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, 2006

o                                    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, par value $0.01 per share

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 if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes x    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No x

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 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o    No x

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 28, 2006, as reported by the New York Stock Exchange on that date, was $1,611,828,364.

The number of shares outstanding of the registrant’s common stock, as of October 23, 2006, was 48,990,530.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement dated November 10, 2006, for the Fiscal 2006 Annual Meeting of Shareholders to be held on December 19, 2006, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

FACTSET RESEARCH SYSTEMS INC.

FORM 10-K

For The Fiscal Year Ended August 31, 2006

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Part I

ITEM 1.                BUSINESS

FactSet Research Systems Inc. (the “Company” or “FactSet”) is a leading provider of global financial and economic information, including fundamental financial data on tens of thousands of companies worldwide. FactSet offers access to financial data and analytics to thousands of investment professionals around the world. Combining hundreds of databases into its own dedicated online service, FactSet provides the tools to download, combine, and manipulate financial data for investment analysis. FactSet applications support and make more efficient workflows for buy and sell-side professionals. These professionals include portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed income professionals. FactSet applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alphatesting, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios. Approximately 75% of the Company’s revenue is generated from its investment management clients, while the remaining revenue is primarily derived from investment banking clients.

The Company combines more than 200 databases, including content regarding tens of thousands of companies and securities from major markets across the globe, from industry-leading suppliers and clients’ own proprietary data into a single powerful online platform of information and analytics, making FactSet a one-stop source for financial information. Clients have simultaneous access to content from an array of sources, which they can combine and utilize in FactSet applications. FactSet is also fully integrated with Microsoft Office applications such as Excel® , Word® and PowerPoint® and allows for the creation of extensive custom reports.

The Company aggregates third-party content from over 50 database suppliers. FactSet is the only source that integrates content from premier providers such as The Thomson Corporation, Reuters Group PLC, Standard and Poor’s (a division of The McGraw-Hill Companies) including Capital IQ Inc., FTSE, IDC, Dow Jones & Company Inc., Northfield Information Services, Inc., MSCI (Morgan Stanley Capital International, Inc.), APT, DRI (Global Insight Inc.), EcoWin (now part of Reuters), Merrill Lynch and Lehman Brothers. 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 have varying lengths and normally can be terminated on one year’s notice at predefined dates. Third-party content fees are either billed directly to FactSet or the Company’s clients. Content fees billed to the Company may be on a fixed or royalty (per client) basis.

A large number of FactSet’s content suppliers are in direct competition with each other and in some cases, with FactSet. 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 six content businesses, Lionshares, Mergerstat, CallStreet, JCF, TrueCourse and Europrospectus, and has fully integrated their data sets into the Company’s 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 data to the financial industry and to improve the quality of the data for its clients.

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During fiscal 2006 the Company completed one content-related acquisition. On February 17, 2006, the Company acquired all the outstanding share capital of europrospectus.com Limited (now known as FactSet Global Filings Limited, the “Global Filings” business), for $7.5 million in cash. Global Filings provides access to equity and fixed income prospectuses. The service offers full text, clause and field searching on debt, equity and warrant prospectuses, pricing supplements and M&A transactions. The acquisition is consistent with the Company’s strategy of selectively creating and distributing its own financial information content in order to offer its clients best of breed content choices.

During fiscal 2006, FactSet released new Private Company and Private Equity databases that have been integrated into its primary investment banking product, IB Central. The Company has continued to enhance existing content sets, notably its estimates offering, which now includes key research brokers and several features, including near real-time processing.

The Company also completed an acquisition in fiscal 2006 that is consistent with the Company’s strategy of developing tools to make client workflows more efficient. On September 1, 2005, the Company acquired all the outstanding share capital of StreamVPN Limited (now known as FactSet Research Systems Limited, the “AlphaMetrics business”), for aggregate consideration of $23.8 million, plus an additional $2.6 million based on the level of working capital of the AlphaMetrics business as of September 1, 2005. The AlphaMetrics business provides institutional clients with a suite of software tools for capturing, measuring and ranking the value of ideas provided by sell-side professionals, as well as those ideas generated internally by research staff.

The Company has established a vast private wide area network to provide clients 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.

A significant part of the Company’s strategy to maintain long-term client relations involves both consulting services and client training. Clients are encouraged to utilize FactSet. The Company’s help desk operates virtually around the clock and sales and consulting personnel regularly visit clients to enhance support and the value of the FactSet products. 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.

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 database suppliers and integrators and their applications, such as The Thomson Corporation, Bond Edge (owned by Interactive Data Corporation), Yield Book (owned by Citigroup), Reuters Group PLC, Bloomberg L.P., Standard and Poor’s (a division of The McGraw-Hill Companies) including its Capital IQ product line, Wilshire Associates Incorporated, Frank Russell and MSCI (Morgan Stanley Capital International, Inc.). Many of these firms offer products or services which are similar to those sold by the Company.

Demand for the Portfolio Analytics suite of applications continues to rise. This suite is comprehensive and includes the applications for portfolio attribution, risk management and quantitative analysis. Portfolio Analysis continued to be the cornerstone of the offering to investment management clients during fiscal

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2006 and represents the largest revenue contributing component of the suite. At August 31, 2006, there were over 475 clients representing approximately 3,900 users who subscribed to this service. This compares favorably to a total of 425 clients and 3,300 users a year ago. Fiscal 2006 also included several significant product releases.

·       The first phase of fixed income attribution analysis, powered by Derivative Solutions, was integrated into the suite.

·       A new portfolio publishing product that creates presentation-ready reports for investment teams and management boards has been introduced.

·       Alphatesting 3.0 and Compustat Point In Time data have proven to be compelling offerings for quantitative professionals.

One of the key features of the suite’s central application, Portfolio Analysis, is an attribution analysis report that enables portfolio managers to dissect and explain the performance of a portfolio through time. For many years, FactSet’s primary focus has been equity portfolios—those that are comprised of stock holdings of publicly traded companies. FactSet’s desire to enhance the attribution module to cover virtually all asset classes, including corporate and sovereign debt and sophisticated derivative securities such as mortgage-backed securities and credit default swaps was a major factor in acquiring Derivative Solutions in August 2005. The acquisition has enabled the Company to deliver an enhanced multi-asset class attribution module. If executed correctly, the Company believes this could create new markets for its products and a potentially strong competitive advantage in the industry.

Marquee®, the Company’s real-time quotes and news application, continued to grow in users and clients during fiscal 2006 with successes within the Company’s investment banking client base. All new clients receive Marquee as part of the standard workstation feature set, making the basic FactSet service even more valuable. Marquee was installed on hundreds of buy and sell-side research analyst desktops during fiscal 2006. The application works in concert with FactSet’s existing platform or can be installed as a stand-alone solution for professionals focused on real-time market movements. Client usage of Marquee increased more than 60% during fiscal 2006. Additionally, the application has emerged as a leading driver of new client sales and has been the key component of several large wins for FactSet in the private wealth management and equity research areas of our business. Many clients recognize Marquee as a product that can streamline their daily workflows while optimizing their financial information budgets. Unique within the industry, FactSet’s Marquee and DIRECTIONS now offer the ability to access real-time information wedded to in-depth historical analysis tools on the same technology platform. As a result, many clients have decided to migrate to the consolidated FactSet solution. A particularly compelling feature of the combined FactSet Marquee/ DIRECTIONS desktop is its ability to share client portfolio holdings automatically between DIRECTIONS and Marquee. Client portfolios may be made available for detailed study in the Portfolio Analytics applications as well as real-time monitoring in Marquee.

Investment in the development of FactSet’s investment banking applications continued with the release of many enhancements during fiscal 2006. IB Central 2.0, an application designed for investment bankers was released during fiscal 2006. The application is the current centerpiece of FactSet’s sell-side offering. Working closely with its proprietary content collection teams, the Company’s product development group released frequent enhancements to the application, including the integration of its new Private Equity and Private Company databases. The application unites dozens of disparate sources within

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an elegant presentation. IB Central gives bankers the tools they need to track a given company as it grows from start-up through acquisition or initial public offering. Transactions associated with a given company are cross-referenced with the financial institutions involved in the deal and executives on the company’s management team.

The number of employees of FactSet and its subsidiaries totaled 1,431 as of October 23, 2006. Employee count at August 31, 2006 was 1,368, up 17% from a year ago. The percentage increase in employee headcount breaks down into 15% from organic growth and 2% from acquisitions over the last twelve months. Approximately one-third of the employees conduct sales and consulting services, another one-third are involved in product development, software and systems engineering and the remaining employees are involved with content collection or provide administrative support.

FactSet was founded in Delaware in 1978, and its headquarters are in Norwalk, Connecticut. The mailing address of the Company’s headquarters is 601 Merritt 7, Norwalk, Connecticut 06851, and its telephone number at that location is (203) 810-1000. The Company’s website address is www.factset.com.

Through a link on the Investor Relations section of its website, the Company makes available the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available free of charge. 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 and the same information is available in print to any shareholder who submits a written request to the Company’s Investor Relations department at its corporate headquarters. 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. The charters of each of the committees of the Company’s Board of Directors are available on the Investor Relations section of the Company’s website and the same information is available in print free of charge to any shareholder who submits a written request to the Company’s Investor Relations department at its corporate headquarters. The Company’s Chief Executive Officer timely submitted his certification on January 17, 2006, to the New York Stock Exchange (“NYSE”) that he was not aware of any violation by the Company of any NYSE corporate governance listing standards as of that date.

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

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ITEM 1A.        RISK FACTORS

Set forth below and elsewhere in this report and in other documents FactSet files with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Investors should carefully consider the risks described below before making an investment decision. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K filed with the SEC, including the Company’s consolidated financial statements and related notes thereto.

FactSet’s operating results are subject to quarterly and annual fluctuations as a result of numerous factors. As a consequence, operating results for a particular future period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the following factors, or any other factors discussed elsewhere herein, could have a material adverse effect on its business, results of operations, and financial condition that could adversely affect its stock price.

FactSet must continue to introduce new products and product enhancements to maintain its leading technological position

The market for the Company’s products is characterized by rapid technological change, changes in customer demands and evolving industry standards. New products based on new technologies or new industry standards can render existing products obsolete and unmarketable. As a result, the Company’s future success will continue to depend upon its ability to develop new products, or product enhancements, that address the future needs of its target markets and to respond to their changing standards and practices. FactSet may not be successful in developing, introducing, marketing and licensing the Company’s new products or product enhancements on a timely and cost effective basis, or at all, and the Company’s new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. In addition, clients may delay purchases in anticipation of new products or product enhancements. In addition, the Company’s ability to develop new products and product enhancements is dependent upon the products of other software vendors, including certain system software vendors, database vendors and development tool vendors. If the products of such vendors have design defects or flaws, are unexpectedly delayed in their introduction, or are unavailable on acceptable terms, the Company’s business could be seriously harmed.

FactSet must ensure the protection and privacy of client data

Many of FactSet’s products and services are comprised of information delivered through a variety of media, including the Internet, software-based applications and dedicated transmission lines. FactSet relies on a complex network of internal controls to protect the privacy of client data. If FactSet fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if FactSet experiences difficulties in its implementation, misappropriation of client data could incur, which could damage the Company’s reputation and ultimately its business.

A prolonged outage at one of FactSet’s data centers could result in reduced service and the loss of customers

FactSet’s customers rely on the Company for the delivery of time-sensitive, up-to-date data. FactSet’s business is dependent on its ability to rapidly and efficiently process substantial volumes of data and transactions on its computer-based networks and systems. The Company’s computer operations and those

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of its suppliers and customers are vulnerable to interruption by fire, natural disaster, power loss, telecommunications failure, terrorist attacks, acts of war, Internet failures, computer viruses and other events beyond the Company’s reasonable control. FactSet maintains back-up facilities for each of its major data centers to seek to minimize the risk that any such event will disrupt operations. In addition, FactSet maintains insurance for such events. However, the business interruption insurance FactSet carries may not be sufficient to compensate the Company fully for losses or damages that may occur as a result of such events. In addition, a loss of the Company’s services may induce its customers to seek alternative data suppliers. Any such losses or damages incurred by FactSet could have a material adverse effect on its business. Although the Company seeks to minimize these risks through security measures, controls and back-up data centers, there can be no assurance that such efforts will be successful or effective.

FactSet must hire and retain key qualified personnel

FactSet’s business is based on successfully attracting and retaining talented employees. Competition for technical personnel in the industry in which the Company competes is intense. The Company is limited in its ability to recruit internationally by restrictive domestic immigration laws. If the Company is less successful in its recruiting efforts, or if it is unable to retain key employees, its ability to develop and deliver successful products and services may be adversely affected. FactSet needs technical resources such as product development engineers to develop new products and enhance existing products. The Company relies upon sales personnel to sell its products and services and maintain healthy business relationships.

FactSet’s ability to integrate newly acquired companies

FactSet has made and expects to continue to make acquisitions from time to time. Acquisitions present significant challenges and risks relating to the integration of the business into its operations, and there can be no assurances that FactSet will manage acquisitions successfully. The related risks include the Company failing to achieve strategic objectives and anticipated revenue improvements as well as the failure to retain key personnel of the acquired business and the assumption of liabilities related to litigation or other legal proceedings involving the acquired business.

Under generally accepted accounting principles, FactSet reviews its amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of its goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in its industry. FactSet may be required to record a significant charge to earnings in its financial statements during the period in which any impairment of its goodwill or amortizable intangible assets is determined resulting in an impact on its results of operations.

The negotiation of contract terms supporting new and existing databases or products

As a leading provider of global financial and economic information, FactSet relies on its ability to combine more than 200 databases into its own dedicated online service. FactSet’s business employs a wide variety of data from a substantial number of data suppliers around the world. Certain of the Company’s products rely on single or limited number of suppliers, although FactSet makes every effort to assure that alternative sources are available if the need arises. The failure of its suppliers to deliver accurate data and in a timely manner could adversely affect the Company’s business.

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Uncertain economic and financial market conditions may affect FactSet’s revenues

FactSet conducts significant sales and customer support operations in countries outside of the United States. For fiscal 2006 and fiscal 2005, FactSet derived 28% and 27% of its revenue, respectively, from outside the United States. Accordingly, future results could be materially adversely affected by a variety of uncontrollable and changing factors, including, among others, foreign currency exchange rates; reductions in expenditures by large customers, poor performance of major financial markets, political or social unrest, terrorist attacks, economic instability or natural disasters in a specific country or region; environmental and trade protection measures and other regulatory requirements, which may affect the Company’s ability to import its products to, export its products from, or sell its products in various countries; political considerations that affect service provider and government spending patterns; health or similar issues, such as the outbreak of avian influenza (bird flu); difficulties in staffing and managing international operations; and adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries. The target clients for its products include a range of financial services organizations that manage investment portfolios, including asset managers, investment advisors, brokerage firms, banks, plan sponsors, hedge funds and others. The success of many of its clients is intrinsically linked to the health of the financial markets. FactSet believes that demand for its solutions could be disproportionately affected by fluctuations, disruptions, instability or downturns in the economy and the financial services industry, which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. Any or all of these factors could have a material adverse impact on the Company’s costs, expenses, and financial condition.

Increased competition in FactSet’s industry that may cause price reductions or loss of market share

FactSet continues to experience intense competition across all markets for its products. Its competitors range in size from Fortune 100 companies to small, single-product businesses that are highly specialized. While the Company believes the breadth of its businesses and product portfolio offers benefits to its customers that are a competitive advantage, its competitors that are focused on a narrower product line may be more effective in devoting technical, marketing, and financial resources to compete with us. In addition, barriers to entry to create a single purpose product are generally low. The internet as a distribution channel and non-commercial software model described above has reduced barriers to entry even further. These competitive pressures may result in decreased sales volumes, price reductions, and increased operating costs, such as for marketing and sales incentives, resulting in lower revenue, gross margins, and operating income. Weak economic conditions also can result in customers’ seeking to utilize lower-cost information that is available from alternative sources.

FactSet’s ability to achieve its historical levels of profitability and growth rates for revenues, earnings per share and cash flows

FactSet has established revenues, earnings per share and cash flow growth targets for 2007. Its growth is dependent upon successfully executing its strategy. The Company’s initiatives and investments may not be sufficient to achieve and maintain such growth targets. A failure to reach and maintain its desired revenue growth or its earnings per share growth targets could have a material adverse affect on the market value of its common stock.

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Third parties may claim FactSet infringes upon their intellectual property rights

From time to time FactSet receives notices from others claiming that the Company has infringed upon their intellectual property rights. The number of these claims may grow. Responding to these claims may require us to enter into royalty and licensing agreements on less favorable terms, require us to stop selling or to redesign affected products, or to pay damages or to satisfy indemnification commitments with the Company’s customers including contractual provisions under various license arrangements. If FactSet is required to enter into such agreements or take such actions, its operating margins may decline as a result. FactSet has made and expects to continue making significant expenditures to acquire the use of technology and intellectual property rights as part of its strategy to manage this risk.

FactSet defends its intellectual property rights and combats unlicensed copying and use of software and intellectual property rights through a variety of techniques. Preventing unauthorized use or infringement of its rights is difficult. While these activities adversely affect U.S. revenue, the impact on revenue from outside the United States is more significant, particularly in countries where laws are less protective of intellectual property rights.

Resolution of ongoing and other probable audits by tax authorities

FactSet is subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining its worldwide provision for income taxes. In the ordinary course of its business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company’s provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact the Company’s result of operations and financial condition in future periods. FactSet is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other tax authorities. Although FactSet believes its tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on its provision for income taxes and cash tax liability. Based on the results of an audit or litigation, a material effect on its income tax provision, net income, or cash flows in the period or periods for which that determination is made could result.

FactSet’s future effective tax rates could be adversely affected by lower than anticipated earnings in countries where the Company has lower statutory rates, and higher than anticipated earnings in countries where FactSet has higher statutory rates, by changes in the valuation of its deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof.

Changes in accounting may affect FactSet’s reported earnings and operating income

Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of its business are highly complex and involve subjective judgments. Changes in these rules, their interpretation, or changes in the Company’s products or business could significantly change its reported earnings and operating income and could add

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significant volatility to those measures, without a comparable underlying change in cash flows from operations.

In connection with the preparation of the Consolidated Financial Statements, FactSet uses certain estimates and assumptions, which are based on historical experience and management’s knowledge of current events and actions that FactSet may undertake in the future. Its most critical accounting estimates are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 28 to 31 of the Company’s 2006 Annual Report to Shareholders. In addition, FactSet makes certain estimates under Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, including decisions related to legal proceedings and reserves. While management believes that these estimates and assumptions are reasonable under the circumstances, by definition they involve the use of judgment and the exercise of discretion, and therefore actual results may differ.

Internal controls may be ineffective

Effective internal controls are necessary to provide reasonable assurance with respect to its financial reports and to effectively prevent fraud. Pursuant to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), FactSet is required to furnish a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If FactSet fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if FactSet experiences difficulties in its implementation, its business and operating results could be harmed, FactSet could fail to meet its reporting obligations, and there could be a material adverse effect on its stock price.

Potential changes in securities laws and regulations governing the investment industry’s use of soft dollars may reduce FactSet’s revenues

Approximately 35% of FactSet’s revenues are paid through soft dollar arrangements. On July 18, 2006, the SEC issued Interpretive Release No. 34-54165 which became effective on July 24, 2006. The release provides guidance on asset managers’ use of client commissions to pay for brokerage and research services within the scope of Section 28(e) of the Securities Exchange Act of 1934. The Interpretive Release outlines a framework for determining whether what types of research services are fall within the safe harbor provisions of that section. Market participants have a six-month grace period ending on January 24, 2007 to bring their soft dollar practices into compliance with the new guidance. Although the Company believes that its services fall within the description of eligible research services covered by the safe harbor, that its services provide lawful and appropriate assistance to the money manager in undertaking investment decisions, and that the commissions for the services are reasonable in relation to the value of the services provided, nevertheless, a client might arrive at a different conclusion. Moreover, if additional rules are issued or certain interpretations are followed that narrow the definition of research or brokerage services, which results in its clients being unable to use soft dollar arrangements to pay for FactSet products and services, the Company’s revenues could decrease.

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Item 1B.               UNRESOLVED STAFF COMMENTS

None.

ITEM 2.                PROPERTIES

At August 31, 2006, the Company leased office space domestically in Norwalk, Connecticut; Boston, Massachusetts; four locations in New York, New York; two locations in Chicago, Illinois; Manchester, New Hampshire; Reston, Virginia; Newark, New Jersey; Tuscaloosa, Alabama; San Mateo and Santa Monica, California; and outside the U.S. in London; Tokyo; Hong Kong; Sydney; Singapore; Frankfurt; Milan; and Paris and Avon, France. The leases expire on various dates through March 2021. 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.

During fiscal 2006, the Company agreed to lease space for the new London headquarters for the Company’s European-based operations. The new location is governed by a 15-year lease with an option to extend for an additional ten years. The Company consolidated its four London-based offices into one, new location. The Company continued to occupy its existing leased office space until the new facility was ready for occupancy on June 19, 2006. As a result, the Company incurred incremental expenses primarily representing a significant short-term redundancy of leased office space. Incremental expenses from this action were $2.7 million for the twelve months ended August 31, 2006.

At August 31, 2006, 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 (in thousands):

ITEM 3.                LEGAL PROCEEDINGS

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The Company is not a party to any material pending legal proceedings as of August 31, 2006.

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

None.

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Part II

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

(a)          Market Information

FactSet common stock trades on the New York Stock Exchange under the symbol “FDS”. The following table sets forth the range of high and low per share sales prices as reported for each fiscal period indicated and reflects all stock splits effected for the Company’s common stock as reported by the New York Stock Exchange:

(b)          Holders

As of October 23, 2006, there were approximately 10,600 stockholders of record and the closing price of FactSet’s common stock was $50.64 per share as reported by the New York Stock Exchange.

(c)           Dividends

In May 2006, the Company increased its regular quarterly dividend from $0.05 to $0.06 per share. On August 18, 2006, the Company announced a regular quarterly dividend of $0.06 per share. The cash dividend was paid on September 19, 2006, to common stockholders of record on August 31, 2006. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Company.

(d)          Securities Authorized for issuance under equity compensation plans

The following table provides a month-to-month summary of the share repurchase activity under the current stock repurchase program during the three months ended August 31, 2006:

(1)          On June 20, 2005, the Company’s Board of Directors authorized the repurchase of up to $50 million of FactSet common stock. Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. No minimum number of shares to be

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repurchased has been fixed. This table does not include share repurchases of common stock owned by employees in the Employee Stock Ownership Plan, which was terminated on June 20, 2005.

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.

(1)          Includes $8,391 of stock-based compensation and $2,674 of incremental expenses due to a significant short-term increase in occupancy costs from a redundancy of leased office space in London.

(2)          Includes $5,981 of stock-based compensation, $1,872 of incremental expenses due to a significant short-term increase in occupancy costs from a redundancy of leased office space in London, an after-tax gain of $939 from the sale of Company-owned real estate during the first quarter of fiscal 2006 and an income tax benefit of $2,913 primarily from the closure of previously filed tax returns.

(3)          Includes an income tax benefit of $1,930 from the closure of previously filed tax returns and changes in estimates.

(4)          Includes a corporate headquarters relocation charge of $837.

(5)          Includes a corporate headquarters relocation charge of $837 (pre-tax) and an income tax benefit of $1,500 from the closure of previously filed tax returns and additional federal and state tax planning.

(6)          Includes an income tax benefit of $1,274 from the final settlement of prior year tax returns and additional federal and state tax planning.

(7)          Includes a data center relocation charge of $904.

(8)          Includes a data center relocation charge of $904 (pre-tax) and an income tax benefit of $893.

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Supplementary Quarterly Financial Data (unaudited)

Quarterly results of operations and earnings per common share for fiscal 2006 and 2005 are as follows (in thousands, except per share data):

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:

·       Executive Overview

·       Results of Operations

·       Liquidity and Capital Resources

·       Off-Balance Sheet Arrangements and Contractual Obligations

·       Critical Accounting Estimates

·       New Accounting Pronouncements

·       Forward-Looking Factors

We believe MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Executive Overview

FactSet is a leading provider of global financial and economic information, including fundamental financial data on tens of thousands of companies worldwide. Our applications support and make more efficient workflows for buy and sell-side professionals. These professionals include portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed income professionals. Our applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alphatesting, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios.

We combine more than 200 databases, including content regarding tens of thousands of companies and securities from major markets all over the globe, into a single online platform of information and analytics. Clients have simultaneous access to content from an array of sources, which they can combine and utilize in any of our applications. We are also fully integrated with Microsoft Office applications such as Excel, Word and PowerPoint. This integration allows our users to create extensive custom reports. Our revenues are derived from month-to-month subscriptions to services, databases and financial applications. Approximately 75% of our revenue is generated from our investment management clients, while the remaining revenue is primarily derived from investment banking clients.

Highlights in support of our strategic objectives in 2006 include:

Products:

·       Expanded product offerings and achieved record levels of usage from our clients.

·       Released IBCentral 2.0, an application designed for investment bankers.

·       Derivative Solutions Inc. (“DSI”) provided a more complete analytical solution for our clients, empowering them to use FactSet to analyze structural products and fixed income portfolios.

·       Served an entirely new user class with AlphaMetrics products linking institutional sales professionals and their portfolio management clients.

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·       Increased acceptance of Marquee, our real-time news and quotes application.

·       Enhanced the Portfolio Analytics suite of products.

Employee Growth:

·       Employed 1,368 employees at August 31, 2006, an increase of 17% over the past twelve months.

·       Approximately one-third of our employees conduct sales and consulting services, another one-third are involved in product development, software and systems engineering and the remaining are involved with content collection or provide administrative support.

Acquisitions:

·       Acquired the AlphaMetrics business in September 2005 for aggregate consideration of $23.8 million, plus an additional $2.6 million based on the level of working capital of the business at closing. The AlphaMetrics business provides institutional clients with a suite of software tools for capturing, measuring and ranking the value of ideas provided by sell-side professionals, as well as those ideas generated internally by research staff. This acquisition is consistent with our strategy of developing tools to make client workflows more efficient.

·       Acquired europrospectus.com Limited (now known as FactSet Global Filings Limited, the “Global Filings business”) for $7.5 million in cash in February 2006. Global Filings provides access to equity, fixed income and derivatives prospectuses. The acquisition is consistent with our strategy of selectively creating and distributing our own financial information content in order to offer our clients best of breed content choices.

·       Successfully integrated DSI, AlphaMetrics and Global Filings business lines, all of which have extended our reach in the financial services industry.

Significant new accounting standards:

·       Effective September 1, 2005, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors. These awards include employee stock options, common shares acquired under employee stock purchases and restricted stock. SFAS 123(R) supersedes our previous accounting under APB 25 for periods prior to September 1, 2005. We adopted the modified prospective transition method as provided by SFAS 123(R). Accordingly, the consolidated financial statement amounts for the prior periods have not been restated to reflect stock-based compensation expense. Stock-based compensation recognized under SFAS 123(R) during fiscal 2006 was $8.4 million. The table below reflects net income and diluted earnings per share for fiscal 2006 compared with the pro forma information for fiscal 2005 as follows (in thousands, except per share data):

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Domestic Operations:

·       Increased U.S. revenues 21% to $277.2 million in fiscal 2006.

·       Revenues from domestic operations accounted for 72% and 73% of our consolidated revenues for fiscal 2006 and 2005.

International Operations:

·       Increased international revenues 32% to $110.2 million in fiscal 2006.

·       Revenues from international operations accounted for 28% and 27% of our consolidated revenues for fiscal 2006 and 2005.

·       Incurred incremental expenses of $2.7 million in connection with the office consolidation in London. The new headquarters for our European operations opened in June 2006.

Returning Value to Shareholders:

·       Authorized the repurchase of up to $50 million of our common stock on June 20, 2005.

·       Repurchased 320,900 shares at an average cost of $43.29 per share under the program in fiscal 2006.

·       Increased our quarterly dividend 20% from $0.05 to $0.06 per share in May 2006.

Results of Operations

For an understanding of the significant factors that influenced our performance during the past three fiscal years, the following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this Annual Report.

Revenues

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Revenues—Revenues in fiscal 2006 increased 24% to $387.4 million from $312.6 million in fiscal 2005. The 24% increase in fiscal 2006 compared to the same period a year ago breaks down into 17% growth in the underlying organic business and 7% growth from acquisitions owned less than one year. Acquisitions over the last twelve months, including Global Filings, the AlphaMetrics business and DSI accounted for 7% or $20.6 million of the revenue growth in the fiscal 2006. Performance was driven by many product lines in all geographic regions. The pace of signing on new clients kept the revenue growth rate of our U.S. business over 21% and our international business at 32% in fiscal 2006. Our IB team was the catalyst behind adding over 3,000 users during fiscal 2006 and increased the appeal of our IB Central application. Applications such as Marquee, our suite of Portfolio Analysis services, deeper penetration within sell side firms and expanded content choices deepened users’ engagement with our products and caused clients, users and subscriptions to increase. Subscriptions to databases and applications to existing clients comprised approximately half of our revenue growth. New clients and users accounted for the remainder. We have deployed our capital to develop a diverse product suite that attracts and engages a global, institutional client base. Fiscal 2005 revenues increased 24% to $312.6 million from $251.9 million in 2004. The 24% increase in fiscal 2005 compared to same period a year ago breaks down into 15% growth in the underlying organic business and 9% growth from acquisitions owned less than one year. Acquisitions during fiscal 2005, including JCF, DSI and TrueCourse accounted for 9% or $23.9 million of the revenue growth in the fiscal 2005. The 15% organic revenue growth in fiscal 2005 was attributable to new client additions, further penetration into overseas markets, subscriptions to additional applications and databases by existing clients. Demand for the Portfolio Analytics suite of applications continues to rise. Our ability to service professionals with a global reach was also driven by new business. Higher demand for global content among clients reflects a market shift in asset allocation to non-US investments during the period.

Demand for our Portfolio Analytics applications rose during fiscal 2006. This suite is comprehensive and includes the applications for portfolio attribution, risk and quantitative analysis. The portfolio analysis workstation is the largest revenue contributing member of this product suite. Approximately 475 clients consisting of 3,900 users subscribed to the PA 2.0 application as of August 31, 2006, an increase of about 50 clients and 600 users over the prior year.

Subscriptions—“Subscriptions” at a given point in time represent the forward-looking revenues for the next twelve months from all subscription services currently being supplied to our clients. With proper notice to us, our clients are generally able to add to, delete portions of, or terminate service at any time. At August 31, 2006, subscriptions were $422.6 million, up $74.8 million or 22% from the prior year total of $347.8 million. On a constant currency basis and excluding the acquisition of Global Filings and the AlphaMetrics business, subscriptions increased $65.5 million or 19% since August 31, 2005. Subscriptions from overseas operations increased from $92.1 million at August 31, 2005 to $125.6 million at August 31, 2006, representing 30% of the company-wide total. Subscription growth was strong, representing the power of our products and client service model. The average subscription per client was $237,000 at the end of 2006 compared to $220,000 and $258,000 at the close of fiscal years 2005 and 2004, respectively. Subscription growth in fiscal years 2006 and 2005 was due to the addition of net new clients, incremental subscriptions to our services by existing clients and increased users. Subscriptions at the end of fiscal 2005 were $347.8 million, up 27.5% from the prior year total of $272.9 million. The acquisitions JCF and DSI added $35.0 million of incremental subscriptions during fiscal 2005. On a constant currency basis and excluding the acquisition of JCF and DSI, subscriptions increased $39.9 million or 15% since August 31, 2004.

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Clients and Users—At August 31, 2006, client count was 1,785, an increase of 209 clients or 13% over the prior 12 months. Included in this rise was the net addition of 25 clients from the acquisitions of AlphaMetrics and Global Filings. In fiscal 2005, clients rose by 115 on a net basis. Including clients added by acquisitions, client count increased by 517 on a net basis in fiscal 2005. During fiscal 2005, the DSI and JCF acquisitions added 73 and 329 net new clients, respectively. The ability to consolidate multiple services into one through the FactSet platform has been a compelling opportunity for firms to recognize efficiencies.

There were approximately 29,800 users as of August 31, 2006, up 11% from 26,800 at the end of fiscal 2005. This count excludes professionals who subscribe exclusively to the AlphaMetrics web-based product. While there are many users, the price per user is materially lower than that of our DIRECTIONS platform.

In 2005, FactSet users increased to about 26,800, up 5,700 from the prior year. Fiscal 2005 user growth was the result of a further increase in users at our investment banking clients as well as additional passwords from the DSI and JCF acquisitions at the purchase date. The DSI and JCF acquisitions added about 400 and 2,000 users, respectively.

Our client retention rate remained at a rate in excess of 95% during each of the past three fiscal years. No individual client accounted for more than 3% of total subscriptions as of August 31, 2006. Subscriptions from the ten largest clients did not surpass 15% of total client subscriptions.

Revenues by Geographic Region—Revenues from the domestic business increased 21% to $277.2 million in fiscal 2006 compared to $229.0 million in the same period a year ago. Domestic revenues, excluding the DSI acquisition, grew 16%. Revenues from domestic operations increased 14% in fiscal 2005 as compared to $200.9 million in fiscal 2004.

International revenues in fiscal 2006 were $110.2 million, an increase of 32% from $83.6 million in the prior year period. On a constant currency basis and excluding the acquisition of Global Filings and AlphaMetrics, revenue growth from international operations advanced 22% for the year ended August 31, 2006 compared to a year ago. European revenues advanced 32% to $90.2 million from $68.3 million. Asia Pacific revenues grew to $20.0 million, up 31% from $15.3 million the same period a year ago. Revenues from international operations accounted for 28% and 27% of our consolidated revenues for fiscal 2006 and 2005, respectively. International revenues in fiscal 2005 were up 64% from fiscal 2004 international revenues of $51.0 million.

Currency Impact—Effective September 1, 2005, our wholly owned subsidiaries within the European segment no longer operate as branch offices and operate under a functional currency different from that of the rest of the Company. The financial statements of these foreign subsidiaries are translated into U.S. dollars using period-end rates of exchange for assets and liabilities, and average rates for the period for revenues and expenses. Translation gains (losses) that arise from translating assets and liabilities of foreign operations are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity.

Prior to September 1, 2005, the functional currency of our wholly owned subsidiaries, excluding JCF, was the U.S. dollar. Accordingly, the foreign currency exchange gains and losses from translating net monetary assets were included in net income.

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Our primary foreign currency exchange exposures are related to those wholly owned subsidiaries that have non-dollar denominated revenues billed and expenses recorded in the Eurodollar, British Pound Sterling and the Japanese Yen. During fiscal 2006, our expenses incurred in non-dollar denominated currencies exceeded our revenues billed in non-dollar denominated currencies by approximately $13.3 million. Historically, the impact of foreign currency fluctuations on our results of operations has not been material. We do not utilize any hedging instruments to limit specific currency risks related to foreign currency-denominated transactions.

A portion of our non-U.S. clients are billed in local currencies such as the Eurodollar, British Pound Sterling and the Japanese Yen, in their native foreign jurisdictions. Volatility in these and other currencies may have either positive or negative effects on our total reported revenues. The effect of currency movements on our fiscal 2006 revenue was immaterial.

Operating Expenses

Cost of Services

Cost of services advanced 32% to $121.4 million in fiscal 2006 from $91.8 million in fiscal 2005. Cost of services increased 24% in fiscal 2005 to $91.8 million from $74.2 million in fiscal 2004. The rise in cost of services in fiscal 2006 was driven by increases in employee compensation, amortization of intangible assets, data costs, and the first time inclusion of stock-based compensation, partially offset by lower depreciation of computer related equipment as a percentage of revenues. The main drivers of the 2005 growth were the first time inclusion of expenses from the JCF acquisition, increases in employee compensation, data costs and amortization of intangible assets, partially offset by lower client-related communication costs and depreciation on computer related equipment.

Employee compensation and benefits for our software engineering and consulting departments advanced $13.0 million in 2006 and $7.6 million in 2005. Employee additions, including those acquired in connection with the acquisitions of DSI, Global Filings, the AlphaMetrics business, and JCF, as well as normal merit increases primarily pushed up employee compensation in both years. Data costs grew $8.3 million and $9.0 million during fiscal 2006 and 2005, respectively, versus the prior year periods. The increased data expenses were largely due to incremental content costs associated with royalty payments to data content suppliers from additional client subscriptions, higher levels of proprietary content collection and new costs from acquisitions included for the first time. Amortization of intangibles assets advanced $4.0 million in fiscal 2006 and $3.1 million in 2005 due to our acquisitions of Global Filings, the AlphaMetrics business, DSI, TrueCourse, JCF and CallStreet in the past two years. Stock-based compensation expense recognized for the first time during fiscal 2006 amounted to an increase in cost of services of $2.7 million.

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A reduction in depreciation on computer related equipment as a percentage of revenues partially offset these component increases of cost of services. Depreciation on computer-related equipment as a percentage of revenues declined 30 basis points in fiscal 2006 and 130 basis points in fiscal 2005, due to efforts by our engineers to optimize software to improve computational capacity and lower industry pricing, partially offset by higher levels of client usage. We also benefited from lower prices from our computer hardware suppliers, as that industry’s trends toward faster and less expensive computers continued to move in our favor. A similar trend in the telecommunications industry during 2005 allowed us to control communications costs as well. Client-related communication costs as a percentage of revenues decreased 84 basis points in 2005 due to lower industry pricing, partially offset by higher bandwidth requirements.

Selling, General and Administrative

Selling, general, and administrative (“SG&A”) expenses advanced 29% to $144.7 million in fiscal 2006 from $111.8 million in fiscal 2005. SG&A rose 24% in 2005 from $90.1 million during fiscal 2004. The rise in SG&A in fiscal 2006 was driven by the first time inclusion of stock-based compensation, higher occupancy costs in London and Tokyo and increases in employee compensation, travel costs, miscellaneous expenses, and amortization of leasehold improvements, partially offset by lower professional fees. SG&A grew in fiscal 2005 due to higher employee compensation, increased travel expenses, greater rent and amortization of leasehold improvements and additional professional fees, partially offset by lower miscellaneous fees.

Employee compensation and benefits expanded $15.9 million during fiscal 2006 and $15.5 million in 2005. The increase can be primarily attributed to more employees classified as SG&A over the past twelve months, additional employee headcount as the result of acquisitions, and merit increases in compensation. Stock-based compensation expense recognized for the first time during fiscal 2006 amounted to an incremental cost to SG&A of $5.7 million during 2006. Occupancy costs advanced $4.5 million in fiscal 2006 as compared to the same period a year ago. We consolidated our four London-based offices into one new location, which resulted in $2.7 million of incremental expenses from a redundancy of leased office space during fiscal 2006. Our new European headquarters located in London opened on June 19, 2006 and is fully operational. In fiscal 2005, rent expense and amortization of leasehold improvements increased $3.5 million primarily due to the opening of our Norwalk headquarters in August 2004. Increases in the number of professionals traveling to service our expanded client base produced incremental travel expenses of $2.0 million and $2.9 million in fiscal 2006 and 2005, respectively.

Partially offsetting these component increases of SG&A was a reduction in professional fees in 2006 of $0.3 million compared to the same period a year ago. Professional fees increased $1.9 million in fiscal 2005 compared to 2004 due to increases in legal fees, tax planning and other consulting fees. Miscellaneous expenses decreased $3.4 million in fiscal 2005 due to the reduction of certain non-income tax accruals after formal discussions with local tax authorities and favorable currency movements.

Employee count at August 31, 2006 was 1,368, up 17% from a year ago. The percentage increase in employee headcount breaks down into 15% from organic growth and 2% from acquisitions over the last twelve months. Our total sales force grew approximately at the rate of revenues.

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Income from Operations and Operating Margin

Operating income advanced 11% to $121.3 million in fiscal 2006 while increasing 24% to $109.0 million in 2005 from $87.6 million in 2004. Our operating margins in fiscal years 2006, 2005 and 2004 were 31.3%, 34.9% and 34.8%, respectively. The operating margin decrease in 2006 as compared to 2005 is primarily due to $8.4 million of stock-based compensation expense recognized for the first time during fiscal 2006 and $2.7 million of incremental expenses incurred in the London office move. Operating margin expansion in 2005 resulted from lower depreciation on computer-related equipment, reduced communication costs and decreased miscellaneous fees, partially offset by increases in employee compensation, data costs and amortization of intangible assets as a percentage of revenues.

Other Income, Income Taxes, Net Income and Earnings per Share

Other Income

During fiscal 2006, other income increased $3.6 million as compared to fiscal 2005 primarily due to higher cash balances, the rise in interest rates and the completion of the sale of our only piece of Company-owned real estate. The sale of our Company-owned real estate resulted in a pre-tax gain of $1.3 million or $0.02 per share during the first quarter of fiscal 2006. The gain was included in other income and had no impact on operating income for the year. Interest income improved during fiscal 2006 as compared to the prior year due to higher cash and investment balances, rising interest rates and shifting available cash from managed accounts to short term money market instruments. Other income decreased $0.6 million in 2005 as compared to 2004 due to lower average cash and investment balances during fiscal 2005.

Income Taxes

For fiscal 2006, the provision for income taxes increased 12% to $43.1 million, up from $38.4 million in the comparable prior year period. Our effective tax rate for the full fiscal 2006 year was 34.2% versus 34.9% for the prior year. Our effective tax rate for fiscal 2006 of 34.2% included $2.9 million in income tax benefits primarily from the conclusion of an audit of the Company’s U.S. federal income tax returns and final settlement of previously filed tax returns. Based on the results of the IRS examination of the Company’s tax returns for the 2003 and 2004 tax years, the Company decreased previously recorded tax reserves by $1.4 million and decreased income tax expense by a corresponding amount during the fourth quarter of fiscal 2006. The decrease in the effective tax rate was partially offset by our inability to recognize a full year of U.S. research and development tax credits due to the expiration of the credit effective on December 31, 2005. An income tax benefit of $1.9 million was recognized in the year ago period due to the closure of previously filed tax returns. The fiscal 2004 effective tax rate was 35.1% which included the effect of a $1.5 million income tax benefit from the final settlement of prior year tax returns and additional

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federal and state tax planning. Excluding the respective tax benefits in all three fiscal years presented, the effective tax rates were: 36.5% in fiscal 2006; 36.6% in fiscal 2005; and 36.8% in fiscal 2004.

During fiscal 2006, we filed an application for change in accounting method with the IRS as a result of IRS Revenue Procedure 2004-34, allowing advanced cash collections to be recognized as income in the same period such revenue is recorded for GAAP purposes. This resulted in a $3.4 million reduction to current deferred tax assets and taxes payable.

The American Jobs Creation Act of 2004 and the Working Families Tax Relief Act of 2004 were both enacted in October 2004. These laws contain provisions which could potentially impact our effective tax rate. These items include the repeal of the Extraterritorial Income Exclusion and the enactment of a Domestic Manufacturing Deduction. Based on our evaluation performed in fiscal 2006, the impact of these laws on our effective tax rate for the year ended August 31, 2006 was immaterial.

Net Income and Earnings per Share

Net income rose 16% to $82.9 million and diluted earnings per common share increased 15% to $1.64 in fiscal 2006 compared to the year ago period. Fiscal 2005 net income rose 24% to $71.8 million and diluted earnings per share advanced 24% to $1.43 compared to fiscal 2004.

Liquidity

The table below, for the periods indicated, provides selected cash flow information (in thousands):

(1)                We define free cash flow as cash provided by operating activities, which includes the cash cost for taxes and changes in working capital, less capital expenditures. Free cash flow is not intended as an alternative measure of cash flows provided by operating activities, as determined in accordance with generally accepted accounting principles in the United States. We use this financial measure, both in presenting our results to shareholders and the investment community, and in our internal evaluation and management of the businesses. Management believes that this financial measure and the information we provide are useful to investors because it permits investors to view our performance using the same tool that management uses to gauge progress in achieving our goals and is also useful to investors because it is an indication of cash flow that may be available to fund further investments in future growth initiatives.

Cash and cash equivalents aggregated to $126.5 million or 28% of our total assets at August 31, 2006, compared with $59.5 million or 17% of our total assets at August 31, 2005. Our cash and cash equivalents increased $67.1 million since August 31, 2005 as a result of cash provided by operations of $120.8 million, proceeds of $2.9 million generated from the sale of Company-owned real estate and cash inflows of $16.6 million from the exercise of employee stock options. Partially offsetting these cash inflows were cash outflows of $28.3 million for the acquisitions of Global Filings and the AlphaMetrics business on

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February 17, 2006 and September 1, 2005, respectively, $16.3 million related to stock repurchases, dividends paid of $10.0 million and capital expenditures of $23.7 million.

We historically pay variable employee compensation related to the previous fiscal year in the first quarter. This cash outlay is anticipated to be approximately $20 million in the first quarter of fiscal 2007. We have included the payout in accrued compensation and represented it as a liability on our balance sheet at August 31, 2006.

All our operating and capital expense requirements were financed entirely from cash generated from our operations.

Cash generated by operating activities during fiscal 2006 increased $26.5 million or 28% since fiscal 2005 as a result of incremental net income of $11.2 million, incremental non-cash charges of $11.8 million from depreciation, amortization, stock-based compensation and deferred taxes, a gain of $1.3 million generated from the sale of Company-owned real estate, a $1.3 million increase in accounts payable and accrued expenses and increases in taxes payable by $7.0 million, partially offset by a $7.0 million decrease in income tax benefits from stock option exercises as a result of the presentation reclassification from operations to financing upon the adoption of SFAS 123(R). In 2005, cash flows from operating activities increased $11.9 million or 14.4% as a result of a larger amount of net income, a reduction in our days’ sales outstanding and higher income tax benefits from stock option exercises, partially offset by a decrease in accounts payable and accrued expenses and current taxes payable.

Net cash used in investing activities decreased $62.0 million in fiscal 2006 as compared to fiscal 2005 due to the significant decrease in cash outflows for acquisitions of businesses. In fiscal 2005, we spent $92.2 million in cash and cash equivalents to purchase the JCF, DSI and TrueCourse businesses. In fiscal 2006, we spent $28.3 million in cash to acquire the AlphaMetrics and Global Filings businesses. Net cash used in financing activities during fiscal 2006 was consistent with fiscal 2005. During fiscal 2006, we repurchased 320,900 shares at an average cost of $43.29 per share under the share repurchase program leaving $36.1 million authorized for future share repurchases.

Capital Resources

Capital Expenditures

Capital expenditures for fiscal 2006 totaled $23.7 million, up from $21.9 million in the same period a year ago. The increase was driven by higher levels of leasehold improvements and furniture and fixtures from the build out of the new London headquarters for our European operations, incremental data center computer equipment purchases in addition to office expansions during fiscal 2006. Capital expenditures are expected to total approximately $29 million to $35 million for fiscal 2007. Approximately 55% of these capital expenditures should relate to computer-related equipment and the remainder for the expansion of various office locations.

Capital expenditures totaled $21.9 million in fiscal 2005, which included $9.2 million in computer-related equipment and $12.7 million in furniture and fixtures and leasehold improvements. Significant capital additions in fiscal 2005 included three new mainframes and the completion of our new headquarters facility in Norwalk.

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Capital Needs

On September 1, 2005, the Company issued an unsecured floating rate note in the amount of $1.7 million, maturing in September 2010. The note bears interest from and including September 1, 2005 at the rate of one percent below LIBOR and payable semi-annually. The note was issued in accordance with the Agreement for the Sale and Purchase of the Share Capital of the AlphaMetrics business dated as of July 27, 2005 among the Company, AlphaMetrics and other parties. The note was issued in lieu of a seller’s cash consideration. The noteholder has the option to require the Company to repay all or any part of the note as of March 1, 2006, or any subsequent interest payment date.

We currently have no other outstanding indebtedness, other than the letters of credit issued in the ordinary course of business, as discussed below.

In March 2006, we renewed our 364-day revolving credit facility and continued to maintain our three-year credit facility. The 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 in March 2007 and March 2008. Approximately $3.0 million in aggregate of these credit facilities has been utilized for letters of credit issued during the ordinary course of business as of August 31, 2006. We are obligated to pay a commitment fee on the unused portion of the facilities at a weighted average annual rate of 0.125%. The facilities also contain covenants that, among other things, require the Company to maintain minimum levels of consolidated net worth and certain leverage and fixed charge ratios.

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 necessary capital expenditures to support 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.

The following table summarizes our significant contractual obligations as of August 31, 2006, and the corresponding effect that these obligations will have on our liquidity and cash flows in future periods.

(1)                 Note payable represents our contractual obligation created from the acquisition of the AlphaMetrics business on September 1, 2005. The note was issued in lieu of a seller’s cash entitlement and allows the noteholder the option to require us to repay all or any part of the note as of March 1, 2006 or any subsequent interest payment date.

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(2)                 Capital purchase obligations represent contractual obligations for construction or acquisitions of fixed assets. These obligations are not recorded as liabilities on our Consolidated Statement of Financial Condition as we have not yet received the related goods or taken title to the property.

(3)                 Purchase obligations represents payment due in future periods in respect of commitments to purchase goods and services such as telecommunication and computer maintenance services as well as commitments to our various data vendors.

Purchase orders do not necessarily reflect a binding commitment but are merely indicative of authorizations and intention to conclude purchases in the future. 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 AlphaMetrics acquisition, contingent consideration will be payable if certain revenue targets are met during the twelve-month period ending October 31, 2006. In relation to the JCF transaction, up to €5,000,000 of contingent consideration will be payable if certain subscription targets are met during the period September 1, 2004 through May 31, 2007. As of August 31, 2006, no targets have been attained or projected to be achieved, and as such, no amount of contingent consideration has been accrued for at August 31, 2006.

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 achievement of targets and may vary significantly.

Share Repurchases

On June 20, 2005, our Board of Directors authorized the repurchase of up to $50 million of our common stock. Repurchases will be made from time to time in the open market and privately negotiated transactions, subject to market conditions. No minimum number of shares to be repurchased has been fixed. During fiscal 2006, we repurchased 320,900 shares at an average cost of $43.29 per share under the program. At August 31, 2006, $36.1 million remains authorized for future share repurchases. In addition, 64,935 shares were repurchased during fiscal 2006 representing common stock owned by employees in the Employee Stock Ownership Plan, which was terminated on June 20, 2005.

During fiscal 2005, FactSet repurchased 342,500 shares at an average cost of $27.71 per share. As a result, the Company completed the stock repurchase program authorized by the Board of Directors on July 16, 2002. Under the program, FactSet repurchased 1,500,000 shares at an average cost of $20.03 per share. The remaining repurchases during fiscal 2005 were repurchases of common stock owned by employees in the Employee Stock Ownership Plan.

On August 1, 2005, the Company issued 305,748 common shares as part of the consideration in the acquisition of DSI. On January 4, 2005, the Company issued 44,613 common shares as part of the

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consideration in the acquisition of TrueCourse. On September 1, 2004, the Company issued 385,601 common shares as part of the consideration in the acquisition of the JCF Group of Companies.

In January 2004, the Company purchased 3,000,000 shares of its common stock from one of its co-founders, Howard E. Wille at a price per share of $23.05. In March 2004, the Company purchased 1,500,000 shares of its common stock from its other co-founder, Charles J. Snyder, at a price per share of $25.41. The Board of Directors approved both purchases of common stock from its co-founders prior to the execution of those purchases. The total cash expended for the two common stock purchases was $107.3 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K as of August 31, 2006.

Critical Accounting Estimates

We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and 2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.

Receivable Reserves

Our client base has generally been of a high quality and, as such, we have not historically experienced a high level of 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 in our receivable reserves. In accordance with this policy, our receivable reserve was $1.2 million and $1.1 million as of August 31, 2006 and 2005, respectively. 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. A 10% change in actual cancellations and billing adjustments during fiscal 2006 and 2005 would have affected our receivable reserves by approximately $0.1 million in both years.

Valuation of Goodwill

We evaluate goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We complete our impairment evaluation by performing internal valuation analyses and consider other publicly available market information. We performed our annual goodwill impairment test during the fourth quarter of each of fiscal years 2005, 2004 and 2003 and determined that there had been no impairment. In the fourth quarter of

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fiscal 2006, we completed our annual impairment testing of goodwill using the methodology described herein, and determined there was no impairment. The carrying value of goodwill as of August 31, 2006, was $141.4 million.

We determine fair value using the discounted cash flows model. This analysis contains uncertainties because it requires management to make assumptions and to apply judgment to estimate industry economic factors including market conditions, legal and technological factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.

We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for goodwill impairment losses. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to an impairment charge that could be material. 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 our Consolidated Statement of Operations and a write-down of the related asset.

Long-lived Assets

Long-lived assets, comprised of property, equipment, leasehold improvements and identifiable intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that may cause an impairment review include significant changes in technology that make current computer-related assets that we use in our operations obsolete or less useful and significant changes in the way we use these assets in our operations. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. The new cost basis will be depreciated (amortized) over the remaining useful life of that asset. Using the impairment evaluation methodology described herein, there have been no long-lived asset impairment charges for each of the last three years. The carrying value of long-lived assets as of August 31, 2006, was $102.9 million.

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.

We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

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Tax Contingencies

Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record reserves for probable exposures. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved or clarified. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

Our tax contingencies reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new offices, the level of earnings and the results of tax audits.

Although management believes that the judgments and estimates discussed in this report are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

Accrued Compensation

In conformity with generally accepted accounting principles, we make significant estimates in determining our accrued compensation. A significant percentage of our employee incentive compensation programs are discretionary. A final review of departmental individual performance is conducted each year end to determine the ultimate amount of discretionary bonus pools. We also review compensation throughout the year to determine how overall performance tracks against management’s expectations. Management takes these and other factors, including historical performance, into account in reviewing accrued compensation estimates quarterly and adjusting accrual rates as appropriate. Accrued compensation recorded in the Consolidated Statement of Financial Condition as of August 31, 2006, was $19.3 million.

Stock-Based Compensation

We have a stock-based compensation plan, which includes qualified and non-qualified stock options and non-vested share awards, and an employee stock purchase plan. See Note 2 and Note 13 to our Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our stock-based compensation programs.

We determine the fair value of our non-qualified stock option awards at the date of grant using option-pricing models. Non-qualified stock option awards granted prior to March 1, 2005 were valued using a Black-Scholes model. Non-qualified stock option awards granted subsequent to March 1, 2005 were valued using a lattice-binomial model. We determine the fair value of our performance-based non-

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vested share awards at the date of grant using a lattice model and the closing market price of our stock. Management reviews its assumptions and the valuations provided by independent third-party valuation advisors to determine the fair value of stock-based compensation awards.

Option-pricing models require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors. Changes in these assumptions can materially affect the fair value estimate.

On August 14, 2006, we granted 1,539,472 stock-based awards, of which 924,989 were performance-based stock options. The aggregate fair value of the performance-based stock options at the date of grant was $13.0 million and will be expensed over their vesting period of five years. Performance-based stock options require management to make assumptions regarding the likelihood of achieving company performance goals. The number of performance-based options that ultimately vest is based on achieving certain financial performance levels during fiscal years 2007 and 2008. Dependent on the financial performance levels attained, 0%, 20%, 60% or 100% of the performance-based stock options will ultimately vest to the grantees of those stock options. At August 31, 2006 we have estimated that 20% or 184,998 of the performance-based stock options should vest. This results in stock-based compensation expense of $2.6 million to be recognized by us over the next five years. A change in the actual financial performance levels achieved by the Company could result in a change in our current estimate of the vesting percentage and related expense. Any change in our estimates would not have been material to the consolidated financial statements for the fiscal year ending August 31, 2006.

New Accounting Pronouncements

In September 2005, FASB issued FASB Staff Position (“FSP”) SFAS No. 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R), to defer the requirement of SFAS 123(R) that a freestanding financial instrument originally subject to SFAS 123(R) becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. The rights under stock-based payment awards issued to employees by us are all dependent on the recipient being an employee. Therefore, this FSP currently does not have an impact on our consolidated financial statements and its measurement of stock-based compensation in accordance with SFAS 123(R).

In October 2005, the FASB issued FSP SFAS No. 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R), to provide guidance on determining the grant date for an award as defined in SFAS 123(R). This FSP stipulates that assuming all other criteria in the grant date definition are met, a mutual understanding of the key terms and conditions of an award to an individual employee is presumed to exist upon the award’s approval in accordance with the relevant corporate governance requirements, provided that the key terms and conditions of an award (a) cannot be negotiated by the recipient with the employer because the award is a unilateral grant, and (b) are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. We have applied the principles set forth in this FSP upon its adoption of SFAS 123(R).

In November 2005, the FASB issued FSP SFAS No. 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, to provide an alternate transition method for the implementation of SFAS 123(R). Because some entities do not have, and may not be able to re-

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create, information about the net excess tax benefits that would have qualified as such had those entities adopted SFAS 123(R) for recognition purposes, this FSP provides an elective alternative transition method. That method comprises (a) a computational component that establishes a beginning balance of the APIC pool related to employee compensation and (b) a simplified method to determine the subsequent impact on the APIC pool of employee awards that are fully vested and outstanding upon the adoption of SFAS 123(R). We have applied the alternative transition method set forth in this FSP upon its adoption of SFAS 123(R).

In February 2006, the FASB issued FSP SFAS No. 123(R)-4, Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event, to address the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. The guidance in this FSP amends paragraphs 32 and A229 of SFAS 123(R). The Company’s employee stock option plans have no cash settlement provisions. Therefore, this FSP currently does not have an impact on our consolidated financial statements or its measurement of stock-based compensation in accordance with SFAS 123(R).

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation clarified the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). Specifically, FIN 48 clarifies the application of SFAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods of income taxes, as well as the required disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the requirements of FIN 48 and have not yet determined if the adoption of FIN 48 will have a significant impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). Among other requirements, SFAS 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. SFAS 157 is effective beginning the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of SFAS 157 on our financial position and results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. We do not believe SAB 108 will have a material impact on our consolidated financial statements.

Forward-Looking Factors

Forward-Looking Statements

In addition to current and historical information, this Management’s Discussion and Analysis and other parts of this report contain forward-looking statements that are based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the

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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 “expects,” “anticipates,” “plans,” “intends,” “projects,” “should,” “indicates,” “continues,” “subscriptions,” and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions. Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements.

We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws as found in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part 1 Item 1A, Risk Factors of  this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

Dividend Payment

On August 18, 2006, we announced a regular quarterly dividend of $0.06 per share. The cash dividend was paid on September 19, 2006, to common stockholders of record on August 31, 2006.

Business Outlook

The following forward-looking statements reflect our expectations as of November 10, 2006. Given the number of risk factors, uncertainties and assumptions discussed below, actual results may differ materially. We do not intend to update our forward-looking statements until our next quarterly results announcement, other than in publicly available statements.

First Quarter Fiscal 2007 Expectations

·       Revenues are expected to range between $106 million and $109 million.

·       Operating margins are expected to range between 31.5% and 33.5%, including the impact from SFAS 123(R). The first quarter of fiscal 2007 will be the first quarter in which the effect of SFAS 123(R) is presented in both periods. Our operating margin guidance includes SFAS 123(R). The increase in the range reflects the end of incremental expenses related to London office space.

·       The effective tax rate is expected to range between 36.0% and 36.8%.

Full Year Fiscal 2007

·       Capital expenditures should total approximately $29 million to $35 million. The midpoint of the range is 7.6% of subscriptions at August 31, 2006 and is consistent with our average over the past five years. Capital expenditures will be allocated approximately 55% to computer equipment and the remainder to office expansion.

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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 EAFE Index) have experienced significant volatility during the past five years. 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 volatile energy prices could undermine the general economic environment. 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, continued inflationary pressures or both could derail the current economic environment 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, 2006 was $16.6 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, we try 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 a restrictive investment policy, our financial exposure to fluctuations in interest rates is expected to remain low.

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,” which are incorporated herein by reference.

ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

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

We have completed integrated audits of FactSet Research Systems Inc.’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of August 31, 2006, and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of FactSet Research Systems Inc. and its subsidiaries at August 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 of financial statements 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.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for share-based payment awards, effective September 1, 2005.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the Report of Management on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of August 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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 effective internal control over financial reporting was

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maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Stamford, Connecticut
October 24, 2006

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Consolidated Statements of Income
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements. The Company adopted SFAS 123(R) on September 1, 2005. Historical periods were not retroactively adjusted to include stock-based compensation expense under SFAS 123(R). See Note 12 to the consolidated financial statements for additional information.

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Consolidated Statements of Financial Condition
(In thousands, except share data)

Assets

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

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Consolidated Statements of Financial Condition
(In thousands, except share data)

Liabilities and Stockholders’ Equity

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

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Consolidated Statements of Cash Flows
(In thousands)