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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

Commission file number 0-19690

Barra, Inc.
(Exact name of registrant as specified in its charter)

(510) 548-5442
(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
Preferred Stock Purchase Rights (currently attached to and trading only with the Common Stock)
(Title of Class)

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, as amended (Exchange Act), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]      NO [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on June 3, 2003, as reported on The Nasdaq Stock Market® (Nasdaq), was approximately $499,664,000. Shares of common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s Common Stock outstanding as of June 3, 2003 was 19,210,881.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the following documents are incorporated by reference into Parts II and III of this Form 10-K: (1) 2003 Annual Report to Stockholders of the Registrant (Part II of this Form 10-K); and (2) Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be held July 31, 2003 (Parts II and III of this Form 10-K).

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K and our 2003 Annual Report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements give our current expectations or forecasts of future actions, events or results. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, project, intend, plan, believe, designed, future, forecast, perceive, possible, potential, targeted, may, scheduled, will, would, could, should, forward, assure and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Our forward-looking statements include statements concerning our future financial performance, market activities, product development and business model. From time to time we may also provide oral or written forward-looking statements in other materials that become publicly available.

Any or all of the forward-looking statements that we make in this Form 10-K, our 2003 Annual Report or any other public statements we issue may turn out to be wrong. They can be affected by actions that we might take or omit or by known or unknown risks and uncertainties. Such factors include, but are not limited to, those described in the “Risk Factors” section set forth below, as well as other risks identified in this Form 10-K, in our 2003 Annual Report and from time to time in other reports filed with the Securities and Exchange Commission, or SEC. Many of these factors may cause our actual results to vary materially from our historical or expected results. Other factors besides those outlined in this form 10-K or in our 2003 Annual Report could also adversely affect us or our business. Consequently, you should not place undue reliance on our forward-looking statements, as they are not guarantees of future results, levels of activity or performance and represent our expectations only as of the date they are made.

We are under no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We suggest, however, that you consult any future disclosures we make on related subjects in our subsequent Form 10-Q, 8-K and 10-K filings with the SEC.

Our fiscal year for financial reporting purposes is April 1 through March 31. The fiscal years are referred to using the year in which the end of the fiscal year falls. Unless otherwise noted, all references in this Form 10-K to 2003, 2002, 2001, 2000, or 1999 are to the fiscal year ending on March 31^st in the year named. This means that the fiscal year ending March 31, 2003 is referred to as “2003.”

Throughout this Form 10-K we “incorporate by reference” certain information from parts of other documents that we have filed with the SEC. The SEC allows us to avoid duplication and disclose important information by referring to it in that manner. Please refer to this information.

All share and per share amounts in this Form 10-K have been restated to reflect a three-for-two stock split effective December 18, 2000 and a three-for-two stock split effective September 22, 1997.

PART I

ITEM 1. BUSINESS

Business Units and Segments

Barra is a leading investment risk management company that provides innovative solutions to financial professionals worldwide. Our products and services support the business-critical portfolio and enterprise-wide risk management needs of global investment professionals and are designed to allow our clients to make strategic investment decisions with confidence. Our comprehensive risk management solutions have set the industry standard for more than 25 years.

Our business is organized into two business units — our Core Business, which accounted for 88% of revenues in 2003, and our Ventures Business, which accounted for 12% of revenues in 2003. A summary of our revenues and results of operations for our business segments is found in Note 11 in the Notes to our Consolidated Financial Statements.

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Our Core Business provides risk management solutions to investment professionals. Our Ventures Business develops new lines of business by leveraging our core research and development, generally through strategic partnerships. As further described below, our Core Business consists of one business segment: Risk Management Products.

Products and Services

Core Business – Our Core Business develops and sells portfolio, enterprise-wide and derivative risk management systems. Our derivative risk management products are developed and sold by Financial Engineering Associates, Inc. (FEA), a business we acquired in December 2002.

In our Core Business, we apply modern portfolio theory to practical investment problems. We entered the portfolio risk management business in 1975 when we introduced our first product for measuring the risk of U.S. equity portfolios. Since then, we have developed additional products covering new countries, asset classes and instruments. As part of that process, we have accumulated an extensive database of proprietary risk information on equity or capital markets and securities worldwide. Our risk methodology is acknowledged as the industry standard for institutional investing. We have developed and offer a broad range of software and internet applications to enable our clients to integrate our risk information into their investment process.

Our risk management systems are designed to help investment professionals identify, measure and control risk in the context of their own investment disciplines. These systems consist of three components: data, models and software applications. We help each client structure the combination of these components to best address their needs.

	•		Data - To create our risk data, we license a variety of fundamental, returns and indices data from more than 120 third party sources. Using our own proprietary algorithms, we create proprietary risk data for equity, fixed income, currency and other financial instruments for all major global markets and asset classes.
	•		Models - We have used our proprietary databases and methodology to develop risk, return and transaction cost prediction models for most of the world’s publicly traded securities. Our risk predictions are frequently refreshed by updated feeds of our proprietary data.
	•		Software Applications - Our models and data are made available to investment professionals through a broad range of software applications. We deliver these applications to customers worldwide via a variety of platforms. We primarily provide Microsoft® Windows® standard software, which interfaces with each customer’s own office productivity system.

Our Core Business product suite is divided into portfolio risk management, enterprise risk management and FEA product offerings. These product suites target trading, portfolio, risk and senior business level decision-makers.

	•		Portfolio Risk Management Systems - Our portfolio risk management products are designed to help investment professionals construct optimal portfolios by measuring and managing risk. Our proprietary risk factors help investment managers identify and confirm the sources of risk within their portfolios, as well as make decisions about any sources of risk they might want to eliminate, in order to achieve a desired level of return.
			Our portfolio risk management products are divided into four application suites:

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•

Enterprise Risk Management Systems – Our enterprise risk management products provide senior business managers at large asset management firms and corporations with the tools they need to manage their investment risks firm-wide.

•

FEA Product Suite – renowned for the development of option valuation models and market risk assessment software, FEA’s product suite offers a host of analytics toolkits that focus on the energy, financial, and commodities markets. The FEA product suite offers a variety of pricing models and authoritative risk management tools for the most complex of financial instruments.

		Our Core Business products, other than the FEA products, are generally provided to clients on an annual subscription basis. The annual subscription price for most of our individual portfolio management products starts at around $60,000. Comprehensive subscriptions often consist of a combination of our products and have significantly higher annual subscription prices. Our standard fees generally include use of the relevant models and applications, periodic database updates, and basic client support for one user. FEA products are generally licensed to clients on a one-time perpetual basis, with recurring annual charges for maintenance and support. Beginning in 2004, FEA expects to implement a term-license fee schedule in addition to continuing to offer perpetual license sales.
		The enterprise solutions that we offer often require system integration, support and management. Many of our large and complex projects (including most of our enterprise risk management systems) involve additional consulting services. These consulting services include on-site resources to assist with the migration of our products and systems onto a client’s existing infrastructure. Our consultants also help with data gathering, integration and aggregation across a client’s complete enterprise. These consulting services are typically provided to our clients for an additional fee.
		As a result of Barra’s 28-year history in financial research, we have amassed a unique library of research models and a large base of historical data. We also offer annual subscriptions of proprietary data and models on a stand-alone basis. A library of published research papers and archived newsletter articles authored by Barra employees is also available on line.

Ventures Business – Our Ventures Business develops new lines of business by leveraging our core research and development into new markets. During 2002 and earlier, the Ventures Business unit consisted of several distinct, generally autonomous companies including POSIT, Symphony Asset Management, Bond Express, Barra RogersCasey and the Barra Strategic Consulting Group. During 2002, we sold or terminated many venture businesses as part of our strategy to focus on our Core Business. As a result of these divestitures, results of operations from these businesses have been reclassified in the accompanying consolidated statements of income to discontinued operations. (See Note 4 to our Consolidated Financial Statements.)

•

POSIT – For years, our research into transactions has focused on cost control. We believed that technology could empower institutional equity investors to increase investment performance by reducing transaction costs. In 1987, this focus resulted in the launch of POSIT, an electronic system for low-cost, confidential trade matching during the market day. POSIT is a computerized trading system through which clients enter buy and sell orders to trade single

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	stocks and portfolios of securities among themselves in a confidential environment. The POSIT crossing network is designed to minimize market impact and other trading costs.
	The POSIT technology is owned by a 50-50 general partnership between subsidiaries of Barra and Investment Technology Group, Inc. (ITG). We initially developed the POSIT technology and have since jointly enhanced it with ITG. Orders may be placed in the POSIT system directly via ITG’s “front-end” software products, QuantEX, ITG Platform and ITG WebAccess or other computer-to-computer links, or indirectly via ITG’s Electronic Trading Desk personnel or the TriAct system (described below). ITG has also entered into arrangements with vendors of other popular trading systems to allow users the flexibility to route orders directly to POSIT from trading products distributed by Bridge Information Systems, BRASS, Bloomberg and others.
	•		U.S. POSIT - Through a license from the POSIT joint venture, a subsidiary of ITG operates the U.S. equity version of the POSIT system. All trades of U.S. equities executed through U.S. POSIT are cleared by, and all brokerage commissions are paid to, ITG. We receive a share of the royalties paid to the POSIT partnership by ITG. Our share of these royalties is equal to approximately 13% of the commissions received by ITG for trades of securities on U.S. POSIT. Total U.S. POSIT trading volumes for the past five fiscal years are shown below:

			U.S. POSIT currently accepts orders for approximately 23,880 different equity securities, but it can be modified, as the need arises, to include additional equity securities. An algorithm is run at scheduled times during each trading day to find the maximum possible number of any buy and sell orders that match or “cross.”
	•		Other POSIT Systems - In addition to the U.S. POSIT system, modified POSIT systems have been launched in Europe, Australia, New Zealand, Canada and Hong Kong. ITG is also licensing from the POSIT joint venture a similar trading system on a worldwide basis called TriAct, which is a continuous, intra-day trading vehicle offering full anonymity, continuous execution opportunities, no market impact in respect of executions, and provides access to POSIT. For all of these arrangements, royalties are paid to the POSIT joint venture based upon the commissions generated by these other trading systems, and Barra receives a negotiated share of those royalties after expenses and, in several cases, after minimum revenue thresholds are met. The revenue generated from these other trading systems were not material to our overall business, operating results or financial condition for 2003.

•

Other Ventures – Prior to their divestiture, several wholly-owned businesses comprised the Other Ventures business segment, including Bond Express, Inc., Barra RogersCasey, Inc. and Barra Strategic Consulting Group. Currently, the Other Ventures business segment consists of minority equity interests in other businesses, the most significant of which are listed below:

	•		Alacra – We own approximately 17% of Alacra, Inc. on a fully diluted basis. Alacra aggregates, cross-indexes, repackages and resells over 90 different business databases, delivering quantitative information directly to Microsoft Excel and textual information in HTML, Microsoft Word and as PDF documents. In May 1998, we granted Alacra a non-exclusive worldwide license to market certain of our proprietary databases. Alacra customers pay a monthly fee to access their services and then purchase content on either a pay-per-view and/or subscription basis.
	•		ValuBond – As consideration for the sale of Bond Express to ValuBond, Barra initially received 2,989,237 shares of convertible preferred stock in ValuBond. In connection with a recapitalization completed in April 2003, Barra converted for no additional consideration 1,020,408 preferred shares into a new series of preferred stock and its remaining 1,968,829 preferred shares into common stock. Currently we hold approximately 8% of ValuBond’s equity on a fully diluted basis. ValuBond uses technology to offer financial services firms trading and private label products that enable them to provide access to primary and secondary inventory and infrastructure for trading and execution.

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Marketing, Sales, Clients and Client Support

Core Business – We currently serve portfolio risk management and enterprise risk management clients at approximately 650 institutions in over 30 countries. These relationships translate into approximately 1,000 separate client accounts. Our clients for these systems include active and passive equity managers, fixed income managers, global managers, fund sponsors, pension and investment consultants, banks, insurance companies, broker-dealers, traders and corporate treasurers. The marketing, sales and client support activities are integrated across all of the products offered by this segment. The large and complex nature of our enterprise risk management projects require additional consulting and support services to assist in the implementation, integration, support and management of these systems.

We market our risk management products to a broad set of financial service providers and institutional investors throughout the world. When marketing new Core Business products, we focus on significant participants in the relevant market segments of the investment community. Our marketing efforts are focused on defining new market segments and geographies and educating them about portfolio and enterprise risk management. This helps us extend Barra’s market penetration across many markets and geographies. In some instances, this brand extension involves new institutions. In other instances, we focus on a different business group inside of some of our existing clients where our products are not yet being used.

In addition, we use a variety of marketing and communication channels designed to achieve market education and broader market penetration on a global scale. Through our targeted advertising campaign, we are extending our brand recognition into new and existing markets. Our advertising campaign focuses on business and trade publications in relevant geographic markets. In addition to traditional print advertising, we have also developed targeted on-line efforts that include a web site, focused direct online marketing activities and online product training. Our marketing efforts also include targeted direct mailings and several public relations activities, including participation in more than 75 trade shows, seminars, and conferences each year.

We use a direct sales force to distribute our portfolio risk management and enterprise risk management systems throughout the world. For all of our Core Business products, we work closely with clients to provide ongoing service and support. Our client support professionals provide training in the methodologies underlying each product and in the use of the product, as well as telephone support, on-line support, and routine consulting services. Our sales and client support personnel are generally required to have strong academic and financial backgrounds. We offer these services via a global structure, with most of the relevant employees located outside our Berkeley, California headquarters in major financial centers around the world.

Due to the complexity of our products, the sales cycle for new clients of most of our portfolio risk management systems is typically several months. The sales cycle for our enterprise risk management systems can be even longer. Most sales require one or more face-to-face meetings with the prospective client. Each new client is introduced to one or more of our client support specialists. Sales and client support specialists help install the product. Due to the complex nature of TotalRisk and the amount of client system integration involved, installations of this system are often subject to an acceptance testing phase.

Ventures Business – The marketing, sales and client support activities for POSIT are controlled and managed by our venture partner, ITG, Inc. Marketing, sales and support activities for our Other Ventures are controlled and managed by the individual companies in which we have minority investments.

POSIT Revenue Contributions

Other than revenue from POSIT, no entity not entirely owned by us and no customer of any of our business segments accounted for more than 10% of our total operating revenues in 2003. POSIT accounted for 12%, 16%, and 16% of our total operating revenues in years 2003, 2002 and 2001 respectively. We do not believe that the loss of revenue from any single customer or any single entity not wholly-owned by us (other than POSIT) would have a material adverse effect on our business, operating results or financial condition.

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Research and Product Development

Innovations by our research and development operations are critical to the success of our Core Business. In research and development activities, we approach investment problems from various angles, starting with their theoretical underpinnings and continuing through the practical implementation of solutions. Our goal is to develop and bring to market innovative products and solutions to help our clients make superior investment and trading decisions. This goal has been supported by our substantial research and development investments. We spent approximately $22 million in 2003, $21 million in 2002 and $21 million in 2001 on Barra-sponsored research and development, representing 16%, 14%, and 16%, respectively, of our total operating revenues for those years, or 18%, 17% and 19% of our Core Business revenues.

We work closely with ITG on the research and development of POSIT enhancements. We believe that this effort is necessary to remain competitive in a securities industry with increasing demand for technology-based services. We expect to continue our level of investment in POSIT to improve existing services and further develop new services.

Competition

Core Business - The markets for our risk management products are competitive but fragmented into many areas of specialization. We presently compete in many geographic areas and across many areas of specialization. There are competitive product sets for all Barra products. In some cases, we only experience this competition in a specific region and in other cases these competitors operate on a global scale. No single competitor, however, currently competes across our entire range of products, services and geographic markets for this business segment.

•		Portfolio Risk Management Systems – We compete with several other companies that have developed financial models, applications and databases. We do not believe, however, that any single competitor offers a suite of products that competes with our entire Aegis System or Cosmos System of products. For example, Wilshire Associates and Northfield each offer products that compete with some components of our Aegis System. These products and other competitive products, however, often offer levels of functionality different from those offered by our products, and may be based on a different type of risk modeling.
•		Enterprise Risk Management Systems – Competition among providers of enterprise risk management systems is as fragmented in this niche of our market as any other. While there are certainly a number of companies who provide these services, such as Algorithmics and SunGard, we do not believe that any company has focused exclusively on the needs of the buy-side asset management firm. To date we have focused our TotalRisk sales, support and marketing efforts on the buy side, specifically targeting asset managers, pension fund managers and corporate treasuries, which is where we believe we possess significant competitive advantage in terms of features and functionality.
•		BarraOne – BarraOne competes in two categories of products- those that use web-based technology and those that have similar analytics. We do not believe, however, that any of the competitors in this space combine a web-based, interactive technology with multi-asset class coverage. The most significant competitors in this category are Factset, Vestek and Wilshire Associates.
•		Enterprise Performance – There are a number of companies that provide performance measurement/attribution systems such as StatPro and Russell/Mellon CAPS. However, we do not believe any of these companies competes with Barra’s ability to manage the performance analysis and reporting process using daily data – critical for accurate performance measurement and attribution.
•		FEA Business – Competition for FEA’s products and services differ depending on market segments. In the Energy markets, where FEA has a strong brand and is considered to be the premier provider of robust tools for commodity and Energy derivatives, we do not believe there are any formidable competitors. There are, however, other third party vendors such as Caminus and GFI, that do offer services that compete with certain FEA offerings to this market. In the financial markets, where derivatives valuation tools are typically provided by in-house quantitative research groups, competition is more fierce. In addition to FEA, companies such as Numerix and Monis also provide similar products and services.

We believe that the principal competitive factors facing our Core Business are:

	•		research and technical capabilities;
	•		product breadth and architecture;

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	•		product features and functions;
	•		quality of customer support and service;
	•		professional and product reputation;
	•		asset coverage;
	•		ease of use; and
	•		price.

We believe that we have certain competitive advantages in each of these areas, including extensive proprietary databases, skilled professional staff, a reputation for excellence developed over years of operation, and an established series of seminars and other training programs. The effort and cost required to develop and maintain our risk models and related databases may present a significant barrier to entry into the marketplaces addressed by certain of our Core Business products. We believe that our extensive experience in product maintenance, together with the economies of scale available to us because of our large client base, give us a competitive advantage in the markets for our Core Business products.

Ventures Business - POSIT

POSIT competes with services offered by leading brokerage firms and transaction processing firms, and with providers of electronic trading and trade order management systems and financial information services. POSIT also competes with various national and regional securities exchanges and execution facilities, such as Nasdaq National Market, electronic communications networks (ECNs) and exchanges, such as Instinet, Island and Archipelago, alternative trading systems (ATSs), as well as other share matching systems for trade execution services. Many of POSIT’s competitors have substantially greater financial, research and development and other resources. We believe that POSIT competes on the basis of:

	•		access to liquidity;
	•		transaction costs;
	•		market impact cost reduction;
	•		timeliness of execution; and
	•		probability of trade execution.

Although we believe that POSIT competes favorably with respect to these factors and has established certain competitive advantages, its ability to maintain these advantages will require continued investment in the development of POSIT.

Proprietary Rights and Licenses

Core Business – We rely on a combination of trade secret, patent, copyright, trademark and other intellectual property laws, license agreements and technical measures to protect our rights in our intellectual property. We currently hold one design patent and our FEA subsidiary holds utility patents for four inventions. Barra is currently applying for two utility patents on certain of our proprietary technologies.

We seek to protect our proprietary assets through non-disclosure undertakings with our employees, clients and partners. In addition, we rely on the following factors to protect the intellectual property of our Core Business products:

	•		Access to the knowledge, ability and experience of our employees is necessary for many of our clients to obtain the support necessary to operate our products.
	•		A quarter century of data collection and derivation have created an unrivaled historical database, which is used to fuel and update our models.
	•		To achieve full functionality, our products are dependent on timely product enhancements and database updates.
	•		Initial and continuing access to our proprietary databases is often required for our Core Business products to function.

Ventures Business

POSIT – The technology used to operate each of the POSIT systems and TriAct is owned by the POSIT joint venture. The joint venture in turn licenses the technology to ITG, or its operating subsidiaries, and in the case of Canada, to the Toronto Stock Exchange. Under the terms of our joint venture agreement, we and ITG are prohibited from competing, directly or indirectly, with POSIT. Related agreements also require that we provide certain support services to the POSIT partnership,

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including the availability of experienced personnel and support for the development and maintenance of the POSIT system. The POSIT joint venture may also earn a royalty from licensing POSIT to other businesses in other markets. Under the terms of the joint venture agreement, ITG generally has the right to approve any sale, transfer, assignment or encumbrance of our interest in the POSIT joint venture.

The intellectual property issues for end users of POSIT mirror those discussed above for the Core Business. Since we do not actively operate any of the POSIT systems, these issues are primarily addressed by the licensee-operators of each crossing system, which are currently ITG subsidiaries in all cases except Canada. We do, however, seek to protect our rights through confidentiality and non-disclosure undertakings, non-competition provisions and limitations on use in each POSIT license agreement.

Other Ventures – Our other ventures are subject to the same intellectual property factors as described for the Core Business above.

For a further discussion of Proprietary Rights and Licenses, see the subsection of the same name under Risk Factors below.

Government Regulations

The financial services industry is subject to extensive regulation at the federal and state levels, as well as by foreign governments. In the U.S., the main governmental authority regulating us is the SEC. The SEC has oversight over our activities due to our status as a publicly traded company and due to the investment advisory nature of some of our businesses. It also regulates the businesses of many of our clients and joint venture partners.

Investment Advisers Act

Companies that provide investment advice to clients generally are regulated under the Investment Advisers Act of 1940, or the Advisers Act. Although we believe and have adopted the position that the products of our Core Business do not provide investment advice for purposes of the Advisers Act, the performance of certain unique consulting arrangements by one unit of our Core Business may constitute the provision of investment advice under the Advisers Act. As a result, we are currently registered as an investment adviser in the State of California with respect to these limited activities only. As a registered investment adviser we are required to meet certain financial criteria, including the maintenance of minimum net capital levels. We are also subject to certain obligations, fiduciary duties and prohibitions with respect to these particular consulting activities. These obligations and duties include certain required disclosures to our consulting clients and potential clients, limitations on receipt of performance-based compensation and restrictions with respect to transactions involving potential conflicts of interest.

Dealers and Alternative Trading Systems (Regulation ATS)

Since the formation of the POSIT joint venture until the adoption of Regulation ATS in 1999, POSIT operated under a “no-action” letter from the SEC staff that it would not recommend that the SEC commence an enforcement action if POSIT were operated without registering as an exchange. ITG currently operates POSIT and TriAct as part of its broker-dealer operations in accordance with Regulation ATS. Accordingly, neither POSIT nor TriAct are registered with the SEC as an exchange.

Our wholly owned subsidiary Barra International (AUS) Pty Ltd. is registered as a dealer under Section 784 of the Companies Act in Australia, and as such, is subject to regulations administered by the Australian Securities and Investment Commission (ASIC).

“Soft Dollars”

We estimate that approximately 19% of our total operating revenues (22% of Core business revenue) are received from U.S. brokers who direct us to provide our Core Business products to their designated clients in the United States. These clients are money managers, fund sponsors and consultants using commissions generated by their advised accounts with the broker to obtain investment research and brokerage services. The funds used by these U.S. brokers to pay for the services are referred to in the securities industry as “soft dollars.” We also have a data contract with Standard & Poor’s Securities, Inc. (SPSI). Under that contract, SPSI and its affiliates provide us with certain U.S. equity data. In return, the contract requires that only SPSI accounts be used for soft dollar payment for the portions of our products that use SPSI data.

Brazilian Central Bank Registration

Barra Brazil is required to register its exchange agreements with the Brazilian Central Bank (BCB).

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International Operations

In 2003, 2002 and 2001 we derived approximately 46%, 46% and 47% of our total operating revenues, respectively, from customers outside the U.S. We also have significant operations for our Core Business outside the U.S., which are conducted primarily through our subsidiaries. Please refer to the Geographic Data table in Note 11 of the Notes to our Consolidated Financial Statements for a breakdown and explanation of revenues and long-lived assets by major geographic areas and business segments.

In 2003, no single country, outside the U.S., Japan and the U.K., had revenues approaching 10% of our total revenues. In addition, our aggregate sales to European Community countries were about 25% of our revenues.

Certain of our activities outside the U.S. are also subject to government-imposed constraints that affect our businesses. See Government Regulation above.

Employees

As of June 3, 2003 our Core Business employed 542 persons through our parent company or its subsidiaries. In addition, we have 12 employees fully dedicated to POSIT. Geographically, this total breaks down approximately as follows:

•		North America – 408;
•		Europe and Africa – 89;
•		Asia and Australia – 52; and
•		South America – 5.

None of our employees were represented by labor unions in 2003. We have experienced no work stoppages and generally believe that our employee relations are good.

Risk Factors

This section should be read in conjunction with the general description of our business in this Part I and in our 2003 Annual Report and the audited consolidated financial statements and related notes, the selected financial data and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-K.

Fluctuations in Quarterly Operating Results

Our revenues and results of operations are difficult to predict and may fluctuate substantially from quarter to quarter, as they have in the past. Factors specifically relating to our business segments are outlined below:

•		Core Business – Our Core Business revenues in any quarter depend substantially upon our total contracting activity (including renewals of existing contracts) and the related timing of when new subscriptions begin. We derive revenue from our Core Business primarily through annual subscriptions that automatically renew unless canceled. There is no assurance that these renewals will continue. Annual subscription fees are recorded as revenues over each subscription period at the rate of 1/12th per month. Sales of subscriptions in any one-month therefore impact reported revenues evenly over the next twelve months. For this reason, our Core Business subscription revenues are not normally subject to significant variability during a year.
		Although they do not constitute a material portion of our total revenues, sales of financial analytics by our FEA subsidiary potentially are subject to greater variability than our other product revenues. FEA sales generally are made on a one-time perpetual license fee basis, and the fees from these perpetual licenses are recorded as revenues in the quarter in which the sale is completed. As a result, Core Business revenues from the sale of FEA products can be subject to quarterly fluctuations depending on our ability to close business in any particular quarter.
		We also include enterprise risk management system implementation consulting fees in our Core Business revenues. These fees reflect non-recurring, project driven revenues that are implemented in phases as contractual milestones are met. Accordingly, they can be susceptible to a large degree of variability depending on our ability to source new projects and the unpredictable nature and significance of fees associated with specific transactions.

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		Our earnings can be affected in our second fiscal quarter because of annual salary adjustments for our employees in July. In addition, our compensation policy historically has involved significant reliance on discretionary bonuses. Because compensation expense is a significant percentage of our operating expenses, the amount of, timing of and accrual for salary adjustments and discretionary bonuses could have a material effect on the net income of our Core Business.
•		Ventures Business – Diverse factors cause variability of operating results in our POSIT Venture Business. The several POSIT systems can experience and have experienced major fluctuations in trading volume. Since approximately 12% of our operating revenue in 2003 and nearly all of our Venture Business income in 2003 came from this venture, these fluctuations can have and have had a significant impact on our revenue and operating income. POSIT trading volume is also directly affected by factors such as economic and political conditions that may lead to decreased trading activity and commission prices in the securities markets generally. For example, our revenues from POSIT declined 29% in fiscal 2003 as compared to the prior fiscal year, reflecting decreased trading activity that was largely attributable to the difficult market conditions and major declines in trading volumes during fiscal 2003. The future economic environment will be subject to periodic downturns, such as recessions. As we actually saw in fiscal 2003, these downturns could result in substantially reduced trading volume and prices, which could materially harm our revenue and operating income.

Our operating expenses are based in part on our expectations regarding future revenue. Our consolidated operating results may be adversely affected if revenue does not develop in a quarter as anticipated. Since expenses are usually incurred before revenues are generated, and because only a small amount of expenses vary with revenue, our consolidated operating results may be impacted significantly by lower revenues. Various factors could cause these lower revenues and could affect quarter to quarter comparisons. Also, much of our revenues are earned under fixed price software subscriptions. Changes in our costs of providing those subscriptions could have a material adverse effect on our business, financial condition and results of operations.

Accounting standards and practices may require us to defer recognition of license revenue for a significant period after entering into a license agreement. Generally, the subscription fees for our Core Business products are initially deferred as unearned revenues when payment has been received, after which revenue is recognized ratably over the term of the subscription. Negotiated terms for some of our Core Business sales and consulting services, particularly enterprise risk management solutions, sometimes do not permit revenue recognition at the time of delivery or even as work on the project is completed.

Changes in General Economic Conditions

The U.S. and certain other economies in which we operate have experienced slower growth after an extended period of growth in previous years. As a result, assets under management have decreased, thereby decreasing the revenues to asset managers. Such reduced asset management revenues have placed pressure on our clients to cut their cost of services, which in turn has adversely impacted our sales, renewal rates and ability to increase prices. These negative trends may continue.

Dependence on Availability of Data

We currently obtain data from over 120 third-party vendors that is used in our products and services. Any termination or interruption of our supply of data from a principal data vendor or vendors, or an interruption of our own data operations or data update processes could have a material adverse effect on our business, financial condition or results of operations. These adverse effects include, for example, our products or services becoming inoperable or their performance being materially reduced.

If any of our third-party vendors change their data offerings, we may need to incur additional costs to ensure continued performance of our products and services. In addition, if the cost of licensing any of these third-party data products materially increases, our gross margin levels could materially decrease.

International Operations

In fiscal 2003 over 46% of our revenues came from customers outside the United States. We anticipate that revenues from customers outside the U.S. will continue to be a significant part of our total revenues for the foreseeable future. Sales and operations outside the U.S. are subject to unique risks, including:

	•		unexpected changes in regulatory requirements;
	•		unexpected changes in exchange rates, tariffs and other trade barriers;
	•		political or economic instability;
	•		seasonal factors, particularly in Europe;
	•		difficulties in staffing, managing and integrating foreign operations;

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	•		longer payment cycles;
	•		difficulties or delays in translating products and related documentation into foreign languages;
	•		currency fluctuations and conversion risks; and
	•		potentially adverse tax consequences.

Any of these factors could have a material adverse effect on our business, financial condition or results of operation.

Risks Associated with Business Combinations and Divestitures

As part of our overall strategy, we may continue to divest ourselves of certain businesses and assets, to acquire or invest in complementary companies, products, and technologies and to enter into joint ventures and strategic alliances with other businesses. For example, in fiscal 2003 we acquired two businesses – Financial Engineering Associates, Inc. (FEA) and Investment Performance Objects Pty Ltd. (IPO).

Some common risks associated with acquisitions and joint ventures include:

	•		the difficulty of assimilating the operations and personnel of the combined companies;
	•		the risk that we may not be able to integrate the acquired technologies or products with our own;
	•		the substantial management time devoted to such activities;
	•		undisclosed liabilities;
	•		the inability of management to maximize our financial and strategic position through the successful integration of acquired businesses;
	•		the risk that the acquired business will not achieve anticipated earnings and revenues;
	•		the failure to realize anticipated benefits (such as cost savings and synergies);
	•		customer dissatisfaction with, or problems caused by, the performance of any acquired technologies; and
	•		geographic dispersion of operations and the complexities of international operations.

Some common risks associated with divestitures include:

	•		the inability to fulfill representations and warranties made to a buyer;
	•		the risk that the divested business will not meet the revenues or earnings requirements necessary to achieve subsequent earn-out goals;
	•		the failure to remain within the scope of any non-competition undertakings requested by a buyer;
	•		the transitioning of the divested business to a stand-alone operation that is separate from the research, development and support services previously offered by Barra; and
	•		costly litigation stemming from post-closing disputes.

We may not be successful in overcoming these risks or any other problems encountered in these transactions.

Limited Protection of Intellectual Property and Proprietary Rights and Potential Infringement of Third Party Intellectual Property Rights

We consider certain aspects of our products, related internal data update processes and services to be proprietary. We rely primarily on a combination of trade secret, patent, copyright, trademark and other intellectual property laws, license agreements and technical measures to protect our rights in our intellectual property. Despite our efforts, a third party may still try to challenge, invalidate or circumvent the protective mechanisms that we select. We cannot assure that any of the rights granted under any copyright, trademark or patent that we may obtain will protect our competitive advantages. Our competitors may also independently develop and patent technology that is the same or similar to ours or may obtain access to our proprietary technology. In addition, the laws of certain foreign countries in which we operate do not protect our proprietary rights to the same extent as do the laws of the United States. Also, some elements of our products and services are not subject to intellectual property protection.

We believe that our products, processes and trademarks do not infringe the intellectual property rights of third parties. There can be no assurance, however, that the intellectual property which we have acquired or developed will not be challenged by infringement claims in the future. Such claims could require us to enter into royalty arrangements or could result in costly litigation.

•

Trademarks – We have registered “Barra” as a trademark in the U.S. and in certain foreign countries. We have also registered other product trademarks and certain service marks in the U.S. and in certain foreign countries. When we

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			enter a new geographic market or introduce a new product brand, there can be no assurance that our existing trademark or mark of choice will be available.
	•		Patents – Businesses operating in the financial services sector, including our competitors and potential competitors, have in recent years increasingly pursued patent protection for their technologies and business methods. We currently hold one design patent and our FEA subsidiary holds utility patents for four inventions. We are currently applying for two utility patents on certain of our proprietary technologies. Patent applications can be extremely costly to process and defend. We cannot assure that we will be issued any patents that we apply for, nor can we assure that any of the rights granted under any patent that we obtain will protect our competitive advantages. Under current law, we do not believe it is feasible to determine in advance whether any of our existing products or any of their components or a service or method infringes on the patent rights of others. From time to time we will receive notices from others containing claims or potential claims of intellectual property infringement, including patent infringement. We may also be called upon to defend a joint venture partner, customer, vendor or licensee against such third party claims under indemnification clauses in our contracts. Responding to these types of claims, regardless of merit, could consume valuable time, result in costly litigation or cause delays, all of which could have a material adverse effect on our business, operating results or financial condition. Responding to these claims could also require us to enter into royalty or licensing agreements with third parties claiming infringement. There can be no assurance that these licenses will be made, if at all, on terms that are commercially acceptable to us.
	•		License Agreements – The software and data products of our Core Business and Ventures Businesses are generally licensed to end users on a periodic subscription basis in a nontransferable license signed by the client. We also permit access to some products through the internet under on-line licenses that are acknowledged by the licensee. The enforceability of these on-line licenses has not been conclusively determined by the courts. We are frequently required to obtain licenses to the proprietary rights of third-party data and software vendors or others. There can be no assurance that these licenses will be made, if at all, on terms acceptable to us.
	•		Trade Secret and Copyright – Existing trade secret and copyright laws only offer us limited protection for our proprietary assets. We believe that the rapid pace of technological change in the software and investment solution industries and the major increase of business method patents in these industries will only make trade secret and copyright protection less significant over time. Consequently, our competitors may independently develop and patent technologies that are substantially equivalent, or superior, to our technology. To protect the proprietary assets of our Core Business, we are considering, and in some cases applying for and/or reviewing, patents for certain of our products. We also rely on the following unique aspects of our business:

	•		the development, maintenance, support and use of our products is dependent upon the knowledge, experience and ability of our highly skilled, educated and trained employees;
	•		most of the software in our products is dependent upon (and of little value without) continuing access to the historical and current data in our proprietary databases; and
	•		the nature of our proprietary database, aggregated and derived over the course of a quarter century, makes if extremely difficult to replicate.

•

Confidentiality Undertakings – Our license agreements restrict clients’ disclosure of proprietary information contained in our products. Our joint venture and development agreements typically contain similar restrictions. It may be possible, however, for unauthorized parties to copy aspects of our products or to obtain and use information that we regard as proprietary. We also seek to protect our proprietary information through non-disclosure agreements with our employees. However, the enforceability of these agreements varies due to the many different jurisdictions in which our employees, joint venture or development partners and clients are located.

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Competition

Each of the markets in which our Core and Ventures Businesses operate has become increasingly competitive in recent years. These markets may become more competitive in the future as a result of the activities of existing competitors and the entrance of new competitors into our markets. In some of these markets, our competitors have substantially greater name recognition, installed client bases, or financial, research, development or other resources. There can be no assurance that:

	•		we and/or our business partners will continue to have sufficient resources to succeed in our efforts and be successful in maintaining our competitive advantages;
	•		our competitors will not devote significantly more resources to competing activities;
	•		our competitors will not develop products or services that are perceived as being superior to ours; or
	•		increased competition will not lead to loss of market share or increased pricing pressure.

Web-Based Products and Services

Our BarraOne and Risk Factor products make use of a web browser as the user interface in place of traditional desktop access through networked personal computers, and it is anticipated that future Barra products may also use a web interface. In addition, regular updates of data required to make our products properly function are frequently carried out via the internet. Access to software or data via the internet or an intranet involves numerous risks inherent in using the internet, including security, availability and reliability. In addition, there is a risk that customers will not be willing or able to implement internet-based applications. Barra may wish to offer its applications on future or existing user interfaces that achieve popularity within the financial application marketplace. These future or existing user interfaces may or may not be architecturally compatible with Barra’s current software product design. Barra may not be able to support new user interfaces and achieve market acceptance of new user interfaces that it does support.

Security Risks and Concerns May Deter the Use of the Internet for Conduct of Business.

A significant barrier to commerce and communications over public networks is the secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information. If any well-publicized compromises of security were to occur, they could have the effect of substantially reducing the use of the internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The internet is a public network, and data is sent over this network from many sources. In the past, computer viruses (software programs that disable or impair computers) have been distributed and have rapidly spread over the internet. Computer viruses could be introduced into our systems or those of our clients or other third parties, which could disrupt or make it inaccessible to clients. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business could be harmed if we do not prevent them.

Volatility of Stock Price; Risk of Litigation

The trading price of Barra common stock has in past and may in the future be subject to significant fluctuations in response to many factors, some of which include:

	•		revenue or results of operations in any quarter failing to meet the expectations (published or otherwise) of the investment community, and the timing of the announcements of such shortfalls;
	•		changes in recommendations or financial estimates by securities analysts;
	•		acquisitions or sales of significant businesses;
	•		timing of new product announcements;
	•		conditions and trends generally in the industries in which we operate;
	•		adoption of new accounting standards affecting the software or financial services industries; and
	•		general market conditions.

Further, the stock market has experienced and may continue in the future to experience extreme price and volume fluctuations that particularly affect the market prices of equity securities of high technology and financial services companies. These fluctuations often are not related, or are disproportionate, to the operating performance of those companies. These

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broad market fluctuations, as well as general economic, political and market conditions, have and may continue to have a material adverse effect on the trading price of Barra common stock. Fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits or claims. Any such suit or claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources. In addition, these sorts of claims and lawsuits could have a material adverse effect on our business, financial condition, or results of operations.

Product Development and Technological Change

The markets in which we compete are characterized by rapidly changing technologies, extensive research, and new product introductions. Our future growth and financial performance will depend on our ability to continue to quickly develop and introduce new products and enhance our existing products in response to advances in finance theory and computer technology, changing market conditions and increasingly sophisticated customer requirements. We may not be able to enhance existing products or develop and introduce new products that receive market acceptance in a timely manner. Our failure to anticipate or respond adequately to changing market conditions could have a material adverse effect on our business, financial condition, or results of operations. Because we offer products across many geographic areas and many areas of specialization, we often must restrict our product development efforts to a limited number of products and operating platforms. There can be no assurance, however, that efforts we select will be successful or will achieve market acceptance. In addition, the cost of research and development efforts required to keep pace with technological changes may, at times, have a significant effect on our business, financial condition, or results of operations.

Dependence on Key Personnel

Our future success will depend in large part on our ability to attract, train and retain highly skilled managerial, research, development, sales, marketing, support, technical and services personnel. Competition for people in the software and financial services industries is intense. At times, we have experienced difficulty in locating candidates with appropriate qualifications and expertise. We also frequently compete with financial institutions and financial services organizations for personnel. These organizations generally have greater resources than we do and therefore may be able to offer significantly higher compensation packages to potential employees. None of our executive officers has entered into employment agreements with Barra. Our inability to attract, train and retain key personnel could have a material adverse effect on our business, financial condition, or results of operations.

Management of Growth and Changes in Staffing

We have historically experienced periods of:

	•		revenue growth;
	•		growth into new foreign markets;
	•		expansion of our Core Business and POSIT; and
	•		substantial fluctuations in the number of our employees.

These changes have resulted in new and increased responsibilities for our management and have placed a significant strain on our operating and financial controls and other resources. To accommodate growth, compete effectively, and manage potential future growth, we must continue to implement and improve the speed and quality of our products and services, management decisions, reporting systems, procedures, and controls. Our personnel, procedures, systems, and controls may not be adequate to support our future operations.

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Potential Liability Based on Use of Products and Services

Our products and services support the investment and/or risk management processes of clients that collectively manage trillions of dollars in assets. Our license and consulting agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or other third parties based on use of our products and services. However, these provisions could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our Core Business and Ventures Businesses products and services for the investment and/or risk management processes creates the risk that clients, or the parties whose funds are managed by our clients, may pursue a claim against us for massive dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources. In addition, these sorts of claims and lawsuits could have a material adverse effect on our business, financial condition, or results of operations.

Government Regulations

The financial services industry is subject to extensive regulation at the federal and state levels, as well as by foreign governments. It is very difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting our businesses. If we fail to comply with any applicable laws, rules or regulations, we could be subject to fines, penalties, suspensions or revocations of licenses or permits. We believe that our existing products and services comply with all applicable laws, rules and regulations. However, there can be no assurance that these laws, rules or regulations will not change in the future, or that such changes will not materially adversely affect our business, financial condition or results of operations.

	•		Investment Advisers Act – We believe and have adopted the position that our Core Business products do not provide investment advice for purposes of the Investment Advisers Act of 1940, the Advisers Act, or similar laws in states or foreign jurisdictions. Future developments in our product line or in the regulatory environment could cause this status to change. If that happens, we may have to broaden our disclosures to the relevant regulatory agencies and to adopt the strict compliance procedures mandated by these laws for a much broader segment of our business. These heightened obligations would likely entail significant additional costs to us.
	•		Data Privacy Legislation – Changes in legislative, regulatory or consumer environments relating to consumer privacy or information collection and use may affect our ability to collect and use data. There could be a material adverse impact on our direct marketing, data sales and business due to the enactment of legislation or industry regulations, or simply a change in customs, arising from public concern over consumer privacy issues. Restrictions could be placed upon the collection, management, aggregation and use of information that is currently legally available, in which case our cost of collecting some kinds of data could materially increase. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could in turn materially affect our ability to meet our clients’ requirements.
	•		ATS – Our joint venture partner ITG currently operates POSIT and TriAct as part of its broker-dealer operations in accordance with Regulation ATS. Accordingly, neither POSIT nor TriAct are registered with the SEC as an exchange. There can be no assurances that the SEC will not in the future seek to impose more stringent regulatory requirements on the operation of alternative trading systems such as POSIT or TriAct. In addition, certain of the securities exchanges have actively sought to have more stringent regulatory requirements imposed upon automated trade execution systems. There can be no assurance that Congress will not enact additional legislation applicable to alternative trading systems. Any such additional regulations or laws could undermine the feasibility of operating POSIT or TriAct. Loss of POSIT revenues would materially adversely affect our financial condition and results of operations.
	•		Soft Dollars – Soft dollars are received from U.S. brokers who direct us to provide Core Business products to designated clients in the United States. These clients are money managers, fund sponsors and consultants using commissions generated by their advised accounts with the broker to obtain investment research and brokerage services. Funds used by the U.S. brokers to pay for the services are referred to in the securities industry as “soft dollars.” For several years the investment community has debated the purchase of goods and services with soft dollars, and the practice is regulated in the U.S. by the SEC and the Department of Labor. Legal or regulatory changes may restrict or prohibit us from providing services to money managers in exchange for soft dollars. Such changes could have a material adverse effect on our business, financial condition, or results of operations.

Catastrophic Events

Our operations depend on our ability to protect our equipment and the information stored in our databases against fires, earthquakes and other natural disasters, as well as power losses, telecommunications failures, unauthorized intrusions,

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terrorist attacks on financial centers where we or our clients are located, and other catastrophic events. There is no assurance that the measures we have taken to reduce the risk of interruption in our operations caused by these events are sufficient. Such events could have a material adverse effect on our business, financial condition or results of operations. For example, our office in New York was temporarily closed due to the September 11, 2001 terrorist attacks. Immediately after the terrorist attacks, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional risk management products. In addition, delivery of some of the data we receive from New York-based vendors was delayed. The grounding of transportation impaired our ability to conduct sales visits and deliver professional services at client sites. During the resulting temporary closure of the U.S. stock markets, POSIT clients were unable to trade over the system and some of the data updates supporting our Core Business were interrupted. These types of interruptions could affect our ability to sell and deliver products and services and could seriously harm our business.

Possible Adverse Effects of Option Exercises

If holders of options to purchase our common stock exercise any significant number of these options and resell the underlying shares, the market price of Barra common stock could decline. At March 31, 2003, there were outstanding vested and exercisable options to purchase approximately 1.8 million shares of Barra common stock issued under various Barra stock option plans. As of that date, options (vested and unvested) to purchase about 1.7 million shares of Barra Common Stock had exercise prices below our closing common stock price on the last trading date of the fiscal year, March 31, 2003 ($29.69).

Effect of Certain Charter and Bylaw Provisions and Anti-Takeover Provisions; Possible Issuance of Preferred Stock

Our Certificate of Incorporation, Bylaws, and certain Delaware laws contain provisions that may discourage a third party from acquiring Barra. This may deprive stockholders of certain opportunities to receive a premium for their shares as part of an acquisition of Barra.

In addition, we have adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of September 7, 2001. Each right, when exercisable, entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $200 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $200 exercise price, shares of our common stock or of any company into which we are merged having a value of $400. The rights expire on September 7, 2011 unless extended by our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to acquire us without the approval of our board of directors, our rights plan makes it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors.

Impact of Legal and Regulatory Proceedings

Elsewhere in this Form 10-K, we have made various disclosures regarding litigation proceedings, as well as the possibility of certain other legal and regulatory proceedings. See “Legal Proceedings” below. Many factors may affect the outcome of such proceedings. Accordingly, until such proceedings are finally resolved, it is difficult to determine the likelihood of a favorable outcome, the direct and indirect costs associated with the proceeding, or, in the event of an unfavorable outcome, the amount of any loss. Any proceeding, even if the outcome were to be ultimately favorable to us, could involve a significant commitment of our management, personnel, financial and other resources. This alone could have a material adverse effect on our business, financial condition, or results of operations.

Availability of Information

Barra maintains an internet website at http://www.barra.com. We make available free of charge on or through the “Investors” portion of our website, as soon as reasonably practicable after the time they are filed with the SEC, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to these reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. None of the information on our website is incorporated into or made part of this annual report on Form 10-K.

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ITEM 2. PROPERTIES

Our world headquarters are located in two buildings in Berkeley, California. These buildings house our principal administrative, marketing and product development facilities. The larger building is occupied under a lease that expires in June 2007, subject to eight consecutive five-year renewal options. The smaller building is occupied under a lease that expires in June 2008. Our headquarters, in total, occupy over 69,000 square feet of leased space in downtown Berkeley, California.

During 2003, directly and through our subsidiaries, we leased office space in 11 cities around the world. During 2002, we shut down the Barra Strategic Consulting Group, which had employees in Darien, Connecticut. We continue to be responsible for rental charges in that location.

Core Business - During 2003, this business segment had employees and operations in the following locations:

•		Berkeley, California, U.S.A:
•		Cape Town, South Africa;
•		Edison, New Jersey, U.S.A;
•		Frankfurt, Germany;
•		Hong Kong;
•		London, England;
•		New York, New York, U.S.A;
•		Rio de Janeiro, Brazil;
•		Sydney, Australia;
•		Tokyo, Japan.

Ventures Businesses -

POSIT - Our employees for this venture are located in Barra’s New York office, in the New York office of ITG and in the United Kingdom. The licensees of the various POSIT systems maintain local offices to support each of those systems.

We believe that our existing facilities and offices are adequate to meet our requirements for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

	•		RJM Ventures, Inc. – On December 21, 2001, RJM Ventures, Inc. (formerly known as Redpoint Software, Inc. (RJM)) initiated a lawsuit against Barra, Inc. in federal court in the Northern District of California. The suit, which seeks unquantified monetary damages, asserts breach of contract, fraud and intentional misrepresentation claims against Barra arising from disputes regarding the calculation of royalty payments related to Barra’s acquisition of certain assets from RJM in June 1998. In particular, RJM alleges that royalty payments should have been made with respect to sales of Barra’s Orion product during the royalty period. On April 15, 2002, the court granted Barra’s motion to dismiss the lawsuit on the grounds that any such claims must be arbitrated as provided in the acquisition agreement. On May 7, 2002 RJM filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. On August 19, 2002, RJM filed a withdrawal of its appeal. On March 20, 2003 Barra and RJM executed an agreement regarding certain procedural matters that would govern the arbitration proceedings. On May 14, 2003, RJM filed its claims with Judicial Arbitration and Mediation Services, Inc (JAMS). Barra believes the claims are without merit and intends to vigorously defend itself in this matter. At this time it is too early to estimate any potential losses from this action, but Barra currently believes that the outcome of the arbitration proceedings will not have a material effect on our business, financial condition or results of operations.
	•		Global Crossing, Ltd. – Beginning on February 5, 2002, RogersCasey, Inc. (formerly Barra RogersCasey, Inc.) (RogersCasey) was named as a defendant in a number of class action lawsuits, totalling 13, brought on behalf of participants in the Global Crossing, Ltd. Employees’ Retirement Savings Plan (the Plan), a 401(k) plan operated and administered by Global Crossing, Ltd. Ten of the complaints were originally filed in the United States District Court, for the Central District of California, Western Division, and three were originally filed in the Western District of New York. Other defendants included the administrators and directors of the Plan, as well as officers and directors of Global Crossing, Ltd. In the complaints that were served on RogersCasey, the plaintiffs generally alleged that the defendants failed to fulfill their fiduciary duties owed to the Plan’s participants under the Employee Retirement Income Security Act of 1974 (ERISA) in connection with allegedly undisclosed information regarding Global Crossing’s business and financial condition and seek unquantified monetary damages and other unspecified equitable remedies. On September 6, 2002, the Judicial Panel on Multidistrict Litigation consolidated and transferred these class action lawsuits to Judge Gerard E. Lynch of the Southern District of New York for

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			centralization. During these organizational phases of the lawsuits, RogersCasey had several communications with the plaintiffs’ legal counsel indicating its belief that the claims against RogersCasey were groundless, that the plaintiffs should dismiss RogersCasey as a defendant, and that it intended to file a motion to compel arbitration of the claims made in the lawsuits as provided in RogersCasey’s engagement contract and pursuant to the Federal Arbitration Act.
			On March 26, 2002, Barra sold RogersCasey to Capital Resource Acquisition, Inc., a subsidiary of Capital Resource Holdings, LLC (CRA). Under the terms of the sale, Barra agreed to indemnify CRA and certain of its affiliates, up to $1 million (net of insurance recoveries), with respect to out-of-pocket expenses incurred by CRA and RogersCasey to defend these actions and related claims. In addition, Barra agreed to reduce the purchase price paid by CRA, up to an amount equal to the purchase price (net of insurance recoveries), for amounts paid in any settlements or judgments, if any, arising out of these litigations and related claims.
			On January 28, 2003, the plaintiffs in this litigation filed an amended and consolidated complaint which removed RogersCasey as a named defendant. Accordingly, at this time RogersCasey is no longer a defendant in this litigation.
	•		Robin S. Pellish, Anne C. Buehl, et al – On April 23, 2002, sixteen former employees of Barra whose employment with the RogersCasey business ended shortly after the sale of RogersCasey to CRA, filed a lawsuit in Connecticut state court against Barra and RogersCasey. The Plaintiffs sought recovery of certain amounts related to their employment, including annual bonus compensation, severance, accrued vacation, unreimbursed business expenses, commissions and a special bonus tied to RogersCasey’s sale and continued employment. The plaintiffs’ complaint sought unquantified monetary damages. On June 13, 2003, the parties agreed to settle the litigation on confidential terms. This litigation had no material impact on our business, financial condition or results of operations.

In addition, we are often subject to various legal proceedings and claims, either asserted or unasserted, arising in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, we do not believe that the results of any of these matters will materially and adversely affect our business, financial condition or results of operations. (See also Note 12 to our Consolidated Financial Statements.)

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

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT

     The following sets forth information regarding our executive officers as of June 3, 2003:

Our executive officers are elected annually by the Board of Directors and serve at the Board’s discretion. There are no family relationships among any of our directors or executive officers.

Andrew Rudd – Dr. Rudd joined our predecessor company in 1975. He served as our President from 1984 to 1992, as our Chief Executive Officer from 1984 to 1999, as a member of our Board of Directors since 1986 and as Chairman since 1992. Between 1977 and 1982, Dr. Rudd was a professor of finance and operations research at Cornell University in Ithaca, New York. In 1995 Dr. Rudd also founded Advisor Software, Inc. (ASI), a provider of distribution technologies to financial institutions and advisors. Dr. Rudd has served as ASI’s Chairman and Chief Executive Officer since its inception.

Kamal Duggirala – Mr. Duggirala has served as our Chief Executive Officer since 1999. He served as our President from 1994 to 2001, and was elected to our Board of Directors in August 2000. Mr. Duggirala has been associated with Barra and its predecessors since 1984. He served in various roles of increasing responsibility in Barra’s Electronic Brokerage and Trader products and Advanced Technology divisions from 1984 to October 1994.

Aamir Sheikh – Dr. Sheikh joined Barra in 1994 as a Senior Consultant. He served in various positions of increasing responsibility in our Research Department and with our Enterprise Risk Management business from 1994 to 2000. In 2000, Dr. Sheikh became an Executive Vice President and assumed management responsibility for our Core Business’s Content division. In 2001, Dr. Sheikh became President of Barra and continues to hold management responsibility for our Core Business’s Distribution division. From 1987 to 1994, Dr. Sheikh was an assistant professor of finance at Indiana University School of Business in Bloomington, Indiana.

Greg Stockett – Mr. Stockett joined Barra in 1996 as Finance Manager. He became Director of Finance in 1998 and Vice President of Finance in 2000. He was appointed Chief Financial Officer in 2001. Prior to joining Barra, Mr. Stockett was with Deloitte & Touche LLP from 1989 to 1996.

Robert Honeycutt – Mr. Honeycutt rejoined Barra as Chief Operating Officer in August of 2001. He first joined Barra as Director of Operations in 1992 and was elected to the position of Chief Operating Officer later that year. He left Barra in early 1999 to become the Chief Executive Officer of Quote.com. Following Quote.com’s sale to Lycos, Inc., Mr. Honeycutt became the Chief Executive Officer and President of Buylink Corp. Prior to joining Barra in 1992, Mr. Honeycutt was Vice President-Corporate Finance for Hambrecht & Quist Incorporated.

Claes Lekander – Mr. Lekander joined Barra in 1985 as a Consultant. He served in various roles of increasing responsibility in our Equity Services and Product Management divisions from 1985 to 2000. Mr. Lekander became an Executive Vice President in 2000 and currently manages our New Markets division.

Bruce Ledesma – Mr. Ledesma was appointed Executive Vice President, General Counsel and Secretary of Barra in April of 2002. He joined Barra as Assistant General Counsel in 1998, serving in our legal department until April 2000, when he became Vice President - Barra Ventures. Prior to joining Barra, Mr. Ledesma worked at the law firm of Latham & Watkins from 1993 to 1998.

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Wendy Lukas – Ms. Lukas joined Barra as the Vice President of Global Human Resources in 2002. Prior to joining Barra, Ms. Lukas was a Senior Human Resources Generalist at Cisco Systems with responsibility for the Routing Technology Group. From 1985 to 2000, Ms. Lukas held a variety of Human Resources leadership roles at Levi Strauss & Co.

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PART II

With the exception of the information specifically incorporated by reference to the 2003 Annual Report in Part II of this Form 10-K, Barra’s 2003 Annual Report is not deemed to be filed as part of this Form 10-K.

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

Our common stock is listed on Nasdaq under the trading symbol “BARZ.” This table displays the range of high and low bid prices for our common stock as reported on Nasdaq.

At June 3, 2003 there were approximately 8,121 holders of our common stock, including both record holders and individual participants in security position listings. To date, we have paid no cash dividends on our common stock. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend upon our capital requirements and financial condition and other relevant factors. Our Board of Directors does not intend to declare any dividends in the foreseeable future. On June 3, 2003 the closing price for our common stock as reported by Nasdaq was $33.36.

Information about securities authorized for issuance under our equity compensation plans appears under “Equity Compensation Plan Information” in our Proxy Statement for our 2003 Annual Meeting. That portion of the Proxy Statement is incorporated by reference into this report.

ITEM 6. SELECTED FINANCIAL DATA

The information in our 2003 Annual Report under the heading “Financial Highlights” regarding our selected financial data required by this Item 6 is incorporated herein by reference. Our 2003 Annual Report has been furnished to the SEC as Exhibit 13.1 to this Form 10-K and, except for the “Financial Highlights” section, is not to be deemed “filed” (See also Item 7 below in Part II of this Report.)

The following discussion and analysis contains descriptions of our current expectations and forecasts regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this Form 10-K and in our 2003 Annual Report to Shareholders are made in reliance on safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information regarding these forward looking statements and the factors that could cause actual results to differ, please look at the Risk Factors section in Part I of this Form 10-K. Any or all of the forward-looking statements that we make in this Form 10-K, our 2003 Annual Report to Shareholders or any other public statements we issue may turn out to be wrong. It is also important to remember that other factors besides those listed in the Risk Factors section could also adversely affect our business, operating results or financial condition.

This section should be read in conjunction with the Risk Factors section of Part I of this Form 10-K, our audited consolidated financial statements and related notes in this Part II and the selected financial data contained in our 2003 Annual Report.

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Critical Accounting Policies and Estimates

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on 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.

Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.

Revenue Recognition

Risk management products - Subscription fees are initially deferred as unearned revenues when payment has been received and revenue is recognized ratably over the subscription term. Implementation fees are recorded as earned, generally on a time and materials basis. Perpetual license fees on derivative market risk assessment products are recorded as revenue upon shipment of the product. Maintenance fees are initially deferred as unearned revenues and ratably recognized over the maintenance term. The timing and certain methods of recognizing revenues require management to make estimates with respect to costs incurred, milestones reached and other factors.

POSIT - POSIT revenues, which consist primarily of royalties based on the trading volume of U.S. equities from the Portfolio System for Institutional Trading (“POSIT”) joint venture, are recognized as trades are executed on POSIT.

Allowance for Doubtful Accounts

We evaluate the collectability of our trade receivables on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligation to us, such as in the case of bankruptcy filings or deterioration in the customer’s financial position, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.

Investments in Unconsolidated Companies

We monitor our investments in unconsolidated companies for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other than temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments in privately held companies are estimated based on one or more of the following: pricing models using historical and forecasted financial information, liquidation values, the values of recent rounds of financing or quoted market prices of comparable public companies. In order to determine whether a decline in value is other than temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the company’s industry, and the company’s relative competitive position within the industry; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. (See Note 8 to our Consolidated Financial Statements.)

Incentive Compensation

Annual incentive bonuses are a significant part of Barra’s compensation philosophy. These cash bonuses are generally tied to achieving certain firm-wide financial metrics and department level objectives. We generally accrue estimated annual bonus costs evenly over the fiscal year, with certain quarterly adjustments related to terminations and hiring and changes in expected financial or operational results. Incentive bonuses related to any fiscal year are generally paid on May 31 following the fiscal year end.

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Accounting for Income Taxes

We make estimates related to our income taxes in each of the jurisdictions in which we operate. These estimates include the allocation of revenue, cost of revenue, depreciation, expenditures and tax credits within and between jurisdictions. Deferred taxes are determined by calculation of the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. As a result of this process, we recognize deferred tax assets and liabilities, which are recorded in our Consolidated Balance Sheets. A valuation allowance is established to the extent that we consider it more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent a valuation allowance is established or adjusted in a period, this amount is included in our Consolidated Statements of Income as an expense or benefit within the provision for income taxes.

Results of Operations

The following table shows the percentage of total operating revenues represented by items in our consolidated statements of income for the years ended March 31:

Core Business - Risk Management

Revenues

Revenue growth for our Core business has slowed significantly over the past fiscal year as a result of fewer subscription sales of our portfolio and enterprise risk products and higher cancellation rates on existing customer subscriptions as compared to previous periods. We believe these results reflect the general cost reduction measures many of our asset management clients have initiated in the face of significant declines in asset-based fees.

Revenues from risk management products consist of annual subscription fees to portfolio and enterprise risk management (ERM) products, license and maintenance fees on FEA products and royalty and other related revenues. A summary of the components of these revenues is as follows (amounts in thousands):

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For the years 2003, 2002 and 2001 revenues from our portfolio risk management products represented 75%, 71% and 73% of total operating revenues. Revenues from our enterprise risk management products represented 7%, 8% and 4% of total operating revenues for 2003, 2002 and 2001, respectively.

Product subscriptions. Product subscriptions are revenues for our portfolio risk management and enterprise risk management products, including related data updates. We generally bill and collect these fees on an annual basis, but recognize the income 1/12th per month over each year of the subscription period. The growth in annual subscription fees continues to be generated from a combination of obtaining new clients and increasing revenues from existing customers through the introduction of new products, features, users and other services.

For 2003 compared to 2002, annual subscription fee revenue increased approximately 1%. For 2002 compared to 2001, annual subscription fee revenue increased approximately 13%. Excluding the impact of changes in foreign currency translation rates, subscription revenues were flat in 2003 compared to 2002 and increased 17% in 2002 compared to 2001.

Implementation fees. Implementation fees are revenues related to implementation services in connection with enterprise risk management system installations. Implementation fees are recorded as earned, generally on a time and materials basis. The timing of the recording of enterprise risk management implementation fees is governed by the terms of the implementation contracts and other factors that can cause significant variations from year to year. The decrease in implementation fees in 2003 as compared to 2002 and 2002 compared to 2001 reflects a decline in the number of new enterprise risk system installations and general weakness in the demand for such services amidst spending constraints at some of our client installations.

Royalty and other revenue. Royalty and other revenues include data and product re-distribution revenues, seminar revenues and other one-time fees. The increase in these revenues from 2002 to 2003 was due primarily to increased revenue from royalty agreements related to the use of data provided by Barra. The decrease from 2001 to 2002 reflects a decrease in consulting fees.

FEA revenues. FEA revenues represent license and maintenance fees from our FEA subsidiary, which Barra acquired in December 2002. FEA develops derivative and risk analytics software for traders, risk managers and financial analysts, focusing on the energy, financial and commodities markets. Product license revenues in 2003 were $0.9 million and related maintenance revenues were $1.1 million.

Revenues from non-U.S. Customers. The percentage of our total operating revenues that come from our non-U.S. customers represented 46%, 46% and 47% in 2003, 2002 and 2001, respectively. The percentage of our risk management product revenues that come from non-U.S. customers represented 52%, 54% and 55% in 2003, 2002 and 2001, respectively.

Expenses

A summary of core business operating expenses is as follows (amounts in thousands):

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Communications, data and seminar. Communications, data and seminar consists of our computer access charges, software and data costs, computer leasing and seminar expenses. This component of operating expenses increased $971,000 or 15% from 2002 to 2003 and increased $546,000 or 9% in 2002 over 2001. The increases in both years primarily reflect higher purchased data costs due to an increase in the number of data offerings purchased as well as increased costs on current data subscriptions.

Compensation and Benefits. Compensation and benefits increased $4,396,000 or 7% in 2003 over 2002 and increased $5,019,000 or 9% in 2002 over 2001. The current year increase was primarily the result of increased headcount along with our annual salary administration and performance evaluation process which results in annual reviews and salary adjustments that are effective as of July 1 of each year. In April 2003 we completed a restructuring that resulted in a 9% reduction in workforce and is expected to result in approximately $5 million in annual compensation savings. Increases in our compensation and benefits costs for 2002 compared to 2001 were primarily the result of wage increases, higher incentive compensation and increased insurance costs.

Occupancy. Occupancy costs increased $655,000 or 12% in 2003 over 2002 and increased $289,000 or 6% in 2002 over 2001. Current year increases reflect scheduled rent increases in several offices, as well as the effect of additional rental expense associated with the FEA offices and added space in our Berkeley location. The increase in costs in 2002 over 2001 resulted primarily from new office space being leased in Tokyo and Hong Kong along with scheduled rent increases in existing office space offset partially by higher sublease income in our London location.

Amortization of acquired intangibles. Current year amortization reflects expense related to intangibles with estimated remaining useful lives acquired through the FEA and IPO transactions. These intangibles are being amortized over two to six years. At the beginning of fiscal 2002, we adopted SFAS No. 142, which prohibits the amortization of goodwill and indefinite-lived intangible assets. SFAS No. 142 requires these assets to be tested annually for impairment. Prior to April 1, 2002 goodwill was amortized over the estimated remaining useful life of the assets. (See Note 3 to our Consolidated Financial Statements for further discussion of intangible assets.)

Other Operating Expenses. Other operating expenses decreased $1,114,000 or 6% in 2003 compared to 2002 and increased $1,011,000 or 6% in 2002 compared to 2001. Our other operating expenses include: travel; office; maintenance; depreciation; amortization; marketing; advertising; outside legal and accounting services; business insurance; data, foreign currency translation gain/loss; and other corporate expenses. The current year decrease reflects primarily decreases in marketing and currency translation losses due to the implementation of a hedging program, and a decrease in advertising expense. The increase in other operating expenses from 2001 to 2002 reflects higher legal, depreciation and charitable contribution costs.

POSIT

Revenues

Our electronic trading revenues decreased $7.0 million or 29% in 2003 compared to 2002 and increased $2.9 million or 14% in 2002 over 2001. Our revenues from POSIT come from royalties based on commissions generated by the trading volume in the various POSIT systems. Shares traded in the U.S. POSIT system were 6.7 billion, 9.3 billion and 8.2 billion, for fiscal years 2003, 2002 and 2001, respectively. Included in POSIT revenues in 2003 is approximately $400,000 related to an insurance recovery for lost POSIT royalties during the four days following the September 11, 2001 terrorist attacks in New York when the system was unable to operate. The decline in POSIT revenues in 2003 reflects principally the impact of lower trading volumes on the POSIT trading systems due to lower overall market trading volumes and increased price competition.

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Expenses

A summary of POSIT operating expenses is as follows (amounts in thousands):

Compensation and benefits. Compensation and benefits decreased $385,000 or 18% in 2003 as compared to 2002 and increased $730,000 or 50% when comparing 2002 to 2001. The decrease in 2003 reflects a decrease in consulting fees from the prior year. The increase in 2002 as compared to 2001 resulted from increased consulting and incentive compensation in 2002.

Occupancy. Occupancy costs increased $52,000 or 28% from 2002 to 2003 and increased $29,000 or 18% when comparing 2002 to 2001. Increases in both years resulted from increased rental and utility allocations for POSIT personnel.

Other operating expenses. Other operating expenses decreased $215,000 or 23% in 2003 as compared to 2002 and increased $385,000 or 71% from 2001 to 2002. The decrease in 2003 reflects lower travel, legal and support costs for this venture. The increase from 2001 to 2002 resulted primarily from increased support costs for POSIT operations.

Interest Income and Other

Interest income and other increased $1.2 million or 18% in 2003 compared to 2002 and increased $4.0 million or 162% in 2002 compared to 2001. The increase in 2003 reflects overall higher average investment balances during the year and increased gains arising from the sales of municipal securities, offset by declining yields on the portfolio. The increase in 2002 as compared to 2001 reflects higher interest earnings due to substantially higher cash balances compared to fiscal 2001 as a result of proceeds received from the sale of Symphony Asset Management LLC (Symphony).

Impairment Loss on Investments in Unconsolidated Companies

In March 2003 we determined that the recorded value of our investments in Alacra and Valubond had been permanently impaired after considering such factors as financial performance, liquidity and other general market factors. An impairment charge of $6,936,000 was recorded to reduce the book value of these investments to their fair market values. (See Note 8 to our Consolidated Financial Statements)

Equity in Income of Unconsolidated Investees

Equity in income of unconsolidated investees represents our share of the income of Australia POSIT and Risk Reporting Ltd.

Income Taxes

Our tax rate in income from continuing operations for fiscal 2003 was approximately 25% compared to 32% for fiscal 2002 and 33% in fiscal 2001. The decrease in our overall effective income tax rate is the result of realizing certain non-recurring tax credits associated with dividends from our Japanese subsidiary in 2003.

Income From Discontinued Operations

Discontinued operations represent the operating results from Symphony, Barra Global Estimates, Bond Express, Inc., Barra RogersCasey Inc., and Barra Strategic Consulting Group during the period under report and up until the time of their sale or disposal. Income from discontinued operations decreased $11.2 million or 85% in 2002 compared to 2001. The decrease reflects lower income from Symphony which was sold in July 2001.

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Discontinued Operations- Gain (Loss) on Sale

Gain on sale of discontinued operations for the year ended March 31, 2003 represents contingent payments received as part of the agreement from the sale of Symphony. These payments are shown net of related income tax. Gain on sale of discontinued operations for the year ended March 31, 2002 represents the gain on sale of Symphony and Barra RogersCasey, net of closure costs associated with Strategic Consulting and applicable income taxes. Loss on sale for the year ended March 31, 2001 represents the loss on the sale of the Barra Global Estimates business, net of applicable taxes. (See Note 4 to our Consolidated Financial Statements.)

Foreign Currency

As an international corporation, our business generates revenues from clients throughout the world. We maintain sales and representative offices worldwide and hold certain deposits and accounts in foreign currencies. Our revenues are generated in both United States and non-U.S. currencies. Subscriptions in the United Kingdom and the European Community are priced in pounds sterling (pounds) and euros, respectively. Additionally, our consolidated subsidiary, Barra Japan, generates revenues, has expenses and has assets and liabilities denominated in Japanese yen. All other things being equal, weakening of the U.S. dollar has a positive impact on profits, and strengthening of the U.S. dollar has a negative impact. Our hedging program is designed to help reduce our exposure to fluctuations in certain foreign currency translation rates from holding net assets denominated in foreign currencies. The program utilizes forward contracts for the sale of foreign currencies to hedge our net asset exposure, consisting principally of cash and receivables denominated in pounds, euros and yen. At March 31, 2003, we had one contract to sell 500 million yen at a rate of 120.12, maturing on May 2, 2003. Also at March 31, 2003, we had one contract to sell 5 million euro at 1.0742, maturing on May 2, 2003. Additionally, at March 31, 2003, we had one contract to sell 5 million pounds at 1.5664, maturing on May 2, 2003. We enter into forward currency contracts only with approved counter parties and all hedging activities are reviewed by our Foreign Exchange Committee. Our hedging program is currently designed only to reduce our exposure to gains and losses that result from translating our foreign assets and liabilities into U.S dollars. It does not currently limit or reduce the exposure we have from fluctuations in currency exchange rates on our reported revenues that are billed in non-U.S. currencies.

For 2003 compared to 2002, the U.S. dollar weakened against the pound, euro and the yen. The resulting net effect of these movements in average exchange rates on operating revenues was an increase in operating revenues of approximately $68,000 and a decrease in net income of approximately $127,000. For 2002 compared to 2001, the U.S. dollar strengthened against the yen, euro and the pound. The resulting net effect of these movements in average exchange rates on operating revenues and net income was a decrease of approximately $4,152,000 and $2,983,000, respectively.

Under current operating arrangements in the countries in which we do business, there are no significant restrictions upon the flow of funds from our foreign subsidiaries to the parent company except in Brazil, where we are required to register Barra Brazil’s exchange agreements with the Central Bank.

New Accounting Standards

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. We will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure- an Amendment to FASB 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement is effective for fiscal years ending after December 15, 2002. The disclosures required by SFAS No. 148 are included in our Consolidated Financial Statements or the accompanying Notes to our Consolidated Financial Statements. We are currently evaluating the various transition methods set forth in SFAS No. 148.

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Liquidity and Capital Resources

As of March 31, 2003, our principal sources of liquidity were our cash and cash equivalents, marketable equity securities held for trading, and marketable debt securities available-for-sale totaling $200 million, representing a decrease of $73 million from the prior year. In addition, we have a commitment from a bank for an unsecured short-term line of credit of up to $25 million, of which no amounts have been, or are presently anticipated to be, drawn down on that line of credit. The decrease in the current year is primarily attributable to the repurchase of 2.6 million shares of our common stock for $95.6 million and the acquisitions of FEA and IPO for a combined $24.5 million.

During fiscal 2003 we generated $40.7 million of cash from operating activities as compared to $28.8 million in fiscal 2002. Cash flows from operating activities continues to be our principal means of generating cash.

We believe that our cash flow from operations (including prepaid subscription fees), together with existing cash balances, will be sufficient to meet our cash requirements for capital expenditures and other cash needs for ongoing business operations.

Principal Financial Commitments

As of June 3, 2003, our principal financial commitments consisted of obligations under operating leases and contracts for office facilities. (See Note 6 to our Consolidated Financial Statements.) On November 7, 2002 our Board of Directors authorized the repurchase of up to 1,500,000 shares of our common stock, pursuant to our stock repurchase plan, of which 754,800 shares remain authorized and un-purchased as of the end of the fiscal year. We are under no commitment to purchase any shares under to our stock repurchase plan.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to the interest bearing portions of our direct investment portfolio. We place our direct investments with high quality credit issuers and, by policy, limit the amount of credit exposure to any one issuer. Our first priority is to reduce the risk of principal loss. Consequently, we seek to preserve our invested funds by limiting default risk, market risk, and re-investment risk. We attempt to mitigate default risk by investing only in high quality credit securities that we believe to be low risk and by positioning our portfolio to respond appropriately to a significant reduction in credit rating of any investment issuer or guarantor. The direct investment portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

Our direct interest bearing investment portfolio includes investments in short-term, high-credit quality money market funds and U.S. Treasury securities. These investments totaled approximately $185 million at March 31, 2003. The money market funds had a an average interest rate of approximately 1% while the portfolio of U.S. Treasury securities had an average interest rate of approximately 2%. The short-term money market funds and U.S Treasury securities are not insured and because of the short-term nature of the investments are subject to credit risk, but are not likely to fluctuate significantly in market value.

Market Risk

We had $15 million at March 31, 2003 invested in certain market-neutral funds managed by our former subsidiary, Symphony. Our investments in market-neutral programs are non-interest bearing and consist principally of long and short positions placed directly through other fund managers in U.S and non-U.S. equity securities of both public and private issuers. Although the intent of the managers of these funds is to structure portfolios that are hedged against general market movements, these investments can be subject to significant changes in market value and are not insured. All investment decisions with respect to these market neutral programs are made by professional investment advisers and the performance of the funds is reviewed periodically by our management. (See Note 2 to our Consolidated Financial Statements.)

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Foreign Currency Risk

We invoice customers in Europe in pounds and euros. In Japan, we bill our customers in yen. Excluding customers in these locations, we generally bill for our services in U.S. dollars. To the extent we invoice our customers in local currency (yen, pound and euro), our international revenues are subject to currency exchange fluctuation risk. To the extent that international revenues that are invoiced in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. Currency fluctuations may also effectively increase the cost of our products and services in countries in which customers are invoiced in U.S. dollars. See the discussion in Item 7, Foreign Currency, for further information on foreign currency and hedging practices.

We have no foreign debt and non-U.S. dollar cash balances held overseas are generally kept at levels necessary to meet current operating and capitalization needs. (See Note 2 to our Consolidated Financial Statements.)

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS’ REPORT

Board of Directors and Stockholders
Barra, Inc.
Berkeley, California

We have audited the accompanying consolidated balance sheets of Barra, Inc. and subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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. An audit also includes 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, such consolidated financial statements present fairly, in all material respects, the financial position of Barra, Inc. and subsidiaries as of March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

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Consolidated Balance Sheets
As of March 31, 2003 and 2002
(In thousands except for share and per share amounts)

The accompanying notes are an integral part of the Barra, Inc. Consolidated
Financial Statements.

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Consolidated Statements of Income
For the Years Ended March 31, 2003, 2002 and 2001
(In thousands except for share and per share amounts)