1. ACCOUNTING POLICIES

NATURE OF OPERATIONS. We are a leading global information services provider serving the financial services, education and business information markets with information products and services. Other markets include energy; automotive; construction; aerospace and defense; broadcasting; and marketing information services. The operations consist of three business segments: McGraw-Hill Education, Financial Services and Information & Media.

     The McGraw-Hill Education segment is one of the premier global educational publishers. This segment consists of two operating groups: the School Education Group (“SEG”), serving the elementary and high school (“el-hi”) markets, and the Higher Education, Professional and International (“HPI”) Group, serving the college, professional, international and adult education markets.

     The Financial Services segment operates under the Standard & Poor’s brand. This segment provides services to investors, corporations, governments, financial institutions, investment managers and advisors globally. The segment and the markets it serves are impacted by interest rates, the state of global economies, credit quality and investor confidence. The segment consists of two operating groups: Credit Market Services and Investment Services. Credit Market Services provides independent global credit ratings, credit risk evaluations, and ratings-related information and products. Investment Services provides comprehensive value added financial data, information, indices and research.

     The Information & Media segment includes business, professional and broadcast media, offering information, insight and analysis; and consists of two operating groups, the Business-to-Business Group (including such brands as J.D. Power and Associates, McGraw-Hill Construction, Platts and Aviation Week) and the Broadcasting Group, which operates nine television stations, four ABC affiliated and five Azteca America affiliated stations.

     PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of all subsidiaries and our share of earnings or losses of joint ventures and affiliated companies under the equity method of accounting. All significant intercompany accounts and transactions have been eliminated.

     USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     CASH AND CASH EQUIVALENTS. Cash and cash equivalents include ordinary bank deposits and highly liquid investments with original maturities of three months or less that consist primarily of money market funds with unrestricted daily liquidity and fixed term time deposits. Such investments and bank deposits are stated at cost, which approximates market value and were $1.2 billion and $471.7 million at December 31, 2009 and 2008, respectively. These investments are not subject to significant market risk.

     SHORT-TERM INVESTMENTS. Short-term investments are securities with original maturities greater than 90 days that are available for use in our operations in the next twelve months. The short-term investments, primarily consisting of certificates of deposit, are classified as held-to-maturity and therefore are carried at cost. Interest and dividends are recorded into income when earned.

     ACCOUNTS RECEIVABLE. Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable are recorded at net realizable value.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS. The allowance for doubtful accounts reserve methodology is based on historical analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, amongst other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as applicable industry trends or market indicators. A significant estimate in the McGraw-Hill Education segment, and particularly within the HPI Group, is the allowance for sales returns, which is based on the historical rate of return and current market conditions.

     INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market. A significant estimate in the McGraw-Hill Education segment is the reserve for inventory obsolescence. In determining this reserve, we consider management’s current assessment of the marketplace, industry trends and projected product demand as compared to the number of units currently on hand.

     PREPUBLICATION COSTS. Prepublication costs, principally external preparation costs, are amortized from the year of publication over their estimated useful lives, one to six years, using either an accelerated or straight-line method. The majority of the programs are amortized using an accelerated methodology. We periodically evaluate the amortization methods, rates, remaining lives and recoverability of such costs, which are sometimes dependent upon program acceptance by state adoption authorities. In evaluating recoverability, we consider management’s current assessment of the marketplace, industry trends and the projected success of programs.

     DEFERRED TECHNOLOGY COSTS. We capitalize certain software development and website implementation costs. Capitalized costs only include incremental, direct costs of materials and services incurred to develop the software after the preliminary project stage is completed, funding has been committed and it is probable that the project will be completed and used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not part of an allocation or existing expense base. Software development and website implementation costs are expensed as incurred during the preliminary project stage. Capitalized costs are amortized from the year the software is ready for its intended use over its estimated useful life, three to seven years, using the straight-line method. Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized software development and website implementation costs are included in other non-current assets and are presented net of accumulated amortization. Gross deferred technology costs were $147.8 million and $145.2 million at December 31, 2009 and 2008, respectively. Accumulated amortization of deferred technology costs was $105.5 million and $96.9 million at December 31, 2009 and 2008, respectively.

     ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS (INCLUDING OTHER INTANGIBLE ASSETS). We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets. There were no material impairments of long-lived assets for the years ended December 31, 2009, 2008 and 2007.

     GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. As of December 31, 2009 and 2008, the carrying value of goodwill and other indefinite lived intangible assets was approximately $1.9 billion in each year. Goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

     We evaluate the recoverability of goodwill using a two step impairment test approach at the reporting unit level. In the first step, the estimated fair value of the reporting unit is compared to its carrying value including goodwill. Fair value of the reporting units are estimated using discounted free cash flow (“DCF”) analyses and are corroborated using Market Approaches principally the guideline public company method. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Free cash flow is discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors including control premiums. If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. The fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge. Significant judgments inherent in this analysis include estimating the amount of and timing of future cash flows and the selection of appropriate discount rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and for some of the reporting units could result in an impairment charge, which could be material to our financial position and results of operations.

     We evaluate the recoverability of indefinite lived intangible assets by comparing the estimated fair value of the intangible asset to its carrying value. The fair value of the J.D. Power and Associates trade name is estimated using the Income Approach. The fair values of our FCC licenses are estimated using the Greenfield Approach. If the indefinite life intangible asset carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in these analyses include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates, broadcast market shares and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each indefinite life intangible asset and could result in an impairment charge, which could be material to our financial position and results of operations.

     We performed our impairment assessment of goodwill and indefinite lived intangible assets and concluded that no impairment existed for the years ended December 31, 2009, 2008 and 2007.

     FOREIGN CURRENCY TRANSLATION. We have operations in many foreign countries. For most international operations, the local currency is the functional currency. For international operations that are determined to be extensions of the Parent Company, the U.S. dollar is the functional currency. For local currency operations, assets and liabilities are translated into U.S. dollars using end of period exchange rates, and revenue and expenses are translated into U.S. dollars using weighted-average exchange rates. Foreign currency translation adjustments are accumulated in a separate component of equity.

     REVENUE RECOGNITION. Revenue is recognized as it is earned when goods are shipped to customers or services are rendered. We consider amounts to be earned once evidence of an arrangement has been obtained, services are performed, fees are fixed or determinable and collectability is reasonably assured. Revenue relating to products that provide for more than one deliverable is recognized based upon the relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to agreements that provide for more than one service is recognized based upon the relative fair value to the customer of each service component as each component is earned. If the fair value to the customer for each service is not objectively determinable, revenue is recorded as unearned and recognized ratably over the service period. Fair value is determined for each service component through a bifurcation analysis that relies upon the pricing of similar cash arrangements that are not part of the multi-element arrangement. Advertising revenue is recognized when the page is run or the spot is aired. Subscription income is recognized over the related subscription period.

     During the first quarter of 2009, J.D. Power and Associates began transitioning a number of syndicated studies to an online service platform. This resulted in $11.4 million of revenue and $7.1 million of operating profit that would have been recognized in 2009 to be deferred and will be recognized over the service period.

     Product revenue consists of the educational and information products, primarily books, magazine circulations and syndicated study products of the McGraw-Hill Education and Information & Media segments. Service revenue consists of the Financial Services segment, the service assessment contracts of the McGraw-Hill Education segment and information-related services and advertising of the Information & Media segment.

     SHIPPING AND HANDLING COSTS. All amounts billed to customers in a sales transaction for shipping and handling are classified as revenue.

     DEPRECIATION. The costs of property and equipment are depreciated using the straight-line method based upon the following estimated useful lives: buildings and improvements — 15 to 40 years; equipment and furniture — two to 10 years. The costs of leasehold improvements are amortized over the lesser of the useful lives or the terms of the respective leases.

     ADVERTISING EXPENSE. The cost of advertising is expensed as incurred. We incurred $54.1 million, $67.3 million and $80.8 million in advertising costs in 2009, 2008 and 2007, respectively.

     STOCK-BASED COMPENSATION. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the requisite service period, which typically is the vesting period. Stock-based compensation is classified as both operating expense and selling and general expense on the consolidated statement of income.

     INCOME TAXES. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize liabilities for uncertain tax positions taken or expected to be taken in income tax returns. Accrued interest and penalties related to unrecognized tax benefits are recognized in interest expense and operating expense, respectively.

     Judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and unrecognized tax benefits. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.

     We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that examinations will be settled prior to December 31, 2010. If any of these tax audit settlements do occur within that period we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, our opinion is that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.

     RECENT ACCOUNTING PRONOUNCEMENTS. In October 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“FASB ASU”) No. 09-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“FASB ASU 09-13”). FASB ASU 09-13 updates the existing multiple-element arrangement guidance currently in FASB ASC 605-25 (“Revenue Recognition-Multiple-Element-Arrangements”). This new guidance eliminates the requirement that all undelivered elements have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to the items that have already been delivered. Further, companies will be required to allocate revenue in arrangements involving multiple deliverables based on estimated selling price of each deliverable, even though such deliverables are not sold separately by either the company itself or other vendors. This new guidance also significantly expands the disclosures required for multiple-element revenue arrangements. The revised guidance will be effective for the fiscal year ending December 31, 2011. We are currently evaluating the impact FASB ASU 09-13 will have on our consolidated financial statements.

     In December 2008, the FASB issued FASB Accounting Standards Codification 715-20-65-2, “Compensation-Retirement Benefits” (“FASB ASC 715-20-65-2”). FASB ASC 715-20-65-2 provides guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan. We adopted FASB ASC 715-20-65-2 on December 31, 2009 and the initial adoption did not have a material impact on our consolidated financial statements.

     In the third quarter of 2009, we adopted the FASB ASC 105, “Generally Accepted Accounting Principles” (“FASB ASC 105”). FASB ASC 105 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in preparation of financial statements in conformity with Generally Accepted Accounting Principles. The adoption did not have a material impact on our consolidated financial statements.

     In the second quarter of 2009, we adopted FASB ASC 855, “Subsequent Events” (“FASB ASC 855”). FASB ASC 855 sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We have evaluated subsequent events through February 24, 2010, which represents the date the financial statements are issued. The adoption did not have a material impact on our consolidated financial statements.

     Effective January 1, 2009, we adopted FASB ASC 810-10-65-1, “Consolidation” (“FASB ASC 810-10-65-1”), which establishes accounting and reporting standards for any noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FASB ASC 810-10-65-1 clarifies that a noncontrolling interest in a subsidiary should be reported as a component of equity in the consolidated financial statements and requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interests. Accordingly, certain amounts in prior year periods presented have been reclassified to reflect the adoption of FASB ASC 810-10-65-1.

     RECLASSIFICATION. Certain prior year amounts have been reclassified for comparability purposes.

2. ACQUISITIONS AND DISPOSITIONS

     ACQUISITIONS. In 2009, we did not make any acquisitions. In 2008, we paid $48.3 million for the acquisition of several businesses and for purchase price adjustments from our prior years’ acquisitions. In 2007, we paid $86.7 million for the acquisition of several businesses and for purchase price adjustments from our prior years’ acquisitions. All of these acquisitions were accounted for under the purchase method. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill and other intangibles. Intangible assets recorded for all current transactions are amortized using the straight-line method for periods not exceeding 18 years.

     NON-CASH INVESTING ACTIVITIES. Liabilities assumed in conjunction with the acquisition of businesses are as follows:

(in millions)		2009				2008				2007
Fair value of assets acquired		$	—			$	50.8			$	102.5
Cash paid (net of cash acquired)			—				48.3				86.7
Liabilities assumed		$	—			$	2.5			$	15.8

     All of these acquisitions are immaterial to us individually and in the aggregate.

     DISPOSITIONS. In May 2009, we sold our Vista Research, Inc. business which was part of our Financial Services segment. This business was selected for divestiture as it no longer fit within our strategic plans. This divestiture enables the Financial Services segment to focus on its core business of providing independent research, ratings, data indices and portfolio services. We recognized a pre-tax loss of $13.8 million ($8.8 million after-tax or $0.03 per diluted share), recorded as other (loss)/income-net.

     In December 2009, we sold BusinessWeek which was part of our Information & Media segment. This business was selected for divestiture as it no longer fit within our strategic plans. We recognized a pre-tax gain of $10.5 million ($6.7 million after tax or $0.02 per diluted share).

     In 2008, we did not make any dispositions.

     In 2007, we sold our mutual fund data business which was part of the Financial Services segment. This business was selected for divestiture as it no longer fit within our strategic plans. The divestiture of the mutual fund data business enables the Financial Services segment to focus on its core business of providing independent research, ratings, data indices and portfolios services. We recognized a pre-tax gain of $17.3 million ($10.3 million after-tax, or $0.03 per diluted share).

     In 2007, all dispositions including the sale of the mutual fund data business were immaterial to us individually and in the aggregate.

3. DEBT AND OTHER COMMITMENTS

A summary of short-term and long-term debt outstanding as of December 31, is as follows:

(in millions)		2009				2008
5.375% Senior Notes, due 2012(a)		$	399.8			$	399.7
5.900% Senior Notes, due 2017(b)			399.3				399.1
6.550% Senior Notes, due 2037(c)			398.5				398.5
Commercial paper			0.0				70.0
Notes payable			0.2				0.3
Total debt			1,197.8				1,267.6
Less: Short-term debt including current maturities			0.0				70.0
Long-term debt		$	1,197.8			$	1,197.6

SENIOR NOTES

(a) As of December 31, 2009, we had outstanding $399.8 million of 2012 senior notes consisting of $400 million principal and an unamortized debt discount of $0.2 million. The 2012 senior notes, when issued in November 2007, were priced at 99.911% with a yield of 5.399%. Interest payments are due semiannually on February 15 and August 15.

(b) As of December 31, 2009, the Company had outstanding $399.3 million of 2017 senior notes consisting of $400 million principal and an unamortized debt discount of $0.7 million. The 2017 senior notes, when issued in November 2007, were priced at 99.76% with a yield of 5.933%. Interest payments are due semiannually on April 15 and October 15.

(c) As of December 31, 2009, the Company had outstanding $398.5 million of 2037 senior notes consisting of $400 million principal and an unamortized debt discount of $1.5 million. The 2037 senior notes, when issued in November 2007, were priced at 99.605% with a yield of 6.580%. Interest payments are due semiannually on May 15 and November 15.

     AVAILABLE FINANCING. The size of our total commercial paper program remains $1.2 billion and is supported by the revolving credit agreement described below. There were no commercial paper borrowings outstanding at December 31, 2009. Commercial paper borrowings outstanding at December 31, 2008 totaled $70.0 million, with an average interest rate and average term of 1.4% and 29 days.

     On September 12, 2008 we closed on two new revolving credit facility agreements totaling $1.15 billion collectively (the “2008 credit facility”) to replace the existing $1.2 billion five-year credit facility that expired on July 20, 2009. The 2008 credit facility was with a syndicate of 14 banks led by JP Morgan Chase and Bank of America. The previous credit facility was cancelled once the 2008 facility became effective.

     On August 14, 2009 we entered into a new $433.3 million 364-day revolving credit facility (the “new 364-day facility”) which replaces our existing $383.3 million 364-day credit agreement entered into on September 12, 2008. The previous credit facility was cancelled after the new 364-day facility became effective.

     The combined credit facility now totals $1.2 billion and consists of two separate tranches, a $433.3 million 364-day facility that will terminate on August 13, 2010 and a $766.7 million 3-year facility that will terminate on September 12, 2011. We pay a commitment fee of 12.5–37.5 basis points for the new 364-day facility and a commitment fee of 10–20 basis points for the 3-year facility, depending upon our credit rating, whether or not amounts have been borrowed. At our current credit rating, the commitment fee is 15 basis points for the new 364-day facility and 12.5 basis points for the 3-year facility. The interest rate on borrowings under the credit facility is, at our option, based on (i) a spread over the prevailing London Inter-Bank Offer Rate (“LIBOR”) that is based on our credit rating (“LIBOR loans”) or (ii) on the higher of (a) the prime rate, which is the rate of interest publicly announced by the administrative agent (b) 0.5% plus the Federal funds rate, or (c) LIBOR plus 1% (“ABR loans”). The interest rate spread on LIBOR loans is calculated by multiplying the current 30 business day average of the CDX 5-year investment grade index by a percentage, ranging from 75–150% for the new 364-day facility and from 50–100% for the 3-year facility. At our current credit rating, the borrowing rate would be 75% of this index on the new 364-day facility and 50% on the 3-year facility, with a minimum spread of 0.75% on the new 364-day facility and 0.5% on the 3-year facility.

     We have the option at the termination of the new 364-day facility to convert any revolving loans outstanding into term loans for an additional year. Term loans can be LIBOR loans or ABR loans and would carry an additional spread of 1.0%.

     The credit facility contains certain covenants. The only financial covenant requires that we not exceed indebtedness to cash flow ratio, as defined in the new credit facility, of 4 to 1. This covenant is similar to the previous credit agreements and has never been exceeded. There were no borrowings under either of the facilities as of December 31, 2009 and 2008.

     We have the capacity to issue Extendible Commercial Notes (“ECN”s) of up to $240 million, provided that sufficient investor demand for the ECNs exists. ECNs replicate commercial paper, except that we have an option to extend the note beyond its initial redemption date to a maximum final maturity of 390 days. However, if exercised, such an extension is at a higher reset rate, which is at a predetermined spread over LIBOR and is related to our commercial paper rating at the time of extension. As a result of the extension option, no backup facilities for these borrowings are required. As is the case with commercial paper, ECNs have no financial covenants. There were no ECN borrowings outstanding as of December 31, 2009 and 2008. In the current credit environment, the ECN market is not available and we have no plans to utilize this market.

     On April 19, 2007, we signed a promissory note with one of our providers of banking services to enable us to borrow additional funds, on an uncommitted basis, from time to time to supplement our commercial paper and ECN borrowings. The specific terms (principal, interest rate and maturity date) of each borrowing governed by this promissory note are determined on the borrowing date of each loan. These borrowings have no financial covenants. There were no promissory note borrowings outstanding as of December 31, 2009 and 2008. In the current credit environment, the market for these instruments is currently not available and we have no plans to utilize them in the short-term.

     On January 1, 2009, we transferred most of Standard & Poor’s U.S. properties and assets from a division to a newly-formed, wholly-owned subsidiary. This action was done to address future operational and financial conditions, and will not affect the ongoing conduct of Standard & Poor’s businesses, including the credit ratings business.

     In conjunction with this reorganization, a series of supplemental agreements were executed. They include a supplemental indenture for our $1.2 billion senior notes (three tranches of $400 million due in 2012, 2017 and 2037), amendments to our $1.15 billion Credit Agreement (including both the 2008 364-day (terminated on August 14, 2009) and the 3-year agreements), amendments to the commercial paper issuing and paying agency agreement (with JP Morgan) and amended and restated commercial paper dealer agreements (with JP Morgan, Morgan Stanley and Merrill Lynch). The 2008 364-day facility was terminated after the 2009 364-day facility became effective in August 2009. The 2009 364-day facility, which brought the total credit facility amount to $1.2 billion, also included a guarantee similar to those in the supplemental agreement. All of these agreements and amendments provide that the new S&P subsidiary will guarantee the senior notes issued pursuant to the indenture, amounts borrowed under the credit agreement and the commercial paper.

     Long-term debt was $1,197.8 million and $1,197.6 million as of December 31, 2009 and 2008, respectively. The carrying amount of our borrowings approximates fair value at December 31, 2009. We paid interest on our debt totaling $71.4 million in 2009, $71.9 million in 2008 and $44.1 million in 2007.

     Aggregate requirements for long-term debt maturities during the next five years are as follows: 2010 through 2011 no amounts due; 2012 – $400.0 million; 2013 through 2014 – no amounts due.

     As of December 31, 2009, the Company’s unconditional purchase obligations payments are as follows:

(in millions)		2010				2011				2012				2013				2014				Thereafter
		$	38.4			$	24.3			$	5.8			$	1.9			$	0.0			$	0.0

4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

We have three reportable segments: McGraw-Hill Education, Financial Services and Information & Media. The McGraw-Hill Education segment is one of the premier global educational publishers serving the elementary and high school (“el-hi”), college and university, professional, international and adult education markets. During 2009, 2008 and 2007, the segment incurred pre-tax restructuring charges that reduced operating profit by $14.0 million, $25.3 million and $16.3 million, respectively. Additionally, in 2009 we revised our estimate for previously recorded restructuring charges and reversed $2.4 million for the segment (see Note 14). Included in 2007 operating profit is a $4.1 million gain resulting from a divestiture of a product line in July 2007.

     The Financial Services segment operates under the Standard & Poor’s brand. This segment provides services to investors, corporations, governments, financial institutions, investment managers and advisors globally. The segment and the markets it serves are impacted by interest rates, the state of global economies, credit quality and investor confidence. During 2009, 2008 and 2007, the segment incurred pre-tax restructuring charges that reduced operating profit by $4.5 million, $25.9 million and $18.8 million, respectively. Additionally, in 2009 we revised our estimate for previously recorded restructuring charges and reversed $4.9 million for the segment (see Note 14). Included in 2009 operating profit is a pre-tax loss of $13.8 million resulting from the sale of our Vista Research, Inc. business. Included in 2007 operating profit is a pre-tax gain of $17.3 million from the sale of our mutual fund data business.

     The Information & Media segment includes business, professional and broadcast media, offering information, insight and analysis. During 2009, 2008 and 2007, the segment incurred pre-tax restructuring charges that reduced operating profit by $5.8 million, $19.2 million and $6.7 million, respectively. Additionally, in 2009 we revised our estimate for previously recorded restructuring charges and reversed $1.8 million for the segment (see Note 14). Included in 2009 operating profit is a pre-tax gain of $10.5 million related to the divestiture of BusinessWeek. The results of 2009 reflect a deferral of $11.4 million of revenue and $7.1 million of operating profit related to the transitioning of a number of syndicated studies to an online service platform, which will be recognized over the service period.

     In 2008, as a result of a reduction in the change in the projected payout of restricted performance stock awards and reductions in other incentive compensation projections, we recorded a decrease in incentive compensation as follows: McGraw-Hill Education, $29.3 million; Financial Services, $166.0 million; Information & Media, $22.6 million and Corporate, $55.8 million. In 2009, we further reduced the projected payout of our restricted performance stock awards, although to a much lesser extent than 2008.

     Information as to the operations of our three segments is set forth below based on the nature of the products and services offered. The Executive Committee, consisting of our principal corporate executives, is our chief operating decision-maker and evaluates performance based primarily on operating profit. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

     The adjustments to operating profit listed below relate to the operating results of the corporate entity, which is not considered an operating segment and includes corporate expenses of $127.0 million, $109.1 million and $159.8 million, and net interest expense of $76.9 million, $75.6 million and $40.6 million, for the years ended December 31, 2009, 2008 and 2007, respectively. Pre-tax restructuring charges impacted corporate expenses by $3.0 million and $1.9 million, for the years ended December 31, 2008 and 2007, respectively. Corporate assets consist principally of cash and equivalents, assets for pension benefits, deferred income taxes and leasehold improvements related to subleased areas.

     Foreign revenue and long-lived assets include operations in approximately 40 countries. We do not have operations in any foreign country that represent more than 5% of our consolidated revenue. Transfers between geographic areas are recorded at agreed upon prices and intercompany revenue and profit are eliminated.

     Segment information for the years ended December 31, 2009, 2008 and 2007 is as follows:

		McGraw-Hill				Financial				Information				Segment								Consolidated
(in millions)		Education				Services				& Media				Totals				Adjustments				Total
2009
Revenue		$	2,387.8			$	2,610.1			$	953.9	(a)		$	5,951.8			$	–			$	5,951.8
Operating profit			276.0				1,014.1				92.7	(a)			1,382.8				(203.9	)			1,178.9
Stock-based compensation			4.3				6.5				3.1				13.9				8.4				22.3
Depreciation and amortization(c)			349.0				53.8				26.7				429.5				6.5				436.0
Assets			2,582.2				1,249.0				846.2				4,677.4				1,797.9				6,475.3
Capital expenditures(d)			203.2				31.5				8.8				243.5				2.0				245.5
Technology project additions			11.4				11.9				—				23.3				0.5				23.8
2008
Revenue		$	2,638.9			$	2,654.3			$	1,061.9			$	6,355.1			$	–			$	6,355.1
Operating profit			321.4				1,070.4				92.0				1,483.8				(184.7	)			1,299.1	*
Stock-based compensation(b)			(1.6	)			(1.9	)			(0.5	)			(4.0	)			2.1				(1.9	)
Depreciation and amortization(c)			351.0				60.2				31.1				442.3				6.5				448.8
Assets			2,859.4				1,247.6				926.9				5,033.9				1,046.2				6,080.1
Capital expenditures(d)			298.7				38.8				18.4				355.9				4.1				360.0
Technology project additions			7.2				10.9				7.3				25.4				–				25.4
2007
Revenue		$	2,705.9			$	3,046.2			$	1,020.2			$	6,772.3			$	–			$	6,772.3
Operating profit			403.1				1,370.2				63.5				1,836.8				(200.4	)			1,636.4	*
Stock-based compensation			27.7				44.2				22.1				94.0				30.7				124.7
Depreciation and amortization(c)			310.3				50.9				33.2				394.4				6.8				401.2
Assets			2,996.0				1,306.4				953.1				5,255.5				1,135.9				6,391.4
Capital expenditures(d)			434.5				62.1				29.6				526.2				2.4				528.6
Technology project additions			5.2				7.1				0.7				13.0				3.7				16.7

     The following is a schedule of revenue and long-lived assets by geographic location:

		2009								2008								2007
						Long-lived								Long-lived								Long-lived
(in millions)		Revenue				Assets				Revenue				Assets				Revenue				Assets
United States		$	4,226.4			$	2,881.5			$	4,579.4			$	3,107.7			$	5,008.5			$	3,175.8
European region			963.7				220.4				1,020.5				220.5				1,030.9				246.3
Asia			467.8				133.2				438.8				117.9				426.1				126.8
Rest of world			293.9				77.1				316.4				70.2				306.8				74.4
Total		$	5,951.8			$	3,312.2			$	6,355.1			$	3,516.3			$	6,772.3			$	3,623.3

5. TAXES ON INCOME

Income before taxes on income resulted from domestic and foreign operations as follows:

(in millions)		2009				2008				2007
Domestic operations		$	878.5			$	981.0			$	1,349.3
Foreign operations			300.4				318.1				287.0
Total income before taxes		$	1,178.9			$	1,299.1			$	1,636.3

     The provision/(benefit) for taxes on income consists of the following:

(in millions)		2009				2008				2007
Federal:
Current		$	281.0			$	319.6			$	455.7
Deferred			(17.5	)			1.8				(59.7	)
Total federal			263.5				321.4				396.0
Foreign:
Current			101.6				77.8				96.8
Deferred			6.6				3.8				8.1
Total foreign			108.2				81.6				104.9
State and local:
Current			46.0				78.7				122.3
Deferred			11.4				(2.0	)			(14.2	)
Total state and local			57.4				76.7				108.1
Total provision for taxes		$	429.1			$	479.7			$	609.0

     A reconciliation of the U.S. statutory tax rate to the Company’s effective tax rate for financial reporting purposes follows:

		2009				2008				2007
U.S. statutory rate			35.0	%			35.0	%			35.0	%
Effect of state and local income taxes			3.9				4.2				4.4
Other — net			(2.5	)			(2.3	)			(2.2	)
Effective tax rate			36.4	%			36.9	%			37.2	%

     The effective tax rates include the impact of a new accounting rule adopted on January 1, 2009 for noncontrolling interests in subsidiaries (see Note 1 to our consolidated financial statements), which resulted in a change to the calculated effective tax rates for 2008 and 2007.

     The principal temporary differences between the accounting for income and expenses for financial reporting and income tax purposes as of December 31, are as follows:

(in millions)		2009				2008
Deferred tax assets:
Reserves and accruals		$	329.4			$	349.6
Postretirement benefits			306.9				343.6
Deferred gain			63.5				68.7
Unearned revenue			4.2				—
Other — net			65.1				78.9
Total deferred tax assets			769.1				840.8
Deferred tax liabilities:
Fixed assets and intangible assets			(367.4	)			(380.7	)
Prepaid pension and other expenses			(90.2	)			(76.5	)
Unearned revenue			—				(4.1	)
Total deferred tax liabilities			(457.6	)			(461.3	)
Net deferred income tax asset before valuation allowance			311.5				379.5
Valuation allowance			(19.0	)			(18.0	)
Net deferred income tax asset		$	292.5			$	361.5
Reported as:
Current deferred tax assets		$	278.4			$	285.4
Non-current deferred tax assets			24.1				79.5
Non-current deferred tax liabilities			(10.0	)			(3.4	)
Net deferred income tax asset		$	292.5			$	361.5

     We record valuation allowances against deferred income tax assets when we determine that it is more likely than not based upon all the available evidence that such deferred income tax assets will not be realized. The valuation allowance is primarily related to operating losses from certain foreign operations.

     We have not recorded deferred income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. Undistributed earnings that are indefinitely reinvested in foreign operations amounted to approximately $449.2 million at December 31, 2009. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

     We made net income tax payments totaling $415.6 million in 2009, $466.1 million in 2008 and $635.4 million in 2007. At December 31, 2009, we had federal net operating loss carryforwards of approximately $11.2 million which will expire between 2017 and 2026, and the utilization of these losses will be subject to limitations.

     On January 1, 2007, we implemented new accounting rules for unrecognized tax benefits. The total amount of federal, state and local, and foreign unrecognized tax benefits as of December 31, 2009 and 2008 was $37.8 million and $27.7 million, respectively, exclusive of interest and penalties. Included in the balance at December 31, 2009 and 2008, are $0.7 million and $2.2 million, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. In addition to the unrecognized tax benefits, as of December 31, 2009 and 2008, we had $8.7 million and $13.5 million, respectively, of accrued interest and penalties associated with uncertain tax positions.

     A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(in millions)		2009				2008				2007
Balance at beginning of year		$	27.7			$	45.8			$	75.1
Additions based on tax positions related to the current year			9.5				8.5				12.0
Additions for tax positions of prior years			16.1				1.3				1.5
Reductions for tax positions of prior years			(15.5	)			(27.9	)			(42.8	)
Balance at end of year		$	37.8			$	27.7			$	45.8

     The net increase of $10.1 million in 2009 is the amount of unrecognized tax benefits that unfavorably impacted tax expense. The unfavorable impact to the tax provision was offset by the favorable outcome of the completed federal, state, local and foreign tax audits.

     During 2009, we effectively completed the U.S. federal tax audit for 2008. The years 2007 and 2008 remain open pending the appeal of certain unresolved issues. In 2009, we also completed various state and foreign tax audits and, with few exceptions, we are no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for the years before 2002. The favorable impact to tax expense in 2009 was $8.7 million.

     During 2008, we completed various federal, state and local, and foreign tax audits. The net decrease of $18.1 million in the amount of unrecognized tax benefits favorably impacted tax expense by $15.9 million. The remaining net decrease was attributable to tax positions that were either timing related or settled. This favorable impact to the tax provision was offset by additional requirements for the repatriation of cash from international operations.

      During 2007, we completed various federal, state and local, and foreign tax audits. The favorable impact to tax expense in 2007 was $20.0 million which was offset by additional tax requirements for the repatriation of cash from foreign operations.

     We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions, and we are routinely under audit by many different tax authorities. We believe that our accrual for tax liabilities is adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. It is possible that tax examinations will be settled prior to December 31, 2010. If any of these tax audit settlements do occur within that period, we would make any necessary adjustments to the accrual for unrecognized tax benefits. Until formal resolutions are reached between us and the tax authorities, the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable. On the basis of present information, it is our opinion that any assessments resulting from the current audits will not have a material effect on our consolidated financial statements.

     We do not expect our 2010 effective tax rate to vary significantly from our 2009 effective tax rate.

     Although the timing of income tax audit resolution and negotiations with taxing authorities are highly uncertain, we do not anticipate a significant change to the total amount of unrecognized income tax benefits within the next twelve months.

6. RENTAL EXPENSE AND
LEASE OBLIGATIONS

Rental expense for property and equipment under all operating lease agreements is as follows:

(in millions)		2009				2008				2007
Gross rental expense		$	236.8			$	241.0			$	228.2
Less: sublease revenue			(2.1	)			(2.4	)			(5.5	)
Less: Rock-McGraw rent credit			(18.4	)			(18.4	)			(17.6	)
Net rental expense		$	216.3			$	220.2			$	205.1

     We are committed under lease arrangements covering property, computer systems and office equipment. Leasehold improvements are amortized straight-line over the shorter of their economic lives or their lease term. Certain lease arrangements contain escalation clauses covering increased costs for various defined real estate taxes and operating services. Rent escalation fees are recognized straight-line over the lease term.

     Minimum rental commitments, including rent payments on the sale-leaseback described in Note 13 to the consolidated financial statements, under existing non-cancelable leases with a remaining term of more than one year, are shown in the following table. The annual rental commitments for real estate are reduced by $2.4 million in 2010, $2.1 million in 2011, $1.3 million in 2012, $1.0 million in 2013 and $0.8 million in 2014 for sublease income.

(in millions)
2010		$	183.4
2011			167.9
2012			149.4
2013			136.4
2014			130.1
2015 and beyond			695.3
Total		$	1,462.5

7. EQUITY

CAPITAL STOCK. Two million shares of preferred stock, par value $1 per share, are authorized; none have been issued.

     In 2009, dividends were paid at the quarterly rate of $0.225 per common share. Dividends were paid at an annualized rate of $0.90, $0.88 and $0.82 per common share in 2009, 2008 and 2007, respectively. Total dividends paid in 2009, 2008 and 2007 were $281.6 million, $280.5 million and $277.7 million, respectively. On January 20, 2010, the Board of Directors approved an increase in the dividends for 2010 to a quarterly rate of $0.235 per common share.

     STOCK REPURCHASES. On January 24, 2006, the Board of Directors approved a stock repurchase program (the “2006 program”) authorizing the purchase of up to 45.0 million shares, which was approximately 12.1% of our total outstanding common stock at that time. At December 31, 2006, authorization for the repurchase of 20.0 million shares remained under the 2006 program.

     On January 31, 2007, the Board of Directors approved a new stock repurchase program (the “2007 program”) authorizing the repurchase of up to 45.0 million additional shares, which was approximately 12.7% of our total outstanding common stock at that time. During 2007, we repurchased 37.0 million shares, which included the remaining 20.0 million shares under the 2006 program, for $2.2 billion at an average price of $59.80. At December 31, 2007, authorization for the repurchase of 28.0 million shares remained under the 2007 program.

     During 2008, we repurchased 10.9 million shares under the 2007 program, for $0.4 billion at an average price of $41.03. At December 31, 2008, authorization for the repurchase of 17.1 million shares remained under the 2007 program.

     During 2009, no shares were repurchased.

     Share repurchases for the years ended December 31, are as follows:

(in millions, except average price)		2009				2008				2007
Shares repurchased			—				10.9				37.0
Average price		$	—			$	41.03			$	59.80
Amount		$	—			$	447.2			$	2,212.7

     Shares repurchased were used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. In any period, cash used in financing activities related to common stock repurchased may differ from the comparable change in equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.

     ACCUMULATED OTHER COMPREHENSIVE LOSS.

Accumulated other comprehensive loss at December 31, consists of the following:

(in thousands)		2009				2008				2007
Foreign currency translation adjustments		$	(61,734	)		$	(104,757	)		$	(8,074	)
Unrealized gain on investment, net of tax			1,959				304				3,747
Pension and other postretirement plans, net of tax			(283,242	)			(339,569	)			(8,296	)
Total accumulated other comprehensive loss		$	(343,017	)		$	(444,022	)		$	(12,623	)

8. STOCK PLAN AWARDS

We have a Director Deferred Stock Ownership Plan and three employee stock ownership plans: the 1987, 1993 and 2002 Employee Stock Incentive Plans.

     DIRECTOR DEFERRED STOCK OWNERSHIP PLAN — Under this Plan, common stock reserved may be credited to deferred stock accounts for eligible Directors. In general, the Plan requires that 50% of eligible Directors’ annual compensation plus dividend equivalents be credited to deferred stock accounts. Each Director may also elect to defer all or a portion of the remaining compensation and have an equivalent number of shares credited to the deferred stock account. Recipients under this Plan are not required to provide consideration to us other than rendering service. Shares will be delivered as of the date a recipient ceases to be a member of the Board of Directors or within five years thereafter, if so elected. The Plan will remain in effect until terminated by the Board of Directors or until no shares of stock remain available under the Plan.

     1987 AND 1993 EMPLOYEE STOCK INCENTIVE PLANS — These plans provided for the granting of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted stock awards, deferred stock (applicable to the 1987 Plan only) or other stock-based awards. No further awards may be granted under these Plans; although awards granted prior to the adoption of the 2002 Plan, as amended, remain outstanding under these Plans in accordance with their terms.

     2002 EMPLOYEE STOCK INCENTIVE PLAN AS AMENDED IN 2004 (THE “2002 PLAN”) — The 2002 Plan permits the granting of nonqualified stock options, SARs, performance stock, restricted stock, and other stock-based awards. Shares subject to awards other than stock options or SARS count against the pool as three shares for every one share granted.

     The number of common shares reserved for issuance at December 31, are as follows:

(in thousands)		2009				2008
Shares available for granting under the 2002 Plan			18,956				20,526
Options outstanding			31,406				32,469
Shares reserved for issuance for employee stock plan awards			50,362				52,995
Director Deferred Stock Ownership Plan			536				556
Total shares reserved for issuance			50,898				53,551

     We issue treasury shares upon exercise of stock options and the issuance of restricted stock and unit awards. To offset the dilutive effect of the exercise of employee stock options, we periodically repurchase shares.

STOCK OPTIONS

Stock options, which may not be granted at a price less than the fair market value of our common stock on the date of grant, vest over a two year service period in equal annual installments and have a maximum term of 10 years.

     We receive a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the quoted market value of the stock at the time of the exercise of the options over the exercise price of the options. The actual income tax benefit realized from stock option exercises for the years ended December 31, is as follows:

(in millions)		2009				2008				2007
Income tax benefit realized from stock option exercises		$	2.0			$	7.0			$	56.6
Net cash proceeds from the exercise of stock options		$	25.2			$	41.4			$	146.9

     For the years ended December 31, 2009, 2008 and 2007, $0.3 million, $4.0 million and $35.8 million, respectively, of excess tax benefits from stock options exercised are reported in cash flows from financing activities.

     We use a lattice-based option-pricing model to estimate the fair value of options granted. The following assumptions were used in valuing the options granted during the years ended December 31, 2009, 2008 and 2007:

		2009				2008				2007
Risk-free average interest rate			0.4—4.1	%			1.4—4.4	%			3.6—6.3	%
Dividend yield			3.3—3.7	%			2.0—3.4	%			1.2—1.7	%
Volatility			33—75	%			21—59	%			14—22	%
Expected life (years)			5.6—6.0				6.7—7.0				7.0—7.2
Weighted-average grant-date fair value		$	5.78			$	9.77			$	15.80

     Because lattice-based option-pricing models incorporate ranges of assumptions, those ranges are disclosed. These assumptions are based on multiple factors, including historical exercise patterns, post-vesting termination rates, expected future exercise patterns and the expected volatility of our stock price. The risk-free interest rate is the imputed forward rate based on the U.S. Treasury yield at the date of grant. We use the historical volatility of our stock price over the expected term of the options to estimate the expected volatility. The expected term of options granted is derived from the output of the lattice model and represents the period of time that options granted are expected to be outstanding.

     Stock option compensation costs are recognized from the date of grant, utilizing a two-year graded vesting method. Under this method, fifty percent of the costs are ratably recognized over the first twelve months with the remaining costs ratably recognized over a twenty-four month period starting from the date of grant. At December 31, 2009, there was $8.6 million of unrecognized compensation costs related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.0 year.

     The total intrinsic value (market value on date of exercise less exercise price) of options exercised during 2009, 2008 and 2007 totaled $5.0 million, $17.4 million and $139.7 million, respectively. The total fair value of options vested during 2009, 2008 and 2007 totaled $25.3 million, $27.3 million and $42.3 million, respectively. The aggregate intrinsic values of stock options outstanding and exercisable at December 31, 2009 were $59.7 million and $30.7 million, respectively. The weighted-average remaining years of contractual life for options outstanding and exercisable at December 31, 2009 were 5 years and 4 years respectively.

     Stock option activity for the year ended December 31, 2009 is as follows:

						Weighted-
						average
(in thousands of shares)		Shares				exercise price
Options outstanding at December 31, 2008			32,469			$	39.89
Granted			2,955			$	23.13
Exercised			(943	)		$	26.68
Cancelled, forfeited and expired			(3,075	)		$	38.16
Options outstanding at December 31, 2009			31,406			$	38.88
Options exercisable at December 31, 2009			27,341			$	40.50

     Nonvested stock option activity for the year ended December 31, 2009 is as follows:

						Weighted-
						average
						grant-date
(in thousands of shares)		Shares				fair value
Nonvested options outstanding at December 31, 2008			3,683			$	11.09
Granted			2,955			$	5.78
Vested			(2,167	)		$	11.60
Forfeited			(406	)		$	8.88
Nonvested options outstanding at December 31, 2009			4,065			$	7.03

RESTRICTED STOCK AND UNIT AWARDS

Restricted stock and unit awards (performance and non-performance) have been granted under the 2002 Plan. Restricted stock and unit performance awards will vest only if we achieve certain financial goals over the performance period. Restricted stock non-performance awards have various vesting periods (generally three years), with vesting beginning on the first anniversary of the awards.

     Recipients of restricted stock and unit awards are not required to provide consideration to us other than rendering service.

     The stock-based compensation expense for restricted stock and unit awards is determined based on the market price of our stock at the grant date of the award applied to the total number of awards that are anticipated to fully vest. For restricted stock and unit performance awards, adjustments are made to expense dependent upon financial goals achieved. At December 31, 2009, there was unrecognized stock-based compensation of $30.1 million related to restricted stock and unit awards, which is expected to be recognized over a weighted-average period of 2.3 years.

     The weighted-average grant-date fair values of restricted stock and unit awards granted during 2009, 2008 and 2007 were $31.05, $39.37 and $56.12, respectively. The total fair value of restricted stock and unit awards vested during 2009, 2008 and 2007 totaled $81.9 million, $29.4 million and $28.5 million, respectively. The tax (expense)/ benefit relating to restricted stock award activity during 2009, 2008 and 2007 was $0.7 million, $(11.7) million and $12.1 million, respectively.

     Restricted stock and unit activity for the year ended December 31, 2009 is as follows:

						Weighted-average
Non-performance Awards						grant-date
(in thousands of shares)		Shares				fair value
Nonvested shares at December 31, 2008			21			$	44.66
Granted			65			$	22.64
Vested			(9	)		$	48.39
Forfeited			(2	)		$	52.01
Nonvested shares at December 31, 2009			75			$	26.01

						Weighted-average
Performance Awards						grant-date
(in thousands of shares)		Shares				fair value
Nonvested shares at December 31, 2008			3,245			$	49.79
Granted			2,386			$	31.28
Vested			(1,421	)		$	57.37
Forfeited			(249	)		$	35.90
Nonvested shares at December 31, 2009			3,961			$	36.77

     Stock-based compensation expense and the corresponding tax benefit for the years ended December 31, are as follows:

(in millions)		2009				2008				2007
Stock-based compensation
Expense/(benefit)		$	22.3			$	(1.9	)		$	124.7
Tax (expense)/benefit		$	8.8			$	(0.8	)		$	50.5

     During 2008, we reduced the projected payout percentage of our outstanding restricted performance stock awards.

     During 2009, we further reduced the projected payout percentage of our outstanding restricted performance stock awards, although to a much lesser extent than 2008. Accordingly, we recorded adjustments to reduce our stock-based compensation expense for the amount of previously recognized expense in excess of the revised projected payouts. In 2008, the effect of these adjustments resulted in a beneficial impact on total stock-based compensation expense.

9. RETIREMENT PLANS

We have a number of defined benefit pension plans and defined contribution plans covering substantially all employees. Our primary pension plan is a noncontributory plan under which benefits are based on employee career employment compensation. We also have unfunded non-U.S. and supplemental benefit plans. The supplemental benefit plans provide senior management with supplemental retirement, disability and death benefits. Certain supplemental retirement benefits are based on final monthly earnings. In addition, we sponsor voluntary 401(k) plans under which we may match employee contributions up to certain levels of compensation as well as profit-sharing plans under which we contribute a percentage of eligible employees’ compensation to the employees’ accounts.

     We recognize the funded status of our pension plans in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of taxes. The amounts in accumulated other comprehensive income represent net unrecognized actuarial losses and unrecognized prior service costs. These amounts will be subsequently recognized as net periodic pension cost pursuant to our accounting policy for amortizing such amounts.

     A summary of the benefit obligation and the fair value of plan assets, as well as the funded status for the defined benefit plans as of December 31, is as follows:

CHANGE IN BENEFIT OBLIGATION

(in millions)		2009				2008
Net benefit obligation at beginning of year		$	1,395.8			$	1,380.8
Service cost			58.1				58.3
Interest cost			86.4				86.0
Plan participants’ contributions			0.6				0.9
Actuarial loss/(gain)			63.6				(4.8	)
Gross benefits paid			(55.7	)			(70.4	)
Foreign currency effect			15.6				(55.0	)
Other adjustments			5.0				—
Net benefit obligation at end of year		$	1,569.4			$	1,395.8

CHANGE IN PLAN ASSETS

(in millions)		2009				2008
Fair value of plan assets at beginning of year		$	972.3			$	1,493.9
Actual return on plan assets			268.1				(445.0	)
Employer contributions			78.0				39.3
Plan participants’ contributions			0.6				0.9
Gross benefits paid			(55.7	)			(70.4	)
Foreign currency effect			13.7				(46.4	)
Fair value of plan assets at end of year			1,277.0				972.3
Funded status		$	(292.4	)		$	(423.5	)

     Benefits paid in the above table include only those amounts contributed directly to or paid directly from plan assets.

     The funded status of the defined benefit plans includes $78.5 million in non-current assets for pension benefits, $5.0 million in other current liabilities and $365.9 million in liability for pension and other postretirement benefits in the consolidated balance sheet as of December 31, 2009, and $53.0 million in non-current assets for pension benefits, $4.5 million in other current liabilities and $472.0 million in liability for pension and other postretirement benefits in the consolidated balance sheet as of December 31, 2008.

     The accumulated benefit obligation as of December 31, for the defined benefit plans is as follows:

(in millions)		2009				2008
Accumulated benefit obligation		$	1,398.7			$	1,235.3

     The following table reflects pension plans with an accumulated benefit obligation in excess of the fair value of plan assets as of December 31:

(in millions)		2009				2008
Projected benefit obligation		$	1,288.3			$	1,180.3
Accumulated benefit obligation		$	1,158.1			$	1,055.2
Fair value of plan assets		$	930.6			$	725.6

     The U.S. weighted-average assumptions used to determine the benefit obligations are as follows:

		2009				2008
Discount rate			5.95	%			6.10	%
Compensation increase factor			5.50	%			5.50	%

     Amounts recognized in accumulated other comprehensive loss, net of tax as of December 31, consist of:

(in millions)		2009				2008
Net actuarial loss		$	281.3			$	343.9
Prior service credit			(6.6	)			(6.9	)
Total recognized in accumulated other comprehensive loss, net of tax		$	274.7			$	337.0

     The actuarial loss and prior service credit included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the year ending December 31, 2010 are $15.1 million and $0.3 million, respectively.

     For purposes of determining annual pension cost, prior service costs are being amortized straight-line over the average remaining service period of employees expected to receive benefits. For 2009, the assumed return on U.S. plan assets of 8.0% is based on a calculated market-related value of assets, which recognizes changes in market value over five years.

     A summary of net periodic benefit cost for our defined benefit plans is as follows:

(in millions)		2009				2008				2007
Service cost		$	58.1			$	58.3			$	64.1
Interest cost			86.4				86.0				79.9
Expected return on assets			(105.0	)			(110.1	)			(98.9	)
Amortization of:
Transition obligation			—				—				0.1
Actuarial loss			5.5				3.1				13.6
Prior service (credit) cost			(0.3	)			(0.4	)			(0.3	)
Net periodic benefit cost		$	44.7			$	36.9			$	58.5

     The U.S. weighted-average assumptions used to determine net periodic benefit cost are as follows:

January 1		2009				2008				2007
Discount rate			6.10	%			6.25	%			5.90	%
Compensation increase factor			5.50	%			5.50	%			5.50	%
Return on assets			8.00	%			8.00	%			8.00	%

     Our United Kingdom (“U.K.”) retirement plan accounted for $6.3 million in 2009, $9.5 million in 2008 and $16.3 million in 2007 of the net periodic benefit cost attributable to the funded plans. The discount rate assumption for our U.K. retirement plan was 5.80%, 5.40% and 4.90% for the years ended December 31, 2009, 2008 and 2007, respectively. The assumed compensation increase factor for the U.K. retirement plan was 5.50%, 5.95% and 5.75% for the years ended December 31, 2009, 2008 and 2007, respectively. Additionally, effective January 1, 2010, we changed our discount rate assumption on our U.S. retirement plans to 5.95% from 6.10% in 2009 and changed our discount rate assumption on our U.K. retirement plan to 5.90% from 5.80% in 2009.

     Other changes in plan assets and benefit obligations recognized in other comprehensive income/(loss), net of tax for the years ended December 31, are as follows:

(in millions)		2009				2008				2007
Net actuarial (gain)/loss		$	(59.1	)		$	324.8			$	(58.7	)
Recognized actuarial gain			(3.5	)			(2.1	)			(8.5	)
Prior service credit			—				—				(5.5	)
Recognized prior service cost			0.3				0.3				0.3
Recognized transition obligation			—				—				(0.1	)
Total recognized in other comprehensive loss, net of tax		$	(62.3	)		$	323.0			$	(72.5	)

     The total cost for our retirement plans was $140.6 million for 2009, $146.5 million for 2008 and $168.1 million for 2007. Included in the total retirement plans cost are defined contribution plans cost of $82.9 million for 2009, $95.9 million for 2008 and $96.8 million for 2007.

     Information about the expected cash flows for all of the defined benefit plans combined is as follows:

EXPECTED EMPLOYER CONTRIBUTIONS

(in millions)
2010		$	30.3