Good day and welcome ladies and gentlemen to the Moody's Corporation First Quarter 2008 Earnings Conference Call. At this time I would like to inform you that this conference is being recorded and then all participants are in a listen-only mode. At the request of the company we will open the conference up for questions and answers following the presentation. I will now turn the conference to Lisa Westlake, Vice President of Investor Relations. Please go ahead.

Thanks, Audra. Good morning everyone, and thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2008. I am Lisa Westlake, Vice President of Investor Relations. Moody's released its results for the first quarter of 2008 this morning. The earnings release and the presentation to accompany this teleconference are both available on our website our 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'll call your attention to the cautionary language set out at the end of our earnings release. Certain statements my colleagues might make today may be forward-looking within the spirit of the Private Securities Litigation Reform Act of 1995. This Act provides the Safe Harbor for such forward-looking statements. I direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K 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 that Safe Harbor statements under the Private Securities Reform Act of 1995 contained in our press release issued this morning. These set froth important factors that could cause actual results to differ from those contained in any such forward-looking statements. I should point out that members of the media might be on the call this morning in a listen-only mode. And now I'm pleased to turn the call over to Ray McDaniel.

Thanks, Lisa, and thank you all for joining us on today's call. I'll begin our prepared remarks this morning with a brief summary of Moody's first quarter results. Linda will then take you through the quarter's operating highlights, provide some commentary on revenue and expenses and update you on our share repurchase program. I will then review recent developments in the regulatory area and finish with Moody's outlook for 2008. After that we'll be happy to respond your questions. Moody's revenue results in the first quarter clearly reflect a difficult credit market conditions in which we are operating. Revenue for the quarter was $431 million, down 26% from a year ago. Significant decreases in ratings revenue from new issuance across most sectors and asset classes were partially offset by our solid base of recurring revenue and strong growth in Moody's Analytics. As a result, while Moody's rated issuance was down 56% versus the prior year quarter, our revenue decline was only about half that amount. Operating income for the first quarter was $199 million, a decrease of 35% year-over-year. Prudent cost management helped to limit the impact of the weak operating environment on overall performance, and foreign currency translation had a positive impact on both revenue and operating income of approximately 200 basis points. Diluted earnings per share of $0.48 for the quarter declined 23% from $0.62 in the year ago period. Before turning the call over to Linda, I want to remind you that as of January 2008, we changed Moody's reported segments to reflect our business reorganization into Moody's Investor Service and Moody's Analytics. The credit rating agencies reported in the Moody's Investor Service segment and all of Moody's other commercial activities including Moody's KMV and sales of research produced by Moody's analysts are reported in the Moody's Analytics segment. At this point, I will turn the call over to Linda who will provide further detail on revenue and expenses for the quarter.

Thanks Ray. I'll begin with revenue at the corporate level. Moody's U.S. revenue declined 39% year-over-year to $233 million, while non-U.S. revenue was down just 3% from the same period. Revenue from outside the U.S. accounted for 46% of Moody's total revenue for the quarter. Focusing on details by segment, for Moody's Investor Service, revenue was $298 million, representing a 37% decrease year-over-year. U.S. revenue from the ratings business was down 48%, while non-U.S. revenue declined 13%. Revenue from outside the U.S. represented 44% of total revenue. Changes in revenue and operating income were positively impacted by foreign currency translation of approximately 200 basis points and 220 basis points respectively. Global structured finance revenue was $107 million, down 57% year-over-year. U.S. structured finance revenue decreased 69% driven by significant declines in issuance across most categories with the biggest impact coming from residential mortgage-backed securities, commercial real estate finance and credit derivatives ratings businesses. Non-U.S. structured finance ratings revenue was down 29% from the prior year period led by declines in European credit derivatives and commercial real estate finance sectors. Global corporate finance revenue of $72 million for the first quarter declined 31% from the prior year period. U.S. corporate finance revenue decreased 41% year-over-year. Significant revenue growth from rating U.S. investment grade debt was more than offset by high double-digit declines in revenue from rating speculative grade bonds and bank loans. Outside the U.S. corporate finance revenue was down 6% due primarily to a decline in revenue from rating European speculative grade securities. Global financial institutions revenue of $64 million decreased 4% for the first quarter of 2008. U.S. financial institutions revenue was down 5% year-over-year. Growth in the banking sector was more than offset by revenue declines in the insurance, finance and securities sectors. Outside the U.S., financial institutions…

Thanks Linda. I would like to now provide a brief update on regulatory developments. We continue to have active communications with regulatory authorities in the U.S. and internationally. As discussed last quarter policymakers and regulators continue to focus closely on the financial services sector including specific attention to the role used in performance of rating agencies. On a global level in preparation for its mid-April meeting the G7 finance ministers and central bank to bank governors had asked the Financial Stability Forum, which is a working group of securities regulators and banking authorities, to provide a set of specific recommendations on five topics, including the role in use of credit ratings in valuing structured financed products. To ensure that its report to the G7 represented a coordinated regulatory approach, the Financial Stability Forum or FSF in turn asked a number of global regulatory authorities including the international organization of securities commissions and the bank of international settlements for their views and recommendations. The FSF's final report was delivered to the G7 at their meeting on April 11 in Washington. With respect to the credit rating agency industry, the FSF's recommendations addressed improving the quality of the rating process and managing conflicts of interests, distinguishing ratings on structured finance products from those on corporate ratings, expanding the initial and ongoing information provided on the risk characteristics of structured products and enhancing the review of the quality of the data input and of the due diligence performed on underlying assets by others involved in structured finance products. The FSF also recommended that both investors and regulators carefully assess their use of ratings and that investors develop standards of due diligence and credit analysis before investing in structured products. In addition, we understand that the SEC is wrapping up its examination of rating…

Thank you. [Operator Instructions]. We'll go first to Karl Choi of Merrill Lynch.

Hi, a couple of questions. One is on the revenue side. Could you split the... could you give us the split between transactions versus non transactions revenues in the quarter and also for non transaction rev... ratings revenues, how did they do in the quarter?

Karl it's Linda. I have got the split of relationship and transaction revenues for the quarter, it's very easy now, it's exactly 50:50.

Then how did relationship-based revenues do in the quarter?

For MIS, the total relationship revenue for the quarter was $148.4 million.

But what about the year-over-year growth I guess, that's what I was looking for?

That's... it's... the relationship based revenue is up from last year, obviously more than offset by the reduction in transaction based revenue year-on-year and it would be... my estimate would be about $20 million up for the relationship based revenue.

Okay. And as far as expenses, Linda could you go through a little bit the details about incentive compensation, how much it was and also could you explain a little bit more the $10 million lower stock based compensation?

Sure. Obviously we've been watching expenses very carefully, Karl, and we are very pleased to have expenses down 17%. We intend to keep the focus on the expense line and as we had said for the rest of the year I think, Ray indicated expenses will be down 5% as compared to last year ex the restructuring charge. Incentive compensation for the first quarter was 7% of total compensation that was down from 16% in this quarter last year, so a little bit less than half. Stock compensation was 7% of total compensation down from 11% last year and all other was 86%. So total compensation for the first quarter was $161.5 million and I hope that's what you are looking for.

Yes. And if you deliver on your guidance, what sort of percentage... in terms of incentive compensation and what should we expect as a percentage of revenues?

I think we usually have... compensation is about 70% of our total expenses and I think we'd probably think that that would hold in line, Karl. But of course, if we do, do better throughout the balance of the year we would have to add to our compensation flow of credits [ph] a little early to forecast that right now.

Okay, thank you.

We will move next to Peter Appert at Goldman Sachs.

Thanks. Linda keeping on that topic for a second fee, are you pretty much done then with the staff reduction initiatives you'd started at the end of last year. And can you tell us where you are on staffing?

Sure. We had announced at the end of last year that we would eliminate 275 employees and at this point we are most of the way through that. We do have some individuals who will be transitioned as we outsource our data center here at Moody's. The net effect of all of this though, Peter, since we have had some additions in other parts of the business because we have purchased other businesses, our headcount at the end of Q1 2008 was 3515 and at the end of Q4 2007 we were about 3600 people. So you can that the net difference is not that great.

Okay, great. Thank you. And Linda or Ray, can you give us any added color on what you are seeing in terms of the pipeline going into the second quarter, anything interesting in terms of geographic differences or specific product categories you could comment on?

Peter it's a little bit difficult to comment on the pipeline, of course, of the businesses right now for a couple of reasons. But the answer to your question I would say that in the structured finance area we probably see the credit card in auto receivable pipelines holding up best. We've seen a little bit more activity recently coming out of quite a lot of its own [ph] obligations and commercial real estate. But those are still weak compared to what we've seen before the credit turmoil and outside of structured where we normally look to the pipeline is on high yield and leverage loans and again I would make the same comment. There's been a little bit of an up-tick but still very weak compared to what we would consider normal conditions in normal pipeline. The other problem though is what comes into the pipeline and what then comes out of the pipeline. And so the question about what assets or pooled assets or corporate loans and bonds are actually being issued is heavily susceptible to investors willingness to step-up and buy credit sensitive instruments and there is still a component sensitivity issue.

Right, right, okay, fair enough. Thank you. And then just last thing, Linda, what's your thought on taking the debt levels up higher to fund further stock repurchases. Would you be willing to do that or is the stock repurchases going forward have to come pretty much exclusively from cash flow from operations?

Well, I think, Peter that would be our first source. The most important thing for us is to maintain... comfortably maintain our A1 commercial paper rating. So we watched that very carefully. We do have additional capacity as we had discussed and I think we've moved quite energetically to buy back the stock when it was cheap. If you do the division I think we bought back the shares in the first quarter below 35.50. So we think we caught a lot of it at the weakest point in the stock we hope. So going forward we'll monitor this and see how it goes but we are pretty comfortable with where we are and we'd probably look more toward free cash flow for the rest of the year.

Great. Thanks very much.

Next we will go to Michael Meltz at Bear Stearns.

Hi, three questions. But following up on Peter's question internationally, Ray, can you talk about what you are seeing there? I think you're... there is certainly a variance between your performance there in the first quarter in the US and internationally. And could you give us a sense as to what you are seeing in Q2? Secondly your guidance talks about sequential revenue improvement throughout the year. Can you just clarify, is that on a percentage basis or are you talking absolute dollars which wouldn't make all that much sense, but I am just... want to make sure I understand that. And then lastly, analytics, can you just tells us in the first quarter what was US versus international growth rates, please?

Sure. Let me address the... our expectation from modest sequential improvement first. We do expect to have some modest increase in dollar revenue through the remainder of the year compared to the first quarter, but it is modest. To the extent that we've had a dramatic decline in most of our transaction based businesses any recovery does not have to be robust for that to contribute to top line growth versus the first quarter. So when I say sequential improvement, I am saying sequential improvement over the first quarter, not year-over-year compared to 2007.

Does that mean you are expecting... understanding you have a tough comparison in Q2, does that mean you are expecting revenues to grow in the fourth quarter?

Are you expecting revenues to grow in the fourth quarter over the first quarter of this year?

No, over the fourth quarter of '07?

We are not giving out quarterly guidance on revenues but I do expect sequential improvement from the first quarter of this year.

Okay.

And Michael on your question on analytics, it split quite evenly for the first quarter in terms of revenue between US and international; both of them are about $66 million. The growth rates in the US 15% and internationally 25%.

And just to address your last question, Mike, I'm going to ask Brian Clarkson, if he would offer some comments on the US international.

Sure. With respect to US versus International, I think your question was specifically what we are seeing with respect to international. And what we are hoping... we hope we are seeing with respect to the pipeline is a modest increase over the first quarter. We think that the... even the banking and financial institutions was down in the first quarter that was mostly due to transactions being pushed off into the second and third quarter. We expect that to sort of pickup over time. We also expect to see an improvement or some improvement with respect to CLOs. Unlike the US, what we have seen is a fairly robust pipeline. In US we have seen a fairly modest pipeline and... but the problem is sort of the close rate international has been down. We have seen a lot of transactions, so it's been put together looking for sort of spreads to come in so you can actually issue those. That we expect modest increase with respect to CLOs, we should... expect modest increase with respect to financial institutions and bank loans, we don't see it with respect to leverage loan. So, if I were to sort of estimate your feel, it probably took [ph] a little further with respect to international versus US but not a lot.

Okay. Thank you.

Yes.

We'll go next to John Neff at William Blair. John H. Neff - William Blair & Co.: Hi, thank you. A few questions for you. Just from... a quick one from the big picture standpoint. Do you foresee any more shoes left to drop in the debt capital markets, in other words things like SIVs or auction rates? Or do you think that we've pretty much exposed all the problems that we can reasonably expect at this point? And then kind of a related question, does your guidance implicitly assuming that the bottom has booked in... put in the first quarter from an issuing standpoint?

Well with respect to the debt capital markets, as we've all seen, this has been a rolling credit crunch. It has moved from sector to sector and across geographies. Well, I think it would be a stretch for me to say that we won't see any other areas affected. I think the bigger concern on the downside at this point in my opinion would be recycling of credit problems back into areas that have already been under stress. In the consumer sector in the US, for example, if we have spiking unemployment and how that might affect, the US housing market further how that might affect consumer debt outside of mortgages. So we may see some further contagion but I would pay most attention to out recycling of problems through the areas that have already been hardest hit. And I apologize I didn't get the second question? I don't know [multiple speakers]. John H. Neff - William Blair & Co.: Just on the... does your guidance essentially sound to me a little bit like you are sort of a assuming... there was an assumption there that we put the bottom in the first quarter from the standpoint of issuance volumes.

Well, I... whether we have put in a firm bottom or not, is of course going to be subject to some speculation. I do believe that if we are not at the bottom we are near it in terms of our business. And I say that because the transaction based businesses have been very, very hard hit. This includes both structured finance in the US and internationally. It includes speculative great bonds and bank loans, US and internationally. So not everything that can go wrong has gone wrong, but a lot of what can go wrong has gone wrong and so that encourages me to think that we are if not at the bottom near the bottom. John H. Neff - William Blair & Co.: Okay, that's very helpful. The consulting piece in the analytics business were up 44%. Can you just remind us what the consulting business entails? You sort of touched on in your comments and also what parts of that business are potentially being targeted by regulators here; some of those comments circulating earlier this week?

I'd be happy to answer that. I will let Mark Almeida begin and I might jump in with a couple of comments.

The consulting piece in Moody's analytics; first is a... it's a relatively small piece of the overall business that it primarily reflects validation and calibration projects that we do for banks that as part of their... responsible to compliance activities and it also reflects our training services... our credit training programs that we offer to banks and other customers.

I just... from the regulatory perspective, two comments. One is, there is clearly a regulatory interest in seeing that any work that might come under a consulting label is fire walled from the credit rating agency and we have, I think, done that very effectively. Secondly once it is fire-walled from the rating agency we are receiving strong encouragement both from market participants and from over-side authorities to provide these kind of services such as credit training to raise awareness about credit risk, credit analytics and the assessment of instruments that are being offered to the institutional investor community. John H. Neff - William Blair & Co.: Thank you. And then Linda a question for you. Any color on D&A expense outlook? Is the first quarter kind of a good run rate and along that line have you given any CapEx expectations for this year. Are we kind of back to normal after the new headquarters related spike last year?

Yes, I think we have a little bit heavier CapEx in the first quarter than might be expected for the rest of the year because we've been finalizing our state out of building. I think it probably would be good to use about $40 million number for the whole year John and so a little bit heavier in the first quarter. John H. Neff - William Blair & Co.: Okay, that's great. And then kind of a last question here and I can get back in the queue. Historically second quarter EPS has been higher than the first quarter. You are talking about a sequential increase in revenues from the first quarter base line. Can we expect kind of a similar EPS sort of progression over the course of the year and then related to that you are still guiding to a mid-40s percent operating margin for this year... for the full year despite doing 46.3% in this quarter and expectations of a more stable credit environment and sequentially increasing revenue on a go-forward basis. So if you could just sort of reconcile that a little?

Okay Linda and I may share this answer, but let me start. The... our revenue expectation for the remainder of the year as we've talked about do expect improve... we do expect improvement off of this first quarter, but we don't expect a lot of improvement. In particular some of the seasonality that we have seen in this business in prior years, I think is going to be importantly dampened. And that seasonality historically had heavily come from our structure and finance business and because of the overall decline in issuance activity and ratings in that business, I think that will take out some of the spikes that we have seen, the saw tooth nature of the business that he had seen in prior years. Against that expected modest increase in revenue, we are continuing to manage expenses as prudently as we can, but we did point out that a bit of our expense management in the first quarter related to first quarter specific items and expense savings that I don't think we'll be able to count on or at least forecast for the rest of the year. So that will constrain our ability to grow EPS if we do see a low growth revenue environment as we are expecting.

And John, to take the other side of that as Ray and I sometimes do, I think we just said that we are very pleased with how the margin came out for the first quarter. Obviously we watch it very, very closely and since we are not going to have the saw tooth seasonality that we did in previous years, if we do have revenue growth, at this point we do have quite a bit of operating leverage, because we've removed a lot of cost from the business. So, we would hope, if conditions do improve, that potentially we may see some improvement. But as Ray said, it's far to early to call that at this moment, but we continue to manage costs very, very tightly and of course as revenues do pick up, we would be looking to do more on our compensation lines for our people if we do have improved conditions toward the end of the year. John H. Neff - William Blair & Co.: Thank you very much.

We'll go next to Edward Atorino at Benchmark Company.

Hi, a couple of questions. On the other line which was 3 million bucks down rather dramatically from the fourth quarter, I know that line bounces around a lot, I thought it would be much higher. Is there any way you could provide some insight as to what that line might look like as the year goes along?

Yes Ed, we worked very hard to make sure that this line was minimized in the first quarter and we did quite well, we are pleased about this. The big components of non-operating expense would be an FX gain of $8.6 million and interest income of about $5 million. Now the expense on borrowing... we have higher borrowings obviously, about $13 million, we've got our FIN 48 expense about $3 million and we've got some items in there. About $11 million of that may not recur in further quarters. So while we were looking at expense of about 3 million on the total all other line for the first quarter, that might look more like 14 million on a more normalized basis. But obviously we are working very hard to minimize that line.

Okay. Secondly, on this 5% increase, I... reading that meaning second, third, fourth quarter this year versus last year, cost will be up 5%, I mean down 5%?

Yes.

Okay. And lastly Ray would you want to speculate on --

Sorry Ed, I am sorry to interrupt. Just to be clear, we are anticipating cost to be down 5% full year.

Over the course of the full year.

Over the... yes [multiple speakers].

Not the next... not just the next three quarters?

Correct.

Okay. So take into account --

Just to make sure we were clear.

Take last year's costs and knocking down 5% then spread it out.

Yes.

Okay. Second, would you... I mean I have read Mr. Clark's [ph] statements and there is a beginning of Times article you are aware of. I got a call this morning from him... where might... can you speculate where this might go other than just beat up the rating agencies? It seems you are a little bit ahead of the curves so to speak in doing what they want you to do. Is there any smoking guns a bit or to say is there really sneaky thing in there that might cause a problem?

Well the process is ongoing. The SEC has been in and met with us a number of times. And they are expected to release their report in early summer. So we know that much. Beyond that they have not communicated to us privately what their findings or conclusions are going to be in the report. I think we have done many of the things that they are identifying as being appropriate and necessary for this business and so I feel good about that. And I would just add one comment based on the hearing yesterday. I did note that the Chairman commented that because they have staff on-site at the rating agencies when they see issues they act on the spot. And I can confirm that we've not been asked to respond to any issues that they have identified. So there may be things that come up in the report that we have to address and I understand that, that process is not complete. But they have not asked us to take any actions so far.

Thank you.

[Operator Instructions]. We'll go next to Catriona Fallon of Citigroup.

Yes hi. Linda, two quick questions for you and then a follow up then for Ray. Linda, I know you gave the 50:50 split on transaction versus surveillance. But can you give that by segments or by structures, by corporate, by financial institutions?

Yes Katrina, I can. What we have got for our corporate finance, we have got transactions are 53% of revenue and relationships are 47%. For financial institutions it's 44% transactions 56% relationships. For the TPIF segment, it's 58% transaction and 44% relationship. And for structured finance now it's 48% transaction and 52% relationship, and all that when weighted and so on comes out to exactly 50:50.

Okay, great. And then just to clarify the $10 million in expense reduction that was related to stock-based comp on the quarter. Can you help us understand why that was specifically related to this quarter and isn't something that's ongoing? Is this something that's going to kind of snap back in Q4?

Well it's actually related to the restructuring charge that we took. And so we had a higher than normal equity forfeiture rate Catriona, meaning that we had a fewer people here who were receiving equity in the first quarter than we might have had otherwise. So given that the results of those restructuring actions are rolling through and are largely completed, we would see that the main impact to that would be in the first quarter.

Okay great. And then Ray, so I have been following the report from ASCO [ph] and from the G7 the FSF, and the main comments that I had question around were the comments around the due diligence. So it's my understanding that securities lot dictates who has the responsibility for carrying out the due diligence and providing accurate information, what do you make of the comments around requiring or asking the rating agencies to do more intelligence? And what might have to change in the cost structure? It's something like that whether it be passed on to the rating agencies. And would there be a change in the fee structure for instance as well?

Well, you are correct, Catriona. There is clearly an interest by regulatory authorities in seeing an improvement in the quality and consistency of information that is being made available, not just to rating agencies but to market participants more broadly. And the regulatory authorities are looking for mechanisms to achieve that objective. They have talked about, I think because of the positions the rating agencies occupy and looking at the securities being issued, they are interested in seeing what we can do to help assure that there is this greater consistency quality in the underlying assets associated with those securities. To the extent that we are asked to provide some sort of service that checks that the third parties that have provided this information had gone through their own rating and validation process I think that is workable and probably something the industry has the capacity to take on. To the extent that they are looking at us to be due diligence firms in terms of looking at the full range of consumer and commercial assets that are being made available into the capital markets, that would be a large burden. And the latter would have to be accompanied by more fundamental changes in the business, the staffing, the kind of work that we do. And there would be costs associated with that. And my view is that it is more efficient and achieves essentially the same ends, having us oversee and verify that other third parties have done this work. But that decision has not been finally reached yet.

And if it were do you think that could also then be something that's passed on as an additional cost to the issuer from the rating agencies?

Again it depends on how significant what we're being asked to do is. If we're being asked to do something very resource intensive, time consuming, staff consuming, yes we would have to pass those costs along.

Great, thank you

We'll go next to Lucas Binder at UBS.

Hi, thank you very much. Couple of quick questions. If we can go back to the expense items for the quarter. Linda, can you maybe walk us through first of all the percent of expenses that were for stock-based comp and for incentive comp for all of last year or at least the last three quarters of last year? So I understand where the benefit is going to translate through the rest of the year because this is a pretty meaningful impact in the first quarter. When do you get that benefit for the rest of the year as well?

Lucas,unfortunately, I've only got the quarter-over-quarter comparisons here in front of me. And I can do those but I can't do full year.

Most of it will come in the first quarter. I don't have the numbers Lucas but most of it will be associated with the first quarter.

And the same thing goes with the incentive compensation as well those benefits. Because last year second quarter was so good I would have thought that there would been some accruals there?

The incentive-based compensation will... to the extent that we don't have a miraculous recovery in the markets, will also be reflected in the second quarter because we did have such a strong first half last year.

Okay. Then maybe Ray if you want to talk a little bit about... obviously, you guys have been the most proactive with regard to considering alternatives to the ratings and changes the ratings and working with the regulators. Have you seen in the investment community how Moody's is being perceived or changed in a way that the investors are kind of using your ratings?

I think that the ratings are still largely being used for their traditional purposes. But there is clearly interest and in some areas demand for us to make additional information content available around complex securities. And as we talked about before whether we can provide additional information on rating transition or volatility risk whether we can make additional information available. On the assumptions and sensitivities to changes in assumptions that go into our models, but that I think would very much be welcomed by the market as opposed to for example, a change in our core rating system and how that might be used. So it's more an enhancement of what we provide and enhancement in how ratings can be used rather than changing the way they are currently used.

Okay. And one last question with regard to international. I know you spoke a bit about where certain parts of the business are holding up. When you look at how deterioration hit the U.S. as rapidly as it did, do you see any trends internationally that give you any pause or you think that you have a pretty good sense of where that backlog certainly stays down [ph]?

Brian [ph] may have some additional comments on this but I guess my initial comment would be that the international business is clearly being affected by problems that started here in the U.S. It has not been as bad as what we've seen in the U.S. for a number of reasons and including the fact that despite some housing stress internationally, we don't have same kind of subprime problem that we do here. But also some of the more sensitive areas or areas that are under stress or not as large, apart of our business internationally. So for example, the speculative grade bond and loan market are important to us in Europe, in particular but they are not nearly the size as in the U.S. even on a percentage basis. So it's more of an investment grade market. And we have more secular growth coming out of the international markets because formally unrated institutions coming in and seeking ratings for the first time. And we see that's in a lot of emerging markets, central or eastern Europe for example. So there is more of a flow of new rating mandates.

The only thing that I would add is that what we've seen is we've seen it more than we've seen in Asia. Asia has been much less affected. Other areas, China, Brazil, Russia, India have been much less affected. And the impact that we've seen on transactions is due to spread widening and also a lack of liquidity in the market rather than an issue with respect to subprime which as Ray said, we didn't really see. I mean you don't see 100% LTV loans, you don't see dark loans [ph] in Europe. And so it's more an effect of the overall sort of financial markets than it is a specific issue related to the subprime.

Great. Thank you very much.

Thank you.

We'll move next to Craig Huber at Lehman Brothers.

Yes thank you. Can you give us the percent change of your overall transactions led revenues within ratings, the percent change for non-transaction please?

Yes from... within Moody's Investor Service first quarter last year was about 73% was transaction, 27% was revenue. And as Linda said that's now gone to a 50:50 split. We got there in a way that wasn't desirable but it's still moved to a 50:50 split. And I would expect we are going to continue to see something like that split going forward for a while.

Okay. And then can you speak about your revenues outside of Europe, outside the U.S. what that percent change was those ratings related revenues in the quarter please? Against for Asia but what was the percent change there?

Our international business in Asia and Latin America in the first quarter was up... it was up modestly. It was mid single digits for Moody's Investor Service. And then when we layered in Moody's Analytics it was up just about 10%.

Okay. Then can we talk a little bit about your expenses that were down 17% here in the first quarter? Your guidance excluding the restructuring charge, those were clearly down [indiscernible]. This simple math implies the last three quarters year-over-year would be down about 1%.

Yes.About flat right.

So would you walk through that? I mean you are roughly $231 million expensed in the first quarter. The average the last three quarters is roughly $265 million. Can you walk us through roughly that $34 million delta each quarter versus what happened in the first quarter?

Craig, it's Linda. We're not going to go through it quarter by quarter. I think it would be fair to say that in Moody's Analytics we got a business that's growing 20%. We have got some good growth internationally, and we're doing some acquisitions. We would see that what we're trying to do is managed taking expenses down with reinvesting them in the growing part of the business. And we think so far we've got that pretty much right. But our intention would be to try to manage that balance prudently and make sure that we're able to invest in the growing areas of the business and maybe Ray may have some more to say about that.

No,I think that's fair.

Other than the one, the items you talked about in the first quarter, is there anything else that kind of splits this gap? It's actually $34 million reported in the first quarter, or a negative 5%, just trying to be overly conservative perhaps?

Well, we are conservative folks here Craig. One of the things I would point out to you as for instance. Our T&E line was down from $9 million in the first quarter last year to $4.5 million this year. Now some of that is because of travel efficiencies, and some of that was because our folks have just taken fewer trips. As the market picks back up, it's pretty important that they get back out there on the road and do what they need to do. So we would expect that the savings in that line, while it may be down versus last year, we may actually see some growth and that would be healthy as market recovers as people need to get back out on the road. So, we're trying to be prudent about what we would see in terms of expense management here. We are relentlessly focused on it though and we're being very careful to make sure that we are looking at every single line that we have and that we're dealing appropriately with our costs. One of the things we're looking to do, for example, is we will be coming out of our New Jersey office space. We are moving 250 million... I am sorry, 250 people... not 250 million, 250 people back here to New York to our 7 World Trade Center location. That will help us on an expense run rate towards each of the next four years, reduce expenses by about $6 million, have tax benefits and then we have additional benefits coming from the city and state of New York for bringing those jobs back here. So, we are looking at every single line, but we don't want to shut off prudent investment to the growing parts of the business.

So it's part of that, you're expecting latter part of the year, you're just bringing in more people. Again it's tall gap [ph] of 30 to 35 million just flexing to me.

I think we probably.... from where we are now I think we probably will have some increase in staff. Again we do want to both grow the parts of the business that are growing. We want to make sure we continue our international expansion in a prudent way. We may have some additional compliance costs that would not be surprising given the close regulatory scrutiny that the industry has been under. So yes I think it's fair to say while we are managing costs closely we are going to continue to feed the business where either it's necessary or we think it's setting us up for growth in '09 and 2010.

Great, thank you.

And next we'll go to William Hogan [ph] at ValueAct Capital.

Ray and Linda, first, I wanted to congratulate you on strong cost management and in order to grow through obviously very difficult issuance environment. But I had a couple of questions. If you are looking out longer term at this business and Ray you talked about last fall, a 10% to 12% of the revenue going away for at least the next couple of years. How should investors think about? Certainly there is a secular decline, a secular component and there is a cyclical component. How do you think about that 10% and 12% going forward through 2009 and 2010 as well as how do you think about that sort of 10% to 15% long term growth rate?

Thanks Will. The 10% to 12% revenue extinction that I have talked about before, I think it's secular. That is not as a result of cyclical conditions. Those are sectors of fixed income activity coming out of structured finance but I just don't believe are going to return. Now, some alternative sources of funding may very well take that place, whether it's through direct corporate issuance or financial institution issuance to support capital raising activities. I think it's fair to say that once we get out of this turmoil there will be some alternatives emerging. But I do think that $200 million to $250 million that we talked about before is going on essentially a permanent basis. The other areas of the business, including some of the areas of structured finance that are being very hard hit right now I think are subject to cyclical but not secular conditions. I would expect to see commercial real estate finance and collateralized loan obligation activity pick up again. Certainly would expect to see speculative grade bond and loan activity pick up again. Those areas have always been very cyclical. So we are currently dealing with declines in areas that are attributable to both secular and cyclical downturns. And we're going to get some of that back but not the $200 million to $250 million. I just don't think we are going to get that back.

And that was off of a 2006 number, is that off of a 2007 number?

Coincidentally it's approximately the same because structured finance ended up being about flat last year on revenue after the very strong first half and the steep decline in the second half. So it would come off of each year.

Okay. And the second question is regarding the incentive comp. And I believe the budget was set off of the original guidance, which is more like $2.21 per share. How did you, on an earnings basis, perform relative to that initial budget and initial guidance?

Well, it's Linda. We then as you saw when we reissued our guidance upon, I believe it was February 11th, we reset our comp according to that --

March 11th.

I am sorry, excuse me, March 11th. We like to minimize the number of times we reissue guidance. We sort of recalibrated as of March 11th and we took down our compensation view as a result of that. So that's where we are.

We did not publicly put out a first quarter forecast, so I don't want to do it retroactively now.

Okay. So the incentive comp for the year, is it a function of that original guidance or is it a function of the $1.90 to $2.00 per share?

It's a function of the $1.90 to $2.00 per share.

Okay. All right, thank you.

Sure, thanks Will [ph].

We will move next to Karl Choi at Merrill Lynch.

Hey Linda just wondered if you can give us the split between transactions and relationship base revenues for the second quarter of last year?

No, we --

It's... whether we... we have a lot of information in front of us but we don't have that. So --

I would expect though it would look quite similar to what we saw in the first quarter last year, that's 73:27 split. Without having the numbers in front of me just thinking back to market conditions, the first and second quarters last year were both very strong off of the transaction side of the business. So roughly speaking I would expect to see the same kinds of numbers.

Yes, and Karl for the first quarter that was sort of 70%, 80%... 80% in the high-end [ph] structure finance for transactions and the relationship being the balance. But as we've said that's come nicely into 50:50 balance for the whole company for the first quarter of this year.

Okay. I will follow up with Lisa then. Could you give us the split in terms of corporate finance revenues in your buckets [ph] then?

Yes, that we do have. If you are looking for first quarter of 2008, Karl, is that okay? Okay.

Are you looking for first quarter '07 or '08?

'08, sorry.

Okay. Good, because we've got that. The high yield percentage is 6%, which is versus 20% for the first quarter of last year, investment grade is 24% down... I am sorry up from 14% from last year. Bank credit facilities are 13% versus 28% from last year and other which is medium term note shelf, commercial paper, and other things is 57% versus 38% from last year. And the corporate finance number is 24% of total MIS and last year it was 22%. That gets you there Karl?

Yeah. Great. Well, thank you.

And we will take our final question from Edward Atorino at Benchmark Company.

Hello. How are you doing? [Indiscernible] says to the fact, it's a great concept. Getting back to this loss of business forever, one has to believe Wall Street's got some pretty bright guys less the trading desks. Any thoughts of whether you said you lose X -- whether there could be some new instruments coming around that would basically replace all the business that's been lost or is that just a speculative to think about?

Yes. Hey, Ed, it's Brian Clarkson, how are you?

I'm fine.

Good. We talked to the Street all the time. They are certainly working on a number of things. I would say that none of them are far enough along where we would feel comfortable to say this is going to be a revenue stream on a going forward basis. Most of them are sort of in the... are definitely in the preliminary category. There's certainly bolster funds out there looking at things. They are looking at different types of structures. What I will say is that in the near term, and its hard to define is that what we are going... what we are seeing is people going back to simplicity. You are seeing simpler structure, you are seeing de-leveraging, you are seeing investors looking for things that the same types of structure you saw four, five years ago where if there's not a lot of complexity, that's easy to understand and easy to take the credit committee. So while we are seeing some innovation, it's very preliminary right now and we are mostly seeing sort of a flight to simplicity.

I would just add also that we certainly recognize that the ability to introduce new instruments or instruments that are currently not very active back into the market is heavily reliant on a restoration of confidence --

Sure.

...and credit ratings and what we do. And we are very focused on that to have a justifiable sense of confidence in the opinions we are putting out through our credit ratings. But that process is going to take a while. Folks have lost a lot of money and they are going to take a while to come back into certain areas of the capital markets.

One other thought. If you begin to have the split rating system whatever it's going to be with [indiscernible] letters, would that affect the price structure for those ratings products or is it too early to make that kind of a comment?

In terms of the rating fees, I think at this point we are looking at what else we can associate with the ratings and see what the market take-up would be with that, how much does the market value it, how useful does it become as part of the apparatus and infrastructure of the markets? Depending on that value and whether it's high or low, we will see whether there's a pricing opportunity.

Thanks a lot.

Thank you.

And that does conclude the question-and-answer session. I'll turn conference set over to management.

I just want to thank everyone for joining us today and remind you that we do have our Investor Day in June. Looking forward to seeing or hearing from many of you then. Thank you very much.

And that does conclude today's conference. Again thank you for your participation.