UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):  November 2, 2006
MORNINGSTAR, INC.
(Exact name of registrant as specified in its charter)

 Illinois
(State or other jurisdiction of incorporation)	 	000-51280
(Commission
File Number)	 	36-3297908
(I.R.S. Employer Identification No.)	
 	 	 	 	 	
 	 	225 West Wacker Drive
Chicago, Illinois
(Address of principal executive offices)	 	60606
(Zip Code)	

 	(312) 696-6000
(Registrant’s telephone number, including area code)	 	
 
N/A
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o                     Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o                     Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o                     Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o                     Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.  Results of Operations and Financial Condition.*
On November 2, 2006, Morningstar, Inc. issued a press release announcing its financial results for the third quarter ended September 30, 2006.  A copy of the press release is attached hereto as Exhibit 99.1.
Item 9.01.  Financial Statements and Exhibits.
(d)           Exhibits:

 Exhibit No.	 	Description	
 	 	 	
99.1*	 	Press Release dated November 2, 2006.	

*                     The information furnished under Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1, is being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	MORNINGSTAR, INC.	
 	 	 	
Date: November 2, 2006	By:	/s/ Martha Dustin Boudos	
 	Name:	Martha Dustin Boudos	
 	Title:	Chief Financial Officer	
 
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EXHIBIT INDEX

 Exhibit No.	 	Description	
 	 	 	
99.1*	 	Press Release dated November 2, 2006.	

*                     The information furnished under Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1, is being furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
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Exhibit 99.1

 		

Contact:
Media:  Margaret Kirch Cohen 312-696-6383  margaret.cohen@morningstar.com
Investors may submit questions to investors@morningstar.com or by fax to 312-696-6009.
FOR IMMEDIATE RELEASE
Morningstar, Inc. Reports Third-Quarter 2006 Financial Results
CHICAGO, Nov. 2, 2006 — Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced its third-quarter 2006 financial results. The company reported consolidated revenue of $81.8 million in the third quarter of 2006, a 44% increase from revenue of $56.9 million in the third quarter of 2005. Morningstar’s third-quarter results included $11.6 million in revenue from acquisitions completed in 2006. Consolidated operating income was $20.5 million in the third quarter of 2006, an increase of $8.2 million, or 66%, compared with $12.3 million in the same period a year ago. Morningstar’s net income was $13.5 million in the third quarter of 2006, or 29 cents per diluted share, compared with $7.5 million, or 17 cents per diluted share, in the third quarter of 2005.
Morningstar has completed three acquisitions in 2006—Ibbotson Associates, Inc. on March 1; Aspect Huntley Pty Limited on July 25; and the database division of InvestorForce, Inc. on Aug. 1. Excluding these acquisitions and the impact of foreign currency translations, the company’s third-quarter revenue increased approximately 23%. Foreign currency translations had a negligible impact in this quarter. Revenue excluding acquisitions and foreign currency translations is a non-GAAP measure; the accompanying financial tables contain a reconciliation to consolidated revenue.
In the first nine months of 2006, revenue increased $61.7 million, or 37%, to $228.1 million, compared with $166.4 million in the same period a year ago. Revenue for the first nine months of the year included $22.8 million from 2006 acquisitions. Consolidated operating income increased 77% to $57.2 million in the first nine months of 2006, compared with $32.4 million in the first nine months of 2005. Net income was $38.2 million, or 82 cents per diluted share, in the first nine months of 2006, compared with $21.0 million, or 48 cents per diluted share, in the same period in 2005.
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Joe Mansueto, chairman and chief executive officer of Morningstar, said, “We had a solid third quarter and continued to generate strong organic revenue growth. Acquisitions also made a significant contribution to our revenue base, primarily from Ibbotson products. We’ve fully integrated Ibbotson into our operations, and we’re making great progress with the Aspect Huntley integration in Australia. And, following our recent acquisition of the database division of InvestorForce, we expect to deliver our enhanced hedge fund and separate account data to clients by December.”
He added, “On a product level, Investment Consulting was the largest contributor to consolidated revenue growth in the quarter, driven both by Morningstar’s growing consulting business and new revenue from Ibbotson. Morningstar Advisor Workstation was the second largest contributor, although a portion of the revenue came from a one-time payment we received because two clients merged and eliminated a redundant license. Other major drivers of organic revenue growth were Morningstar.com, including both Premium Membership service and online ad sales; Licensed Data; and Morningstar Equity Research. New revenue from EnCorr and the Advice by Ibbotson service were also significant contributors to the revenue increase.”
Key Business Drivers
Revenue:   During the third quarter of 2006, revenue in the Individual segment increased 32% compared with the third quarter of 2005; 11 percentage points of this increase came from acquisitions. Revenue in the Advisor segment increased 31%, with 10 percentage points of the increase coming from acquisitions. Revenue in the Institutional segment increased 60%, of which 34 percentage points came from acquisitions.
Revenue from international operations was $12.3 million in the third quarter of 2006, a 63% increase from the same period a year ago. International revenue included $3.2 million from acquisitions. Foreign currency translations had a positive impact of $0.3 million on international revenue. Excluding the impact of acquisitions and foreign currency translations, international revenue increased approximately 16% compared with the prior-year period. International revenue excluding acquisitions and foreign currency translations is a non-GAAP measure; the accompanying financial tables contain a reconciliation to international revenue.
Revenue Composition:   Morningstar defines “walk-in” revenue as revenue it expects to recognize during the year from subscriptions and license agreements in place as of Jan. 1 of each year, adjusted for cancellations, currency translations, and other routine adjustments during the year. During the first nine
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months of 2006, the company closed renewals and brought in new business that will contribute an estimated $127.8 million to 2006 revenue, absent cancellations.
Morningstar estimates that 2006 walk-in revenue plus the full-year impact of new and renewal business closed during the first nine months of 2006, absent additional cancellations, will total $260.6 million.  Revenue from acquisitions has not been incorporated into new, renewal, or walk-in revenue. In addition, the 2006 total does not include variable revenue from asset-based services such as Morningstar Managed Portfolios, managed retirement accounts, and Investment Consulting.
After announcing full-year financial results for 2006 and walk-in revenue for 2007, Morningstar will no longer report quarterly information on new, renewal, and walk-in revenue. The company is evaluating potential new metrics that it believes may be more useful to investors.
Operating Income :  Consolidated operating income was $20.5 million in the third quarter of 2006, a 66% increase from the same period in 2005. Operating expense rose $16.7 million, or 38%, in the third quarter of 2006, primarily because of an increase in compensation costs and amortization expense. Compensation-related expense, excluding bonuses, increased $5.7 million, mainly because of an increase in staffing. Worldwide headcount increased to approximately 1,400 employees as of Sept. 30, 2006, compared with 1,120 as of Sept. 30, 2005. This increase includes additional employees from recent acquisitions and continued hiring in the company’s development center in China. Bonus expense increased $5.0 million in the quarter, primarily reflecting the third-quarter impact of updated internal estimates for full-year performance versus 2005 and incremental expense from acquisitions. Amortization of intangible assets related to 2006 acquisitions contributed $2.0 million to operating expense in the quarter.
The company’s operating margin was 25.1% in the third quarter of 2006, compared with 21.7% in the same period in 2005. In the first nine months of 2006, operating margin was 25.1%, compared with 19.5% in the first nine months of 2005. A $2.6 million decrease in stock-based compensation expense had a positive impact on margins for the year-to-date period.
Income in Unconsolidated Entities:   Morningstar owns approximately 35% of Morningstar Japan K.K. (MJKK), a public company that trades on the Osaka Stock Exchange. In the third quarter of 2006, MJKK recorded a gain related to the sale of shares in a subsidiary’s initial public offering. Morningstar’s share of the pre-tax gain was approximately $1.0 million. This gain added approximately 2 cents to Morningstar’s net income per diluted share in the quarter.
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Free Cash Flow:   Morningstar generated free cash flow of $28.7 million in the third quarter of 2006, reflecting cash provided by operating activities of $29.6 million and capital expenditures of $0.9 million. Free cash flow increased by $11.8 million in the quarter, partly because of increases in net income, income taxes payable, and accrued compensation. The increase in income taxes payable reflects expected fourth- quarter payments because the company has fully utilized the cash tax benefit from the Ibbotson acquisition.
In the first nine months of 2006, Morningstar generated free cash flow of $66.2 million, reflecting cash provided by operating activities of $69.0 million and capital expenditures of $2.8 million. Free cash flow in the first nine months of 2006 increased $39.9 million compared with the prior-year period, reflecting a $39.1 million increase in cash provided by operating activities and a $0.8 million decrease in capital expenditures. Free cash flow is a non-GAAP measure; the accompanying financial tables include a reconciliation to cash provided by operating activities. Morningstar defines free cash flow as cash provided by or used for operating activities less capital expenditures.
As of Sept. 30, 2006, Morningstar had cash, cash equivalents, and investments of $124.3 million, compared with $153.2 million as of Dec. 31, 2005. The decrease primarily reflects cash used for acquisitions, partially offset by cash from operations and proceeds from stock option exercises.
Business Segment Performance
Individual Segment:   The largest product in this segment based on revenue is the company’s U.S.-based Web site for individual investors, Morningstar.com ® . The Individual segment also includes Morningstar ®  Equity Research, print and online publications, and several newly acquired newsletters from Aspect Huntley.
·                   Revenue was $20.4 million in the third quarter of 2006, a 32% increase from $15.5 million in the third quarter of 2005.
·                   Acquisitions contributed revenue of $1.7 million to the Individual segment in the third quarter, the majority of which reflects new revenue from Aspect Huntley.
·                   Morningstar.com was the major contributor to segment revenue growth as the number of Premium Memberships continued to expand steadily and ad sales growth remained strong. Premium subscriptions grew to 161,001 as of Sept. 30, 2006, a 13% increase over the prior-year period. Morningstar Equity Research, which includes research related to the Global Analyst Research Settlement as well as company reports and other services sold to additional customers, was another important driver behind growth in this segment for the quarter.
·                   Operating income was $5.5 million in the third quarter of 2006, a 55% increase from $3.5 million in the prior-year period.
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·                   Operating margin was 27.0% in the third quarter of 2006, compared with 22.9% in the third quarter of 2005.
Advisor Segment: The largest products in this segment based on revenue are Morningstar ®  Advisor Workstation SM , Morningstar ®  Principia ® , and Morningstar ®  Managed Portfolios SM .  This segment now includes software and investment conferences from the acquisition of Aspect Huntley.
·                   Revenue was $24.4 million in the third quarter of 2006, a 31% increase from $18.6 million in the same period in 2005.
·                   Acquisitions contributed revenue of $1.7 million to the Advisor segment in the third quarter, the majority of which reflects revenue from Ibbotson.
·                   Licenses for Morningstar Advisor Workstation grew to 121,179 as of Sept. 30, 2006, an 18% increase compared with the prior-year period. Quarterly revenue for this product included $1.3 million in revenue related to eliminating a redundant license following the merger of two clients. The number of Principia subscriptions declined slightly to 48,944 as of Sept. 30, 2006; however, revenue was essentially unchanged.
·                   Operating income was $7.7 million in the third quarter of 2006, an increase of 88% compared with $4.1 million in the third quarter of 2005.
·                   Operating margin was 31.6% in the third quarter of 2006, compared with 22.1% in the prior-year period.
Institutional Segment: The largest products and services in this segment based on revenue are Investment Consulting, Licensed Data SM , Retirement Advice (including Advice by Ibbotson ®  and Morningstar ®  Retirement Manager SM ), Morningstar Direct SM , Licensed Tools and Content,  Investment Profiles™ & Guides, and EnCorr ® . This segment now includes the hedge fund and separate account database division acquired from InvestorForce and financial information and other data on Australian stocks from the acquisition of Aspect Huntley.
·                   Revenue was $38.6 million in the third quarter of 2006, a 60% increase from $24.1 million in the third quarter of 2005.
·                   Acquisitions contributed revenue of $8.2 million to the Institutional segment in the third quarter, the majority of which was from Ibbotson.
·                   Revenue growth in this segment was primarily driven by Investment Consulting services, which focus on asset allocation and investment selection for funds of funds. The company provided advisory services on approximately $47.6 billion in assets, including $35.0 billion from Morningstar Associates and $12.6 billion from Ibbotson Associates, as of Sept. 30, 2006, compared with approximately $19.4 billion as of Sept. 30, 2005. Assets under advisement for Morningstar Associates grew significantly, primarily because of asset growth among existing clients. Licensed Data and Morningstar Direct were also significant contributors to segment revenue growth in the quarter. Both products benefited from expanded sales efforts in Europe and other international markets, as well as continued strength in the United States. Morningstar Direct licenses grew to 1,212 as of Sept. 30, 2006, a 30% increase over the prior-year period.
·                   Operating income was $9.7 million in the third quarter of 2006, an increase of 72% from $5.6 million in the same period in 2005.
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·                   Operating margin was 25.0% in the third quarter of 2006, compared with 23.4% in the prior-year period.
About Morningstar, Inc.
 Morningstar, Inc. is a leading provider of independent investment research in the United States and in major international markets. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on more than 145,000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 14 countries and minority ownership positions in companies based in three other countries.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This press release contains forward-looking statements. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.  In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements.
Other factors that could materially affect actual results, levels of activity, performance, or achievements can be found in Morningstar’s filings with the Securities and Exchange Commission, including Morningstar’s Annual Report on Form 10-K for the year ended Dec. 31, 2005. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in this press release reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.
Non-GAAP Financial Measures
To supplement Morningstar’s consolidated financial statements presented in accordance with GAAP, Morningstar uses the following measures considered as non-GAAP by the Securities and Exchange Commission:  free cash flow, revenue excluding acquisitions and foreign currency translations (organic revenue), and international revenue excluding acquisitions and foreign currency translations.
Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after Morningstar spends money to operate its business. Morningstar uses free cash flow to evaluate the performance of its business. Free cash flow should not be considered an alternative to any measure of performance as promulgated under GAAP (such as cash provided by (used for) operating, investing, and financing activities), nor should this data be considered an indicator of Morningstar’s overall financial performance or liquidity. Also, the free cash flow definition used by Morningstar may not be comparable to similarly titled measures reported by other companies. For more information on free cash flow, please see the reconciliation from cash provided by operating activities to free cash flow included in the accompanying financial tables.  Morningstar presents revenue excluding acquisitions and foreign currency translations (organic revenue) and international revenue excluding acquisitions and foreign currency translations because the company believes these non-GAAP measures help investors better compare period-to-period results. For more information, please see the reconciliation provided in the accompanying financial tables.
###
© 2006 Morningstar, Inc. All rights reserved.
 
6

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations

	 	Three months ended September 30	 	Nine months ended September 30	 	
(in thousands, except per share amounts)	 	2006	 	2005	 	change	 	2006	 	2005	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	81,821	 	$	56,927	 	43.7%	 	$	228,138	 	$	166,374	 	37.1%	 	
Operating expense(1):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	22,389	 	16,261	 	37.7%	 	63,114	 	47,847	 	31.9%	 	
Development	 	7,876	 	4,749	 	65.8%	 	21,273	 	14,491	 	46.8%	 	
Sales and marketing	 	12,971	 	9,499	 	36.6%	 	36,511	 	29,129	 	25.3%	 	
General and administrative	 	13,781	 	11,849	 	16.3%	 	39,606	 	36,068	 	9.8%	 	
Depreciation and amortization	 	4,267	 	2,222	 	92.0%	 	10,440	 	6,470	 	61.4%	 	
Total operating expense	 	61,284	 	44,580	 	37.5%	 	170,944	 	134,005	 	27.6%	 	
Operating income	 	20,537	 	12,347	 	66.3%	 	57,194	 	32,369	 	76.7%	 	
Operating margin	 	25.1%	 	21.7%	 	3.4pp	 	25.1%	 	19.5%	 	5.6pp	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating income (expense):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income, net	 	1,169	 	892	 	31.1%	 	3,086	 	1,946	 	58.6%	 	
Other income (expense), net	 	(31	)	(46	)	(32.6%	)	(343	)	14	 	NMF	 	
Non-operating income, net	 	1,138	 	846	 	34.5%	 	2,743	 	1,960	 	39.9%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes, equity in net income of unconsolidated entities, and cumulative effect of accounting change	 	21,675	 	13,193	 	64.3%	 	59,937	 	34,329	 	74.6%	 	
Income tax expense	 	9,228	 	5,857	 	57.6%	 	24,450	 	14,517	 	68.4%	 	
Equity in net income of unconsolidated entities	 	1,100	 	183	 	NMF	 	2,405	 	1,212	 	98.4%	 	
Income before cumulative effect of accounting change	 	13,547	 	7,519	 	80.2%	 	37,892	 	21,024	 	80.2%	 	
Cumulative effect of accounting change, net of income tax expense of $171(2)	 	—	 	—	 	—	 	259	 	—	 	NMF	 	
Net income	 	$	13,547	 	$	7,519	 	80.2%	 	$	38,151	 	$	21,024	 	81.5%	 	
Basic income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before cumulative effect of accounting change	 	$	0.33	 	$	0.19	 	 	 	$	0.93	 	$	0.54	 	 	 	
Cumulative effect of accounting change	 	—	 	—	 	 	 	—	 	—	 	 	 	
Net income	 	$	0.33	 	$	0.19	 	 	 	$	0.93	 	$	0.54	 	 	 	
Diluted income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before cumulative effect of accounting change	 	$	0.29	 	$	0.17	 	 	 	$	0.81	 	$	0.48	 	 	 	
Cumulative effect of accounting change	 	—	 	—	 	 	 	0.01	 	—	 	 	 	
Net income	 	$	0.29	 	$	0.17	 	 	 	$	0.82	 	$	0.48	 	 	 	
Weighted average common shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	41,448	 	39,922	 	 	 	40,913	 	39,151	 	 	 	
Diluted	 	46,578	 	45,354	 	 	 	46,598	 	43,939	 	 	 	

	 	Three months ended September 30	 	Nine months ended September 30	 	
 	 	2006	 	2005	 	 	 	2006	 	2005	 	 	 	
(1)  Includes stock-based compensation expense of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	$	302	 	$	274	 	 	 	$	859	 	$	1,202	 	 	 	
Development	 	141	 	112	 	 	 	386	 	492	 	 	 	
Sales and marketing	 	152	 	129	 	 	 	415	 	582	 	 	 	
General and administrative	 	1,663	 	1,515	 	 	 	4,611	 	6,579	 	 	 	
Total stock-based compensation expense	 	$	2,258	 	$	2,030	 	 	 	$	6,271	 	$	8,855	 	 	 	
 
(2) Relates to adoption of Statement of Financial Accounting Standards No. 123(R).
 
NMF — Not meaningful, pp — percentage points
7

Morningstar, Inc. and Subsidiaries
Operating Expense as a Percentage of Revenue

 	 	Three months ended
September 30	 	Nine months ended
September 30	 	
 	 	2006	 	2005	 	change	 	2006	 	2005	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	100.0%	 	100.0%	 	—	 	100.0%	 	100.0%	 	—	 	
Operating expense(1):	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	27.4%	 	28.6%	 	(1.2)pp	 	27.7%	 	28.8%	 	(1.1)pp	 	
Development	 	9.6%	 	8.3%	 	1.3 pp	 	9.3%	 	8.7%	 	0.6 pp	 	
Sales and marketing	 	15.9%	 	16.7%	 	(0.8)pp	 	16.0%	 	17.5%	 	(1.5)pp	 	
General and administrative	 	16.8%	 	20.8%	 	(4.0)pp	 	17.4%	 	21.7%	 	(4.3)pp	 	
Depreciation and amortization	 	5.2%	 	3.9%	 	1.3 pp	 	4.6%	 	3.9%	 	0.7 pp	 	
Total operating expense(2)	 	74.9%	 	78.3%	 	(3.4)pp	 	74.9%	 	80.5%	 	(5.6)pp	 	
Operating margin	 	25.1%	 	21.7%	 	3.4 pp	 	25.1%	 	19.5%	 	5.6 pp	 	

 	 	Three months ended
September 30	 	Nine months ended
September 30	 	
 	 	2006	 	2005	 	change	 	2006	 	2005	 	change	 	
(1)  Includes stock-based compensation expense of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of goods sold	 	0.4%	 	0.5%	 	(0.1)pp	 	0.4%	 	0.7%	 	(0.3)pp	 	
Development	 	0.2%	 	0.2%	 	—	 	0.2%	 	0.3%	 	(0.1)pp	 	
Sales and marketing	 	0.2%	 	0.2%	 	—	 	0.2%	 	0.3%	 	(0.1)pp	 	
General and administrative	 	2.0%	 	2.7%	 	(0.7)pp	 	2.0%	 	4.0%	 	(2.0)pp	 	
Total stock-based compensation expense(2)	 	2.8%	 	3.6%	 	(0.8)pp	 	2.7%	 	5.3%	 	(2.6)pp	 	
 
(2)              Sum of percentages may not equal total because of rounding.
8

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows

 	 	 	 	 	 	
 	 	Three months ended
September 30	 	Nine months ended
September 30	 	
($000)	 	2006	 	2005	 	2006	 	2005	 	
Operating activities	 	 	 	 	 	 	 	 	 	
Net income	 	$	13,547	 	$	7,519	 	$	38,151	 	$	21,024	 	
Adjustments to reconcile net income to net cash flows from operating activities:	 	 	 	 	 	 	 	 	 	
Cumulative effect of accounting change	 	—	 	—	 	(259	)	—	 	
Depreciation and amortization	 	4,267	 	2,222	 	10,440	 	6,470	 	
Deferred income tax expense (benefit)	 	(1,593	)	985	 	(2,310	)	(292	)	
Stock-based compensation	 	2,258	 	2,030	 	6,271	 	8,855	 	
Equity in net income of unconsolidated entities	 	(1,100	)	(183	)	(2,405	)	(1,212	)	
Excess tax benefits from stock option exercises	 	(2,312	)	1,117	 	(8,820	)	1,117	 	
Other, net	 	(192	)	81	 	624	 	207	 	
Changes in operating assets and liabilities, net of effects of acquisitions	 	14,723	 	4,465	 	27,335	 	(6,284	)	
Cash provided by operating activities	 	29,598	 	18,236	 	69,027	 	29,885	 	
Investing activities	 	 	 	 	 	 	 	 	 	
Purchases of investments	 	(19,586	)	(24,997	)	(57,369	)	(54,938	)	
Proceeds from sale of investments	 	4,785	 	15,420	 	65,239	 	55,830	 	
Capital expenditures	 	(853	)	(1,298	)	(2,876	)	(3,625	)	
Acquisitions, net of cash acquired	 	(30,496	)	(35	)	(116,859	)	(8,192	)	
Other, net	 	(14	)	—	 	(308	)	18	 	
Cash used for investing activities	 	(46,164	)	(10,910	)	(112,173	)	(10,907	)	
Financing activities	 	 	 	 	 	 	 	 	 	
Proceeds from stock option exercises	 	2,365	 	2,572	 	13,212	 	3,964	 	
Excess tax benefits from stock option exercises	 	2,312	 	—	 	8,820	 	—	 	
Proceeds from initial public offering, net	 	—	 	—	 	—	 	18,108	 	
Payments of long-term debt and capital lease obligations	 	—	 	—	 	—	 	(18	)	
Cash provided by financing activities	 	4,677	 	2,572	 	22,032	 	22,054	 	
Effect of exchange rate changes on cash and cash equivalents	 	(189	)	(9	)	(72	)	(166	)	
Net increase (decrease) in cash and cash equivalents	 	(12,078	)	9,889	 	(21,186	)	40,866	 	
Cash and cash equivalents — Beginning of period	 	83,259	 	66,884	 	92,367	 	35,907	 	
Cash and cash equivalents — End of period	 	$	71,181	 	$	76,773	 	$	71,181	 	$	76,773	 	
 
Reconciliation from cash provided by operating activities to free cash flow (a non-GAAP measure):

 	 	 	 	 	 	
 	 	Three months ended
September 30	 	Nine months ended
September 30	 	
($000)	 	2006	 	2005	 	2006	 	2005	 	
Cash provided by operating activities	 	$	29,598	 	$	18,236	 	$	69,027	 	$	29,885	 	
Less: Capital expenditures	 	(853	)	(1,298	)	(2,876	)	(3,625	)	
Free cash flow	 	$	28,745	 	$	16,938	 	$	66,151	 	$	26,260	 	

9

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

 	 	September 30,	 	December 31,	 	
($000)	 	2006	 	2005	 	
 	 	 	 	 	 	
Assets	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	71,181	 	$	92,367	 	
Investments	 	53,069	 	60,823	 	
Accounts receivable, net	 	57,893	 	47,530	 	
Deferred tax asset, net	 	61	 	—	 	
Other	 	6,777	 	5,495	 	
Total current assets	 	188,981	 	206,215	 	
 	 	 	 	 	 	
Property and equipment, net	 	16,102	 	17,355	 	
Investments in unconsolidated entities	 	18,218	 	16,355	 	
Goodwill	 	84,542	 	17,500	 	
Intangible assets, net	 	77,876	 	7,251	 	
Deferred tax asset, net	 	8,907	 	29,729	 	
Other assets	 	2,263	 	1,906	 	
Total assets	 	$	396,889	 	$	296,311	 	
 	 	 	 	 	 	
Liabilities and shareholders’ equity	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Accounts payable and accrued liabilities	 	$	21,367	 	$	13,664	 	
Accrued compensation	 	29,423	 	26,463	 	
Income tax payable	 	2,470	 	1,259	 	
Deferred revenue	 	92,750	 	71,155	 	
Deferred tax liability, net	 	—	 	833	 	
Other	 	2,312	 	2,467	 	
Total current liabilities	 	148,322	 	115,841	 	
 	 	 	 	 	 	
Accrued compensation	 	5,147	 	4,458	 	
Other long-term liabilities	 	3,471	 	2,298	 	
Total liabilities	 	156,940	 	122,597	 	
Total shareholders’ equity	 	239,949	 	173,714	 	
Total liabilities and shareholders’ equity	 	$	396,889	 	$	296,311	 	
 
10

Morningstar, Inc. and Subsidiaries
Segment Information

 	 	Three months ended September 30	 	Nine months ended September 30	 	
($000)	 	2006	 	2005	 	change	 	2006	 	2005	 	change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	 	 	 	 	 	 	 	 	 	 	 	 	
Individual	 	$	20,389	 	$	15,489	 	31.6%	 	$	58,892	 	$	46,625	 	26.3%	 	
Advisor	 	24,397	 	18,593	 	31.2%	 	70,468	 	53,868	 	30.8%	 	
Institutional	 	38,569	 	24,063	 	60.3%	 	103,437	 	69,396	 	49.1%	 	
Eliminations	 	(1,534	)	(1,218	)	25.9%	 	(4,659	)	(3,515	)	32.5%	 	
Consolidated revenue	 	$	81,821	 	$	56,927	 	43.7%	 	$	228,138	 	$	166,374	 	37.1%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue—U.S.	 	$	69,517	 	$	49,391	 	40.7%	 	$	197,879	 	$	144,739	 	36.7%	 	
Revenue—international	 	$	12,304	 	$	7,536	 	63.3%	 	$	30,259	 	$	21,635	 	39.9%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income (loss)(1)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Individual	 	$	5,509	 	$	3,548	 	55.3%	 	$	17,293	 	$	10,523	 	64.3%	 	
Advisor	 	7,719	 	4,114	 	87.6%	 	20,196	 	10,936	 	84.7%	 	
Institutional	 	9,661	 	5,626	 	71.7%	 	25,674	 	13,647	 	88.1%	 	
Corporate items and eliminations	 	(2,352	)	(941	)	149.9%	 	(5,969	)	(2,737	)	118.1%	 	
Consolidated operating income	 	$	20,537	 	$	12,347	 	66.3%	 	$	57,194	 	$	32,369	 	76.7%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin(1)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Individual	 	27.0%	 	22.9%	 	4.1pp	 	29.4%	 	22.6%	 	6.8pp	 	
Advisor	 	31.6%	 	22.1%	 	9.5pp	 	28.7%	 	20.3%	 	8.4pp	 	
Institutional	 	25.0%	 	23.4%	 	1.6pp	 	24.8%	 	19.7%	 	5.1pp	 	
Consolidated operating margin	 	25.1%	 	21.7%	 	3.4pp	 	25.1%	 	19.5%	 	5.6pp	 	

(1) Includes stock-based compensation expense allocated to each segment.
11

Morningstar, Inc. and Subsidiaries
Supplemental Data

($000)	 	Q3 2006	 	Q3 2005	 	change	 	Full-Year 2006(3)	 	
Revenue composition (1)	 	 	 	 	 	 	 	 	 	
New revenue	 	$	11,373	 	$	10,129	 	12.3%	 	$	39,720	 	
Renewal revenue	 	30,594	 	20,152	 	51.8%	 	88,114	 	
Walk-in revenue	 	28,215	 	26,646	 	5.9%	 	132,783	 	
Revenue excluding acquisitions	 	70,182	 	56,927	 	23.3%	 	260,617	 	
Acquisitions(2)	 	11,639	 	—	 	NMF	 	—	 	
Consolidated revenue	 	$	81,821	 	$	56,927	 	43.7%	 	$	260,617	 	
% of revenue excluding acquisitions	 	 	 	 	 	 	 	 	 	
New revenue	 	16.2%	 	17.8%	 	(1.6)pp	 	15.3%	 	
Renewal revenue	 	43.6%	 	35.4%	 	8.2pp	 	33.8%	 	
Walk-in revenue	 	40.2%	 	46.8%	 	(6.6)pp	 	50.9%	 	
Revenue excluding acquisitions	 	100.0%	 	100.0%	 	—	 	100.0%	 	

(1)  Morningstar separates revenue into three categories: 1) new revenue, defined as revenue from selling additional products to current customers or from selling to new customers; 2) renewal revenue, defined as revenue from renewals of subscriptions or licenses; and 3) “walk-in” revenue, defined as revenue it expects to recognize during the year from subscriptions and license agreements in place as of January 1 of each year, adjusted for cancellations, currency translations, and other routine adjustments during the year. After announcing full-year financial results and 2007 walk-in revenue, Morningstar will no longer report quarterly information on new, renewal, and walk-in revenue.
 
(2) Revenue from acquisitions has not been incorporated into new, renewal, or walk-in revenue.
 
(3) Full-year 2006 revenue is an estimate of revenue that will be recognized from business closed through the end of the third quarter. It includes net walk-in revenue plus the full-year impact, absent cancellations, of new and renewal business closed during the first nine months of 2006. This estimate does not include any revenue from new or renewal business that will be closed during the fourth quarter of 2006, nor does it include revenue from acquisitions.

 	 	As of September 30	 	
 	 	2006	 	2005	 	% change	 	
Our employees	 	 	 	 	 	 	 	
Worldwide headcount (approximate)	 	1,400	 	1,120	 	25.0%	 	
Number of U.S. stock analysts	 	92	 	86	 	7.0%	 	
Number of U.S. fund analysts	 	28	 	27	 	3.7%	 	
 	 	 	 	 	 	 	 	
Our business	 	 	 	 	 	 	 	
Number of Morningstar.com Premium subscriptions	 	161,001	 	141,939	 	13.4%	 	
Number of registered users for Morningstar.com (U.S.)	 	4,794,976	 	4,277,614	 	12.1%	 	
Number of U.S. Advisor Workstation licenses	 	121,179	 	102,606	 	18.1%	 	
Number of Principia subscriptions	 	48,944	 	50,484	 	(3.1)%	 	
Number of Morningstar Direct licenses	 	1,212	 	931	 	30.2%	 	
Assets under management for Morningstar Managed Portfolios	 	$	1.6bil	 	$	1.3bil	 	23.1%	 	
Assets under management for managed retirement accounts	 	$	7.2bil	 	$	225.9mil	 	NMF	 	
Morningstar Associates	 	$	513.7mil	 	$	225.9mil	 	127.4%	 	
Ibbotson Associates(4)	 	$	6.7bil	 	—	 	NMF	 	
Assets under advisement for Investment Consulting	 	$	47.6bil	 	$	19.4bil	 	145.4%	 	
Morningstar Associates	 	$	35.0bil	 	$	19.4bil	 	80.4%	 	
Ibbotson Associates(4)	 	$	12.6bil	 	—	 	NMF	 	

(4) Ibbotson Associates was acquired on March 1, 2006.

 	 	Three months ended September 30	 	Nine months ended September 30	 	
($000)	 	2006	 	2005	 	2006	 	2005	 	
Effective income tax expense rate	 	 	 	 	 	 	 	 	 	
Income before income taxes, equity in net income
of unconsolidated entities, and cumulative effect
of accounting change	 	$	21,675	 	$	13,193	 	$	59,937	 	$	34,329	 	
Equity in net income of unconsolidated entities	 	1,100	 	183	 	2,405	 	1,212	 	
Total	 	$	22,775	 	$	13,376	 	$	62,342	 	$	35,541	 	
Income tax expense	 	$	9,228	 	$	5,857	 	$	24,450	 	$	14,517	 	
Effective income tax expense rate	 	40.5%	 	43.8%	 	39.2%	 	40.8%	 	

 
12

Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures     
 
Reconciliation from consolidated revenue to revenue excluding acquisitions and foreign currency translations (organic revenue):

 	 	Three months ended September 30	 	Nine months ended September 30	 	
($000)	 	2006	 	2005	 	% change	 	2006	 	2005	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidated revenue	 	$	81,821	 	$	56,927	 	43.7%	 	$	228,138	 	$	166,374	 	37.1%	 	
Less: acquisitions	 	(11,639	)	—	 	NMF	 	(22,815	)	—	 	NMF	 	
Less: impact of foreign currency	 	(335	)	—	 	NMF	 	(358	)	—	 	NMF	 	
Revenue excluding acquisitions and foreign currency translations	 	$	69,847	 	$	56,927	 	22.7%	 	$204,965	 	$	166,374	 	23.2%	 	

 
Reconciliation from international revenue to international revenue excluding acquisitions and foreign currency translations:

 	 	Three months ended September 30	 	Nine months ended September 30	 	
($000)	 	2006	 	2005	 	% change	 	2006	 	2005	 	% change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
International revenue	 	$	12,304	 	$	7,536	 	63.3%	 	$	30,259	 	$	21,635	 	39.9%	 	
Less: acquisitions	 	(3,214	)	—	 	NMF	 	(3,935	)	—	 	NMF	 	
Less: impact of foreign currency	 	(335	)	—	 	NMF	 	(358	)	—	 	NMF	 	
International revenue excluding acquisitions and foreign currency translations	 	$	8,755	 	$	7,536	 	16.2%	 	$	25,966	 	$	21,635	 	20.0%	 	

 
13