Mr. Gaulke: Exponent is a multidisciplinary consulting firm dedicated to solving important science, engineering, and business problems for our clients. We were founded some 35 years ago, and over that period of time, we have combined the skills of over 70 scientific disciplines into one dynamic organization where we offer the expertise and knowledge of our firm to help clients make sound strategic decisions. The basic value proposition we offer our clients is to help them solve high exposure problems. These tend to be problems that arise through the manufacture of products or problems that our clients have in the areas of health or the environment. These exposures are often measured in dollars and the setting is most often one of litigation or regulation. It is typical for us, in any given year, to work on many problems that give rise to exposures of tens of millions of dollars. A few of these problems will have exposures well in excess of $1 billion. We have built a firm whose reputation is founded on helping make a difference in the outcomes to those kinds of problems. I will talk a little bit about who our clients are. They tend to be corporations, generally. Our typical client is usually a large corporation that is a manufacturer of products. The core of our business has us working in the area of litigation known as product liability. We also have as clients many of the law firms that represent these manufacturers in product liability issues. We do some work with associations and more recently technology development work for the US government. The US Army in particular has been a major client for us over the last few years. We have 400 plus consultants on our staff. They tend to be highly educated; about half of them hold a PhD or a MD in their field and from that standpoint tend to be very highly qualified. We source that talent from some of our best educational institutions, with a heavy emphasis on recruiting staff from MIT, Caltech, and Stanford. We look for and attempt to attract the best and the brightest technical talent. In the United States, we have 19 offices around the country. About a fourth of our employees are based in Silicon Valley, but we have developed an office structure that supports an ability to do work on a national basis. We have two overseas offices: one in Germany and one in the UK. We manage the firm around the project and today do 4,000 plus projects a year, so the project really becomes a center of our universe. Our 400 consultants are organized into 15 different practice areas. Ten of these have more of an engineering focus and run the gamut from vehicles, biomechanics, data analysis, electrical, human factors, thermal sciences, technology development, industrial structures, civil, to mechanics and materials. We also have five practice areas in the health and environmental arena: these are ecosciences, environmental, human health toxicology, epidemiology and food and chemicals. The food and chemicals business is a recent addition that we made through an acquisition last year, and provides a nice complement to our other health and environmental businesses. A project manager in our firm who is asked to lead a specific project has the ability to call upon whatever expertise is needed out of any of those 15 practice areas to assist in solving a particular project problem. Let me talk about a couple areas of emerging opportunity for our firm: health and defense technology. In the health area, we see a particular opportunity for our firm to build a business that is comparable to what we have done in the engineering disciplines. The predecessor to Exponent was a firm called Failure Analysis Associates and we are still very much known in the marketplace by many of our clients as Failure Analysis. That presence was principally built up through the engineering disciplines by helping clients with the products' liability problems of an engineering nature. Over the last five years, we have begun to build a parallel effort based in the sciences with a particular focus in the health arena and the environmental arena. The types of problems that we are working on in health are centered in the areas of human health toxicology, epidemiology, and food and chemical safety. An example of the type of project we have been working on in health is looking at the health concerns associated with acrylamides, one of the constituents in French fries that currently have many involved in food safety concerned. We are also looking at the areas of nutraceuticals, agrochemicals and pharmaceutical economics. We have been actively involved in assisting our clients in the medical device arena with the development of their new products, in particular helping them in the design phase to select the right materials and assisting them getting their products approved. As an example of our epidemiology work, we have conducted what I believe is the largest study to date on the safety of cellular telephones. I can tell you who the client is today because it was a study that was peer reviewed and has been published. This work was for Motorola, that proactively wanted to look at the safety of their products and determine if there was any evidence of a link between exposure to RF radiation and brain cancer, lymphoma or leukemia. Fortunately, we found none. In the technology development area, we got involved with a program called Land Warrior in early 1999. This is a program that the Army approached us on and asked for some help. Land Warrior was a program conceived in the early 1990s to put technology on the infantry soldier consisting of a wearable computer, heads-up display, GPS, a wireless LAN so that you could see in a moving map on a heads-up display, not only where you are, but also where all the rest of your squad or platoon are and where the enemy is thought to be on the map as well. The weapon system has a video sight and thermal weapon sight that show up in a heads-up display, as well as other capabilities. The program was competitively bid in 1995 and won by one of our major defense contractors that managed to spend $128 million over the next three years developing and working on the Land Warrior program but never really demonstrated a working prototype to the satisfaction of the customer. We were asked to take a look at this program in early 1999 and decided to take a very different approach to its development, one which significantly leveraged commercial off-the-shelf technology. As a result of that approach, we were able to build three working prototypes in six weeks. That was a very dramatic demonstration of the power of using commercial off-the-shelf technology or COTS. The result: we were given the lead program in designing the Land Warrior System. We have more recently won a prime contract in the competition for what is called the Objective Force Warrior, which is a program similar to Land Warrior except broader in scope and going further into the future. That was a program that the government wanted to conduct with two prime contractors in competition with each other. Ourselves and General Dynamics were awarded Phase I contracts for Objective Force Warrior; that was announced at the end of August of last year. We are currently in a competition to down select to one of us for the follow-on Phase II and Phase III portions of the program. These two follow-on phases have an announced price tag of about $140 million. The competition is ongoing right now and we are both in the process of submitting our proposals and expect to hear the outcome of the competition by the end of June of this year, literally in a couple of months. The approach that we have taken in working on the Land Warrior program, the Objective Force Warrior program, and the other military assignments that we have had is one that I would describe as being 'the honest technology broker.' We are not pushing any hardware that we have manufactured as a firm, but rather are in a position where we can identify and deliver the best technology available in the marketplace to the client. This approach involves leveraging commercial off-the-shelf and governmental off-the-shelf technologies and employing rapid prototyping so we can very quickly test what it is that we think solves the problem. Then we use a process that we call Quick Looks where we are able to take those prototypes and put them in the hands or on the backs of soldiers to very quickly try them out. A very good example of how quickly we, as a firm, can respond is a program that we were asked to get involved in this past summer to support our troops in Afghanistan. This was an effort to bring to the troops in the field, robots that could be used in the exploration of caves in Afghanistan where Al Qaeda or Taliban might be hiding. The caves can be dangerous environments as many contain ordnance, maybe booby traps or perhaps hostiles. Rather than have to send a soldier into the cave, the ability to send a robot in first to see if there are hazards present is an option that is very appealing. The Army has robot programs; the first one is scheduled to field in 2008. So the question was, could we adapt commercial off-the-shelf technology here to solve this problem? From the time that we got the call in May until we had four robots and eight controllers ready to deploy and send to Afghanistan was a lapsed time of 30 days. It actually took those robots 10 days to get to Afghanistan, but they were in the field 40 days from the time that we were first contacted. That program effort turned out to be a real success, the robots worked flawlessly and the program is now expanding. I think it's a good example of employing a different paradigm: Leveraging existing technology and quickly getting it into the hands of our troops. We are also involved in the Department of Defense's Common Access Card program, often called the smart card program, where the military is in the process of issuing smart cards to all of our active duty components as well as government DoD employees. Financially, we had a very good year this past year with record revenues and record net income. Our revenues were up 10% and our net income up 29% from the year before. We are looking forward to continuing to go after the growth opportunities that I have talked about and leverage the very strong market position we enjoy. I believe that the future for our firm is one that should be of real interest to investors.
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