ITEM 1. BUSINESS

This Business Section and other parts of this Form 10-K, as well as portions of our 2002 Annual Report to Shareholders, contain forward-looking statements that involve risks and uncertainties. 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 of this Part I and the section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Form 10-K.

Barra, Inc. (which may be referred to as Barra, the Company, we, us or our) is an investment risk management company that provides innovative solutions to financial professionals worldwide. We have two business units. Our Core Business provides portfolio risk management and enterprise risk management systems to investment professionals. Our Ventures Business develops new lines of business by leveraging our core research and development, generally through strategic partnerships.

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 2002, 2001, 2000, 1999, or 1998 are to the fiscal year ending on March 31st in the year named. This means that the fiscal year ending March 31, 2002 is referred to as “2002.”

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.

Business Units and Segments

Our activities are organized into two business units, our Core Business and our Ventures Business . As further described below, our Core Business consists of one business segment: portfolio and enterprise risk management systems. For certain periods during 2002, our Ventures Business consisted of three business segments: Portfolio System for Institutional Trading (POSIT®), Symphony Asset Management (Symphony) and Other Ventures. As of April 1, 2002, the Ventures Business unit consisted solely of the POSIT business segment and certain minority equity investments in Other Ventures.

We sold or terminated four venture businesses during 2002 as part of our strategy to focus on our Core Business. As a result of this process, in July 2001, Barra completed the sale of its ownership stake in Symphony Asset Management LLC to The John Nuveen Company. In August of 2001, we sold our Bond Express subsidiary to ValuBond, Inc. Finally, in the last quarter of 2002, we divested both of our consulting ventures, Barra Strategic Consulting Group and Barra RogersCasey. Barra Strategic Consulting Group ceased operations in February 2002, and in March 2002, Barra RogersCasey was sold to a subsidiary of Capital Resource Holdings, LLC. As a result of these divestitures, historical results of operations from these businesses have been reclassified in the accompanying consolidated statements of income to discontinued operations. (See Note 4 in the accompanying Consolidated Financial Statements.)

While our two business units serve some common clients, they each require different marketing and distribution strategies, and operate as separate companies.

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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 1100 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 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 portfolio risk management and enterprise risk management systems 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 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. In the U.S., products are marketed directly by our parent company. Throughout the rest of the world, they are primarily marketed by our wholly-owned subsidiaries: Barra International (Japan), Ltd. (Barra Japan) in Japan, Barra Consult Ltda. (Barra Brazil) in South America, and Barra International, Ltd. (Barra International) elsewhere. 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, telephone support, on-line support, and routine consulting services are provided. 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.

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 ITG, Inc.

POSIT — The institutional investors currently using POSIT include corporate and government pension plans, insurance companies, bank trust departments, investment advisors, broker dealers and mutual funds. All marketing, sales and direct (first tier) client support for the various POSIT crossing networks is conducted by the entity licensed to operate each network. Barra generally provides second tier support to the various POSIT licensees on behalf of the POSIT joint venture. ITG conducts the marketing and provides the sales and first tier client support for U.S. POSIT primarily through the sales, support and consulting activities of its research group. These activities include introducing clients and prospects to the features, pricing and technical/functional specifications of the system. ITGE conducts the marketing and provides the sales and first

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tier client support for EuroPOSIT. ITGA conducts the marketing and provides the sales and first tier client support for Australia/New Zealand POSIT. The Toronto Stock Exchange conducts the marketing and provides the sales and first tier client support for Canada POSIT.

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 2002. POSIT accounted for 16%, 16%, and 17% in years 2002, 2001 and 2000 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.

Research and Product Development

Innovations by our research and development operations are critical to the success of our Core Business and to the efforts of our Ventures 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 $21 million in 2002, $21 million in 2001 and $19 million in 2000 on Barra-sponsored research and development, representing 14%, 16%, and 17%, respectively, of our total operating revenues for those years.

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 this level of investment to improve existing services and continue the development of new services.

Competition

Core Business — The markets for our portfolio risk management and enterprise risk management systems 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 are on a global scale. No single competitor, however, currently competes across our entire range of products, services and geographic markets for this business segment.

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

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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 for 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 — POSIT competes with services offered by leading brokerage firms and transaction processing firms, with providers of electronic trading and trade order management systems and with financial information services. POSIT also competes with various national and regional and securities exchanges and exchange facilities, such as Nasdaq, electronic communications networks (ECNs), such as Instinet and Archipelago, and alternative trading systems (ATSs) 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:

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, copyright, trademark and other intellectual property laws, license agreements and technical measures to protect our rights in our intellectual property. We currently hold no utility patents, but are applying for one design and 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:

Ventures Business — POSIT

POSIT — The technology used to operate each of the POSIT systems is owned by the POSIT joint venture. The joint venture in turn licenses the technology to ITG, ITGE and ITGA. Under the terms of our joint venture agreement, we and ITG are prohibited from competing, directly or indirectly, with POSIT. The licensee operators of POSIT are also subject to restrictions on competition with POSIT. Related agreements also require that we provide certain support services to the POSIT partnership, 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

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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. 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 Regulation

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.

Advisers Act

Our parent company, Barra, Inc., is currently registered as an investment adviser solely in the state of California but is seeking an exemption from the SEC to permit federal registration under the Advisers Act. As a registered investment adviser we are required to meet certain financial criteria, including the maintenance of minimum net capital levels. We are also are subject to certain obligations, fiduciary duties and prohibitions with respect to our operations, including our dealings with clients. These include certain required disclosures to clients and potential clients, limitations on receipt of performance-based compensation and restrictions with respect to transactions involving potential conflicts of interest.

The development of certain other one-off consulting arrangements performed by one unit of our Core Business may constitute providing investment advice under the Advisers Act and we are currently registered as an investment adviser in the State of California with respect to such activities. We believe and have adopted the position that the products of our Core Business do not otherwise provide investment advice for purposes of the Advisers Act.

Data Privacy Legislation

More than 40 countries have adopted some form of data privacy legislation. In the U.S., much privacy legislation has been introduced in Congress and in most of the 50 states. Currently, with the exception of certain types of data (such as financial and medical data), most personal data on the Internet is protected only by voluntary self-regulation in the form of the privacy policies implemented by each website. The Federal Trade Commission does, however, have the authority to force companies to live up to their stated privacy policies. In addition, the SEC has adopted the Regulation S-P (Reg. S-P) privacy rules promulgated under the Gramm-Leach-Bliley Act (GLB Act). Under Reg. S-P and the GLB Act a financial institution must provide its customers with notice of its privacy policies and practices, and must not disclose nonpublic personal information about a consumer to nonaffiliated third parties unless the institution provides certain information to the consumer and the consumer has not elected to opt out of the disclosure. The GLB Act also requires the SEC to establish appropriate standards for the protection of customer information by financial institutions. In the European Union, the Data Protection Act of 1998 (DPA) governs the collection and distribution of personal data. The London branch of Barra International is registered under the DPA. We are in the process of conforming our privacy policy to the requirements of Reg. S-P, the GLB Act, the DPA and other relevant data privacy legislation.

Dealers and Alternative Trading Systems (ATS)

Upon POSIT’s inception, the POSIT joint venture obtained a “no-action” letter from the SEC. In that letter, the SEC advised POSIT that it would not recommend enforcement action to require registration as a stock exchange. Pursuant to the conditions of the “no-action” letter and under Rule 17a-23 of the Securities Exchange Act of 1934, as amended (Rule17a-23), the operators of POSIT in the U.S. were required to maintain certain records and to provide the SEC with certain reports and data. On April 21, 1999, SEC Regulation ATS became effective. Regulation ATS repealed Rule 17a-23 and established a

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new regulatory framework for ATSs such as POSIT. Regulation ATS allows ATSs to choose to register as exchanges or as broker/dealers and requires compliance and reporting requirements that are similar to those in Rule 17a-23. Since the effectiveness of SEC Regulation ATS, ITG has operated U.S. POSIT as part of its own broker/dealer operations. Accordingly, POSIT is no longer subject to the restrictions of the “no-action” letter and has not been 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 16% of our total operating revenues 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. 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).

International Operations

In 2002, 2001 and 2000 we derived approximately 46% , 47% 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. During 2000, we used an independent contractor to conduct our Core Business in Canada. Please refer to the Geographic Data table in Note 11 of the Notes to our Consolidated Financial Statements for a breakdown of revenues by major geographic areas and business segments.

In 2002, 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, 2002 our Core Business and Ventures Businesses employed 528 persons through our parent company. Geographically, this total breaks down approximately as follows:

None of our employees were represented by labor unions in 2002. We have experienced no work stoppages and generally believe that our employee relations are good.

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Risk Factors

This Form 10-K and our 2002 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 results, 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 2002 Annual Report or any other public statements we issue may turn out to be wrong. They can be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties. Many factors described in this Risk Factors section and elsewhere in this Form 10-K and in our 2002 Annual Report may cause our actual results to vary materially from our historical or expected results. Other factors, besides those outlined herein or in our 2002 Annual Report could also adversely affect us or our business. Consequently, no forward-looking statement can be guaranteed.

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.

This section should be read in conjunction with the general description of our business in this Part I and in our 2002 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:

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

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to quarter comparisons. Also, much of our revenues are earned under fixed price software subscriptions. Changes in our costs of 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.

Dependence on Availability of Data

We currently obtain data from over 120 third-party vendors that is used in our products and services. Any 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 data vendors change their product 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 2002 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:

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

Some common risks associated with acquisitions and joint ventures include:

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Some common risks associated with divestitures include:

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 currently hold no patents. We rely primarily on a combination of trade secret, 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 or trademark 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 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 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.

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Competition

Each of the markets in which our Core and POSIT 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 bases, or financial, research, development or other resources. There can be no assurance that:

Web-Based Product Model

It is intended that future Barra products, such as BarraOne, will make use of a web browser as the user interface in place of traditional desktop access through networked personal computers. Web browser access 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

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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 factors such as:

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 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. None of our executive officers has entered into a long-term employment agreement 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.

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Management of Growth and Changes in Staffing

We have experienced an extended period of

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 recent 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.

Potential Liability Based on Use of Products and Services

Our license and consulting agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or other third parties. 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 investment decision-making creates the risk that clients, or the parties whose funds are managed by our clients, may pursue a claim against us. 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.

Government Regulation

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.

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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, 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, we are vulnerable to interruption caused by political and terrorist incidents. 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. 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. In addition, during the 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.

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 may decrease, thereby decreasing the revenues to asset managers. Such reduced asset management revenues could place pressure on our clients to cut their cost of services, which in turn could adversely impact our sales, renewal rates and ability to increase prices.

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, 2002, there were outstanding exercisable options to purchase approximately 1.3 million shares of Barra common stock issued under various Barra stock option plans. As of that date, options to purchase about 3.6 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 28, 2002 ($60.57).

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, in August 2001 we 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 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 take us over without the approval of our board of directors, our rights plan could make 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

Throughout this Form 10-K we have made various disclosures regarding litigation proceedings, as well as the possibility of certain other legal and regulatory proceedings. 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

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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, would likely 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.