the reputation of Novigen, including the President of Novigen, Dr. Barbara Petersen. In addition, the services Novigen provides are complementary to our existing environmental and health segment.

The purchase price was allocated to the net assets acquired based on the estimated fair value at the date of acquisition. The Company recorded approximately $1.9 million of goodwill associated with the acquisition. The goodwill balance will be subject to periodic impairment testing as a result of the Company’s adoption of SFAS No. 142. 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 consolidated financial statements since the date of acquisition. Pro forma disclosures giving effect to the acquisition of Novigen do not differ materially from the Company’s historical results.

The following table summarizes the purchase price allocation (in thousands):

Accounts receivable, net	$	1,520
Prepaid expenses and other assets		47
Property, equipment and leasehold improvements, net		192
Goodwill		1,884
Non-compete agreement		136
Other assets		39

Total assets acquired		3,818

Accounts payable and accrued liabilities		(313	)
Current installments of long-term obligations		(263	)
Accrued payroll and employee benefits		(338	)
Deferred revenues		(33	)
Long-term obligations, net of current installments		(12	)

Total liabilities assumed		(959	)

Net assets acquired	$	2,859

On September 30, 2000, the Company acquired all of the outstanding capital stock of Lockwood-Singh & Associates, Inc. (“Lockwood-Singh”), a Los Angeles based provider of geotechnical engineering and geologic consulting services, for $1.031 million in cash. The Company initially recorded approximately $467,000 of goodwill related to the acquisition. The terms of the purchase also considered additional future payments based on the achievement of certain performance criteria. During fiscal 2002 and 2001, respectively, additional payments of $40,000 and $160,000 were made and recorded as goodwill. Approximately $159,000 in goodwill was amortized through December 28, 2001. The remaining goodwill balance of $508,000 will be subject to periodic impairment testing, as a result of the Company’s adoption of SFAS No. 142 in fiscal 2002. Following the acquisition, the net assets and staff of Lockwood-Singh became part of Exponent’s Civil Engineering practice.

This acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated to the net assets acquired based on the estimated fair market value at the date of the acquisition. The results of operations from the date of acquisition have been included in the Company’s consolidated financial statements. Pro forma disclosures giving effect to the acquisition of Lockwood-Singh do not differ materially from the Company’s historical results.

Note 13: Related Party Transactions

Novigen Sciences, Inc. 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. Exponent recorded software licensing expenses related to this contract of approximately $51,000 during fiscal 2002. The terms of this contract call for payments of $95,000, $100,000 and $110,000 in fiscal years 2003 through 2005, respectively.

Note 14: Discontinued Operations

The Company committed to a formal plan to divest BCS Wireless, Inc. effective April 2, 1999. On May 1, 2000, the Company sold certain assets of BCS for $2.0 million in cash and the assumption of approximately $745,000 in liabilities. The Company recorded a gain on the disposition of BCS of $451,000, net of taxes of $320,000. The results of operations for BCS for fiscal year 2000 have been recorded as a discontinued operation.

Note 15: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:

	Fiscal Years
(In thousands)	2002		2001		2000
Cash paid during the year:
Interest	$	57	$	109	$	173
Income taxes	$	5,312	$	4,497	$	7,031

Non-cash investing and financing activities:
Issuance of debt for financing of insurance policies	$	532	$	437	$	977
Capital leases for equipment	$	116	$	72	$	90
Common stock issued for acquisition of Novigen	$	725	$	—	$	—

Note 16: Segment Reporting

The Company has two operating segments based on two primary areas of service. One 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.

Segment information is presented for selected data from the statements of income and statements of cash flows for fiscal years 2002, 2001 and 2000. Segment information for selected data from the balance sheets is presented for the fiscal years ended January 3, 2003 and December 28, 2001.

Revenues

	Fiscal Years
(In thousands)	2002		2001		2000
Environmental and health	$	32,971	$	26,625	$	24,388
Other scientific and engineering		93,084		87,836		88,639

Total revenues	$	126,055	$	114,461	$	113,027

Operating Income

	Fiscal Years
(In thousands)	2002			2001			2000
Environmental and health	$	7,084		$	6,449		$	5,085
Other scientific and engineering		18,787			16,140			20,284

Total segment operating income		25,871			22,589			25,369
Corporate operating expense		(11,951	)		(12,972	)		(14,707	)

Total operating income	$	13,920		$	9,617		$	10,662

Assets

	Fiscal Years
(In thousands)	2002		2001
Environmental and health	$	12,732	$	9,649
Other scientific and engineering		49,438		48,860

Total segment assets		62,170		58,509
Corporate assets		45,046		32,525

Total assets	$	107,216	$	91,034

Capital Expenditures

	Fiscal Years
(In thousands)	2002		2001		2000
Environmental and health	$	184	$	94	$	325
Other scientific and engineering		1,593		1,531		8,043

Total segment capital expenditures		1,777		1,625		8,368
Corporate capital expenditures		360		567		293

Total capital expenditures	$	2,137	$	2,192	$	8,661

Depreciation and Amortization

	Fiscal Years
(In thousands)	2002		2001		2000
Environmental and health	$	218	$	227	$	242
Other scientific and engineering		2,288		2,437		2,252

Total segment depreciation and amortization		2,506		2,664		2,494
Corporate depreciation and amortization		914		1,855		1,824

Total depreciation and amortization	$	3,420	$	4,519	$	4,318

Information regarding Exponent’s operations in different geographical areas:

Revenues ¹

	Fiscal Years
(In thousands)	2002		2001		2000
United States	$	123,250	$	112,286	$	110,436
Foreign Countries		2,805		2,175		2,591

Total	$	126,055	$	114,461	$	113,027

Property, Equipment and Leasehold Improvements, net

	Fiscal Years
(In thousands)	2002		2001
United States	$	31,646	$	32,584
Foreign Countries		66		56

Total	$	31,712	$	32,640

¹ Geographic revenues are allocated based on the location of the client.

Note 17: Comparative Quarterly Financial Data (unaudited)

Summarized quarterly financial data is as follows:

Fiscal 2002 (In thousands, except per share data)	March 29, 2002		June 28, 2002		September 27, 2002		January 3, 2003
Revenue before reimbursements	$	28,231	$	28,894	$	28,467	$	29,706
Revenues		30,612		31,632		30,962		32,849
Operating income		3,902		3,618		3,688		2,712
Income before income taxes		4,014		3,756		3,741		3,129

Net income	$	1,919	$	2,123	$	2,115	$	1,767


Net income per share
Basic	$	0.29	$	0.32	$	0.31	$	0.25
Diluted	$	0.26	$	0.28	$	0.28	$	0.23
Shares used in per share computations
Basic		6,545		6,739		6,932		7,037
Diluted		7,361		7,480		7,581		7,715

Fiscal 2001 (In thousands, except per share data)	March 30, 2001		June 29, 2001		September 28, 2001		December 28, 2001
Revenue before reimbursements	$	27,861	$	25,326	$	26,446	$	24,864
Revenues		29,854		28,353		28,997		27,257
Operating income		3,713		1,456		2,620		1,828
Income before income taxes		4,195		1,657		2,792		1,985

Net income	$	2,425	$	953	$	1,613	$	1,131


Net income per share
Basic	$	0.37	$	0.15	$	0.25	$	0.17
Diluted	$	0.34	$	0.13	$	0.23	$	0.16
Shares used in per share computations
Basic		6,471		6,560		6,527		6,466
Diluted		7,174		7,312		7,148		7,071

Independent Auditors’ Report

The Board of Directors and Stockholders

Exponent, Inc.

We have audited the accompanying consolidated balance sheets of Exponent, Inc. and subsidiaries (the Company) as of January 3, 2003 and December 28, 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended January 3, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Exponent, Inc. and subsidiaries as of January 3, 2003 and December 28, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended January 3, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, effective December 29, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

/s/ KPMG LLP

Mountain View, California

January 28, 2003

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: April 3, 2003				/ S / R ICHARD L. S CHLENKER , J R .
				Richard L. Schlenker, Jr., Chief Financial Officer and Corporate Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title	Date

/ S / M ICHAEL R. G AULKE Michael R. Gaulke	Chief Executive Officer, President and Director	April 3, 2003

/ S / R ICHARD L. S CHLENKER , J R . Richard L. Schlenker, Jr.	Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer)	April 3, 2003

/ S / R OGER L. M C C ARTHY Roger L. McCarthy	Chairman of the Board	April 3, 2003

/ S / S UBBAIAH V. M ALLADI Subbaiah V. Malladi	Chief Technical Officer and Director	April 3, 2003

/ S / E DWARD J. K EITH Edward J. Keith	Vice Chairman of the Board	April 3, 2003

/ S / S AMUEL H. A RMACOST Samuel H. Armacost	Director	April 3, 2003

/ S / B ARBARA M. B ARRETT Barbara M. Barrett	Director	April 3, 2003

/ S / L ESLIE G. D ENEND Leslie G. Denend	Director	April 3, 2003

/ S / J ON R. K ATZENBACH Jon R. Katzenbach	Director	April 3, 2003

/ S / S TEPHEN C. R IGGINS Stephen C. Riggins	Director	April 3, 2003

CERTIFICATION PURSUANT TO RULE 15d-14

OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael R. Gaulke, President and Chief Executive Officer of Exponent, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Exponent, Inc. (the “registrant”);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

April 3, 2003

/s/ M ICHAEL R. G AULKE

Michael R. Gaulke

President and Chief Executive Officer

CERTIFICATION PURSUANT TO RULE 15d-14

OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard L. Schlenker, Chief Financial Officer of Exponent, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Exponent, Inc. (the “registrant”);

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

April 3, 2003

/s/ R ICHARD L. S CHLENKER

Richard L. Schlenker Chief Financial Officer

Schedule II

Valuation and Qualifying Accounts

			Additions		Deletions ¹
(In thousands)	Balance at Beginning of Year		Provision Charged to Expenses		Accounts Written-off Net of Recoveries			Balance at End of Year
Year Ended January 3, 2003
Allowance for Doubtful Accounts	$	1,865	$	771	$	(1,143	)	$	1,493
Year Ended December 28, 2001
Allowance for Doubtful Accounts	$	2,162	$	1,593	$	(1,890	)	$	1,865
Year Ended December 29, 2000
Allowance for Doubtful Accounts	$	1,527	$	2,024	$	(1,389	)	$	2,162

¹ Balance includes currency translation adjustments.

Schedules other than above have been omitted since they are either not required, not applicable, or the information is otherwise included in the Report.

EXHIBIT INDEX

The following exhibits are filed as part of, or incorporated by reference into (as indicated parenthetically), the Annual Report on Form 10-K:


3.1		Restated Certificate of Incorporation of the Company (incorporated by reference to the Company’s Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562).

3.2		Amended and Restated Bylaws of the Company (incorporated by reference to the Company’s Registration statement on Form S-1 as filed on June 25, 1990, registration number 33-35562).

4.1		Specimen copy of Common Stock Certificate of the Company (incorporated by reference to the Company’s Registration Statement on Forms S-1 as filed on June 25, 1990, registration number 33-35562).

*10.1		1990 Stock Option and Rights Plan, as amended through March 31, 1993 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended May 28, 1993).

*10.2		Form of Incentive Stock Option Agreement under the 1990 Stock Option and Rights Plan (incorporated by reference to the Company’s Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562).

*10.3		Form of Nonqualified Stock Option Agreement under the 1990 Stock Option and Rights Plan (incorporated by reference to the Company’s Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562).

*10.4		Form of Indemnification Agreement entered into or proposed to be entered into between the Company and its officers and directors (incorporated by reference to the Company’s Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562).

10.5		Zarnowicka Elektrownia Gazowa, joint venture, dated September 8, 1994 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 1994).

*10.6		Exponent, Inc. 1998 Non Statutory Stock Option Plan dated October 24, 1998 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 1999).

10.7		Revolving reducing note with Wells Fargo Bank dated January 27, 1999 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.8		Exponent, Inc. 401(k) Savings Plan dated March 1, 1998 and restated effective January 2, 1999 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.9		Exponent, Inc. Employee Stock Purchase Plan, as amended and restated March 23,1999 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.10		Exponent, Inc. 1999 Stock Option Plan (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).


*10.11		Exponent, Inc. 1999 Restricted Stock Plan (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

10.12		First Amendment to Exponent, Inc. 401(k) Savings Plan dated March 1, 1998 and restated effective January 2, 1999 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2001).

10.13		Second Amendment to Exponent, Inc. 401(k) Savings Plan dated March 1, 1998 and restated effective January 2, 1999 (incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2001).

10.14		Third Amendment to Exponent, Inc. 401(k) Savings Plan dated March 1, 1998 and restated effective January 2, 1999.

10.15		Commercial Lease No. 03-53542 between the Company and the Arizona State Land Department, effective January 17, 1998.

21.1		List of subsidiaries.

23.1		Report on financial statement schedule and consent of KPMG LLP, independent auditors.

99.1		Certification of Michael R. Gaulke

99.2		Certification of Richard L. Schlenker

* Indicates management compensatory plan, contract or arrangement.

Exhibit 10.14

THIRD AMENDMENT TO THE EXPONENT, INC. 401(K) SAVINGS PLAN

(AS AMENDED AND RESTATED JANUARY 2, 1999)

WHEREAS, Exponent, Inc. (the “Company”) adopted an amended and restated 401(k) Savings Plan effective January 2, 1999 (the “Plan”); and

WHEREAS, the Plan must be amended to reflect the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001; and

WHEREAS, the Company has acquired and plans to merge with Novigen Sciences, Inc. (“Novigen”) and in connection therewith wishes to designate Novigen as a “participating employer” under the Plan and to credit certain employees of Novigen with hours and years of service that such employees had earned for service with Novigen prior to the acquisition for purposes of vesting and benefit accrual under the Plan; and

WHEREAS, the Company retains the right to amend the Plan under Section 11.1(a) thereof; and

WHEREAS, pursuant to Section 11.1(b) of the Plan, the Company has delegated to the Plan’s administrative committee the authority to adopt amendments that are designed to bring the Plan into compliance with applicable law, designed to ensure the continued tax-qualified status of the Plan or do not have a significant financial impact on the Company;

NOW, THEREFORE, effective January 1, 2002, except as otherwise provided, the Plan is amended as follows:

1. The following provision is inserted at the end of Section 2.30 Participating Employer : “Effective May 20, 2002, Novigen Sciences, Inc. (“Novigen”) shall become a Participating Employer.”

2. The following provisions are inserted after the third sentence of subparagraph (b) of Section 4.3 Employer Mandatory Contributions and Qualified Nonelective Contributions :

“For purposes of determining whether an allocation of an Employer Mandatory Contribution shall be made for the Plan Year commencing January 1, 2002, Participants who were employed by Novigen immediately prior to the Company’s acquisition of Novigen and became Employees on May 20, 2002 shall be credited under the Plan with all hours of service such Participants earned from January 1, 2002 to May 19, 2002 while employed by Novigen. For purposes of the foregoing, the term “hours of service” shall be as defined in Section 2.25, except that Novigen shall be considered the Employer.”

3. The following provisions are inserted at the end of Section 6.1 Vested Interest to read in full as follows:

“(g) For purposes of determining a Participant’s vested percentage in his Employer Matching Contributions and Employer Mandatory Contributions, Participants who were employed by Novigen immediately prior to the Company’s acquisition of Novigen and became Employees on May 20, 2002 shall be credited under the Plan with all hours of service and years of service such Participants earned while employed by Novigen. For purposes of the foregoing, the terms “hours of service” and “years of service” shall be as defined in Sections 2.25 and 2.46, respectively, except that Novigen shall be considered the Employer.”

4. Appendix E EGTRRA Changes , attached hereto in its entirety, is appended to the Plan.

IN WITNESS WHEREOF, the Company has caused this Third Amendment to be executed by its duly authorized officer.

Dated: September 12, 2002	EXPONENT, INC.

	By:	/s/ Richard L. Schlenker
	Title:	Chief Financial Officer

APPENDIX E

EGTRRA CHANGES

This Appendix E is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). This Appendix E is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. Except as otherwise provided, this Appendix E shall be effective as of January 1, 2002.

This Appendix E shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Appendix.

1. Increase in Compensation Limit

The annual compensation of each Participant taken into account in determining allocations for any Plan Year beginning after December 31, 2001, shall not exceed $200,000, as adjusted for cost-of-living increases in accordance with Code Section 401(a)(17)(B). “Annual compensation” means compensation during the Plan Year or such other consecutive 12-month period over which compensation is otherwise determined under the Plan (the “determination period”). The cost-of-living adjustment in effect for a calendar year applies to annual compensation for the determination period that begins with or within such calendar year.

2. Salary Deferral Contribution Limitation

No Participant shall be permitted to have Salary Deferral Contributions made under this Plan, or any other qualified plan maintained by the Employer during any taxable year, in excess of the dollar limitation contained in Code Section 402(g) in effect for such taxable year, except to the extent permitted under Section 3 of this Appendix E and Code Section 414(v), if applicable.

3. Catch-Up Contributions

All Participants who are eligible to make Salary Deferral Contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v) and any uniform and non-discriminatory procedures established by the Committee. Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) and 415. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416, as applicable, by reason of the making of such catch-up contributions.

E-1

4. Hardship Distributions

A Participant who receives a distribution after December 31, 2001, on account of hardship shall be prohibited from making Salary Deferral Contributions and employee contributions under this and all other plans of the Employer for 6 months after receipt of the distribution. A Participant who has received a hardship distribution shall be permitted to make Salary Deferral Contributions for the calendar year immediately following the calendar year in which the distribution was made up to the applicable limit under Code Section 402(g) for such year.

5. Limitations on Contributions

Except to the extent permitted under Section 3 of this Appendix E and Code Section 414(v), if applicable, the annual addition that may be contributed or allocated to a Participant’s Account under the Plan for any Limitation Year beginning after December 31, 2001 shall not exceed the lesser of $40,000, as adjusted for increases in the cost-of-living under Code Section 415(d) or 100 percent of the Participant’s compensation, within the meaning of Code Section 415(c)(3), for the limitation year.

6. Direct Rollovers of Plan Distributions

6.1 Effective Date . This Section shall apply to distributions made after December 31, 2001.

6.2. Modification of Definition of Eligible Retirement Plan . For purposes of the direct rollover provisions in Section 6.10 of the Plan, an Eligible Retirement Plan shall also mean an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. The definition of Eligible Retirement Plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Code Section 414(p).

6.3. Modification of Definition of Eligible Rollover Distribution to Exclude Hardship Distributions . For purposes of the direct rollover provisions in Section 6.10 of the Plan, any amount that is distributed on account of hardship as provided in Section 6.17 shall not be an Eligible Rollover Distribution and the distributee may not elect to have any portion of such a distribution paid directly to an Eligible Retirement Plan.

7. Rollovers from Other Plans

The Plan will accept Rollover Contributions made after December 31, 2001 as follows:

Direct Rollovers from Other Plans :

The Plan will accept a direct rollover of an eligible rollover distribution from:

E-2

(a) a qualified plan described in Code Section 401(a) or 403(a) (excluding after-tax employee contributions);

(b) an annuity contract described in Code Section 403(b) (excluding after-tax employee contributions); and

(c) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state.

Participant Rollover Contributions from Other Plans :

The Plan will accept a Participant contribution of an eligible rollover distribution from:

(a) a qualified plan described in Code Section 401(a) or 403(a) (excluding after-tax employee contributions);

(b) an annuity contract described in Code Section 403(b) (excluding after-tax employee contributions); and

(c) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state.

Participant Rollover Contributions from IRAs :

The Plan will not accept a Rollover Contribution of the portion of a distribution from an individual retirement account or annuity described in Code Section 408(a) or 408(b) that is eligible to be rolled over and would otherwise be includible in gross income.

8. Repeal of Multiple Use Test

The multiple use test described in Treasury Regulation section 1.401(m)-2 and Section 5.7(c) of the Plan shall not apply for Plan Years beginning after December 31, 2001.

E-3

9. Modification of Top-Heavy Rules

9.1. Effective Dat e. This Section shall apply for purposes of determining whether the Plan is a Top-Heavy Plan under Code Section 416(g) for Plan Years beginning after December 31, 2001, and whether the Plan satisfies the minimum benefits requirements of Code Section 416(c) for such years. This Section amends Article XIV of the Plan.

9.2 Determination of Top-Heavy Status .

9.2.1 Key Employee . “Key Employee” means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the Determination Date was an officer of the Employer having annual compensation greater than $130,000 (as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002), a 5-percent owner of the Employer, or a 1- percent owner of the Employer having annual compensation of more than $150,000. For this purpose, “annual compensation” means compensation within the meaning of Code Section 415(c)(3). The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder.

9.2.2 Determination of Present Values and Amounts . This Section 9.2.2 shall apply for purposes of determining the present values of accrued benefits and the amounts of account balances of Employees as of the determination date.

9.2.2.1 Distributions during Year Ending on the Determination Date . The present values of accrued benefits and the amounts of account balances of an Employee as of the Determination Date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with the Plan under Code Section 416(g)(2) during the 1-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting “5-year period” for “1-year period.”

9.2.2.2 Employees Not Performing Services During Year Ending on the Determination Date . The accrued benefits and accounts of any individual who has not performed services for the Employer during the 1-year period ending on the Determination Date shall not be taken into account.

9.3. Minimum Benefits . Employer Matching Contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Code Section 416(c)(2) and the Plan. The preceding sentence shall apply with respect to Employer Matching Contributions under the Plan or if applicable, another plan of the Employer that provides the minimum contribution requirement. Employer Matching

E-4

Contributions that are used to satisfy the minimum contribution requirements shall be treated as Employer Matching Contributions for purposes of the actual contribution percentage test and other requirements of Code Section 401(m).

E-5

Exhibit 10.15

COMMERCIAL LEASE
LONG TERM

LEASE NO.

03-53542

TABLE OF CONTENTS
COMMERCIAL LEASE 03-53542

ARTICLE 1 .....................................................................    1
     DEFINITIONS ..............................................................    1
          1.1     Affiliated Entity ...........................................    1
          1.2     Date of Determination .......................................    1
          1.3     Change in Use ...............................................    1
          1.4     Default .....................................................    1
          1.5     Department ..................................................    1
          1.6     Impositions .................................................    1
          1.7     Improvements ................................................    2
          1.8     Interest Rate ...............................................    2
          1.9     Leasehold Mortgagee .........................................    2
          1.10    Parcel ......................................................    2
          1.11    Premises.....................................................    2
          1.12    Rent ........................................................    2
          1.13    CPI .........................................................    2
          1.14    Current Appraised Land Value ................................    2
          1.15    Aggregate CPI ...............................................    2
          1.16    Adjustment Differential .....................................    2
          1.17    Adjustment Percentage .......................................    2

ARTICLE 2 .....................................................................    3
     PARCEL ...................................................................    3
          2.1     Definition ..................................................    3
          2.2     Condition ...................................................    3

ARTICLE 3 .....................................................................    3
     TERM .....................................................................    3
          3.1     Commencement; Expiration ....................................    3
          3.2     Extension ...................................................    3

ARTICLE 4 .....................................................................    4
     RENT .....................................................................    4
          4.1     Annual Rent .................................................    4
          4.2     Base Rent ...................................................    4
          4.3     Adjustment of Land Value ....................................    4
          4.4     Additional Rent Applicable to Unforeseen Development ........    5
          4.5     Interest; Penalty ...........................................    6
          4.6     Notice and Demand ...........................................    6

          4.7     Extension ...................................................    6
          4.8     Sublease to Affiliated Entity; Imputed Rent .................    6
          4.9     Prepaid Rent ................................................    6
          4.10    Proration of Rent ...........................................    7

ARTICLE 5 .....................................................................    8
     ADDITIONAL AMOUNTS .......................................................    8
          5.1     Definition ..................................................    8
          5.2     Payment .....................................................    8
          5.3     Evidence ....................................................    8
          5.4     Interest ....................................................    8
          5.5     Taxes .......................................................    8

ARTICLE 6 .....................................................................    9
     USE AND OCCUPANCY OF PREMISES ............................................    9
          6.1     Uses ........................................................    9
          6.2     Artifacts ...................................................    9
          6.3     Native Plants ...............................................    9
          6.4     Waste; Conformity to Law ....................................    9
          6.5     Minerals ....................................................    9
          6.6     Quiet Enjoyment .............................................   10
          6.7     Inspection ..................................................   10
          6.8     Surrender ...................................................   10
          6.9     Zoning ......................................................   10
          6.10    Change in Use ...............................................   10
          6.11    Trespass ....................................................   10
          6.12    Repair and Maintenance ......................................   10

ARTICLE 7 .....................................................................   11
     EASEMENTS AND DEDICATIONS ................................................   11
          7.1     Public Use Interests ........................................   11
          7.2     Temporary, Non-Exclusive Easements ..........................   11
          7.3     Reservations ................................................   11

ARTICLE 8 .....................................................................   12
     RECORDS ..................................................................   12
          8.1     Record Keeping; Inspection ..................................   12

ARTICLE 9 .....................................................................   12
     CONSTRUCTION AND IMPROVEMENTS ............................................   12
          9.1     Definitions .................................................   12
          9.2     Prior Approval ..............................................   12

          9.3     Utilities; New Construction ................................    13
          9.4     Annual Statement ...........................................    13
          9.5     Ownership ..................................................    13
          9.6     Subleases ..................................................    13
          9.7     Insurance Proceeds .........................................    14
          9.8     Reimbursement; Amortization ................................    14
          9.9     Removal ....................................................    14
          9.10    Use and Removal of Water ...................................    14
          9.11    Improvements Dedicated to Public Use .......................    14

ARTICLE 10....................................................................    15
     LIENS ...................................................................    15
          10.1    Payment; Indemnity .........................................    15
          10.2    Notice .....................................................    15
          10.3    Contest ....................................................    15

ARTICLE 11....................................................................    15
     INSURANCE AND INDEMNITY .................................................    15
          11.1    Indemnity ..................................................    15
          11.2    Policies ...................................................    16
          11.3    Amounts ....................................................    16
          11.4    Blanket Policy .............................................    16
          11.5    Copies .....................................................    16

ARTICLE 12....................................................................    17
     DAMAGE ..................................................................    17
          12.1    Lessee's Obligations .......................................    17

ARTICLE 13....................................................................    17
     TRADE FIXTURES AND PERSONAL PROPERTY ....................................    17
          13.1    Personal Property ..........................................    17

ARTICLE 14....................................................................    17
     ASSIGNMENTS AND SUBLEASES ...............................................    17
          14.1    Financing ..................................................    17
          14.2    Other Assignments ..........................................    17
          14.3    Subleases ..................................................    18
          14.4    Attornment .................................................    18

ARTICLE 15 ...................................................................    19
     CONDEMNATION ............................................................    20
          15.1    Definition; Division .......................................    20

iii

          15.2    Termination ................................................    20
          15.3    No Termination .............................................    21
          15.4    Temporary Taking ...........................................    21

ARTICLE 16 ...................................................................    21
     LESSOR'S RIGHT TO PERFORM AND INSPECT ...................................    21
          16.1    Right ......................................................    21
          16.2    Inspection .................................................    22

ARTICLE 17 ...................................................................    22
     DEFAULT AND REMEDIES ....................................................    22
          17.1    Events .....................................................    22
          17.2    Remedies ...................................................    23
          17.3    Waiver .....................................................    24

ARTICLE 18....................................................................    24
     HOLDING OVER ............................................................    24
          18.1    No Holding over ............................................    24

ARTICLE 19 ...................................................................    25
     MORTGAGES ...............................................................    25
          19.1    Definition .................................................    25
          19.2    Filing .....................................................    25
          19.3    Preconditions ..............................................    25
          19.4    Conditions .................................................    25
          19.5    Limitations ................................................    29

ARTICLE 20 ...................................................................    29
     ENVIRONMENTAL MATTERS ...................................................    29
          20.1    Definition of Regulated Substances and Environmental Laws ..    29
          20.2    Compliance with Environmental Laws .........................    30
          20.3    Designated Compliance Officer ..............................    30
          20.4    Audit ......................................................    30
          20.5    Environmental Assessment ...................................    30
          20.6    Indemnity for Environmental Damage .........................    31
          20.7    Scope of Indemnity .........................................    31
          20.8    Lessee's Participation in the Defense ......................    31
          20.9    Restoration ................................................    31

ARTICLE 21 ...................................................................    32
     ARBITRATION .............................................................    32
          21.1    Jurisdiction ...............................................    32

          21.2    Request ....................................................    32
          21.3    Rules ......................................................    32
          21.4    Decision ...................................................    32
          21.5    Fees .......................................................    32
          21.6    Injunctive Relief ..........................................    33
          21.7    Mandatory Arbitration ......................................    33

ARTICLE 22 ...................................................................    33
     MUTUAL CANCELLATION .....................................................    33
          22.1    Mutual Cancellation ........................................    33
          22.2    Lessee's Termination .......................................    33
          22.3    Proration of Rent ..........................................    33

ARTICLE 23 ...................................................................    34
     MISCELLANEOUS ...........................................................    34
          23.1    Rights .....................................................    34
          23.2    Binding Effect .............................................    34
          23.3    No Partnership .............................................    34
          23.4    Quitclaim Upon Termination .................................    34
          23.5    Titles .....................................................    34
          23.6    Notices ....................................................    34
          23.7    No Promise To Sell .........................................    35
          23.8    Cancellation ...............................................    35
          23.9    Applicable Law .............................................    35
          23.10   Amendment ..................................................    35
          23.11   Attorneys' Fees ............................................    35
          23.12   Execution ..................................................    35
          23.13   Severability ...............................................    35
          23.14   Mortgagee Request ..........................................    35
          23.15   Memorandum .................................................    36
          23.16   Cooperation ................................................    36
          23.17   Construction ...............................................    36
          23.18   Governing Law ..............................................    36

COMMERCIAL LEASE NO. 03-53542

ARIZONA STATE LAND DEPARTMENT

THIS COMMERCIAL LEASE is entered into by and between the State of Arizona (as "Lessor" acting by and through the Arizona State Land Department) and Failure Analysis Associates, Inc. (as "Lessee"). In consideration of the payment of Rent and the performance by the parties of each of the provisions set forth herein, the parties agree as follows:

ARTICLE I
DEFINITIONS

1.1 Affiliated Entity. An Affiliated Entity for purposes of this lease shall mean a partnership, corporation, trust or other legal entity controlled by or under common control of Lessee. "Control," for these purposes, shall mean ownership of at least 25% of the stock, interest in profits, or beneficial interest.

1.2 Date of Determination. The fifth, tenth, fifteenth, twentieth and twenty-fifth anniversaries of the commencement date.

1.3 Change in Use. A change in the use of the Premises from a Permitted Use as defined in Paragraph 6.1 to a use which is not a Permitted Use as defined in Paragraph 6.1.

1.4 Default As defined in Paragraph 17.1.

1.5 Department. The Arizona State Land Department and any successor agency, board or commission.

1.6 Impositions. All assessments and charges for utilities and communication services, all assessments imposed pursuant to the development, construction and operation of any project on the Parcel, all license, permit and other authorization fees, all taxes, duties, charges and assessments of every kind and nature imposed by any public or governmental authority pursuant to any current or subsequently enacted law, ordinance, regulation or order which during the Term of the Lease become due, or imposed upon, charged against, measured by or become a lien on (a) the Parcel; (b) any Improvements or personal property of the Lessee located on the Parcel; (c) the interest of the Lessee in this Lease or in the proceeds received by Lessee from any assignments and/or subleases of the Premises.

1.7 Improvements. As defined in Paragraph 9.1.

1.8 Interest Rate: The rate of interest established pursuant to A.R.S. (S) 37-241 (D) or any successor statute.

1.9 Leasehold Mortgagee. As defined in Paragraph 19.1.

1.10 Parcel. As defined in Paragraph 2.1.

1.11 Premises. The Parcel together with all rights and easements appurtenant thereto as expressly granted by this Lease, Improvements, temporary or portable structures, and personal property located on, below or above the Parcel.

1.12 Rent. "Rent" means Annual Rent, Base Rent, Percentage Rent, or any combination thereof, including any and all payments required by Lessee to Lessor.

1.13 CPI. "CPI" shall mean the revised Consumer Price Index, U.S. City Average for all Urban Consumers--All Items (1982-1984 equals 100) for the pertinent month, issued by the Bureau of Labor Statistics of the U.S. Department of Labor. If the CPI shall hereafter be converted to a different standard reference base or otherwise revised, adjustments of rent based upon the CPI shall be made with the use of such conversion factor, formula or table for converting the CPI as may be published by the Bureau of Labor Statistics, or if said Bureau shall not publish the same, then with the use of such conversion factor, formula or table as may be published by any nationally recognized publisher of similar statistical information. If the CPI shall cease to be published, there shall be substituted therefore such index as Lessor selects a reasonable substitute.

1.14 Current Appraised Land Value. Current Appraised Land Value shall mean the land Value, as adjusted pursuant to the terms of this Lease.

1.15 Aggregate CPI. Aggregate CPI shall mean the cumulative total CPI over the previous five years preceding the current Date of Determination, to the nearest one-tenth (1/10) of one percent (0.1%).

1.16 Adjustment Differential. Adjustment Differential shall mean the number resulting from the difference between the Aggregate CPI subtracted from one (1), if the Aggregate CPI is greater than that of the previous five (5) years, except as provided in Paragraph 4.3 (d). If the Aggregate CPI is equal to or less than that of the previous five (5) years, the Adjustment Differential shall be one hundred percent (100%).

1.17 Adjustment Percentage. Adjustment Percentage shall mean the product of the Adjustment Differential multiplied by the Aggregate CPI, rounded to the nearest ten thousandth (1/100 of 1%).

ARTICLE 2
PARCEL

2.1 Definition. Lessor hereby leases to Lessee for the Term, at the Rent, and in accordance with the provisions set forth herein, the State Land in Maricopa County, Arizona described in Exhibit "A" attached hereto (the "Parcel") for the uses and purposes specified in Article 6 hereof.

2.2 Condition. Lessee has examined the physical condition of the Parcel, is familiar with it, and takes it "as is". Lessor makes no express or implied warranties as to the physical condition of the Parcel.

ARTICLE 3
TERM

3.1 Commencement; Expiration. The Term of this Lease shall be for a period of no more than 30 Years commencing on January 17, 1998 "Commencement Date" and ending on January 16, 2028, "Expiration Date", unless sooner canceled or terminated as provided herein.

3.2 Extension. Lessee may at any time during the term of this lease (but in any event not later than one hundred eighty (180) days prior to the expiration date of this Lease, or any extension thereof), without Lessor's approval, elect to extend the term of this Lease for a period of fifteen (15) years by delivering written notice of such election to Lessor. Such election by lessee may be exercised two (2) times for a total extension period not to exceed thirty
(30) years. (a) In the event Lessee exercises the first extension, as allowed hereunder, the Current Appraised Land Value, commencing on the first day of the extension period, shall be determined by a new appraisal as follows: not later than one hundred fifty days (150) prior to the Expiration Date, Lessor shall select a qualified, State of Arizona Certified General Real Estate appraiser to appraise the Parcel. The appraisal shall be a determination of the Fair Market Value of the Parcel as of the Expiration Date. The appraisal shall value the Parcel as if vacant and available for its highest and best use, which may or may not be the then current use. The Fair Market Value shall hereafter be referred to as the Current Appraised Land Value. (b) Commencing on the beginning date of the first extension period, the Base Rent shall be 8.5% of the Current Appraised Land Value. The Base Rent shall be adjusted every five (5) years during the first and second option period, in the manner provided in Article 4.3 (d), commencing on the first Date of Determination of the first extension period, subject to Article 4.3.

ARTICLE 4
RENT

4.1 Annual Rent. Lessee shall pay Rent as provided herein to Lessor, without notice or demand, each year in advance on the anniversary of the commencement date of this Lease for the use and occupancy of the Parcel during the Term of this Lease without offset or deduction.

4.2 Base Rent. The annual Base Rent shall be a percentage of the Current Appraised Land Value. The Current Appraised Land Value on the Commencement Date of this Lease is $6,445,560.00. Base rent as a percentage of the then Current Appraised Land Value over the term of this Lease is as follows:

Lease Years 1 and 2            6%

Lease Years 3 and 4            7%

Lease Years 5 and 6         7.25%

Lease Years 7               7.50%

Lease Years 8 and 9            8%

Lease Years 10 and 11       8.25%

Lease Years 12 through 30   8.50%

4.3 Adjustment of Land Value. The following provisions shall constitute the Land Value adjustment methodology for purposes of rent escalation for this Lease and any extensions(s) hereof.

(a) All calculations shall be carried out to a minimum of four (4) decimal places, i.e., calculated to the nearest ten thousandth (1/100 of 1%).

(b) On the fifth anniversary of the Commencement Date, the Current Appraised Land Value of Lease year Five shall to multiplied by 10 percent (10%). The product of that calculation shall be added to the Current Appraised Land Value of Lease Year Five and that sum shall be the Current Appraised Land Value for Lease Years Six through Ten.

(c) On the Tenth anniversary of the Commencement Date the Current Appraised Land Value of Lease Year Ten shall be multiplied by 20 percent (20%). The product of that calculation shall be added to the Current Appraised Land Value of Lease Year Ten. The sum of that calculation shall be the Current Appraised Land Value for the Lease Years Eleven through Fifteen.

(d) On all subsequent Dates of Determination, the Current Appraised Land Value shall be adjusted as follows:

(i) If the Aggregate CPI is greater than that of the previous five (5) years, the Aggregate CPI shall be subtracted from the number one (1). The difference in that calculation, the Adjustment Differential, shall be multiplied by the Aggregate CPI. The Product of that calculation shall be the Adjustment Percentage. The Adjustment Percentage shall be multiplied by the Current

Appraised Land Value of the lease year preceding the Date of Determination. The Product of that calculation shall be the Current Appraised Land Value.

Example:   Aggregate CPI                  = A
           Number one (1)                 = B
           Adjustment Differential        = C
           Adjustment Percentage          = D

Current Appraised Land Value of Lease Year Preceding the Date of Determination = E B - A = C
C x A = D
D x E = Current Appraised Land Value

(ii) The Adjustment Differential at any Date of Determination shall never be less than 1750 (17.5%), or greater than 1.00 (100%)

(iii) No adjustment to the Current Appraised Land Value shall be made if the Aggregate CPI for the current Date of Determination is a negative number.

(iv) If the Aggregate CPI for the current Date of Determination is equal to or less than the Aggregate CPI from the previous Date of Determination, the Adjustment Percentage shall be the actual sum of the Aggregate CPI. [The Adjustment Differential shall be 100 percent (100%).]

(v) If the Adjustment Differential as calculated in Paragraph 4.3
(d)(i) or (ii) for the current Date of Determination is 17.5% on two or more successive Dates of Determination, the Adjustment Differential shall be 35% for the second successive Date of Determination during which this phenomenon occurs. If said Adjustment Differential would be calculated at 17.5% for a third successive five-year period, it shall increase to 70 percent (70%) for the third successive Date of Determination.

4.4 Additional Rent Applicable to Unforeseen Development. Lessee intends to expend $14,000,000 (in addition to existing improvements) for additional Improvements (as defined in Article 9) on the Parcel. Lessor is concerned that if Lessee intensifies Lessee's use of the Parcel beyond the present expectations of the Lessor and Lessee, the rent described in Article 4 hereof will not reflect such unforeseen expansion or intensification of Lessee's use of the Parcel. Therefore, Lessee agrees that Lessee shall pay to Lessor annually as additional rent an amount equal to five percent (5%) of the sum of the amount in excess of said $14,000,000 (adjusted as provided herein), which Lessee so invests. Such additional rent shall be payable in the year in which completed, within 30 days of completion on a pro rata basis, and shall be added to base rent each year thereafter. The date of completion of the additional Improvements shall be the date on which the Lessee is issued a Certificate of Occupancy from the appropriate Governmental Agency, or upon final inspection from the appropriate Governmental Entity. Lessee shall notify Lessor of the actual cost of such excess structures within 30 days of their completion and provide to Lessor such evidence as Lessor may reasonably require to verify such costs. The aforesaid $14,000,000 shall be adjusted by multiplying it by a fraction, the numerator of which is the CPI for the Month in which the excess

improvement is completed and the denominator of which is the CPI for the month in which this Lease is signed.

4.5 Interest; Penalty. Lessee shall pay a penalty of five percent (5%) plus interest on any amount of delinquent Rent. Interest shall accrue daily on the delinquent amount and on the penalty at the Interest Rate until paid.

4.6 Notice and Demand. Unless the time for payment of Rent has previously been extended pursuant to Paragraph 4.7, if Lessor has not received a Rent payment by the due date, the Lessor shall not be entitled to exercise any right or remedy hereunder unless it has delivered to Lessee written notice pursuant to
A.R.S. (S)37-289 demanding that within thirty (30) days after the receipt of such notice Lessee make such Rent payment and such thirty (30) day period has expired.

4.7 Extension. Prior to or after the time the Annual Rent becomes due and owing, Lessee may, in writing, request that Lessor extend the time for payment of Rent or any portion thereof by up to three (3) successive ninety (90) day periods (for a total extension of 270 days for each Lease Year). The Department shall promptly notify Lessee of its approval or disapproval of such extension. Such extended Rent shall be subject to the provisions of Paragraph 4.5 including interest and penalty charged to the Lessee.

4.8 Sublease to Affiliated Entity; Imputed Rent. Should Lessee desire to sublease the Premises to itself or to an Affiliated Entity, Lessee must first obtain written approval of the terms and conditions of the proposed sublease from Lessor, regardless of whether a pre-approved form of sublease is utilized, which approval shall not be unreasonably withheld, and a Fair Market Rent shall be imputed to such a sublease for purposes of calculating Rent under this Article. Lessee shall set forth in its application the Fair Market Rent to be imputed to the proposed sublease, which determination Lessor may dispute, at Lessor's election, either according to the arbitration provisions of Article 21 of this Lease, or by obtaining an independent appraisal at Lessor's expense; such Rent as determined through arbitration or appraisal shall be binding upon Lessor and Lessee for the purposes of imputing Rent under this paragraph. For the purposes of this paragraph, "Fair Market Rent" means the most probable rent that the subject property would command if it were exposed on the open market for a period of time sufficient to attract a tenant who rents the property with full knowledge of the alternatives available to him on the market.

4.9 Prepaid Rent. Lessee shall be allowed to prepay Base Rent with Lessor's written approval for rights of way to be dedicated to public use at any time during the term of this Lease, under the following conditions:

(a) Such prepayment shall be of all the remaining Base Rent payable through the thirtieth (30th) year on the portion of the Parcel for which prepayment is being made.

(b) Prepaid rent shall be calculated by discounting to a present value the total Base Rent for the remainder of the Lease Term. The discount rate for prepayment shall be the interest rate being earned by the State of Arizona Treasurer's office on long term investments (10 Years or more)

as announced by Treasurer's office for the month immediately preceding the prepayment (as provided for in A.R.S. (S)37-295). If at any time the State of Arizona Treasurer's office ceases to announce a long term interest rate, the discount rate shall be determined using a comparable measure of interest rates on long term investments reasonably acceptable to Lessor and Lessee. Notwithstanding the preceding, in no event shall the discount rate used for a prepayment exceed the maximum rate permitted by applicable law as of the date of such prepayment.

(c) Such prepayment shall be based on entire rent payments for the years in which Lessee prepays rent, and not pro-rata portions of the year.

(d) The following pro-rata formula shall be used at any time throughout the term of this Lease for calculating rent on acreage remaining subject to this Lease as a result of prepayment of rent on acreage due to dedication for public use or issuance of rights of way.

[(C-A)/C] x B

Where: A = Number of Acres Prepaid B = Base Rent otherwise payable for the Lease Year(s) in question
C = Total acreage leased prior to prepayment

(e) If Lessee intends to prepay Base Rent as set forth above for rights of way to be dedicated to public use, upon Lessee's request Lessor shall, at Lessee's expense, provide Lessee with an appraisal of the reversionary interest. The reversionary interest appraised shall be either in fee simple or permanent easement at the sole discretion of Lessor. Immediately upon Lessee's prepayment of Base Rent on the rights of way, Lessee shall dedicate its leasehold interest therein to the appropriate governmental authority, and Lessor shall proceed to sell its reversionary interest at public auction in accordance with Arizona law. Lessee shall attend the auction for the reversionary interest and bid the minimum bid amount, all in accordance with the terms set forth in the auction notice. If Lessee is the successful bidder at the auction, Lessee shall proceed to purchase the reversionary interest according to the terms of sale included in the auction notice, and upon completion of the purchase shall dedicate the reversionary interest to the appropriate governmental authority. Failure of the Lessee to bid for, and if required, to purchase and dedicate the rights of way as provided in this paragraph shall result in the immediate cancellation of this Lease, in which event both parties shall be relieved of further rights, duties and obligations under this Lease except those which survive cancellation by the terms of this Lease or Arizona Law. All public rights of way shall be constructed, at no cost to Lessor, so as to conform to City of Phoenix, Maricopa County, and Arizona Department of Transportation standards and specifications, as applicable.

(f) Lessee acknowledges that in no event will it be entitled to refund of prepaid rent.

4.10 Proration of Rent. Upon cancellation or termination of this Lease for any reason rent shall not be pro-rated unless specifically stipulated elsewhere in this document or by written agreement of Lessor and Lessee.

ARTICLE 5
ADDITIONAL AMOUNTS

5.1 Definition. In addition to the Annual Rent, Lessee shall also pay or cause to be paid all Impositions and all other costs, expenses, liabilities, obligations or other payments which Lessee under this Lease assumes and agrees to pay, all of which are hereinafter referred to individually and collectively as "Additional Amounts".

5.2 Payment. Lessee shall pay or cause to be paid all Additional Amounts before any interest, penalty, fine or cost accrues for nonpayment; provided, however, that if any Additional Amount may by law be paid in installments, Lessee may pay such Additional Amounts in installments provided that such installments do not extend past the Expiration Date. Lessee shall pay all such installments and any applicable interest at the time they become due and before any further penalty or fine may be added thereto.

5.3 Evidence. On request, Lessee shall provide Lessor with evidence of payment of taxes on the Improvements, Removable Improvements, and personal property on the Parcel and other Impositions by governmental authorities. As to all other Additional Amounts, within a reasonable period after Lessee's receipt of a written request, Lessee shall furnish to Lessor pertinent official receipts or other proof satisfactory to Lessor evidencing the payment of any Additional Amounts before the same become delinquent.

5.4 Interest. If Lessee fails to pay or cause to be paid in accordance with Article 5 any Additional Amounts, then Lessor shall have all the rights and remedies provided in Section 17.2 as in the case of nonpayment of Rent and in
Section 17.1 including the right to interest at the Interest Rate on all such Additional Amounts, if and to the extent paid by Lessor from and after the date of Lessee's nonpayment.

5.5 Taxes. Lessee shall timely pay and discharge, without deduction or abatement for any cause, all duties, taxes, charges, assessments, impositions and payments, extraordinary as well as ordinary, unforeseen as well as foreseen, of every kind and nature (under or by virtue of any current or subsequently enacted law, ordinance, regulation or order of any public or governmental authority), which during the Term are due, imposed upon, charged against, measured by or become a lien on (i) any part of the premises; (ii) the interest of any of the parties to this Lease or in proceeds received pursuant to this Lease; and (iii) the rent paid pursuant to this Lease. Lessee shall have the right to contest any such taxes, assessments or other charges provided that the fee interest of Lessor shall not thereby be encumbered. In event of sale or exchange of fee title to a private party taxes and assessments payable under this paragraph shall exclude all municipal, State or federal income, gift, estate inheritance or excess profit taxes assessed against Lessor.

ARTICLE 6
USE AND OCCUPANCY OF PREMISES

6.1 Uses. The Premises shall be used solely and exclusively for "Permitted Uses"; Permitted Uses shall mean research, engineering, testing, and development of vehicles, vehicular components, machinery, structures and structural components, industrial processes, agriculture equipment, military equipment, mechanical, chemical and electrical systems, and other uses allowed by zoning unless Lessor determines and advises Lessee in writing otherwise. All other uses are prohibited.

6.2 Artifacts. (a) Pursuant to A.R.S. (S)(S)41-841 and 41-842, Lessee, Lessee's employees, and Lessee's guests shall not excavate or collect any prehistoric or historic archaeological specimens on the Premises without a permit from the Director of the Arizona State Museum and written approval of Lessor pursuant to the terms of this Lease. Lessee shall immediately report any unpermitted excavation or collection or archaeological specimens on the Premises to the Arizona State Museum and Lessor. (b) Pursuant to A.R.S. (S)41-844, Lessee shall report to the Director of the Arizona State Museum and Lessor any prehistoric or historic archaeological site, or paleontological site, that is discovered on the Premises by Lessee, Lessee's employees, or Lessee's guests, and shall, in consultation with the Director of the Arizona State Museum and Lessor, immediately take all reasonable steps to secure the preservation of the discovery.

6.3 Native Plants. Lessee shall not move, use, destroy, cut or remove or permit to be moved, used, destroyed, cut or removed any cactus, protected native plants or products of the land except that which is necessary for the use of the Parcel, and then only with the prior written approval of Lessor, and such permission shall not be unreasonably withheld or delayed. If the removal or destruction of plants protected under the Arizona Native Plant Law is necessary to the use of the Parcel, Lessee shall also obtain the prior written approval of the Arizona Department of Agriculture.

6.4 Waste; Conformity to Law. Lessee shall not conduct or permit to be conducted any public or private nuisance on the Premises, nor commit or permit to be committed any waste thereon. Lessee shall maintain the entire Premises in a clean and wholesome condition. Lessee shall not use or permit the Premises be used in any manner that is not in conformity with all federal, state, county, and municipal laws, rules, and regulations, unless Lessor determines and advises Lessee in writing otherwise.

6.5 Minerals. Lessor excepts and reserves out of the Parcel all oil, gases, geothermal resources, coal, ores, minerals, fossils, and fertilizers of every kind which may be in or upon the Parcel, and the right to enter upon the Parcel to inspect, explore or extract any such items. Lessee shall be entitled to reasonable compensation for any damages resulting from the exercise of the rights reserved hereunder.

6.6 Quiet Enjoyment. Lessee shall have and hold, peaceable, quiet enjoyment of the Parcel during the Term of this Lease so long as Lessee is in compliance with all the provisions of this Lease.

6.7 Inspection. Except as otherwise provided herein, Lessor and its duly authorized agents, employees and representatives, shall have the right to enter upon and inspect the Premises and all improvements thereon at a reasonable time, and in a reasonable manner.

6.8 Surrender. In the event this lease is not renewed, Lessee shall surrender peaceably the possession of the Premises upon expiration of the Term of this Lease.

6.9 Zoning. Lessee agrees to abide by the applicable provisions of the Maricopa County, or any successor Governmental entity's zoning ordinances, unless Lessor determines and advises Lessee in writing otherwise. To the extent consistent with the purpose of this lease, Lessor shall cooperate with lessee in obtaining any necessary or desired site plan and design review approvals, stipulation modifications, use permits and any other necessary governmental approvals and shall execute and deliver such petitions, plans, applications or other documents as Lessee may from time to time reasonably request to effect such governmental approvals. Lessee shall not rezone any part or all of the Parcel without Lessor's written consent.

6.10 Change in Use. Lessor shall not unreasonably withhold or delay a request made by Lessee for a Change in Use, provided that such proposed Change in Use (i) is consistent with Lessor approved zoning and (ii) is likely to render the Premises more valuable than the Permitted Use. Lessor shall cause the Parcel for which such Change in Use is requested to be promptly reappraised to determine the then full value of the Parcel. Lessee shall be entitled to obtain, at Lessee's cost, and submit to the Lessor an appraisal, for Lessor's review and consideration for these purposes, from an independent qualified appraiser previously approved by Lessor. The proposed use of underground storage tanks or other environmentally hazardous activities shall be considered reasonable grounds to withhold approval of a Change in Use.

6.11 Trespass. Lessee shall report to Lessor and appropriate law enforcement authorities any known or suspected trespass or waste committed on the Premises.

6.12 Repair and Maintenance. Lessor shall be under no obligation whatever to maintain, repair, rebuild or replace any improvement on the Premises. Lessee shall, subject to the provisions of Article 12 (Damage) and Article 15 (Condemnation) and at its own expense, keep and maintain the Premises in good order, condition and repair in conformity with any applicable governmental requirements and if applicable, those of the insurance underwriting board or insurance inspection bureau having jurisdiction over the Premises.

ARTICLE 7
EASEMENTS AND DEDICATIONS

7.1 Public Use Interests. (a) Lessor hereby agrees to make land available for easements (hereinafter called "Public Use Interests") for roadways, access, utilities, and drainage over, under, upon and across such portions of the Parcel as are identified and requested from time to time by Lessee and are reasonably necessary. Such Public Use Interests may be perpetual easements, as required by pertinent governmental authorities or public utilities or Lessor and permitted by state law, and may, at Lessor's option survive cancellation or termination of this Lease and leasehold interest created pursuant hereto.

(b) Before Lessor makes a Public Use Interest available, Lessee shall deliver a legal description of the pertinent portion of the Parcel demised herein, a completed Application for Right-of-Way and a notice describing the nature of the Public Use Interest required.

(c) Easements requiring rights which transcend the rights granted herein, either in scope or in time, must be purchased at a price and in the manner required by Arizona law.

(d) After notification and upon receiving full compensation for the Public Use Interest in the manner required by Arizona law, Lessor shall execute and deliver a patent or easement, as the case may be, in recordable form for the Public Use Interest to the purchaser of the Public Use Interest. The purchaser of the Public Use Interest, if other than the pertinent governmental authority or public utility, shall thereupon immediately dedicate the Public Use Interest to the pertinent governmental authority or public utility and record such Public Use Interest in the office of the Maricopa County Recorder. Lessor shall also execute such other and further documents as may be required to fully implement the intent of this Paragraph; provided that, any other documents executed pursuant to this Paragraph shall not affect any real property other than that portion of the Parcel sold or leased for the Public Use Interest which is included in the Parcel demised herein.

7.2 Temporary, Non-Exclusive Easements. At Lessee's election and without further consent of Lessor, Lessee may, from time to time, create non-exclusive easements or licenses over, under and across Parcel for roadway, access, drainage and utilities including without limitation, water, power, gas, electric, sewer, telephone, television, and other communications; provided, however, that the term of such easements shall not survive the expiration or termination of this Lease. Lessor shall not be entitled to any compensation for such temporary, non-exclusive easements, except that Lessor shall be entitled to and Lessee shall pay to Lessor fifteen percent (15%) of the revenue from such uses as rent in addition to the Rent otherwise provided for in Article 4 (Rent) of this lease.

7.3 Reservations. Lessor reserves those rights as required in A.R.S. (S) 37-287, and Lessee has those rights enumerated therein.

ARTICLE 8
RECORDS

8.1 Record Keeping: Inspection. Lessee shall make and keep for the Term of the Lease and either (a) five years thereafter; or (b) until the conclusion of any dispute concerning this Lease, whichever is later, appropriate books and records concerning the operation of this Lease including but not limited to Federal and State tax statements, receipts and other records. Upon five (5) business days prior written notice Lessor, its duly authorized agents, employees and representatives shall have the right at reasonable times during the Term of this Lease and for either (a) five years thereafter; or (b) until the conclusion of any dispute concerning this Lease, whichever is later, to make reasonable examination of those books, records or other material in order to obtain information which Lessor deems necessary to administer this Lease. Further, upon five (5) business days prior written notice Lessor, its duly authorized agents, employees and representatives shall have the right at all times during the term of any sublease or any extension thereof, and for either (a) five years thereafter; or (b) until the conclusion of any dispute concerning this Lease, whichever is later, to make reasonable examination of any sublessee's books, records or other material which Lessor deems necessary in order to obtain information to administer Article 4 ("Rent") of this Lease.

ARTICLE 9
CONSTRUCTION AND IMPROVEMENTS

9.1 Definitions. (a) "Improvement" means anything placed on or any disturbance of the Parcel which is permanent in character, which is the result of labor or capital expended by Lessee, or by his sublessees, successors or predecessors in interest, on the Parcel in its reclamation or development, and which has enhanced the value of the land. Anything placed on or any disturbance of the Parcel during the Term of this Lease which does not constitute an "Improvement" as defined herein will not be subject to reimbursement. (b) "Removable Improvement" means anything not permanent in character which is the result of labor or capital expended by the Lessee, his sublessees, successors or predecessors in interest on the Parcel. (c) "Reimbursable Improvement" means an Improvement on or of the Parcel (i) for which Lessee shall be reimbursed by a succeeding lessee pursuant to Arizona law, (ii) which is not removable, and
(iii) which is either authorized pursuant to the terms of this Lease or has been preapproved in writing by Lessor prior to placement or disturbance.

9.2 Prior Approval. Lessee shall not place or construct or permit to be placed or constructed any Improvement or Removable Improvement on or to the Premises, other than Improvements necessary to carry out the purpose of this Lease. All other Improvements are prohibited. Prior to applying for a building permit or prior to beginning construction if no permit is required, Lessee shall submit to Lessor on a current version of Lessor's form known as an Application To Place Improvement ("Application"). No construction shall begin until Lessor

approves in writing the Application. The Application shall include plans and specifications (including but not limited to grading, construction and landscape plans) showing the nature, location, approximate cost, and quality of the proposed Improvements. Drainage and waste disposal plans must be submitted with the Application. Plans submitted must be stamped by an Arizona registered engineer or architect. The work shall be completed by an Arizona registered contractor. The location of completed Improvements, as built construction plans stamped by an Arizona registered engineer or architect, and any other information required by Lessor, shall be submitted to Lessor within thirty (30) days following the completion of construction on Lessor's form known as Report Of Improvement Placed With Prior Approval. Any Improvements placed on the Premises shall conform to existing laws and ordinances applicable to construction and maintenance in the jurisdiction where the Premises are located, unless Lessor determines and advises Lessee in writing otherwise.

9.3 Utilities; New Construction. Gas, electric, power, telephone, water, sewer, cable television and other utility or service lines of every nature shall be placed and kept underground unless Lessor grants prior written approval otherwise. All Improvements shall be of new construction and no Improvements shall be moved from any other location onto the Premises without Lessor's prior written approval.

9.4 Annual Statement. Within 180 days after each anniversary of the commencement date of this Lease, Lessee shall file with Lessor a sworn statement setting forth the general description of any Improvements placed on the Premises during the prior lease year and the actual cash value of such Improvements. Lessee shall not be deemed to be in default hereunder if the actual cash value is incorrect so long as Lessee made the determination in good faith.

9.5 Ownership. All Improvements constructed upon the Premises by Lessee shall be the property of Lessee or any successor in interest to whom Lessee specifically conveys all or any part of the Improvements, and shall, unless they become the property of Lessor, be subject to assessment for taxes in the name of Lessee, the same as other property of Lessee. Within sixty (60) days prior to or ninety (90) days following the expiration or termination of this Lease, Lessee may remove those Improvements which belong to it, have been previously approved by Lessor in writing, are free of any liens and can be removed without causing injury to the Parcel. At its option, Lessor may waive any of the above listed prerequisites to Lessee's removal of Improvements on the Parcel. Lessee may, with Lessor's prior written approval and within the time allowed for removal, sell its Improvements to the succeeding Lessee. Lessee's rights under this Paragraph 9.5 shall survive any termination or cancellation of this Lease. Such surviving rights shall not restrict Lessor's ability to release the land and are subject to A.R.S. (S)(S) 37-288 and 37-293.

9.6 Subleases. In connection with any sublease or assignment filed with Lessor, Lessee may sell all of its right, title and interest in and to any and all Improvements and may allow sublessees or assignees to construct Improvements, subject to the provisions of Paragraph 6.1 ("Uses") in which event the party that purchases or constructs such Improvements, and its successors

and assigns, except as may be set forth in any agreement between Lessee and such party, shall thereafter be deemed to be the owner of Improvements with respect thereto, and shall be subject to the requirements, and enjoy the benefits, of this Article as to such Improvements.

9.7 Insurance Proceeds. Subject to the rights of any pertinent Leasehold Mortgagees, the owner of Improvements and Removable Improvements shall be entitled to any casualty insurance or condemnation proceeds resulting from the destruction or taking of any Improvements or Removable Improvements; provided, however, that the Lessee shall remain obligated to pay to Lessor the Rent under Article 4 (Rent), and the provisions of Article 15 (Condemnation) shall govern the disposition of condemnation awards that include Lessor's interest in the fee title to the Parcel.

9.8 Reimbursement; Amortization.

(a) It is understood and agreed that, all Improvements constructed on the Premises during the term of this Lease shall be fully amortized, on a straight line basis for purposes of reimbursement under A.R.S. 37-242 or A.R. S.37-293, over a fifteen (15) year period. Under no circumstances shall any Improvements be considered to have a value greater than zero after the sixteenth anniversary of the Commencement Date of this Lease, or any extensions.

(b) The Improvements existing on the Parcel on the Commencement Date hereof have a reimbursement value of $847,277, and shall be amortized for purposes of reimbursement over the first twelve (12) years of this Lease.

(c) The cost upon which the depreciation schedule described in Paragraph 9.8 (a), shall be the cost of said Improvements at the time of construction as evidenced by the notification required in Paragraph 4.4.

(d) Any and all Improvements constructed during a permitted option period shall be amortized over the lesser of fifteen (15) years or the remaining term of the last option period exercised. In the event an option period is not exercised subsequent to construction of Improvements, said Improvement shall be amortized, as provided herein, over the option period in which they were constructed.

9.9 Removal. With the approval of any pertinent Leasehold Mortgagee, the Owner of any structures and Improvements shall have the right, from time to time, to remove or demolish all or any part of such structures or Improvements on the Parcel without any obligation to reconstruct Improvements thereon; provided, however, that the Lessee shall continue to be obligated to pay the annual rent as set forth in Article 4.

9.10 Use and Removal of Water. This Lease does not confer upon Lessee, its assignees or sublessees, any express or implied rights to the use or removal of surface or ground water from the Parcel.

9.11 Improvements Dedicated to Public Use. Lessee shall have no right to reimbursement for Improvements that are dedicated or otherwise committed or transferred to public use.

ARTICLE 10
LIENS

10.1 Payment; Indemnity. Lessee shall be responsible for payment of all costs and charges for any work done by or for it on the Premises or in connection with Lessee's occupancy thereof, and Lessee shall keep the Premises free and clear of all mechanics' liens and other liens and encumbrances on account of work done for or authorized by Lessee or persons or entities claiming under Lessee or bond over such liens according to State law. Lessee expressly agrees to and shall indemnify and hold Lessor harmless against liability, damages, costs, attorney's fees and all other expenses or loss on account of claims of lien or other encumbrances of laborers or materialmen or others for work performed or materials or supplies furnished for or authorized by Lessee or persons or entities claiming under Lessee. Further, any contracts between Lessee, Lessee's assignee or sublessee, and any contractors or subcontractors shall expressly hold Lessor harmless against any liability arising from such contracts, as described above.

10.2 Notice. Should any claims of lien or other encumbrances be filed against the Parcel or any action purporting to affect the title to the Parcel be commenced, the party receiving notice of such lien or action shall immediately give the other party written notice thereof.

10.3 Contest. Notwithstanding anything contained herein to the contrary, after written notice to Lessor, Lessee may contest by appropriate legal proceeding, conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Imposition, legal requirement, lien, encumbrance, charge or any other adverse claim against all or any part of the Premises provided that: (a) the fee interest of Lessor shall not thereby by encumbered; and (b) Lessor shall not thereby become subject to any civil or criminal liability whatsoever for Lessee's failure to comply.

ARTICLE 11
INSURANCE AND INDEMNITY

11.1 Indemnity. Except to the extent occurring or existing prior to the Commencement Date hereof, Lessee hereby expressly agrees to indemnify and hold Lessor harmless, or cause Lessor to be indemnified and held harmless, from and against all liabilities, obligations, damages, penalties, claims, causes of action, costs, charges and expenses, including attorney's fees and costs, which may be imposed upon or incurred by or asserted against Lessor by reason of any:
(a) accident, injury or damage to any person or property occurring on or about the Premises or any portion thereof; (b) use, non-use or condition of the Premises or any portion thereof; or (c) failure on the part of Lessee to perform or comply with any of the provisions of this Lease; except that none of the foregoing shall apply to Lessor's intentional conduct or active negligence nor to the intentional conduct or active negligence of Lessor's agents, servants, contractors or subcontractors. If any action or proceeding is brought against Lessor by reason of any such occurrence, Lessee, upon Lessor's written request

and at Lessee's expense, will resist and defend such action or proceeding, or cause the same to be resisted either by counsel designated by Lessee or where such occurrence is covered by liability insurance, by counsel designated by the insurer.

11.2 Policies. Lessee, at its expense, shall at all times during the Term of this Lease, and any extension thereof, maintain in full force a policy or policies of commercial general liability insurance, including property, damage, written by one or more responsible insurance companies licensed to do business in the State of Arizona, and each policy shall be written on an occurrence basis, which insure Lessee and Lessor against liability for injury to persons and property and death of any person or persons occurring in, on or about the Premises, or arising out of Lessee's maintenance, use and occupancy thereof. All commercial general liability and personal property damage policies shall contain a provision that Lessor, named as an additional insured, shall be entitled to recovery under the policies for any loss occasioned to it, its servants, agents and employees by reason of the negligence or wrongdoing of Lessee, its servants, agents and employees or sublessee. Further, the policies shall provide that their coverage is primary over any other insurance coverage available to the Lessor, its servants, agents and employees. All policies of insurance delivered to Lessor must contain a provision that the company writing the policy shall give to Lessor ten (10) days notice in writing in advance of any cancellation or lapse, or the effective date of any reduction in the amounts of insurance.

11.3 Amounts. The insurance as described in Paragraph 11.2 herein shall afford protection not less than $2,000,000 in combined single limits for bodily injury and property damage liability and each liability policy or policies shall be written on an occurrence basis; provided, however, that the minimum amount of coverage for the above shall be adjusted upward on Lessor's reasonable request to be made no more frequently than once every two (2) years so that such respective minimum amounts of coverage shall not be less than the amounts then required by statute or generally carried on similarly improved real estate in the County herein described, whichever is greater. If at any time Lessee fails, neglects or refuses to cause such insurance to be provided and maintained, then Lessor may, at its election, procure or renew such insurance and any amounts paid therefor by Lessor shall be an additional amount due at the next date Rent is due and payable.

11.4 Blanket Policy. Notwithstanding anything to the contrary in this Article, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a socalled blanket policy or policies of insurance maintained by Lessee, provided, however, that the coverage afforded Lessor will not be reduced by reason of the use of such blanket policy of insurance.

11.5 Copies. Copies of said policies shall be delivered to Lessor prior to Lessee's occupancy of the Premises along with a current certificate of insurance. Lessee shall maintain with Lessor a current certificate of insurance and a current copy of the policy during this lease.

ARTICLE 12
DAMAGE

12.1 Lessee's Obligations If the Parcel or any building or other Improvement or Removable Improvement located thereon is damaged or destroyed during the Term of this Lease, Lessee may, but shall be under no obligation to, arrange, at its expense for the repair, restoration and reconstruction of the same substantially to its former condition, but such damage or destruction shall not terminate this Lease or relieve Lessee from its duties and liabilities hereunder or, as Lessee may elect, for development and construction of a substantially different project consistent with a permitted use approved by Lessor pursuant to Paragraph 6.10 ("Change in Use").

ARTICLE 13
TRADE FIXTURES AND PERSONAL PROPERTY

13.1 Personal Property. Any trade fixtures, signs, store equipment, and other personal property installed in or on the Parcel by Lessee or any sublessee shall remain their property subject to the provisions of this Lease. Lessee shall have the right, provided it is not then in breach hereunder, at any time to remove any and all of the same, subject to the restrictions of Paragraph 9.5 ("Ownership").

ARTICLE 14
ASSIGNMENTS AND SUBLEASES

14.1 Financing. Without further approval by Lessor, Lessee shall have the right at any time and from time to time during the Term of this Lease to assign or otherwise encumber by way of mortgages, deeds of trust or other documents or instruments, all or any part of its right, title and interest in and to this Lease to any person or entity for the purpose of obtaining financing. An assignment pursuant to this Paragraph 14.1 shall not relieve Lessee of any obligations hereunder. The provisions of Paragraph 14.2 ("Other Assignments") shall not in anyway limit Lessee's right to obtain leasehold financing as set forth herein.

14.2 Other Assignments. With Lessor's prior written approval, which shall not be unreasonably withheld or delayed, Lessee may at any time and from time to time during the Term of this Lease assign all or any part of its rights, interest and obligations hereunder to all of the Premises. Lessee shall request approval for any assignment by submitting an application therefore on such forms as Lessor may require. Lessee shall not be deemed to have assigned its interests herein as a result of (a) any addition or withdrawal of a partner, if Lessee is a partnership, (b) any change in stock ownership, if Lessee is a corporation,
(c) any change in the beneficial ownership, if Lessee is any other form of entity, or (d) assignment by Lessee of part or all of its interest herein to an Affiliated Entity.

14.3 Subleases. So long as there is then no uncured default, Lessee may sublease portions of the Premises with the prior written approval of Lessor upon submission of a copy of the proposed sublease, which approval shall not be unreasonably withheld or delayed, provided the following conditions are satisfied:

(a) No sublease shall relieve Lessee of its responsibility to pay and perform all of its obligations hereunder;

(b) Lessee shall not be entitled under a sublease to collect rent which is prepaid in excess of one year in advance, unless Lessee either: (i) prepays Rent to the extent allowed by this Lease, for the portion of the Parcel covered by the sublease, or (ii) provides Lessor with a letter of credit or other bond which is in such form as is reasonably satisfactory to Lessor and secures payment to Lessor of the pro rata portion of such prepaid rent which Lessor would be entitled to receive as Rent under this Lease for the pertinent portion of the Premises;

(d) The term of the sublease is for a period of not less than 2 years;

(e) Such sublease provides that any violation of any provisions of this Lease, whether by act or omission, by a sublessee shall be a default under the sublease, entitling the lessor thereunder to terminate such sublease and exercise other remedies as a result thereof;

(f) Such sublease contains the attornment provisions of paragraph 14.4;

(g) Such sublease is an arms-length transaction negotiated in good faith and provides for rental rates comparable to existing market rates; and

(h) Such sublease is on a form of lease which has been previously approved by Lessor or is otherwise entered into upon terms and conditions which are reasonably satisfactory to Lessor.

14.4 Attornment. If this Lease is terminated prior to the expiration of its term, then, so long as a sublessee complies with the terms and conditions set forth in its sublease, it shall attorn thereunder directly to Lessor, Lessor shall attorn to such sublessee, including recognizing the rights of any lenders under the sublease, and Lessor shall not disturb such sublessee, in accordance with the terms of the pertinent sublease; provided, however, that:

(a) Lessor's obligations thereunder shall be no greater and its rights no less than those set forth in this Lease;

(b) No sublessee shall be required to make any payment to Lessor unless and until such sublessee shall have received written notice from Lessor of the termination of this Lease and direction that payments and performance thereafter be made directly to Lessor. Thereafter, upon such sublessee's timely payment or performance to Lessor, Lessor shall not be entitled to claim a default for not having received any corresponding payment or performance from Lessee. If a sublessee, however, receives conflicting written notices demanding payment or performance from Lessor and Lessee, such sublessee shall have the right to interplead such payment and/or other matters in any court of competent jurisdiction, in which event such sublessee shall not be deemed in default. Payment or performance when and as ordered by such court shall constitute full performance. So long as a sublessee has made payment for performance to Lessor or interpleaded such matters and is not subject to termination for default of the pertinent sublease, Lessor shall not join that sublessee as a party defendant in any auction or proceeding or take any other action for the purpose of terminating sublessee's interest and estate because of any default under or termination of this Lease. Moreover, notwithstanding the termination of this Lease, so long as Lessee has complied with the requirements hereof relating to subleases, Lessor shall recognize any and all subleases entered into pursuant to the terms hereof and any executory contracts to sublease pursuant to the terms hereof; provided, however, that any and all benefits which would thereafter accrue to Lessee under the sublease shall belong to Lessor;

(d) Lessor shall not be subject to any offsets or defenses which the sublessee may have against any prior lessor (including Lessee);

(e) Lessor shall not be bound by any payment in respect of rent, common area expenses, or other additional charges, as described in the sublease, which the sublessee might have paid for more than one rental period in advance to any prior lessor (including Lessee);

(f) Lessor shall not be bound by any agreement or modification of the sublease made without the written consent of Lessor;

(g) Lessor shall not be bound by any provision set forth in the sublease requiring the sublessor to indemnify or hold the sublessee harmless;

(h) Lessor shall not be bound by any covenant to undertake or complete any construction of the Parcel or Premises or any portion thereof; and

(i) Lessor shall not be bound by any obligation to make any payment to the sublessee.

ARTICLE 15

CONDEMNATION

15.1 Definition; Division. Lessor, any pertinent Leasehold Mortgagees and, if Lessee is not in default, Lessee, shall cooperate in prosecuting and collecting their respective claims for an award on account of a taking of all or any portion of the Premises and all damages or awards (with any interest thereon) to which Lessor, Lessee or any pertinent Leasehold Mortgagees may be entitled by reason of any taking of all or any portion of the Premises (herein referred to as "Condemnation Proceeds"). In the event of the taking or condemnation by any competent authority for any public or quasi-public use or purpose of all or any portion of the Premises at any time during the Lease Term, the rights of Lessor, Lessee, or any Leasehold Mortgagees, to share in the net proceeds of any award for land, buildings, improvements and damages upon any such taking, shall be apportioned as follows:

(a) Lessee shall receive that portion attributed to the then fair market value of the buildings and Improvements constructed thereon and Lessee shall receive the fair market value immediately prior to such taking of Lessee's leasehold interest in the Leased Premises so taken;

(b) Lessor shall receive the fair market value of its reversionary interest under this Lease (exclusive of any value attributable to improvements).

The entire amount of the award, settlement or payment attributable to the value of buildings and improvements shall belong to Lessee.

15.2 Termination. If the whole or materially all of the Premises shall be taken or condemned, this Lease, at Lessee's option as set forth below, shall cease and terminate, and Lessee's obligations to pay Rent, Additional Amounts and other charges hereunder shall be apportioned as of the date of vesting of title in such taking or condemnation proceedings. For the purposes of this Article, a taking or condemnation of materially all of the Premises, as distinguished from a taking or condemnation of the whole of the Premises, means a taking of such scope that the untaken portion of the Premises is not reasonably usable for Lessee's purposes or insufficient to permit the restoration of the then existing Improvement thereon so as to constitute Improvements capable of producing a proportionately fair and reasonable net annual income, taking into consideration the payment of all operating expenses thereof including but not limited to Rent and all other charges herein reserved, and after the performance of all covenants, agreements and provisions herein provided to be performed by Lessee. The determination of what constitutes a fair and reasonable net annual income shall be governed by reference to the average net annual income produced by the Premises during the five-year period immediately preceding the taking (or, if the taking occurs during the first five years of the Lease Term, during the Lease Term to date). As used above, the term "operating expenses" does not include depreciation or income taxes. If there is any controversy as to whether materially all of the Premises have been taken, the controversy shall be resolved by arbitration.

If materially all of the Premises are taken or condemned, then Lessee, at its option, upon thirty (30) days prior notice to Lessor, given at any time within ninety (90) days after the vesting of title in the condemnor, may cancel and terminate this Lease as to the entire Premises. The Rent and other charges hereunder shall be prorated as of this date of termination.

15.3 No Termination. In the event of a partial taking or condemnation,
i.e., a taking or condemnation of less than materially all of the Premises, this Lease (except as hereinafter provided) shall nevertheless continue, but the Rent for the Lease Year in which such condemnation occurs shall be pro-rated as of the date of such condemnation and that portion of the Rent attributable to that portion of the Premises so taken shall be credited to Lessee's obligations next arising under this Lease, and the Rent shall thereafter be reduced proportionately to reflect the loss of the land taken. In the event that there be any controversy over such proportionate reduction in the Rent, the controversy shall be resolved by arbitration.

15.4 Temporary Taking, If the whole or any part of the Premises or of the Lessee's interest under this Lease be taken or condemned by any competent authority for its or their temporary use or occupancy for a period which is fewer than four (4) months, this Lease shall not terminate by reason thereof and Lessee shall continue to pay, in the manner and at the times herein specified, the full amounts of the annual rent and all other charges payable by Lessee hereunder, and, except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the condemning authority, to perform and observe all of the other terms, covenants, conditions and obligations imposed upon Lessee under this Lease, as though such taking or condemnation had not occurred. If the whole or any part of the Premises or the Lessee's interest in this Lease be taken or condemned by a competent authority for its or their temporary use or occupancy for a period which is in excess of 4 months, this lease may be terminated at the option of Lessee upon notice given within thirty
(30) days of the taking or condemnation. Notwithstanding anything to the contrary herein, in the event of any temporary taking or condemnation the Lessee shall, if this Lease has not been terminated as provided in this Paragraph 15.4, be entitled to receive the entire amount of any award made for such taking or condemnation, whether paid by way of damages, Rent or otherwise, unless such period of temporary use or occupancy shall extend to or beyond the Expiration Date, in which case such award shall be apportioned between the Lessor and the Lessee as of such Expiration Date.

ARTICLE 16
LESSOR'S RIGHT TO PERFORM AND INSPECT

16.1 Right. If a default occurs hereunder, then thirty (30) days with respect to monetary defaults or 45 days with respect to nonmonetary defaults (or such additional time as may be necessary to effect a cure in the exercise of reasonable diligence) after Lessee's receipt of written notice of such default, Lessor may, but without being obligated to do so, cure such default by making such payment or performing such act for the account and at the expense of Lessee. No such payment

or performance by Lessor shall operate to release or discharge Lessee from any obligation hereunder. All sums paid by Lessor, pursuant to this Article 16 and all reasonable costs and expenses (including reasonable attorneys' fees and costs) so incurred shall constitute Additional Amounts payable by Lessee to Lessor on demand.

16.2 Inspection. Lessee acknowledges and agrees that Lessor and its authorized representatives shall have the right to enter the Premises and any portion thereof at all reasonable times following reasonable notice (but in no event less than 48 hours prior notice, except in case of emergency) to inspect for compliance with the terms of this Lease, and may take all such action as may be necessary or appropriate for such purposes. Furthermore, Lessee acknowledges and agrees that, at any time within one year prior to the Expiration Date and upon reasonable notice, Lessor may enter the Premises or any portion thereof for the purpose of showing the same to prospective tenants, purchasers or mortgagees and, with the prior approval of Lessee, may display on the Premises advertisements for sale or lease; provided, however, that Lessor may only enter and inspect the structures after reasonable notice and during reasonable business hours. No entry pursuant to this Section shall constitute an eviction.

ARTICLE 17
DEFAULT AND REMEDIES

17.1 Events. Default shall only be deemed to have occurred in the following situations and Lessee shall not be deemed in default hereunder for the purpose of Lessor's exercise of any right or privilege herein until the following applicable notice and grace period has expired:

(a) If Lessee fails to pay any installment of Rent any penalty or accrued interest thereon as required by the provisions of Article 4 and such failure continues for thirty (30) days after the receipt of notice of default from Lessor, unless the time for the payment has been previously extended pursuant to paragraph 4.7 ("Extension")

(b) If Lessee fails to perform or comply with any other Term of this Lease and such failure continues for forty-five (45) days after the receipt of notice of default from Lessor; provided, however, that with respect to any such failure which is of such nature that although curable, it cannot, with due diligence and adequate resources, be cured within forty five (45) days, a default shall not be deemed to exist if Lessee commences curing such failure within the 45-day period and thereafter proceeds with reasonable diligence and action to complete curing such failure.

(c) To the extent then allowed by law, if Lessee files a voluntary petition in bankruptcy which is not dismissed within 90 days after the filing thereof; is adjudicated bankrupt or insolvent; files any petitions or answers seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation: seeks, consents to, or acquiesces in the appointment of any trustee,

receiver, or liquidator of Lessee, or of all or any substantial part of its respective property or of the pertinent portion of the Premises; makes any general assignments for the benefit of creditors; or admits in writing its inability to pay its debts generally as they become due.

(d) To the extent then allowed by law, if a petition is filed against Lessee seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future federal, state or other statute, law, or regulation, which remains undismissed or unstayed for an aggregate of ninety (90) days (whether or not consecutive), or if a trustee, receiver, or liquidator of Lessee, or of all or any substantial part of its properties or of the Premises is appointed without the consent or acquiescence of Lessor and such appointment remains unvacated or unstayed for an aggregate of ninety (90) days (whether or not consecutive).

17.2 Remedies. Subject to the notice and cure provisions set out in Paragraph 17.1 ("Events") and the rights of any assignee, sublessee or Leasehold Mortgagee, if default exists, Lessor may at its option, exercise, in addition to its rights at law or in equity, any of those remedies set forth below:

(a) Lessor shall have the right, at its election, to reenter the Premises, or any part thereof, either with or without process of law, and to expel, remove and put out Lessee and persons occupying the Premises under Lessee, using such force as may be necessary in so doing, to take full possession of and control over the Premises and to have, hold and enjoy the same and to receive all rental income of and from the same. No reentry by Lessor shall be deemed an acceptance of a surrender of this Lease, nor shall it absolve or discharge Lessee from any liability under this Lease. Upon such reentry, all rights of Lessee to occupy or possess the Premises shall cease and terminate.

(b) Lessor shall have the right, at its election, with or without reentry as provided in subparagraph (a) immediately above, to give written notice to Lessee stating that this Lease and the Term hereby demised shall terminate on the date specified by such notice, and upon the date specified in such notice this Lease and the Term hereby demised and all rights of Lessee hereunder shall terminate. Upon such termination, Lessee shall quit and peacefully surrender to Lessor the Premises and the Improvements then situated hereon.

(c) At any time and from time to time after such reentry, Lessor may relet the Premises, or any part thereof, in the name of Lessor or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term of this Lease), and on such conditions (which may include concessions or free rental) as Lessor, in its reasonable discretion, may determine and may collect and receive the rental therefor. However, in no event shall Lessor be under any obligation to relet the Premises or any part thereof, and Lessor shall in no way be responsible or liable for any failure to relet or for any failure to collect any rental due upon any such reletting. Even though it may relet the Premises, Lessor shall have the right thereafter to terminate this Lease and all of the rights of Lessee in or to the Premises.

(d) Unless Lessor shall have notified Lessee in writing that it has elected to terminate this Lease, no such re-entry or action in lawful detainer or otherwise to obtain possession of the Premises shall relieve Lessee of its liability and obligations under this Lease; and all such liability and obligations shall survive any such re-entry. In the event of any such re-entry, whether or not the Premises, or any part thereof, shall have been relet, Lessee shall pay to Lessor the entire Rent and all other charges required to be paid by Lessee up to the time of such re-entry. Thereafter, Lessee, until the end of what would have been the Term of this Lease in the absence of such re-entry, shall be liable to Lessor, and shall pay to Lessor, as and for liquidated damages:

(i) The amount of Rent and Additional Amounts which would be payable under this Lease by Lessee if this Lease were still in effect, less

(ii) The net proceeds of any reletting, after deducting all of Lessor's reasonable expenses in connection with such reletting, including without limitation all reasonable repossession costs, brokerage commissions, legal expenses, attorneys' fees, alteration and repair costs and expenses of preparation for such reletting. Lessor's reasonable expenses of reletting shall not include the cost of constructing any new Improvements on the Parcel nor shall any duty of Lessor to mitigate damages be construed as obligating Lessor to construct new Improvements on the Parcel.

Lessee shall pay such damages to Lessor annually on the date that payment of Rent is due, and Lessor shall be entitled to recover from Lessee annually as the same shall arise. Lessee shall be liable for such damages on an annual basis, whether or not in any prior Lease Year or Lease Years the net proceeds described in subparagraph (ii) above shall have exceeded the Rent and Additional Amounts described in subparagraph (i) above.

(e) In the event of any breach or threatened breach by Lessee of any of the terms, covenants or agreements contained in this Lease, Lessor shall have, in addition to any specific remedies provided in this Lease, the right to invoke any right or remedy allowed by law or in equity or by statute or otherwise, including the right to enjoin such breach or threatened breach.

17.3 Waiver. No waiver or breach of any Term of this Lease shall be construed as a waiver of any succeeding breach of the same or any other term.

ARTICLE 18
HOLDING OVER

18.1 No Holding over. There shall not be any holding over by Lessee or any assignee or sublessee, upon the expiration or cancellation of this Lease for any reason. If nevertheless there be any holding over by Lessee or any assignee or sublessee, the holding over shall give rise to a tenancy at the sufferance of Lessor upon the same terms and conditions as are provided for herein with a Rent for the holdover period commensurate with, but in no event less than, the previous year's Rent.

ARTICLE 19
MORTGAGES

19.1 Definition. Any instrument including, but not limited to, a deed of trust, mortgage, agreement for sale or other security device which creates an encumbrance on Lessee's or any sublessee's leasehold interest, and which is filed with Lessor as set forth in this Article 19 ("Mortgages"), is herein referred to as a "Permitted Mortgage" unless it is held by an Affiliated Entity, and the holder of the Permitted Mortgage is herein referred to as a "Leasehold Mortgagee". In no event shall an Affiliated Entity be deemed a Leasehold Mortgagee.

19.2 Filing. No Leasehold Mortgagee shall be entitled to the rights set forth in this Article 19 ("Mortgages") until a true copy thereof is filed with Lessor. The term of any such obligation secured by a Permitted Mortgage shall not be longer than the then remaining Term of this Lease, as such may be extended.

19.3 Preconditions. Lessee, or any sublessee leasing under a sublease approved by Lessor, from time to time during the Term of this Lease may make one or more Permitted Mortgages upon their leasehold interests, or any fractional portion thereof without the prior written consent of the Lessor; provided that:

(a) The Lessee, sublessee or the Leasehold Mortgagee shall promptly deliver to the Lessor in the manner herein provided for the giving of notice to the Lessor, a true copy of the Permitted Mortgage and of any assignment thereof and shall notify the Lessor of the address of the Leasehold Mortgagee to which notices may be sent; and

(b) Each Permitted Mortgage shall contain provisions permitting the disposition and application of condemnation awards in the manner provided in this Lease.

19.4 Conditions. With respect to any Permitted Mortgage filed in accordance with the provisions of Paragraph 19.2 ("Filing") hereof, the following provisions shall apply:

(a) Lessor, upon providing Lessee any notice of: (i) default under this Lease, or (ii) a termination of this Lease, or (iii) a matter on which Lessor may predicate or claim a default, shall at the same time provide a true copy of such notice to every Leasehold Mortgagee. No such notice by Lessor to Lessee shall be deemed to have been duly given unless and until a copy thereof has been so provided to every Leasehold Mortgagee that has filed a notice with Lessor in accordance with Paragraph 19.2 ("Filing"). From and after such notice has been given to a Leasehold Mortgagee, such Leasehold Mortgagee shall have the same period after the receipt of such notice for remedying any default or acts or omissions which are the subject matter of such notice or causing the same to be remedied, as is given Lessee. If an event of default is of a nature that it can reasonably be cured, by lawful means, only by Leasehold Mortgagee obtaining actual physical

possession of the Premises, or any part thereof, the period for curing the default shall be extended so long as (i) the Leasehold Mortgagee is pursing such self-help as is available under applicable law or (ii) such Leasehold Mortgagee shall be diligently attempting to obtain, in a court of competent jurisdiction, the right to actual physical possession of the Premises or any part thereof, and the Leasehold Mortgagee cures all other events of default which are susceptible of being cured by the Leasehold Mortgagee.

(b) Any Leasehold Mortgagee shall have the right to cure any default of Lessee hereunder whether the same consists of the failure to pay Rent or any other sums due and owing hereunder or the failure to perform any other matter or thing which the Lessee is hereby required to do or perform, and the Lessor shall accept such performance on the part of the Leasehold Mortgagee as though the same had been done or performed by the Lessee.

(c) Any Leasehold Mortgagee may, at the time of any damage or destruction, by fire or otherwise, to all or any portion of the Premises or any property thereon, at no cost or expense to Lessor, repair or replace the same, as the case may be.

(d) Lessor will take no action by reason of any default on the part of Lessee so long as the periods for the Leasehold Mortgagee's opportunity to cure Lessee's defaults as set forth herein have not run. In the event Lessor issues an order canceling this Lease, the order shall not become final until any foreclosure action by a Leasehold Mortgagee, registered with Lessor pursuant to Paragraph 19.2 ("Filing") of this Lease, is finally resolved, if the Leasehold Mortgagee does both of the following:

(i) Within thirty (30) days of the date of issuance of a notice of default, files written notice the Lessor of its intent to proceed with a foreclosure action, and

(ii) Within one hundred twenty days (120) of the date of issuance of a notice of default, has commenced either a foreclosure action in court or a nonjudicial foreclosure of a deed of trust, and has provided Lessor with a certified copy of the complaint or other document that officially commences the foreclosure process, and thereafter prosecutes the foreclosure with reasonable diligence.

Such Leasehold Mortgagee shall not be required to continue such possession or continue such foreclosure or other proceedings if the default which would have been the reason for serving such a notice shall be cured. In addition, so long as Lessor has provided notice and an opportunity to cure to Lessee and any Leasehold Mortgagee as provided herein, nothing herein shall preclude the Lessor from exercising any rights or remedies under this lease with respect to any other default by the Lessee during any period of such forbearance. If the Leasehold Mortgagee holding a Permitted Mortgage encumbering Lessee's leasehold interest or a purchaser at a foreclosure or trustee's sale (a "Purchaser") shall acquire title to Lessee's leasehold interest by foreclosure, or by assignment in lieu of foreclosure, or otherwise, and shall cure all defaults of Lessee which are required to be cured by

such Leasehold Mortgagee or Purchaser pursuant hereto, as the case may be, then such defaults of Lessee or any prior holder of the Lessee's leasehold interests which are not required to be cured by such Leasehold Mortgagee (or Purchaser) shall no longer be deemed to be defaults hereunder.

(e) Any Leasehold Mortgagee or Purchaser of the Lessee's or, if applicable, any sublessee's leasehold interest (or any portion thereof) may become the legal owner and holder of all or a portion of this Lease or such sublease by judicial or non-judicial foreclosure of a Permitted Mortgage or as a result of the assignment of this Lease or such sublease in lieu of foreclosure without Lessor's consent, whereupon such Leasehold Mortgagee or Purchaser at a foreclosure sale shall immediately become and remain liable under this Lease (or such sublease) to the same extent as Lessee (or such sublessee), and any and all benefits that would thereafter accrue to Lessee (or such sublessee) under this Lease (or such sublease) shall belong to such Leasehold Mortgagee or Purchaser. In case any such Leasehold Mortgagee or Purchaser by foreclosure of Lessee's interest becomes the owner and holder of this Lease, any of the same events described in Paragraph 17.1 ("Events") by such Leasehold Mortgagee or Purchaser shall constitute a default, and Lessor shall be entitled to the same remedies, but only with respect to that part or portion of the Premises held under this Lease by such Leasehold Mortgagee or Purchaser. Nothing contained herein shall be construed or interpreted to preclude Lessor from exercising any of its rights and remedies hereunder if Leasehold Mortgagee or Purchaser, within the periods provided herein, fails to cure any event of default occurring after the Leasehold Mortgagee or Purchaser acquires its interest herein.

(f) If such Leasehold Mortgagee or Purchaser is a trustee, each and every obligation of such trustee shall be binding upon it solely in its fiduciary capacity and shall have no force and effect against such trustee in its individual capacity.

(g) Lessor shall upon request of a Leasehold Mortgagee execute, acknowledge and deliver to such Leasehold Mortgagee, an agreement prepared at the sole cost and expense (excluding, however, the cost of any attorneys' fees incurred by Lessor) of Lessee, the Leasehold Mortgagee or the sublessee if the Permitted Mortgage is on any sublessee's interest, in form satisfactory to such Leasehold Mortgagee between Lessor, Lessee (or sublessee), and Leasehold Mortgagee, agreeing to all of the provisions of this Section.

(h) Lessor agrees that the name of any Leasehold Mortgagee may be added as an additional insured or to the "loss payable endorsement" or named under a standard mortgagee clause of any and all insurance policies carried by Lessee (or sublessee, if applicable). The proceeds arising from any insurance policies are to be held by a bank or trust company chosen by such Leasehold Mortgagee which is authorized to do business in Arizona and has a net worth of $10,000,000.00 or more (the "Depository"), and distributed pursuant to the provisions of this Lease, or, subject to Lessor's prior approval, by the Leasehold Mortgagee whose Permitted Mortgage encumbers Lessee's interest and is prior in lien to any other Leasehold Mortgagee, but the Leasehold Mortgagee may reserve its right to apply to the mortgage debt all, or any part, of Lessee's share of such proceeds pursuant to the Permitted Mortgage.

(i) Any Leasehold Mortgagee shall be given prompt notice by Lessor of any arbitration proceedings or legal proceedings by the parties hereto involving obligations under this Lease, and shall have the right to intervene therein and be made a party to such proceedings, and the parties hereto do hereby consent to such intervention. In the event that any Leasehold Mortgagee shall not elect to intervene or become a party to such proceedings, the Leasehold Mortgagee shall receive notice of, and a copy of, any award or decision made in said arbitration proceedings which shall be binding on all Leasehold Mortgagees not intervening after receipt of notice of arbitration.

(j) As to any Permitted Mortgage of Lessee's leasehold interest, Lessor consents to a provision therein for an assignment of rents due from sublessee to the holder thereof, effective upon any default under such Permitted Mortgage, subject to Lessee's or Lessor's right to collect such rents. The holder thereof in any action to foreclose the same shall be entitled to the appointment of a receiver.

(k) Nothing herein contained shall be deemed to impose any obligation on the part of Lessor to deliver physical possession of the Premises to any Leasehold Mortgagee, or to its nominee. Lessor agrees, however, that Lessor will, at the sole cost and expense of such Leasehold Mortgagee, or its nominee, cooperate in the prosecution of summary proceedings to evict the then defaulting Lessee (or sublessee, if applicable).

(l) Lessee may delegate irrevocably to any Leasehold Mortgagee holding a Permitted Mortgage encumbering Lessee's leasehold interest the authority to exercise any or all of Lessee's rights hereunder, but no such delegation shall be binding upon Lessor unless and until either Lessee or said Leasehold Mortgagee gives to Lessor a true copy of a written instrument effecting such delegation. Such delegation of authority may be effected by the terms of the Permitted Mortgage itself, in which case the service upon Lessor of a true copy of the Permitted Mortgage in accordance with this Article 19 ("Mortgages"), together with a written notice specifying the provision therein which delegates such authority to said Leasehold Mortgagee, shall be sufficient to give Lessor notice of such delegation. The rights set forth in this paragraph shall not affect, modify, or limit the rights of the Leasehold Mortgagee contained in this Lease or Lessee's duties and obligations hereunder.

(m) No payment made to Lessor by a Leasehold Mortgagee shall constitute an agreement that such payment is, in fact, due under the terms of this Lease. A Leasehold Mortgagee having made any payment to Lessor pursuant to Lessor's wrongful, improper, or mistaken demand shall be entitled to the return of any such payment or a portion thereof provided such Leasehold Mortgagee shall have made demand therefor not later than one year after the date of its payment.

(n) Lessor shall, without charge, at any time and from time to time hereafter, within ten (10) days after written request of Lessee, any sublessee, or Leasehold Mortgagee to do so, certify by written instrument duly executed and acknowledged to any Leasehold Mortgagee or sublessee, Purchaser, assignee of any right, title or interest of Lessee in this Lease or proposed

Leasehold Mortgagee sublessee, Purchaser, or assignee of any right, title or interest of Lessee in this Lease or any other person, firm, or corporation specified in such request: (i) as to whether this Lease has been supplemented or amended, and if so, the substance and manner of such supplement or amendment;
(ii) as to the existence of any default hereunder to the best of Lessor's knowledge; (iii) as to the Commencement Date and Expiration Date of the Lease Term; (iv) acknowledging that the lienholder is a Leasehold Mortgagee; (v) as to whether the Lessor has assigned its interests or any portion thereof in this Lease and, to the best of its knowledge, as to whether the Lessee has assigned it interests or any portion thereof in the Lease; (vi) certifying that, to the best of Lessor's knowledge, there has been no violation of any law, ordinance or governmental rule or regulation relating to the Premises; (vii) acknowledging that the creation of the Permitted Mortgage or the Leasehold Mortgagee's acquisition of Lessee's interest in the Premises by foreclosure or otherwise will not constitute an event of default under the Lease; and (viii) as to any other matters as may be reasonably so requested. Any such certificate may be relied upon by the Lessee and any other person, firm, or corporation to whom the same may be exhibited or delivered.

(o) Nothing herein contained shall require any Leasehold Mortgagee or Purchaser, as a condition to its exercise of rights, to cure any default of Lessee not reasonably susceptible of being cured by such Leasehold Mortgagee or Purchaser, including but not limited to, a default related to bankruptcy and insolvency and any other sections of this Lease that may impose conditions of default not susceptible to being cured by a Leasehold Mortgagee or Purchaser. Such failure to cure shall not constitute a default hereunder upon the Leasehold Mortgagee or Purchaser taking possession of the Premises through foreclosure of the Leasehold Mortgage or Deed-in-Lieu thereof.

(p) So long as any Permitted Mortgage of Lessee's leasehold interest is in existence, unless all Leasehold Mortgagees holding Permitted Mortgages of Lessee's leasehold interest shall otherwise consent in writing, the fee title to the Premises and the leasehold estate of Lessee therein created by this Lease shall not merge but shall remain separate and distinct, notwithstanding the acquisition of such fee title by Lessee or by a third party, by purchase or otherwise. In addition, this Lease shall not be terminated or modified by an agreement between Lessor and Lessee without the consent of all Leasehold Mortgagees.

19.5 Limitations. This Lease grants to any Leasehold Mortgagee only those rights expressly set forth herein, regardless of the terms of the Permitted Mortgages or other documents executed in connection therewith.

ARTICLE 20
ENVIRONMENTAL MATTERS

20.1 Definition of Regulated Substances and Environmental Laws. For purposes of this Lease, the term "Environmental Laws" shall include but not be limited to any relevant federal, state, or local environmental laws, and the regulations, rules and ordinances, relating to environmental

matters, and publications promulgated pursuant to the local, state, and federal laws and any rules or regulations relating to environmental matters. For the purpose of this Agreement, the term "Regulated Substances" shall include but not be limited to substances defined as "regulated substance," "solid waste," "hazardous waste," "hazardous materials," "hazardous substances," "toxic materials," "toxic substances," "inert materials," "pollutants," "toxic pollutants," "herbicides," "fungicides," "rodenticides," "insecticides," "contaminates," "pesticides," "asbestos," "environmental nuisance," "criminal littering," or "petroleum products" as defined in Environmental Laws.

20.2 Compliance with Environmental Laws. Lessee/Permittee ("Lessee") shall strictly comply with all Environmental Laws, including, without limitation, water quality, air quality, and handling, transportation, storage, treatment, or disposal of any Regulated Substance on, under, or from the Premises. Without limiting the foregoing, compliance includes that Lessee shall: (a) comply with all reporting obligations imposed under Environmental Laws; (b) obtain and maintain all permits required by Environmental Laws and provided a copy to Lessor within ten business days of receipt of the permit; (c) provide copies of all documentation required by Environmental Laws to Lessor within ten business days of Lessee's submittal and/or receipt of the documentation; (d) during the Term of this Lease, provide copies of all information it receives or obtains regarding any and all environmental matters relating to the premises, including but not limited to environmental audits relating to the Premises regardless of the reason for which the information was obtained or whether or not the information was required by Environmental Laws; and (e) prevent treatment, storage, disposal, handling or use of any Regulated Substances within the Premises without prior written authorization from Lessor.

20.3 Designated Compliance Officer. Lessee at all times shall employ or designate an existing employee, consultant or representative (the "Designated Compliant Officer") who is responsible for knowing all Environmental Laws affecting Lessee and Lessee's business and monitoring Lessee's continued compliance with applicable Environmental Laws. Upon request by Lessor, Lessee shall make the Designated Compliance Officer available to discuss Lessee's compliance, answer any questions, and provide such reports and confirming information as Lessor may reasonably request.

20.4 Audit. At any time, Lessor may request the Lessee to provide an environmental audit of the Premises performed by an Arizona registered professional engineer or an Arizona registered geologist. Lessee shall pay the entire cost of the audit.

20.5 Environmental Assessment. At any time during the Term of the lease, Lessor may require Lessee to obtain one Phase I environmental assessment of the Premises performed by an Arizona registered professional engineer or an Arizona registered geologist. If, based upon the Phase I environmental assessment or its own independent investigation, Lessor identifies any possible violation of Environmental Laws or the terms of this Lease, Lessor may require Lessee to conduct additional environmental assessments as Lessor deems appropriate for the purpose of ensuring that the Premises are in compliance with Environmental Laws. The Phase I assessment, or any other

assessment required by Lessor, shall be obtained for the benefit of both Lessee and Lessor. A copy of the Phase I report shall be provided both to Lessee and Lessor. Lessor, in its sole discretion, shall have the right to require Lessee to perform additional assessments of any damage to the Premises arising out of any violations of Environmental Laws. If Lessee fails to obtain any assessment required by Lessor, Lessee shall pay the entire costs of any and all assessments required by Lessor, notwithstanding the expiration or termination of the Lease.

20.6 Indemnity for Environmental Damage. Lessee shall defend, indemnify and hold Lessor harmless from and against any and all liability, obligations, losses, damages, penalties, claims, environmental response and cleanup costs and fines, and actions, suits, costs, taxes, charges, expenses and disbursements, including legal fees and expenses of whatever kind or nature (collectively, "claims" or "damages") imposed on, incurred by, or reserved against Lessor in any way relating to or arising out of any non-compliance by Lessee, Lessee's successors or sublessees, with any Environmental Laws, the existence or presence from and after the Commencement Date of any Regulated Substance, on, under, or from the Premises, and any claims or damages in any way relating to or arising out of the removal, treatment, storage, disposition, mitigation, cleanup or remedying of any Regulated Substance on, under, or form the Premises by the Lessee, its agents, contractors, or subcontractors.

20.7 Scope of Indemnity. This indemnity shall include, without limitation, claims or damages arising out of any and all violations of Environmental Laws regardless of any real or alleged fault, negligence, willful misconduct, gross negligence, breach of warranty, or strict liability on the part of any of the indemnitees. This indemnity shall survive the expiration or termination of this Lease and/or transfer of all or any portion of the Premises and shall be governed by the laws of the State of Arizona.

20.8 Lessee's Participation in the Defense. In the event any action or claim is brought or asserted against Lessor which is or may be covered by this indemnity, the Lessee shall fully participate, at Lessee's expense, in the defense of the action or claim including but not limited to the following: (a) the conduct of any required cleanup, removal or remedial actions and/or negotiations, (b) the conduct of any proceedings, hearings, and/or litigation, and (c) the negotiation and finalization of any agreement or settlement. Lessor shall retain the right to make all final decisions concerning the defense.

20.9 Restoration. Prior to the termination of this Lease and in addition to those obligations set forth in this Lease, Lessee shall restore the Premises by removing any and all Regulated Substances. In addition, the restoration shall include, but not be limited to, removal of all waste and debris deposited by the lessee. If the Premises or any portions thereof are damaged or destroyed from the existence or presence of any Regulated Substance or if the Premises or any portions thereof are damaged or destroyed in any way relating to or arising out of the removal, treatment, storage, disposition, mitigation, cleanup or remedying of any Regulated Substance, the Lessee shall arrange, at its expense, for the repair, removal, remediation, restoration, and reconstruction to the Premises to the original condition existing on the date that the Lessee first occupied the Premises, to the satisfaction of Lessor. In any event, any damage, destruction, or restoration by Lessee shall not relieve Lessee from its obligations and liabilities under this Lease.

ARTICLE 21
ARBITRATION

21.1 Jurisdiction. The parties hereby agree that after Lessee has exhausted its administrative remedies as may be required by law, all claims, disputes and other matters in question hereunder shall be subject to arbitration as set forth below; provided, however, that the arbitrators shall have no power to change any of the provisions of this Lease in any respect nor shall they have any power to make an award of reformation and the jurisdiction of the arbitrators is hereby expressly limited accordingly.

21.2 Request. Either party may serve the other with a written request for arbitration which shall also specify the name and address of one person designated to act as arbitrator on behalf of that party. Within thirty (30) days after the service of such request, the other party shall give to the first party written notice specifying the name and address of the person designated to act as arbitrator on its behalf. If the other party fails to so notify the first party within the time above specified, then the appointment of the second arbitrator shall be made by the first arbitrator. The two arbitrators chosen shall meet within ten (10) days after the second arbitrator is appointed and shall appoint a third arbitrator who shall be a competent, impartial person, and in the event of their being unable to agree upon such appointment within ten(10) days after the time aforesaid, the said arbitrator shall be selected by the parties themselves if they can agree thereon within a further period of twenty
(20) days. If the parties do not so agree, then either party on behalf of both may request the American Arbitration Association to appoint such third arbitrator. The person so appointed pursuant to this Article must be an attorney-at-law actively engaged in the practice of law in Arizona for at least ten (10) years.

21.3 Rules. Said arbitration shall be conducted in accordance with the rules for Commercial arbitration then in effect for the American Arbitration Association or any successor organization thereto.

21.4 Decision. The arbitrators shall render their decision, upon the concurrence of at least two of their number, within thirty (30) days after the appointment of the third arbitrator. Their decision shall be in writing and counterpart copies shall be delivered to each of the parties. A decision in which any two of the arbitrators acting hereunder concur may be appealed de novo directly to the superior Court of Arizona, Maricopa County within thirty (30) days of the date of the decision. Unless so appealed, such decision shall in all cases be final, binding and conclusive upon the parties and judgment upon the decision may be entered by any court having jurisdiction thereof.

21.5 Fees. Unless otherwise required by the decision of the arbitrators, each party shall pay the fees and expenses of the original arbitrator appointed by such party or in whose stead, as above provided, such arbitrator was appointed, and the fees and expenses of the third arbitrator, if any shall be borne equally by the parties. Each party shall bear the expense of its own counsel, experts, and preparation and presentation of proof.

21.6 Injunctive Relief. Nothing contained herein shall preclude either party from obtaining temporary restraining orders or other injunctive relief issued by courts of law or equity pending the outcome of arbitration pursuant hereto.

21.7 Mandatory Arbitration. To the extent applicable, Lessor and Lessee agree to make use of mandatory arbitration pursuant to A.R.S.(S) 12-133.

ARTICLE 22
MUTUAL CANCELLATION

22.1 Mutual Cancellation. This lease may be terminated prior to the expiration date upon written agreement signed by both Lessor and Lessee. The agreement shall specify the terms and conditions of such a cancellation and may include but shall not be limited to an acceleration of the amortization of the improvements. In consideration of mutual termination of this Lease, Lessee shall pay Lessor an amount equal to eighteen (18) months rental, based on the rents due for the Lease Years following the termination.

22.2 Lessee's Termination. Lessee may terminate this Lease after the fifteenth anniversary of the commencement Date, with not less than 180 days prior written notice to Lessor, provided that:

(a) Lessee has paid the annual rental for the calendar year in which the termination takes effect;

(b) Lessee waives its rights and interest, if any, to pro rata refund of prepaid or paid rental; and

(c) In consideration of such early termination, (i) Lessee conveys to Lessor all right, title, and interest in and to the Improvements, free and clear of all monetary liens, reimbursement rights, and encumbrances, or, at Lessor's option, (ii) Lessee, at Lessee's sole cost and expense, removes the Improvements from the Parcel. The aforesaid written notice shall include a reference to this Paragraph 22.2 and a request that Lessor notify Lessee of its election of alternative (i) or (ii) above more than sixty (60) days before the termination date.

(d) Lessee agrees to allow access to Lessor and make the Premises available to Lessor for marketing purposes, including walk-throughs by potential Lessees.

(e) Lessee agrees to provide Lessor with a three (3) year prepaid Liability and Property damage insurance policy, naming Lessor as Primary insured. In the event the Lessor should lease the Premises prior to expiration of said Insurance Policy, the Lessor hereby waives any right to a refund of pre-paid premiums.

(f) In consideration of such early termination, if Lessee provides Lessor with three (3) years advance written notice, Lessee shall pay Lessor an amount equal to six (6) months pro rata portion of the following year's Base Rent; or if Lessee provides Lessor with two (2) years advance written notice, Lessee shall pay Lessor an amount equal to one (1) years' Base Rent, based on the rent for the subsequent lease year; or if Lessee provides Lessor with One
(1) year or less, advance written notice, Lessee shall pay Lessor an amount equal to two (2) years Base Rent, based on the rent for the subsequent lease year.

22.3 Proration of Rent. Upon cancellation or termination for any reason Rent shall not be pro-rated unless specifically stipulated elsewhere in this document.

ARTICLE 23
MISCELLANEOUS

23.1 Rights. This Lease grants Lessee only those rights expressly and unequivocally granted herein and Lessor retains and reserves all other rights in the Premises.

23.2 Binding Effect. Each provision of this Lease shall extend to, be binding on and inure to the benefit of not only Lessee but each of its respective heirs, administrators, executors, successors and assigns. When reference is made in this Lease to either "Lessor" or "Lessee", the reference shall be deemed to include, wherever applicable, the heirs, administrators, executors, successors and assigns of the parties. This Lease shall be binding upon all subsequent owners of the Premises, and of any interest or estate therein or lien or encumbrance thereon.

23.3 No Partnership. The relationship of the parties is that of Lessor and Lessee, and it is expressly understood and agreed that Lessor does not in any way or for any purpose become a partner of Lessee or a joint venturer with Lessee in the conduct of Lessee's business or otherwise, and that the provisions of any agreement between Lessor and Lessee relating to Rent are made solely for the purpose of providing a method by which Rent is to be measured and ascertained.

23.4 Quitclaim Upon Termination. After the expiration, cancellation, or termination of this Lease, Lessee shall execute, acknowledge and deliver to Lessor within thirty (30) days after written demand from Lessor to Lessee, any document requested by Lessor quitclaiming any right, title or interest in the Leasehold to Lessor or other document required by any reputable title company to remove the cloud of this Lease from the Premises; provided, however, such document shall not act to diminish or terminate any rights of the owner of Improvements to remove the Improvements as set forth herein.

23.5 Titles. The titles to the Articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part of the Lease.

23.6 Notices. Any notice to be given or other document to be delivered to Lessee or Lessor hereunder shall be in writing and delivered to Lessee or Lessor by depositing same in the United States Mail, with prepaid postage thereon and addressed as follows:

TO Lessor: Arizona State Land Department 1616 West Adams Street - First Floor Phoenix, Arizona 85007

TO Lessee: Address of Record, with a copy to all Leasehold Mortgagees

Lessee must notify Lessor by written notice of any change in address within thirty (30) days. Lessor may, by written notice to Lessee designate a different address. A copy of any notice to Lessee shall also be given to all Leasehold Mortgagees. Notice shall be deemed given upon delivery in case of personal delivery or 5 days following deposit in the U.S. Mails.

23.7 No Promise To Sell. Lessee acknowledges that it has not been induced to enter into this Lease by any promise from Lessor or any of its agents, servants or employees that the Parcel will be offered for sale at any time.

23.8 Cancellation. Lessor may cancel this Lease within three (3) years of execution, without penalty or further obligation, if any person significantly involved in initiating, negotiating, securing, drafting or creating the Lease on behalf of Lessor or any of its departments or agencies is, at any time while the Lease or any extension of the Lease is in effect, an employee of any other party to the Lease in any capacity, or a consultant to any other party of the Lease with respect to the subject matter of the Lease. The cancellation shall be effective when written notice from the Governor is received by all other parties to the Lease unless the notice specifies a later time. This provision is subject to the statutory rights of all Leasehold Mortgagees as provided by law and the statutory limits on this right of cancellation.

23.9 Applicable Law. This lease is subject to all current and subsequently enacted rules, regulations and laws applicable to State lands and to the rights and obligations of Lessors and Lessees. No provision of this Lease shall create any vested right in Lessee except as otherwise specifically provided in this Lease.

23.10 Amendment. This Lease may be amended only as permitted by law, in writing and upon agreement by Lessor and Lessee.

23.11 Attorneys' Fees. In any action arising out of this Lease, the prevailing party is entitled to recover reasonable attorneys' fees and costs in addition to the amount of any judgment, costs and other expenses as determined by the court. In the case of Lessor, reasonable attorneys' fees shall be calculated at the reasonable market value for such services when rendered by private counsel, notwithstanding that it is represented by the Arizona Attorney General's Office or other salaried counsel.

23.12 Execution. This document is submitted for examination. This is not an option or offer to lease or grant a permit. This document shall have no binding effect on the parties unless and until executed by Lessor (after execution by the Lessee), and a fully executed copy is delivered to the Lessee.

23.13 Severability. If any provision of this Lease or any application thereof shall be invalid or unenforceable, the Lease shall remain in full force and effect if such provision was not a material inducement to the benefitted party and the remaining provisions permit the parties to achieve the practical benefits of the arrangements contemplated hereby.

23.14 Mortgagee Request. If any Leasehold Mortgagee to whom the Lessee proposes to make a Permitted Mortgage on Lessee's leasehold interest shall require as a condition to making any loan secured by such Permitted Mortgage that Lessor agree to amend this Lease, then Lessor expressly agrees that it will make the requested amendments; provided that, the amendments do not impair Lessor's interests and can be legally effected without conducting a public hearing or advertising and offering this Lease as so amended at any public auction.

23.15 Memorandum. The parties shall execute and Lessee shall cause to be recorded, at Lessee's option, a memorandum of this Lease suitable for recording purposes, in the Official Records of Maricopa County, Arizona. The Lessee shall be responsible for preparing and recording the necessary documents and all costs associated therewith.

23.16 Cooperation. The parties hereto agree to fully and reasonably cooperate so as to allow Lessee to develop the Parcel consistent with this Lease and the applicable zoning. Lessor's cooperation shall not include any obligation on the part of Lessor to expend any monies on behalf of Lessee. Lessor's cooperation shall include, but not be limited to, cooperation by executing applications and petitions for any zoning and rezoning in accordance with Article 6, and cooperation by executing such other and further documents as may be reasonably required by Lessee to carry out the intent of the parties contemplated by this Lease.

23.17 Construction. The parties acknowledge that they have both had the benefit of legal counsel in negotiating and drafting this lease. They therefore agree that, notwithstanding anything contained herein to the contrary, this Lease and all of its terms, provisions and conditions shall be construed fairly and not against either Lessor or the Lessee.

23.18 Governing Law. Since the parcel is situated in Arizona, this Lease shall be governed by, construed and enforced in accordance with the laws of the State of Arizona. Any legal proceeding arising out of this Lease shall be brought in the Superior Court of Arizona, Maricopa County.

IN WITNESS HEREOF, the parties hereto have signed this Lease, effective the day and year set forth previously herein.

LESSOR:                                 LESSEE:

STATE OF ARIZONA                        FAILURE ANALYSIS ASSOCIATES, INC.
Arizona State Land Department


By: /s/ Illegible                       By: /s/ Michael R. Gaulke
    --------------------------------        ---------------------------------
                                        Its: President & C.E.O.

DATED this 15th Day of February 1998.   DATED this 10th Day of February 1998.

                                   EXHIBIT A

                         ARIZONA STATE LAND DEPARTMENT
                             LEGAL DESCRIPTION FORM
================================================================================

SUBMITTED TO: JOEL GILMORE                      THIS IS TO CERTIFY THAT THIS
REFERENCE: 03-53542                             LEGAL DESCRIPTION WAS
                                                PREPARED UNDER MY DIRECTION.


THE ENGINEERING AND MAPPING SECTION HEREBY
SUBMITS THE LEGAL DESCRIPTION OF LANDS REQUIRED
AND LOCATED IN:
SEC. 7 TWP. 4N RGE. 3E co. MARICOPA
================================================================================

LEGAL DESCRIPTION:

THAT PORTION OF LOT 4, AND THE SOUTHEAST QUARTER OF THE SOUTHWEST QUARTER (SE1/4SW1/4) AND THE SOUTH HALF OF THE SOUTHEAST QUARTER (S1/2SE1/4) OF SECTION 7, TOWNSHIP 4 NORTH, RANGE 3 EAST, OF THE GILA AND SALT RIVER MERIDIAN, MARICOPA COUNTY, ARIZONA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS;

COMMENCING AT THE SOUTHWEST CORNER OF SAID SECTION 7; THENCE N00 DEG.04'43"W ALONG THE WEST LINE OF SAID SOUTHWEST QUARTER 55.00 FEET, THENCE S89 DEG.50'
28 "E, PARALLEL WITH AND 55.00 FEET NORTH OF THE SOUTH LINE OF SAID SOUTHWEST QUARTER, 40.00 FEET TO THE TRUE POINT OF BEGINNING; THENCE N00 DEG.04'43"W, PARALLEL WITH AND 40.00 FEET EAST OF SAID WEST LINE A DISTANCE OF 1236.27 FEET, THENCE N89 DEG.41'48"E PARALLEL WITH AND 30.00 FEET SOUTH OF THENORTH LINE OF THE SOUTH HALF OF SAID SOUTHWEST QUARTER A DISTANCE OF 2483.57 FEET TO A POINTON THE NORTH-SOUTH MIDSECTION LINE OF SAID SECTION 7, THENCE N89 DEG.41'45"E PARALLEL WITH AND 30.00 FEET SOUTH OF THE NORTH LINE OF SAID SOUTH HALF OF THE SOUTHEAST QUARTER OF SECTION 7, A DISTANCE OF 2630.20 FEET, THENCE S03DEG.08'52"W, PARALLEL WITH AND 55.00 FEET WEST OF THE EAST LINE OF SAID SOUTH HALFA DISTANCE OF 1279.09 FEET, THENCE N89DEG.50'44"W, PARALLEL WITH AND 55.00 FEET NORTH OF THE SOUTH LINE OF SAID SECTION 7, A DISTANCE OF 2596.45 FEET TO A POINT ON SAID NORTH-SOUTH MIDSECTION LINE,' THENCE N89DEG.50'28"W, PARALLEL WITH AND 55.00 FEET NORTH OF THE SAID SOUTH LINE A DISTANCE OF 2445.34 FEET TO THE POINT OF BEGINNING.

CONTAINING 146.49 ACRES MORE OR LESS.

T.B. LEGAL:                                     /s/ Illegible
M&B IN LOT4; SESW; S2SE 146.49 AC.              --------------------------------
                                                          SIGNATURE
                                                          10/14/97
                                                            DATE

SHEET /   OF /
       --     --

EXHIBIT 21.1

SUBSIDIARIES OF THE COMPANY

Subsidiary		State or Other Jurisdiction of Incorporation or Incorporation or Organization
170181 Canada Ltd.		Canada
Failure Analysis Associates B.V.		Netherlands
Failure Analysis Associates, Spolka z o.o.		Poland
Exponent Realty LLC		Delaware
Exponent International Ltd.		United Kingdom

Exhibit 23.1

Independent Auditors’ Report and Consent

The Board of Directors

Exponent, Inc.:

The audits referred to in our report dated January 28, 2003, included the related financial statement schedule as of January 3, 2003, and for each of the years in the three-year period ended January 3, 2003, as listed in the index in Item 15(a)2 herein. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We consent to incorporation by reference in the registration statements (Nos. 33-38479, 33-46054, 33-72510, 33-79368, 333-31830, 333-67806, and 333-99243) on Form S-8 of Exponent, Inc. of our reports dated January 28, 2003, relating to the consolidated balance sheets of Exponent, Inc. and subsidiaries as of January 3, 2003 and December 28, 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended January 3, 2003 and the related schedule, which reports appear in the January 3, 2003, annual report on Form 10-K of Exponent, Inc.

Our report contains an explanatory paragraph that refers to the Company’s adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” effective December 29, 2001.

/s/ KPMG LLP

Mountain View, California

April 2, 2003

Exhibit 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Exponent, Inc. (the “Company”) on Form 10-K for the fiscal period ending January 3, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Gaulke, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

April 3, 2003



By:		/s/ Michael R. Gaulke
		Michael R. Gaulke President and Chief Executive Officer

Exhibit 99.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Exponent, Inc. (the “Company”) on Form 10-K for the fiscal period ending January 3, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard L. Schlenker, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

April 3, 2003



By:		/s/ Richard L. Schlenker
		Richard L. Schlenker Chief Financial Officer