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.

Results of Operations

Three Months Ended September 30, 2008 compared with Three Months Ended September 30, 2007

Moody's Corporation

The table below provides a summary of revenue and operating results, followed by
further insight and commentary:



                                             Three Months Ended
                                               September 30,
                                              2008         2007     % change
          Revenue:
          United States                    $    218.3    $  306.9      (28.9 %)
          International                         215.1       218.1       (1.4 %)

          Total                            $    433.4    $  525.0      (17.4 %)

          Operating, SG&A expenses         $    230.8    $  262.9      (12.2 %)
          Operating income                 $    189.8    $  250.5      (24.2 %)
          Interest expense (income), net   $     12.6    $   11.2       12.5 %
          Net income                       $    113.0    $  136.9      (17.5 %)

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.

Segment Results

Moody's Investors Service

The table below provides a summary of revenue and operating results, followed by
further analysis and commentary:



                                                   Three Months Ended
                                                     September 30,
                                                    2008         2007     % change
    Revenue:
    Structured finance                           $     97.7    $  195.3      (50.0 %)
    Corporate finance                                  75.0        92.2      (18.7 %)
    Financial institutions                             64.4        63.3        1.7 %
    Public, project and infrastructure finance         59.7        53.9       10.8 %

    Total                                        $    296.8    $  404.7      (26.7 %)

    Operating, SG&A expenses                     $    157.1    $  189.9      (17.3 %)
    Operating income                             $    132.5    $  207.7      (36.2 %)

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.

Moody's Analytics

The table below provides a summary of revenue and operating results, followed by
further insight and commentary:



                                          Three Months Ended
                                            September 30,
                                           2008         2007     % change
             Revenue:
             Subscriptions              $    118.7    $  107.5       10.4 %
             Software                         11.1         8.2       35.4 %
             Consulting                        6.8         4.6       47.9 %

             Total                      $    136.6    $  120.3       13.5 %

             Operating, SG&A expenses   $     73.7    $   73.0        1.0 %
             Operating income           $     57.3    $   42.8       33.9 %

Global MA revenue, which comprises 32% of global MCO revenue in 2008 compared to 23% in 2007, increased $16.3 million from prior year with 74% of the growth generated outside the U.S. Recurring revenue in 2008 accounted for 91% of global, a slight decrease from 93% in the prior year, reflecting the impact of strong growth in the consulting and software LOBs which are primarily transaction-based. In the U.S., revenue of $64.9 million increased $4.2 million, or 7%, reflecting growth in subscription revenue, partially offset by a decline in the consulting LOB. International revenue was $71.7 million and increased $12.1 million, or 20%, from prior year generated from growth in all business lines. FX translation contributed approximately $2 million to international revenue in 2008.

Global subscription revenue increased $11.2 million and accounted for 68% of global MA growth, reflecting continued demand from new and existing customers for credit and economic research, structured finance analytics, credit risk assessment and other offerings. U.S. revenue was $59.1 million, an increase of $4.3 million or 8% from 2007. International revenue of $59.6 million increased $6.9 million or 13% over prior year, with 94% of the growth generated within the European region.

Global software revenue increased $2.9 million, reflecting a higher volume of large deals recognized in 2008 compared to 2007. U.S. revenue of $4.4 million remained flat with prior year and accounts for approximately 40% of global software revenue. Internationally, revenue increased $2.8 million or 72% from 2007, with growth generated from all regions.

Global consulting revenue increased $2.2 million over prior year reflecting relatively higher demand internationally for credit education, portfolio analysis, risk modeling and scorecard development services.

Operating, SG&A expenses, including allocated corporate overhead, were $73.7 million, flat compared to the 2007 period as reductions in compensation and benefits were offset by increases in non-compensation expenses. Compensation and benefits expense of $48.8 million decreased $2.7 million primarily due to lower stock-based compensation resulting largely from restructuring actions taken in the fourth quarter of 2007. This decrease was partially offset by an increase in salary expense and annual cash incentive compensation reflecting the growth and strong financial performance of the business. Non-compensation expenses were $24.9 million, an increase of $3.3 million, or 15.3% from 2007 mainly due to a higher proportion of allocated corporate overhead expenses in 2008 compared to prior year based on the revenue-split methodology and the absence in 2008 of a $2.5 million sales tax benefit received in the second quarter of 2007.

Operating income increased $14.5 million from 2007, as a result of strong revenue growth coupled with stable operating expenses compared to prior year. FX translation had a $2.7 million positive impact on operating income growth.

Nine Months Ended September 30, 2008 compared with Nine Months Ended September 30, 2007

Moody's Corporation

The table below provides a summary of revenue and operating results, followed by
further insight and commentary:



                                             Nine Months Ended
                                               September 30,
                                             2008        2007      % change
          Revenue:
          United States                    $   714.6   $ 1,084.6      (34.1 %)
          International                        637.1       669.5       (4.8 %)

          Total                            $ 1,351.7   $ 1,754.1      (22.9 %)

          Operating, SG&A expenses         $   687.7   $   804.2      (14.5 %)
          Operating income                 $   622.8   $   918.9      (32.2 %)
          Interest expense (income), net   $    36.5   $     9.0      305.6 %
          Net income                       $   368.9   $   574.2      (35.8 %)

Global revenue decreased $402.4 million from 2007, due to the significant decline in MIS partly offset by good growth in MA. U.S. revenue was down $370 million from prior year while international revenue decreased $32.4 million from 2007 and accounted for 47% of global revenue compared to 38% a year ago. FX translation contributed $34 million to international revenue in 2008, primarily reflecting the weakening of the U.S. dollar to the euro and the British pound.

Operating, SG&A expenses decreased $116.5 million from prior year, driven primarily by lower accruals for annual cash incentive compensation and stock-based compensation of $46.7 million and $25.0 million, respectively. The decrease in stock-based compensation reflects the restructuring actions from the fourth quarter of 2007 and a lower Black-Scholes value for the 2008 grants compared to prior years, while the decrease in annual cash incentive compensation is due to weaker financial performance compared to prior year. Non-compensation expenses of $200.3 million were down $27.3 million, due primarily to reductions in T&E, rent/occupancy, and net consulting of approximately $15 million, $3 million and $5 million, respectively.

Depreciation and amortization of $43.9 million increased $12.9 million from 2007 due to 7WTC assets placed in service beginning in mid-2007 and approximately $4 million of accelerated depreciation through June 30, 2008 related to the closure of the New Jersey office.

Operating income of $622.8 million was down $296.1 million, due to the decline in revenue outpacing the reduction in operating expenses, resulting in a 630 basis point decline in operating margin compared to prior year. FX translation had a positive $27 million impact on 2008 operating income.

Net interest expense of $36.5 million increased $27.5 million from 2007 due to higher debt levels. Additionally, there were reversals of accrued interest relating to the favorable resolution of a Legacy Tax Matter in 2008 and 2007 of $2.3 million and $17.5 million, respectively.

Other non-operating income was $15.2 million in 2008 compared to $14.5 million in 2007. Reflected in the 2008 amount is $10.0 million of FX gains, partially offset by approximately $6 million of other expenses. In addition, 2008 and 2007 reflects $11.0 million and $14.4 million, respectively, of income related to the favorable resolution of certain Legacy Tax Matters.

Moody's effective tax rate of 38.7% increased slightly from 37.9% in 2007 due to a $27.3 million Legacy Tax Matter benefit in 2007. Additionally, recorded in other non-operating income in both years was the aforementioned Legacy Tax Matter benefit, part of which was non-taxable (See Contingencies - Legacy Tax Matters below). Absent these benefits in both years the effective tax rate would have been 39.1% in 2008 and 41.5% in 2007, with the decrease 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 of $368.9 million, or $1.49 per diluted share, was $205.3 million or $0.59 per share, lower than the same period in 2007, reflecting revenue declines outpacing cost reductions, as well as a $41.7 million decrease in net benefits associated with Legacy Tax Matters. Excluding the Legacy Tax Matter benefits in both years and an immaterial adjustment made in 2008 to the 2007 restructuring charge, net income would have been $356.6 million, a decrease of $165.3 million, or 31.6%, and diluted earnings per share would have been $1.44, a decrease of . . .