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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended August 31, 2004

¨  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: 1-11869

FACTSET RESEARCH SYSTEMS INC.

(Exact name of registrant as specified in its charter)

601 Merritt 7 Norwalk, Connecticut 06851

(Address of principal executive office, including zip code)

Registrant’s telephone number, including area code: (203) 810-1000

Securities registered pursuant to Section 12(b) of the Act: Common Stock

Name of each exchange on which registered: New York Stock Exchange

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

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.  ¨

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based upon the closing price of a share of the registrant’s common stock on February 27, 2004, as reported by the New York Stock Exchange on that date, was $758,717,225.

The number of shares outstanding of the registrant’s common stock, as of October 22, 2004, was 31,747,522.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement dated November 10, 2004, for the Fiscal 2004 Annual Meeting of Shareholders to be held on December 21, 2004, are incorporated by reference into Part III.

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FACTSET RESEARCH SYSTEMS INC.

FORM 10-K

For The Fiscal Year Ended August 31, 2004

PART I

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Part I

I TEM 1. BUSINESS

FactSet Research Systems Inc. (the “Company” or “FactSet”) supplies financial intelligence to the global investment community. The Company combines more than 200 databases, including content regarding tens of thousands of companies from multiple stock markets, research firms, governments and other sources, into a single online platform of information and analytics. Clients have simultaneous access to content from all the sources, which they can combine and download into spreadsheets and analyze using FactSet or custom-built applications.

The Company aggregates third-party content from over 50 database suppliers. FactSet seeks to maintain contractual relationships with a minimum of two content providers for each type of financial data, when possible. Third-party content contracts are generally renewable annually and may often be terminated on one year’s notice. A large number of the Company’s content suppliers are in direct competition with each other and in some cases, with FactSet. Third-party content fees are either billed directly to FactSet or its clients. Content fees billed to the Company are on a fixed or royalty (per client) cost basis.

In May 2004, FactSet acquired CallStreet, LLC (“CallStreet”). CallStreet is a provider of corporate conference call transcripts and event calendars to the investment community, a highly desirable content set for the Company’s clients. The product has been completely integrated into FactSet’s online system.

On September 1, 2004, FactSet closed its acquisition of the JCF Group of companies (“JCF”). JCF, headquartered in Paris, France, provides a global database of broker detail and consensus earnings estimates and other financial projections to the professional investment community. In Europe, JCF’s reputation for quality has been the major reason for that group’s emergence in recent years as a prominent player in the broker estimate space. JCF provides access to its proprietary content set via JCF Quant, a Microsoft^® Windows-based application, as well as via electronic data feeds. The JCF database has been integrated into FactSet Directions, the Company’s online application, and has been made available to FactSet’s clients on a subscription basis. With the acquisition, FactSet has provided its clients with an additional option in this important content area, and will continue to invest in the Company’s collection efforts to provide a premium earnings estimate database in the industry.

The preliminary purchase price of the JCF acquisition is $65.2 million, which was paid in cash and the issuance of 257,067 common shares. As of September 1, 2004, JCF’s 368 clients (of which 39 were also FactSet clients), represented over 2,000 users and subscribed to services totaling $17.7 million. The vast majority of JCF’s business is generated in Europe, though its product scope is global. As of September 1, 2004, the combined FactSet and JCF subscriptions totaled approximately $290.6 million. The combined Company now has more than 1,000 employees. The JCF sales team, virtually all of which is in Europe, has been integrated with the existing FactSet European sales force.

FactSet has historically focused on integrating third-party content into our system. As the financial information industry has consolidated over the past several years, it has become increasingly evident that, strategically, FactSet must be in a position to control access to critical content to its clients. Toward that end, FactSet has evolved a multi-dimensional strategy to provide what it believes is the widest breadth and the best quality content to its clients. FactSet continues to pursue mutually beneficial partnerships with long-time third-party data providers; however, if necessary, FactSet is committed to acquiring or building content sets on its own. Since 2001, the Company has acquired four content providers – Lionshares, Mergerstat, CallStreet and JCF – and has fully integrated their data sets into its system, while at the same time continuing to invest in development of third-party data feeds across all content areas. The net effect of this strategy to date has been to increase the accessibility of these data sets to the financial industry and to improve the quality of the data for its clients.

The Company’s private wide area network provides clients with access to the Company’s data centers. FactSet’s wide area network provides a high-speed direct link between the client’s local network and the data content and powerful applications found on the Company’s mainframes. Clients pay an annual fee for the right to access the Company’s system through the private wide area network.

In February 2004, FactSet opened a new data center in Reston, Virginia. The Reston data center is located in a state-of-the-art facility with fully-redundant servers, storage, power supply and telecommunication links. The Company has built a reputation as one of the most highly dependable business partners in the industry.

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A significant part of the Company’s strategy to maintain long-term client relations involves both consulting services and client training. Through the Company’s call center system and various client visits during the fiscal year, consulting and sales teams receive current information about client activities which enable them to provide better service. The Company strongly encourages its clients to take part in the training programs, conducted either at the client’s location or a FactSet office. FactSet’s training programs are designed to give clients a comprehensive understanding of the service. The training programs supplement the consulting services available around the clock through the Company’s Help Desk.

FactSet competes in the global financial information services industry, which includes both large and well-capitalized companies, as well as smaller, niche firms. International and domestic competitors include market data suppliers, news and information providers and many of the content providers that supply the Company with financial information included in the FactSet system. Competitors and competitive products in the United States include online, CD-ROM, and Internet database suppliers and integrators and their applications, such as The Thomson Corporation, Bloomberg L.P., FAME, Barra Inc., Capital IQ Inc., and COMPUSTAT^® (a set of products of Standard & Poors, a subsidiary of The McGraw-Hill Companies), and Reuters Group PLC. Datastream, owned by The Thomson Corporation, and RIMES are the Company’s primary international competitors. Many of these firms offer products or services which are similar to those sold by the Company.

FactSet’s Portfolio Analytics subscriptions increased to 385 clients, consisting of approximately 2,900 users, as of August 31, 2004. During the year, this product line made progress in all areas. SPAR, the Company’s portfolio return analysis tool, and FactSet’s portfolio risk application have now been established as industry leaders. These products have empowered the Company’s sales team to expand relationships with many existing clients by introducing the FactSet service to its clients’ performance and marketing groups. FactSet expanded the product to support fixed income instruments during fiscal 2003, and added several fixed income benchmark databases to the application during fiscal 2004. These enhancements are important, especially for the Company’s European clients for whom a larger percentage of assets under management are in fixed income instruments. During fiscal 2004, the Company also released a version of the Portfolio Analysis for plan sponsors.

Marquee^™, the Company’s real-time quotes and news application, continued to gain traction during fiscal 2004. All new clients receive Marquee as part of the standard workstation feature-set, making the basic FactSet service ever more valuable. Client usage increased more than 100% during fiscal 2004, and the application is increasingly being viewed as a critical component of the FactSet experience. During fiscal 2004, FactSet released the first phase of international equity quotes, as the Company seeks to create a global quote and news product. Additionally, FactSet has added numerous newswires to the application, including FactSet-sourced CallStreet conference call transcripts and FactSet Flashwire, the Company’s merger and acquisition newswire derived from its Mergerstat database.

FactSet continued to invest in the development of investment banking applications and released numerous enhancements to our offerings during fiscal 2004. The Company began a beta release of IB Central, its new application focusing on the workflow of senior bankers and less numerically intensive users.

Also in fiscal 2004, the Data Warehousing group released Cornerstone 2.0, FactSet’s electronic data feed product. This product allows a client to specify an electronic data feed comprised of virtually any piece of data on the client’s FactSet service, to be delivered in the most convenient format at any frequency it wishes. The Company’s Internal Research Notes product is another enhancement that allows clients to post quick-hitting textual notes into FactSet’s Data Central application to be shared with their colleagues in a variety of channels throughout the FactSet online system, including within the news module of Marquee.

The number of employees of FactSet and its subsidiaries totaled 1,038 as of October 22, 2004. At August 31, 2004, the Company had 887 employees, compared to 793 at August 31, 2003.

The Company’s website address is www.factset.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through a link on the “Investor Relations” section of our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. In addition, the Company’s Code of Ethical Conduct for Financial Managers and Code of Business Conduct and Ethics are posted in the “Investor Relations” section of the Company’s website. Any amendments to or waivers of such code required to be publicly disclosed by the applicable exchange rules or the Securities and Exchange Commission will be posted on the Company’s website. FactSet was incorporated in Delaware in 1984.

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Additional information with respect to the Company’s business is included in the following pages and is incorporated herein by reference:

ITEM 2. PROPERTIES

At August 31, 2004, the Company leased office space domestically in Norwalk, Connecticut; Boston and Newton, Massachusetts; New York, New York; Chicago, Illinois; Manchester, New Hampshire; Reston, Virginia; Tuscaloosa, Alabama; San Mateo and Santa Monica, California; and internationally in London; Tokyo; Hong Kong; Sydney; Frankfurt; and Paris and Avon, France. The leases expire on various dates through December 2019. Total minimum rental payments associated with the leases are recorded as rent (a component of selling, general and administrative expenses) on a straight-line basis over the periods of the respective non-cancelable lease terms.

At August 31, 2004, the Company’s lease commitments for office space provide for the following future minimum rental payments under non-cancelable operating leases with remaining terms in excess of one year:

I TEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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Part II

I TEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the New York Stock Exchange under the symbol “FDS”. As of October 22, 2004, there were approximately 9,000 stockholders of record and the closing price of FactSet’s common stock was $48.20 per share as reported by the New York Stock Exchange.

On August 16, 2004, the Company announced a regular quarterly dividend of $0.07 per share. The cash dividend was paid on September 21, 2004, to common stockholders of record on August 31, 2004. Shares of common stock outstanding were as follows:

On July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of the Company’s outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,000,000 shares of FactSet common stock. The program established no minimum number of shares for repurchase. During fiscal 2004, the Company repurchased approximately 65,000 shares at an average cost of $37.59 per share. Since the inception of the stock repurchase program, FactSet has purchased approximately 772,000 shares at an average cost of $26.64 per share. The company did not repurchase any shares in the fourth quarter of fiscal 2004.

In January 2004, the Company purchased 2,000,000 shares of its common stock from one of its co-founders, Howard E. Wille, at a price per share of $34.58. In March 2004, the Company purchased an additional 1,000,000 shares of its common stock from its other co-founder, Charles J. Snyder, at a price per share of $38.12.

The following table sets forth for the fiscal periods indicated the high and low sale prices for our common stock as reported by the New York Stock Exchange:

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

OVERVIEW.  FactSet supplies global economic and financial data and analytics to the global investment community, including analysts, investment banks, and other investment professionals. The FactSet service integrates and aggregates more than 200 databases from multiple sources, both proprietary and sourced through third-party vendors, into a single source of information, accessible online through a private wide area network. Clients may download, screen, manipulate and analyze data in a variety of formats, including custom-designed reports in a secure and reliable environment. A large part of our service also entails on-site training client and technical support.

Fiscal 2004 was an active year. In February 2004, the Company opened a new data center in Reston, Virginia. In May 2004, The Company acquired CallStreet, LLC, a provider of a provider of management conference call transcripts, for $6.5 million in cash. The CallStreet data has been fully integrated into the FactSet service. In August 2004, the corporate headquarters relocated to Norwalk, CT, consolidating all Connecticut employees in one office. The Company also took advantage of the opportunity to purchase a total of 3,000,000 shares of common stock from its co-founders, Howard E. Wille and Charles J. Snyder, for approximately $107 million in the aggregate.

In addition, on September 1, 2004, FactSet acquired the JCF Group of companies, which provides a global database of broker detail and consensus earnings estimates and other financial projections to the professional investment community. That acquisition’s preliminary purchase price is $65.2 million, of which $11.4 million was in the form of FactSet common stock.

Over the past fiscal year, FactSet has experienced growth and expansion in all its functional areas. We continually enhance our applications and have made strides with the release of new applications, including Cornerstone 2.0 and IB Central. We have also enhanced Marquee, our real time news and quote product. In fiscal 2004, subscriptions (which we discuss in more detail below) rose 16% to $272.9 million at August 31, 2004. We also experienced an increase in the number of net clients and passwords.

The Company’s employees and functional areas are grouped into a few main areas: sales and consulting, engineering and administrative. In recent years, and consistent with changes in strategy, FactSet has also added a data collection group.

RESULTS OF OPERATIONS

Revenues

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REVENUES.  Fiscal 2004 revenues increased 13.3% to $251.9 million from $222.3 million a year ago. During fiscal 2003, revenues advanced 12.1% from $198.3 million in 2002. Continued demand for our value-added applications and databases by our existing clients as well as year-over-year new client additions and further penetration into overseas markets were the main catalysts of revenue growth in both periods. Sales of databases and applications comprise approximately half of our revenue. Our base fee and subscriptions for incremental passwords account for the remainder of our revenue.

Revenues from international operations totaled $51.0 million in 2004, up 15.4% from the prior year. Revenues generated by our European and Asia Pacific sales operations increased 15.1% and 16.4%, respectively. International revenues rose 12.2% to $44.2 million in fiscal 2003, as European revenues grew 14.1% and Asia Pacific revenues advanced 6.2%. In fiscal 2004, international revenues comprised 20.2% of consolidated revenues. Overseas revenues accounted for 19.9% of total revenues in fiscal 2003. Greater than 95% of our total revenues are remitted to us in U.S. dollars. Net monetary assets maintained by our international branch offices were not material and foreign currency fluctuations did not have a material effect on the results of our operations.

SUBSCRIPTIONS.  “Subscriptions” at a given point in time represent the forward-looking revenues for the next twelve months from all services currently being supplied to our clients. Typically, our clients enjoy the freedom and flexibility to add to, delete portions of, or terminate service at any time. Subscriptions at the end of fiscal 2004 were $272.9 million, up 16.1% from the prior year total of $235.0 million. Subscriptions grew 11.1% in 2003 from $211.5 million at the conclusion of fiscal 2002. The average annual subscription per client was $258,000 at the end of 2004 compared to $242,000 and $232,000 at the close of fiscal years 2003 and 2002, respectively.

The primary drivers of subscription growth in fiscal years 2004 and 2003 were the addition of net new clients, incremental subscriptions to our services by existing clients, and the expiration of price discounts previously granted to clients. At the end of fiscal 2004, we had 385 clients, representing nearly 2,900 users, who subscribed to Portfolio Analytics, up from approximately 345 clients and 2,500 users at the conclusion of fiscal 2003. Fiscal 2004 subscriptions grew nearly $2.0 million due to the acquisition of CallStreet, LLC (“CallStreet”) on May 7, 2004. The acquisition of the entire ownership interest in FactSet Mergerstat, LLC (“Mergerstat”) on January 23, 2003, increased fiscal 2003 subscriptions by approximately $2.0 million. Approximately three quarters of our subscriptions were derived from our investment management clients and the remaining subscriptions from our investment banking clients. No individual client accounted for more than 5% of total subscriptions and subscriptions from our ten largest clients did not exceed 25% of total client subscriptions.

CLIENTS.  We had 1,059 clients at the end of fiscal 2004 resulting from the net addition of 89 clients during the year. Fiscal 2003 saw the addition of 58 net new clients. During each of the three most recent fiscal years, our client retention rate exceeded 95%.

PASSWORDS.  We use password count as a measure of the number of users of our services and products. During fiscal 2004, password count expanded by 1,900 to 21,100 from 19,200 at the close of fiscal 2003. In 2004, our clients, particularly those in the investment banking industry, increased hiring due to an improved market environment. In 2003, our password count declined by 2,800 from 22,000 at the end of fiscal 2002 primarily as a result of large-scale personnel reductions among our investment banking clients.

OPERATING EXPENSES AND NET INCOME

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COST OF SERVICES.  Cost of services increased 11.9% in fiscal 2004 to $74.2 million. Cost of services grew 9.8% to $66.3 million in fiscal 2003 from $60.4 million in fiscal 2002. The main components of the increase in 2004 were higher costs related to employee compensation and benefits, data costs and client-related communication expenses, partially offset by a decrease in depreciation on computer-related equipment. Incremental growth in cost of services in 2003 resulted from greater levels of employee compensation and benefits, data costs and client-related communication costs.

Employee compensation and benefits associated with the software engineering and consulting departments grew $6.4 million in 2004 and $3.3 million in 2003. The increases in both years were caused by employee additions and growth in merit increases within these two groups. Data costs rose $3.2 million in fiscal 2004 and $1.4 million in fiscal 2003. The rise in 2004 resulted from expanded database selections offered to our clients, higher database fees due to a greater number of client users and our acquisition of CallStreet during the third quarter. In 2003, our data costs expanded because of higher database costs due to a greater number of client users and augmented database offerings made available to our clients. Client-related communication costs increased $0.8 million in both 2004 and 2003. Incremental costs incurred to execute the roll-out of Marquee, our application featuring a streaming display of news, quotes and broker research, to our clients was the main factor in the increase for both years. Depreciation on computer-related equipment decreased $2.5 million in 2004 and remained nearly flat in 2003 relative to 2002. During the first quarter of fiscal 2004, we implemented an upgrade of our mainframe computers located in both of our data centers. The acquisition cost of our new Hewlett-Packard Marvel mainframe computers was significantly less than the acquisition cost of the replaced mainframes which were originally placed in service in fiscal 2001. The lower depreciable cost bases of these mainframes were largely responsible for the decrease in computer-related depreciation costs in fiscal 2004.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A).  SG&A grew 13.7% to $90.1 million during fiscal 2004 and 5.6% to $79.3 million in fiscal 2003. Increased levels of employee compensation and benefits, travel expenses, rent and amortization of leasehold improvements and professional fees were the primary reasons for the growth in 2004. The increase in 2003 was mainly due to higher costs associated with employee compensation and benefits, partially offset by lower professional fees and other expenses.

Employee compensation and benefits rose $5.1 million in 2004 and $5.2 million in 2003. Additions to employee headcount and merit increases in compensation were largely responsible for the increases in both years. Increased travel by our sales personnel to service our expanding client base produced the $1.3 million increase in travel expenses in fiscal 2004, while travel costs remained relatively flat during 2003. Rent expense and amortization of leasehold improvements increased $1.5 million in fiscal 2004. Our data center opening in Virginia and an office expansion in New York were the main factors contributing to this growth. During 2003, we extended the lease terms for our Greenwich facility and one of our Stamford office facilities for an additional year at a higher rental rate in order to synchronize the expiration of the leases related to our three Connecticut offices with the move to our new Norwalk headquarters facility. As part of our relocation and consolidation of our Connecticut offices, we incurred a charge of $837,000 in the fourth quarter of fiscal 2004. Each of our leases related to our three former Connecticut offices expired on September 30, 2004. As a result of our abandonment of these facilities in August 2004, we incurred an accelerated rent expense of $305,000 in fiscal 2004 which would have been recorded in fiscal 2005 had we occupied those facilities until their respective leases expired. We incurred an additional $362,000 in accelerated depreciation in 2004 related to furniture and fixtures and leasehold improvements utilized at our three former office facilities as these assets did not become part of our consolidated Norwalk office facility. In addition, we incurred a moving charge of $120,000 to consummate the move to our single office in Norwalk. These three charges totaling $787,000 were part of the $837,000 charge incurred in the fourth quarter of fiscal 2004. Rent expense and amortization of leasehold improvements remained flat in 2003 compared to 2002. Professional fees and other expenses grew $1.9 million in fiscal 2004 due to higher legal, tax planning and other consulting fees. Professional fees and other expenses declined $1.6 million in 2003 as a result of lower consulting fees incurred and decreased expenses for taxes other than income taxes.

INCOME FROM OPERATIONS, OPERATING MARGIN AND EFFECTIVE TAX RATE.  Operating income increased 14.2% to $87.6 million in 2004 from $76.7 million in 2003. Income from operations rose 23.9% in fiscal 2003 from $61.9 million in fiscal 2002.

Our operating margins in fiscal years 2004 and 2003 were 34.8% and 34.5%, respectively. Operating margin in 2002 was 31.2%. Operating margin expanded in 2004 largely as a result of decreases in depreciation on computer-related equipment, amortization of leasehold improvements and computer repair and maintenance as a percentage of revenues. These decreases were partially offset by increases in data costs and professional fees as a percentage of revenues as well as the non-recurring relocation charge of $837,000 incurred in 2004 related to our new Norwalk, Connecticut headquarters. The improvement in the 2003 operating margin was attributed to declines in depreciation on computer-

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related equipment, professional fees and other expenses and rent expense and amortization of leasehold improvements as a percentage of revenues. We further incurred $904,000 in expense related to the relocation of one our data centers from New York City to Manchester, New Hampshire during fiscal 2002, which reduced that year’s operating margin.

Our effective tax rate for fiscal 2004 was 35.1% which included the effect of a $1.5 million income tax benefit related to the settlement of prior year tax returns for certain state credits, additional state and federal tax planning and certain changes in estimates. Including the impact of a $1.3 million income tax benefit associated with additional federal income tax planning and certain changes in estimates related to income taxes payable for fiscal years prior to 2003, our fiscal 2003 effective tax rate was 34.9%. The effective tax rate was 36.4% in fiscal 2002 after factoring in an income tax benefit of $893,000 largely resulting from adjustments to prior years’ federal and state tax returns attributable to a favorable state income tax ruling. Excluding the respective tax benefits in all three fiscal years presented, the effective tax rates were: 36.8% in fiscal 2004; 36.5% in fiscal 2003; and 37.8% in fiscal 2002.

The American Jobs Creation Act of 2004 and the Working Families Tax Relief Act of 2004 were both enacted in October 2004. These bills contain provisions which could potentially impact our effective tax rate. These items include the extension of the Research and Development Credit through December 2005, the repeal of the Extraterritorial Income Exclusion and the enactment of a Domestic Manufacturing deduction. We are continuing to evaluate the effect on the Company’s effective tax rate for the quarter ended November 30, 2004 and the year ended August 31, 2005.

NET INCOME AND EARNINGS PER SHARE.  Net income grew 12.8% to $58.0 million and diluted earnings per share, benefiting from share repurchases, advanced 16.2% to $1.72 in fiscal 2004. Fiscal 2003 net income increased 25.9% to $51.4 million and diluted earnings per share rose 26.5% to $1.48. In fiscal 2002, net income experienced growth of 22.3% to $40.8 million and diluted earnings per share increased 21.9% to $1.17.

Liquidity and Capital Resources

Our operating activities generated yearly cash flow of $76.4 million, $74.7 million and $66.7 million in fiscal years 2004, 2003 and 2002, respectively. In 2004, cash flows from operating activities increased $1.7 million as a result of a larger amount of net income as adjusted for non-cash related items and increases in accounts payable and accrued expenses and taxes payable, partially offset by growth in accounts receivable and other working capital assets. As a result, our days’ sales outstanding rose from 61 days at the end of fiscal 2003 to 63 days at the close of fiscal 2004. The improvement in operating cash flow in fiscal 2003 was due to growth in net income as adjusted for non-cash related items, increases in accounts payable, accrued compensation and taxes payable partially offset by increased accounts receivable and declining deferred fees.

Fiscal 2004 capital expenditures totaled $37.8 million. Of those expenditures, $26.9 million related to leasehold improvements and the acquisition of furniture and fixtures for the expansion of our domestic office facilities, primarily relating to our new headquarters facility in Norwalk, Connecticut. The remaining $10.9 million was expended in 2004 largely related to the acquisition of computer-related assets mainly for our two data centers. We executed our mainframe computer upgrade by placing into service five Hewlett-Packard Marvel mainframe computers during the first quarter of fiscal 2004, for a total of eight installed at our two data centers.

In January 2004, we purchased 2,000,000 shares of our common stock from one of our co-founders, Howard E. Wille, at a price per share of $34.58. We purchased an additional 1,000,000 shares of our common stock in March 2004, from another co-founder, Charles J. Snyder, at a price per share of $38.12. The total cash expended for the two common stock purchases from our co-founders was $107.3 million.

Cash, cash equivalents and investments totaled $98.1 million and comprised 42.7% of total assets at August 31, 2004. All our operating and capital expenditure needs were financed completely by cash flows generated by our operations. We currently have no outstanding indebtedness, other than letters of credit issued in the ordinary course of business, as discussed below.

In fiscal 2004, we renewed our 364-day revolving credit facility and continued to maintain our existing three-year credit facility. Both credit facilities (the “facilities”) are available in an aggregate principal amount of up to $25.0 million for working capital and general corporate purposes, with the facilities split into two equal tranches and maturing March 2005 and November 2004. Approximately $3.5 million in aggregate of these credit facilities has been utilized for letters of credit issued in the ordinary course of business. We have no present plans to draw any portion of the remaining available credit of approximately $21.5 million. We are obligated to pay a commitment fee on the unused portion of the facilities at a weighted average annual rate of 0.175%. The facilities also contain covenants that, among other things, require us to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios.

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BUSINESS COMBINATIONS.  On May 7, 2004, we acquired all the ownership interests of CallStreet, for $6.5 million in cash. CallStreet is a provider of corporate conference call transcripts and event calendars to the investment community, a highly desirable content set for our clients. This acquisition is consistent with our strategy of controlling access to critical content used by our clients. This factor contributed to a purchase price in excess of fair value of the CallStreet net tangible and intangible assets, and as a result, we have recorded goodwill in connection with this transaction. The weighted average life of the intangible assets is two years. Goodwill is not deductible for income tax purposes. A summary of the CallStreet purchase price allocation consists of the following:

The operating results of CallStreet are included in our financial statements from the date of acquisition. Pro forma statements of income have not been presented because the effect of this acquisition was not material to our consolidated financial results.

Share Repurchases

On July 16, 2002, the Board of Directors authorized a share repurchase program to acquire shares of our outstanding common stock in open market or negotiated transactions. This program authorized the repurchase of up to 1,000,000 shares of our common stock. The program established no set minimum number of shares for repurchase. During fiscal 2004, we repurchased 65,000 shares at an average cost of $37.59 per share under this program. Since the inception of the stock repurchase program, we have repurchased approximately 772,000 shares at an average cost of $26.64 per share under this program.

In January 2004, we purchased 2,000,000 shares of our common stock from one of our two co-founders, Howard E. Wille, at a price per share of $34.58. In March 2004, we purchased an additional 1,000,000 shares of our common stock from our other co-founder, Charles J. Snyder, at a price per share of $38.12. The Board of Directors approved both purchases of common stock from our co-founders prior to the execution of those purchases. The total cash expended for the two common stock purchases from our co-founders was $107.3 million.

SUBSEQUENT EVENT.  On September 1, 2004, we acquired all the outstanding shares of the JCF Group (“JCF”) of companies. JCF, based in Paris and London, was a provider of global broker estimates and other financial and macroeconomic data to institutional investors. JCF provides access to its proprietary content set via JCF Quant, a Microsoft^® Windows-based application, as well as via electronic data feeds. The acquisition enables us to provide our clients with an additional option in this important estimates content area. The preliminary purchase price of the JCF acquisition is $65.2 million, which was paid in cash and the issuance of 257,067 common shares. In addition, up to €5,000,000 of contingent consideration will be payable if certain subscription targets are met during the two years following the closing of the transaction.

Contractual Obligations

Fluctuations in our operating results, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments as well as continued growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here.

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The following table summarizes our significant contractual obligations as of August 31, 2004, and the corresponding effect that these obligations will have on our liquidity and cash flows in future periods. Amounts in this table exclude amounts already recorded on our Consolidated Statement of Financial Condition at August 31, 2004:

Purchase orders do not necessarily reflect a binding commitment but are merely indicative of authorizations to purchase rather than amounts for which we are contractually obligated to make corresponding disbursements. For the purpose of this tabular disclosure, purchase obligations for goods and services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. It is expected that all the contractual obligations noted in the table will be funded from existing cash and cash flows from operations.

Any contractual obligations contingent upon the achievement of certain milestones are excluded from the table above. Specifically related to the JCF transaction, up to €5,000,000 of contingent consideration will be payable if certain subscription targets are met during the two years following the closing of the transaction. As of August 31, 2006, additional required payments of €5,000,000 will be made, provided that all targets are achieved or exceeded.

Expected timing pertaining to the contractual obligations included in the table above has been estimated based on information currently available. The amounts paid and timing of those payments may differ based on when the goods and services provided by our vendors to whom we are contractually obligated are actually received as well as due to changes to agreed upon amounts for any of our obligations. Contingent contractual obligation amounts are dependent on the targets being achieved and can vary significantly.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K as of August 31, 2004.

NEW ACCOUNTING PRONOUNCEMENTS.  In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. The adoption of SAB 104 did not have a material impact on our consolidated results of operations or financial position. SAB 104 primarily rescinds the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance.

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Critical Accounting Policies

In December of 2001, the SEC issued FR 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, and in January of 2002, the SEC issued FR 61, Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are making certain incremental disclosures in our critical accounting policies below pursuant to these changes. We do not engage in off-balance sheet financing activities other than operating leases, nor do we make use of derivatives transactions or engage in significant related-party transactions (other than the stock purchases from our founders, noted above). Lease commitments and credit lines are disclosed in the quarterly reports on Form 10-Q and annual report on Form 10-K for each fiscal year. Moreover, we have determined that the following represent our critical accounting policies.

Revenue Recognition

We apply SAB 104 to our business arrangements for revenue recognition. Our company does not license, sell, lease or market computer software. Clients are invoiced monthly, in arrears, to reflect the actual services rendered to them. Subscription revenue is earned each month as the service is rendered to clients, according to the specific subscription and the number of workstations deployed for such month. A provision is made to allow for billing adjustments as a result of cancellation of service or reduction in the number of workstations. Such provisions are accounted for as a reduction of subscription revenue, with a corresponding reduction to subscriptions receivable.

We recognize revenue when all the following criteria are met:

Amounts that have been earned but not yet paid through the receipt of commissions on securities transactions or through cash payments are reflected on the Consolidated Statements of Financial Condition as receivables from clients and clearing brokers, net. Amounts that have been received through commissions on securities transactions or through cash payments that are in excess of earned subscription revenues are reflected on the Consolidated Statements of Financial Condition as deferred fees.

Under the guidance in SAB 104, our subscriptions represent a single earnings process. Collection of subscription revenues through FactSet Data Systems, Inc.’s (“FDS”) external clearing brokers does not represent a separate service or earnings process since FDS is not the principal party to the settlement of the securities transactions for which the clearing brokers charge clearing fees.

Receivable Reserves

Our client base has generally been of a high quality and, as such, we have not historically experienced high credit-related write-offs. Aged client receivables are analyzed each month and our collection efforts are directed accordingly. We take historical company information, industry trends and general market conditions into account in estimating reserves, and apply a percentage to the month-end client receivable balance. Additionally, we also include amounts relating to the estimated cancellations and billing adjustments we discussed above in our receivable reserves. Actual cancellations and billing adjustments could differ from those estimated amounts and could have an impact on the financial statements of higher or lower expense.

Valuation of Goodwill

In September 2001, we adopted SFAS 142, which requires that a goodwill impairment test be completed during the first six months of the year the standard is adopted. SFAS 142 further requires a separate annual goodwill impairment test to be performed each year along with additional goodwill impairment tests on an event-driven basis. We performed our goodwill impairment test during the quarter ended February 28, 2002, and noted that goodwill had not been impaired. We performed an annual goodwill impairment test during the fourth quarter of fiscal years 2004, 2003 and 2002 and determined that there had been no impairment. On an ongoing basis, we will evaluate the acquired businesses and

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related assets for indications of potential impairment. We may base our judgment regarding the existence of impairment indicators on market conditions, legal and technological factors and the operational performance of the Company. Future events could cause us to conclude that indicators of impairment do exist and that goodwill associated with our previous acquisitions is impaired, which could result in an impairment loss in the Statement of Income and a write-down of the related asset.

Long-lived Assets

We depreciate computers and related equipment on a straight-line basis over estimated useful lives of three years or less. Furniture and fixtures are depreciated over estimated useful lives of five to seven years using a double declining balance method. We amortize leasehold improvements on a straight-line basis over the shorter of the related lease terms or the estimated useful lives of the improvements. The potential impairment of our fixed assets is evaluated whenever changes in circumstances or events indicate that the carrying value of the fixed assets may not be recoverable. Factors that may cause an impairment review of fixed assets include, but are not limited to, the following:

After we acquired Innovative Systems Techniques, Inc. (“Insyte”), LionShares, Mergerstat and CallStreet, we recorded assets for intangible assets on our Consolidated Statements of Financial Condition. We review intangibles for evidence of impairment whenever changes in circumstances or events indicate that the carrying value of the intangible assets may not be recoverable.

Intangible assets consist of acquired technology and certain acquired content databases resulting from the acquisitions of the Insyte, LionShares, Mergerstat, and CallStreet businesses and are amortized on a straight-line basis using estimated useful lives ranging between two and ten years.

Accounting for Income Taxes

We estimate our income taxes in each of the jurisdictions in which we operate. Deferred taxes are determined by calculating the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. As a result of this process, we recognize deferred tax assets and liabilities, which are recorded in the Consolidated Statements of Financial Condition. A valuation allowance is established to the extent that it is considered more likely than not that some portion or all the deferred tax assets will not be realized. To the extent a valuation allowance is established or adjusted in a period, we include this amount in the Consolidated Statement of Income as an expense or benefit within the provision for income taxes.

Accrued Liabilities

In conformity with generally accepted accounting principles, we make significant estimates in determining our accrued liabilities. Accrued liabilities include estimates relating to employee compensation, operating expenses and tax liabilities. Most of our employee incentive compensation programs are discretionary. A final review of departmental performance is conducted each year end, with senior management and the Board of Directors determining the ultimate amount of discretionary bonus pools. We also review compensation throughout the year to determine how overall performance tracks against managers’ expectations. Management takes these and other factors, including historical performance, into account in reviewing accrued compensation estimates quarterly and adjusting accrual rates as appropriate. Because final reviews are not normally completed until after the year-end closing cycle, it is possible that actual amounts ultimately approved could differ from amounts previously accrued based upon information available prior to the final reviews. As such, the difference, if any, will be recorded in the period in which the estimate is changed and would result in higher or lower expense.

Forward-Looking Factors

Dividend Payment

On August 16, 2004, we announced a regular quarterly dividend of $0.07 per share. The cash dividend was paid on September 21, 2004, to common stockholders of record on August 31, 2004.

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Income Taxes

In the normal course of business, our tax filings are subject to audit by federal, state and foreign tax authorities. Audits by two tax authorities are presently ongoing. Although there is inherent uncertainty in the audit process, we have no reason to believe that such audits will result in the payment of additional taxes or penalties or both that would have a material adverse effect on our results of operations or financial position, beyond current estimates.

Market Sensitivities

We are exposed to various economic and financial risks associated with equity and foreign currency markets as well as risks related to interest rate fluctuations during the normal course of business. The major equity indices (for example Dow Jones 30 Industrials, Russell 2000^®, Nasdaq Composite^®, and MSCI European Index) have experienced significant volatility since March 2000. Continued volatility in general economic and market conditions is still possible in the near future. External factors such as the threat of terrorist activities or rising energy prices could undermine any potential continued economic recovery. A decline in the worldwide markets could adversely impact a significant number of our clients (primarily investment management firms and investment banks) and increase the likelihood of personnel and spending reductions among our existing and potential clients. Continued investigations into the investment management industry by various regulatory bodies could have an adverse effect on our business. A policy of persistent interest rate increases adopted by the Federal Reserve Bank and/or continued inflationary pressures could derail the current economic recovery and adversely affect the operations of our clients. In addition, changes to regulations regarding soft dollar payments could have a negative impact on our operations.

The fair market value of our investment portfolio at August 31, 2004 was $19.5 million. It is anticipated that the fair market value of our portfolio will continue to be immaterially affected by fluctuations in interest rates. Preservation of principal is the primary goal of our investment portfolio. Pursuant to our established investment guidelines, third-party managers construct portfolios to achieve high levels of credit quality, liquidity and diversification. Our investment policy dictates that the weighted-average duration of short-term investments may not exceed two years. Our investment guidelines do not permit us to invest in puts, calls, strips, short sales, straddles, options or futures, nor are we permitted to invest on margin. Because we have no outstanding long-term indebtedness and we have a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low.

Forward-Looking Statements

This Management’s Discussion and Analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about our strategy for growth, product development, market position, subscriptions and expected expenditures and financial results are forward-looking statements. Forward-looking statements may be identified by words like “expected,” “anticipates,” “plans,” “intends,” “projects,” “should,” “indicates,” “continues,” “subscriptions,” “commitments” and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions (“future factors”). Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements. We will publicly update forward-looking statements as a result of new information or future events in accordance with applicable Securities and Exchange Commission regulations.

Future factors include, but are not limited to, our ability to hire and retain qualified personnel; the maintenance of our leading technological position; our ability to integrate acquisitions; the impact of global market trends on our revenue growth rate and future results of operations; the negotiation of contract terms supporting new and existing databases or products; our ability to conclude various strategic transactions; retention of key clients and their current service levels; increased competition in our industry; the successful resolution of ongoing and other probable audits by tax authorities; the continued employment of key personnel; and the absence of U.S. or foreign governmental regulation restricting international business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation – “Forward-Looking Factors” entitled “Market Sensitivities” and “Forward-Looking Statements”, which are incorporated herein by reference.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of FactSet Research Systems Inc.

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of FactSet Research Systems Inc. and its subsidiaries at August 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Stamford, Connecticut

September 20, 2004

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Consolidated Statements of Income

THOUSANDS, EXCEPT PER SHARE DATA

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

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Consolidated Statements of Financial Condition

THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

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

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Consolidated Statements of Changes in Stockholders’ Equity

THOUSANDS

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

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Consolidated Statements of Cash Flow

THOUSANDS

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

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Notes to Consolidated Financial Statements

1. ORGANIZATION AND NATURE OF BUSINESS

FactSet Research Systems Inc. (the “Company” or “FactSet”) provides online integrated database services to the global investment community. The Company combines more than 200 databases into a single online source of information and analytics. FactSet’s revenues are derived from month-to-month subscription charges.

Solely at the option of each client, these charges may be paid either in commissions from securities transactions or in cash. To facilitate the payment for services in commissions, the Company’s wholly owned subsidiary, FactSet Data Systems, Inc. (“FDS”), is a member of the National Association of Securities Dealers, Inc. and is a registered broker-dealer under Section 15 of the Securities and Exchange Act of 1934. Services paid in commissions are derived from securities transactions introduced and cleared on a fully disclosed basis primarily through two clearing brokers. That is, a client paying subscription charges on a commission basis directs the clearing broker, at the time the client executes a securities transaction, to credit the commission on the transaction to FDS.

FactSet Limited, FactSet France, Inc., FactSet GmbH, FactSet Pacific, Inc., LionShares Europe S.A.S., Innovative Systems Techniques, Inc. (“Insyte”), FactSet Mergerstat, LLC (“Mergerstat”) and CallStreet, LLC (“CallStreet”) are wholly owned subsidiaries of the Company, with operations in London, Paris, Frankfurt, Tokyo, Hong Kong, Sydney, Avon (France), New York, Boston and Santa Monica, California. The Company dissolved eLumient.com, Insyte’s wholly owned, inactive subsidiary, on December 23, 2002.

2. ACCOUNTING POLICIES

The significant accounting policies of the Company and its subsidiaries are summarized below.

FINANCIAL STATEMENT PRESENTATION.  The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany activity and balances have been eliminated from the consolidated financial statements.

USE OF ESTIMATES.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 reporting period. Significant estimates have been made in areas that include income and other taxes, depreciable lives of fixed assets, accrued liabilities, accrued compensation, receivable reserves and allocation of purchase price to assets and liabilities acquired. Actual results could differ from those estimates.

REVENUE RECOGNITION.  FactSet applies Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, to its business arrangements for revenue recognition. Clients are invoiced monthly, in arrears, to reflect the actual services rendered to them. Subscription revenue is earned each month as the service is rendered to clients, according to the specific subscription and the number of workstations deployed for such month. A provision is made to allow for billing adjustments as a result of cancellation of service or reduction in number of workstations. Such provisions are accounted for as a reduction of subscription revenue, with a corresponding reduction to subscriptions receivable. FactSet recognizes revenue when all the following criteria are met:

Under the guidance in SAB 104, the Company’s subscriptions represent a single earnings process. Collection of subscription revenues through FDS’s external clearing brokers does not represent a separate service or earnings process since FDS is not the principal party to the settlement of the securities transactions for which the clearing brokers charge clearing fees.

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Amounts that have been earned but not yet paid through the receipt of commissions on securities transactions or through cash payments are reflected on the Consolidated Statements of Financial Condition as receivables from clients and clearing brokers, net. As of August 31, 2004, the amount of receivables from clients and clearing brokers, net that was unbilled totaled $23.9 million. Since the Company invoices its clients monthly in arrears, the $23.9 million unbilled as of August 31, 2004 was billed at the beginning of September 2004. Amounts that have been received through commissions on securities transactions or through cash payments that are in excess of earned subscription revenues are reflected on the Consolidated Statements of Financial Condition as deferred fees.

The Company calculates a receivable reserve through analyzing aged client receivables each month and reviewing historical company information, industry trends and general market conditions.

COST OF SERVICES.  Cost of services is composed of employee compensation and benefits for the software engineering and consulting groups, clearing fees net of recoveries, data costs, amortization of identifiable intangible assets, computer maintenance and depreciation expenses and client-related communication costs.

SELLING, GENERAL & ADMINISTRATIVE.  Selling, general and administrative expenses include employee compensation and benefits for the sales, product development and various other support departments, travel and entertainment expenses, promotional costs, rent, amortization of leasehold improvements, depreciation of furniture and fixtures, office expenses, professional fees and other expenses.

CLEARING FEES.  Clearing fees are expensed as a cost of service in the period incurred, at the time that a client executes securities transactions through clearing brokers. The Company earns the right to recover the clearing fee from its clients at the time the securities transactions are executed, which is the period in which the clearing fees are incurred. This cost recovery is recorded as a reduction of cost of services. Clearing fees and the related cost recovery in fiscal years 2004, 2003 and 2002 approximated $7.6 million, $8.0 million and $7.6 million, respectively.

CASH AND CASH EQUIVALENTS.  Cash and cash equivalents consist of demand deposits and money market investments with maturities of 90 days or less and are reported at fair value.

INVESTMENTS.  Investments have maturities greater than 90 days from the date of acquisition, are classified as available-for-sale securities and are reported at fair value. Fair value is determined for most investments from readily available quoted market prices. Unrealized gains and losses on available-for-sale securities are included net of tax in accumulated other comprehensive income in stockholders’ equity.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS.  Computers and related equipment are depreciated on a straight-line basis over estimated useful lives of three years or less. Depreciation of furniture and fixtures is recognized using the double declining balance method over estimated useful lives between five years and seven years. Leasehold improvements are amortized on a straight-line basis over the terms of the related leases or estimated useful lives of the improvements, whichever period is shorter.

GOODWILL.  Goodwill has resulted from the acquisitions of the Insyte, LionShares, Mergerstat, and CallStreet businesses. We performed an annual goodwill impairment test during the fourth quarter of fiscal years 2004, 2003 and 2002 and determined that there had been no impairment.

INTANGIBLE ASSETS.  Intangible assets primarily consist of acquired technology and certain acquired content databases resulting from the acquisitions of the Insyte, LionShares, Mergerstat, and CallStreet businesses and are amortized on a straight-line basis using estimated useful lives ranging between two and ten years.

INTERNAL USE SOFTWARE.  The Company capitalizes only those direct costs incurred during the application development and implementation stages for developing, purchasing or otherwise acquiring software for internal use that management believes have a probable future application in the Company’s subscription-based service. These costs are amortized over the estimated useful lives of the underlying software, generally three years or less. All costs incurred during the preliminary planning project stage, including project scoping, identification

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and testing of alternatives, are expensed as incurred. Capitalized direct costs associated with developing, purchasing or otherwise acquiring software for internal use are reported in the Property, Equipment & Leasehold Improvements line item of the Company’s Consolidated Statements of Financial Condition. These costs are amortized on a straight-line basis over the expected useful life of the software, beginning when the software is implemented and ready for its intended use.

LANDLORD CONTRIBUTIONS TO LEASEHOLD IMPROVEMENTS  In conjunction with entering into leases for office space, the Company receives contributions from landlords toward leasehold improvements which are included in the Deferred Rent and Other Non-Current Liabilities line item of the Company’s Consolidated Statements of Financial Condition. These contributions are amortized as a reduction to rent expense over the non-cancelable lease terms to which they pertain, primarily fifteen years.

ACCRUED LIABILITIES.  Accrued liabilities include estimates relating to employee compensation, operating expenses and tax liabilities. Most of our employee incentive compensation programs are discretionary. A final review of departmental performance is conducted each year end, with senior management and the Board of Directors determining the ultimate amount of discretionary bonus pools.

INCOME AND DEFERRED TAXES.  Deferred taxes are determined by calculating the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. A valuation allowance is established to the extent management considers it more likely than not that some portion or all the deferred tax assets will not be realized. The effect on deferred taxes from income tax law changes is recognized immediately upon enactment. The deferred tax provision is derived from changes in deferred taxes on the balance sheet and reflected on the Consolidated Statements of Income as a component of income taxes. Income tax benefits derived from the exercise of non-qualified stock options or the disqualifying disposition of incentive stock options are recorded directly to capital in excess of par value.

COMPREHENSIVE INCOME (LOSS).  The Company reports comprehensive income (loss) in accordance with SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income (loss) in a set of financial statements. Comprehensive income (loss) is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

EARNINGS PER SHARE.  The computation of basic earnings per share in each year is based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding includes shares issued to the Company’s employee stock plans. Diluted earnings per share are based on the weighted average number of common shares and potentially dilutive common shares outstanding. Shares available pursuant to grants made under the Company’s stock option plans are included as common share equivalents using the treasury stock method.

STOCK-BASED COMPENSATION.  The Company follows the disclosure-only provisions of Financial Accounting Standards Board Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of SFAS 123, to require 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. As permitted by SFAS 123, the Company accounts for its stock option and employee stock purchase plans under APB Opinion No. 25, under which no compensation cost has been recorded. Stock option exercise prices equal the fair market value of the Company’s stock price on the date of grant; thus no compensation costs are recorded. Had compensation costs for the Company’s stock option plans and employee stock purchase plan been determined pursuant to the measurement principles under SFAS 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts for fiscal years 2004, 2003 and 2002.

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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal years 2004, 2003 and 2002:

Stock Option Plans

Employee Stock Purchase Plan

NEW ACCOUNTING PRONOUNCEMENTS.  In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. The adoption of SAB 104 did not have a material impact on FactSet’s consolidated results of operations or financial position. SAB 104 primarily rescinds the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance.

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3. COMMON STOCK AND EARNINGS PER SHARE

On August 16, 2004, the Company announced a regular quarterly dividend of $0.07 per share. The cash dividend was paid on September 21, 2004, to common stockholders of record on August 31, 2004. Shares of common stock outstanding were as follows: