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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2006
or
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 000-21433
 
 
 
 
Forrester Research, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  04-2797789
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
400 Technology Square
  02139
Cambridge, Massachusetts
(Address of principal executive offices)
  (Zip Code)
 
Registrant’s telephone number, including area code:
(617) 613-6000
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $.01 Par Value
  The Nasdaq Stock Market, Inc.
 
Securities to be 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 o     No þ
 
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 þ
 
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 requirement for the past 90 days.  Yes o     No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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 off the Exchange Act. (Check one):
 
Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2006 (based on the closing price as quoted by the Nasdaq National Market as of such date) was approximately $405,000,000.
 
As of July 13, 2007, 23,076,966 shares of the registrant’s common stock were outstanding.
 


TABLE OF CONTENTS

PART I
PART II
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PART III
SUMMARY COMPENSATION TABLE FOR 2006
DIRECTOR COMPENSATION TABLE FOR 2006
PART IV
EXHIBIT INDEX
SIGNATURES
EX-10.8 - Summary of Non-Employee Director Compensation
EX-10.17 - Form of Performance-Based Option Certificate
EX-10.18 - Form of Director's Option Certificate
EX-10.20 - Separation Agreement with Daniel Mahoney dated December 12, 2006
EX-10.21 - Employment Offer Letter to Michael A. Doyle dated July 24, 2007
EX-14.1 - Code of Business Conduct and Ethics
EX-21 - Subsidiaries of the Registrant
EX-23.1 Consent of BDO Seidman, LLP
EX-31.1 - Section 302 Certification of CEO
EX-31.2 - Secton 302 Certification of CFO
EX-32.1 - Section 906 Certification of CEO
EX-32.2 - Section 906 Certification of CFO


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This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward- looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
Explanatory Note
 
In this 2006 Annual Report on Form 10-K, Forrester Research, Inc. (“Forrester” or “the Company”, “we” or “our”) is restating its consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the two years ended December 31, 2005 and December 31, 2004. We have also included under Item 6, “Selected Consolidated Financial Data”, restated financial information as of, and for each of the years ended, December 31, 2002, 2003, 2004, and 2005, and in Footnote 16 to the consolidated financial statements included herein, restated financial information for the first three quarters of 2006 and all of the interim periods of 2005.
 
The Company expects to file shortly quarterly reports on Form 10-Q for the three months ended March 31, 2007 (“Q1 2007”) and the three and six months ended June 30, 2007 (“Q2 2007”). The Q1 2007 and Q2 2007 Form 10-Q’s will contain restated financial information for the comparable periods of the prior year.
 
Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q have not been amended and should not be relied upon.
 
Background
 
On December 19, 2006, we announced that the Audit Committee of our Board of Directors had initiated a voluntary inquiry into the Company’s stock option granting practices and had hired the law firm of Ropes & Gray LLP in November 2006 to conduct an independent investigation of such practices. Independent counsel and outside forensic accounting experts, at the Audit Committee’s direction, conducted an extensive review of the Company’s historical stock option granting practices and related accounting. On February 14, 2007, we announced that the Audit Committee had reported to the Board of Directors certain findings of its investigation into the conduct of the Company’s officers, directors and former officers in connection with the granting of stock options, principally between 1997 and 2003. On March 5, 2007, we announced that the Audit Committee, after consultation with management and with BDO Seidman LLP, the Company’s independent registered public accounting firm, had determined that the Company’s historical consolidated financial statements included in the Company’s Annual Reports of Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on From 8-K should no longer be relied upon.
 
As a result of the voluntary inquiry and the independent investigation, management has concluded, and the Audit Committee agrees, that incorrect measurement dates were used for financial accounting purposes for options to purchase approximately 16.99 million of the more than 19.16 million shares subject to stock option grants awarded from 1997 through 2006. Accordingly, revised measurement dates were determined for all grants with incorrect measurement dates, and we have recorded additional non-cash stock-based compensation expense and related tax effects based on the revised measurement dates for these past stock option grants. Previously filed financial statements are being restated in this annual report on Form 10-K.
 
Independent Investigation
 
The scope of the investigation included a review of the conduct of the Company’s current and former officers, directors and other employees in granting stock options as noted above, and a forensic review of (i) all Company-wide grants (those made to all employees or to a broad group of key employees, referred to as “Company-wide grants”) from 1997 — 2006, covering 13.34 million shares of common stock, (ii) a sample of “ad hoc” grants (stock options granted in connection with promotions or new hires or in special circumstances awarded between 1997 and


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September 30, 2006, referred to as “ad hoc grants”), with a particular focus on periods where fluctuations in the Company’s stock price presented increased incentive and opportunity to choose retrospective grant dates with favorable pricing, such sample covering a majority of the 5.36 million shares subject to ad hoc grants, and (iii) all stock options granted to directors of the Company between 1997 and 2006, covering 460,500 shares of common stock. The conduct phase of the investigation included interviews of current and former officers and employees, and two current independent directors. In addition, the independent investigators reviewed a substantial volume of electronic and hard copy documents, including documents identified by computer-driven searches of electronic data that identified potentially responsive e-mails and other documents.
 
The Audit Committee’s report to the Board of Directors included the following key findings:
 
The investigation found that the responsibility for issuing, and establishing controls over, option grants during the period 1997 — 2003 was shared between Forrester’s finance and strategic growth (human resources) organizations. The individuals who led those organizations during that time period are no longer at the Company. Warren Hadley, the Company’s Chief Financial Officer from February 2002 — 2006 resigned in December 2006 as a result of irregularities discovered in the course of the investigation with respect to a stock option granted to him in 1999. Timothy Riley, the Company’s Chief People Officer since 1997, resigned in February 2007. Susan Whirty, the Company’s former Chief Financial Officer from 1998 until her resignation in January 2002, also served as General Counsel of the Company from the time of the Company’s initial public offering in November 1996 until her resignation in 2002.
 
The investigation uncovered no evidence of misconduct by George Colony, who has been Chief Executive Officer since he founded the Company in 1983. The investigation uncovered no evidence suggesting that Mr. Colony knew of any flexible dating or backdating of stock options.
 
The investigation also found no evidence that the members of the Compensation Committee of the Board of Directors or any of the other independent directors received mispriced options, or directed the granting of, or knew of, any flexible dating practice or backdating of options.
 
The Audit Committee and Company management concluded that the actual “measurement date”, as that term is defined in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), was different from the measurement date recorded by the Company for certain option grants to purchase Company common stock which were awarded both to officers and other employees. From 1997 — 2006, stock options covering a total of 19.16 million shares were awarded, of which 17.29 million shares, or 90%, were selected for review. The results of the review were such that 89% of the stock options reviewed indicated that the actual measurement date was different than the recorded measurement date (original measurement date) as further discussed below. As a result of having identified these incorrect measurement dates, management concluded that the Company’s previously issued financial statements should be restated. The issues identified by the investigation as having given rise to the incorrect measurement dates fall into the following main categories:
 
Inadequate or inconsistent documentation.  For a number of the grants made to all or a large group of Company employees on an annual basis, there was inadequate or inconsistent documentation to establish that the requisite approvals had been obtained, or that the list of recipients was final as of the original measurement date. In addition, for many “ad hoc” grants awarded primarily to new hires or to individuals for promotions, documentation was lacking (or could not be located given the passage of time since the grant date), inadequate or insufficient to support the original measurement date.
 
Targeted pricing for certain Company-wide and ad hoc grants.  For two Company-wide grants (July 1999 and January 2002), and for certain ad hoc grants awarded primarily during 1999 and 2000, the original measurement date preceded the actual measurement date as determined under APB No. 25. It appears that the original measurement date was chosen in part because pricing was favorable on that date.
 
Evidence developed during the investigation suggests that principally in 1999 and 2000, the date of an employee’s promotion (and therefore the corresponding date on which the stock option relating to that promotion was granted) subsequently would be changed to a date on which the Company’s stock price was lower. Although the evidence did not establish that such changes were uniformly made, they did occur, particularly in the case of promotion grants, on numerous occasions, principally in 1999 and 2000 when the Company’s stock price was fluctuating substantially. In several such instances, two promotion letters were generated for the same promotion,


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with the latter letter reflecting the more advantageous promotion/grant date. Approximately 40 grants representing options to purchase 512,000 shares were identified during the course of the investigation as having been repriced and as a result were accounted for as variable options under APB No. 25.
 
Grants without evidence of proper authorization.  These grants included stock options awarded without approval of the Compensation Committee of the Board even when such approval was required (i.e., a grant to an executive officer or a grant that exceeded the scope of the delegation of authority to the chief executive officer). In many instances, particularly with ad hoc grants, the Compensation Committee procedures were not followed, or, where the award was made pursuant to delegated authority, there was no evidence of the chief executive officer’s approval.
 
Upon the conclusion of the independent investigation into the conduct of certain officers, directors and employees, the Company completed an assessment of the actual measurement dates for all stock options granted between 1997 and 2006 under applicable accounting principles. This assessment included a review of a substantial volume of contemporaneous documentation to determine the actual measurement date for stock options. In certain cases, the documentation supported the original measurement date, and in other cases, the documentation supported an alternative measurement date. However, for many stock option grants, no reliable documentation could be found to support the original or any alternative measurement date. For those cases, we determined that the most appropriate source of information to determine the actual measurement date is the date of entry of the applicable grant into the Company’s stock option database, since the entry into the database constituted an acknowledgment by the Company of the grantee’s legal entitlement to the stock option grant.
 
Based on the results of the Company’s comprehensive assessment, the measurement dates, as adjusted, for all of the stock options granted by the Company from 1997-2006 are categorized as follows:
 
         
    Number of Shares
 
Measurement Date
  (in 000’s)  
 
Original Measurement Date
    2,163  
Alternative Date
    9,054  
Database Entry Date
    7,939  
Total
    19,156  
 
Our approach wherever practicable was to determine the actual measurement date for each grant based on available documentary evidence and to apply the default approach of date of entry into the stock option database only in those cases where documentation with respect to the grant was either unavailable or unreliable. As noted above, the available documentation supported the original measurement or an alternative measurement date for a majority of the option shares, consisting principally of certain program option grants and ad hoc grants to executive officers and new hires on and after 2003. The available evidence relied upon to support the original or alternative measurement date for the program grants consisted of minutes and/or unanimous written consents of the board of directors or compensation committee of the board where available, and e-mails to the stock option administrator containing detailed listings of individuals and the related grants where available. For the ad hoc grants, in the case of executive officers, the documentary evidence consisted of minutes of meetings or unanimous written consents of the compensation committee of the board of directors detailing the specific new hire or promotion grant, as well as employment offer letters, recorded start dates in the applicable employee data base, and the filing dates of Form 4 stock transaction reports for section 16 officers. For ad hoc grants to non-officer new hires, the documentary evidence relied upon consisted of the employment offer letters and the recorded start dates in the applicable employee data base. However, for a substantial number of grants, documentation was either unavailable or unreliable, particularly for stock options granted in earlier years. For those grants, we concluded that the most appropriate approach was to default to the date of entry into the stock option data base, as noted above.
 
We considered various alternative approaches to establishing the actual measurement dates for stock options granted during the stated period and believe that the approach we used was the most appropriate under the circumstances. The use of a different approach may have resulted in different measurement dates, which could have resulted in substantially higher or lower cumulative stock-based compensation expense. This in turn would have caused net income to be different than amounts reported in the restated consolidated financial statements included in this Annual Report on Form 10-K.


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In addition to the restatement adjustments resulting from the Company’s historical stock option granting practices (“the Stock Option Investigation Restatement Adjustments”), the Company is restating its consolidated financial statements to recognize a deferred tax liability associated with the book tax difference relating to the write-off of goodwill for tax purposes during 2002 (“the German Deferred Tax Liability Adjustment”). Previously, the Company had not recognized the deferred tax liability for the difference in book and tax basis for goodwill, as required under Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes (“SFAS No. 109”), The Company is also restating its interim quarterly financial information for 2006 to reverse stock-based compensation expense resulting from the failure to appropriately update management’s estimate of the applicable pre-vesting forfeiture rate, which resulted in the recognition of excess stock-based compensation expense under SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) during 2006 interim periods (“the 2006 Forfeiture Rate Adjustments”).
 
Summary of the Restatement Adjustments
 
As a result of the errors identified, the Company restated its historical statements of income from 1998 through 2005 to record $37.4 million of additional non-cash stock-based compensation expense and associated payroll tax expense, net of related income tax effects, together with the recognition of a deferred tax liability related to the different basis for book and tax purposes of goodwill associated with an acquisition in Germany in 2000, a significant portion of which was written down to net realizable value for tax purposes in 2002. For 2005 and 2004, these errors resulted in an after tax benefit to the consolidated statements of income of $596,000 and $731,000, respectively. The cumulative effect of the related after-tax expenses for periods prior to 2004 was $38.7 million.
 
The Company determined that it was more likely than not that it would realize the benefits of the future deductible amounts related to non-cash stock-based compensation expense. As a result, we recorded a cumulative tax benefit through 2005 of $16.3 million related to stock-based compensation expense. Previously, the Company had recorded the deferred tax asset from the net operating losses related to the exercise of stock options as a benefit to additional paid-in capital within stockholders’ equity. As a result of the restatement, a portion of the benefit previously recorded as a benefit to additional paid-in capital was reclassified to income tax benefit. The cumulative effect of the tax benefit recorded as adjustments to periods prior to 2004 was $15.8 million.
 
Under section 162(m) of the Internal Revenue Code (“IRC”), stock options that are in-the-money at the time of grant do not qualify as performance-based compensation and therefore the Company is not entitled to a deduction for the compensation expense related to the exercise of those options held by officers who are covered by IRC section 162(m). The Company previously recognized deferred tax assets as a benefit to additional paid-in capital related to covered officers whose grants were in-the-money, totaling approximately $5.4 million for the years 1999 through 2002. Those benefits have been reversed through a reduction of the Company’s deferred taxes and a reduction of additional paid-in capital and are included in the cumulative effect of restatement recorded as of December 31, 2003.
 
The Company reviewed the tax effects associated with stock options for which the original measurement date was corrected (“Adjusted Options”). Many of the Adjusted Options were originally intended to be incentive stock options (“ISOs”) under U.S. income tax regulations. However, by definition, ISOs may not be granted with an exercise price less than the fair market value of the underlying stock on the date of grant. Due to the impact of the measurement date changes on the qualified status of affected ISOs, they may no longer qualify as ISOs under the regulations. Therefore, the affected ISOs were accounted for as if they were non-qualified stock options for income tax accounting purposes. The Company recorded a liability for the unpaid income and employment taxes due plus potential penalties and interest based upon the change in status of the affected options in the amount of $5.8 million for the periods 1998 through 2006. The Company recorded reversals of this accrual in the amount of $5.3 million through 2006 due to the expiration of the payroll tax statute of limitations for years 2003 and prior. These adjustments resulted in a net charge to expense of approximately $202,000 over the restatement period. The net expense recorded during 2006 was approximately $326,000.
 
If the Company’s assumptions with respect to unpaid taxes due based upon the change in status of the affected options were challenged, including with respect to the expiration of the statute of limitations, the Company’s liability for unpaid taxes could be materially higher, which in turn would cause net income to be materially different


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than amounts reported in the restated consolidated financial statements included in this Annual Report on Form 10-K. Previously, the Company had not properly accounted for the differences in book and tax basis for goodwill related to an acquisition in Germany in 2000, a significant portion of which was written down to net realizable value for tax purposes in 2002. The Company accordingly has recorded net cumulative adjustments to its income tax provision of $5.8 million for the period 2000 to 2005. For periods prior to 2004, the Company recorded a cumulative increase to its income tax provision of $6.2 million. The deferred tax liability is the result of a write-down of goodwill for tax purposes in 2002 that was not required to be recognized for book purposes under SFAS No. 142, Goodwill and Intangible Assets.
 
The following is a summary of the restatement adjustments by year (in thousands):
 
                                                                                 
                            ‘‘The German
                               
                            Deferred Tax
                               
                            Liability
                               
          “The Stock Option Investigation Restatement Adjustments”     Adjustment”
                               
                      Income Tax
    Income
                               
          Non-Cash
    Payroll
    Benefit
    Tax Benefit
                               
          Stock
    and Other
    Related to
    (Expense)
    Total
    Net
    Diluted
             
    Net Income
    Based
    (Expense)
    Stock
    Related
    Restatement
    Income
    EPS
          Diluted
 
    (As Previously
    Compensation
    Benefit,
    Based
    to German
    (Expense)
    (Loss)
    (as Previously
          (As
 
Year Ended:
  Reported)     Adjustments     Net     Compensation     Goodwill     Benefit     (As Restated)     Reported)     Adjustment     Restated)  
 
December 31, 1998
  $ 7,547     $ (6,905 )   $ (30 )   $ 2,588     $     $ (4,347 )   $ 3,200     $ 0.40     $ (0.23 )   $ 0.17  
December 31, 1999
    10,981       (10,757 )     (254 )     3,991             (7,020 )     3,961       0.55       (0.35 )     0.20  
December 31, 2000
    21,614       (18,910 )     (3,226 )     5,981       (247 )     (16,402 )     5,212       0.88       (0.67 )     0.21  
December 31, 2001
    18,117       (6,031 )     (1,602 )     1,616       (83 )     (6,100 )     12,017       0.76       (0.26 )     0.50  
December 31, 2002
    589       (3,305 )     122       1,126       (4,584 )     (6,641 )     (6,052 )     0.02       (0.28 )     (0.26 )
December 31, 2003
    2,191       (681 )     3,202       516       (1,269 )     1,768       3,959       0.10       0.07       0.17  
                                                                                 
Cumulative effect at December 31, 2003
            (46,589 )     (1,788 )     15,818       (6,183 )     (38,742 )                                
December 31, 2004
    4,132       (613 )     1,552       223       (431 )     731       4,863       0.18       0.03       0.21  
December 31, 2005
    11,348       (446 )     34       239       769       596       11,944       0.52       0.03       0.55  
                                                                                 
Total
            (47,648 )     (202 )     16,280       (5,845 )     (37,415 )                                
 
The vesting and/or exercise of certain stock options that were granted on a discounted basis (exercise price is less than the fair market value of the stock on the date of grant) may be subject to Internal Revenue Code section 409A. In February 2007, the Company filed a notice of participation in the voluntary program described in Internal Revenue Service (IRS) Announcement 2007-18, the Compliance Resolution Program for Employees other than Corporate Insiders for Additional 2006 Taxes Arising under Section 409A due to the Exercise of Stock Rights. The Company also participated in the similar program prescribed by the California Franchise Tax Board. Under these programs, employers pay the requisite additional tax and associated interest and penalties on behalf of employees (and former employees) who exercised discounted stock options in 2006. During 2007, Forrester paid a total of $362,000 to the Internal Revenue Service and the California Franchise Tax Board under these programs.
 
PART I
 
General
 
Forrester Research, Inc. conducts independent technology and market research and provides pragmatic and forward-thinking advice to global leaders in business and technology. We offer products and services in four major areas: Research, Data, Consulting, and Community. Our products and services are targeted to specific roles, including principally senior management, business strategists, and marketing and technology professionals at $1 billion-plus companies who collaborate with us to align their technology investments with their business goals.
 
Research serves as the foundation for all our offerings and consists primarily of annual memberships to our syndicated research offering RoleViewtm, formerly known as WholeView®2, that provides comprehensive access to our core research on a wide range of business and technology issues of interest to the specific roles our products and services address. In addition to RoleView, we also provide several client-focused products and services in our Data, Consulting, and Community offerings. Each of these allow our clients to interact directly with analysts and explore in greater detail the issues and topics covered by RoleView on a client-specific basis.
 
We were incorporated in Massachusetts on July 7, 1983 and reincorporated in Delaware on February 16, 1996. In February 2003, we acquired Giga Information Group, Inc., or Giga, a global technology advisory firm. Giga’s


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products and services enhanced our offerings by providing objective research, pragmatic advice and personalized consulting on information technology.
 
Our Internet address is www.forrester.com. We make available free of charge, on or through the investor information section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Code of Business Conduct and Ethics, which is applicable to our officers, directors and employees, including our principal executive, financial and accounting officers, is posted on the investor information section of our website. We intend to post any amendment to, or waiver from, a provision of the Company’s Code of Business Conduct and Ethics, and that relates to a substantive amendment or material departure from a provision of the Code, on our Internet website at www.forrester.com. We will provide a copy of the Code, free of charge, upon request.
 
Industry Background
 
Emerging technologies play a central role in companies’ and their employees’ efforts to remain both competitive and cost-efficient in an increasingly complex global business environment. Developing comprehensive and coordinated business strategies is difficult because as the economy and technology change, consumers and businesses adopt new methods of buying and selling, and markets grow increasingly dynamic.
 
Consequently, companies and the professionals who are in the roles we focus on rely on external sources of expertise that provide independent business advice spanning a variety of areas including technology, business strategy, and consumer behavior. We believe there is a need for objective research that is thematic, prescriptive, and executable, and that provides a comprehensive perspective on the integrated use of technology in business.
 
Forrester’s Strategy
 
In early 2007, Forrester accelerated execution of a role-based strategy to focus attention on serving leaders in multiple roles across its client base. Forrester’s syndicated RoleView research provides clients with more relevant research, easier access to the insights individual leaders need to make them successful in their roles and new community tools to provide a more comprehensive view of the problems they face.
 
We seek to maintain and enhance our position as a leading independent technology and market research firm and to capitalize on demand for our research by:
 
Identifying and Defining New Business Models, Technologies, and Markets.   We seek to differentiate ourselves from other research firms by delivering pragmatic and forward-thinking research and analysis on the impact of technology on business models and technology infrastructure. We believe that our research methodology and our creative culture allow us to identify and analyze rapid shifts in the use of technology before these changes appear on the horizons of most users, vendors, and other research firms. Our early identification of these shifts enables us to help our clients capitalize on emerging business models and technologies.
 
Leveraging our RoleView Research.  Our business model, technology platform, and research methodologies allow us to sell existing products and to rapidly introduce new products and services without incurring significant incremental costs. We intend to continue to use our business model, technology platform, and research methodologies to both increase sales of our existing RoleView research and introduce innovative new products. Our Data, Consulting, and Community offerings complement, enhance and supplement our RoleView research offering, and many are designed to address clients’ customized needs.
 
Using Targeted, Global Sales Channels.  We sell our products and services directly through our global sales force in various locations in North America, Europe, Asia and Australia. We also sell our products and services through independent sales representatives in select international locations. In 2006, our business was managed through three geographic regions — Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific. Effective January 2007, we reorganized our business into global client groups to more closely align with our client base: the IT Client Group, the Marketing & Strategy Client Group, and the Technology Industry Client Group.


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Growing Our Client Base Worldwide and Increasing Sales to Existing Clients.  We believe that our products and services can be successfully marketed and sold to new client companies worldwide and to new roles and additional units and divisions within our existing client companies. We believe that within our client base of over 2,300 client companies as of December 31, 2006 there is opportunity to sell additional products and services. In addition, we intend to expand our international presence as the growing impact of technology on business innovation creates demand for external sources of objective research.
 
Developing and Retaining Outstanding Research Professionals.  The knowledge and experience of our analysts are critical elements of our ability to provide high-quality products and services. We employ outstanding research professionals from varied backgrounds and a wide range of industries. We believe that our culture, which emphasizes quality, cooperation, and creativity, helps us to develop and retain high-caliber research professionals. We provide a competitive compensation structure, as well as recognition and rewards for excellent individual and team performance.
 
Forrester’s Solution
 
Our business and technology expertise enables us to offer our clients the best available research on changing business models and technologies, technology investments, implementation changes, and customer trends. Our solution provides our clients with:
 
A Unified Set of Services to Build Business and Technology Strategies.  We offer clients a comprehensive and unified view of technology’s impact on business. The primary component of this view is RoleView. Clients may combine RoleView with our Data, Consulting, and Community offerings to obtain access to the research, data, analysts, and peer insights they need to:
 
  •  Assess potential new markets, competitors, products, and services.
 
  •  Anticipate technology-driven business model shifts.
 
  •  Understand how technology affects consumers and can improve business processes.
 
  •  Educate, inform, and align strategic decision-makers in their organizations.
 
  •  Navigate technology implementation challenges and optimize technology investments.
 
  •  Capitalize on emerging technologies.
 
Expertise on Emerging Technologies.  We started our business in 1983 and have a long history of, and extensive experience in, identifying technology trends and providing research and executable advice on the impact of technology on business. Our research analysts have many years of industry experience, are frequent speakers at business and technology conferences, and are often quoted in the media. They enjoy direct access to the leaders and decision-makers within large enterprises and technology vendors. We provide our research analysts with training to ensure that they have the skills to challenge conventional viewpoints and provide prescriptive, executable insight and research to our clients.
 
Products and Services
 
We offer our clients a selection of engagement opportunities in the areas of Research, Data, Consulting, and Community which are organized for and directed toward the multiple professional roles we cover.
 
Research
 
Our primary syndicated research product, renamed RoleView in February 2007 (formerly known as WholeView2), is a holistic, unified offering that provides clients with comprehensive access to our core syndicated research designed to inform their strategic decision-making. Like WholeView2, RoleView consists of a library of cross-linked documents that interconnects our reports, data, product rankings, best practices, evaluation tools, and research archives and allows clients to move barrier-free across our research, but RoleView access is provided through role-based websites that facilitate client access to research and tools that are most relevant to their professional roles. Through this access structure, RoleView addresses the interplay of an individual client’s


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responsibilities and goals, business demands, and technology capabilities. Our RoleView research includes The Forrester Wave. The Forrester Wave provides a detailed analysis of vendors’ technologies and services based on transparent, fully accessible criteria, and measurement of characteristics weighted by us. The Forrester Wave includes an Excel spreadsheet that allows clients to compare products and get in-depth data and analysis about each one and tools to develop a custom shortlist based on the client’s unique requirements. The Forrester Wave is our primary mechanism for evaluating enterprise technologies.
 
Clients subscribing to RoleView may choose between two membership levels:
 
  •  RoleView Member Licenses include access to the written research, as well as Inquiry with all analysts, one Event seat, and access to Forrester Teleconferences.
 
  •  Inquiry.  Inquiry enables clients to contact any of our analysts for quick feedback on projects they may have underway, to discuss ideas and models in the research, or for answers to questions about unfolding industry events. Typically, Inquiry sessions are 30-minute phone calls, scheduled upon client request, or e-mail responses coordinated through our Inquiry Team.
 
  •  Event Seat.  Events bring together executives and other participants for one- or multi-day conferences to network with their peers and to hear business leaders discuss the impact of technology on business.
 
  •  Forrester Teleconferences.  Forrester Teleconferences are hour-long audio conferences on selected topics of interest to particular professional roles that typically are held several times a week. They consist of an analyst-led presentation followed by questions from participants. Members may access the analyst Web presentation and participate in the subsequent forum for questions and discussion among all attendees. Teleconferences are also made available for member down load.
 
  •  RoleView Reader Licenses provide access to our written research.
 
Both Member and Reader clients receive access to our Research Help Desk, which is a call center dedicated to providing additional information about our research, methodologies, coverage areas, and sources. The Research Help Desk is available to help clients navigate our website, find relevant information, and put clients in contact with the appropriate analyst for inquiries.
 
Data
 
Our Data products and services focus on consumers’ and business users’ attitudes about and behavior toward technology, including ownership, future purchases, and adoption trends. These products incorporate extensive survey research designed and analyzed by our staff. Clients can leverage our Technographics research or choose to have us conduct data analysis on their behalf. Our Data products include:
 
  •  Consumer Technographics Data & Services.  Our Technographics Data & Services leverage our core research findings to provide an in-depth understanding of how consumers buy, think about, and use technology. Consumer Technographics delivers both primary data and quantitative research, based on surveys of over 225,000 households in North America, Europe and Asia Pacific which is analyzed and categorized into relevant market segments to help organizations and their leaders capitalize on changing consumer behavior. We combine respondent data sets from our Consumer Technographics surveys into four offerings: North American Consumer Technology Adoption Study, European Consumer Technology Adoption Study, Hispanic American Technology Adoption Study, and Asia Pacific Consumer Technology Adoption Study. Additionally, clients have access to a Technographics data specialist to help them use the data effectively to meet their specific business needs.
 
  •  Business Data & Services (formerly known as Business Technographics).  Our Business Data Services is an ongoing quantitative research program that provides comprehensive, in-depth assessments of what motivates businesses to choose certain technologies and vendors over others. We annually survey more than 13,000 business and IT executives at North American, European, and Asia Pacific large enterprises and small and midsize businesses. Our surveys reveal these firms’ technology adoption trends, budgets, business organization, decision processes, purchase plans, and brand preferences. Business Data and Services clients also have access to a data specialist and input into survey design.


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Consulting
 
Our Consulting services leverage RoleView to deliver customized research to assist clients in executing technology and business strategy, assessing viable initiatives for competitive technology gains, and making large technology investments. Specifically, we help our clients, via custom research with:
 
  •  Market Strategy
 
  •  Effective Use of Technology
 
  •  Innovation & Organizational Design
 
  •  Supply & Demand Networks
 
  •  IT Sourcing
 
We also offer Website Reviews that provide targeted, action-oriented assessments of clients’ websites, extranets, or intranets. Feedback is based on comprehensive examination of the clients’ website and web strategies.
 
Community
 
Our Community offerings are designed to foster effective connections between peers in the same or similar roles, our analysts, and the relevant research. Our Community programs provide exclusive networking opportunities, advice on best practices, and targeted analysis. Community products and services include the Forrester Leadership Boards, participation in Workshops, and attendance at Forrester Events.
 
  •  Forrester Leadership Boards.  Our Forrester Leadership Boards are exclusive offerings for executives and other key employees at large companies worldwide. Clients may choose to participate in one or more Forrester Leadership Boards. Memberships are available in the CIO Group and the CMO Group and in additional technology, marketing, and vendor programs. In addition to a Member license to access RoleView, members of our Forrester Leadership Boards receive access to the following:
 
  •  analyst teams for individual research-related questions,
 
  •  membership-directed research which includes comprehensive coverage of industry trends and best practices,
 
  •  exclusive industry-specific benchmark data, and
 
  •  peer-to-peer networking through premier event meetings and group audio-conferences.
 
  •  Workshops.  Forrester conducts several Workshops (formerly known as “Boot Camps”) over the course of a year, each of which focuses on a specific issue or subject matter of interest to particular technology or marketing professionals and other executives. Workshops are an efficient forum for clients to receive relevant and useful information and tools to help them succeed in their roles.
 
  •  Forrester Events.  We host multiple Events in various locations in North America and Europe throughout the year. Events build upon our research and data to bring together executives and other participants to network with their peers, meet with Forrester analysts, and to hear business leaders discuss the impact of technology on business.
 
Pricing and Contract Size
 
We report our revenue from client contracts in two categories of revenue: (1) research and (2) advisory services and other. All the product and service offerings listed above are comprised of research, advisory services and other, or some combination of the two. Research offerings principally generate research revenues, and Consulting offerings consist solely of advisory services revenues. We classify revenue from our Consumer Technographics Data & Services and Business Data and Services as research services revenue. Within Community, revenue from memberships to the Forrester Leadership Boards is classified as research services revenue, and revenue from Workshops and Forrester Events is classified as other revenue in our advisory services and other revenue classification.


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Contract pricing for annual memberships for research only is principally a function of the number of licensed users at the client. Pricing of contracts for research and advisory services is a function of the number of licensed users, and the amount and type of advisory services. The average contract for annual memberships for research only at December 31, 2006 was approximately $43,500, an increase of 7% from $40,600 at December 31, 2005. The average contract for an annual membership for research which also included advisory services at December 31, 2006 was approximately $87,900, an increase of 2% from $85,800 at December 31, 2005.
 
We track the agreement value of contracts to purchase research and advisory services as a significant business indicator. We calculate agreement value as the total revenues recognizable from all research and advisory service contracts in force at a given time (but not including advisory-only contracts), without regard to how much revenue has already been recognized. Agreement value increased 16% to $172.8 million at December 31, 2006 from $148.6 million at December 31, 2005.
 
Research Analysts and Methodology
 
We employ a structured methodology in our research that enables us to identify and analyze technology trends, markets, and audiences and ensures consistent research quality and recommendations across all coverage areas. We seek to provide relevant research that will contribute to the success of our clients in their professional roles.
 
We ascertain the issues important to technology users through thousands of interactions and surveys with vendors and business, marketing, and IT professionals, and accordingly, the majority of our research is focused on the issues our clients face each day. We use the following primary research inputs:
 
  •  Confidential interviews with early adopters and mainstream users of new technologies.
 
  •  In-depth interviews with technology vendors and suppliers of related services.
 
  •  Ongoing briefings with vendors to review current positions and future directions.
 
  •  Continuous dialogue with our clients to identify technology issues in the marketplace.
 
Our Consumer Technographics and Business Data and Services research combines our qualitative research methodology with traditional survey research methodologies such as correlation, frequency distribution, cross-tabulation, and multivariate statistics to produce research reports, quantitative survey data, and data briefs. Third-party data vendors are frequently used for data collection and tabulation.
 
The Forrester Wave combines in-depth product test results and user interviews with market and strategic analysis to score attributes of emerging technologies. We then apply this research and strategic analysis to determine the weighting of each attribute and create interactive spreadsheets, databases, and reports.
 
Collaboration among analysts is an integral part of our process, leading to higher-quality research and a unified perspective. All RoleView research begins either with a client or vendor catalyst or with discussion sessions among analysts to generate ideas for research. Analysts test ideas throughout the research process at both informal and weekly research meetings. Our reports are consistent in format, and we require our analysts to write in a structure that combines graphics with easy-to-read text to deliver concise, decisive, relevant, and objective research to our clients. At the final stage of the research process, senior analysts meet to test the conclusions of each research report.
 
Sales and Marketing
 
We sell our products and services through a direct sales force in various locations in North America, Europe, and Asia. We also sell our products and services through independent sales representatives and suppliers in select international locations. We employed 303 salespersons as of December 31, 2006, an increase of 15% from 263 as of December 31, 2005. We also sell our research products directly online through our website.
 
For information on our international operations, see Note 14 of the Notes to Consolidated Financial Statements included herein.
 
Our marketing activities are designed to increase awareness of the Forrester brand and further our reputation as a leader in role-based emerging technology research. We actively promote brand awareness via our website,


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Forrester Events, extensive worldwide press relations, and direct mail campaigns. We also employ an integrated direct marketing strategy that uses Internet, mail, and telephone channels for identifying and attracting high-quality sales leads. We encourage our analysts to increase our visibility by having their research ideas selectively distributed through various Internet, print, and television outlets.
 
As of December 31, 2006, our research was delivered to more than 2,300 client companies. No single client company accounted for more than 2% of our 2006 revenues.
 
Competition
 
We believe that the principal competitive factors in our industry include the following:
 
  •  Quality of research and analysis and related services.
 
  •  The ability to offer products and services that meet the changing needs of organizations and executives for research and analysis.
 
  •  Customer service.
 
  •  Independent analysis and opinions
 
  •  Timely delivery of information.
 
  •  The ability to leverage new technologies.
 
  •  Price.
 
We believe that we compete favorably with respect to each of these factors. We believe that our early focus on emerging technologies is a significant competitive advantage. Additionally, we believe that our role-based strategy, research methodology, easy-to-read formats, and portfolio of complementary product offerings distinguish us from our competitors.
 
We compete principally in the market for research and advisory services about and relating to technology and its impact on business. Our principal direct competitors include other providers of similar services, such as Gartner Group, as well as providers of peer networking services and Internet and digital media measurement services. In addition, our indirect competitors include the internal planning and marketing staffs of our current and prospective clients, as well as other information providers such as electronic and print publishing companies, survey-based general market research firms, and general business consulting firms. Our indirect competitors could choose to compete directly against us in the future. In addition, there are relatively few barriers to entry into our market, and new competitors could readily seek to compete against us in one or more market segments addressed by our research. Increased competition could adversely affect our operating results through pricing pressure and loss of market share. There can be no assurance that we will be able to continue to compete successfully against existing or new competitors.
 
Employees
 
As of December 31, 2006, we employed a total of 779 persons, including 298 research staff and 270 sales personnel.
 
Our culture emphasizes certain key values — including client service, quality, and creativity — that we believe are critical to our future growth. We promote these values through training and frequent recognition for achievement. We encourage teamwork and promote and recognize individuals who foster these values. New employees participate in a three-day training process that focuses on our products and services, corporate culture, values and goals.


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Item 1A.   Risks Factors
 
We are subject to risks and uncertainties that could cause our actual future activities and results of operations to be materially different from those set forth in forward-looking statements made by us. These risks and uncertainties include:
 
Fluctuations in Our Operating Results.  Our revenues and earnings may fluctuate from quarter to quarter based on a variety of factors, many of which are beyond our control, and which may affect our stock price. These factors include, but are not limited to:
 
  •  Trends in technology spending in the marketplace and general economic conditions.
 
  •  The timing and size of new and renewal memberships for our research services from clients.
 
  •  The utilization of our advisory services by our clients.
 
  •  The timing of revenue-generating Events sponsored by us.
 
  •  The introduction and marketing of new products and services by us and our competitors.
 
  •  The hiring and training of new analysts and sales personnel.
 
  •  Changes in demand for our research and advisory services.
 
As a result, our operating results in future quarters may be below the expectations of securities analysts and investors, which could have an adverse effect on the market price for our common stock. Factors such as announcements of new products, services, offices, or strategic alliances by us or the technologies services industry may have a significant impact on the market price of our common stock. The market price for our common stock may also be affected by movements in prices of stocks in general.
 
A Decline in Renewals for Our Membership-Based Research Services.  Our success depends in large part upon renewals of memberships for our research products. Approximately 77%, 78%, and 76% of our client companies with memberships expiring during the years ended December 31, 2006, 2005, and 2004, respectively, renewed one or more memberships for our products and services. These renewal rates are not necessarily indicative of the rate of future retention of our revenue base. Any future declines in renewal rates could have an adverse effect on our results of operations.
 
Ability To Develop and Offer New Products And Services.  Our future success will depend in part on our ability to offer new products and services. These new products and services must successfully gain market acceptance by addressing specific industry and business organization sectors and by anticipating and identifying changes in client requirements and changes in the technology industry. The process of internally researching, developing, launching and gaining client acceptance of a new product or service, or assimilating and marketing an acquired product or service, is risky and costly. We may not be able to introduce new, or assimilate acquired, products or services successfully. Our failure to do so would adversely affect our ability to maintain a competitive position in our market and continue to grow our business.
 
Loss of Key Management.  Our future success will depend in large part upon the continued services of a number of our key management employees. The loss of any one of them, in particular George F. Colony, our founder, Chairman of the Board and Chief Executive Officer, could adversely affect our business.
 
The Ability To Attract and Retain Qualified Professional Staff.  Our future success will depend in large measure upon the continued contributions of our senior management team, research analysts, and experienced sales and marketing personnel. Thus, our future operating results will be largely dependent upon our ability to retain the services of these individuals and to attract additional professionals from a limited pool of qualified candidates. We experience competition in hiring and retaining professionals from developers of Internet and emerging-technology products, other research firms, management consulting firms, print and electronic publishing companies and financial services companies, many of which have substantially greater ability, either through cash or equity, to attract and compensate professionals. If we lose professionals or are unable to attract new talent, we will not be able to maintain our position in the market or grow our business.


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Failure To Anticipate and Respond To Market Trends.  Our success depends in part upon our ability to anticipate rapidly changing technologies and market trends and to adapt our research to meet the changing information needs of our clients. The technology and commerce sectors that we analyze undergo frequent and often dramatic changes. The environment of rapid and continuous change presents significant challenges to our ability to provide our clients with current and timely analysis, strategies and advice on issues of importance to them. Meeting these challenges requires the commitment of substantial resources. Any failure to continue to provide insightful and timely analysis of developments, technologies, and trends in a manner that meets market needs could have an adverse effect on our market position and results of operations.
 
Competition.  We compete in the market for research products and services with other independent providers of similar services. We may also face increased competition from Internet-based research firms. Some of our competitors have substantially greater financial, information-gathering, and marketing resources than we do. In addition, our indirect competitors include the internal planning and marketing staffs of our current and prospective clients, as well as other information providers such as electronic and print publishing companies, survey-based general market research firms and general business consulting firms. Our indirect competitors may choose to compete directly against us in the future. In addition, there are relatively few barriers to entry into our market, and new competitors could readily seek to compete against us in one or more market segments addressed by our products and services. Increased competition could adversely affect our operating results through pricing pressure and loss of market share.
 
Material weaknesses in our internal control over financial reporting could lead to errors in our financial statements and a lack of investor confidence in us and a resulting decline in our stock price.  We had a material weakness in our internal control over financial reporting at December 31, 2005 relating to the proper accounting for non-cash stock option expense that resulted in restatements of our financial statements for two quarters in 2005. We also report in Item 9A that material weaknesses existed at December 31, 2006 in our internal control over financial reporting relating to stock option accounting, and to income tax accounting for goodwill and intangible assets. Internal controls that do not meet applicable accounting and auditing standards could result in errors in our financial statements and lead investors to question the reliability and accuracy of our reported financial information. Any such lack of confidence in the financial information that we produce could cause investors to sell our stock and result in a decline in our stock price.
 
We face risks related to the restatement of our financial statements and the ongoing SEC investigation regarding our historical stock-based compensation practices.  The Securities and Exchange Commission (“SEC”) has commenced a formal inquiry into our historical stock-based compensation practices. We are cooperating with the SEC and will continue to do so as the inquiry moves forward. At this point, we are unable to predict what, if any, consequences the SEC investigation may have on us. However, the investigation has resulted in considerable expenses, is diverting management’s attention from other business concerns, and could harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or fines and could become subject to an administrative order and/or a cease and desist order. The filing of our restated financial statements will not resolve the SEC investigation. Further, the resolution of the SEC investigation could require the filing of additional restatements of our prior financial statements, and/or our restated financial statements, or require that we take other actions not presently contemplated. In addition, there can be no assurance that the SEC will accept the Company’s approach for establishing the correct measurement dates for stock options granted during the restatement period or that the Company’s assumptions with respect to the related tax effects will not be challenged by the Internal Revenue Service.
 
This list of uncertainties and risks is not exhaustive. Certain factors that could affect our actual future activities and results and cause actual results to differ materially from those contained in forward-looking statements made by us include, but are not limited to, those discussed above as well as those discussed in other reports filed by us with the Securities and Exchange Commission.
 
Item 1B.   Unresolved Staff Comments
 
We have not received written comments from the Securities and Exchange Commission that remain unresolved.


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Item 2.   Properties
 
Our headquarters are located in approximately 125,000 square feet of office space in Cambridge, Massachusetts, all of which is currently occupied by the Company. This facility accommodates research, marketing, sales, technology, and operations personnel. The lease term of this facility expires in September 2011. We have the option to extend this lease for an additional five-year term.
 
We also have leased office space in Foster City, California, Amsterdam, Dallas, Denmark, Frankfurt, London and Paris.
 
We believe that our existing facilities are adequate for our current needs and that additional facilities are available for lease to meet future needs.
 
Item 3.   Legal Proceedings
 
We are not currently a party to any material legal proceedings.
 
In June, 2007, the SEC notified us that it had commenced a formal inquiry into our historical stock option granting practices. In December 2006, prior to the resignation of our chief financial officer in connection with irregularities involving a stock option grant awarded to him in 1999, we advised the SEC of our voluntary internal investigation. We have been cooperating fully with the SEC since then and will continue to do so as the inquiry moves forward. We are unable to predict what, if any, consequences the SEC investigation may have on us or on our results of operations.
 
Item 4.   Submission Of Matters To A Vote Of Security Holders
 
Not applicable.
 
PART II
 
Item 5(a).   Market For Registrant’s Common Equity And Related Stockholder Matters
 
Our common stock is traded on the Nasdaq Stock Market under the symbol “FORR.” We did not declare or pay any dividends during the fiscal years ended December 31, 2005 and 2006. We anticipate that future earnings, if any, will be retained for the development of our business, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
As of October 22, 2007 there were approximately 48 stockholders of record of our common stock. On October 22, 2007, the closing price of our common stock was $24.48 per share.
 
The following table represents the ranges of high and low sale prices of our common stock for the fiscal years ended December 31, 2005 and December 31, 2006:
 
                                 
    2005     2006  
    High     Low     High     Low  
 
First Quarter
  $ 18.46     $ 13.79     $ 23.15     $ 17.76  
Second Quarter
  $ 18.77     $ 13.61     $ 28.00     $ 20.31  
Third Quarter
  $ 21.58     $ 17.45     $ 29.55     $ 23.55  
Fourth Quarter
  $ 21.00     $ 17.28     $ 32.32     $ 26.29  


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The following table summarizes, as of December 31, 2006, the number of options issued under our equity compensation plans and the number of shares available for future issuance under these plans:
 
                         
    (a)
          (c)
 
    Number of Securities
    (b)
    Number of Securities Remaining
 
    to be Issued Upon Exercise
    Weighted Average Exercise
    Available for Future Issuance Under
 
    of Outstanding Options,
    Price of Outstanding Options,
    Equity Compensation Plans (Excluding
 
Plan Category
  Warrants and Rights     Warrants and Rights     Securities Reflected in Column (a)(1)  
 
Equity Compensation plans approved by stockholders(1)
    3,319,980     $ 21.52       4,880,953  
Equity compensation plans not approved by stockholders
    N/A       N/A       N/A  
                         
Total
    3,319,980     $ 21.52       4,880,953  
 
 
(1) Column (c) includes 132,278 shares that are available for issuance under our Amended and Restated 1996 Employee Stock Purchase Plan as of December 31, 2006.


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The following graph compares the cumulative stockholder return on our common stock during the period from December 31, 2001 through December 31, 2006 with the cumulative return during the same period for the Nasdaq Stock Market (U.S. Companies) and the Russell 2000, and assumes that dividends, if any, were reinvested.
 
 
                                                             
      Comparison of Cumulative Total Return
      12/31/2001     12/31/2002     12/31/2003     12/31/2004     12/31/2005     12/31/2006
Forrester Research
      100         77.31         88.13         89.08         93.10         134.60  
 
Nasdaq Stock Market (US Companies)
      100         69.13         103.36         112.48         114.87         126.22  
 
Russell 2000
      100         78.42         114.00         133.38         137.81         162.63  
 
                                                           
 


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Item 6.   Selected Consolidated Financial Data
 
We recently completed an inquiry into and review of our historical stock option granting practices. The review, which included option grants made since our initial public offering in November 1996 through the end of 2006, was directed by the Audit Committee of our Board of Directors with the assistance of independent counsel and forensic accountants. In March 2007, we reported that based on the preliminary findings of this review, we would need to restate our historical financial statements to record additional non-cash charges for compensation expense related to past stock option grants and related tax impacts, and accordingly, that our financial statements for the periods 1998-2006, and all selected financial data, press releases and other communications with respect thereto, including any interim periods, should no longer be relied upon.
 
Based on the results of the completed review, the Audit Committee concluded that the actual measurement dates for many stock option grants were different from the original measurement dates for such awards. As a result, revised measurement dates were applied in those cases and we have recorded additional stock-based compensation expense for the years 1998 through 2006, and related tax adjustments.
 
The selected consolidated financial data has been restated as a result of the review, as well as with respect to the failure to properly account for the difference between tax and book basis for goodwill related to an acquisition in Germany in 2000, of which a significant portion was written down for tax purposes in 2002. See the Explanatory Note included on page 2, the discussion included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7, and Note 2 to “Notes to Consolidated Financial Statements,” all included in this Annual Report on Form 10-K.
 
The selected consolidated statements of operations data presented below for the three years ended December 31, 2006, and the selected consolidated balance sheet data as of December 31, 2006 and December 31, 2005, is derived from, and qualified by reference to, the audited restated financial statements appearing elsewhere in this Report, and should be read in conjunction with those financial statements. The consolidated statements of operations data for the years ended December 31, 2003 and December 31, 2002, and the consolidated balance sheet data as of December 31, 2004, December 31, 2003 and December 31, 2002, are derived from unaudited financial statements not included herein that have also been restated.


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    Consolidated Statement of Operations Data Year Ended  
    2002     2003     2004     2005     2006  
    (In thousands, except per share amounts)  
    As
    As
    As
    As
       
    Restated(1)     Restated(1)     Restated(1)(2)     Restated(1)(2)        
    (Unaudited)     (Unaudited)                    
 
Statement of Operations data:(1)(2)
                                       
Research services
  $ 70,955     $ 92,289     $ 93,750     $ 96,699     $ 114,876  
Advisory services and other
    25,981       33,710       43,874       54,700       66,597  
                                         
Total revenues
    96,936       125,999       137,624       151,399       181,473  
                                         
Operating expenses:
                                       
Cost of services and fulfillment
    35,607       49,006       52,456       60,461       73,268  
Selling and marketing
    31,493       40,127       46,078       51,050       59,626  
General and administrative
    13,586       14,084       16,224       18,039       22,859  
Depreciation
    8,078       6,256       3,691       3,539       3,618  
Amortization of intangible assets
    328       8,778       6,461       3,527       2,060  
Reorganization costs
    12,170       2,594       8,396              
Integration costs
          1,055                    
                                         
Total operating expenses
    101,262       121,900       133,306       136,616       161,431  
                                         
(Loss) income from continuing operations
    (4,326 )     4,099       4,318       14,783       20,042  
Other income, net; Realized gains on securities, net
    1,421       1,598       4,220       4,722       6,052  
                                         
Income from continuing operations before income tax (benefit) provision
    (2,905 )     5,697       8,538       19,505       26,094  
Income tax (benefit) provision
    3,147       1,738       2,860       7,243       10,037  
                                         
Income from continuing operations
  $ (6,052 )   $ 3,959     $ 5,678     $ 12,262     $ 16,057  
(Loss) income from discontinued operations, net of taxes
                (815 )     (318 )     300  
Gain on sale of discontinued operations, net of taxes
                            1,399  
Net (loss) income
  $ (6,052 )   $ 3,959     $ 4,863     $ 11,944     $ 17,756  
                                         
Basic (loss) income per common share from continuing operations
  $ (0.26 )   $ 0.18     $ 0.25     $ 0.58     $ 0.72  
Basic (loss) income per common share from discontinued operations
  $     $     $ (0.03 )   $ (0.02 )   $ 0.08  
                                         
Basic (loss) income per common share
  $ (0.26 )   $ 0.18     $ 0.22     $ 0.56     $ 0.80  
                                         
Diluted (loss) income per common share from continuing operations
  $ (0.26 )   $ 0.17     $ 0.25     $ 0.56     $ 0.70  
Diluted (loss) income per common share from discontinued operations
  $     $     $ (0.03 )   $ (0.01 )   $ 0.07  
                                         
Diluted (loss) income per common share
  $ (0.26 )   $ 0.17     $ 0.22     $ 0.55     $ 0.77  
Basic weighted average common shares outstanding
    23,189       22,555       22,024       21,413       22,195  
                                         
Diluted weighted average common shares outstanding
    23,189       22,891       22,464       21,876       22,973  
                                         
Balance Sheet Data as of December 31,
                                       
Cash, cash equivalents, and available for sale securities
  $ 194,631     $ 126,733     $ 127,440     $ 132,268     $ 207,833  
Working capital
  $ 155,099     $ 77,331     $ 82,457     $ 99,005     $ 166,274  
Deferred revenue
  $ 42,123     $ 68,630     $ 72,357     $ 86,663     $ 99,875  
Total assets
  $ 276,213     $ 308,524     $ 300,093     $ 308,342     $ 384,143  
Total stockholders’ equity
  $ 200,328     $ 196,324     $ 188,641     $ 189,347     $ 244,905  
 
 
(1) As a result of having identified incorrect measurement dates for historical stock options, management concluded that the Company’s previously issued financial statements should be restated. Results for 2005 and prior years have been restated to reflect non-cash compensation expense for stock options with incorrect


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measurement dates, and related tax effects. Additionally, the Company recorded additional tax adjustments related to differences in the book and tax basis of goodwill related to an acquisition in Germany in 2000, a significant portion of which was written down for tax purposes in 2002. See footnote 2 to the Company’s consolidated financial statements included in this 2006 Annual Report on Form 10-K for further discussion of the impact of the restatement.
 
(2) In September 2006, we sold our Ultimate Consumer Panel product line to Lightspeed Online Research, Inc. As a result, operating results of this product line for all periods presented have been reclassified into the caption “Income (loss) from discontinued operations.” See footnote 3 to the Company’s consolidated financial statements for further discussion of the Company’s sale of the Ultimate Consumer Panel product line and the related accounting treatment.


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The following table reconciles selected historical consolidated financial data from the previously reported results to the restated results for the fiscal years ended December 31, 2002 and 2003. See Note 2 to the consolidated financial statements included in the Annual Report on Form 10-K for similar reconciliations for the years ended December 31, 2004 and 2005.
 
                                 
    Unaudited Consolidated Statement of Operations Data Year Ended December 31, 2002  
          Stock Option
    German
       
          Investigation
    Deferred
       
          Restatement
    Tax Liability
       
    As Reported     Adjustments     Adjustment     As Restated  
    (In thousands, except per share amounts)  
 
Statement of Operations Data :
                               
Research services
  $ 70,955     $     $     $ 70,955  
Advisory services and other
    25,981                   25,981  
                                 
Total revenues
    96,936                   96,936  
                                 
Operating expenses:
                               
Cost of services and fulfillment
    34,026       1,581             35,607  
Selling and marketing
    30,745       748             31,493  
General and administrative
    12,732       854             13,586  
Depreciation
    8,078                   8,078  
Amortization of intangible assets
    328                   328  
Reorganization costs
    12,170                   12,170  
Integration costs
                       
                                 
Total operating expenses
    98,079       3,183             101,262  
                                 
(Loss) income from continuing operations
    (1,143 )     (3,183 )           (4,326 )
Other income, net; Realized gains on securities, net
    1,421                   1,421  
                                 
Income (Loss) from continuing operations before income tax (benefit) provision
    278       (3,183 )             (2,905 )
Income tax (benefit) provision
    (311 )     (1,126 )     4,584       3,147  
                                 
Income from continuing operations
  $ 589       (2,057 )     (4,584 )   $ (6,052 )
(Loss) income from discontinued operations, net of taxes
                       
Gain on sale of discontinued operations, net of taxes
                       
Net (loss) income
  $ 589       (2,057 )     (4,584 )   $ (6,052 )
                                 
Basic (loss) income per common share from continuing operations
  $ 0.03       (0.08 )     (0.20 )   $ (0.26 )
Basic (loss) income per common share from discontinued operations
  $                 $  
                                 
Basic (loss) income per common share
  $ 0.03       (0.08 )     (0.20 )   $ (0.26 )
                                 
Diluted (loss) income per common share from continuing operations
  $ 0.02       (0.08 )     (0.20 )   $ (0.26 )
Diluted (loss) income per common share from discontinued operations
  $                 $  
                                 
Diluted (loss) income per common share
  $ 0.02       (0.08 )     (0.20 )   $ (0.26 )
Basic weighted average common shares outstanding
    23,189                       23,189  
                                 
Diluted weighted average common shares outstanding
    23,653                       23,189  
                                 
 


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    Consolidated Statement of Income Data
 
    Year Ended December 31, 2003  
          Stock Option
    German
       
          Investigation
    Deferred Tax
       
          Restatement
    Liability
       
    As Reported     Adjustments     Adjustment     As restated  
    (In thousands, except per share amounts)  
 
Statement of Income data:
                               
Research services
  $ 92,289     $     $     $ 92,289  
Advisory services and other
    33,710                   33,710  
                                 
Total revenues
    125,999                   125,999  
                                 
Operating expenses:
                               
Cost of services and fulfillment
    50,047       (1,041 )           49,006  
Selling and marketing
    41,017       (890 )           40,127  
General and administrative
    14,674       (590 )           14,084  
Depreciation
    6,256                   6,256  
Amortization of intangible assets
    8,778                   8,778  
Reorganization costs
    2,594                   2,594  
Integration costs
    1,055                   1,055  
                                 
Total operating expenses
    124,421       (2,521 )           121,900  
                                 
Income from continuing operations
    1,578       2,521             4,099  
Other income, net; Realized gains on securities, net
    1,598                   1,598  
                                 
Income (Loss) from continuing operations before income tax (benefit) provision
    3,176       2,521               5,697  
Income tax (benefit) provision
    985       (516 )     1,269       1,738  
                                 
Income from continuing operations
  $ 2,191       3,037       (1,269 )   $ 3,959  
(Loss) income from discontinued operations, net of taxes
                       
Gain on sale of discontinued operations, net of taxes
                       
Net (loss) income
  $ 2,191     $ 3,037     $ (1,269 )   $ 3,959  
                                 
Basic (loss) income per common share from continuing operations
  $ 0.10       0.13       (0.06 )   $ 0.18  
Basic (loss) income per common share from discontinued operations
  $     $     $     $  
                                 
Basic (loss) income per common share
  $ 0.10       0.13       (0.06 )   $ 0.18  
                                 
Diluted (loss) income per common share from continuing operations
  $ 0.10       0.13       (0.06 )   $ 0.17  
Diluted (loss) income per common share from discontinued operations
  $     $     $     $  
                                 
Diluted (loss) income per common share
  $ 0.10       0.13       (0.06 )   $ 0.17  
Basic weighted average common shares outstanding
    22,555                       22,555  
                                 
Diluted weighted average common shares outstanding
    23,837                       22,891  
                                 
 
                                                                                                 
    Consolidated Balance Sheet Data:
 
    As of December 31  
    2002     2003     2004  
          Stock Option
    German
                Stock Option
    German
                Stock Option
    German
       
          Investigation
    Deferred
                Investigation
    Deferred Tax
                Investigation
    Deferred Tax
       
    As
    Restatement
    Tax Liability
    As
    As
    Restatement
    Liability
    As
    As
    Restatement
    Liability
    As
 
    Reported     Adjustments     Adjustment     Restated     Reported     Adjustments     Adjustment     Restated     Reported     Adjustments     Adjustment     Restated  
    (In thousands)  
 
                                                                                                 
Cash, cash equivalents, and available for sale securities
  $ 194,631                     $ 194,631     $ 126,733                     $ 126,733     $ 127,440                     $ 127,440  
                                                                                                 
Working capital
  $ 157,443       (2,344 )           $ 155,099     $ 77,171       160             $ 77,331     $ 81,106       1,351             $ 82,457  
                                                                                                 
Deferred revenue
  $ 42,123                     $ 42,123     $ 68,630                     $ 68,630     $ 72,357                     $ 72,357  
                                                                                                 
Total assets
  $ 278,273       (2,060 )           $ 276,213     $ 310,975       (2,451 )           $ 308,524     $ 302,872       (2,779 )           $ 300,093  
                                                                                                 
Total stockholders’ equity
  $ 213,868       (8,626 )     (4,914 )   $ 200,328     $ 208,322       (5,815 )     (6,183 )   $ 196,324     $ 199,846       (4,591 )     (6,614 )   $ 188,641  

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Item 7.   Management’s Discussion and Analysis Of Financial Condition And Results Of Operations
 
Restatement of Prior Period Financial Statements
 
In this 2006 Annual Report on Form 10-K, we are restating our consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the two years ended December 31, 2005 and December 31, 2004. We have also included under Item 6, “Selected Financial Data”, restated financial information as of, and for each of the years ended, December 31, 2002, 2003, 2004, and 2005. Restated financial information for the first three quarter of 2006 and all interim periods of 2005 is included below and in Footnote 16 to the consolidated financial statements included in this Annual Report on Form 10-K.
 
The Company expects to file shortly quarterly reports on Form 10-Q for the three months ended March 31, 2007 (“Q1 2007”) and the three and six months ended June 30, 2007 (“Q2 2007”). The Q1 2007 and Q2 2007 Form 10-Q’s will contain restated financial information for the comparable periods of the prior year.
 
Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q have not been amended and should not be relied upon.
 
See the Explanatory Note on page 2 of this Annual Report on Form 10-K and Footnote 2 to the Consolidated Financial Statements included herein for a further discussion of the restatement of our prior period financial statements.
 
Overview
 
We derive revenues from memberships to our research products and from our advisory services and events available through what we refer to as Research, Data, Consulting, and Community offerings. We offer contracts for our research products that are typically renewable annually and payable in advance. Research revenues are recognized as revenue ratably over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Clients purchase advisory services offered through our Data, Consulting and Community products and services to supplement their memberships to our research. Billings attributable to advisory services are initially recorded as deferred revenue and are recognized as revenue when the services are performed. Event billings are also initially recorded as deferred revenue and are recognized as revenue upon completion of each event. Consequently, changes in the number and value of client contracts, both net decreases as well as net increases, impact our revenues and other results over a period of several months.
 
Our primary operating expenses consist of cost of services and fulfillment, selling and marketing expenses, general and administrative expenses, depreciation, and amortization of intangible assets. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, and it includes the costs of salaries, bonuses, and related benefits for research personnel, non-cash stock based compensation expense, and all associated editorial, travel, and support services. Selling and marketing expenses include salaries, bonuses, employee benefits, non-cash stock-based compensation expense, travel expenses, promotional costs, sales commissions, and other costs incurred in marketing and selling our products and services. General and administrative expenses include the costs of the technology, operations, finance, and strategy groups and our other administrative functions, including salaries, bonuses, employee benefits, and non-cash stock-based compensation expense. Overhead costs are allocated over these categories according to the number of employees in each group. Amortization of intangible assets represents the cost of amortizing acquired intangible assets such as customer relationships.
 
Deferred revenue, agreement value, client retention, dollar retention and enrichment are metrics we believe are important to understanding our business. We believe that the amount of deferred revenue, along with the agreement value of contracts to purchase research and advisory services, provide a significant measure of our business activity. Deferred revenue reflects billings in advance of revenue recognition as of the measurement date. We calculate agreement value as the total revenues recognizable from all research and advisory service contracts in force at a given time (but not including advisory-only contracts), without regard to how much revenue has already been recognized. No single client accounted for more than 2% of agreement value at December 31, 2006. We calculate client retention as the number of client companies who renewed with memberships during the most recent twelve-


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month period as a percentage of those that would have expired during the same period. We calculate dollar retention as a percentage of the dollar value of all client membership contracts renewed during the most recent twelve-month period to the total dollar value of all client membership contracts that expired during the period. We calculate enrichment as a percentage of the dollar value of client membership contracts renewed during the period to the dollar value of the corresponding expiring contracts. Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows:
 
                                 
    Year Ended
    Absolute
    Percentage
 
    December 31,     Increase
    Increase
 
    2005     2006     (Decrease)     (Decrease)  
 
Deferred Revenue (in millions)
  $ 86.7     $ 99.9     $ 13.2       15 %
Agreement Value (in millions)
  $ 148.6     $ 172.8     $ 24.2       16 %
Client Retention
    78.0 %     77.0 %     (1.0 )     (1.0 )%
Dollar Retention
    87.0 %     86.0 %     (1.0 )     (1.0 )%
Enrichment
    105.0 %     112.0 %     7.0       7.0 %
Number of clients (at year-end)
    2,007       2,312       305       15 %
 
                                 
    Year Ended
    Absolute
    Percentage
 
    December 31,     Increase
    Increase
 
    2004     2005     (Decrease)     (Decrease)  
 
Deferred Revenue (in millions)
  $ 72.4     $ 86.7     $ 14.3       20 %
Agreement Value (in millions)
  $ 137.1     $ 148.6     $ 11.5       8.4 %
Client Retention
    76.0 %     78.0 %     2.0       2.6 %
Dollar Retention
    85.0 %     87.0 %     2.0       2.4 %
Enrichment
    107.0 %     105.0 %     (2.0 )     (1.9 )%
Number of clients (at year-end)
    1,866       2,007       141       7.5 %
 
The increase in deferred revenue and agreement value from 2005 to 2006 is primarily due to increases in the number of clients and in the average contract size. The average contract for annual memberships for research only at December 31, 2006 was approximately $43,500, an increase of 7% from $40,600 at December 31, 2005. The average contract for an annual membership for research which also included advisory services at December 31, 2006 was approximately $87,900, an increase of 2% from $85,800 at December 31, 2005. Increases in average contract sizes and enrichment in 2006 reflect increasing demand for our products, reduced discounting and increased prices.
 
The increase in deferred revenue and agreement value from 2004 to 2005 is primarily due to an increase in the number of clients. The increase in client retention and dollar retention reflects an improving economic environment. The decrease in enrichment from 2004 to 2005 reflects more clients renewing memberships at the same level as the prior year, coupled with an increase in advisory-only contracts purchased by clients during the membership term and not in connection with the renewal.
 
Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our policies and estimates, including but not limited to, those related to our revenue recognition, non-cash stock-based compensation, allowance for doubtful accounts, non-marketable investments, goodwill and other intangible assets and income taxes. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.


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We consider the following accounting policies to be those that require the most subjective judgment or those most important to the portrayal of our financial condition and results of operations. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. This is not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. For a discussion of our other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, beginning on page   .
 
  •  Revenue Recognition.  We generate revenues from licensing our research, performing advisory services, hosting events and conducting teleconferences. We execute contracts that govern the terms and conditions of each arrangement. Revenues from contracts that contain multiple deliverables are allocated among the separate units based on their relative fair values; however, the amount recognized is limited to the amount that is not contingent on future performance conditions. Research service revenues are recognized ratably over the term of the agreement. Advisory service revenues are recognized during the period in which the customer receives the agreed upon deliverable. Forrester Teleconferences revenue and reimbursed out-of-pocket expenses are recorded as advisory service revenues. Events revenues are recognized upon completion of the event. Annual memberships which include access to our research, unlimited phone or email analyst inquiry, unlimited participation in Forrester’s Teleconferences, and the right to attend one event, are accounted for as one unit of accounting and recognized ratably as research services revenue over the membership period.
 
While historical business practice had been to offer contracts with a non-cancelable term, effective April 1, 2005, we began offering clients a money-back guarantee, which gives clients the right to cancel their membership contracts prior to the end of the contract term. For contracts that can be terminated during the contract term, refunds would be issued for unused products or services. Furthermore, our revenue recognition determines the timing of commission expenses, which are deferred and then recorded as expense as the related revenue is recognized. We evaluate the recoverability of deferred commissions at each balance sheet date.
 
  •  Non-Cash Stock-Based Compensation.  Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires the recognition of the fair value of stock-based compensation in net income. To determine the fair value of stock- based compensation, SFAS No. 123R requires significant judgment and the use of estimates, particularly surrounding assumptions such as stock price volatility and expected option lives and forfeiture rates. Prior to SFAS No. 123R adoption, we accounted for share-based payments under APB No. 25. We determined the actual measurement dates for historical stock option grants using the approach described in the Explanatory Note on page 2 and footnote 2 to the consolidated financial statements included in this Annual Report on Form 10-K. The use of a different approach could have resulted in different measurement dates, with exercise prices that may have resulted in more or less compensation expense to the Company. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated. The actual expense recognized over the vesting period will only be for those shares that vest. The development of an expected life assumption involves projecting employee exercise behaviors (expected period between stock option vesting date and stock option exercise dates). The assumptions used in calculating the fair value of share-based awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. If our actual forfeiture rate is materially different from our estimate, the actual stock-based compensation expense could be significantly different from what we have recorded in the current period.
 
  •  Allowance for Doubtful Accounts.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make contractually obligated payments. When evaluating the adequacy of the allowance for doubtful accounts, management makes judgments regarding the collectibility of accounts receivable by specifically analyzing historical bad debts, customer concentrations, current economic trends, and changes in our customer payment terms. If the financial condition of our customers


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  were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and if the financial condition of our customers were to improve, the allowances may be reduced accordingly.
 
  •  Non-Marketable Investments.  We hold minority interests in technology-related companies and equity investment funds. These investments are in companies that are not publicly traded, and, therefore, because no established market for these securities exists, the estimate of the fair value of our investments requires significant judgment. We have a policy in place to review the fair value of our investments on a regular basis to evaluate the carrying value of the investments in these companies, which consists primarily of reviewing the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects. We record impairment charges when we believe that an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
 
  •  Goodwill and Intangible Assets and Other Long-Lived Assets.  We have goodwill and identified intangible assets with finite lives related to our acquisitions. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and intangible assets with indefinite lives be measured for impairment at least annually or whenever events indicate that there may be an impairment. In order to determine if an impairment exists, we compare the reporting unit’s carrying value to the reporting unit’s fair value. Determining the reporting unit’s fair value requires us to make estimates on market conditions and operational performance. Absent an event that indicates a specific impairment may exist, we have selected November 30th as the date of performing the annual goodwill impairment test. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
 
Intangible assets with finite lives consist of acquired customer relationships, research content and trademarks and are valued according to the future cash flows they are estimated to produce. These assigned values are amortized on an accelerated basis which matches the periods in which those cash flows are estimated to be produced. Tangible assets with finite lives consist of property and equipment, which are depreciated and amortized over their estimated useful lives. We continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our identifiable intangible and long-lived tangible assets may warrant revision or that the carrying value of these assets may be impaired. To compute whether intangible assets have been impaired, the estimated undiscounted future cash flows for the estimated remaining useful life of the assets are compared to the carrying value. To the extent that the future cash flows are less than the carrying value, the assets are written down to the estimated fair value of the asset.
 
  •  Income Taxes.  We have deferred tax assets related to temporary differences between the financial statement and tax bases of assets and liabilities as well as operating loss carryforwards (primarily from stock option exercises and the acquisition of Giga Information Group, Inc. in 2003. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and before the carryforwards expire. Although realization is not assured, based upon the level of our historical taxable income and projections for our future taxable income over the periods during which the deferred tax assets are deductible and the carryforwards expire, management believes it is more likely than not that we will realize the benefits of these deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be reduced if our estimates of future taxable income during the carry-forward periods are incorrect. In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS Statement No. 109,” (“FIN 48”) which seeks to reduce the significant diversity in practice associated with certain aspects of measurement and recognition in accounting for


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  income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Upon adoption, the cumulative effect of any changes in net assets resulting from the application of FIN 48 will be recorded as an adjustment to retained earnings. We adopted FIN 48 in the first quarter of 2007 and the adoption of FIN 48 did not have a material impact on the Company’s financial position or results of operations.
 
Discontinued Operations
 
On September 26, 2006, we completed the sale of our Ultimate Consumer Panel (“UCP”) product line to Lightspeed Online Research, Inc. for $2.5 million in cash, of which $2.25 million was paid at the closing date subject to a working capital adjustment, with the remainder due nine months after the closing date. The sale resulted in a gain on the disposal (net of $1.0 million of income tax expense) of $1.4 million. The sale included the transfer of certain assets, including all UCP customer contracts, historical data, intellectual property, six employees, and licenses as well as certain liabilities arising in the normal course of business. Forrester sold the product line as it was no longer a strategic fit with its core focus on broad, global business and consumer technology data. The UCP product line had gross revenues for the years 2006, 2005, and 2004 of $1.8 million, $1.8 million, and $854,000, respectively. Net income from the discontinued operations was $300,000 (net of $204,000 of income tax expense) for the year ended December 31, 2006, and net loss from the discontinued operations was $318,000 (net of $219,000 of income tax benefit) and $815,000 (net of $552,000 of income tax benefit) for the years ended December 31, 2005 and 2004, respectively. The financial results of the UCP product line are reported as a single line item of ‘‘(Loss) income from discontinued operations” for all periods presented. The gross revenue and net income numbers noted above for UCP for 2006 only include amounts recorded through September 26 as UCP was disposed of on September 26, 2006.


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Results of Operations for the years ended December 31, 2004, 2005 and 2006, including interim periods of 2005 and 2006
 
The following table sets forth selected financial data as a percentage of total revenues for the years noted.
 
                         
    Year Ended
 
    December 31,  
 
Research services
    68 %     64 %     63 %
Advisory services and other
    32       36       37  
                         
Total revenues
    100       100       100  
Cost of services and fulfillment
    38       40       40  
Selling and marketing
    34       34       33  
General and administrative
    12       12       13  
Depreciation
    3       2       2  
Amortization of intangible assets
    5       2       1  
Reorganization costs
    6              
                         
Income from continuing operations
    2       10       11  
Other income, net
    3       2       3  
Gains on sales of available-for-sale securities
    1       1        
Gains from non-marketable investments, net of impairments
                 
                         
Income from continuing operations before income tax provision
    6       13       14  
Income tax provision
    2       5       5  
                         
Income from continuing operations
    4       8       9  
(Loss) income from discontinued operations, net of taxes
    (1 )            
Gain on sale of discontinued operations, net of taxes
                1  
                         
Net income
    3 %     8 %     10 %
                         


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Results of Quarterly Operations
 
The following tables set forth a summary of our unaudited quarterly operating results for each of our eight most recently ended fiscal quarters. We have derived this information from our unaudited interim consolidated financial statements, which, in the opinion of our management, have been prepared on a basis consistent with our financial statements contained elsewhere in this Annual Report on Form 10-K and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation in accordance with generally accepted accounting principles in the United States when read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. Historically, our total revenues, operating profit, and net income in the fourth quarter have reflected the significant positive contribution of revenues attributable to advisory services performed. As a result, we have historically experienced a decline in total revenues, operating profit, and net income from the quarter ended December 31 to the quarter ended March 31. Our quarterly operating results are not necessarily indicative of future results of operations. Each of the quarterly periods in 2005 and 2006 have been restated to reflect additional stock-based compensation expense and related tax effects, as well as the correction of the errors identified by the Company related to forfeitures in 2006, as required under SFAS No. 123R, and failure to appropriately account for the difference in book and tax basis of goodwill, a significant portion of which was written down to net realizable value for tax purposes in 2002. See Note 2 to our consolidated financial statements for further discussion of the restatement and see Note 16 for reconciliations between the as reported and as restated results of quarterly operations.
 
                                                                 
    Three Months Ended  
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
 
    2005     2005     2005     2005     2006     2006     2006     2006  
    (Amounts in thousands, except per share data)  
    (Restated)
    (Restated)
    (Restated)
    (Restated)
    (Restated)
    (Restated)
    (Restated)
       
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
 
Research services
  $ 22,989     $ 23,483     $ 24,586     $ 25,641     $ 26,775     $ 27,815     $ 29,690     $ 30,596  
Advisory services and other
    10,225       15,397       14,008       15,070       13,818       20,043       14,384       18,352  
                                                                 
Total revenues
    33,214       38,880       38,594       40,711       40,593       47,858       44,074       48,948  
Cost of services and fulfillment
    13,140       16,144       15,303       15,874       17,312       19,919       17,070       18,967  
Selling and marketing
    11,882       13,045       12,700       13,423       14,475       15,328       14,228       15,595  
General and administrative
    4,040       4,547       4,920       4,532       5,643       5,672       5,445       6,099  
Depreciation
    874       882       859       924       884       916       947       871  
Amortization of intangible assets
    1,123       833       786       785       652       472       474       462  
                                                                 
Income from continuing operations
    2,155       3,429       4,026       5,173       1,627       5,551       5,910       6,954  
Other income, net
    750       754       722       801       958       1,326       1,652       1,768  
Gains on sales of marketable securities
    1,489                                            
Gains (loss) from non-marketable investments, net of impairments
    179       112       241       (326 )     199       8       98       43  
                                                                 
Income from continuing operations before income tax provision
    4,573       4,295       4,989       5,648       2,784       6,885       7,660       8,765  
Income tax provision
    1,718       1,778       2,504       1,243       1,446       3,237       2,828       2,526  
                                                                 
Income from continuing operations
  $ 2,855     $ 2,517     $ 2,485     $ 4,405     $ 1,338     $ 3,648     $ 4,832     $ 6,239  
                                                                 
(Loss) income from discontinued operations, net of taxes
    (65 )     (166 )     (82 )     (5 )     114       135       51        
Gain on sale of discontinued operations, net of taxes
                                        1,399        
Net income
  $ 2,790     $ 2,351     $ 2,403     $ 4,400     $ 1,452     $ 3,783     $ 6,282     $ 6,239  
                                                                 
Basic income per common share from continuing operations
  $ 0.13     $ 0.12     $ 0.12     $ 0.21     $ 0.07     $ 0.17     $ 0.21     $ 0.27  
Basic (loss) income per common share from discontinued operations
  $     $ (0.01 )   $     $     $ 0.01     $ 0.01     $ 0.06     $  
                                                                 
Basic income per common share
  $ 0.13     $ 0.11     $ 0.12     $ 0.21     $ 0.08     $ 0.18     $ 0.27     $ 0.27  
                                                                 
Diluted income per common share from continuing operations
  $ 0.13     $ 0.12     $ 0.12     $ 0.20     $ 0.06     $ 0.17     $ 0.21     $ 0.26  
Diluted (loss) income per common share from discontinued operations
  $     $ (0.01 )   $     $     $ 0.01     $ 0.01     $ 0.06     $  
                                                                 
Diluted income per common share
  $ 0.13     $ 0.11     $ 0.12     $ 0.20     $ 0.07     $ 0.18     $ 0.27     $ 0.26  
                                                                 
 


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    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
 
    2005     2005     2005     2005     2006     2006     2006     2006  
    (As a percentage of revenues)  
    (Restated)
    (Restated)
    (Restated)
    (Restated)
    (Restated)
    (Restated)
    (Restated)
       
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
 
Research services
    69 %     60 %     64 %     63 %     66 %     58 %     67 %     63 %
Advisory services and other
    31       40       36       37       34       42       33       37  
                                                                 
Total revenues
    100       100       100       100       100       100       100       100  
Cost of services and fulfillment
    40       42       40       39       43       42       39       39  
Selling and marketing
    36       34       33       33       36       32       32       32  
General and administrative
    12       12       13       11       14       12       12       12  
Depreciation
    3       2       2       2       2       2       2       2  
Amortization of intangible assets
    3       2       2       2       2       1       1       1  
                                                                 
Income from continuing operations
    6       8       10       13       3       11       14       14  
Other income, net
    2       2       2       2       2       3       4       4  
Gains on sales of marketable investments
    4                                            
Gains (loss) from non-marketable investments, net of impairments
    1       1       1       (1 )     1       1              
                                                                 
Income from continuing operations before income tax provision
    13       11       13       14       6       15       18       18  
Income tax provision
    5       5       7       3       3       7       6       5  
                                                                 
Income from continuing operations
    8       6       6       11       3       8       12       13  
Income from discontinued operations
                                               
Gain on sale of discontinued operations
                                        3        
                                                                 
Net income
    8 %     6 %     6 %     11 %     3 %     8 %     15 %     13 %
                                                                 

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Discussion of results of operations for 2006 compared to 2005, including interim periods (interim periods are unaudited)
 
Revenues
 
                                 
                Absolute
    Percentage
 
    2005     2006     Increase     Increase  
    (As Restated)     (As Restated
             
          through
             
          September 30)              
 
Revenues (dollars in millions)
                               
Quarter Ended:
                               
March 31,
  $ 33.2     $ 40.6     $ 7.4       22 %
June 30,
  $ 38.9     $ 47.9     $ 9.0       23 %
September 30,
  $ 38.6     $ 44.1     $ 5.5       14 %
December 31,
  $ 40.7     $ 48.9     $ 8.2       20 %
Full Year Ended December 31,
  $ 151.4     $ 181.5     $ 30.1       20 %
Revenues from research services (dollars in millions)
                               
Quarter Ended:
                               
March 31,
  $ 23.0     $ 26.8     $ 3.8       17 %
June 30,
  $ 23.5     $ 27.8     $ 4.3       18 %
September 30,
  $ 24.6     $ 29.7     $ 5.1       21 %
December 31,
  $ 25.6     $ 30.6     $ 5.0       20 %
Full Year Ended December 31,
  $ 96.7     $ 114.9     $ 18.2       19 %
Revenues from advisory services and other (dollars in millions)
                               
Quarter Ended:
                               
March 31,
  $ 10.2     $ 13.8     $ 3.6       35 %
June 30,
  $ 15.4     $ 20.0     $ 4.6       30 %
September 30,
  $ 14.0     $ 14.4     $ 0.4       3 %
December 31,
  $ 15.1     $ 18.4     $ 3.3       22 %
Full Year Ended December 31,
  $ 54.7     $ 66.6     $ 11.9       22 %
Revenue Attributable to customers outside of the US (dollars in millions)
                               
Quarter Ended:
                               
March 31,
  $ 10.4     $ 12.4     $ 2.0       19 %
June 30,
  $ 12.1     $ 14.1     $ 2.0       17 %
September 30,
  $ 11.4     $ 12.5     $ 1.1       10 %
December 31,
  $ 12.4     $ 14.2     $ 1.8       15 %
Full Year Ended December 31,
  $ 46.3     $ 53.2     $ 6.9       15 %
Percentage of Revenue Attributable to customers outside of the US.
                               
Quarter Ended:
                               
March 31,
    31 %     31 %            
June 30,
    31 %     30 %     (1 )     (3 )%
September 30,
    29 %     28 %     (1 )     (3 )%
December 31,
    31 %     29 %     (1 )     (3 )%
Full Year Ended December 31,
    31 %     29 %     (1 )     (3 )%
Number of clients (at end of period)
                               
March 31,
    1,872       2,076       204       11 %
June 30,
    1,906       2,172       266       14 %
September 30,
    1,936       2,273       337       17 %
December 31,
    2,007       2,312       305       15 %
Number of research employees (at end of period)
                               
March 31,
    222       275       53       24 %
June 30,
    227       286       59       26 %
September 30,
    256       277       21       8 %
December 31,
    257       291       34       13 %
Number of events
                               
March 31,
    2       1       (1 )     (50 )%
June 30,
    3       3             0 %
September 30,
    1       2       1       100 %
December 31,
    2       3       1       50 %
Year ended December 31,
    8       9       1       13 %


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The increase in total revenues as well as the increase in the number of clients for both the interim periods of 2006 and full year as compared to the comparable periods of 2005 is primarily attributable to increased demand for certain of our syndicated research products, reduced discounting and increased prices. The increase in advisory services and other revenues is primarily attributable to increased demand for more customized services and increased research personnel available to deliver advisory services as well as to an increase in event sponsorship and attendance. No single client company accounted for more than 2% of revenues during 2005 or 2006. The effects of foreign currency translation on total revenues when comparing 2005 to 2006 were negligible.
 
Research services revenues as a percentage of total revenues declined from 64% in 2005 to 63% in 2006 as customer demand continued to shift towards advisory services, which is reflected in the increase in advisory services and other revenues during 2006 and the interim periods of 2006.
 
International revenues increased due to increased demand for our products internationally. The decrease in international revenues as a percentage of total revenues is primarily attributable to demand for our products and services growing at a faster rate domestically than internationally.
 
Cost of Services and Fulfillment
 
                                 
                Absolute
    Percentage
 
                Increase
    Increase
 
    2005     2006     (Decrease)     (Decrease)  
    (As restated)     (As Restated
             
          through
             
          September 30)              
 
Cost of services and fulfillment (dollars in millions)
                               
Quarter Ended (unaudited):
                               
March 31,
  $ 13.1     $ 17.3     $ 4.2       32 %
June 30,
  $ 16.1     $ 19.9     $ 3.8       24 %
September 30, 
  $ 15.3     $ 17.1     $ 1.8       12 %
December 31,
  $ 15.9     $ 19.0     $ 3.1       19 %
Full Year Ended December 31, 
  $ 60.4     $ 73.3     $ 12.9       21 %
Cost of services and fulfillment as a percentage of total revenues
                               
Quarter Ended (unauditied):
                               
March 31,
    40 %     43 %     3       8 %
June 30, 
    42 %     42 %            
September 30, 
    40 %     39 %     (1 )     3 %
December 31,
    39 %     39 %            
Full Year Ended December 31, 
    40 %     40 %            
Number of research and fulfillment employees (at end of period)
                               
March 31,
    286       345       59       21 %
June 30,
    291       356       65       22 %
September 30,
    317       349       32       10 %
December 31,
    328       362       34       10 %
 
The increase in cost of services and fulfillment in 2006 as compared to 2005 is primarily attributable to increased compensation and benefit costs resulting from an increase in average headcount and annual increases in compensation costs, including an increase in non-cash stock-based compensation expense related to the adoption of SFAS No. 123R when compared to the non-cash stock-based compensation expense recognized in 2005 under APB No. 25 for the March 31, 2005 performance-based grant and the mispriced options for which measurement dates were corrected as a result of the stock option practices investigation.


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For the interim periods of 2005 compared to 2006, the total cost of services and fulfillment is primarily attributable to increased compensation and benefits costs associated with the corresponding increase in average headcount and the recognition of non-cash stock based compensation expense under SFAS No. 123R. For the quarter ended March 31, 2006, the primary reason for the increase in cost of services and fulfillment as a percentage of revenue was the adoption of SFAS No. 123R and the associated non-cash stock-based compensation expense as compared with the first quarter of 2005.
 
Selling and Marketing
 
                                 
                Absolute
    Percentage
 
                Increase
    Increase
 
    2005     2006     (Decrease)     (Decrease)  
    (As Restated)     (As Restated
             
          through
             
          September 30)              
 
Selling and marketing expenses (dollars in millions)
                               
Quarter Ended (unaudited):
                               
March 31, 
  $ 11.9     $ 14.5     $ 2.6       22 %
June 30,
  $ 13.0     $ 15.3     $ 2.3       18 %
September 30, 
  $ 12.7     $ 14.2     $ 1.5       13 %
December 31, 
  $ 13.4     $ 15.6     $ 2.2       16 %
Full Year Ended December 31,
  $ 51.0     $ 59.6     $ 8.6       17 %
Selling and marketing expenses as a percentage of total revenues
                               
Quarter Ended (unaudited):
                               
March 31, 
    36 %     36 %            
June 30, 
    34 %     32 %     (2 )     (6 )%
September 30, 
    33 %     32 %     (1 )     (3 )%
December 31, 
    33 %     32 %     (1 )     (3 )%
Full Year Ended December 31, 
    34 %     33 %     (1 )     (3 )%
Selling and marketing employees (at end of period)
                               
March 31, 
    244       283       39       16 %
June 30, 
    263       289       26       10 %
September 30, 
    254       295       41       16 %
December 31, 
    263       303       40       15 %
 
For both the full year and interim periods, the increase in selling and marketing expenses in 2006 is primarily attributable to increased compensation and benefit costs resulting from an increase in average headcount and annual increases in compensation costs, as well as to an increase in non-cash stock-based compensation expense related to the adoption of SFAS No. 123R when compared to the non-cash stock-based compensation expense recognized in 2005 under APB No. 25 for the March 31, 2005 performance-based grant and the mispriced options for which measurement dates were corrected as a result of the stock option practices investigation. The decrease in selling and marketing expenses as a percentage of total revenue is primarily attributable to an increased revenue base.


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General and Administrative
 
                                 
                Absolute
    Percentage
 
                Increase
    Increase
 
    2005     2006     (Decrease)     (Decrease)  
    (As Restated)     (As Restated
             
          through
             
          September 30)              
 
General and administrative expenses (dollars in millions)
                               
Quarter Ended (Unaudited):
                               
March 31,
  $ 4.0     $ 5.6     $ 1.6       40 %
June 30,
  $ 4.6     $ 5.7     $ 1.2       27 %
September 30,
  $ 4.9     $ 5.4     $ 0.5       10 %
December 31,
  $ 4.5     $ 6.1     $ 1.6       35 %
Full Year Ended December 31,
  $ 18.0     $ 22.9     $ 4.9       27 %
General and administrative expenses as a percentage of total revenues
                               
Quarter Ended (Unaudited):
                               
March 31,
    12 %     14 %     2        
June 30,
    12 %     12 %            
September 30,
    13 %     12 %     (1 )     (8 )%
December 31,
    11 %     12 %     1       9 %
Full Year Ended December 31,
    12 %     13 %     1       8 %
General and administrative employees (at end of period)
                               
March 31,
    94       104       10       11 %
June 30,
    95       107       12       13 %
September 30,
    95       108       13       14 %
December 31,
    103       114       11       11 %
 
The increase in general and administrative expenses for the full year and interim periods of 2006 as compared to 2005, and in general and administrative expenses as a percentage of total revenues in 2006 as compared to 2005 is primarily attributable to increased compensation expense resulting from an increase in average headcount and annual increases in compensation costs, as well as to an increase in non-cash stock-based compensation expense related to the adoption of SFAS No. 123R when compared to the non-cash stock-based compensation expense recognized in 2005 under APB No. 25 for the March 31, 2005 performance-based grant and the mispriced options for which measurement dates were corrected as a result of the stock option practices investigation.


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Depreciation
 
                                 
                Absolute
    Percentage
 
                Increase
    Increase
 
    2005     2006     (Decrease)     (Decrease)  
    (As Restated)     (As Restated
             
          through
             
          September 30)              
 
Depreciation Expense (dollars in thousands)
                               
Quarter Ended (Unaudited):
                               
March 31,
  $ 874     $ 884     $ 10       1 %
June 30,
  $ 882     $ 916     $ 34       4 %
September 30,
  $ 859     $ 947     $ 88       10 %
December 31,
  $ 924     $ 871     $ (53 )     (6 )%
Full Year Ended December 31,
  $ 3,539     $ 3,618     $ 79       2 %
Depreciation Expense as a percentage of total revenues
                               
Quarter Ended (Unaudited):
                               
March 31,
    4 %     2 %     (2 )     50 %
June 30,
    2 %     2 %            
September 30,
    2 %     2 %            
December 31,
    2 %     2 %            
Full Year Ended December 31,
    2 %     2 %            
 
Depreciation expense increased 2% to $3.6 million in 2006 from $3.5 million in 2005. The increase is primarily attributable to depreciation expense related to purchases of computer equipment and leasehold improvements during 2005 and 2006.
 
Amortization of Intangible Assets.
 
                                 
                Absolute
    Percentage
 
    2005     2006     (Decrease)     (Decrease)  
    (As Restated)     (As Restated
             
          through
             
          September 30)              
 
Amortization Expense (dollars in thousands)
                               
Quarter Ended (Unaudited):
                               
March 31,
  $ 1,123     $ 652     $ (471 )     (42 )%
June 30,
  $ 833     $ 472     $ (361 )     (43 )%
September 30,
  $ 786     $ 474     $ (312 )     (40 )%
December 31,
  $ 785     $ 462     $ (323 )     (41 )%
Full Year Ended December 31,
  $ 3,527     $ 2,060     $ (1,467 )     (42 )%
Amortization Expense as a percentage of total revenues
                               
Quarter Ended (Unaudited):
                               
March 31,
    3 %     1 %     (2 )     (67 )%
June 30,
    2 %     1 %     (1 )     (50 )%
September 30,
    2 %     1 %     (1 )     (50 )%
December 31,
    2 %     1 %     (1 )     (50 )%
Full Year Ended December 31,
    2 %     1 %     (1 )     (50 )%
 
Amortization of intangible assets decreased to $2.1 million in 2006 from $3.5 million in 2005. This decrease in amortization expense is primarily attributable to the accelerated method we are using to amortize our acquired intangible assets according to the expected cash flows to be received from these assets.


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Other Income, Net.  Other income, net increased 90% to $5.7 million in 2006 from $3.0 million in 2005. The increase is primarily due to an increase in the average cash and investment balances available for investment in 2006 as compared to 2005 and to higher returns on invested capital.
 
Gains on Sales of Available-for-Sale Securities.  In 2005, we sold the remaining total of approximately 89,000 shares of Greenfield Online, Inc., received net proceeds of approximately $1.7 million, and recognized a gain of approximately $1.5 million related to the sale.
 
Gains from Non-Marketable Investments, Net of Impairments.  Gains on non-marketable investments resulted from distributions from our investments and totaled $575,000 during 2006 compared to $370,000 during 2005. Impairments of non-marketable investments resulted in net charges of $227,000 during 2006 compared to $164,000 during 2005.
 
Gain on Sale of Discontinued Operations, Net of Taxes.  In 2006, we completed the sale of our Ultimate Consumer Panel (“UCP”) product line to Lightspeed Online Research, Inc. for $2.5 million in cash, of which $2.25 million was paid at the closing date subject to a working capital adjustment, with the remainder due nine months after the closing date. The sale resulted in a gain on the disposal of discontinued operations of $1.4 million, net of $1.0 million of taxes.
 
Provision for Income Taxes.
 
                                 
                Absolute
    Absolute
 
                Increase
    Increase
 
    2005     2006     (Decrease)     (Decrease)  
    (As Restated)     (As Restated)
             
          through
             
          September 30              
 
Provision for Income Taxes (dollars in millions)
                               
Quarter Ended (unaudited):
                               
March 31,
  $ 1.7     $ 1.5     $ (0.2 )     (12 )%
June 30,
  $ 1.8     $ 3.2     $ 1.4       78 %
September 30,
  $ 2.5     $ 2.8     $ 0.3       12 %
December 31,
  $ 1.2     $ 2.5     $ 1.3       108 %
Full Year Ended December 31,
  $ 7.2     $ 10.0     $ 2.8       39 %
 
During 2006, we recorded an income tax provision of $10.0 million reflecting an effective tax rate of 38.5%. During 2005, we recorded an income tax provision of $7.2 million reflecting an effective tax rate of 37.1%. The increase in our effective tax rate for fiscal year 2006 resulted primarily from an increase in deferred tax expense due to foreign currency translation losses related to the deferred tax liability of our German holding companies offset by an increase in tax exempt investment income as a percentage of total income.


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Years Ended December 31, 2004 and December 31, 2005
 
Revenues
 
                                 
    Year Ended
    Absolute
    Percentage
 
    December 31,     Increase
    Increase
 
    2004     2005     (Decrease)     (Decrease)  
    (As Restated)     (As Restated)              
 
Revenues (dollars in millions)
  $ 137.6     $ 151.4     $ 13.8       10 %
Revenues from research services (dollars in millions)
  $ 93.8     $ 96.7     $ 2.9       3 %
Advisory services and other revenues (dollars in millions)
  $ 43.9     $ 54.7     $ 10.8       25 %
Revenues attributable to customers outside of the United States (dollars in millions)
  $ 45.7     $ 46.3     $ 0.6       1 %
Revenues attributable to customers outside of the United States as a percentage of total revenue
    33 %     31 %     (2.0 )     (6 )%
Number of clients (at end of period)
    1,866       2,007       141       8 %
Number of research employees (at end of period)
    203       257       54       27 %
Number of events
    9       8       (1 )     (11 )%
 
The increase in total revenues is primarily attributable to increased demand for advisory services, the introduction of new products and improving economic conditions. No single client company accounted for more than 2% of revenues during 2004 or 2005.
 
Excluding the effects of foreign currency translation, total revenues would have increased approximately 11% in 2005 compared to 2004.
 
Research services revenues as a percentage of total revenues declined from 68% in 2004 to 64% in 2005 as customer demand shifted towards advisory services, which is reflected in the increase in advisory services and other revenues. The increase in advisory services and other revenues is primarily attributable to increased demand for more customized services and increased research personnel available to deliver advisory services.
 
The decrease in international revenues as a percentage of total revenues is primarily attributable to demand for our products and services growing at a faster rate domestically than internationally.
 
Cost of Services and Fulfillment
 
                                 
    Year Ended
             
    December 31,     Absolute
    Percentage
 
    2004     2005     Increase     Increase  
    (As Restated)     (As Restated)              
 
Cost of services and fulfillment (dollars in millions)
  $ 52.5     $ 60.5     $ 8.0       15 %
Cost of services and fulfillment as a percentage of total revenues
    38 %     40 %     2       4 %
Number of research and fulfillment employees
    275       328       53       19 %
 
The increase in cost of services and fulfillment and cost of services and fulfillment as a percentage of total revenues is primarily attributable to increased compensation expense resulting from an increase in the number of research employees and annual increases in compensation costs, increased third-party survey costs and the recording of non-cash stock-based compensation expense related to the March 31, 2005 performance-based stock option grant (“March 31, 2005 grant”).


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Selling and Marketing
 
                                 
    Year Ended
    Absolute
    Percentage
 
    December 31,     Increase
    Increase
 
    2004     2005     (Decrease)     (Decrease)  
    (As Restated)     (As Restated)              
 
Selling and marketing expenses (dollars in millions)
  $ 46.1     $ 51.0     $ 4.9       11 %
Selling and marketing expenses as a percentage of total revenues
    34 %     34 %            
Number of selling and marketing employees
    229       263       34       15 %
 
The increase in selling and marketing expenses is primarily attributable to increased compensation expense resulting from an increase in average headcount and annual increases in compensation costs, professional fees related to the Forrester magazine, the last issue of which was published at the end of 2005, as well as to the recording of non-cash stock-based compensation expense related to the March 31, 2005 grant.
 
General and Administrative
 
                                 
    Year Ended
             
    December 31,     Absolute
    Percentage
 
    2004     2005     Increase     Increase  
    (As Restated)     (As Restated)              
 
General and administrative expenses (dollars in millions)
  $ 16.2     $ 18.0     $ 1.8       11 %
General and administrative expenses as a percentage of total revenues
    12 %     12 %            
Number of general and administrative employees
    89       103       14       16 %
 
The increase in general and administrative expenses is primarily attributable to increased compensation expense resulting from an increase in average headcount and annual increases in compensation costs, as well as to the recording of non-cash stock-based compensation expense related to the March 31, 2005 grant.
 
Depreciation.  Depreciation expense decreased 5% to $3.5 million in 2005 from $3.7 million in 2004. The decrease is primarily attributable to computer and software assets becoming fully depreciated and to the write-off of certain depreciable assets in connection with office vacancies, offset by the depreciation of 2004 and 2005 capital purchases.
 
Amortization of Intangible Assets.  Amortization of intangible assets decreased to $3.5 million in 2005 from $6.5 million in 2004. This decrease in amortization expense is primarily attributable to the accelerated method we use to amortize our acquired intangible assets according to the expected cash flows to be received from these assets. Specifically, research content and registered trademarks that were acquired in connection with the Giga acquisition in 2003 were fully amortized by the end of 2004.
 
Reorganization Costs.  There were no reorganization costs recorded in 2005. During 2004, reorganization costs of $8.4 million related to severance and related benefits costs in connection with the termination of approximately 15 positions, as well as revisions to lease loss estimates related to prior reorganizations.
 
Other Income, Net.  Other income, net increased 3% to $3.0 million in 2005 from $2.9 million in 2004. The increase is primarily attributable to an increase in the average cash and investment balances available for investment in 2005 as compared to 2004 and an increase in average interest rates in the second half of 2005.
 
Gains on Sales of Available-for-Sale Securities.  In 2004, we sold a total of approximately 47,000 shares of Greenfield Online, Inc. and received net proceeds of approximately $701,000. Upon consummation of Greenfield’s initial public offering, we also received a conversion payment of approximately $463,000. Accordingly, in the year ended December 31, 2004, we recognized a gain of approximately $1.1 million related to these sales. In 2005, we sold the remaining total of approximately 89,000 shares of Greenfield Online, Inc., received net proceeds of approximately $1.7 million, and recognized a gain of approximately $1.5 million related to the sale.


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Gains from Non-Marketable Investments, Net of Impairments.  Gains on non-marketable investments resulted from distributions from our investments and totaled $370,000 during 2005 compared to $281,000 during 2004. Impairments of non-marketable investments resulted in net charges of $164,000 during 2005.
 
Provision for Income Taxes.  During 2005, we recorded an income tax provision of approximately $7.2 million reflecting an effective tax rate of 37.1%. During 2004, we recorded an income tax provision of approximately $2.9 million reflecting an effective tax rate of 33.5%. The increase in our effective tax rate for fiscal year 2005 resulted primarily from an increase in non-deductible expenses as well as an increase in deferred tax benefit due to foreign currency translation gains in 2005 related to the deferred tax liability of our German holding companies, compared to currency translation losses in 2004.
 
Liquidity and Capital Resources
 
We have financed our operations primarily through funds generated from operations. Memberships for research services, which constituted approximately 63% of our revenues during 2006, are annually renewable and are generally payable in advance. We generated cash from operating activities of $45.8 million during 2006 and $23.9 million during 2005. The increase in cash from operating activities primarily resulted from non-cash adjustments to our net income for stock-based compensation expense and to cash received from the payment of accounts receivable.
 
We used $86.4 million of cash in investing activities during 2006 and we generated $2.3 million of cash from investing activities during 2005. The increase in cash used in investing activities is primarily attributable to an increase in net purchases of available-for-sale securities. We regularly invest excess funds in short- and intermediate-term interest-bearing obligations of investment grade.
 
In June 2000, we committed to invest $20.0 million in two technology-related private equity investment funds over an expected period of five years. As of December 31, 2006, we had contributed approximately $19.4 million to the funds. The timing and amount of future contributions are entirely within the discretion of the investment funds. In July 2000, we adopted a cash bonus plan to pay bonuses, after the return of invested capital, measured by the proceeds of a portion of the share of net profits from these investments, if any, to certain key employees who must remain employed with us at the time any bonuses become payable under the plan, subject to the terms and conditions of the plan. The principal purpose of this cash bonus plan was to retain key employees by allowing them to participate in a portion of the potential return from Forrester’s technology-related investments if they remained employed by the Company. The plan was established at a time when technology and internet companies were growing significantly, and providing incentives to retain key employees during that time was important. To date, we have not paid any bonuses under this plan.
 
In December 2003, we committed to invest an additional $2.0 million over an expected period of 2 years in an annex fund of one of the two private equity investment funds. As of December 31, 2006, we had contributed $2.0 million to the annex fund.
 
We generated $30.5 million in cash from financing activities during 2006 and used $14.5 million during 2005. The increase in cash from financing activities is primarily attributable to proceeds from the exercise of employee stock options.
 
In February 2005, our Board of Directors authorized an additional $50.0 million to purchase common stock under the stock repurchase program. During 2006, we repurchased 472,000 shares of common stock at an aggregate cost of approximately $12.3 million. As of December 31, 2006, we had cumulatively repurchased approximately 4.8 million shares of common stock at an aggregate cost of approximately $85.8 million.
 
As of December 31, 2006, we had cash and cash equivalents of $39.2 million and available-for-sale securities of $168.7 million. We do not have a line of credit and do not anticipate the need for one in the foreseeable future. We plan to continue to introduce new products and services and expect to make the requisite investments in our infrastructure during the next 12 months. For each of the interim periods of 2005 and 2006, and with respect to 2006, we believed and believe that our current cash balance, available-for-sale securities, and cash flows from operations were sufficient to and will satisfy working capital, financing activities, and capital expenditure requirements for at least the next two years.


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As of December 31, 2006, we had future contractual obligations as follows for operating leases:
 
                                                         
Contractual
  Future Payments by Year
Obligations
  Total   2007   2008   2009   2010   2011   Thereafter
    (In thousands)
 
Operating leases
  $ 33,281     $ 9,109     $ 6,928     $ 6,858     $ 6,712     $ 3,526     $ 148  
                                                         
 
  •  The above table does not include future minimum rentals to be received under subleases of $330,000. The above table also does not include the remaining $638,000 of capital commitments to the private equity funds described above due to the uncertainty and timing of capital calls made by such funds to pay these capital commitments.
 
Off-Balance Sheet Arrangements
 
We do not maintain any off-balance sheet financing arrangements.
 
Recent Accounting Pronouncements
 
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of the materiality assessment. Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such prior year misstatements existing in the current year’s ending balance sheet. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our financial position or results of operations.
 
In June 2006, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross Versus Net Presentation)’(“EITF 06-03”). The EITF reached a consensus that the presentation of taxes on either a gross or net basis is an accounting policy decision that requires disclosure. EITF 06-03 is effective for the first interim or annual reporting period beginning after December 15, 2006. Our policy is to present taxes on a net basis and as a result the adoption of EITF 06-03 will not have any effect on our financial position or results of operations.
 
In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which seeks to reduce the significant diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Upon adoption, the cumulative effect of any changes in net assets resulting from the application of FIN 48 will be recorded as an adjustment to retained earnings. We adopted FIN 48 in the first quarter of 2007 and the adoption of FIN 48 did not have a material impact on our financial position or results of operations.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007; therefore we will begin to apply the standard in our fiscal year commencing January 1, 2008. We are in the process of evaluating the impact, if any, that SFAS No. 157 will have on our financial position and results of operations.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election


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dates. If the fair value option is elected, a business entity shall report unrealized gains and losses on elected items in earnings at each subsequent reporting date. Upon initial adoption of this Statement an entity is permitted to elect the fair value option for available-for-sale and held-to-maturity securities previously accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The effect of reclassifying those securities into the trading category should be included in a cumulative-effect adjustment of retained earnings and not in current-period earnings and should be separately disclosed. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We have not yet determined the effect, if any, that the application of SFAS No. 159 will have on our consolidated financial statements.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments.
 
Interest Rate Sensitivity.  We maintain an investment portfolio consisting mainly of federal and state government obligations and corporate obligations, with a weighted-average maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity (except for any future acquisitions or mergers). Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on our securities portfolio. The following table provides information about our investment portfolio. For investment securities, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates.
 
Principal amounts by expected maturity in US dollars (dollars in thousands):
 
                                         
    Fair Value at
    Year Ending
    Year Ending
    Year Ending
    Year Ending
 
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
 
    2006     2006     2007     2008     2009  
 
Cash equivalents
  $ 15,035     $ 15,035     $     $     $  
Weighted average interest rate
    4.83 %     4.83 %                  
Investments
  $ 168,616           $ 141,895     $ 17,054     $ 9,667  
Weighted average interest rate
    3.64 %           3.64 %     3.61 %     3.58 %
Total portfolio
  $ 183,651     $ 15,035     $ 141,895     $ 17,054     $ 9,667  
Weighted average interest rate
    3.73 %     4.83 %     3.64 %     3.61 %     3.58 %
 
Foreign Currency Exchange.  On a global level, we face exposure to movements in foreign currency exchange rates. This exposure may change over time as business practices evolve and could have a material adverse impact on our results of operations. To date, the effect of changes in currency exchange rates has not had a significant impact on our financial position or our results of operations. Accordingly, we have not entered into any hedging agreements. However, we are prepared to hedge against fluctuations that the euro, or other foreign currencies, will have on foreign exchange exposure if this exposure becomes material. As of December 31, 2006, the total assets excluding goodwill and intangible assets, related to non-U.S. dollar denominated currencies were approximately $31.9 million.


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Item 8.   Consolidated Financial Statements and Supplementary Data
 
The financial statements listed in the following Index to Financial Statements are filed as a part of this 2006 Annual Report on Form 10-K.
 
FORRESTER RESEARCH, INC.
 
INDEX TO FINANCIAL STATEMENTS
 
         
    Page
 
  F-1
  F-2
  F-3
  F-4
  F-5
  F-6


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Table of Contents

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Forrester Research, Inc.:
 
We have audited the accompanying consolidated balance sheets of Forrester Research, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2006, and the related consolidated statements of income, stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forrester Research, Inc. and subsidiaries at December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
 
As described in Note 1 to the accompanying consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 123R, “Share Based Payment”, effective January 1, 2006.
 
As discussed in Note 2 to the accompanying consolidated financial statements, the consolidated balance sheet as of December 31, 2005 and the related consolidated statements of income, stockholders’ equity and comprehensive income and cash flows for the two years ended December 31, 2005 have been restated.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 2, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of a material weakness.
 
/s/  BDO Seidman, LLP
 
Boston, Massachusetts
November 2, 2007


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Table of Contents

FORRESTER RESEARCH, INC.
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2005     2006  
    (As Restated)        
    (In thousands)  
 
CURRENT ASSETS:
Cash and cash equivalents
  $ 48,538     $ 39,157  
Available-for-sale securities (Note 6)
    83,730       168,676  
Accounts receivable, net of allowance for doubtful accounts of $799 and $717 in 2005 and 2006, respectively (Note 15)
    52,177       59,727  
Deferred income tax assets (Note 8)
    13,644       13,592  
Deferred commissions
    8,940       10,117  
Prepaid expenses and other current assets
    5,126       7,610  
                 
Total current assets
    212,155       298,879  
                 
LONG-TERM ASSETS:
               
Property and equipment, net (Note 15)
    5,771       5,611  
Goodwill, net (Note 4)
    52,639       53,171  
Deferred income taxes, net (Note 8)
    20,332       11,335  
Intangible assets, net (Note 4)
    3,530       1,517  
Non-marketable investments (Note 7)
    13,258       13,015  
Other assets
    657       615  
                 
Total long-term assets
    96,187       85,264  
                 
Total assets
  $ 308,342     $ 384,143  
                 
CURRENT LIABILITIES:
Accounts payable
  $ 1,716     $ 2,878  
Accrued expenses (Note 15)
    24,771       29,852  
Deferred revenue
    86,663       99,875  
                 
Total current liabilities
    113,150       132,605  
                 
Deferred income tax liability (Note 8)
    5,845       6,633  
COMMITMENTS (NOTES 9 and 12) 
               
STOCKHOLDERS’ EQUITY (NOTE 10):
               
Preferred stock, $.01 par value
               
Authorized — 500 shares
               
Issued and outstanding — none
           
Common stock, $.01 par value
               
Authorized — 125,000 shares
               
Issued — 25,391 and 27,884 shares in 2005 and 2006, respectively
               
Outstanding — 21,023 and 23,045 shares in 2005 and 2006, respectively
    254       279  
Additional paid-in capital
    220,217       270,306  
Retained earnings
    45,010       62,766  
Treasury stock — 4,368 and 4,839 shares in 2005 and 2006, respectively, at cost
    (73,530 )     (85,834 )
Accumulated other comprehensive loss
    (2,604 )     (2,612 )
                 
Total stockholders’ equity
    189,347       244,905  
                 
Total liabilities and stockholders’ equity
  $ 308,342     $ 384,143  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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FORRESTER RESEARCH, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Years Ended December 31,  
    2004     2005     2006  
    (In thousands, except per share data)  
    (As Restated)     (As Restated)        
 
REVENUES:
                       
Research services 
  $ 93,750     $ 96,699     $ 114,876  
Advisory services and other
    43,874       54,700       66,597  
                         
Total revenues
    137,624       151,399       181,473  
                         
OPERATING EXPENSES:
                       
Cost of services and fulfillment
    52,456       60,461       73,268  
Selling and marketing
    46,078       51,050       59,626  
General and administrative
    16,224       18,039       22,859  
Depreciation
    3,691       3,539       3,618  
Amortization of intangible assets (Note 4)
    6,461       3,527       2,060  
Reorganization costs (Note 5) 
    8,396              
                         
Total operating expenses
    133,306       136,616       161,431  
                         
Income from continuing operations
    4,318       14,783       20,042  
Other income, net
    2,867       3,027       5,704  
Gains on sales of available-for-sale securities (Note 6)
    1,072       1,489        
Gains from non-marketable investments, net of impairments (Note 7)
    281       206       348  
                         
Income from continuing operations before income tax provision
    8,538       19,505       26,094  
Income tax provision (Note 8)
    2,860       7,243       10,037  
                         
Income from continuing operations 
    5,678       12,262       16,057  
(Loss) income from discontinued operations, net of taxes (Note 3)
    (815 )     (318 )     300  
Gain on sale of discontinued operations, net of taxes (Note 3) 
                1,399  
                         
Net income
  $ 4,863     $ 11,944     $ 17,756  
                         
Basic income per common share from continuing operations
  $ 0.25     $ 0.58     $ 0.72  
Basic (loss) income per common share from discontinued operations
  $ (0.03 )   $ (0.02 )   $ 0.08  
                         
Basic income per common share
  $ 0.22     $ 0.56     $ 0.80  
                         
Diluted income per common share from continuing operations
  $ 0.25     $ 0.56     $ 0.70  
Diluted (loss) income per common share from discontinued operations
  $ (0.04 )   $ (0.01 )   $ 0.07  
                         
Diluted income per common share
  $ 0.21     $ 0.55     $ 0.77  
                         
Basic weighted average common shares outstanding
    22,024       21,413       22,195  
                         
Diluted weighted average common shares outstanding 
    22,464       21,876       22,973  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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FORRESTER RESEARCH, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 
                                                                         
                                        Accumulated
             
    Common Stock     Additional
          Treasury Stock     Other
    Total
       
    Number of
    $.01 Par
    Paid-in
    Retained
    Number of
          Comprehensive
    Stockholders’
    Comprehensive
 
    Shares     Value     Capital     Earnings     Shares     Cost     Income (Loss)     Equity     Income  
                            (In thousands)                    
 
Balance, December 31, 2003, as reported
    24,355     $ 243     $ 172,523     $ 66,945       1,894     $ (30,300 )   $ (1,089 )   $ 208,322          
Cumulative Effect of restatements
                26,744       (38,742 )                       (11,998 )        
                                                                         
Balance at December 31, 2003, as restated
    24,355       243       199,267       28,203       1,894       (30,300 )     (1,089 )     196,324          
Issuance of common stock under stock option plans, including tax benefit
    291       3       3,885                               3,888          
Issuance of common stock under employee stock purchase plan, including tax benefit
    83       1       1,296                               1,297          
Stock-based compensation expense
                    613                                       613          
Purchase of common stock
                            1,032       (17,756 )           (17,756 )        
Structured stock repurchases, net
                2,054             119       (2,000 )           54          
Net income
                      4,863                         4,863     $ 4,863  
Unrealized gain on available-for-sale securities, net of tax provision
                                        235       235       235  
Cumulative translation adjustment
                                        (878 )     (878 )     (878 )
                                                                         
Total comprehensive income, as restated
                                                                  $ 4,220  
                                                                         
Balance, December 31, 2004, as restated
    24,729       247       207,115       33,066       3,045       (50,056 )     (1,732 )     188,640          
Issuance of common stock under stock option plans, including tax benefit
    579       6       9,785                               9,791          
Issuance of common stock under employee stock purchase plan, including tax benefit
    83       1       1,315                               1,316          
Stock-based compensation expense
                2,002                               2,002          
Purchase of common stock
                            1,323       (23,474 )           (23,474 )        
Net income
                      11,944                         11,944     $ 11,944  
Unrealized loss on available-for-sale securities, net of tax provision
                                        (1,578 )     (1,578 )     (1,578 )
Cumulative translation adjustment
                                        706       706       706  
                                                                         
Total comprehensive income, as restated
                                                                  $ 11,072  
                                                                         
Balance, December 31, 2005, as restated
    25,391       254       220,217       45,010       4,368       (73,530 )     (2,604 )     189,347          
Issuance of common stock under stock option plans, including tax benefit
    2,409       24       41,318                               41,342          
Issuance of common stock under employee stock purchase plan, including tax benefit
    84       1       1,561                               1,562          
Stock-based compensation expense
                7,210                               7,210          
Purchase of common stock
                            471       (12,304 )           (12,304 )        
Net income
                      17,756                         17,756     $ 17,756  
Unrealized gain on available-for-sale securities, net of tax provision
                                        271       271       271  
Cumulative translation adjustment
                                        (279 )     (279 )     (279 )
                                                                         
Total comprehensive income
                                                                  $ 17,748  
                                                                         
Balance, December 31, 2006
    27,884     $ 279     $ 270,306     $ 62,766       4,839     $ (85,834 )   $ (2,612 )   $ 244,905          
                                                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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FORRESTER RESEARCH, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31,  
    2004     2005     2006  
    As Restated     As Restated        
    (In thousands)  
 
Cash flows from operating activities:
                       
Net income 
  $ 4,863     $ 11,944     $ 17,756  
Loss (Income) from discontinued operations, net 
    815       318       (300 )
Gain on disposal of discontinued operations, net 
                (1,399 )
                         
Income from continuing operations
    5,678       12,262       16,057  
Adjustments to reconcile net income to net cash provided by operating activities —
                       
Depreciation
    3,691       3,539       3,551  
Amortization of intangible assets
    6,461       3,527       2,060  
Gains from non-marketable investments, net of impairments
    (281 )     (206 )     (348 )
Realized gains on sales of available-for-sale securities
    (1,072 )     (1,489 )      
Tax (deficit) benefit from exercises of employee stock options
    (139 )     2,243       75  
Deferred income taxes
    600       4,973       9,636  
Non-cash stock-based compensation expense
    613       2,002       7,210  
Non-cash reorganization costs
    1,558              
Increase in provision for doubtful accounts 
    309       100       358  
Loss on disposal of fixed assets
                67  
Amortization of premium on available-for-sale securities
    924       1,080       852  
Changes in assets and liabilities —
                       
Accounts receivable
    2,131       (14,307 )     (7,765 )
Deferred commissions
    (788 )     (2,084 )     (1,267 )
Prepaid expenses and other current assets
    995       (545 )     (1,906 )
Accounts payable
    1,152       (2,063 )     1,171  
Accrued expenses
    (5,116 )     (2,022 )     2,935  
Deferred revenue
    937       16,508       12,751  
                         
Net cash provided by continuing operations
    17,653       23,518       45,437  
                         
Net cash provided by discontinued operations
    353       414       325  
                         
Net cash provided by operating activities
    18,006       23,932       45,762  
                         
Cash flows from investing activities:
                       
Purchases of property and equipment
    (3,664 )     (3,012 )     (3,334 )
Purchases of non-marketable investments
    (3,613 )     (700 )     (300 )
Proceeds from non-marketable investments
          741       555  
Proceeds from sale of discontinued operations
                1,642  
Decrease in other assets
    1,081       995       391  
Purchases of available-for-sale securities
    (161,344 )     (260,362 )     (565,495 )
Proceeds from sales and maturities of available-for-sale securities
    176,509       264,626       480,166  
                         
Net cash provided by (used in) investing activities
    8,969       2,288       (86,375 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of common stock under stock option plans and employee stock purchase plan
    5,279       8,963       42,526  
Tax benefits related to stock options
                308  
Repurchase of common stock
    (17,756 )     (23,474 )     (12,304 )
Structured stock repurchases, net
    54              
                         
Net cash (used in) provided by financing activities
    (12,423 )     (14,511 )     30,530  
                         
Effect of exchange rate changes on cash and cash equivalents
    391       (499 )     702  
                         
Net increase (decrease) in cash and cash equivalents
    14,943       11,210       (9,381 )
Cash and cash equivalents, beginning of year
    22,385       37,328       48,538  
                         
Cash and cash equivalents, end of year
  $ 37,328     $ 48,538     $ 39,157  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for income taxes
  $ 1,265     $ 288     $ 2,186  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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FORRESTER RESEARCH, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
 
(1)  Operations and Significant Accounting Policies
 
Business
 
Forrester Research, Inc. (“Forrester” or “the Company”) conducts independent technology research and provides pragmatic and forward-thinking advice to global leaders in business and technology. Forrester’s products and services are targeted to specific roles, including principally senior management, business strategists, and marketing and technology professionals at $1 billion-plus companies who collaborate with Forrester to align their technology investments with their business goals.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of Forrester and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.
 
Management Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Forrester considers the more significant of these estimates to be revenue recognition, non-cash stock-based compensation, allowance for doubtful accounts, non-marketable investments, goodwill and intangible assets, and taxes. On an ongoing basis, management evaluates its estimates. Actual results could differ from these estimates.
 
Financial Instruments
 
Forrester’s financial instruments consist of cash equivalents, marketable securities, accounts receivable and accounts payable. The estimated fair values of these financial instruments approximate their carrying values. The fair market value of marketable securities is based on market quotes. Forrester’s cash equivalents and marketable securities are generally investment-grade corporate bonds and obligations of the federal government or municipal issuers.
 
Cash, Cash Equivalents, and Marketable Investments
 
Forrester considers all short-term, highly liquid investments with original maturities at the time of purchase of 90 days or less to be cash equivalents. Forrester accounts for investments in marketable securities as available-for-sale securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). Under SFAS No. 115, securities purchased to be held for indefinite periods of time and not intended at the time of purchase to be held until maturity are classified as available-for-sale securities. Forrester continually evaluates whether any marketable investments have been impaired and, if so, whether such impairment is temporary or other than temporary.
 
Concentrations of Credit Risk
 
Forrester has no significant off-balance sheet or concentration of credit risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially subject Forrester to concentrations of credit risk are principally cash equivalents, available-for-sale securities, and accounts receivable. Forrester places its investments in highly rated securities. No single customer accounted for greater than 2% of revenues or accounts receivable in any of the periods presented.


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FORRESTER RESEARCH, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred Commissions
 
Commissions incurred in acquiring new or renewing existing contracts are deferred and expensed to operations as the related revenue is recognized. Forrester evaluates the recoverability of deferred commissions at each balance sheet date.
 
Intangible Assets and Impairment of Long-Lived Assets Subject to Amortization
 
Forrester continually evaluates whether events or circumstances have occurred that indicate that the estimated remaining useful life of long-lived assets and certain identifiable intangible assets may warrant revision or that the carrying value of these assets may be impaired if events or circumstances indicate that the carrying value of these assets may be impaired. To compute whether assets have been impaired, the estimated undiscounted future cash flows for the estimated remaining useful life of the assets are compared to the carrying value. To the extent that the future cash flows are less than the carrying value, the assets are written down to the estimated fair value of the asset.
 
Foreign Currency
 
The functional currencies of Forrester’s wholly-owned subsidiaries, with the exception of the German holding companies where the functional currency is the U.S. dollar, are their respective local currencies. The financial statements of the subsidiaries other than the German holding companies are translated to United States dollars using period-end exchange rates for assets and liabilities and average exchange rates during the corresponding period for revenues and expenses. Translation gains and losses as a result of this translation are accumulated as a component of accumulated other comprehensive loss. Net gains and losses resulting from foreign exchange transactions are included in other income in the consolidated statements of income and were not significant during the periods presented. For the German holding companies, the foreign translation and transaction gains and losses are recognized in the related current period income statement. For 2005 and 2006, the only material translation gains and losses, respectively, arising from the German holding companies were related to deferred tax liabilities and therefore are recorded as components of income tax expense and represented $873,000 and $671,000, respectively.
 
Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss as of December 31, 2005 and 2006 are as follows (in thousands):
 
                 
    2005     2006  
 
Unrealized loss on available-for-sale securities, net of taxes
  $ (379 )   $ (108 )
Cumulative translation adjustment
    (2,225 )     (2,504 )
                 
Total accumulated other comprehensive loss
  $ (2,604 )   $ (2,612 )
                 
 
During the year ended December 31, 2005, the unrealized loss activity includes a reclassification adjustment of approximately $1.1 million, which relates to a portion of the realized gain recorded from the sale of 89,000 shares of Greenfield Online, Inc. in 2005.
 
Revenue Recognition
 
Forrester generates revenues from licensing research, performing advisory services, hosting events and conducting teleconferences. Forrester executes contracts that govern the terms and conditions of each arrangement. Revenues from contracts that contain multiple deliverables are allocated among the separate units based on their relative fair values; however, the amount recognized is limited to the amount that is not contingent on future performance conditions. Research service revenues are recognized ratably over the term of the agreement. Advisory service revenues are recognized during the period in which the customer receives the agreed upon deliverable. Forrester Teleconferences revenue and reimbursed out-of-pocket expenses are recorded as advisory service


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FORRESTER RESEARCH, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
revenues. Event revenues are recognized upon completion of the event. Annual memberships which include access to our research, unlimited phone or email analyst inquiry, unlimited participation in Forrester’s Teleconferences, and the right to attend one event, are accounted for as one unit of accounting and recognized ratably as research services revenue over the membership period.
 
While historical business practice had been to offer contracts with a non-cancelable term, effective April 1, 2005, Forrester began offering clients a money-back guarantee, which gives clients the right to cancel their membership contracts prior to the end of the contract term. For contracts that are terminated during the contract term, refunds would be issued for unused products or services. Furthermore, revenue recognition determines the timing of commission expenses that are deferred and recorded as expense as the related revenue is recognized. The recoverability of deferred commissions is evaluated at each balance sheet date.
 
Stock-Based Compensation
 
Effective January 1, 2006, Forrester adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). All of Forrester’s stock-based compensation is accounted for as equity instruments and Forrester has five equity plans required to be evaluated under SFAS No. 123R: two equity incentive plans, two directors’ stock option plans and an employee stock purchase plan. Under the provisions of SFAS No. 123R, Forrester recognizes the fair value of stock-based compensation in net income over the requisite service period of the individual grantee, which generally equals the vesting period. Prior to January 1, 2006, Forrester followed Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations in accounting for its stock-based compensation. See Note 2 and Note 11 for further discussion of Forrester’s historical accounting under APB No. 25.
 
Forrester has elected the modified prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in the periods after the date of adoption using the same valuation method and assumptions determined under the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) as disclosed in previous filings. Periods prior to January 1, 2006 will not include compensation costs calculated under the fair value method. Under the provisions of SFAS No. 123R, Forrester recorded approximately $7.2 million of stock-based compensation in the accompanying consolidated statement of income for the year ended December 31, 2006, included in the following expense categories (in thousands):
 
         
    Year Ended
 
    December 31,
 
    2006  
 
Cost of services and fulfillment
  $ 3,185  
Selling and marketing
    1,885  
General and administrative
    2,140  
         
Total
  $ 7,210  
         
 
The Company elected to adopt the alternative transition method for calculating the tax effects of employee stock-based compensation awards outstanding upon the adoption of SFAS No. 123R, as provided under the Financial Accounting Standards Board Staff Position No. FAS 123(R)-3, Transition Related to Accounting for Tax Effects of Share-Based Payment Award. The alternative transition method provides simplified methods to calculate the tax effects of such outstanding stock-based compensation awards on the beginning balance of the additional paid-in capital pool (“APIC pool”) and to determine the subsequent effect of such tax effects on the APIC pool and the statements of cash flows.
 
The assumptions underlying this computation and additional information with respect to periods prior to January 1, 2006 are included in Note 11 to these consolidated financial statements.


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FORRESTER RESEARCH, INC.