UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

COMMISSION FILE NUMBER: 000-21433

FORRESTER RESEARCH, INC.

Registrant’s telephone number, including area code: (617) 613-6000

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

As of November 4, 2004, 21,855,569 shares of the registrant’s common stock were outstanding.

FORRESTER RESEARCH, INC.

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORRESTER RESEARCH, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

FORRESTER RESEARCH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report of Forrester Research, Inc. (“Forrester”) as reported on Form 10-K for the year ended December 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the nine months ended September 30, 2004 may not be indicative of the results that may be expected for the year ended December 31, 2004, or any other period.

Stock-Based Compensation

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to financial statements. Forrester has determined it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion (“APB”) No. 25 and elect the disclosure-only alternative under SFAS No. 123. There is no compensation expense related to option grants reflected in the accompanying financial statements.

If compensation cost for Forrester’s stock option plans had been determined using the fair value method prescribed in SFAS No. 123, net income for the three and nine months period ended September 30, 2004 and 2003 would have been approximately as follows (in thousands, except per share data):

Income Taxes

     Forrester provides for income taxes on an interim basis according to management’s estimate of the effective tax rate expected to be applicable for the full fiscal year ending December 31.

NOTE 2 — ACQUISITIONS

     (a) Giga Information Group, Inc.

In the first quarter of 2003, Forrester acquired Giga Information Group, Inc. (“Giga”), a global technology advisory firm, pursuant to a cash tender offer and second step merger. The acquisition increased agreement value and the number of client companies and has reduced operating expenses of the combined entity through economies of scale. The aggregate purchase price was $62,510,000 in cash which consisted of $60,347,000 for the acquisition of all outstanding shares of Giga common stock; $981,000 of estimated direct acquisition costs; and $1,182,000 for severance related to 27 employees of Giga terminated as a result of the acquisition. The results of Giga’s operations have been included in Forrester’s consolidated financial statements since February 28, 2003. Forrester elected

to treat the acquisition of Giga as a stock purchase for income tax purposes, and accordingly, the goodwill and intangible assets are not deductible for income tax purposes.

The following table summarizes the estimated fair values of the Giga assets acquired and liabilities assumed at the date of acquisition.

The acquired intangible assets are being amortized using an accelerated method according to the expected cash flows to be received from the underlying assets over their respective lives as follows:

Amortization expense related to identifiable intangible assets was approximately $1,118,000 and $2,526,000 during the three months ended September 30, 2004 and 2003, respectively, and $4,293,000 and $5,895,000 during the nine months ended September 30, 2004 and 2003, respectively.

The following table presents pro forma financial information as if the acquisition of Giga had been completed as of January 1, 2003.

(b) GigaGroup S.A.

As part of the acquisition of Giga discussed above, Forrester acquired an equity investment in GigaGroup S.A. (“GigaGroup”). GigaGroup was created in 2000 through the spin-off of Giga’s French subsidiary, and held an exclusive agreement to distribute all Giga research and certain services in France, Belgium, Netherlands, Luxemburg, Switzerland, Italy, Spain, and Portugal. During 2003, prior to the acquisition discussed below, Forrester recognized revenues of approximately $964,000 related to this distribution agreement.

On November 30, 2003, Forrester acquired the assets of GigaGroup. The acquisition increased the number of client companies and allows Forrester to sell Giga research and services in France, Belgium, Netherlands, Luxemburg, Switzerland, Italy, Spain and Portugal. The aggregate purchase price of $4,124,000 consisted of $2,866,000 in cash, $118,000 of direct acquisition costs, $521,000 of outstanding accounts receivable due to Forrester and the contribution of the equity investment in GigaGroup valued at $619,000. Prior to the acquisition, the equity investment of $1,215,000 was accounted for using the cost method and, accordingly, was valued at cost unless a permanent impairment in its value occurred or the investment was liquidated. In connection with the acquisition, an impairment of $596,000 to the carrying value of the investment was included in impairments of non-marketable investments in the consolidated financial statements and, as such, the remaining value of the investment of $619,000 was included in the purchase price.

Forrester elected to treat the acquisition of GigaGroup as an asset purchase for income tax purposes and, as such, the goodwill and intangible assets are deductible for income tax purposes.

The results of GigaGroup’s operations have been included in Forrester’s consolidated financial statements since December 1, 2003. GigaGroup’s historical financial position and results of operations prior to the date of acquisition were not material to Forrester’s financial position and results of operations.

The following table summarizes the estimated fair values of the GigaGroup assets acquired and liabilities assumed at the date of acquisition. Forrester is continuing to finalize certain estimates and appraisals related to the purchase price allocation and expects to finalize the purchase accounting in 2004.

The acquired intangible asset is being amortized using an accelerated method according to the expected cash flows to be received from the underlying asset over its life as follows:

Amortization expense during the three and nine months ended September 30, 2004 related to the intangible asset acquired from GigaGroup was $234,000 and $723,000, respectively.

NOTE 3 — INTANGIBLE ASSETS

A summary of Forrester’s amortizable intangible assets as of September 30, 2004 is as follows:

Amortization expense related to identifiable intangible assets was approximately $1,384,000 and $2,608,000 during the three months ended September 30, 2004 and 2003, respectively, and $5,112,000 and $6,140,000 during the nine months ended September 30, 2004 and 2003, respectively. Estimated amortization expense related to identifiable intangible assets that will continue to be amortized is as follows:

NOTE 4 — REORGANIZATION COSTS

In January 2004, Forrester announced a reduction of its workforce by approximately 15 positions in connection with the integration of GigaGroup’s operations. As a result, Forrester recorded a reorganization charge of $1,957,000 during the three months ended March 31, 2004. Approximately 53% of the terminated employees had been members of the sales force, while 27% and 20% had held administrative and research roles, respectively. The charge consisted primarily of severance and related benefit costs, and other payments for professional services incurred in connection with the reorganization. During the three months ended June 30, 2004, Forrester provided for additional severance and related benefits costs of $240,000.

In connection with the integration of GigaGroup’s operations, Forrester vacated and subleased office space in San Francisco, Amsterdam and London during the three-months ended June 30, 2004. As a result of these vacancies and related subleases, Forrester recorded reorganization charges of approximately $4,693,000 related to the excess of contractual lease commitments over the contracted sublease revenue and $1,861,000 for the write-off of related leasehold improvements and furniture and fixtures.

The activity related to these 2004 reorganizations during the nine months ended September 30, 2004 is as follows:

The accrued costs related to these 2004 reorganizations are expected to be paid in the following periods:

In connection with reorganizations of its workforce prior to 2004, Forrester consolidated its office space. As a result of those consolidations, Forrester has aggregate accrued facility consolidation costs of $1.3 million as of September 30, 2004. The activity related to these costs during the nine months ended September 30, 2004 is as follows:

These accrued facility costs are expected to be paid in the following periods:

NOTE 5 — NET INCOME PER COMMON SHARE

Basic net income per common share was computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share was computed by dividing net income by the diluted weighted average number of common shares outstanding during the period. The weighted average number of common equivalent shares outstanding has been determined in accordance with the treasury-stock method. Common stock equivalents consist of common stock issuable on the exercise of outstanding options, when dilutive. A reconciliation of basic to diluted weighted average shares outstanding is as follows:

During the three month periods ended September 30, 2004 and 2003, options to purchase approximately 2,772,000 and 2,921,000 shares of common stock, respectively, were excluded from the calculation of diluted weighted average shares outstanding as the effect would have been anti-dilutive.

During the nine month periods ended September 30, 2004 and 2003, options to purchase approximately 2,459,000 and 3,145,000 shares of common stock, respectively, were excluded from the calculation of diluted weighted average shares outstanding as the effect would have been anti-dilutive.

NOTE 6 — COMPREHENSIVE INCOME (LOSS)

The components of total comprehensive income (loss) for the three and nine months ended September 30, 2004 and 2003 are as follows:

NOTE 7 — NON-MARKETABLE INVESTMENTS

In June 2000, Forrester committed to invest $20.0 million in two private equity investment funds over a period of up to five years. During the three months ended September 30, 2004 and 2003, Forrester contributed approximately $412,500 and $1,100,000 to these investment funds, respectively. During the nine months ended September 30, 2004 and 2003, Forrester contributed approximately $2.0 million and $3.2 million to these investment funds, respectively, resulting in total cumulative contributions of approximately $17.5 million as of September 30, 2004. One of these investments is being accounted for using the cost method and, accordingly, is valued at cost unless an other than temporary impairment in its value occurs or the investment is liquidated. The other investment is being accounted for using the equity method. The carrying value of the investment funds as of September 30, 2004 was approximately $11.7 million. During the nine months ended September 30, 2004 and 2003, distributions of $313,000 and $419,000, respectively, were recorded and resulted in a gain in the consolidated statements of income. During the nine months ended September 30, 2003, Forrester recorded net impairments to these investments of approximately $442,000 which was included in the consolidated statements of income. During the three months ended September 30, 2004 and 2003, fund management charges of approximately $84,000 were included in other income, net in the consolidated statements of income, respectively. During the nine months ended September 30, 2004 and 2003, fund management charges of approximately $253,000 and $326,000 were included in other income, net in the consolidated statement of income, respectively, bringing the total cumulative fund management charges paid by Forrester to approximately $1.9 million. Fund management charges are recorded as a reduction of the investments’ carrying value.

Forrester has adopted a cash bonus plan to pay bonuses, after the return of invested capital, measured by the proceeds of a portion of its share of net profits from these investments, if any, to certain key employees, subject to the terms and conditions of the plan. The payment of such bonuses would result in compensation expense with respect to the amounts so paid. To date, no bonuses have been paid under this plan.

In December 2003, Forrester committed to invest an additional $2.0 million over an expected period of 2 years in an annex fund of one of the two private equity investment funds. The annex fund investment is outside of the scope of the previously mentioned bonus plan. During the nine months ended September 30, 2004, Forrester contributed $600,000 to this annex fund. This investment is being accounted for using the cost method and, accordingly, is valued at cost unless an other than temporary impairment in its value occurs or the investment is liquidated. The carrying value of this investment at September 30, 2004 is $600,000.

The timing of the recognition of future gains or losses from these investment funds is beyond Forrester’s control. As a result, it is not possible to predict when Forrester will recognize such gains or losses, if Forrester will award cash bonuses based on the net profit from such investments, or when Forrester will incur compensation expense in connection with the payment of such bonuses. If the investment funds realize large gains or losses on their investments, Forrester could experience significant variations in its quarterly results unrelated to its business operations. These variations could be due to significant gains or losses or to significant compensation expenses. While gains may offset compensation expenses in a particular quarter, there can be no assurance that related gains and compensation expenses will occur in the same quarters.

In July 2000, Forrester invested $1.6 million to purchase preferred shares of ComScore Networks, Inc. (“comScore”), a provider of infrastructure services which utilizes proprietary technology to accumulate comprehensive information on consumer buying behavior, resulting in approximately a 1.2% ownership interest. This investment is being accounted for using the cost method and, accordingly, is valued at cost unless a permanent

impairment in its value occurs or the investment is liquidated. In June 2003, Forrester determined that its investment in comScore had been permanently impaired due to an additional round of financing at a significantly lower valuation. As a result, during the nine months ended September 30, 2003, Forrester recorded a further write-down of $130,000 in the consolidated statement of income.

NOTE 8 — MARKETABLE INVESTMENT

Forrester owns common stock of Greenfield Online, Inc. (“Greenfield”), an Internet-based market research firm. In July 2004, Greenfield (NASDAQ: SRVY) completed an initial public offering. Upon consummation of the offering, Forrester received a conversion payment of approximately $463,000, and participated in the offering by selling approximately 21,000 shares for which Forrester received net proceeds of approximately $256,000. Accordingly, in the three months ended September 30, 2004, Forrester recognized a gain of approximately $678,000. As of September 30, 2004, the remaining investment of approximately $2.4 million, which is included in marketable securities in the accompanying consolidated balance sheet, is classified as available-for-sale and stated at fair market value with any unrealized gains and losses reported as a component of accumulated other comprehensive income. During the three months ended September 30, 2004, approximately $1.3 million was recorded as an unrealized gain as a component of other comprehensive income.

NOTE 9 — OTHER ASSETS

Other assets consist primarily of capitalized third-party survey costs which are being amortized over their expected period of benefit.

NOTE 10 — STOCK REPURCHASE

In October 2001, Forrester announced a program authorizing the repurchase of up to $50 million of its common stock. The shares repurchased may be used, among other things, in connection with Forrester’s employee stock option and stock purchase plans and for potential acquisitions. As of September 30, 2004, Forrester had repurchased approximately 2,732,000 shares of common stock at an aggregate cost of approximately $44.9 million.

During the three months ended March 31, 2004, Forrester entered into a structured stock repurchase agreement giving Forrester the right to acquire shares of Forrester’s common stock in exchange for an up-front net payment of $1.5 million. The $1.5 million up-front net payment was recorded in stockholders’ equity as a reduction of additional paid-in capital. Upon expiration of this agreement in May 2004, Forrester received approximately $1.6 million in cash which was recorded as an increase to additional paid-in capital in the accompanying consolidated balance sheet.

During the three-months ended December 31, 2003, Forrester entered into a similar agreement in exchange for an up-front net payment of $2.0 million. Upon expiration of this agreement in February 2004, Forrester received 119,000 shares which were recorded as treasury stock.

NOTE 11 — SEGMENT AND ENTERPRISE WIDE REPORTING

Forrester’s operations are managed within the following three operating groups (“Operating Groups”): (i) North America, (ii) Europe and, (iii) World Markets which includes Asia, Middle East, Africa, and Latin America. All of the Operating Groups generate revenues through sales of the same research, advisory and other service offerings. Each of the Operating Groups is composed of sales forces responsible for clients located in such Operating Group’s region and research personnel focused primarily on issues generally more relevant to clients in that region. Because the three Operating Groups have similar economic characteristics, production processes, and classes of clients, provide similar products and services, and use similar distribution methods, they are aggregated for presentation in Forrester’s consolidated financial statements. Accordingly, the financial information disclosed in the consolidated statements of income for the three and nine months ended September 30, 2004 and 2003 represents the aggregation of the Operating Groups.

Net revenues by geographic client location and as a percentage of total revenues are as follows:

NOTE 12 — RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial Accounting Standards Board (“FASB”) issued a proposed Statement, “Share-Based Payments”, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and would generally require that such transactions be accounted for using a fair value-based method. As discussed in Note 1, Forrester currently accounts for share-based compensation transactions using APB Opinion No. 25. If this statement is issued, the adoption of this interpretation will have a material negative impact on Forrester’s consolidated financial position and results of operations, the level of which Forrester is currently assessing.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions are intended to identify these forward-looking statements. These statements include, but are not limited to, statements about the potential success of WholeView 2 and other product offerings, the ability to achieve all of the anticipated benefits from the acquisition of Giga Information Group, the amount of the charge and any cost savings related to reductions in force and associated actions, and our ability to achieve success as the economy improves. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and results to differ include, among others, our ability to anticipate business and economic conditions, market trends, competition, the ability to attract and retain professional staff, possible variations in our quarterly operating results, risks associated with our ability to offer new products and services, the actual amount of the charges and any cost savings related to reductions in force and associated actions, and our dependence on renewals of our membership-based research services and on key personnel. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

We are a leading independent technology research firm that conducts research and analysis on the impact of technologies on business, consumers, and society. We provide our clients with an integrated perspective on technology and business, which we call the WholeView. This approach provides companies with the strategies, data, and product evaluations they need to win customers, identify new markets, and gain competitive operational advantages. Our products and services primarily are targeted to benefit the senior management, business strategists, and marketing and technology professionals at companies with revenues of $1 billion-plus who use our prescriptive, executable research to understand and capitalize on business models and emerging technologies.

We derive revenues from memberships to our research product offerings and from our advisory services and events available through what we refer to as Research, Data, Consulting, and Community offerings. Contracts for our research products are available through our Research, Data, or Community offerings and are typically renewable annually and payable in advance. Research revenues are recognized as revenue ratably over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Advisory services are available through our Data, Consulting, and Community offerings to supplement and complement memberships to our research. Billings attributable to advisory services are initially recorded as deferred revenue and are recognized as revenue when performed. Event billings are also initially recorded as deferred revenue and are recognized as revenue upon completion of each event. Consequently, changes in the number and value of client contracts, both net decreases as well as net increases, impact our revenues and other results over a period of several months.

Our primary operating expenses consist of cost of services and fulfillment, selling and marketing expenses, general and administrative expenses, depreciation and amortization of intangible assets. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, and includes the costs of salaries, bonuses, and related benefits for research personnel and all associated editorial, travel, and support services. Selling and marketing expenses include salaries, employee benefits, travel expenses, promotional costs, sales commissions, and other costs incurred in marketing and selling our products and services. General and administrative expenses include the costs of the technology, operations, finance, and strategy groups and our other administrative functions. Overhead costs are allocated over these categories according to the number of employees in each group. Depreciation expense represents the depreciation of our fixed assets over their estimated useful lives. Amortization of intangible assets represents amortization of our identifiable intangible assets acquired from our acquisitions.

In February 2003, we acquired Giga Information Group, Inc. (“Giga”), a global technology advisory firm, pursuant to a cash tender offer and second step merger. The results of Giga’s operations have been included in our consolidated financial statements since February 28, 2003.

We believe that the “agreement value” of contracts to purchase research and advisory services provides a significant measure of our business volume. We calculate agreement value as the total revenues recognizable from all research and advisory service contracts in force at a given time, without regard to how much revenue has already been recognized. Agreement value increased approximately 6% to $125.4 million as of September 30, 2004 from $118.0

million as of September 30, 2003 and decreased approximately 1% from $126.3 million as of December 31, 2003. Agreement value increased approximately 5% to $125.4 million as of September 30, 2004 from $119.5 million as of June 30, 2004. Client retention, measured as the number of client companies who renewed with memberships as a percentage of those that would have expired, was 75% during the twelve months ended September 30, 2004, as compared with 62% during the twelve months ended September 30, 2003. Dollar retention, measured as a percentage of the dollar value of all client membership contracts renewed during the most recent twelve month period to the total dollar value of all client membership contracts that expired during the period, was 86% during the twelve months ended September 30, 2004, as compared with 73% during the twelve months ended September 30, 2003. Enrichment rate, measured as a percentage of the dollar value of client membership contracts renewed during the period to the dollar value of the corresponding expiring contracts, was 113% during the twelve months ended September 30, 2004, as compared with 91% during the twelve months ended September 30, 2003. Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. No single client accounted for more than 2% of agreement value at September 30, 2004 or 2003.

Reorganization Costs

In January 2004, Forrester announced a reduction of its workforce by approximately 15 positions in connection with the integration of GigaGroup’s operations. As a result, Forrester recorded a reorganization charge of $1,957,000 during the three months ended March 31, 2004. Approximately 53% of the terminated employees had been members of the sales force, while 27% and 20% had held administrative and research roles, respectively. The charge consisted primarily of severance and related benefit costs, and other payments for professional services incurred in connection with the reorganization. During the three-months ended June 30, 2004, Forrester provided for additional severance and related benefits costs of $240,000.

In connection with the integration of GigaGroup’s operations, Forrester vacated and subleased office space in its San Francisco, Amsterdam and London offices during the three-months ended June 30, 2004. As a result of these vacancies and related subleases, Forrester recorded reorganization charges of approximately $4,693,000 related to the excess of contractual lease commitments over the contracted sublease revenue and $1,861,000 for the write-off of related leasehold improvements and furniture and fixtures.

The activity related to these 2004 reorganizations during the nine months ended September 30, 2004 is as follows:

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including but not limited to, those related to our revenue recognition, allowance for doubtful accounts, non-marketable investments, and goodwill and other intangible assets and income taxes. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider the following accounting policies to be those that require the most subjective judgment and those most important to the portrayal of our financial condition and results of operations. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. This is not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available

alternative would not produce a materially different result. For further discussion of the application of these and our other accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2003, previously filed with the SEC.

- REVENUE RECOGNITION. We generate revenues from licensing research, performing advisory services, and hosting events. We execute contracts that govern the terms and conditions of each arrangement. Revenues from contracts that contain multiple deliverables are allocated among the separate units based on their relative fair values; however, the amount recognized is limited to the amount that is not contingent on future performance conditions. Research service revenues are recognized ratably over the term of the agreement. Advisory service revenues are recognized during the period in which the services are performed. Events revenues are recognized upon completion of the events. While our current business practice is to offer membership contracts with a non-cancelable term, we do from time to time, in response to competitive conditions, offer clients the right to cancel their membership contracts prior to the end of the contract term. For these cancelable contracts that are terminated during the contract term, refunds are issued on a pro-rata basis only. Reimbursed out of pocket expenses are recorded as advisory revenue. Furthermore, our revenue recognition determines the timing of commission expenses that are deferred and expensed to operations as the related revenue is recognized. We evaluate the recoverability of deferred commissions at each balance sheet date. As of September 30, 2004, deferred revenues and deferred commissions totaled $60.8 million and $5.2 million, respectively.

- ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make contractually obligated payments that totaled approximately $1.3 million as of September 30, 2004. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, and if the financial condition of our customers were to improve, the allowances may be reduced accordingly.

- NON-MARKETABLE INVESTMENTS. We hold minority interests in technology-related companies and equity investment funds that totaled approximately $12.3 million as of September 30, 2004. Our investments are in companies that are not publicly traded, and, therefore, because no established market for these securities exists, the estimate of the fair value of our investments requires significant judgment. We have a policy in place to review the fair value of our investments on a regular basis to evaluate the carrying value of the investments in these companies which consists primarily of reviewing the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects. We record impairment charges when we believe that an investment has experienced a decline in value that is other than temporary. As of September 30, 2004, we have no investments that have experienced a decline in value which we believe is only temporary and accordingly no impairment charges have been recorded. We did not record any impairment charges during the three and nine months ended September 30, 2004 and we recorded net impairment charges of $572,000 during the nine months ended September 30, 2003. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

- GOODWILL AND OTHER INTANGIBLE ASSETS. At September 30, 2004, we had goodwill and identified intangible assets with finite lives related to our acquisitions that totaled approximately $56.9 million and $8.3 million, respectively. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and intangible assets with indefinite lives no longer be amortized but instead be measured for impairment at least annually or whenever events indicate that there may be an impairment. In order to determine if an impairment exists, we obtain an independent appraisal which determines if the carrying amount of the reporting unit exceeds the fair value. The estimates of the reporting unit’s fair value are based on market conditions and operational performance. Absent an event that indicates a specific impairment may exist, we have selected November 30th as the date of performing the annual goodwill impairment test. As of September 30, 2004, we believe that the carrying value of our goodwill is not impaired. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Intangible assets with finite lives are valued according to the future cash flows they are estimated to produce. These assigned values are amortized on an accelerated basis which matches the periods those cash flows are estimated to be produced. We continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our intangible assets may warrant revision or that the carrying value of these assets may be impaired. To compute whether assets have been impaired, the estimated undiscounted future cash flows for the

estimated remaining useful life of the assets are compared to the carrying value. To the extent that the future cash flows are less than the carrying value, the assets are written down to the estimated fair value of the asset.

- INCOME TAXES. We have deferred tax assets related to temporary differences between the financial statement and tax bases of assets and liabilities as well as operating loss carryforwards (primarily from stock option exercises and the acquisition of Giga) that totaled approximately $39.7 million as of September 30, 2004. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the carryforwards expire. Although realization is not assured, based upon the level of our historical taxable income and projections for our future taxable income over the periods during which the deferred tax assets are deductible and the carryforwards expire, management believes it is more likely than not that we will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carry-forward periods are reduced.

RESULTS OF OPERATIONS

The following table sets forth selected financial data as a percentage of total revenues for the periods indicated:

THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003

REVENUES. Total revenues increased 5% to $33.9 million in the three months ended September 30, 2004 from $32.2 million in the three months ended September 30, 2003. The increase in revenue is primarily attributable to improving economic conditions, the timing of the acquisition of GigaGroup and the effects of foreign currency translation. Foreign currency translation resulted in approximately a 2% positive effect on revenues in the three months ended September 30, 2004. GigaGroup’s results of operations have been included in our consolidated financial statements since November 30, 2003.

Revenues from research services decreased 1% to $23.5 million in the three months ended September 30, 2004 from $23.8 million in the three months ended September 30, 2003 and comprised 69% and 74% of total revenues during the three months ended September 30, 2004 and 2003, respectively. The decrease in research revenues is primarily attributable to shifting customer demand towards our advisory services. No single client company accounted for more than 3% of revenues during the three months ended September 30, 2004 or 2003.

Advisory services and other revenues increased 23% to $10.3 million in the three months ended September 30, 2004 from $8.4 million in the three months ended September 30, 2003. One forum was held during the three months ended September 30, 2004 and 2003. The increase in advisory services and other revenues is primarily attributable to increased demand for advisory services, as well as an increase in events revenues from event sponsorships by third parties.

Revenues attributable to customers outside the United States increased 24% to $11.1 million in the three months ended September 30, 2004 from $8.9 million in the three months ended September 30, 2003. Revenues attributable to customers outside the United States increased as a percentage of total revenues to 33% during the three months ended September 30, 2004 from 28% during the three months ended September 30, 2003. The increase in international revenues in dollars and as a percentage of total revenues is primarily attributable to the timing of the acquisition of GigaGroup and from the effects of foreign currency translation.

COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment remained constant at 39% as a percentage of total revenues in the three months ended September 30, 2004 and September 30, 2003. These expenses increased 6% to $13.3 million in the three months ended September 30, 2004 as compared to $12.5 million in the three months ended September 30, 2003. The consistency in expense as a percentage of revenue is primarily attributable to increased revenues resulting from customer demand shifting towards advisory services resulting in a reallocation of our existing resources to meet those demands. The increase in expenses is primarily attributable to increased compensation costs resulting from increased incentive-based advisory services performed and to increased survey costs.

SELLING AND MARKETING. Selling and marketing expenses remained constant at 33% as a percentage of total revenues in the three months ended September 30, 2004 and September 30, 2003. These expenses increased 3% to $11.0 million in the three months ended September 30, 2004 from $10.7 million in the three months ended September 30, 2003. The increase in expenses is primarily attributable to increases in compensation costs and related office expenses from the opening of our office in France in connection with the acquisition of GigaGroup in December 2003.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to 13% as a percentage of total revenues during the three months ended September 30, 2004 from 12% in the three months ended September 30, 2003. These expenses increased 9% to $4.3 million in the three months ended September 30, 2004 from $3.9 million in the three months ended September 30, 2003. The increase in expenses and expenses as a percentage of total revenues is primarily attributable to our provision for doubtful accounts and annual increases in compensation costs and professional fees.

DEPRECIATION. Depreciation expense decreased 51% to $0.7 million in the three months ended September 30, 2004 from $1.5 million in the three months ended September 30, 2003. The decrease is primarily attributable to computer and software assets purchased prior to 2002 becoming fully depreciated and to the write-off of certain depreciable assets in connection with the office vacancies during the three months ended June 30, 2004.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets decreased to $1.4 million in the three months ended September 30, 2004 from $2.6 million in the three months ended September 30, 2003. This decrease is primarily attributable to the research content and registered trademarks that were acquired in connection with the Giga acquisition and amortized using an accelerated method becoming fully amortized in 2004.

OTHER INCOME, NET. Other income, net, decreased 14% to $680,000 during the three months ended September 30, 2004 from $787,000 during the three months ended September 30, 2003. The decrease is primarily attributable to declines in interest income resulting from lower returns on invested capital.

REORGANIZATION COSTS. Reorganization costs in the three months ended September 30, 2003 consisted primarily of lease losses and fixed-asset write-offs in connection with office vacancies and related subleases.

NON-MARKETABLE INVESTMENTS GAINS (IMPAIRMENTS), NET. Net gains on non-marketable investments totaled $313,000 during the three months ended September 30, 2004 resulting from distributions from one of our investments.

PROVISION FOR INCOME TAXES. During the three months ended September 30, 2004, we recorded an income tax provision of $1.6 million, which reflected an effective tax rate of 33.5%. During the three months ended September 30, 2003, we recorded an income tax provision of $83,000 reflecting an effective tax rate of 31%. The increase in our effective tax rate for fiscal year 2004 resulted primarily from our tax-exempt investment income comprising a smaller percentage of our estimated total pre-tax income in 2004 as compared to 2003.

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003

REVENUES. Total revenues increased 11% to $100.5 million in the nine months ended September 30, 2004 from $90.7 million in the nine months ended September 30, 2003. The increase in revenue is primarily attributable to

improving economic conditions, the timing of the acquisition of GigaGroup and the effects of foreign currency translation. Foreign currency translation resulted in approximately a 2% positive effect on revenues in the nine months ended September 30, 2004. GigaGroup’s results of operations have been included in our consolidated financial statements since November 30, 2003.

Revenues from research services increased 2% to $69.6 million in the nine months ended September 30, 2004 from $68.2 million in the nine months ended September 30, 2003 and comprised 69% and 75% of total revenues during the nine months ended September 30, 2004 and 2003, respectively. Increases in revenues from research services were primarily attributable to improving economic conditions and to the timing of the acquisitions of GigaGroup. The decrease in revenues from research services as a percentage of total revenue is primarily attributable to shifting customer demand towards our advisory services. No single client company accounted for more than 3% of revenues during the nine months ended September 30, 2004 or 2003.

Advisory services and other revenues increased 38% to $31.0 million in the nine months ended September 30, 2004 from $22.5 million in the nine months ended September 30, 2003. During the nine months ended September 30, 2004, we held five events, as compared to eight events held during the nine months ended September 30, 2003. The increase in advisory services and other revenues is primarily attributable to increased demand for advisory services as well as an increase in events revenue due to third-party event sponsorships which offset decreased events revenue from holding fewer events in 2004.

Revenues attributable to customers outside the United States increased 28% to $32.9 million in the nine months ended September 30, 2004 from $25.7 million in the nine months ended September 30, 2003. Revenues attributable to customers outside the United States increased as a percentage of total revenues to 33% during the nine months ended September 30, 2004 compared to 28% during the nine months ended September 30, 2003. The increase in international revenues in dollars and as a percentage of total revenues is primarily attributable to the timing of the acquisition of GigaGroup and from the effects of foreign currency translation.

COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment remained constant at 40% as a percentage of total revenues during the nine months ended September 30, 2004 and 2003. These expenses increased 12% to $40.8 million in the nine months ended September 30, 2004 from $36.4 million in the nine months ended September 30, 2003. The consistency in expense as a percentage of revenue is primarily attributable to increased revenues resulting from customer demand shifting towards advisory services resulting in a reallocation of our existing resources to meet those demands. The increase in expenses is primarily attributable to increased compensation costs resulting from increased incentive-based advisory services performed and to increased survey costs.

SELLING AND MARKETING. Selling and marketing expenses remained constant at 33% as a percentage of total revenues during the nine months ended September 30, 2004 and 2003. These expenses increased 14% to $33.7 million in the nine months ended September 30, 2004 from $29.5 million in the nine months ended September 30, 2003. The increase in expenses is primarily attributable to increased compensation and related office expenses primarily attributable to the timing of the acquisitions of Giga and GigaGroup.

GENERAL AND ADMINISTRATIVE. General and administrative expenses remained constant at 12% as a percentage of total revenues in the nine months ended September 30, 2004 and September 30, 2003. These expenses increased 6% to $11.7 million in the nine months ended September 30, 2004 from $11.0 million in the nine months ended September 30, 2003. The increase in expenses is primarily attributable to our provision for doubtful accounts and annual increases in compensation costs and professional fees.

DEPRECIATION. Depreciation expense decreased 45% to $2.8 million in the nine months ended September 30, 2004 from $5.1 million in the nine months ended September 30, 2003. The decrease is primarily attributable to computer and software assets purchased prior to 2002 becoming fully depreciated and to the write-off of certain depreciable assets in connection with the offices vacancies during the nine months ended September 30, 2004.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets decreased to $5.1 million in the nine months ended September 30, 2004 from $6.1 million in the nine months ended September 30, 2003. This decrease is primarily attributable to the research content and registered trademarks that were acquired in connection with the Giga acquisition and amortized using an accelerated method becoming fully amortized in 2004.

OTHER INCOME, NET. Other income, consisting primarily of interest income, decreased 19% to $2.2 million during the nine months ended September 30, 2004 from $2.7 million during the nine months ended September 30, 2003. The decrease is primarily attributable to declines in interest income resulting from lower returns on invested capital coupled with lower cash and investment balances available for investment.

REORGANIZATION COSTS. Reorganization costs in the nine months ended September 30, 2004 consisted primarily of costs associated with lease losses and fixed-asset write-offs resulting from office vacancies in the three months ended June 30, 2004 and related benefits costs in connection with the elimination of approximately 17 positions in the three months ended March 31, 2004. Reorganization costs in the nine months ended September 30, 2003 consisted primarily of costs associated with severance and related benefits costs in connection with the termination of approximately 30 positions.

NON-MARKETABLE INVESTMENTS GAINS (IMPAIRMENTS), NET. Net gains on non-marketable investments totaled $370,000 during the nine months ended September 30, 2004 resulting from a distribution from one of our investments as compared to net impairments of $572,000 during the nine months ended September 30, 2003.

PROVISION FOR INCOME TAXES. During the nine months ended September 30, 2004, we recorded a tax provision of $305,000, which reflected an effective tax rate of 33.5%. During the nine months ended September 30, 2003, we recorded an income tax provision of $945,000 reflecting an effective tax rate of 31%. The increase in our effective tax rate for fiscal year 2004 resulted primarily from our tax-exempt investment income comprising a smaller percentage of our estimated total pre-tax income in 2004 as compared to 2003.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily through funds generated from operations. Memberships for research services, which constituted approximately 69% of our revenues during the nine months ended September 30, 2004, are annually renewable and are generally payable in advance. We generated cash from operating activities of $13.6 million and $3.0 million during the nine months ended September 30, 2004 and 2003, respectively. The increase in cash flow from operations is primarily attributable to increased cash collections of accounts receivable and deferred revenue during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 as a result of increased demand for our products and services, and the acquisitions of Giga and GigaGroup.

During the nine months ended September 30, 2004, we generated $10.3 million of cash from investing activities, consisting primarily of $14.1 million received from net sales of marketable securities, offset by $2.3 million for purchases of non-marketable investments and $2.4 million for purchases of property and equipment. We regularly invest excess funds in short and intermediate-term interest-bearing obligations of investment grade.

In the first quarter of 2003, we acquired Giga pursuant to a cash tender offer and second step merger. The aggregate purchase price was $62.5 million in cash which consisted of $60.3 million for the acquisition of all outstanding shares of Giga common stock; $981,000 of direct acquisition costs; and $1.2 million for severance related to 27 employees terminated as a result of the acquisition.

As part of the acquisition of Giga, we acquired an equity investment in GigaGroup S.A. (“GigaGroup”). In November 2003, we acquired the assets of GigaGroup for a total purchase price of $4.1 million, consisting of $2.9 million in cash, $118,000 in direct acquisition costs, $521,000 of outstanding accounts receivable due to us, and the contribution of the equity investment in GigaGroup valued at $619,000.

In June 2000, we committed to invest $20.0 million in two private equity investment funds over a period of up to five years. As of September 30, 2004, we had contributed approximately $17.5 million to the funds. The timing and amount of future contributions are entirely within the discretion of the investment funds. We have adopted a cash bonus plan to pay bonuses, after the return of invested capital, measured by the proceeds of a portion of the share of net profits from these investments, if any, to certain key employees, subject to the terms and conditions of the plan. To date, we have not paid any bonuses under this plan.

In December 2003, we committed to invest an additional $2.0 million over an expected period of 2 years in an annex fund of one of the private equity investment funds. The annex fund investment is outside of the scope of the previously mentioned bonus plan. The timing of this additional investment is within the discretion of the fund. As of September 30, 2004, we had contributed $600,000 to this annex fund.

We own common stock of Greenfield Online, Inc. (“Greenfield”), an Internet-based market research firm. In July 2004, Greenfield (NASDAQ: SRVY) completed an initial public. Upon consummation of the offering, we received a conversion payment of approximately $463,000, and participated in the offering by selling approximately 21,000 shares for which we received net proceeds of approximately $256,000. Accordingly, in the three months ended September 30, 2004, we recognized a gain of approximately $678,000. As of September 30, 2004, our remaining investment of approximately $2.4 million, which is included in marketable securities in the accompanying

consolidated balance sheet, is classified as available-for-sale and stated at fair market value with any unrealized gains and losses reported as a component of accumulated other comprehensive income. During the three months ended September 30, 2004, approximately $1.3 million was recorded as an unrealized gain as a component of other comprehensive income.

During the nine months ended September 30, 2004, we used $9.6 million of cash in financing activities, consisting of $12.6 million for the repurchases of our common stock, offset by $3.0 million in proceeds from the exercise of employee stock options and the issuance of common stock under our employee stock purchase plan.

In October 2001, we announced a program authorizing the repurchase of up to $50 million of our common stock. The shares repurchased may be used, among other things, in connection with our employee stock option and stock purchase plans and for potential acquisitions. As of September 30, 2004, we had repurchased approximately 2.7 million shares of common stock at an aggregate cost of approximately $44.9 million.

During the three months ended March 31, 2004, we entered into a structured stock repurchase agreement giving us the right to acquire shares of our common stock in exchange for an up-front net payment of $1.5 million. The $1.5 million up-front net payment was recorded in stockholders’ equity as a reduction of additional paid-in capital and upon expiration of this agreement in May 2004, we received approximately $1.6 million in cash which was recorded as an increase to additional paid-in capital in the accompanying consolidated balance sheet.

As of September 30, 2004, we had cash and cash equivalents of $36.6 million and marketable securities of $91.8 million. We do not have a line of credit and do not anticipate the need for one in the foreseeable future. We plan to continue to introduce new products and services and expect to make minimal investments in our infrastructure during the next 12 months. We believe that our current cash balance, marketable securities, and cash flows from operations will satisfy working capital, financing activities, and capital expenditure requirements for at least the next two years.

As of September 30, 2004, we had future contractual obligations as follows*:

We do not maintain any off-balance sheet financing arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

INTEREST RATE SENSITIVITY. We maintain an investment portfolio consisting mainly of corporate, federal agency, and state and municipal obligations with a weighted-average maturity of approximately 14 months. These available-for-sale securities are subject to interest rate risk and will decline in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on our securities portfolio. The following table provides information about our investment portfolio. For investment securities, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates.

Principal amounts by expected maturity in U.S. dollars are as follows:

FOREIGN CURRENCY EXCHANGE. On a global level, we face exposure to movements in foreign currency exchange rates. This exposure may change over time as business practices evolve and could have a material adverse impact on our financial results. Historically, our primary exposure has been related to non-U.S. dollar-denominated operating expenses in Canada and Asia, where we sell primarily in U.S. dollars. The introduction of the Euro as a common currency for members of the European Monetary Union has not, to date, had a significant impact on our financial position or results of operations. To date, we have not entered into any hedging agreements. However, we are prepared to hedge against fluctuations that the Euro, or other foreign currencies, will have on foreign exchange exposure if this exposure becomes material. As of September 30, 2004, the total assets related to non-US dollar denominated currencies that are subject to foreign currency exchange risk were approximately $18.5 million.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2004. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms and were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In October 2001, we announced a program authorizing the repurchase of up to $50 million of our common stock (“the stock repurchase program”). During each of the three months ended September 30, 2004, we purchased the following shares of our common stock under the stock repurchase program:

All purchases of our common stock were made under the stock repurchase program.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K on July 27, 2004 furnishing under Item 12 our second quarter press release which included our results of operations and financial condition for the second quarter.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FORRESTER RESEARCH, INC.

Exhibit Index