Edgar Filing: MSCI Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-33812

MSCI INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		13-4038723
(State of Incorporation)		(I.R.S. Employer Identification Number)

Wall Street Plaza, 88 Pine Street New York, NY		10005
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 804-3900

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

As of June 29, 2010, there were 117,796,084 shares of the Registrant’s class A common stock, $0.01 par value, outstanding and no shares of Registrant’s class B common stock, $0.01 par value, outstanding.

MSCI INC.

FORM 10-Q

FOR THE QUARTER ENDED MAY 31, 2010

TABLE OF CONTENTS

		Page
	Part I
Item 1.	Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	39

	Part II
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 5.	Other Information	47
Item 6.	Exhibits	47

AVAILABLE INFORMATION

MSCI Inc. files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including MSCI Inc.) file electronically with the SEC. MSCI Inc.’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

MSCI Inc.’s internet site is www.mscibarra.com. You can access MSCI Inc.’s Investor Relations webpage at www.mscibarra.com/about/ir. MSCI Inc. makes available free of charge, on or through its Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. MSCI Inc. also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of MSCI Inc.’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

MSCI Inc. has a Corporate Governance webpage. You can access information about MSCI Inc.’s corporate governance at www.mscibarra.com/about/company/governance. MSCI Inc. posts the following on its Corporate Governance webpage:

•

Charters for our Audit Committee, Compensation Committee and Nominating and Governance Committee;

•

Corporate Governance Policies; and

•

Code of Ethics and Business Conduct.

MSCI Inc.’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer and its Chief Financial Officer. MSCI Inc. will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, Inc. (“NYSE”) on its internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, Wall Street Plaza, 88 Pine Street, New York, NY 10005; (212) 804-1583. The information on MSCI Inc.’s internet site is not incorporated by reference into this report.

PART I

Item 1.

Condensed Consolidated Financial Statements

MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per share data)

	As of
	May 31,			November 30,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	152,148		$	176,024
Short-term investments		61,399			295,304
Trade receivables (net of allowances of $740 and $847 as of May 31, 2010 and November 30, 2009, respectively)		92,530			77,180
Deferred taxes		23,334			24,577
Prepaid and other assets		32,975			29,399
Total current assets		362,386			602,484
Property, equipment and leasehold improvements (net of accumulated depreciation of $30,256 and $26,498 at May 31, 2010 and November 30, 2009, respectively)		25,387			29,381
Goodwill		441,623			441,623
Intangible assets (net of accumulated amortization of $156,928 and $148,589 at May 31, 2010 and November 30, 2009, respectively)		111,634			120,189
Other non-current assets		6,901			6,592
Total assets	$	947,931		$	1,200,269
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	534		$	1,878
Accrued compensation and related benefits		35,200			65,088
Other accrued liabilities		23,289			30,502
Current maturities of long term debt		8,245			42,088
Deferred revenue		181,906			152,944
Total current liabilities		249,174			292,500
Long term debt, net of current maturities		62,325			337,622
Deferred taxes		36,712			40,080
Other non-current liabilities		23,286			23,011
Total liabilities		371,497			693,213

Commitments and Contingencies (see Note 9)

Shareholders' equity:
Preferred stock (par value $0.01; 100,000,000 shares authorized; no shares issued)		—			—
Common stock (par value $0.01; 500,000,000 class A shares and 250,000,000 class B shares authorized; 105,701,071 and 105,391,919 class A shares issued and 105,019,494 and 104,781,404 class A shares outstanding at May 31, 2010 and November 30, 2009, respectively; no class B shares issued and outstanding at May 31, 2010 and November 30, 2009, respectively)		1,057			1,054
Treasury shares, at cost (681,577 and 610,515 shares at May 31, 2010 and November 30, 2009, respectively)		(21,618	)		(19,168	)
Additional paid in capital		465,384			448,747
Retained earnings		135,598			84,013
Accumulated other comprehensive loss		(3,987	)		(7,590	)
Total shareholders' equity		576,434			507,056
Total liabilities and shareholders' equity	$	947,931		$	1,200,269

See Notes to Unaudited Condensed Consolidated Financial Statements

MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

	Three Months Ended May 31,						Six Months Ended May 31,
	2010			2009			2010			2009
	(unaudited)						(unaudited)
Operating revenues	$	125,170		$	109,375		$	246,850		$	215,290

Cost of services		30,463			29,269			59,754			58,204
Selling, general and administrative		40,177			34,052			77,638			68,768
Amortization of intangible assets		4,277			6,428			8,555			12,857
Depreciation and amortization of property, equipment and leasehold improvements		3,556			2,972			6,949			6,023
Total operating expenses		78,473			72,721			152,896			145,852
Operating income		46,697			36,654			93,954			69,438

Interest income		(343	)		(220	)		(751	)		(341	)
Interest expense		8,991			4,904			13,427			10,542
Other expense (income)		98			(2	)		(510	)		880
Other expense (income), net		8,746			4,682			12,166			11,081
Income before provision for income taxes		37,951			31,972			81,788			58,357
Provision for income taxes		13,884			12,354			30,203			22,015
Net income	$	24,067		$	19,618		$	51,585		$	36,342
Earnings per basic common share	$	0.23		$	0.19		$	0.48		$	0.35
Earnings per diluted common share	$	0.22		$	0.19		$	0.48		$	0.35
Weighted average shares outstanding used in computing earnings per share
Basic		105,345			100,359			105,290			100,324
Diluted		106,003			100,371			105,923			100,330

See Notes to Unaudited Condensed Consolidated Financial Statements

MSCI INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended May 31,
	2010			2009
	(unaudited)
Cash flows from operating activities
Net income	$	51,585		$	36,342
Adjustments to reconcile net income to net cash provided by operating activities:
Share based compensation		10,486			16,714
Amortization of intangible assets		8,555			12,857
Depreciation of property, equipment and leasehold improvements		6,949			6,023
Amortization of debt origination fees		3,429			716
Foreign currency loss		50			616
Unpaid interest rate swap expense		700			—
Loss on sale or disposal of property, equipment and leasehold improvements, net		—			274
Excess tax benefits from share-based compensation		(1,463	)		—
Provision for bad debts		322			376
Amortization of discount on U.S. Treasury securities		(548	)		(144	)
Amortization of discount on long-term debt		500			82
Deferred taxes		(4,583	)		(10,950	)
Changes in assets and liabilities:
Trade receivables		(17,143	)		(9,350	)
Due from related parties		—			1,765
Prepaid and other assets		(3,208	)		5,880
Accounts payable		(1,335	)		37,205
Payable to related parties		—			(34,992	)
Deferred revenue		32,834			29,963
Accrued compensation and related benefits		(26,973	)		(21,892	)
Other accrued liabilities		(2,215	)		(2,387	)
Other		(2,838	)		59
Net cash provided by operating activities		55,104			69,157

Cash flows from investing activities
Proceeds from redemption of short-term investments		347,114			—
Purchase of investments		(112,556	)		(244,734	)
Capital expenditures		(4,696	)		(9,519	)
Net cash provided by (used in) investing activities		229,862			(254,253	)

Cash flows from financing activities
Repayment of long-term debt		(309,640	)		(11,125	)
Repurchase of treasury shares		(2,450	)		(605	)
Proceeds from exercise of stock options		2,214			30
Excess tax benefits from share-based compensation		1,463			—
Net cash used in financing activities		(308,413	)		(11,700	)
Effect of exchange rate changes		(429	)		1,488
Net decrease in cash		(23,876	)		(195,308	)
Cash and cash equivalents, beginning of period		176,024			268,077
Cash and cash equivalents, end of period	$	152,148		$	72,769

Supplemental disclosure of cash flow information
Cash paid for interest	$	8,559		$	9,802
Cash paid for income taxes	$	36,964		$	26,121

Supplemental disclosure of non-cash investing activities
Property, equipment and leasehold improvements in other accrued liabilities	$	3,405		$	2,449

See Notes to Unaudited Condensed Consolidated Financial Statements

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. INTRODUCTION AND BASIS OF PRESENTATION

MSCI Inc. together with its wholly-owned subsidiaries (the “Company” or “MSCI”) is a leading global provider of investment decision support tools, including indices and portfolio risk and performance analytics. MSCI products and services include indices, portfolio risk and performance analytics and, following the acquisition discussed below, governance tools. The Company’s flagship products are its global equity indices marketed under the MSCI brand, its equity portfolio analytics marketed under the Barra brand and its energy and commodity asset valuation analytics products marketed under the FEA brand.

On June 1, 2010, MSCI completed its acquisition of RiskMetrics Group, Inc. (“RiskMetrics”) in a cash-and-stock transaction valued at approximately $1,572.4 million. With the acquisition of RiskMetrics, MSCI expanded its primary product offerings to include market and credit risk analytics products marketed under the RiskMetrics brand, out-sourced proxy research voting and vote reporting services marketed under the ISS brand, and forensic accounting risk research, legal/regulatory risk assessment and due diligence products marketed under the CFRA brand.

Certain actions taken and costs incurred in connection with acquisition of RiskMetrics prior to the acquisition closing date are reflected in these condensed consolidated financial statements. However, the assets acquired and liabilities assumed and the results of operations from RiskMetrics are not reflected in these condensed consolidated financial statements as of and for the three and six months ended May 31, 2010. (See Note 15. “Acquisition of RiskMetrics Group, Inc.” for additional information.)

Basis of Presentation and Use of Estimates

These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of May 31, 2010 and November 30, 2009, the results of operations for the three and six months ended May 31, 2010 and 2009 and cash flows for the six months ended May 31, 2010 and 2009. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in MSCI’s Annual Report on Form 10-K for the fiscal year ended November 30, 2009. The condensed consolidated financial statement information as of November 30, 2009 has been derived from the 2009 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require the Company to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the deferral and recognition of income, the allowance for doubtful accounts, impairment of long-lived assets, accounting for income taxes and other matters that affect the condensed consolidated financial statements and related disclosures. The Company believes that estimates used in the preparation of these condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates.

The Condensed Consolidated Statements of Income for the three and six months ended May 31, 2009 reflect expense allocations for certain corporate functions previously provided by Morgan Stanley, including human resources, information technology, accounting, legal and compliance, corporate services, treasury and other services. These allocations were based on what the Company and Morgan Stanley considered reasonable reflections of the utilization levels of these services required in support of the Company’s business and were based on methods that include direct time tracking, headcount, inventory metrics and corporate overhead. As of May 22, 2009, Morgan Stanley no longer provided corporate functions for the Company and no additional expense allocations have been recorded by the Company since that date. (See Note 6, “Related Party Transactions,” for further information.)

Inter-company balances and transactions are eliminated in consolidation.

Concentration of Credit Risk

The Company licenses its products and services primarily to investment managers principally in the United States, Europe and Asia (primarily Hong Kong and Japan). The Company evaluates the credit of its customers and does not require collateral. The Company maintains reserves for estimated credit losses.

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Financial instruments that may potentially subject the Company to concentrations of credit risk consist principally of cash deposits and short-term investments. At May 31, 2010 and November 30, 2009, cash and cash equivalents held primarily on deposit were $152.1 million and $176.0 million, respectively. At May 31, 2010 and November 30, 2009, the Company had invested $61.4 million and $295.3 million, respectively, in debt securities with maturity dates ranging from 91 to 365 days from the date of purchase.

For the three months ended May 31, 2010, BlackRock Inc. accounted for 12.4% of the Company’s operating revenues. For the six months ended May 31, 2010, BlackRock Inc. accounted for 12.5% of the Company’s operating revenues. For the three and six months ended May 31, 2009, no single customer accounted for 10.0% or more of the Company’s operating revenues.

2. RECENT ACCOUNTING STANDARDS UPDATES

In June 2008, the Financial Accounting Standards Board (“FASB”) issued guidance titled, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This guidance is covered under ASC Section 260-10-55, “Earnings Per Share-Overall-Implementation Guidance and Illustrations.” The guidance addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described by ASC Section 260-10-45, “Earnings Per Share-Overall-Other Presentation Matters.” Under the guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share (“EPS”) pursuant to the two-class method. The accounting guidance on whether share-based payment transactions are participating securities became effective for the Company on December 1, 2009. All prior-period EPS data presented have been adjusted retrospectively. The Company’s adoption of this accounting guidance, which addresses the computation of EPS under the two-class method for share-based payment transactions that are participating securities, reduced basic EPS by $0.01 for both the three and six months ended May 31, 2009 and reduced diluted EPS by $0.01 for the six months ended May 31, 2009. The Company’s adoption of this accounting guidance had no effect on diluted EPS for the three months ended May 31, 2009.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” or ASU No. 2009-13. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. ASU No. 2009-13 will be effective for the Company’s fiscal year 2011 with early adoption permitted. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. The Company is currently assessing the impact that this guidance will have on its condensed consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985): Certain Revenue Arrangements That Include Software Elements,” or ASU No. 2009-14. ASU No. 2009-14 modifies the scope of the software revenue recognition guidance to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASC No. 2009-14 will be effective for the Company’s fiscal year 2011 with early adoption permitted. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. The Company is currently assessing the impact that this guidance will have on its condensed consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-9, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-9. ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is a U.S. Securities and Exchange Commission (“SEC”) filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 was effective immediately for the Company. The adoption of ASU 2010-09 did not have a material impact on its condensed consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-12, “Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts,” or ASU 2010-12. This update clarifies questions surrounding the accounting implications of the different signing dates of the Health Care and Education Reconciliation Act (signed March 30, 2010) and the Patient Protection and Affordable Care Act (signed March 23, 2010). ASU 2010-12 states that the FASB and the Office of the Chief Accountant at the SEC would not be opposed to viewing the two Acts together for accounting purposes. The adoption of ASU 2010-12 did not have a material impact on its condensed consolidated financial statements.

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3. EARNINGS PER COMMON SHARE

Basic EPS is computed by dividing income available to MSCI common shareholders by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied either the explicit vesting terms or retirement-eligible requirements. Diluted EPS reflects the assumed conversion of all dilutive securities. There were no anti-dilutive stock options excluded from the calculation of diluted EPS for the three or six months ended May 31, 2010. There were no anti-dilutive stock options excluded from the calculation of diluted EPS for the three months ended May 31, 2009. There were 1,038,170 stock options excluded from the calculation of diluted EPS for the six months ended May 31, 2009 because of their anti-dilutive effect.

The Company computes EPS using the two-class method and determines whether instruments granted in share-based payment transactions are participating securities. The following table presents the computation of basic and diluted EPS:

	Three Months Ended May 31,						Six Months Ended May 31,
	2010			2009			2010			2009
	(in thousands, except per share data)
Net income	$	24,067		$	19,618		$	51,585		$	36,342
Less: Allocations of earnings to unvested restricted stock units (1)		(337	)		(569	)		(722	)		(1,054	)

Earnings available to MSCI common shareholders	$	23,730		$	19,049		$	50,863		$	35,288

Basic weighted average common shares outstanding		105,345			100,359			105,290			100,324

Basic weighted average common shares outstanding
Effect of dilutive securities:
Stock options		658			12			633			6

Diluted weighted average common shares outstanding		106,003			100,371			105,923			100,330

Earnings per basic common share	$	0.23		$	0.19		$	0.48		$	0.35

Earnings per diluted common share	$	0.22		$	0.19		$	0.48		$	0.35

(1)	The restricted stock units participate in all of the earnings of the Company in the computation of basic EPS and, therefore, the restricted stock units are not included as incremental shares in the diluted EPS computation.

4. COMPREHENSIVE INCOME

The components of comprehensive income are as follows:

	Three Months Ended May 31,						Six Months Ended May 31,
	2010			2009			2010			2009
	(in thousands)
Net income	$	24,067		$	19,618		$	51,585		$	36,342
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on cash flow hedges		4,191			(1,089	)		5,379			(2,533	)
Pension and other post-retirement adjustments		104			336			206			257
Unrealized gains (losses) on available-for-sale securities		(210	)		—			3			—
Foreign currency translation adjustments		(200	)		254			274			355
Other comprehensive income (loss), before tax		3,885			(499	)		5,862			(1,921	)
Income tax (expense) benefit related to items of other comprehensive income		(1,524	)		156			(2,259	)		672
Other comprehensive income (loss), net of tax		2,361			(343	)		3,603			(1,249	)
Comprehensive income	$	26,428		$	19,275		$	55,188		$	35,093

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. SHORT-TERM INVESTMENTS

Short-term investments include U.S. Treasury and state and municipal securities with maturity dates ranging from 91 to 365 days from the date of purchase.

The Company classifies its short-term investments as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders’ equity. Fair value is determined based on quoted market rates. The cost of securities sold is based on the specific-identification method. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included as a component of interest income (expense). Interest on securities classified as available-for-sale is included as a component of interest income.

The fair value and gross unrealized gains and losses of securities available-for-sale at May 31, 2010 were as follows:

(in thousands)	Amortized Cost plus Accrued Interest		Gross unrealized gains		Gross unrealized losses			Estimated Fair value
Debt securities available-for-sale

U.S. Treasury securities	$	57,466	$	5	$	(2	)	$	57,469
State and municipal securities		3,930		—		—			3,930
Total	$	61,396	$	5	$	(2	)	$	61,399

As of November 30, 2009, the Company had the intent and ability to hold its investments to maturity and, thus, classified these investments as held-to-maturity and stated them at amortized cost plus accrued interest. The changes in the value of these securities, other than impairment charges, are not reported on the condensed consolidated financial statements.

The net carrying value and fair value of securities held-to-maturity at November 30, 2009 were as follows:

(in thousands)	Net Carrying Value		Gross unrecognized gains		Gross unrecognized losses		Estimated Fair value
Debt securities held-to-maturity

U.S. Treasury securities	$	295,304	$	264	$	—	$	295,568
State and municipal securities		—		—		—		—
Total	$	295,304	$	264	$	—	$	295,568

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Unrealized Losses on Investments

Investments with continuous unrealized losses for less than 12 months and for 12 months or greater and their related fair values at May 31, 2010 were as follows:

	Less than 12 Months					12 Months or Greater				Total
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Total Fair Value		Total Unrealized Losses
U.S. Treasury securities	$	28,090	$	(2	)	$	—	$	—	$	28,090	$	(2	)
State and municipal securities		—		—			—		—		—		—
Total	$	28,090	$	(2	)	$	—	$	—	$	28,090	$	(2	)

None of the Company’s investments in held-to-maturity securities had been in an unrealized loss position as of November 30, 2009.

Evaluating Investments for Other-than-Temporary Impairments

If the fair values of the Company’s debt security investments are less than the amortized costs at the balance sheet date, the Company assesses whether the impairments are other than temporary. As the Company currently invests only in U.S. Treasury and state and municipal securities with a short duration (one year or less), it would take a significant decline in fair value and U.S. economic conditions for the Company to determine that these investments are other than temporarily impaired.

Additionally, management assesses whether it intends to sell or would more-likely-than-not not be required to sell the investment before the expected recovery of the cost basis. Management has asserted that it believes it is more-likely-than-not that it will not be required to sell the investment before recovery of the cost basis.

As of May 31, 2010, no other-than-temporary impairment had been recorded on any of the Company’s investments.

6. RELATED PARTY TRANSACTIONS

Prior to May 22, 2009, Morgan Stanley owned a controlling interest in the Company and, as such, was treated as a related party. On May 22, 2009, Morgan Stanley sold all of its remaining shares of the Company’s stock. At that time, Morgan Stanley ceased to be a related party and all subsequent transactions between Morgan Stanley and MSCI are accounted for, and presented as, third party transactions.

Morgan Stanley or its affiliates subscribe to, in the normal course of business, certain of the Company’s products. Amounts recognized as related party revenues by the Company from subscription to the Company’s products by Morgan Stanley for the three and six months ended May 31, 2009 were $2.5 million and $5.3 million, respectively.

Morgan Stanley affiliates had invoiced administrative expenses to the Company primarily relating to staff services. The amounts invoiced by Morgan Stanley affiliates for staff services for the three and six months ended May 31, 2009 were $0.6 million and $5.8 million, respectively. Interest expense incurred on payables to Morgan Stanley for the three and six months ended May 31, 2009 was $0.2 million and $0.4 million, respectively.

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements at May 31, 2010 and November 30, 2009 consisted of the following:

	As of
	May 31,			November 30,
	2010			2009
	(in thousands)
Computer & related equipment	$	37,029		$	38,773
Furniture & fixtures		2,918			3,004
Leasehold improvements		14,978			13,947
Work-in-process		718			155
Subtotal		55,643			55,879
Accumulated depreciation and amortization		(30,256	)		(26,498	)
Property, equipment and leasehold improvements, net	$	25,387		$	29,381

Depreciation and amortization expense of property, equipment and leasehold improvements was $3.6 million and $3.0 million for the three months ended May 31, 2010 and 2009, respectively. Depreciation and amortization expense of property, equipment and leasehold improvements was $6.9 million and $6.0 million for the six months ended May 31, 2010 and 2009, respectively.

8. INTANGIBLE ASSETS

The Company amortizes definite-lived intangible assets over their estimated useful lives. Amortizable intangible assets are tested for impairment when impairment indicators are present, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. No impairment of intangible assets has been identified during any of the periods presented. The Company has no indefinite-lived intangibles.

Amortization expense related to intangible assets for the three months ended May 31, 2010 and 2009 was $4.3 million and $6.4 million, respectively. Amortization expense related to intangible assets for the six months ended May 31, 2010 and 2009 was $8.6 million and $12.9 million, respectively.

The gross carrying amounts and accumulated amortization totals related to the Company’s identifiable intangible assets are as follows:

	Gross Carrying			Accumulated			Net Carrying
	Value			Amortization			Value
			(in thousands)
As of May 31, 2010
Technology/software	$	140,462		$	(114,139	)	$	26,323
Trademarks		102,220			(28,973	)		73,247
Customer relationships		25,880			(13,816	)		12,064
Total intangible assets	$	268,562		$	(156,928	)	$	111,634

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Gross Carrying			Accumulated			Net Carrying
	Value			Amortization			Value
			(in thousands)
As of November 30, 2009
Technology/software	$	140,678		$	(109,090	)	$	31,588
Trademarks		102,220			(26,611	)		75,609
Customer relationships		25,880			(12,888	)		12,992
Total intangible assets	$	268,778		$	(148,589	)	$	120,189

The estimated amortization expense for succeeding years is presented below:

Fiscal Year	Amortization Expense
	(in thousands)
Remainder of 2010	$	8,556
2011		17,111
2012		17,110
2013		6,582
2014		6,582
Thereafter		55,693
Total	$	111,634

9. COMMITMENTS AND CONTINGENCIES

Leases. The Company leases facilities under non-cancelable operating lease agreements. The terms of certain lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on the straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Rent expense for the three and six months ended May 31, 2010 was $2.9 million and $5.6 million, respectively. For the three and six months ended May 31, 2009, rent expense was $2.4 million and $5.0 million, respectively.

Long-term debt. On November 14, 2007, the Company entered into a secured $500.0 million credit facility with Morgan Stanley Senior Funding, Inc. and Bank of America, N.A., as agents for a syndicate of lenders, and other lenders party thereto pursuant to a credit agreement dated as of November 20, 2007 (the “Credit Facility”). The Credit Facility consisted of a $425.0 million term loan facility and a $75.0 million revolving credit facility. The revolving credit facility is available for working capital requirements and other general corporate purposes (including the financing of permitted acquisitions), subject to certain conditions. Outstanding borrowings under the Credit Facility initially accrued interest at (i) the London Interbank Offered Rate (“LIBOR”) plus a fixed margin of 2.50% in the case of the term loan A facility and the revolving credit facility and 3.00% in the case of the term loan B facility or (ii) the base rate plus a fixed margin of 1.50% in the case of the term loan A facility and the revolving credit facility and 2.00% in the case of the term loan B facility. In April 2008 and again in July 2008, the Company’s fixed margin rate was reduced by 0.25% on both the term loan A facility and the term loan B facility. In February 2010, the Company’s fixed margin rate on its term loan A facility was reduced by an additional 0.25%. During the three months ended February 28, 2009, the Company exercised its rights and chose to have a portion of both the term loan A facility and term loan B facility referenced to the one month LIBOR rates while the remaining portions continued to reference the three month LIBOR rates. The term loan A facility and the term loan B facility were scheduled to mature on November 20, 2012 and November 20, 2014, respectively. The revolving credit facility was scheduled to mature on November 20, 2012.

On April 1, 2010 and April 15, 2010, the Company prepaid principal balances on its term loan facility of approximately $147.0 million and $150.0 million, respectively. As of May 31, 2010, $70.9 million remained outstanding under the term loan facility and there was $75.0 million of unused credit under the revolving credit facility. For the unused credit, the Company pays an annual 0.5% non-usage fee which was approximately $0.1 million for each of the three months ended May 31, 2010 and 2009 and approximately $0.2 million for each of the six months ended May 31, 2010 and 2009. Interest on the principal is required to be paid either every three months in February, May, August and November or monthly, depending on whether the referenced LIBOR rates are three-month or one-month LIBOR rates.

In connection with entering into the Credit Facility, the Company recorded origination fees of $8.0 million which were being amortized over five to seven years. As a result of the prepayments described above, the Company recognized approximately $2.7 million in accelerated amortization of the origination fees during the three months ended May 31, 2010. At May 31, 2010, $1.7 million of the origination fees remained unamortized.

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Credit Facility is guaranteed by each of the Company’s direct and indirect wholly-owned domestic subsidiaries and secured by substantially all of the shares of the capital stock of the Company’s present and future domestic subsidiaries and up to 65% of the shares of capital stock of its foreign subsidiaries, substantially all of the Company’s and its domestic subsidiaries’ present and future property and assets. In addition, the Credit Facility contains restrictive covenants.

Current maturities of long term debt at May 31, 2010 was $8.2 million, net of a $0.1 million discount. Long term debt, net of current maturities at May 31, 2010 was $62.3 million, net of a $0.2 million discount. For the three and six months ended May 31, 2010, approximately $0.5 million of the debt discount had been amortized. For the three and six months ended May 31, 2009, less than $0.1 million of the debt discount had been amortized.

At May 31, 2010, the fair market value of the Company’s debt obligations was approximated by its carrying value. The fair market value was estimated based on the termination value paid on June 1, 2010. (See Note 16, “Subsequent Events,” for further information.)

Interest Rate Swaps and Derivative Instruments. The Company manages its interest rate risk by using derivative instruments in the form of interest rate swaps designed to reduce interest rate risk by effectively converting a portion of floating-rate debt into fixed rate debt. This action reduces the Company’s risk of incurring higher interest costs in periods of rising interest rates and improves the overall balance between floating and fixed-rate debt. On February 13, 2008, the Company entered into two interest rate swap agreements for an aggregate notional principal amount of $251.7 million, amortizing through November 2010, that were designated as cash flow hedges of interest rate risk. The Company's interest rate swaps are recorded as assets or liabilities at fair value. The effective portion of the changes in fair value of interest rate swaps designated, and that qualify as, cash flow hedges is initially recorded as a component of accumulated other comprehensive loss on the Condensed Consolidated Statements of Financial Condition and is subsequently reclassified into interest expense on the Condensed Consolidated Statements of Income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

On April 15, 2010, MSCI prepaid a portion of its existing term loan facilities that was being hedged with its interest rate swaps. As a result, MSCI fully terminated one of its interest rate swaps and partially terminated the other interest rate swap to match the remaining projected debt balances outstanding under the existing term loan facilities terms through November 2010.

On April 15, 2010, MSCI discontinued prospective hedge accounting on the terminated swap notional amounts and the loss in accumulated other comprehensive loss on the Condensed Consolidated Statements of Financial Condition as of the termination date relating to the terminated swap contract amounts was reclassified to earnings in interest expense on the Condensed Consolidated Statements of Income as the hedged transactions were no longer probable to occur. The Company also discontinued prospective hedge accounting on the remaining swap contract at April 15, 2010 as it no longer met the strict requirements for hedge accounting.

At May 31, 2010, the Company planned to prepay the remaining portion of its existing term loan facilities and terminate the remaining swap contract on June 1, 2010. Because the hedged transactions were no longer probable to occur, the remaining loss in accumulated other comprehensive loss on the Condensed Consolidated Statements of Financial Condition was reclassified to interest expense on the Condensed Consolidated Statements of Income on May 31, 2010. (See Note 16, “Subsequent Events,” for further information.)

The gross carrying values of the interest rate contracts as of May 31, 2010 and 2009 were $0.7 million and $6.2 million, respectively, and were recorded in other accrued liabilities on the Condensed Consolidated Statements of Financial Condition.

For the three and six months ended May 31, 2010, the amount of loss recognized on the effective portion of these interest rate contracts in accumulated other comprehensive loss on the Condensed Consolidated Statements of Financial Condition was less than $0.1 million and $0.3 million, respectively. For the three and six months ended May 31, 2009, the amount of loss recognized on the effective portion of these interest rate contracts in accumulated other comprehensive loss on the Condensed Consolidated Statements of Financial Condition was $1.1 million and $2.5 million, respectively.

For the three and six months ended May 31, 2010, the amount of loss on the effective portion of these interest rate contracts reclassified from accumulated other comprehensive loss into interest expense on the Condensed Consolidated Statements of Income was $1.0 million and $2.5 million, respectively. For the three and six months ended May 31, 2009, the

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

amount of loss on the effective portion of these interest rate contracts reclassified from accumulated other comprehensive loss into interest expense on the Condensed Consolidated Statements of Income was $1.0 million and $1.4 million, respectively.

During the three months ended May 31, 2010, the Company accelerated the reclassification of amounts in accumulated other comprehensive loss to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts were a loss of $3.1 million and were included in interest expense on the Condensed Consolidated Statements of Income. No hedge ineffectiveness was recorded for the three and six months ending May 31, 2010 and 2009.

Credit-risk-related contingent features. The Company had agreements with each of its derivative counterparties that contained cross-default provisions whereby if the Company defaulted on any of its indebtedness, the Company could also be declared in default on its derivative obligations.

As of May 31, 2010, the fair value of derivatives in a liability position related to these agreements was $0.7 million. As of May 31, 2010, the Company has not posted any collateral related to these agreements. If the company breached any of these provisions it would be required to settle its obligations under the agreements at their termination value of $0.7 million.

10. EMPLOYEE BENEFITS

The Company sponsors a 401(k) plan for eligible U.S. employees and defined contribution and defined benefit pension plans that cover substantially all of its non-U.S. employees. For the three months ended May 31, 2010 and 2009, costs relating to 401(k), pension and post-retirement benefit expenses were $1.8 million and $1.4 million, respectively. Of these amounts, $0.9 million and $0.7 million were recorded in cost of services and $0.9 million and $0.7 million were recorded in selling, general and administrative for the three months ended May 31, 2010 and 2009, respectively.

For the six months ended May 31, 2010 and 2009, costs relating to 401(k), pension and post-retirement benefit expenses were $4.4 million and $4.5 million, respectively. Of these amounts, $2.5 million and $2.2 million were recorded in cost of services and $1.9 million and $2.3 million were recorded in selling, general and administrative for the six months ended May 31, 2010 and 2009, respectively.

401(k) and Other Defined Contribution Plans. Eligible employees may participate in the MSCI 401(k) plan (or any other regional defined contribution plan sponsored by MSCI) immediately upon hire. Eligible employees receive 401(k) and other defined contribution plan matching contributions and, in the case of the MSCI 401(k) plan, an additional Company contribution of 3% of the employees’ cash compensation, which is subject to vesting and certain other limitations. The Company’s expenses associated with the 401(k) plan and other defined contribution plans for the three months ended May 31, 2010 and 2009 were $1.2 million and $1.1 million, respectively. The Company’s expenses associated with the 401(k) plan and other defined contribution plans for the six months ended May 31, 2010 and 2009 were $3.3 million and $3.4 million, respectively.

Net Periodic Benefit Expense. Net periodic benefit expense related to defined benefit pension plans was $0.6 million and $0.3 million for the three months ended May 31, 2010 and 2009, respectively. Net periodic benefit expense related to defined benefit pension plans was $1.1 million for each of the six months ended May 31, 2010 and 2009.

11. SHARE BASED COMPENSATION

On November 6, 2007, the Company’s Board of Directors approved the award of founders grants to its employees in the form of restricted stock units and/or options (“Founders Grant Award”). The aggregate value of the grants, which were made on November 14, 2007, was approximately $68.0 million. The restricted stock units and options vest over a four year period, with 50% vesting on the second anniversary of the grant date and 25% vesting on each of the third and fourth anniversary of the grant date. The options have an exercise price per share of $18.00 and have a term of 10 years, subject to earlier cancellation in certain circumstances. The aggregate value of the options was calculated using the Black-Scholes valuation method consistent with ASC Subtopic 718-10, “Compensation-Stock Compensation.” The first tranche of the Founders Grant Award, representing one-half of the total award, vested on November 14, 2009.

On December 16, 2008, the Company, as a component of the 2008 annual bonus, awarded certain of its employees with a grant in the form of restricted stock units (“2008 Bonus Award”). The aggregate value of the grants was approximately $9.5 million of restricted stock units. The restricted stock units vest over a three year period, with one-third vesting on January 8, 2010, January 10, 2011 and January 9, 2012, respectively. Approximately $4.2 million of this grant was awarded to retirement-eligible employees under the award terms. Based on interpretive guidance related to ASC Subtopic 718-10, the Company accrues the estimated cost of these awards over the course of the fiscal year in which the award is earned. As such,

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

the Company accrued the estimated cost of the 2008 Bonus Award related to retirement-eligible employees over the 2008 fiscal year. The first tranche of the 2008 Bonus Award vested on January 8, 2010.

On December 16, 2009, the Company, as a component of the 2009 annual bonus, awarded certain of its employees with a grant in the form of restricted stock units (“2009 Bonus Award”). The aggregate value of the grants was approximately $13.2 million of restricted stock units. The restricted stock units vest over a three year period, with one-third vesting on December 20, 2010, December 19, 2011 and December 17, 2012, respectively. Approximately $5.1 million of this grant was awarded to retirement-eligible employees under the award terms. The Company accrued the estimated cost of the 2009 Bonus Award granted to retirement-eligible employees over the 2009 fiscal year.

For the Founders Grant Award, all or a portion of the award may be cancelled in certain limited situations, including termination for cause, if employment is terminated before the end of the relevant restriction period. For the 2008 and 2009 Bonus Awards, all or a portion of the award may be cancelled if employment is terminated for certain reasons before the end of the relevant restriction period for non-retirement-eligible employees.

During the six months ended May 31, 2010, the Company awarded 8,427 shares in MSCI common stock and 8,286 restricted stock units to directors who were not employees of the Company or Morgan Stanley during the period. During the six months ended May 31, 2009, the Company awarded 13,703 shares in MSCI common stock and 7,824 restricted stock units to directors who were not employees of the Company or Morgan Stanley during the period.

Share based compensation expense was $5.4 million and $10.5 million for the three and six months ended May 31, 2010, of which $2.0 million and $4.1 million was related to the Founders Grant Award, respectively. Share based compensation expense was $9.0 million and $16.7 million for the three and six months ended May 31, 2009, of which $7.3 million and $13.5 million was related to the Founders Grant Award, respectively.

12. INCOME TAXES

The Company’s provision for income taxes was $30.2 million and $22.0 million for the six months ended May 31, 2010 and 2009, respectively. These amounts reflect effective tax rates of 36.9% and 37.7% for the six months ended May 31, 2010 and 2009, respectively. The Company’s effective tax rate of 36.9% for the six months ended May 31, 2010 reflects the Company’s estimate of the annual effective tax rate adjusted for the impact of the costs related to the acquisition of RiskMetrics, which are not tax deductible, and net discrete tax benefits recognized during the period.

The Company is under examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom, and states in which the Company has significant business operations, such as New York. The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions resulting from these open examinations and subsequent years’ examinations. The Company believes the resolution of tax matters will not have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s Consolidated Statement of Income for a particular future period and on the Company’s effective tax rate for any period in which such resolution occurs.

The following table summarizes the major taxing jurisdictions in which the Company and its affiliates operate and the open tax years for each major jurisdiction:

	Tax Jurisdiction	Open Tax Years
	United States	1999-2008
	California	2004-2008
	New York State and City	2002-2008
	Hong Kong	2002-2008
	United Kingdom	2006-2008
	Japan	2006-2008

13. SEGMENT INFORMATION

ASC Subtopic 280-10, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

allocate resources and in assessing performance. Based on the Company’s integration and management strategies, the Company leverages common production, development and client coverage teams to create, produce and license investment decision support tools to various types of investment organizations worldwide. On this basis, the Company assesses that it operates in a single business segment.

Revenue by geography is based on the shipping address of the customer.

The following table sets forth revenue for the periods indicated by geographic area:

	Three Months Ended				Six Months Ended
	May 31, 2010		May 31, 2009		May 31, 2010		May 31, 2009
		(in thousands)
Revenues
Americas:
United States	$	56,278	$	53,070	$	116,436	$	103,093
Other		4,288		3,496		8,148		6,876

Total Americas		60,566		56,566		124,584		109,969

EMEA:
United Kingdom		20,127		13,368		34,108		26,944
Other		23,219		21,416		46,646		42,113

Total EMEA		43,346		34,784		80,754		69,057

Asia & Australia:
Japan		11,305		9,982		21,915		20,352
Other		9,953		8,043		19,597		15,912

Total Asia & Australia		21,258		18,025		41,512		36,264

Total	$	125,170	$	109,375	$	246,850	$	215,290

Long-lived assets consist of property, equipment, leasehold improvements, goodwill and intangible assets, net of accumulated depreciation and amortization.

The following table sets forth long-lived assets on the dates indicated by geographic area:

	As of
	May 31, 2010		November 30, 2009
Long-lived assets	(in thousands)

Americas:
United States	$	560,604	$	571,052
Other		1,952		672

Total Americas		562,556		571,724

EMEA:
United Kingdom		2,199		1,488
Other		8,196		11,997

Total EMEA		10,395		13,485

Asia & Australia:
Japan		435		503
Other		5,258		5,481

Total Asia & Australia		5,693		5,984

Total	$	578,644	$	591,193

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

14. LEGAL MATTERS

From time to time, the Company is party to various litigation matters incidental to the conduct of its business. The Company is not presently party to any legal proceedings the resolution of which the Company believes would have a material adverse effect on its business, operating results, financial condition or cash flows.

15. ACQUISITION OF RISKMETRICS GROUP, INC.

On June 1, 2010, MSCI acquired RiskMetrics. Under the terms of the Agreement and Plan of Merger dated as of February 28, 2010 by and among MSCI, Crossway Inc. (“Merger Sub”), a wholly owned subsidiary of MSCI, and RiskMetrics, Merger Sub merged with and into RiskMetrics, with RiskMetrics continuing as the surviving corporation and a wholly owned subsidiary of MSCI. MSCI and RiskMetrics began joint operations immediately after the Merger became effective. MSCI acquired RiskMetrics to, among other things, offer clients a more comprehensive portfolio of investment decision support tools that will enable clients to understand risk across their entire investment processes as well as broaden the focus of the Company’s client base beyond asset owners, asset managers and broker dealers to include a greater number of hedge fund, mutual fund and bank clients. No financial results of RiskMetrics have been included in the Company’s condensed financial statements as of, or for the three or six months ended, May 31, 2010.

The total preliminary purchase price for RiskMetrics was approximately $1,572.4 million and was comprised of:

(in thousands)
Cash	$	1,146,699
MSCI class A common stock valued using the New York Stock Exchange closing price on June 1, 2010		371,817
Preliminary fair value of outstanding vested and unvested stock options and unvested restricted stock awards assumed		53,904

Total preliminary purchase price	$	1,572,420

MSCI issued approximately 12.6 million class A common shares and reserved approximately 4.3 million class A common shares for outstanding vested and unvested stock options and unvested restricted stock awards assumed as part of the acquisition of RiskMetrics.

The preliminary fair values of stock options assumed were estimated using a Hull-White Lattice option-pricing model. The preliminary fair value of the unearned portion of the unvested RiskMetrics stock options and restricted stock awards will be recorded as operating expense over the remaining service periods, while the preliminary fair values of the earned portion of the vested and unvested stock options and unvested restricted stock awards are included in the total purchase price. The preliminary purchase price for RiskMetrics is subject to change during the measurement period as MSCI finalizes the number of RiskMetrics common shares outstanding that it purchased, validates the conversion calculations of RiskMetrics stock options and restricted stock awards assumed, and finalizes the proportion of such stock options and restricted stock awards assumed that are earned as of the acquisition date.

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Preliminary Purchase Price Allocation

The acquisition method of accounting is based on ASC Subtopic 805-10, “Business Combinations,” and uses the fair value concepts defined in ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” which MSCI has adopted as required. The total preliminary purchase price for RiskMetrics was allocated to the preliminary net tangible and intangible assets based upon their preliminary fair values as of June 1, 2010 as set forth below. The excess of the preliminary purchase price over the preliminary net tangible assets and preliminary intangible assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a preliminary valuation and the estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, certain legal matters, income and non-income based taxes and residual goodwill. MSCI expects to continue to obtain information to assist it in determining the fair value of the net assets acquired at the acquisition date during the measurement period. The preliminary purchase price allocation for RiskMetrics is as follows:

(in thousands)
Cash and cash equivalents	$	76,459
Trade receivables		33,577
Other assets		36,203
Intangible assets		622,667
Goodwill		1,252,036
Accounts payable and other liabilities		(42,139	)
Debt		(107,485	)
Deferred revenues		(115,526	)
Deferred tax liabilities, net		(183,372	)

Total preliminary purchase price	$	1,572,420

MSCI generally does not expect the goodwill recognized to be deductible for income tax purposes.

Preliminary Valuations of Intangible Assets Acquired

The following table sets forth the preliminary components of intangible assets acquired in connection with the RiskMetrics acquisition:

	Estimated Fair Value		Estimated Useful Life
	(in thousands)
Customer relationships—finite-lived	$	424,500	13 to 15 years
Developed technology—finite-lived		51,200	4 to 7 years
Proprietary processes—finite-lived		4,900	6 years
Trade names—finite-lived		138,700	10 to 20 years
Internally developed software—finite-lived		787	3 years
Non-compete agreements—finite-lived		2,580	1.5 years
Total	$	622,667

Preliminary Pre-Acquisition Contingencies Assumed

MSCI has evaluated and continues to evaluate pre-acquisition contingencies relating to RiskMetrics that existed as of the acquisition date. MSCI has preliminarily determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, have preliminarily recorded the best estimates for these contingencies as a part of the preliminary purchase price allocation for RiskMetrics. MSCI continues to gather information

MSCI INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

for, and evaluate substantially all, pre-acquisition contingencies that have been assumed from RiskMetrics. If MSCI makes changes to the amounts recorded or identifies additional pre-acquisition contingencies during the remainder of the measurement period, such amounts recorded will be included in the purchase price allocation during the measurement period and, subsequently, in MSCI’s results of operations.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for MSCI and RiskMetrics as though the companies were combined as of December 1, 2008. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition including the amortization charges from acquired intangible assets (certain of which are preliminary), adjustments to interest income for lower average cash balances, interest expense for borrowings and the amortization of deferred financing fees, debt discounts and prepaid agency fees, the elimination of certain goodwill impairment charges incurred by RiskMetrics and the related tax effects as though the aforementioned companies were combined as of December 1, 2008. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions and any borrowings undertaken to finance the acquisition had taken place at December 1, 2008.

The unaudited pro forma financial information for the six months ended May 31, 2010 combined the historical results of MSCI for the six months ended May 31, 2010 and the historical results of RiskMetrics for the six month-period ended March 31, 2010 (due to differences in reporting periods). The unaudited pro forma financial information for the six months ended May 31, 2009 combined the historical results of MSCI for the six months ended May 31, 2009 and the historical results of RiskMetrics for the six month-period ended March 31, 2009 (due to differences in reporting periods).

The unaudited pro forma financial information and the effects of the pro forma adjustments listed above were as follows for the six months ended May 31, 2010 and 2009:

	Six Months Ended May 31,
(in thousands)	2010		2009
Total revenues	$	400,368	$	368,164
Net income	$	59,626	$	39,474
Earnings per diluted common share	$	0.49	$	0.33

16. SUBSEQUENT EVENTS

Management of the Company evaluated subsequent events from May 31, 2010 through the issuance date of this Form 10-Q.

On June 1, 2010, MSCI acquired RiskMetrics. (See Note 15, “Acquisition of RiskMetrics Group, Inc.,” for further information.) In connection with the acquisition, MSCI entered into a senior secured credit agreement dated as of June 1, 2010 with Morgan Stanley Senior Funding, Inc., as administrative agent, Morgan Stanley & Co. Incorporated, as collateral agent, and the other lenders party thereto, which is comprised of (i) a $1,275.0 million six-year term loan facility and (ii) a $100.0 million five-year revolving credit facility. Principal on the term loan facility is expected to be paid at 1.00% per year plus a portion of MSCI’s excess cash flows (as defined in the agreement and depending on its leverage ratio), with remaining principal payable in the final year. Borrowings under the credit facilities bear interest at a rate equal to the greater of LIBOR, or 1.50%, plus a margin of 3.25%, which margin, beginning a specified period after the acquisition, will be subject to adjustment based on MSCI’s leverage ratio.

In connection with entering into the senior secured credit agreement described above, MSCI paid $71.1 million on June 1, 2010 to retire its then-existing term loan facility plus accrued interest and $0.7 million to retire its interest rate swap and accrued interest. (See Note 9, “Commitments and Contingencies,” for further information.)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of MSCI Inc.:

We have reviewed the accompanying condensed consolidated statement of financial condition of MSCI Inc. and subsidiaries (the “Company”) as of May 31, 2010, and the related condensed consolidated statements of income for the three and six month periods ended May 31, 2010 and 2009, and the condensed consolidated statements of cash flows for the six month periods ended May 31, 2010 and 2009. These interim financial statements are the responsibility of the management of MSCI Inc.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of MSCI Inc. and subsidiaries as of November 30, 2009 and the related consolidated statements of income, comprehensive income, cash flows and shareholders’ equity for the fiscal year then ended (not presented herein); and in our report dated January 29, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 30, 2009 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

/s/ Deloitte & Touche LLP

New York, New York

July 1, 2010

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended November 30, 2009 (the “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Item 1A.—Risk Factors,” within this Form 10-Q and in our Form 10-K.

Overview

We are a leading global provider of investment decision support tools, including indices and portfolio risk and performance analytics. Our products and services include indices, portfolio risk and performance analytics, and, following the acquisition discussed below, governance tools. Our flagship products are our global equity indices marketed under the MSCI brand, our equity portfolio analytics marketed under the Barra brand and our energy and commodity asset valuation analytics products marketed under the FEA brand. Certain products and services added as the result of the acquisition of RiskMetrics Group, Inc. (“RiskMetrics”) are discussed below.

As of May 31, 2010 our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds (“ETFs”), hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. As of May 31, 2010, we had over 3,200 clients across 66 countries. We had 21 offices in 15 countries to help serve our diverse client base, with approximately 50.5% of our revenue from clients in the Americas, 32.7% in Europe, the Middle East and Africa (“EMEA”), 8.9% in Japan and 7.9% in Asia-Pacific (not including Japan), based on revenues for the six months ended May 31, 2010.

Our principal sales model is to license annual, recurring subscriptions to our products for use at specified locations by a given number of users for an annual fee paid up front. The substantial majority of our revenues come from these annual, recurring subscriptions. Over time, as their needs evolve, our clients often add product modules, users and locations to their subscriptions, which results in an increase in our revenues per client. Additionally, a significant source of our revenues comes from clients who use our indices as the basis for index-linked investment products such as ETFs. These clients commonly pay us a license fee based on the investment product’s assets. We also generate a limited amount of our revenues from certain exchanges that use our indices as the basis for futures and options contracts and pay us a license fee based on their volume of trades.

In evaluating our financial performance, we focus on revenue growth for the company in total and by product category as well as operating profit growth and the level of profitability as measured by our operating margin. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our operating profits into excess cash in the future. Our revenue growth strategy includes: (a) expanding and deepening our relationships with investment institutions worldwide; (b) developing new and enhancing existing equity product offerings, as well as further developing and growing our investment tools for multi-asset class investment institutions; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings.

To maintain and accelerate our revenue and operating income growth, we will continue to invest in and expand our operating functions and infrastructure, including new sales and client support staff and facilities in locations around the world and additional staff and supporting technology for our research and our data operations and technology. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture. Over time, our goal is to keep the rate of growth of our operating expenses below the rate of growth of our revenues, allowing us to expand our operating margins. However, at times, because of significant market opportunities, it may be more important for us to invest in our business in order to support increased efforts to attract new clients and to develop new product offerings, rather than emphasize short-term operating margin expansion. Furthermore, in some periods our operating expense growth may exceed our operating revenue growth due to the variability of revenues from several of our products, including our equity indices licensed as the basis of ETFs.

Acquisition of RiskMetrics Group, Inc.

On June 1, 2010, MSCI completed its acquisition of RiskMetrics in a cash-and-stock transaction valued at approximately $1,572.4 million. In connection with the acquisition, we entered into a senior secured credit agreement, which

is comprised of (i) a $1,275.0 million six-year term loan facility and (ii) a $100.0 million five-year revolving credit facility. See “—Liquidity and Capital Resources” below for additional information.

RiskMetrics is a leading provider of risk management and corporate governance products and services to participants in the global financial markets. With the acquisition of RiskMetrics, the Company now offers clients a more comprehensive portfolio of investment decision support tools that will enable clients to understand risk across their entire investment processes, with product offerings including the MSCI indices which include over 120,000 daily indices covering more than 70 countries; Barra portfolio risk and performance analytics covering global equity and fixed income markets; RiskMetrics market and credit risk analytics; ISS out-sourced proxy research, voting and vote reporting services; CFRA forensic accounting risk research, legal/regulatory risk assessment, and due-diligence; and FEA valuation models and risk management software for the energy and commodities markets. The acquisition of RiskMetrics also broadens the focus of the Company’s client base beyond asset owners, asset managers and broker dealers to include a greater number of hedge fund, mutual fund and bank clients.

For the year ended November 30, 2009, we had total operating revenues of $442.9 million and operating expenses of $292.0 million. For the year ended December 31, 2009, RiskMetrics had total operating revenues of $303.4 million and operating expenses of $236.4 million. We will assign a significant value to the intangible assets of RiskMetrics as part of the acquisition, which will increase the amortization expense we will recognize. We also expect to incur increased interest expense as a result of the credit facility we entered into in connection with acquisition. We therefore expect that the acquisition of RiskMetrics will have a significant impact on our financial results in future periods. Additionally, we may have additional exposure to foreign currency risk following the acquisition as a result of the subsequent change in the relative mix of our non-U.S. dollar revenues and expenses.

As part of the acquisition, we increased our employee base by approximately 1,140 additional people and acquired 20 offices in 12 countries. As a result, we expect we will experience increased costs related to compensation and benefits, occupancy costs, market data fees and information technology services. In the near term, we expect we will also experience duplicative selling, general and administrative costs due to the increased size and scope of our selling, marketing and administrative functions. While we are continuing to focus on the cost structure of the combined company and expect to generate significant synergies, we also expect to incur non-recurring restructuring costs associated with integrating the companies.

Due to significant limitations on access to certain information relating to RiskMetrics prior to the acquisition date and the limited time since the acquisition date, management is continuing to review the potential impact of the acquisition on our financial results in future periods.

Certain actions taken and costs incurred in connection with acquisition of RiskMetrics prior to the acquisition closing date are reflected in these condensed consolidated financial statements. However, the assets acquired and liabilities assumed and the results of operations from RiskMetrics are not reflected in these condensed consolidated financial statements as of and for the three and six months ended May 31, 2010. See Note 15. Acquisition of RiskMetrics Group, Inc. for additional information.

Additional information, such as the unaudited pro forma condensed combined financial statements of MSCI and RiskMetrics as of and for the three months ended February 28, 2010 and for the year ended November 30, 2009, can be found in MSCI’s Current Report on Form 8-K filed with the SEC on June 7, 2010. Also See Note 15. Acquisition of RiskMetrics Group, Inc. —Unaudited Pro Forma Financial Information.

The discussion of our results of operations for the three and six months ended May 31, 2010 and 2009 are presented below. The results of operations for interim periods may not be indicative of future results.

Results of Operations

Three Months Ended May 31, 2010 Compared to the Three Months Ended May 31, 2009:

	Three Months Ended May 31,
	2010		2009		Increase/(Decrease)
	(in thousands, except per share data)
Operating revenues	$	125,170	$	109,375	$	15,795		14.4	%
Operating expenses:
Cost of services		30,463		29,269		1,194		4.1	%
Selling, general and administrative		40,177		34,052		6,125		18.0	%
Amortization of intangible assets		4,277		6,428		(2,151	)	(33.5	%)
Depreciation and amortization of property, equipment, and leasehold improvements		3,556		2,972		584		19.7	%
Total operating expenses		78,473		72,721		5,752		7.9	%
Operating income		46,697		36,654		10,043		27.4	%
Other expense (income), net		8,746		4,682		4,064		86.8	%
Provision for income taxes		13,884		12,354		1,530		12.4	%
Net income	$	24,067	$	19,618	$	4,499		22.7	%

Earnings per basic common share	$	0.23	$	0.19	$	0.04		21.1	%

Earnings per diluted common share	$	0.22	$	0.19	$	0.03		15.8	%

Operating margin		37.3%		33.5%

Operating Revenues

We group our revenues into the following four product categories:

•

Equity indices

•

Equity portfolio analytics

•

Multi-asset class portfolio analytics

•

Other products

The following table summarizes the revenue by category for the three months ended May 31, 2010 compared to the three months ended May 31, 2009:

	Three Months Ended May 31,
	2010		2009		Increase/(Decrease)
	(in thousands)

Equity indices:
Equity index subscriptions	$	54,222	$	47,282	$	6,940		14.7	%
Equity index asset based fees		25,696		15,220		10,476		68.8	%

Total equity indices		79,918		62,502		17,416		27.9	%
Equity portfolio analytics		29,041		31,582		(2,541	)	(8.0	%)
Multi-asset class portfolio analytics		11,107		9,572		1,535		16.0	%
Other products		5,104		5,719		(615	)	(10.8	%)

Total operating revenues	$	125,170	$	109,375	$	15,795		14.4	%

Total operating revenues for the three months ended May 31, 2010 increased $15.8 million, or 14.4%, to $125.2 million compared to $109.4 million for the three months ended May 31, 2009. The growth was comprised of increases in asset based fees and subscription revenues of $10.5 million and $5.3 million, respectively. Subscription revenues consist of our revenues related to equity index subscriptions, equity portfolio analytics, multi-asset class portfolio analytics and other products. Our revenues are impacted by changes in exchange rates primarily as they relate to the U.S. dollar. Had the U.S. dollar not strengthened relative to exchange rates at the beginning of the year, our revenues for the three months ended May 31, 2010 would have been higher by $1.2 million.

Revenues related to equity indices increased $17.4 million, or 27.9%, to $79.9 million for the three months ended May 31, 2010 compared to $62.5 million in the same period in 2009. Revenues from the equity index subscriptions sub-category were up $6.9 million, or 14.7%, to $54.2 million during the current period with strength across all regions and client types except broker dealers, which were down slightly. The growth was led by increases in our emerging market and small cap index modules as well as custom indices and our value/growth index extension modules.

Revenues attributable to the equity index asset based fees sub-category increased $10.5 million, or 68.8%, to $25.7 million for the three months ended May 31, 2010 compared to $15.2 million in the same period in 2009 led by growth in our ETF asset based fee revenues. The average value of assets in ETFs linked to MSCI equity indices in the aggregate increased 87.4% to $252.4 billion for the three months ended May 31, 2010 compared to $134.7 billion for the three months ended May 31, 2009. As of May 31, 2010, the value of assets in ETFs linked to MSCI equity indices was $237.6 billion, representing an increase of 35.1% from $175.9 billion as of May 31, 2009. We estimate that the $61.7 billion year-over-year increase in value of assets in ETFs linked to MSCI equity indices was attributable to $32.5 billion of net cash inflows and $29.2 billion of net asset appreciation.

The three MSCI indices with the largest amount of ETF assets linked to them as of May 31, 2010 were the MSCI Emerging Markets, EAFE and U.S. Broad Market Indices with $67.5 billion, $35.8 billion and $13.7 billion in assets, respectively.

The following table sets forth the value of assets in ETFs linked to MSCI indices and the sequential change of such assets as of the periods indicated:

	Quarter Ended
	2009									2010
$ in Billions	February			May		August		November		February		May
AUM in ETFs linked to MSCI Indices	$	107.8		$	175.9	$	199.2	$	234.2	$	235.6	$	237.6
Sequential Change ($ Growth in Billions)
Market Appreciation/(Depreciation)	$	(13.6	)	$	42.2