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Article by DailyStocks_admin    (02-06-09 07:08 AM)

Filed with the SEC from Jan 22 to Jan 28:

Moody's (MCO)
Berkshire Hathaway (BRKA), which has long filed disclosures as a passive investor, changed its filing status Jan. 23, but indicated that it doesn't plan to take a more active role.
Berkshire continues to hold 48 million Moody's shares, but because of buybacks, its stake now equals 20.2% of the total of shares outstanding. A holding above 20% triggers a change in filing status and requires investors to disclose any activist intentions.

BUSINESS OVERVIEW

Background

As used in this report, except where the context indicates otherwise, the terms “Moody’s” or the “Company” refer to Moody’s Corporation, a Delaware corporation, and its subsidiaries. The Company’s executive offices are located at 7 World Trade Center at 250 Greenwich Street, New York, NY 10007 and its telephone number is (212) 553-0300. Prior to September 8, 2000, the Company operated as part of The Dun & Bradstreet Corporation.

The Company

Moody’s is a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software and credit portfolio management solutions and (iii) beginning in January 2008, fixed income pricing data and valuation models. Founded in 1900, Moody’s employs approximately 3,600 people worldwide. Moody’s maintains offices in 27 countries and has expanded into developing markets through joint ventures or affiliation agreements with local rating agencies. Moody’s customers include a wide range of corporate and governmental issuers of securities as well as institutional investors, depositors, creditors, investment banks, commercial banks and other financial intermediaries. Moody’s is not dependent on a single customer or a few customers, such that a loss of any one would have a material adverse effect on its business.

Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV (“MKMV”). For additional financial information on these segments, see Part II, Item 8. “Financial Statements – Note 18 – Segment Information.” Beginning in January 2008, Moody’s segments were changed to reflect the implementation of the business reorganization announced in August 2007. A discussion concerning Moody’s new operating segments, as if they were in place beginning January 1, 2005, is outlined in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Moody’s Investors Service publishes credit ratings and associated opinions on a broad range of obligors and obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. It also publishes investor-oriented credit information, research and economic commentary, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. Moody’s credit ratings and research help investors analyze the credit risks associated with fixed-income securities and other credit-sensitive instruments. Such independent credit ratings and research also contribute to efficiencies in markets for other obligations, such as insurance policies and derivative transactions, by providing credible and independent assessments of credit risk. Moody’s provides ratings and credit research on governmental and commercial entities in more than 100 countries. Moody’s global and increasingly diverse services are designed to increase market efficiency and may reduce transaction costs. As of December 31, 2007, Moody’s had ratings relationships with more than 11,000 corporate issuers and approximately 26,000 public finance issuers. Additionally, the Company has rated more than 110,000 structured finance obligations. Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors.

Moody’s research services, data and analytic tools are utilized by institutional investors and other credit and capital markets professionals. These services cover various segments of the loan and debt capital markets, and are sold to more than 8,700 customer accounts worldwide. Within these accounts, more than 30,000 unique users accessed Moody’s research website (www.moodys.com) during calendar year 2007. In addition to these clients, more than 167,000 other individuals visited Moody’s website to retrieve current ratings and other information made freely available to the public.

MKMV develops and distributes quantitative credit risk assessment products and services, including credit processing and analytical tools for credit portfolio management. With more than 1,800 clients operating in approximately 85 countries, MKMV serves banks, corporations and institutional investors, including most of the world’s largest financial institutions. MKMV’s quantitative credit analysis tools include models that estimate the probability of default for approximately 29,000 publicly traded firms globally, updated daily. In addition, MKMV’s RiskCalc™ models extend the availability of these probabilities to privately held firms in many of the world’s economies. MKMV also offers services to value and improve the performance of credit-sensitive portfolios.

Prospects for Growth

Over recent decades, global fixed-income markets have grown significantly in terms of outstanding principal amount and types of securities or other obligations. Despite the recent market disruption and decline in issuance activity for some important classes of securities in the U.S. and internationally, Moody’s believes that the overall long-term outlook remains favorable for continued secular growth of fixed-income markets worldwide. However, Moody’s expects that, in the near-term, growth drivers such as financial innovation and disintermediation will slow as capital market participants adjust to the recent poor performance of some structured finance asset classes, such as U.S. residential mortgage-backed securities and credit derivatives. Restoring investor confidence in structured products will require enhancements to Moody’s rating processes and probably greater transparency from issuers of structured (or securitized) debt. Moody’s is developing updated rating methodologies, volatility measures, and pricing and valuation services to aid the return of investor trust and, though it is likely to be a measured process, Moody’s expects that these initiatives will support continued long-term demand for high-quality, independent credit opinions.

Growth in global fixed-income markets is attributable to a number of forces and trends. Advances in information technology, such as the Internet, make information about investment alternatives widely available throughout the world. This technology facilitates issuers’ ability to place securities outside their national markets and investors’ capacity to obtain information about securities issued outside their national markets. Issuers and investors are also more readily able to obtain information about new financing techniques and new types of securities that they may wish to purchase or sell, many of which may be unfamiliar to them. This availability of information promotes the ongoing integration and development of worldwide financial markets and a greater need for credible, globally comparable opinions about credit risk. As a result, existing capital markets have expanded and a number of new capital markets have emerged. In addition, more issuers and investors are accessing developed capital markets.

Another trend that is driving growth in the world’s capital markets is the disintermediation of financial systems. Issuers increasingly raise capital in the global public capital markets, in addition to, or in substitution for, traditional financial intermediaries. Moreover, financial intermediaries have sold assets in the global public capital markets, in addition to or instead of retaining those assets. Recent credit market disruptions have slowed the trend of disintermediation in important markets such as the U.S. and Europe, but Moody’s believes that debt capital markets offer advantages in capacity and efficiency compared to the traditional banking systems. Thus, disintermediation is expected to expand in the longer-term.

Growth in issuance of structured finance securities has generally been stronger than growth in straight corporate and financial institutions debt issuance, though with recent market turmoil this trend is expected to change at least over the near term, and possibly longer, with investors preferring simpler, more standardized and more transparent securities to more complex financial instruments. Compared with 2007, Moody’s expects a decline in structured finance revenue at least through 2008 and possibly into 2009 and beyond.

Rating fees paid by debt issuers account for most of the revenue of Moody’s Investors Service. Therefore, a substantial portion of Moody’s revenue is dependent upon the volume and number of debt securities issued in the global capital markets that Moody’s rates. Moody’s is therefore affected by, for example, the performance, and the prospects for growth, of the major world economies, the fiscal and monetary policies pursued by their governments, and the decisions of issuers to request Moody’s ratings to aid investors in their investment decision process. However, annual fee arrangements with frequent debt issuers, annual debt monitoring fees and annual fees from commercial paper and medium-term note programs, bank and insurance company financial strength ratings, mutual fund ratings, subscription-based research and other areas are less dependent on, or independent of, the volume or number of debt securities issued in the global capital markets.

Moody’s operations are also subject to various risks inherent in carrying on business internationally. Such risks include currency fluctuations and possible nationalization, expropriation, exchange and price controls, changes in the availability of data from public sector sources, limits on providing information across borders and other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced because the Company’s basic service is the creation and dissemination of information, rather than the production of products that require manufacturing facilities or the use of natural resources. However, the formation of, for example, a new government-sponsored regional or global rating agency would pose a risk to Moody’s growth prospects. Management believes that this risk, compared to other regulatory changes under consideration for the credit rating industry, is relatively low because of the likelihood that substantial investments over a sustained period would be required, with uncertainty about the likelihood of financial success.

Legislative bodies and regulators in both the United States, Europe and selective other jurisdictions continue to conduct regulatory reviews of credit rating agencies, which may result in, for example, an increased number of competitors, changes to the business model or restrictions on certain business activities of Moody’s Investors Service, or increased costs of doing business for Moody’s. Therefore, in order to broaden the potential for expansion of non-ratings services, beginning in January 2008, Moody’s has reorganized into two distinct businesses, Moody’s Investors Service, consisting solely of the ratings business, and Moody’s Analytics. Moody’s Analytics now conducts all non-ratings activities, and includes the MKMV business, the sale of credit research produced by Moody’s Investors Service and the production and sale of other credit related products and services. The reorganization is expected to broaden the opportunities for expansion by Moody’s Analytics into activities which were previously restricted, due to the potential for conflicts of interest with the ratings business. At present, Moody’s is unable to assess the nature and effect any regulatory changes may have on future growth opportunities. See “Regulation” below.

Moody’s Analytics expects to benefit from the growing demand among credit market participants for information that enables them to make sound investment and risk management decisions. These customers require advanced qualitative and quantitative tools to support their management of increasingly complex capital market instruments. Such complexity creates analytical challenges for market participants, including financial intermediaries, asset managers and other investors. In recent years, reliable third-party ratings and research served to supplement or substitute for traditional in-house research as the scale, geographic scope and complexity of financial markets grew. Recent disruptions in credit markets threaten to slow this trend, but Moody’s expects to sustain reliance on its offerings as enhancements to credit rating methodologies and other changes in securities origination processes restore investor confidence and more orderly market operations.

Growth in Moody’s Analytics is also expected as financial institutions adopt active credit portfolio management practices and implement internal credit assessment tools for compliance with Basel II regulations. Moody’s Analytics offers products that respond to these needs. This growth will be realized by, for example, the development of new private firm default probability models for specific countries and by expanding analysis capabilities of new asset classes.

Competition

The Moody’s Investors Service business competes with other credit rating agencies and with investment banks and brokerage firms that offer credit opinions and research. Many of our customers also have in-house credit research capabilities. Moody’s largest competitor in the global credit rating business is Standard & Poor’s Ratings Services (“S&P”), a division of The McGraw-Hill Companies, Inc. There are some rating markets, based on industry, geography and/or instrument type, in which Moody’s has made investments and obtained market positions superior to S&P’s. In other markets, the reverse is true.

In addition to S&P, Moody’s competitors include Fitch, a subsidiary of Fimalac S.A., Dominion Bond Rating Service, Ltd. of Canada (“DBRS”) and A.M. Best Company, Inc. In 2007, Japan Credit Rating Agency, Ltd., Rating and Investment Information, Inc, (R&I) and Egan-Jones also were designated as Nationally Recognized Statistical Rating Organizations (“NRSRO”), and in February 2008, LACE Financial Corp. also was registered as an NRSRO. One or more additional rating agencies may emerge in the United States as the Securities and Exchange Commission (“SEC”) continues to expand the number of NRSROs. Competition may also increase in developed or developing markets outside the United States over the next few years as the number of rating agencies increases.

Financial regulators are reviewing their approach to supervision and have sought or are seeking comments on changes to the global regulatory framework that could affect Moody’s. Bank regulators, under the oversight of the Basel Committee on Banking Supervision, have proposed using refined risk assessments as the basis for minimum capital requirements. The proposed Standardized Approach relies on rating agency opinions, while the proposed Internal Ratings Based Approach relies on systems and processes maintained by the regulated bank. The increased regulatory focus on credit risk presents both opportunities and challenges for Moody’s. Global demand for credit ratings and risk management services may rise, but regulatory actions may result in a greater number of rating agencies and/or additional regulation of Moody’s and its competitors. Alternatively, banking or securities market regulators could seek to reduce the use of ratings in regulations, thereby reducing certain elements of demand for ratings, or otherwise seek to control the analysis or business of rating agencies.

Credit rating agencies such as Moody’s also compete with other means of managing credit risk, such as credit insurance. Competitors that develop quantitative methodologies for assessing credit risk also may pose a competitive threat to Moody’s.

Moody’s Analytics’ main competitors for quantitative measures of default risk include the RiskMetrics Group, S&P, CreditSights, R&I’s Financial Technology Institute, Fitch Algorithmics, Dun and Bradstreet, and other smaller vendors, as well as models developed internally by customers. Other firms may compete in the future. Baker Hill, acquired by Experian, and Bureau van Dijk Electronic Publishing are Moody’s Analytics’ main competitors in the market for analytical software supporting commercial lending activities. Mercer Oliver Wyman competes with the professional services group at Moody’s Analytics for certain credit risk consulting services business. In economic analysis, data and modeling services, Moody’s Analytics faces competition from Global Insight, Haver Analytics and a number of smaller firms around the world.

Moody’s Strategy

Moody’s intends to focus on the following opportunities:

Expansion in Financial Centers

Moody’s serves its customers through its global network of offices and business affiliations. Moody’s currently maintains comprehensive rating and marketing operations in financial centers including Frankfurt, Hong Kong, London, Madrid, Milan, Moscow, New York, Paris, Singapore, Sydney and Tokyo. Moody’s expects that its global network will position it to benefit from the expansion of worldwide capital markets and thereby increase revenue. Moody’s also expects that the growth of its Moody’s Investors Service business as a consequence of financial market integration in Europe will continue. Additionally, Moody’s expects to continue its expansion into developing markets either directly or through joint ventures. This will allow Moody’s to extend its credit opinion franchise to local and regional obligors, through domestic currency ratings and national scale ratings.

New Rating Products

Moody’s is pursuing numerous initiatives to expand credit ratings, including from public fixed-income securities markets to other sectors with credit risk exposures. Within established capital markets, Moody’s continues to expand its rating coverage of bank loans and project finance loans and securities. In global and local counterparty markets, Moody’s offers distinct sets of rating products to address the creditworthiness of financial firms, including bank financial strength and deposit ratings, and insurance financial strength ratings. Moody’s has also introduced issuer ratings for corporations not active in the debt markets. In response to growing investor demand for expanded credit opinion in the high yield market, Moody’s has introduced a number of new products, including joint default analysis, corporate financial metrics, and both loss-given-default and probability-of-default ratings. The recent disruptions in the structured finance markets may provide opportunities to enhance structured finance offerings to meet investor demands for more information content. In order to capitalize on market developments and to enhance ratings surveillance efficiency, Moody’s has created a new products group within Moody’s Investors Service to focus on new ratings products, such as hedge fund operations quality ratings, and to identify, design, develop and maintain value-added research, analytics and data products serving the capital markets.

Internet-Enhanced Products and Services

Moody’s is expanding its use of the Internet and other electronic media to enhance client service. Moody’s website provides the public with instant access to ratings and provides the public and subscribers with credit research. Internet delivery also enables Moody’s to provide services to more individuals within a client organization than were available with paper-based products and to offer higher-value services because of more timely delivery. Moody’s expects that access to these applications will increase client use of Moody’s services. Moody’s expects to continue to invest in electronic media to capitalize on these and other opportunities.

Expansion of Credit Research Products and Investment Analytic Tools

Moody’s plans to expand its research and analytic services through internal development and through acquisitions. Most new product initiatives tend to be more analytical and data-intensive than traditional narrative research offerings. Such services address investor interest in replicating the monitoring activities conducted by, for example, Moody’s securitization analysts and provide the means for customers to gain access to raw data and adjusted financial statistics and ratios used by Moody’s analysts in the rating process for municipalities, companies and financial institutions. These products represent important sources of growth for the research business. Moody’s Analytics is developing products in the fixed-income valuations and pricing arena that facilitate price transparency in global fixed income markets, especially for complex structured securities and derivative instruments. Moreover, Moody’s continues to explore opportunities to extend its research relevance in new domestic or regional markets (e.g., China) as well as new functional markets (e.g., hedge funds).

New Quantitative Credit Risk Assessment Services

Moody’s will continue to provide banks and other institutions with quantitative credit risk assessment services. Moody’s believes that there will be increased demand for such services because they assist customers trading or holding credit-sensitive assets to better manage risk and deliver better performance. Also, international bank regulatory authorities are assessing the adequacy of banks’ internal credit risk management systems for the purpose of determining regulatory capital. Such regulatory initiatives create demand for, and encourages adoption of, related services by banks from third-party providers.

Regulation

In the United States, since 1975, Moody’s Investors Service (“MIS”) has been designated as an NRSRO by the SEC. The SEC first applied the NRSRO designation in that year to companies whose credit ratings could be used by broker-dealers for purposes of determining their net capital requirements. Since that time, Congress, the SEC and other governmental and private bodies have used the ratings of NRSROs to distinguish between, among other things, “investment grade” and “non-investment grade” securities.

In September 2006, the Credit Rating Agency Reform Act of 2006 (“Reform Act”) was passed, which created a voluntary registration process for rating agencies wishing to be designated as NRSROs. The Reform Act provides the SEC with authority to oversee NRSROs, while prohibiting the SEC from regulating the substance of credit ratings or the procedures and methodologies by which any NRSRO determines credit ratings. In June 2007, the SEC published final rules to implement the Reform Act, which address the NRSRO application and registration process, as well as oversight rules related to recordkeeping, financial reporting, prevention of misuse of material non-public information, conflicts of interest, and prohibited acts and practices. In June 2007, MIS submitted to the SEC its application for registration as an NRSRO and in September 2007 the SEC registered MIS as an NRSRO under the Securities Exchange Act of 1934. Consequently, MIS is now subject to the SEC’s oversight rules described above and, as required by the rules, has made its Form NRSRO Initial Application publicly available by posting it on the Regulatory Affairs page of the Company’s website.

Internationally, several regulatory developments have occurred:

The Group of 7 Finance Minister and Central Bank Authorities (G-7 )—After their October 2007 meeting, the G-7 published a joint-statement outlining their intended approach to the recent financial turbulence. In this statement, the Finance Ministers formally asked the Financial Stability Forum (FSF) to analyze the underlying causes of the turbulence and to provide an update at the G-7’s meetings in late Spring 2008. The G-7 identified the following four areas on which it would like the FSF to offer proposals: liquidity and risk management; accounting and valuation of financial derivatives; role, methodologies and use of credit rating agencies in structured finance; and basic supervisory principles of prudential oversight, including the treatment of off-balance sheet vehicles. The FSF has been working on this request and is expected to provide its recommendations at the G-7’s Spring 2008 meeting.

IOSCO — In April 2007, the Technical Committee of the International Organization of Securities Commissions (“IOSCO”) announced that it would reconstitute the Task Force on rating agencies to undertake a new mandate on the role of credit rating agencies in relation to the development of structured finance products. This work is to be carried out in close cooperation with the Committee on the Global Financial System (CGFS). In November 2007, IOSCO announced the creation of a new and dedicated Task Force to review the issues facing securities regulators following the recent events in the global credit markets. The topics which will be covered by this Task Force include: risk management / prudential supervision; transparency / due diligence; valuation of assets / accounting issues; and, credit rating agencies. It is anticipated that the Task Force will present its final report to the Technical Committee in May 2008 during IOSCO’s Annual Conference in Paris.

In December 2004, the Technical Committee of IOSCO published its Code of Conduct Fundamentals for Credit Rating Agencies (“IOSCO Code”). MIS initially published its Code of Professional Conduct (“MIS Code”) pursuant to the IOSCO Code in June 2005 and published an updated Moody’s Code in October 2007. In December 2007, MIS published its second, annual report on the implementation of the Moody’s Code. The two annual reports and the MIS Code can be found on the Regulatory Affairs page of the Company’s website.

European Union —The European Commission (“Commission”) stated in January 2006 and again in January 2007 that recent European Union (“EU”) financial services legislative measures that are relevant to credit rating agencies, combined with a self-regulatory framework for rating agencies based on the IOSCO Code, provided a suitable framework for the oversight of rating agencies and that no legislative actions were required at the time. The Committee of European Securities Regulators (“CESR”) has been charged with monitoring rating agencies’ compliance with the IOSCO Code and reporting back to the Commission regularly. CESR conducted its first annual review to assess such compliance during 2006 and published its report in January 2007. CESR concluded that four internationally active rating agencies operating in the EU, including Moody’s, are largely compliant with the IOSCO Code, and it identified a few areas where it believed rating agencies could improve their processes and disclosures and where the IOSCO Code could be improved. CESR began its second annual review in 2007 and is evaluating the areas identified in its 2006 report, the impact of the Reform Act on the ratings business in the European Union, and the role of rating agencies in the structured finance process, including securitizations backed by subprime residential mortgages. As part of CESR’s review process, CESR has on two occasions requested comments from rating agencies and other market participants. The written responses MIS submitted to the CESR questionnaires can be found on the Regulatory Affairs page of the Company’s website. CESR plans to publish its second annual report in mid-2008.

The Basel Committee —In June 2004, the Basel Committee on Banking Supervision published a new bank capital adequacy framework (“Basel II”) to replace its initial 1988 framework. Under Basel II, ratings assigned by recognized credit rating agencies (called External Credit Assessment Institutions or “ECAIs”) can be used by banks in determining credit risk weights for many of their institutional credit exposures. Recognized ECAIs could be subject to a broader range of oversight. National authorities have begun the ECAI recognition process. Moody’s has been recognized as an ECAI in several jurisdictions and the recognition process is ongoing in many others. Moody’s does not currently believe that Basel II will materially affect its financial position or results of operations.

In addition, as a result of the recent events in the U.S. subprime residential mortgage sector and the credit markets more broadly, various national and global regulatory and other authorities have initiated, or indicated that they are considering, reviews of the role of rating agencies in the U.S. subprime mortgage-backed securitization market and structured finance more generally. Moody’s is the subject of a number of such reviews and cannot predict the ultimate outcome of such current or potential future reviews, or their ultimate impact on the competitive position, financial position or results of operations of Moody’s.

Other legislation and regulation relating to credit rating and research services has been considered from time to time by local, national and multinational bodies and is likely to be considered in the future. In certain countries, governments may provide financial or other support to locally-based rating agencies. In addition, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could change the competitive landscape in which Moody’s operates. In addition, the legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of Moody’s cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or regulatory or legislative actions, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of Moody’s.

Intellectual Property

Moody’s and its affiliates own and control a variety of trade secrets, confidential information, trademarks, trade names, copyrights, patents, databases and other intellectual property rights that, in the aggregate, are of material importance to Moody’s business. Management of Moody’s believes that each of the trademarks and related corporate names, marks and logos containing the term “Moody’s” are of material importance to the Company. Moody’s is licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and other intellectual property rights owned and controlled by Moody’s. The Company considers its trademarks, service marks, databases, software and other intellectual property to be proprietary, and Moody’s relies on a combination of copyright, trademark, trade secret, patent, non-disclosure and contractual safeguards for protection.

The names of Moody’s products and services referred to herein are trademarks, service marks or registered trademarks or service marks owned by or licensed to Moody’s or one or more of its subsidiaries.

Employees

As of December 31, 2007, the number of full-time equivalent employees of Moody’s was approximately 3,600.

Available Information

Moody’s investor relations Internet website is http://ir.moodys.com/. Under the “SEC Filings” tab at this website, the Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

MANAGEMENT DISCUSSION FROM LATEST 10K

This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody’s Corporation consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 41 and Item 1A. “Risk Factors” commencing on page 10 for a discussion of uncertainties, risks and other factors associated with these statements.

The Company

Except where otherwise indicated, the terms “Moody’s” and the “Company” refer to Moody’s Corporation and its subsidiaries. Moody’s is a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software, and credit portfolio management solutions and (iii) beginning in January 2008, fixed income pricing data and valuation models. In 2007 and prior years, Moody’s operated in two reportable segments: Moody’s Investors Service and Moody’s KMV (“MKMV”). Beginning in January 2008, Moody’s segments were changed to reflect the business reorganization announced in August 2007. As a result of the reorganization, the rating agency remains in the Moody’s Investors Service operating company and several ratings business lines have been realigned. All of Moody’s other commercial activities, including MKMV and sales of MIS research, are now combined under a new operating company known as Moody’s Analytics.

Moody’s Investors Service publishes rating opinions on a broad range of credit obligors and credit obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs. It also publishes investor-oriented credit information, research and economic commentary, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks.

The MKMV business develops and distributes quantitative credit risk assessment products and services including credit processing software and analytical tools for credit portfolio management.

Prior to September 30, 2000, the Company operated as part of The Dun & Bradstreet Corporation (“Old D&B”). On September 8, 2000, the Board of Directors of Old D&B approved a plan to separate into two publicly traded companies – the Company and The New D&B Corporation (“New D&B”). On September 30, 2000 (“the Distribution Date”), Old D&B distributed to its shareholders all of the outstanding shares of New D&B common stock (the “2000 Distribution”). New D&B comprised the business of Old D&B’s Dun & Bradstreet operating company (the “D&B Business”). The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the “Moody’s Business”) and was renamed “Moody’s Corporation”.

New D&B is the accounting successor to Old D&B, which was incorporated under the laws of the State of Delaware on April 8, 1998. Old D&B began operating as an independent publicly-owned corporation on July 1, 1998 as a result of its June 30, 1998 spin-off (the “1998 Distribution”) from the corporation now known as “R.H. Donnelley Corporation” and previously known as “The Dun & Bradstreet Corporation” (“Donnelley”). Old D&B became the accounting successor to Donnelley at the time of the 1998 Distribution.

Prior to the 1998 Distribution, Donnelley was the parent holding company for subsidiaries then engaged in the businesses currently conducted by New D&B, Moody’s and Donnelley. Prior to November 1, 1996, it also was the parent holding company of subsidiaries conducting business under the names Cognizant Corporation (“Cognizant”) and ACNielsen Corporation (“ACNielsen”). On that date Donnelley effected a spin-off of the capital stock of Cognizant and ACNielsen to its stockholders (the “1996 Distribution”). Cognizant subsequently changed its name to Nielsen Media Research, Inc. in connection with its 1998 spin-off of the capital stock of IMS Health Incorporated (“IMS Health”).

For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a distribution agreement, tax allocation agreement, employee benefits agreement, shared transaction services agreement, insurance and risk management services agreement, data services agreement and transition services agreement.

Detailed descriptions of the 1996, 1998 and 2000 Distributions are contained in the Company’s 2000 annual report on Form 10-K, filed on March 15, 2001.

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, goodwill and intangible assets, pension and other post-retirement benefits and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions. The following accounting estimates are considered critical because they are particularly dependent on management’s judgment about matters that are uncertain at the time the accounting estimates are made and changes to those estimates could have a material impact on the Company’s consolidated results of operations or financial condition.

Revenue Recognition

In recognizing revenue related to ratings, Moody’s uses judgments to allocate billed revenue between ratings and the future monitoring of ratings in cases where the Company does not charge ongoing monitoring fees for a particular issuer. These judgments are not dependent on the outcome of future uncertainties, but rather relate to allocating revenue across accounting periods. In such cases, the Company defers portions of rating fees that it estimates will be attributed to future monitoring activities and recognizes the deferred revenue ratably over the estimated monitoring periods.

The portion of the revenue to be deferred is based upon a number of factors, including the estimated fair market value of the monitoring services charged for similar securities or issuers. The monitoring period over which the deferred revenue will be recognized is determined based on factors such as the estimated lives of the rated securities. Currently, the estimated monitoring periods range from one to ten years. At December 31, 2007, 2006 and 2005, deferred revenue included approximately $54 million, $47 million and $36 million, respectively, related to such monitoring fees.

Additionally, in the case of commercial mortgage-backed securities, derivatives, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods, ranging from nine to 46 years, which are based on the expected lives of the rated securities. At December 31, 2007, 2006 and 2005, deferred revenue related to these securities was approximately $86 million, $72 million and $57 million, respectively.

Moody’s estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2007, 2006 and 2005, accounts receivable included approximately $38 million, $34 million and $31 million, respectively, related to accrued commercial paper revenue. Historically, the Company has not had material differences between the estimated revenue and the actual billings.

Accounts Receivable Allowance

Moody’s records, as reductions of revenue, provisions for estimated future adjustments to customer billings based on historical experience and current conditions. Such provisions are reflected as additions to the accounts receivable allowance. Adjustments to and write-offs of accounts receivable are charged against the allowance. Moody’s evaluates its accounts receivable by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its reviews, Moody’s establishes or adjusts allowances as considered appropriate in the circumstance. This process involves a high degree of judgment and estimation and could involve significant dollar amounts. Accordingly, Moody’s results of operations can be affected by adjustments to the allowance. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated adjustments and write-offs under current conditions. However, significant changes in any of the above factors, or actual write-offs or adjustments that differ from the estimated amounts could result in revenue adjustments that are greater or less than Moody’s estimates. In each of 2007, 2006 and 2005, the Company adjusted its provision rates and its allowances to reflect its current estimate of the appropriate level of accounts receivable allowance.

Contingencies

Accounting for contingencies, including those matters described in the “Contingencies” section of this “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”, commencing on page 38 is highly subjective and requires the use of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent management’s best estimates of the then current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where deemed appropriate . The Company regularly reviews contingencies and as additional information becomes available may, in the future, adjust its associated liabilities. Based on its review of the latest information available, and subject to the contingencies described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contingencies”, the ultimate liability of the Company in connection with pending legal and tax proceedings, claims and litigation is not likely to have a material adverse effect on Moody’s future reported results and financial position.

For the years ended December 31, 2007, 2006 and 2005, the provision for income taxes reflected credits of $27.3 million, $2.4 million and $8.8 million, respectively, due to changes in the Company’s liabilities for legacy income tax exposures that were assumed by Moody’s in connection with its separation from Old D&B in October 2000. These tax matters are more fully described under the caption “Legacy Contingencies” within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Goodwill and Other Intangible Assets

Moody’s evaluates its goodwill for impairment annually or more frequently if impairment indicators arise in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. The evaluation of the carrying value of goodwill requires that the Company make important assumptions and judgments about future operating results and cash flows as well as terminal values and discount rates. In estimating future operating results and cash flows, Moody’s considers internal budgets and strategic plans, expected long-term growth rates, and the effects of external factors and market conditions. If actual future operating results and cash flows or external conditions differ from the Company’s judgments, or if changes in assumed terminal values or discount rates are made, an impairment charge may be necessary to reduce the carrying value of goodwill, which charge could be material to the Company’s financial position and results of operations. Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Restructuring Charge

The Company has engaged, and may continue to engage, in restructuring actions, which require management to utilize significant estimates related to expenses for severance and other employee benefit costs, contract termination costs and asset impairments. If the actual amounts differ from these estimates, the amount of the restructuring charge could be impacted. For a full description of Moody’s restructuring actions, refer to the “Results of Operations” section below and Note 10 to the consolidated financial statements.

Pension and Other Post-Retirement Benefits

The expenses, assets, liabilities and obligations that Moody’s reports for pension and other post-retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions include the following:


•future compensation increases, based on the Company’s long-term actual experience and future outlook


•long-term return on pension plan assets, based on historical portfolio results and the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity and fixed-income investments)


•future healthcare cost trends, based on historical market data, near-term outlooks and assessments of likely long-term trends


•discount rates, based on current yields on high-grade corporate long-term bonds

The discount rate selected to measure the present value of the Company’s benefit obligations as of December 31, 2007 was derived using a cash flow matching method whereby the Company compares the plans’ projected payment obligations by year with the corresponding yield on the Citibank pension discount curve. The cash flows are then discounted back to their present value and an overall discount rate is determined.

Moody’s major assumptions vary by plan and assumptions used are set forth in Note 11 to the consolidated financial statements. In determining these assumptions, the Company consults with outside actuaries and other advisors as deemed appropriate. While the Company believes that the assumptions used in its calculations are reasonable, differences in actual experience or changes in assumptions could have a significant effect on the expenses, assets and liabilities related to the Company’s pension and other post-retirement benefits.

When actual plan experience differs from the assumptions used, actuarial gains or losses arise. To the extent the total outstanding gain or loss exceeds a corridor threshold as defined in SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”), the excess is subject to amortization in annual expense over the estimated average future working lifetime of active plan participants. For Moody’s pension and other post-retirement benefit plans, the total losses as of December 31, 2007 which have not been recognized in annual expense are $19.0 million and in 2008, Moody’s expects amortization of actuarial losses to be immaterial.

For Moody’s funded pension plan, the differences between the expected long-term rate of return assumption and actual experience could also affect the net periodic pension expense. As permitted under SFAS No. 87, the Company spreads the impact of asset experience over a five-year period for purposes of calculating the market related value of assets which is used in determining the expected return on assets’ component of annual expense and in calculating the total unrecognized gain or loss subject to amortization. As of December 31, 2007, the Company has an unrecognized asset gain of $4.1 million, of which $1.7 million will be recognized in the market related value of assets that is used to calculate the expected return on assets’ component of 2009 expense.

A one percentage-point increase in assumed healthcare cost trend rates will not affect 2008 projected expenses. Based on current projections, the Company estimates that expenses related to pension and post-retirement plans will be approximately $13 million in 2008 compared with $16.2 million in 2007, excluding the costs of curtailment and special termination benefits of $10.8 million in 2007. The expected expense decrease in 2008 reflects the effects of higher discount rates, lower amortization of actuarial losses and reduction in workforce due to restructuring, which are partially offset by lower plan asset gains.

Stock-Based Compensation

On January 1, 2006, the Company implemented, under the modified prospective application method, the fair value method of accounting for stock-based compensation SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). Under this pronouncement, companies are required to record compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Previously, on January 1, 2003, the Company implemented, on a prospective basis, the fair value method of accounting for stock-based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation”. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions and estimates that the Company believes are reasonable. Some of the assumptions and estimates, such as share price volatility and expected option holding period, are based in part on Moody’s experience during the period since becoming a public company, which is limited. The use of different assumptions and estimates in the Black-Scholes option pricing model could produce materially different estimated fair values for option awards and related expense.

Income Taxes

The Company is subject to income taxes in the United States and various foreign jurisdictions. The Company’s tax assets and liabilities are affected by the amounts charged for service provided and expenses incurred as well as other tax matters such as inter-company transactions. The Company accounts for income taxes under the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” Therefore, income tax expense is based on reported income before income taxes, and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.

Moody’s is subject to tax audits in various jurisdictions which involve legacy and other tax matters. The Company regularly assesses the likely outcomes of such audits in order to determine the appropriateness of its FIN No. 48 tax liabilities. On January 1, 2007, upon the implementation of FIN No. 48, the Company implemented the accounting policy to classify interest related to income taxes as a component of interest expense in the Company’s consolidated financial statements and to classify associated penalties, if any, as part of other non-operating expenses. Prior to the implementation of FIN No. 48, the Company had classified interest related to income taxes and associated penalties as components of income tax expense. In accordance with FIN No. 48, prior period financial statements have not been reclassified for this change.

FIN No. 48 requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. Upon the initial implementation of FIN No. 48, the Company recorded a reduction of its January 1, 2007 retained earnings of $43.3 million, which is comprised of $32.9 million of tax and accrued interest of $17.3 million ($10.4 million, net of tax). As the determination of FIN No. 48 liabilities and associated interest and penalties requires significant estimates to be made by the Company, there can be no assurance that the Company will accurately predict the outcomes of these audits, and thus, the eventual outcomes could have a material impact on the Company’s net income or financial condition.

Other Estimates

In addition, there are other accounting estimates within Moody’s consolidated financial statements, including recoverability of deferred tax assets, anticipated dividend distributions from non-U.S. subsidiaries and valuation of investments in affiliates. Management believes the current assumptions and other considerations used to estimate amounts reflected in Moody’s consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in Moody’s consolidated financial statements, the resulting changes could have a material adverse effect on Moody’s consolidated results of operations or financial condition.

See Note 2 to the consolidated financial statements for further information on significant accounting policies that impact Moody’s.

Operating Segments

Beginning in January 2008, Moody’s segments were changed to reflect the implementation of the business reorganization announced in August 2007. As a result of the reorganization, the rating agency remains in the Moody’s Investors Service operating company and several ratings business lines have been realigned. All of Moody’s other commercial activities, including MKMV and sales of MIS research, are now combined under a new operating company known as Moody’s Analytics. See “Reorganization and New Segments” section below.

In 2007 and prior years, Moody’s operated in two reportable segments: Moody’s Investors Service and MKMV. Moody’s Investors Service consisted of (i) four rating groups — structured finance, corporate finance, financial institutions and sovereign risk, and public finance — that generate revenue principally from the assignment of credit ratings to issuers and issues of fixed-income obligations in the debt markets, and (ii) research, which primarily generates revenue from the sale of investor-oriented credit information research, data and other analytical tools that are produced principally by the rating groups. For presentation purposes, Europe represents Europe, the Middle East and Africa and public finance represents U.S. public finance. Given the dominance of Moody’s Investors Service to Moody’s overall results, the Company does not separately measure or report corporate expenses, nor are such expenses allocated between the Company’s business segments. Accordingly, all corporate expenses are included in operating income of the Moody’s Investors Service segment and none have been allocated to the MKMV segment.

The MKMV business develops and distributes quantitative credit risk assessment products and services, including credit processing software and analytical tools for credit portfolio management.

Certain prior year amounts have been reclassified to conform to the current presentation.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody’s Corporation condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains Forward-Looking Statements. See “Forward-Looking Statements” commencing on page 39 for a discussion of uncertainties, risks and other factors associated with these statements.

The Company

Moody’s is a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software and credit portfolio management solutions and (iii) beginning in January 2008, fixed income pricing data and valuation models. Moody’s operates in two reportable segments MIS and MA.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors.

The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, securities pricing and valuation services, and specialized consulting services. MA also distributes investor-oriented research and data developed by MIS as part of its rating process, including in-depth research on major debt issuers, industry studies, and commentary on topical credit related events.

In addition to its reported results, Moody’s has included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations certain adjusted results that the SEC defines as “non-GAAP financial measures.” Management believes that such non-GAAP financial measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period to period comparisons of the Company’s performance. These non-GAAP financial measures relate to Legacy Tax Matters and adjustments made to the Company’s 2007 restructuring Plan, further described in Note 11 and Note 8, respectively, to the Company’s condensed consolidated financial statements.

Critical Accounting Estimates

Moody’s discussion and analysis of its financial condition and results of operations are based on the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, goodwill and intangible assets, pension and other post-retirement benefits, stock-based compensation, and income taxes. Actual results may differ from these estimates under different assumptions or conditions. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s annual report on Form 10-K for the year ended December 31, 2007, includes descriptions of some of the judgments that Moody’s makes in applying its accounting estimates in these areas. Since the date of the annual report on Form 10-K, there have been no material changes to the Company’s critical accounting estimates.

Operating Segments

Beginning in January 2008, Moody’s segments were changed to reflect the Reorganization announced in August 2007. As a result of the Reorganization, the rating agency is reported in the MIS segment and several ratings business lines have been realigned. All of Moody’s other non-rating commercial activities, including MKMV and sales of research produced by MIS analysts and the production and sales of other products and services, are represented in the MA segment.

As part of the Reorganization there were several realignments within the MIS LOBs. Sovereign and sub-sovereign ratings, which were previously part of financial institutions; infrastructure/utilities ratings, which were previously part of corporate finance; and project finance, which was previously part of structured finance, were combined with the public finance business to form a new LOB called public, project and infrastructure finance. In addition, real estate investment trust ratings were moved from financial institutions and corporate finance to the structured finance business. Furthermore, in August 2008 the global managed investments group, previously part of the structured finance business, was combined with the financial institutions business.

Within MA various aspects of the legacy MIS research business and MKMV business were combined to form the subscriptions, software and consulting businesses. The subscriptions business includes credit and economic research, data and analytical models that are sold on a subscription basis; the software business includes license and maintenance fees for credit risk software products, and the consulting business includes professional services and credit training associated with risk modeling, credit scorecard development, and other specialized analytical projects, as well as credit education services that are typically sold on a per-engagement basis. Subscription services are typically sold for an initial 12-month term, with automatic renewal features for subsequent annual periods.

The following is a discussion of the results of operations of the new segments, excluding the intersegment royalty revenue for MIS and expense charged to MA for the rights to use and distribute content, data and products developed by MIS. Additionally, overhead costs and corporate expenses of the Company, all of which were previously included in the former MIS segment, are allocated to each new segment based on a revenue-split methodology. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resource, information technology and legal.

Certain prior year amounts have been reclassified to conform to the current presentation.

Consolidated revenue was $433.4 million, a decrease of $91.6 million from the same quarter last year. The decrease is primarily attributable to the continued downturn in the credit markets resulting in lower fees from new issuance across most sectors and asset classes in the MIS segment. These declines were partially offset by growth in recurring ratings revenue and increases within all global LOBs in the MA segment.

U.S. revenue of $218.3 million decreased $88.6 million from prior year primarily reflecting weak issuance volumes due to continued market volatility and high interest rate spreads. The adverse market conditions and historically-wide interest spreads continue to affect new issuance activity for most products within SFG and for the bank loan, investment grade and speculative grade ratings areas of CFG.

International revenue was $215.1 million, a decrease of $3.0 million from 2007, reflecting the impact of the credit market turmoil that began in the U.S. in 2007 and has since spread to the European and Asian markets. Significant declines in issuance of structured finance and corporate finance obligations were partially offset by increases in new issuances within the European banking sector. Favorable FX translation contributed approximately $9 million to international revenue in 2008.

Operating, SG&A expenses decreased $32.1 million from 2007, primarily due to a $22.8 million decline in compensation expenses. Salary and benefits expense was $131.4 million, down $10.4 million compared to prior year, reflecting the impact of restructuring actions taken in the fourth quarter of 2007. Annual cash incentive compensation of $11.8 million was down $5.9 million, or 33%, reflecting weaker financial performance compared to prior year, while stock-based compensation of $16.9 million declined $6.5 million reflecting the restructuring actions taken in the fourth quarter of 2007 and a lower Black-Scholes value for the 2008 grants compared to the prior years’ grants. Non-compensation expenses of $70.7 million decreased $9.3 million or 12% from prior year, reflecting reductions, primarily in the areas of T&E, rent/occupancy and recruiting of $4.1 million, $2.8 million and $1.7 million, respectively. Also included in non-compensation expense in 2008 was approximately $4 million of bad debt recognized during the quarter, compared to an immaterial amount in the same period of 2007.

Depreciation and amortization of $14.6 million increased $3.0 million from 2007 primarily due to 7WTC assets fully in service in 2008 as opposed to the phase-in of 7WTC assets during the third quarter of 2007.

Operating income decreased $60.7 million from prior year and operating margin of 43.8% decreased 390 basis points from 47.7% in 2007, primarily reflecting the decline in revenue, partially offset by the reduction in operating expenses. FX translation positively impacted operating income by approximately $10 million.

Net interest expense was $12.6 million, an increase of $1.4 million from prior year due to higher debt levels. Interest income of $5.1 million in 2008 and $5.2 million in 2007, was partially offset by interest on FIN 48 and other tax related liabilities of $3.6 million and $4.2 million in 2008 and 2007, respectively.

Other non-operating income of $6.7 million in 2008 increased $4.5 million due primarily to $4.6 million of income relating to the resolution of a Legacy Tax Matter in 2008.

Moody’s effective tax rate of 38.6% decreased from 43.3% in 2007, due primarily to a larger portion of consolidated taxable income being generated from outside the U.S., which is taxed at a lower rate than the U.S. statutory rate, and the realization of credits and deductions available for U.S.-based manufacturing and research activities.

Net income decreased $23.9 million from 2007, primarily reflecting revenue declines outpacing cost reductions. Included in the 2008 results are a $2.8 million net benefit associated with a Legacy Tax Matter and a $1.1 million net favorable adjustment to the 2007 restructuring charge. Excluding these benefits in 2008, net income and would have been $109.1 million, a decrease of $27.8 million, or 20.3%. Earnings per diluted share would have been $0.45, which was $0.06 or 11.8% lower than 2007, with the smaller percentage decrease in earnings per diluted share due to 9% fewer shares outstanding.

Global revenue of $296.8 million declined $107.9 million from 2007 with SFG accounting for the vast majority of the net decrease. In the U.S., revenue of $153.4 million decreased $92.8 million, or 38%, from prior year and comprises 52% of global revenue compared to 61% in 2007. Internationally, revenue of $143.4 million was $15.1 million, or 10%, lower than prior year and included a $7 million positive impact from FX translation. The split of revenue between relationship and transaction for the quarter of 49% and 51%, respectively, has shifted more towards recurring revenue than in prior year when the split was 34% relationship-based and 66% from initial transaction fees. The lower proportion of transaction revenue in 2008 is primarily due to the significant decline in new issuance. Relationship revenue represents the recurring monitoring of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations, while transaction revenue represents the initial rating of a new debt issuance as well as other one-time fees.

Global SFG revenue decreased $97.6 million from prior year, with 81% of the decline occurring within the U.S. Relationship based revenue increased to 46% of total revenue in 2008 from 25% in the prior year. U.S. revenue was $42.1 million, down 65%, from 2007, led by declines in Derivatives, CREF and RMBS of $29.2 million or 59%, $23.3 million or 80%, and $19.3 million or 91%, respectively, reflecting the more than 80% decline in dollar volume and deal count issuance as a result of the lack of investor demand for securitizable assets, market volatility and higher spreads in the credit markets. Internationally, revenue of $55.6 million accounted for 57% of global and decreased $18.9 million or 25% from 2007 when it accounted for 38% of total SFG. Decreases in Derivatives and CREF of $14.7 million and $7.4 million, respectively, were partially offset by growth in long-term ABS and RMBS of $2.3 million and $2 million, respectively. FX translation contributed approximately $3 million to international revenue in 2008.

Global CFG revenue decreased $17.2 million from 2007, with $12.2 million or 71% of the decline occurring in the U.S. Revenue from new issuance activity decreased to 53% of total CFG in 2008, versus 65% in 2007, resulting from fewer transactions and smaller average size per transaction compared to prior year. U.S. revenue totaled $44.4 million, down 22% from prior year, led by decreases in bank loan ratings, investment and speculative-grade securities of $8.1 million, $2.2 million and $1.4 million, respectively. Other CFG services such as national scale ratings and company credit assessment services also decreased $2.5 million from prior year. These decreases were partially offset by growth from monitoring fees of $2.3 million or 26%. International revenue in 2008 was $30.6 million, a decrease of $5.0 million or 14% from 2007, with $3.0 million of the decrease attributable to bank loans. Declines in speculative-grade securities and estimated ratings of $1.3 million and $1 million, respectively, were partially offset by growth in monitoring fees of $1.1 million. FX translation contributed $1.6 million to international revenue in 2008.

Global FIG revenue increased $1.1 million, mostly from the international banking sector. Relationship revenue increased to 63% of global compared to 55% in the prior year. In the U.S., revenue of $27.1 million was down $3 million or 10% from prior year due primarily to a $3.2 million decline in revenue from the insurance sector. International revenue of $37.3 million increased $4.1 million, or 12%, from 2007 with $3.9 million generated from within the EMEA banking sector. FX translation contributed approximately $2 million to international revenue in 2008.

Global PPIF revenue increased $5.8 million from prior year. Recurring revenue represented 39% of global compared to 40% a year-ago. In the U.S., revenue of $39.8 million increased $1.1 million, or 3%, from prior year with the $2.3 million increase in municipal structured product revenue being partially offset by a $1.6 million decline in the public finance sector. International revenue was $19.9 million, an increase of $4.7 million, or 31%, from 2007, led by growth in the project and infrastructure finance sector of $3.9 million, or 43% from prior year, primarily within the EMEA region. The FX translation impact on international revenue in 2008 was not material.

Total Operating, SG&A expenses, including allocated corporate costs decreased $32.8 million from 2007 reflecting declines in both compensation and non-compensation costs. Compensation costs of $111.3 million decreased $20.1 million, or 15%, from prior year mainly due to reductions in salary expense as a result of the fourth quarter 2007 restructuring Plan; stock-based compensation resulting from impact of the Plan as well as a lower Black-Scholes value in 2008 compared to prior years; and annual cash incentive compensation reflecting weaker financial performance compared to prior year. Non-compensation expenses of $45.8 million decreased $12.6 million, or 21.6%, from prior year due primarily to overall cost controls in place, particularly in the areas of T&E, recruiting and marketing, as well as a lower percentage of overhead costs allocated to MIS in 2008 compared to 2007 due to reduced MIS revenue. The reductions in non-compensation costs were partially offset by approximately $3 million of bad debt expense recorded during the quarter, compared to an immaterial amount in the prior year.

Operating income decreased $75.2 million from 2007 reflecting the reduction in revenue outpacing the decline in Operating, SG&A expenses. FX translation had a positive $7.4 million impact on operating income for the quarter.


CONF CALL

Lisa Westlake

Good morning everyone. Thanks for joining us on this teleconference to discuss Moody's results for the third quarter of 2008. I am Lisa Westlake, Vice President of Investor Relations. Moody's released its results for the third quarter of 2008 this morning. The earnings release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation will lead this morning's conference call. Also on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation.

Before we get started, I call your attention to the cautionary language set out at the end of our earnings release. Certain statements my colleagues and I make today may be forwardlooking within the spirit of the Private Securities Litigation Reform Act of 1995. This act provides the safe harbor for such forwardlooking statements. I direct your attention to the management discussion and analysis section and the risk factors discussed in our annual report on Form 10K for the year ended December 31, 2007, and in other SEC filings made by the company from time to time.

I would also like to point out the safe harbor statement under the Private Securities Litigation Reform act of 1995 contained in our press release issued this morning. These set forth important factors that could cause actual results to differ materially from those contained in any such forwardlooking statements. I should point out that members of the media might be on the call this morning in a listenonly mode. I am now pleased to turn the call over to Ray McDaniel.

Ray McDaniel

I will begin our prepared remarks this morning with a brief summary of Moody's third quarter results. Linda will then take you through the quarter's operating highlights, provide some commentary on revenues and expenses and update you on our share repurchase program and our latest acquisition. I will then review recent developments in the regulatory area and finish with Moody's outlook for 2008. After that, we will be happy to respond to your questions

The disruptions and uncertainty in the financial markets worsened materially in September, undermining credit market activity across all asset classes and spreading into areas that have been relatively active earlier in the year. Moody's results in the third quarter were adversely impacted by the credit market freeze, which drove global nongovernment debt issuance for the month of September down more than 40% from already depressed levels a year ago.

Revenue for the quarter was $433 million, down 17% from a year ago. Strength in public and infrastructure finance and growth from Moody's Analytics was more than offset by extremely limited issuance of structured finance securities and speculative grade bonds and bank loans.

Operating income for the third quarter was $190 million, a decrease of 24% yearoveryear. Excluding the positive impact from foreign currency translation, revenue and operating income decreased 19% and 28%, respectively. Recurring revenue and our ongoing cost management efforts continue to reduce the impact of weak issuance conditions on overall performance.

Diluted earnings per share for the quarter were $0.46, down 10% compared to $0.51 a year ago. Excluding primarily legacy tax matters, diluted EPS for the quarter declined 12% to $0.45.

Turning now to yeartodate performance, revenue for the first nine months of 2008 was approximately $1.4 billion, a decrease of 23% from the first nine months of 2007. Operating income of $623 million was down 32% from the same period a year ago. Excluding the positive impact of foreign currency translation, revenue and operating income declined 25% and 35%, respectively.

Reported yeartodate earnings per share of $1.49 included a benefit relating to the resolution of certain legacy tax matters and adjustments made in 2008 related to the 2007 restructuring. Excluding these items, diluted earnings per share decreased 24% to $1.44 for the first nine months of 2008.

In recent weeks, the financial system has experienced significant additional turmoil as core problems in credit have been amplified by a much wider crisis in confidence and deceleration in macroeconomic activities. A range of global responses have been initiated to contain the damage. While we expect that these efforts will help stabilize markets, timing for recovery remains uncertain and has probably been extended.

Globally, a reduction of debt issuance has resulted from historically wide interest spreads that cause many issuers to delay transactions. Spreads for investment grade industrial debt are approaching levels not seen since the 1930s, while spreads over U.S. Treasuries for speculative grade debt reached a record 1600 basis points in midOctober.

In light of these recent developments, we have revised our guidance down for the full year 2008 earnings per share to a range of $1.71 to $1.77 excluding legacy tax matters, 2007 restructuring adjustments, and the Fermat acquisition. I will further discuss our revised outlook later in the call. At this point, I will turn the call over to Linda to provide more details on our financial results and other updates.

Linda Huber

I will begin with revenue for the third quarter. Moody's U.S. revenue declined 29% yearoveryear to $218 million. Revenue from outside the U.S. was $215 million, about flat with a year ago, and represented 50% of Moody's total revenue for the quarter. Recurring revenue of $268 million was up 8% from the third quarter of 2007 and represented 62% of total revenue for the quarter. For the first nine months of 2008, recurring revenue grew 12% to $807 million, representing 60% of total revenue.

Focusing on details by business segment, I will start will the ratings business. Moody's Investors Service revenue for the quarter was $297 million, a decline of 27% yearoveryear. Excluding the favorable impact of foreign currency translations, revenue was lower by 29%. U.S. ratings revenue was down 38% compared to a 10% decrease in nonU.S. ratings revenue. Revenue from outside the U.S. represented 48% of total ratings revenue.

Global structure finance revenue for the third quarter was $98 million, down 50% yearoveryear. U.S. structured finance revenue decreased 65% due to issuance declines led by residential mortgage-backed securities, commercial real estate finance and derivatives. NonU.S. structured finance revenue was down 25% from the prior year period. Declines in the European credit derivative and commercial real estate and financial sectors better partially offset by growth in assetbacked and residential mortgagebacked securities as banks took advantage of favorable arrangements with the European central bank by securitizing balance sheets.

Global corporate finance revenue of $75 million for the third quarter declined 19% from a year ago. U.S. corporate finance revenue decreased 22% yearoveryear led by a significant decline in bank loan ratings and a decrease in investment grade issuance to levels last seen in 2005. Outside the U.S., corporate finance revenue was down 14%, due primarily to declines in revenue from speculative grade bond and bank loan ratings.

Global financial institutions revenue of $64 million increased 2% from the same quarter of 2007. U.S. financial institutions revenue was down 10%, as revenue declines in the insurance and finance and securities sectors more than offset growth in the banking and managed investment sector. However, outside the U.S., financial institutions revenue grew 12%, primarily due to higher revenue from European bank ratings.

Global revenue for public project and infrastructure finance increased 11% to $60 million. U.S. revenue for these sectors increased 3% from the third quarter of 2007, with solid doubledigit growth in revenue from U.S. municipal ratings. NonU.S. revenue rose 30% driven by increased project and infrastructure finance activity, primarily by European utilities.

Turning now to Moody's Analytics, global revenue of $137 million increased 14% from the third quarter of 2007. Excluding the positive impact of foreign currency translation, revenue grew by 12%. U.S. revenue was up 7% to $65 million, while nonU.S. revenues grew 20% and represented 52% of total revenue.

Within Analytics, global revenue from subscriptions rose 10% to $119 million, while both software and consulting businesses saw strong doubledigit revenue growth driven primarily by software licensing fees and consulting projects for customers outside the U.S.

Turning now to expenses, Moody's third quarter operating expenses were $244 million, 11% lower than the prior year period. We continue to manage the business prudently and maintain rigorous control of nonessential costs. Lower incentive and stockbased compensation expense positively impacted these results.

Nonoperating expense for the quarter included a onetime benefit of approximately $5 million, or be $0.01 per share, relate to resolution of certain legacy tax matters.

Operating margin for the third quarter of 2008 was 43.8%, 390 basis points lower than the third quarter of 2007. Our effective tax rate for the quarter was 38.6%, compared with 43.3% for the prior year period. The decrease was due primarily to a larger portion of consolidated taxable income being generated from outside the U.S., which is taxed at a lower rate than the U.S. statutory rate, and the realization of credits and deductions available for U.S.based manufacturing and research activities.

I would like to turn now to an update on capital allocations and stock buybacks. Moody's remains committed to using its strong cash flow to create value for shareholders by investing in growing areas of our business, reinvesting in ratings quality initiatives, making selected acquisitions in related businesses, repurchasing our own stock, and paying a modest dividend.

Although transaction revenue has declined this year due to lower issuance, Moody's recurring revenue continues to generate significant and stable cash flow. We intend to continue returning capital to shareholders in a manner that is consistent with maintaining sufficient liquidity in this uncertain environment.

During the third quarter of 2008, Moody's repurchased 4.2 million shares at a total cost of $145 million and issued 394,000 shares under employee stockbased compensation plans. For the quarter, we repurchased shares at an average price of $34.25. Share repurchases during the quarter were funded primarily from free cash flow. Outstanding shares as of September 30, 2008, totaled 239.8 million, representing 7% reduction from a year ago.

In the first nine months of the year, Moody's repurchased a total of 13.4 million shares at a total cost of $473 million and issued about 2.1 million shares under employee stockbased compensation plans. Yeartodate we repurchased shares at an average price of $35.22. For this period, share repurchases were funded using a combination of free cash flow and borrowing.

At quarterend, Moody's had $1.4 billion of outstanding debt with approximately $350 million of additional capacity available. Also as of September 30, 2008, Moody's had $1.6 billion of share repurchase authority remaining under its current program.

Before I turn the call back over to Ray, I would like to discuss our most recent acquisition. On October 9, we closed the acquisition of Fermat International, a leading provider of risk and performance management software to the global banking sector. The combination of Moody's credit portfolio management and economic capital tools with Fermat's expertise in risk management software positions Moody's to deliver comprehensive analytical solutions for financial institutions worldwide. We believe this is a particularly attractive opportunity given the current environment of heightened sensitivity to capital risk management and expect this business to generate annual revenues in excess of $70 million by 2010. With that, I will turn it back over to Ray.

Ray McDaniel

Thanks, Linda. I will provide a brief update on regulatory developments at this point. We continue to have active communications with regulatory authorities on both a global and regional level. At the global level, the G7 finance ministers recently stated that they would accelerate the implementation of the Financial Stability Forum recommendations which includes several points on credit rating agencies and the role and use of ratings.

Related to these recommendations, International Organization of Securities Commissions, or IOSCO, has published a revised code of conduct for credit rating agencies. We expect to publish a revised Moody's Code of Professional Conduct in the coming weeks that will address changes in the IOSCO code.

Turning to the U.S., as many of you are aware, last week I participated in a hearing held by the U.S. House of Representatives committee on oversight and government reform. This is one of a series of hearings that has been planned during the months of October and November by both the House and Senate. We anticipate that there will be additional hearings over the next year as U.S. policymakers and regulators seek to restore confidence in the stability and resiliency of the U.S. financial system.

Earlier in October, the President's working group released a progress update on its policy statements on financial market developments. The update summarized policy initiatives taken over the past several months, including the proposed rules for nationally recognized statistical rating organizations published by the Securities and Exchange Commission earlier this summer. It's expected that the SEC will publish its final set of rules by the end of this year.

Turning to Europe, this past summer, the European Commission published a proposal for the oversight of rating agencies in the EU, which drew comments from over 90 market participants, including Moody's. It is expected that the commission will publish a revised proposal by midNovember for review by the European parliament and the council of the European union. Moody's supports the ongoing efforts undertaken by global policymakers and regulators to restore confidence in the credit markets. We will continue to communicate our messages and address issues and concerns that various authorities may have in our mutual goal of greater market stability and the return of investor confidence.

I would like to conclude this morning's prepared remarks by discussing our outlook for the remainder of 2008. Moody's outlook for 2008 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer spending, residential mortgage borrowing and refinancing activity, securitization levels, capital market issuance, and the impact of governmentsponsored economic stabilization initiatives. There is an important degree of uncertainty surrounding these assumptions; and if actual conditions differ from these assumptions, Moody's results for the year may differ materially from our current outlook.

In light of difficult current conditions in the global debt markets and uncertainty regarding the pace of recovery, we've revised our outlook downward for the full year of 2008. At Moody's overall, we now expect full year 2008 revenue to decline in the low 20s percent range. This decline excludes any revenue relating to the acquisition of Fermat and assumes foreign currency translation in 2008 at current exchange rates.

We are maintaining rigorous focus on expense management and planning conservatively for the business in light of lower revenue expectations. Full year operating expenses are now expected to be about 11% lower on an asreported basis, compared to full year 2007. Excluding the impacts from restructuring in the Fermat acquisition, we now project full year expenses for 2008 to decline about 8% from 2007. And we expect full year 2008 operating margin to be in the low 40s percent range, down from our previous guidance of mid40s percent range due primarily to lower revenue.

Excluding the items previously mentioned, as well as legacy tax matters, earnings per share for 2008 are now projected in the range of $1.71 to $1.77 versus the previous range of $1.90 to $2.00.

For the global Moody's Investors Service business, we now expect revenue for full year 2008 to decline in the low 30s percent range in anticipation of poor market conditions for remainder of the year. For the full year 2008, we now project Moody's Investors Service revenue in the U.S. to decrease in the low 40s percent range and revenue outside the U.S. to decrease in the midteens percent range.

We expect structured finance revenue in the U.S. to decline in the mid60s percent range, reflecting significant percent declines across all asset classes. However, we expect the percent decline outside the U.S. to be about half the U.S. rate.

Corporate finance revenue for the U.S. is expected to decrease in the low 30s percent range, with weakness across all asset classes led by declines in speculative grade bond and bank loan ratings. International corporate finance revenue is also projected to decline, but at a much slower rate.

We now project a low singledigit decline in global financial institutions revenue, with U.S. revenue expected to decrease in the lowto midteens percent range, partially offset by international growth.

We anticipate slight growth within the global public project and infrastructure finance sectors, with U.S. revenue expected to be about flat and low doubledigit percent growth expected outside the U.S.

For Moody's Analytics, we now expect revenue growth in the low doubledigit percent range, as market weakness among financial institutions is leading to longer sales cycles and somewhat higher customer attrition. U.S. revenue is expected to grow in the high singledigit percent range, while nonU.S. growth is still projected in the midteens percent range.

Growth in the subscription business is anticipated at a low doubledigit percent rate. In the software business, we now expect revenue to be about flat with 2007; and in the smaller consulting business, we continue to anticipate strong growth reflecting sustained demand for professional services and credit training projects.

While sales cycles are lengthening due to financial market uncertainty, robust demand continues for Moody's expertise and credit education risk modeling and scorecard development. Of

That concludes our prepared remarks; and joining Linda and me for the questionandanswer session are Michael Madelain, the Chief Operating Officer of Moody's Investors Service, and Mark Almeida, President of Moody's Analytics. We would be pleased to take any questions you may have.

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