Results of Operations - Comparing Three Months Ended September 30, 2008 and 2007
Consolidated Review
The Segment Review that follows is incorporated herein by reference.
Revenue and Operating Profit

                                       Third                        Third
                                      Quarter          %           Quarter
                                       2008         Decrease        2007

              Revenue              $ 2,048,541        (6.4 )%   $ 2,187,996
              Operating profit *   $   655,968       (15.5 )%   $   776,338

              % Operating margin          32.0 %                       35.5 %

* Operating profit is income before taxes on income, interest expense and corporate expense.

Revenue and Operating Profit
• The third quarter revenue and operating profit decreases are primarily attributable to declines at the Financial Services and the McGraw-Hill Education segments. Financial Services revenue and operating profit declined 14.2% and 18.8%, respectively, largely due to weakness in Credit Market Services. The McGraw-Hill Education segment's revenue and operating profit declined 3.8% and 14.5%, respectively, principally due to softness in the School Education Group.

o Partially offsetting the revenue and operating profit declines were increases at the Information & Media segment of 5.3% and 22.6%, respectively, driven primarily by the Business-to-Business Group.

o Reductions to reflect a change in the projected payout of restricted performance stock awards and reductions in other incentive compensation projections reduced expenses in the third quarter and helped mitigate the operating profit decline as follows:

? McGraw-Hill Education incentive compensation expense declined $15.9 million compared to prior year.

? Financial Services incentive compensation expense declined $60.0 million compared to prior year.

? Information & Media incentive compensation expense declined $12.4 million compared to prior year.

? Corporate incentive compensation expense declined $29.1 million compared to prior year.

o Foreign exchange rates positively affected both revenue and operating profit by $8.7 million and $11.9 million, respectively.

• During the third quarter of 2008, the Company implemented a restructuring plan related to a limited number of businesses across the Company to contain costs and mitigate the impact of the current and expected future economic conditions. The Company incurred a pre-tax restructuring charge of $23.4 million ($14.6 million after-tax, or $0.05 per diluted share), which consisted primarily of severance costs related to a workforce reduction of approximately 270 positions as follows:

o McGraw-Hill Education: $5.4 million and approximately 90 positions

o Financial Services: $4.1 million and approximately 40 positions

o Information & Media: $13.9 million and approximately 140 positions

• Product revenue and expenses consist of the McGraw-Hill Education and the Information & Media segments, and represents educational and information products, primarily books, magazine circulations, and syndicated study products.

o Product revenue decreased 2.6% or $30.8 million, primarily due to McGraw-Hill Education, driven by softness in the School Education Group.

o Product operating-related expenses increased 3.2% or $13.9 million, primarily due to the growth in expenses at McGraw-Hill Education related to major product launches in a strong 2008 state adoption market, partially offset by lower cost of sales as a result of decreased revenues. Amortization of prepublication costs increased $14.1 million or 12.7% driven by spending associated with the state adoption cycles.

o Product related selling and general expenses increased 1.3% or $4.0 million, primarily due to increased sampling related to the strong 2008 adoption market opportunities and increased information & technology costs, partially offset by reduced marketing, selling and administrative costs.

o Product margin decreased 330 basis points to 33.1% for the third quarter 2008 primarily due to McGraw-Hill Education which had lower revenues due to softness at School Education Group and growth in expenses related to major product launches in a strong 2008 state adoption market.

• Service revenue and expenses consist of the Financial Services segment, the service assessment contracts of the McGraw-Hill Education segment and the remainder of the Information & Media segment, primarily related to information-related services and advertising.

o Service revenue decreased 10.6% or $108.6 million primarily due to Financial Services.

? Financial Services revenue decreased primarily due to Credit Market Services, which was adversely impacted by turbulence in the global financial markets resulting from frozen credit markets, financial difficulties experienced by several financial institutions and shrinking investor confidence in the capital markets.

? The McGraw-Hill Education segment's service revenue declined due to softness in the assessments market.

? Growth in the Information & Media segment helped partially offset the service revenue decline.

o Service operating-related expenses decreased 10.1% or $33.0 million, primarily due to reduced 2008 incentive compensation costs.

o Service related selling and general expenses decreased 11.0% or $37.7 million, primarily due to reduced 2008 incentive compensation costs.

o The service margin decreased 10 basis points to 34.3% for the third quarter of 2008 primarily due to the decline in Credit Market Services, partially offset by reduced 2008 incentive compensation expense.

• Total expenses in the third quarter of 2008, including the impact of the restructuring charge discussed above, decreased $47.1 million or 3.2% driven primarily by reductions in 2008 incentive compensation costs and lower direct costs related to revenues, partially offset by increased spending relating to sales opportunities in the McGraw-Hill Education segment and increased information and technology costs.

• Interest expense, net increased 42.7% to $22.0 million mainly driven by the impact of $1.2 billion in senior notes issued in the fourth quarter of 2007, partially reduced by interest income.

• For the quarters ended September 30, 2008 and 2007, the effective tax rate was 37.5%. The Company expects the effective tax rate to be at 37.5% for the remainder of the year absent the impact of events such as intervening audit settlements, changes in federal, state or foreign law and changes in the geographical mix of the Company's pre-tax income.

• Net income for the quarter decreased $61.9 million or 13.7%. Diluted earnings per share decreased 8.2% to $1.23 from $1.34 in 2007. Included in the 2008 diluted earnings per share is the $0.05 after-tax impact of the restructuring charge.

Risks and Uncertainties
The world financial markets have been experiencing volatility and disruption and more recently, the volatility and disruptions have reached extreme levels. These difficult conditions have impacted the businesses and results of operations of the Company and we do not expect these conditions to improve in the near term.
• In the McGraw-Hill Education segment, the weakening U.S. economy has resulted in declines in discretionary spending which have impacted our results of operations.

• In the Financial Services segment, frozen credit markets and shrinking investor confidence in the capital markets have resulted in a significant decline in global debt issuance which has impacted our results of operations in Credit Market Services.

• In the Information & Media segment, the general weakening of the U.S. economy has resulted in declines in advertising and consumer and business spending.

Segment Review
McGraw-Hill Education

                                                              Third                 %                 Third
                                                             Quarter           (Decrease)/           Quarter
                                                              2008              Increase              2007

Revenue
School Education Group                                    $   623,526               (9.1 )%       $   686,309
Higher Education, Professional and International              507,826                3.7 %            489,645

Total revenue                                             $ 1,131,352               (3.8 )%       $ 1,175,954

Operating profit                                          $   351,479              (14.5 )%       $   411,059

% Operating margin                                               31.1 %                                  35.0 %

Revenue and Operating Profit
• Revenue and operating profit for the McGraw-Hill Education segment reflect the seasonal nature of the Company's educational publishing operations, with the first quarter being the least significant, and the third quarter being the most significant.

• McGraw-Hill School Education Group ("SEG") revenue declined for the quarter, as increases in state new adoption basal sales were more than offset by lower residual and supplemental sales in adoption states and in the open territory market. The decline in residual and supplemental sales this quarter is attributable to lower discretionary spending by schools, many of which are operating on tighter budgets as state and local tax revenues have declined while other costs, especially energy costs, have increased.

o In the K-5 market for balanced basal programs, sales increased for the quarter due to higher adoption state sales in Texas and Florida. Open territory sales for these programs were higher because of increased sales in several states, particularly for reading. Sales of SEG's alternative K-5 basal programs in reading and math declined for the quarter due to the earlier timing of New York City math orders, which were fulfilled in the second quarter this year, and strong 2007 sales for reading in North Carolina that could not be wholly replaced in 2008. K-5 residual and supplemental sales declined in both the adoption states and open territory as schools reduced discretionary spending.

o 6-12 basal sales decreased for the quarter due primarily to a reduction in adoption state opportunities for secondary materials that was driven by Texas, which moved from 6-12 math purchasing in 2007 to K-5 math purchasing in 2008, and by Florida, which purchased for a number of 6-12 courses in 2007 but purchased K-5 reading in 2008. Open territory sales of 6-12 products increased due to higher orders for math and science in New York. As was true in the K-5 market, residual sales of 6-12 materials declined in adoption states and open territory as schools reduced discretionary spending.

o Non-custom or "shelf" testing revenue increased for the quarter driven by sales of the LAS series for English-language learners and increased Acuity revenues in New York City. This gain was partially offset by lower revenues for older shelf products.

o Custom testing revenue declined due to reductions in the volume of work performed for Missouri and Indiana during the quarter and the expiration of several contracts that produced revenue in the prior year.

• Higher Education revenue increased this quarter for both print and digital products. All major imprints achieved growth, led by a strong gain at the Career imprint. Growth in digital revenue was driven by Homework Management products and eBooks.

o Key titles contributing to third quarter performance included McConnell, Economics, 17/e; Nickels, Understanding Business, 8/e; Garrison, Managerial Accounting, 12/e; Ober, Keyboarding, 10/e; Knorre, Puntos de partida, 8/e; Silberberg, Chemistry, 5/e; and Spiceland, Intermediate Accounting, 5/e.

• Revenue in the professional market declined versus the prior year due to lower orders of backlist titles in a weak retail environment, which could not be wholly offset by strong sales of the new edition of Harrison's Principles of Internal Medicine. Digital subscriptions and digital licensing had a favorable impact on results for the quarter.

• International revenue increased during the quarter, led by growth in India and Asia, the Ibero/Italy region and Canada partially offset by sales declines in Latin America and Australia.

• Operating margin declined primarily due to decreased SEG revenues coupled with increased sampling costs, prepublication amortization, free-with-order expense and information and technology charges.

• Continued reductions in 2008 incentive compensation helped mitigate the operating profit reduction, as further described in the "Consolidated Review" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

• During the third quarter of 2008, the McGraw Hill Education segment incurred a pre-tax restructuring charge of $5.4 million consisting of employee severance costs related to the reduction of approximately 90 positions, driven by continued cost containment and cost reduction activities because of the current economic conditions.

• Foreign exchange rates had an immaterial impact on revenue and operating profit for the quarter.

Industry Highlights and Outlook
• The total available state new adoption market in 2008 is estimated at between $925 million and $950 million compared with approximately $820 million in 2007.

• Total U.S. PreK-12 enrollment for 2007-2008 is estimated at 56 million students, up 0.4% from 2006-2007, according to the National Center for Education Statistics ("NCES").

• The year's key opportunities in the state new adoption market are primarily offered by K-5 reading in Florida, K-5 math in Texas, and K-8 math in California. Other opportunities for 2008 include science in California, reading in Alabama, Indiana, Louisiana, and Oklahoma, and social studies in Arkansas and Tennessee.

o The Company expects to capture a majority share of the important Florida K-5 reading market as well as a major share of the overall K-12 reading/literature state new adoption market.

o In the overall K-12 math state new adoption market, SEG projects a strong share based on solid results in the K-5 Texas adoption as well as announced K-8 decisions in California, where some sales activity may continue throughout the fall.

• According to statistics compiled by the Association of American Publishers ("AAP"), total net basal and supplementary sales of elementary and secondary instructional materials decreased 3.3% through September 2008 compared to prior year. Basal sales in adoption states and open territory for the industry decreased 1.9% compared to prior year. In the supplemental market, industry sales were down 10.4% versus prior year. The supplementary market has been declining in recent years, in large part because basal programs are increasingly comprehensive, offering integrated ancillary materials that reduce the need for separate supplemental products.

• Refer to the Risks and Uncertainties included in the "Consolidated Review" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Financial Services

                                         Third            %            Third
                                        Quarter      (Decrease)/      Quarter
                                         2008         Increase         2007

             Revenue
             Credit Market Services   $ 423,247          (24.2 )%   $ 558,495
             Investment Services        228,211           13.5 %      201,119

             Total Revenue            $ 651,458          (14.2 )%   $ 759,614

             Operating profit         $ 281,642          (18.8 )%   $ 346,650

             % Operating margin            43.2 %                        45.6 %

Revenue and Operating Profit
• Credit Market Services revenue was adversely impacted by turbulence in the global financial markets resulting from frozen credit markets, financial difficulties experienced by several financial institutions and shrinking investor confidence in the capital markets. Specifically, the decrease in revenue was attributed to the continuing significant decreases in structured finance as well as decreases in corporate ratings; partially offset by increases in public finance ratings and credit ratings-related information products such as RatingsXpress and RatingsDirect.

o Continued significant decreases in issuance volumes in both the United States and Europe of residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), collateralized debt obligations ("CDO") and asset-backed securities ("ABS") contributed to the decrease in revenue.

o Corporate ratings decreases were driven by wider credit spreads and tighter lending standards in light of the weakening of the global economy and uncertainty in the world financial markets.

o Growth in information products was driven by increased customer demand for value-added solutions.

• Investment Services revenue was driven by growth in Capital IQ products and index services.

o The number of Capital IQ clients at September 30, 2008 increased 22.2% from the prior year and 5.2% from June 30, 2008.

o Revenue related to Standard & Poor's indices increased as assets under management for exchange-traded funds ("ETF") rose 6.7% from September 30, 2007 to $223.5 billion at September 30, 2008. ETF assets under management at December 31, 2007 were $235.3 billion. The number of exchange-traded futures and option contracts based on S&P indices exhibited strong increases in the third quarter of 2008 compared to the same period of the prior year, thereby also contributing to the revenue growth.

• Continued reductions in 2008 incentive compensation helped mitigate the operating profit reduction, as further described in the "Consolidated Review" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

• During the third quarter of 2008, the Financial Services segment incurred a pre-tax restructuring charge of $4.1 million consisting of employee severance costs related to the reduction of approximately 40 positions, driven by continued cost containment and cost reduction activities as a result of the current credit market environment and economic conditions.

• Foreign exchange positively impacted revenue by $6.5 million and operating profit by $11.5 million.

Issuance Volumes
The Company monitors issuance volumes as an indicator of trends in transaction revenue streams within Credit Market Services. The following table depicts changes in issuance levels as compared to prior year, based on Harrison Scott Publications and Standard & Poor's internal estimates (Harrison Scott Publications/S&P). Revenue was adversely impacted by the declines in issuance volumes of structured finance products in both the U.S. and Europe, in addition to declines in corporate debt issuance in the U.S.

                                                              Third Quarter
                                                          Compared to Prior Year
     Structured Finance                                     U.S.           Europe
     Residential Mortgage-Backed Securities ("RMBS")          -97.8 %       -87.3 %
     Commercial Mortgage-Backed Securities ("CMBS")          -100.0 %       -95.3 %
     Collateralized Debt Obligations ("CDO")                  -85.8 %       -87.1 %
     Asset-Backed Securities ("ABS")                           -2.6 %       -63.9 %
     Total New Issue Dollars (Structured Finance)             -78.3 %       -83.7 %

• The large decline in CDO issuance resulted from continued lack of investor appetite for the complex deal structures and secondary market trading liquidity concerns.

• Continued deterioration in the subprime mortgage market has significantly impacted dollar volume issuance in the RMBS market.

• CMBS issuance decreased due to the market dislocation attributed to high credit spreads resulting in high interest rates which are not economical to borrowers.

• In Europe, widening credit spreads and weak secondary market trading have contributed to the decline in new issue ABS volume.

                                                        Third Quarter
                                                    Compared to Prior Year
           Corporate Issuance                         U.S.           Europe
           High Yield Issuance                         -18.5 %         -8.9 %
           Investment Grade                            -67.3 %        -13.9 %
           Total New Issue Dollars (Corporate)         -65.8 %        -13.8 %

• Corporate debt issuance declined as the result of insufficient investor demand despite widening credit spreads in both the investment grade and high yield sectors

• New dollar issuance in the U.S. municipal market decreased 1.8% in the third quarter of 2008 versus the same period of last year.

Outlook
The current turbulent conditions in the global financial markets have resulted from frozen credit markets, financial difficulties experienced by several financial institutions and shrinking investor confidence in the capital markets. Because of the current credit market conditions, issuance levels deteriorated significantly across all asset classes. It is possible that these market conditions and global issuance levels in structured finance and corporate issuance could persist through the end of 2008 and beyond. The outlook for RMBS, CMBS and CDO asset classes as well as other asset classes is dependent upon many factors, including the general condition of the economy, interest rates, credit quality and spreads, and the level of liquidity in the financial markets. Although several governments and central banks around the globe have recently implemented measures in an attempt to provide additional liquidity to the global credit markets, it is still too early to determine the effectiveness of these measures.
Legal and Regulatory Environment
The financial services industry is subject to the potential for increased regulation in the United States and abroad. The businesses conducted by the Financial Services segment are in certain cases regulated under the Credit Rating Agency Reform Act of 2006, U.S. Investment Advisers Act of 1940, the U.S. Securities Exchange Act of 1934 and/or the laws of the states or other jurisdictions in which they conduct business.
Standard & Poor's Ratings Services is a credit rating agency that is registered with the Securities and Exchange Commission ("SEC") as one of ten Nationally Recognized Statistical Rating Organizations, or NRSROs. The SEC first began designating NRSROs in 1975 for use of their credit ratings in the determination of capital charges for registered brokers and dealers under the SEC's Net Capital Rule.
Credit rating agency legislation entitled "Credit Rating Agency Reform Act of 2006" (the "Act") was signed into law on September 29, 2006. The Act created a new SEC registration system for rating agencies that

volunteer to be recognized as NRSROs. Under the Act, the SEC is given authority and oversight of NRSROs and can censure NRSROs, revoke their registration or limit or suspend their registration in certain cases. The SEC is not authorized to review the analytical process, ratings criteria or methodology of the NRSROs. An agency's decision to register and comply with the Act will not constitute a waiver of or diminish any right, defense or privilege available under applicable law. Pre-emption language is included in the Act consistent with other legal precedent. The Company does not believe the Act will have a material adverse effect on its financial condition or results of operations.
The SEC issued rules to implement the Act, effective June 2007. Standard & Poor's submitted its application on Form NRSRO on June 25, 2007. On September 24, 2007, the SEC granted Standard & Poor's registration as an NRSRO under the Act. In March 2008, S&P filed its first annual update of its registration with the SEC. The public portions of S&P's Form NRSRO are available on S&P's website.
On June 16, 2008, the SEC issued proposed rules that focus largely on NRSROs' structured finance ratings process. The proposed rules address a broad range of issues, including disclosure and management of conflicts related to the issuer-pays model, prohibitions against analysts' accepting gifts or making "recommendations" when rating a security, and limitations on analyst participation in fee discussions. Under the proposed rules, additional records of all rating actions must be created, retained and made public, and records must be kept of material deviations in ratings assigned from model outputs as well as complaints about analysts' performance. The proposals require more disclosure of performance statistics and methodologies, a new annual report by NRSROs of their rating actions to be provided confidentially to the SEC, and unless structured finance ratings are distinguished from other ratings, NRSROs will be required to issue a report describing the differences for each structured rating. S&P submitted comments on the proposals by the July 25th deadline. The Company believes that some of the proposals raise serious legal issues. On July 1, 2008, the SEC also proposed changes to numerous SEC rules and forms that expressly utilize NRSRO ratings. The SEC's review of these proposals is ongoing.
In the third quarter of 2007, rating agencies became subject to scrutiny for their ratings on structured finance transactions that involve the packaging of subprime residential mortgages, including residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs").
On August 29, 2007, Standard & Poor's received a subpoena from the New York Attorney General's Office requesting information and documents relating to Standard & Poor's ratings of securities backed by residential real estate mortgages. Standard & Poor's has entered into an agreement with the New York Attorney General's Office which calls for S&P to implement certain structural reforms. The agreement resolves the Attorney General's investigation with no monetary payment and no admission of wrongdoing.
In September 2007, the SEC commenced an examination of rating agencies' policies and procedures regarding conflicts of interest and the application of those policies and procedures to ratings on RMBS and related CDOs. Standard & Poor's is cooperating with the SEC staff in connection with this examination. The SEC . . .