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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant    x

Filed by a Party other than the Registrant    ¨

Check the appropriate box:

¨    Definitive Proxy Statement

The McGraw-Hill Companies, Inc.

(Name of Registrant as Specified In Its Certificate)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

x    No fee required.

Notes:

Reg. §240.14a-101.

SEC 1913 (3-99)

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March 21, 2005

DEAR SHAREHOLDER:

On behalf of our Board of Directors and management, we cordially invite you to attend our Annual Meeting of Shareholders on Wednesday, April 27, 2005. The Meeting will be held at our headquarters at 1221 Avenue of the Americas, New York, New York, at 11:00 a.m. (EDT). If you are unable to attend the Annual Meeting in New York, please join us via live Webcast on the Company’s Web site at www.mcgraw-hill.com.

The Notice of Meeting and Proxy Statement accompanying this letter describe the business we will consider at the Meeting. Your vote is very important. I urge you to vote to be certain your shares are represented at the Meeting even if you plan to attend. Most shareholders have a choice of voting over the Internet, by telephone or by using a traditional proxy card. Please refer to your proxy materials or the information forwarded by your bank, broker or other holder of record to see which methods are available to you.

I look forward to seeing you at the Meeting.

HAROLD MCGRAW III

Chairman of the Board, President and Chief Executive Officer

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Notice of Annual Meeting of Shareholders

To Be Held April 27, 2005

The Annual Meeting of Shareholders of The McGraw-Hill Companies, Inc. will be held on Wednesday, April 27, 2005, at 11:00 a.m. (EDT) at the Company’s headquarters at 1221 Avenue of the Americas, New York, New York. At the Meeting, shareholders will be asked to:

You may vote at the Meeting if you were a shareholder of the Company at the close of business on March 8, 2005, the record date for the Meeting.

By Order of the Board of Directors.

SCOTT L. BENNETT

Senior Vice President, Associate General

Counsel and Secretary

New York, New York

March 21, 2005

Please sign and return the enclosed proxy card in the postage-paid envelope provided or, if you prefer, please follow the instructions on the enclosed proxy card for voting by telephone or via the Internet. You may access the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor  relations for further Internet voting instructions as well as to view the Proxy Statement and Annual Report online.

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The McGraw-Hill Companies, Inc.

Proxy Statement

2005 Annual Meeting of Shareholders

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The McGraw-Hill Companies, Inc.

Proxy Statement

2005 Annual Meeting of Shareholders

GENERAL INFORMATION

Why did I receive this Proxy Statement?

The Board of Directors of The McGraw-Hill Companies, Inc. (the “Company”, “we” or “us”) is soliciting proxies for the 2005 Annual Meeting of Shareholders (the “Annual Meeting” or “Meeting”) to be held on Wednesday, April 27, 2005, and at any adjournment of the Meeting. When the Company asks for your proxy, we must provide you with a Proxy Statement that contains certain information specified by law. This Proxy Statement summarizes the information you need in order to vote at the Annual Meeting.

The Company’s 2004 Annual Report, Notice of Annual Meeting, Proxy Statement and proxy are being mailed to shareholders beginning March 21, 2005.

What will I vote on?

Five items:

Will there be any other items of business on the agenda?

We do not expect any other items of business at the Meeting. Nonetheless, if there is an unforeseen need, your proxy will give discretionary authority to the persons named on the proxy to vote on any other matters that may be brought before the Meeting. These persons will use their best judgment in voting your proxy.

Who is entitled to vote?

Shareholders as of the close of business on the record date, which is March 8, 2005, may vote at the Annual Meeting.

How many votes do I have?

You have one vote for each share of common stock you held on the record date.

What constitutes a quorum for the Meeting?

A quorum is necessary to conduct business at the Annual Meeting. A quorum requires the presence at the Meeting of a majority of the outstanding shares entitled to vote, in person or represented by proxy. You are part of the quorum if you have voted by proxy. As of the record date,                  shares of Company common stock were issued and outstanding.

How do I vote?

You can vote either in person at the Annual Meeting or by proxy without attending the Meeting. We urge you to vote by proxy even if you plan to attend the Meeting so we will know as soon as possible that enough votes will be present for us to hold the Meeting. If you attend the Annual Meeting in person, you may vote at the Meeting and your earlier proxy will not be counted.

May I vote by telephone or via the Internet?

Yes. Instead of submitting your vote by mail using the enclosed proxy card, you may be able to vote on the Internet or by telephone. Please note that there are separate Internet and telephone voting arrangements depending on whether you hold your shares:

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If you are a registered shareholder, you may vote by telephone or via the Internet by following the instructions on your proxy card.

If you are a beneficial owner, please refer to the information forwarded by your bank, broker or other holder of record to see which options are available to you. Most brokers and banks offer voting by telephone and via the Internet, as well as by mail.

If you vote via the Internet, you may incur costs, such as usage charges from Internet access providers and telephone companies. You will be responsible for these costs.

How do I vote my shares in the Dividend Reinvestment Plan?

If you participate in the Dividend Reinvestment Plan, any proxy you give will also govern the voting of all shares you hold in this Plan, unless you give us other instructions.

How do I vote my shares in the Company’s employee benefit plans?

You may instruct the plans’ Trustee on how to vote your shares in these plans held by you as of March 8, 2005 by mail, by telephone, or via the Internet. Your vote must be received by April 22, 2005, or the shares represented will not be voted.

Can I change my vote?

Yes. If you are a shareholder of record, you have the right to revoke your proxy at any time before the Meeting by: (1) sending a notice to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095; or (2) delivering a later dated proxy by telephone, via the Internet, or in writing. You may also revoke your proxy by voting in person at the Meeting.

If you are a beneficial owner, please refer to the information forwarded by your broker, bank or other holder of record for procedures on revoking or changing your proxy.

What are the costs of soliciting these proxies and who will pay them?

The Company will pay all costs of soliciting these proxies. Although we are mailing these proxy materials, some of our officers and employees may solicit proxies by telephone or in person. We will reimburse banks and brokers for the expenses they incur in forwarding the proxy materials to you. Georgeson Shareholder Communications Inc. is assisting us with the solicitation of proxies for a fee of $22,000 plus out-of-pocket expenses.

How many votes are required for the approval of each item?

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Are abstentions and broker non-votes part of the quorum?

Abstentions, broker non-votes and votes withheld for Director nominees count as “shares present” at the Annual Meeting for purposes of determining a quorum.

What are broker non-votes?

If your shares are held by a broker, the broker may require your instructions in order to vote your shares. If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two things can happen depending on the type of proposal. For the election of Directors and ratification of the Company’s independent Registered Public Accounting Firm, the broker may vote your shares in its discretion. For approval of the Key Executive Short-Term Incentive Compensation Plan, the amendment to the Company’s Restated Certificate of Incorporation increasing the authorized shares of common stock, and the shareholder proposal, the broker may not vote your shares at all. When that happens, it is called a “broker non-vote”.

Who will count the vote?

Votes at the Meeting will be counted by two independent inspectors of election appointed by the Board.

What if I don’t vote for some or all of the matters listed on my proxy card?

If you are a registered shareholder and you return a signed proxy card without indicating your vote for some or all of the matters, your shares will be voted as follows for any matter you did not vote on:

How do I submit a shareholder proposal for the 2006 Annual Meeting?

The Company’s 2006 Annual Meeting is scheduled for April 26, 2006. There are two different deadlines for submitting shareholder proposals. First, if a shareholder wishes to have a proposal considered for inclusion in next year’s Proxy Statement, he or she must submit the proposal in writing so that we receive it by November 21, 2005. Proposals should be addressed to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. If you submit a proposal, it must comply with applicable laws, including Rule 14a-8 of the Securities Exchange Act of 1934.

In addition, the Company’s By-Laws provide that any shareholder wishing to nominate a candidate for Director or to propose any other business at the Annual Meeting must give the Company written notice no earlier than December 28, 2005 and no later than January 27, 2006. This notice must comply with applicable laws and the Company’s By-Laws. Copies of the By-Laws are available to shareholders free of charge on request to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. You may also download the By-Laws from the Corporate Governance section of the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations.

Can I view future proxy materials online instead of receiving them by mail?

Yes. If you are a shareholder of record or own Company shares through one of the Company’s employee benefit plans, you may, if you wish, view future Proxy Statements and Annual Reports online. If you elect this feature, you will receive an e-mail notice which will include the Web address for viewing the materials online. The e-mail notice will also include instructions so you can vote your proxy online or by telephone. If you have more than one account, you may receive separate e-mails for each account. Costs normally associated with electronic delivery, such as usage and telephone charges, as well as any costs incurred in printing documents, will be your responsibility.

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At any time during the year, shareholders of record or owners of Company shares through one of the Company’s employee benefit plans may give consent to view future Proxy Statement and Annual Report materials online. During the 2005 proxy voting period, the Internet voting system will automatically prompt shareholders for their consent. For other times during the year, go to https://www.giveconsent.com/mhp. The enrollment site reviews the basic information and terms. At the user login screen, please enter your shareholder account number or taxpayer identification number and provide an e-mail address so we can contact you when proxy materials are available online. You will receive confirmation by e-mail indicating your preference for electronic delivery. If you are a beneficial owner, please contact your broker, bank or other holder of record for procedures on how to consent to view materials online instead of receiving them by mail.

What are the benefits of electronic delivery?

Electronic delivery saves the Company money by reducing printing and mailing costs. It will also make it convenient for you to view your proxy materials and vote your shares online. If you have shares in more than one account, it is also an easy way to eliminate receiving duplicate copies of proxy materials.

What are the costs of electronic delivery?

The Company charges nothing for electronic delivery. You may, of course, incur expenses associated with Internet access, such as telephone charges or charges from your Internet service provider.

May I change my mind later?

Yes. You may discontinue electronic delivery at any time. Shareholders of record may resume mail delivery of the Proxy Statement and Annual Report by going to https://www.giveconsent.com/mhp and revoking your election. You will receive a confirmation by e-mail indicating your preference to resume mail delivery.

If you are a beneficial owner, please contact your broker, bank or other holder of record for procedures on how to revoke your consent and resume delivery of materials by mail.

Will I receive a copy of the Company’s Annual Report?

Unless you previously elected to view our Annual Report via the Internet, we mailed our 2004 Annual Report to shareholders beginning on March 21, 2005.

What is “householding”?

We have adopted “householding”, a procedure under which beneficial owners who have the same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of our Annual Report and Proxy Statement unless one or more of these shareholders notifies us that they wish to continue receiving individual copies. This procedure reduces duplicate mailings and thus reduces our printing costs and postage fees. Shareholders who participate in householding will continue to receive separate proxy cards. Householding does not affect dividend check mailings.

What if I want to receive a separate copy of the Proxy Statement?

If you participate in householding and wish to receive a separate copy of the 2004 Annual Report or this Proxy Statement, or if you wish to receive separate copies of future Annual Reports and/or Proxy Statements, please call us toll-free at (866) 436-8502, or send an e-mail to investor_relations@mcgraw-hill.com, or write to: Investor Relations, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. We will promptly deliver to you the documents you requested.

Where can I find the voting results?

We will file a Form 8-K with the Securities and Exchange Commission (the “SEC”) reporting the voting results for Proposal Three, the proposal to amend the Company’s Restated Certificate of Incorporation to increase the authorized shares of common stock, by May 2, 2005. We will publish the voting results for all the proposals,

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including Proposal Three, in our Form 10-Q for the Second Quarter of 2005 which we will file with the SEC on or about July 29, 2005. To view these online, go to the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations, and click on the SEC Filings link.

Do the Directors attend the Meeting?

It is the Company’s policy that, subject to illness or an unavoidable schedule conflict, all Directors will attend and be introduced at the Meeting. All of our Directors attended the 2004 Annual Meeting.

What should I do if I want to attend the Meeting?

All shareholders of the Company may attend the Meeting. The Meeting will be held on the second floor of the Company’s headquarters at 1221 Avenue of the Americas, New York, New York 10020-1095, and will begin promptly at 11:00 a.m. (EDT). You may be asked to present photo identification before being admitted to the Meeting. If you have questions about attending the Meeting, you may call Investor Relations toll-free at (866) 436-8502.

Can a shareholder communicate directly with our Board? If so, how?

Yes. You may communicate directly with our Board, including the Presiding Director, by writing to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095 or by sending an e-mail to the Company’s Secretary at corporate_secretary@mcgraw-hill.com. The Company’s Secretary will then forward your questions or comments directly to our Board. For additional information about the Presiding Director, please see page 7 of this Proxy Statement.

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BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

The Company’s business and affairs are over-seen by our Board pursuant to the New York Business Corporation Law and our Restated Certificate of Incorporation and By-Laws. Under the Company’s Restated Certificate of Incorporation, the members of the Board are grouped into three classes. The three classes are as equal in number as possible. One class is elected at each Annual Meeting to hold office for a three-year term beginning on the date of the Meeting.

New members are assigned to classes upon ini-tial appointment so that the size of each class is as nearly equal as possible. The four Director nominees standing for election at this year’s Annual Meeting, Sir Winfried Bischoff, Mr. Douglas N. Daft, Ms. Linda Koch Lorimer and Mr. Harold McGraw III, are currently serving as Directors of the Company. All four of the Director nominees are being nominated for three-year terms that will expire in 2008.

Mr. Harold W. McGraw, Jr., a Director from 1954 to 1988, Chairman of the Board from 1976 to 1988, and Chief Executive Officer from 1975 to 1983, retired from the Board after the 1988 Annual Meeting in accordance with the Board’s retirement age policy. However, in recognition of Mr. McGraw’s past service and contributions to the Company and to assure his continued close association with the Board and the Company, the Board elected Mr. McGraw permanently to the position of Chairman Emeritus.

Director Independence

The Board has determined that all of the Company’s Directors, with the exception of Messrs. Harold McGraw III (the Company’s Chairman of the Board, President and Chief Executive Officer) and Robert P. McGraw (the brother of Harold McGraw III), have met the independence requirements of the New York Stock Exchange, based upon the application of objective categorical standards adopted by the Board. To be considered independent, a Director must have no material relationship (other than as a Director) with the Company, or any of its subsidiaries, either directly or as a partner, shareholder or officer of an organization that has a material relationship with the Company or any of its subsidiaries. In making independence determinations, the Board broadly considers all relevant facts and circumstances. In accordance with the Company’s Corporate Governance Guidelines, a Director will not be an independent Director of the Company if:

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For purposes of sub-paragraphs (i) through (v) above, an “immediate family member” includes a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law and anyone (other than domestic employees) who shares such person’s home. Individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated are not taken into consideration with respect to the determination of a Director’s independence.

Presiding Director

On February 23, 2005, the Board once again appointed Ms. Linda Koch Lorimer, the Chair of the Nominating and Corporate Governance Committee, as the Presiding Director of the Board for the period February 23, 2005 through February 22, 2006. In her capacity as the Presiding Director, Ms. Lorimer presides at regularly scheduled executive sessions of the Board at which only non-management Directors are present. Shareholders may communicate with Ms. Lorimer by sending a letter to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095 or by sending an e-mail message to corporate_secretary@mcgraw-hill.com. The Company’s Secretary will then forward your letter to Ms. Lorimer.

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Directors’ Biographies

Class of 2008

The following four Director nominees are currently serving as Directors of the Company and have been nominated to stand for re-election at this Annual

Meeting to serve three-year terms that will expire in 2008. Please see page 32 of this Proxy Statement for voting information.

		Sir Winfried Bischoff, age 63, has been since 2000 Chairman of Citigroup Europe, which represents the European businesses of Citigroup, Inc., a global financial services firm. He is also a member of Citigroup, Inc.’s Management Committee. Sir Winfried Bischoff was Chairman of Schroders plc, an international investment banking and asset management firm headquartered in Great Britain, from 1995 to 2000. Prior to that, Sir Winfried Bischoff was Chairman of J. Henry Schroder Co. (the London investment bank of Schroders plc) from 1983 to 1995 and Group Chief Executive of Schroders plc from 1984 to 1995. He is a Director of Eli Lilly and Company and Land Securities plc. Sir Winfried Bischoff has served as a Director of the Company since 1999 and is a member of the Compensation and Financial Policy Committees.

		Douglas N. Daft, age 62, was Chairman of the Board and Chief Executive Officer of The Coca-Cola Company from 2000 to 2004. He served as President and Chief Operating Officer of The Coca-Cola Company from 1999 until 2000. He previously served as Senior Vice President of The Coca-Cola Company from 1991 until 1999. Mr. Daft worked at The Coca-Cola Company since 1969, and held various executive positions since 1984. Mr. Daft is a Director of Wal-Mart Stores, Inc. Mr. Daft is also an advisory board member for SISTEMA (the Russian Telecom Group) and Longreach, Inc. (a Japan-based private equity firm). He served on the Boards of the Boys and Girls Clubs of America, Catalyst, and a number of educational and professional associations. Mr. Daft was a Trustee of Emory University, the American Assembly, and the Center for Strategic & International Studies. He was also a member of The Business Council and The Business Roundtable. Mr. Daft has served as a Director of the Company since 2003 and is a member of the Audit and Compensation Committees.

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		Linda Koch Lorimer, age 53, has been Vice President and Secretary of Yale University since 1995, having returned to Yale as Secretary of the University in 1993. She was President of Randolph-Macon Woman’s College from 1987 to 1993 and was Associate Provost of Yale University from 1983 to 1987. She is a Director of Sprint Corporation. Ms. Lorimer is the former Chairman of the Board of the Association of American Colleges and Universities and the Women’s College Coalition. Ms. Lorimer is a Director of Yale-New Haven Hospital and a Trustee of Hollins University. Ms. Lorimer has served as a Director of the Company since 1994 and is Chair of the Nominating and Corporate Governance Committee and a member of the Compensation and Executive Committees. She also serves as the Presiding Director of the Company’s Board of Directors.

		Harold McGraw III, age 56, has been Chairman of the Board since 2000 and President and Chief Executive Officer of the Company since 1998. Prior to that, Mr. McGraw had been President and Chief Operating Officer of the Company since 1993. He was Executive Vice President, Operations, of the Company from 1989 to 1993. Prior to that, he was President of the McGraw-Hill Financial Services Company, President of the McGraw-Hill Publications Company, Publisher of Aviation Week & Space Technology magazine and Vice President, Corporate Planning. Before joining the Company in 1980, he held financial positions at the GTE Corporation. Mr. McGraw serves on the Board of Directors of United Technologies, a diversified company that provides high technology products and support services to the commercial building and the aerospace industries. He is Chairman of the Business Roundtable’s International Trade and Investment Task Force and Chairman of the Emergency Committee for American Trade (ECAT). He is a member of The Business Council and served as a member of President George W. Bush’s Transition Advisory Committee on Trade. Mr. McGraw is Chairman of the National Council on Economic Education as well as The National Actors Theatre. He serves on the Board of Trustees of Carnegie Hall as well as the Board of The New York Public Library. He also is a member of the Boards of the National Organization on Disability, The National Academy Foundation and Hartley House. Mr. McGraw has served as a Director of the Company since 1987 and is Chair of the Executive Committee. (a)

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Class of 2006

The following three Directors will continue in office until 2006:

		James H. Ross, age 66, was Deputy Chairman of National Grid Transco plc from 2002 to 2004, a public UK company with interests in electricity and gas transmission and distribution in the United Kingdom, the United States, Argentina, Zambia and Australia. Prior to that, Mr. Ross was Chairman of National Grid Group plc from 1999 to 2002. Mr. Ross was also Chairman of The Littlewoods Organisation from 1996 to 2002, a private company in Great Britain operating in the retail home shopping and leisure businesses. Mr. Ross was Chief Executive and Deputy Chairman of Cable & Wireless plc, an international provider of telecommunications services, between 1992 and 1995. He was a Managing Director of British Petroleum plc, which engages in all phases of the petroleum business, from 1991 to 1992, and Chairman and Chief Executive Officer of BP America Inc., a subsidiary of British Petroleum plc, from 1988 to 1992. Mr. Ross is a Director of Prudential plc, Schneider Electric and Datacard Inc. He is also the Chairman of the Leadership Foundation for Higher Education in the United Kingdom. Mr. Ross has served as a Director of the Company since 1989 and is Chair of the Financial Policy Committee and a member of the Executive and Nominating and Corporate Governance Committees.

		Kurt L. Schmoke, age 55, has been the Dean of the Howard University School of Law since 2003. Prior to that, he was a partner at the Washington, D.C. based law firm of Wilmer Cutler & Pickering from 2000 through 2002. Mr. Schmoke served three terms as the Mayor of Baltimore from 1987 until 1999. Mr. Schmoke served as the State’s Attorney for Baltimore City from 1982 until 1987. Mr. Schmoke is a Director of The Baltimore Life Companies and Legg Mason, Inc. He is a Trustee of Tuskegee University, Yale University, McDaniel College, Loyola College of Maryland and Howard Hughes Medical Institute, a private philanthropic group. Mr. Schmoke is also a member of the Council on Foreign Relations, and a member of the Board of Directors of the World Wildlife Fund. Mr. Schmoke was named to President Jimmy Carter’s domestic policy staff in 1977. Mr. Schmoke has served as a Director of the Company since February 2003 and is a member of the Financial Policy and Nominating and Corporate Governance Committees.

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		Sidney Taurel, age 56, has been Chairman, President and Chief Executive Officer of Eli Lilly and Company, a pharmaceutical company, since 1999. Mr. Taurel joined Lilly in 1971 and held management positions in the company’s operations in Brazil and Europe before becoming President of Eli Lilly International Corporation in 1986. He was elected a Director of Eli Lilly and Company in 1991, became Executive Vice President in 1993, and President and Chief Operating Officer in 1996. He has served as President and CEO since June 1998, adding the role of Chairman of the Board in January 1999. Mr. Taurel is a Director of IBM. He is a member of The Business Council and The Business Roundtable, and a Director of Pharmaceutical Research and Manufacturers of America. He is a Member of the Board of Overseers of the Columbia Business School, a founder of the International School of Indiana, a Vice Chair of the Kennedy Center Corporate Fund, and a Trustee of the Indianapolis Museum of Art. Mr. Taurel is also a Director of the RCA Tennis Championships. In June 2002, President Bush appointed him to the President’s Homeland Security Advisory Council, and in February 2003 to the President’s Export Council. Mr. Taurel has served as a Director of the Company since 1996 and is Chair of the Compensation Committee and a member of the Executive and Nominating and Corporate Governance Committees.

Class of 2007

The following four Directors will continue in office until 2007:

		Pedro Aspe, age 54, has been since April 2001 Chairman of the Board and Chief Executive Officer of Protego Asesores Financieros, a leading investment banking advisory firm in Mexico. From 1996 to March 2001, Dr. Aspe was Chairman of the Board of Vector Casa de Bolsa, S.A. de C.V., an investment banking firm in Mexico. Dr. Aspe has been since 1995 a professor at the Instituto Tecnológico Autónomo de México located in Mexico City. Dr. Aspe has held a number of positions with the Mexican government and was most recently the Secretary of Finance and Public Credit of Mexico from 1988 through 1994. Dr. Aspe is a Director of the Carnegie Corporation and of Televisa located in Mexico City. Dr. Aspe is a member of the Advisory Board of Stanford University’s Institute of International Studies, the Visiting Committee of the Department of Economics of MIT, and the Center for Politics and Economics at Claremont University. Dr. Aspe also sits on the Advisory Board of Marvin & Palmer and American International Group, Inc. Dr. Aspe has served as a Director of the Company since 1996 and is Chair of the Audit Committee and a member of the Executive and Financial Policy Committees.

		Robert P. McGraw, age 50, is currently Chairman and Chief Executive Officer of Averdale International, LLC, an investment company. Prior to that, Mr. McGraw was Executive Vice President of the Professional Publishing Group of the Company from 1989 to August 1998. He was Executive Vice President of the Healthcare Group from 1987 to 1989, and Group Vice President of that same group from 1985 to 1987. Prior to that, he served in several key positions in the Health Professions Division of the Company: General Manager from 1983 to 1985; Editorial Director from 1982 to 1983; and Editor from 1979 to 1982. He joined the Company in 1976 as a sales representative for McGraw-Hill Higher Education. Mr. McGraw has served as a Director of the Company since 1995 and is a member of the Financial Policy Committee. (a)

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		Hilda Ochoa-Brillembourg, age 60, is the founder and has been since 1987 the President and Chief Executive Officer of Strategic Investment Group, a group of affiliated investment management firms, and Managing Director of Emerging Markets Investment Corporation and Emerging Markets Management, LLC. From 1976 to 1987, she was Chief Investment Officer of the Pension Investment Division at the World Bank. Prior to joining the World Bank, she served as an independent consultant in the fields of economics and finance, as a lecturer at the Universidad Catolica Andres Bello in Venezuela and as Treasurer of the C.A. Luz Electrica de Venezuela in Caracas. Ms. Ochoa-Brillembourg is a Director of General Mills, Inc., the World Bank/International Monetary Fund Credit Union and the Harvard Management Company, Inc. Ms. Ochoa-Brillembourg is Founding Chair of the Youth Orchestra of the Americas and a Trustee and Executive Committee member of the Washington National Opera. She is also a Trustee of the Executive Committee of the National Symphony Orchestra and an Advisory Board member of the Rockefeller Center for Latin American Studies at Harvard University. Ms. Ochoa-Brillembourg has served as a Director of the Company since 2004 and is a member of the Audit and Financial Policy Committees.

		Edward B. Rust, Jr., age 54, has been since 1987 Chairman of the Board and Chief Executive Officer of State Farm Insurance Companies, the largest insurer of automobiles and homes in the United States. Mr. Rust is a Director of Helmerick & Payne, an oil and gas drilling company, and Caterpillar Inc., a manufacturer of construction and mining equipment. Mr. Rust is a Trustee for Illinois Wesleyan University. Additionally, he was a member of President George W. Bush’s Transition Advisory Team Committee on Education. Mr. Rust is Co-Chairman of the Business Roundtable. He is also Chairman of the Business Higher Education Forum and Co-Chairman of the Committee for Economic Development’s Subcommittee on Education Studies. Mr. Rust has served as a Director of the Company since 2001 and is a member of the Audit and Compensation Committees.

(a) Messrs. Harold McGraw III and Robert P. McGraw are brothers and the sons of Mr. Harold W. McGraw, Jr.

Corporate Governance Materials

The following corporate governance materials are available and can be viewed and downloaded from the Corporate Governance section of the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations: (i) the Company’s Restated Certificate of Incorporation; (ii) the Company’s By-Laws; (iii) the Company’s Corporate Governance Guidelines; (iv) Board Committee Charters for the Company’s Audit, Compensation, Executive, Financial Policy, and Nominating and Corporate Governance Committees; (v) the Code of Business Ethics applicable to all Company employees; (vi) the Code of Ethics applicable to the Company’s Chief Executive Officer and Senior Financial Officers; and (vii) the Audit Committee’s Policy concerning Employee Complaint Procedures regarding Accounting and Auditing Matters. A copy of these materials is available to shareholders free of charge on request to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095.

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Committees of the Board of Directors

The Company has standing Audit, Compensation, and Nominating and Corporate Governance Committees. The Chair of each Committee reports to the full Board as appropriate from time to time. Each Committee has a Charter that is reviewed by the Nominating and Corporate Governance Committee on a regular basis. In addition to these three standing Committees, the Board has an Executive Committee and a Financial Policy Committee. A brief description of the Audit, Compensation, and Nominating and Corporate Governance Committees follows.

Audit Committee

The Audit Committee’s duties include, among other matters, assisting the Board’s oversight of:

Additional information about the Audit Committee follows:

Compensation Committee

The Compensation Committee’s duties include, among other matters:

Additional information about the Compensation Committee follows:

Nominating and Corporate Governance Committee

The functions performed by the Nominating and Corporate Governance Committee include, among other matters:

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Additional information about the Nominating and Corporate Governance Committee follows:

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Membership and Meetings of the Board and Its Committees

In 2004, no Director attended fewer than 75 percent of the aggregate of the total number of meetings of the Board and the Committees on which he or she served. Current Committee membership and the number of meetings of the full Board and each Committee are shown in the table below.

In 2004, the non-management Directors met in executive sessions twice without any member of management present. Mr. Robert P. McGraw, who is not an independent Director as defined in the rules of the New York Stock Exchange due to his familial relationship with Mr. Harold McGraw III, the Company’s Chairman, President and Chief Executive Officer, was not present at one of these non-management Director executive sessions.

Indemnification

Each Director and certain of our executive officers have entered into an indemnification agreement with the Company which provides indemnification for judgments and amounts paid in settlement and related expenses to the fullest extent permitted under the applicable provisions of the New York Business Corporation Law. This indemnification will be reduced to the extent that a Director or executive officer is indemnified by the Company’s directors’ and officers’ liability insurance. The Company has for many years carried directors’ and officers’ liability insurance coverage. The Company’s current insurance coverage was purchased for the period December 31, 2004 to December 31, 2005 for an

annual premium of $1,600,000. The Company has purchased this coverage from National Union Fire Insurance Company of Pittsburgh, PA; Federal Insurance Company; Great American Insurance Companies; and Liberty Mutual Insurance Co. This coverage, subject to a number of standard exclusions and certain deductibles, indemnifies the Directors and officers of the Company and its subsidiaries for liabilities or losses incurred in the performance of their duties up to an aggregate sum of $65,000,000. No sums have been paid under this coverage to the Company or any Directors or officers nor have any claims for reimbursement been made under this policy.

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Audit Committee Report

The Audit Committee reviews the Company’s financial reporting process on behalf of the Board. All of the members of the Committee are independent Directors in accordance with the listing standards of the New York Stock Exchange. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The Board has adopted a written Charter for the Audit Committee.

In this context, the Committee has met and held discussions with management and the Company’s independent Registered Public Accounting Firm. Management represented to the Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Committee has reviewed and discussed the consolidated financial statements with management and the Company’s independent Registered Public Accounting Firm, which review included a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Committee discussed with the Company’s independent Registered Public Accounting Firm matters required to be discussed by Statement on Auditing Standards No. 61 as amended by Statement on Auditing Standards No. 90 (Communication With Audit Committees).

In addition, the Committee has reviewed with the Company’s independent Registered Public Accounting Firm the Firm’s independence from the Company and its management. The Committee received from the Company’s independent Registered Public Accounting Firm the written disclosures and the letter regarding its independence as required by Independence Standards Board Standard No. 1 (Independence Discussions With Audit Committees).

The Committee discussed with the Company’s internal auditors and independent Registered Public Accounting Firm the overall scope and plans for their respective audits. The Committee met with the internal and independent auditors, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

The Committee has also considered whether the provision of services by Ernst & Young LLP, the Company’s independent Registered Public Accounting Firm, not related to the audit of the financial statements referred to above is compatible with maintaining Ernst & Young LLP’s independence.

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC. The Committee and the Board also have recommended, subject to shareholder approval, the selection of the Company’s independent Registered Public Accounting Firm for 2005.

Pedro Aspe (Chair)

Hilda Ochoa-Brillembourg

Douglas N. Daft

Edward B. Rust, Jr.

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Independent Registered Public Accounting Firm’s Fees and Services

Shareholders are being asked to ratify the appointment of Ernst & Young LLP as the independent Registered Public Accounting Firm for the Company and its subsidiaries for 2005. Please see page 37 of this Proxy Statement for voting information. During the years ended December 31, 2004 and December 31, 2003, Ernst & Young LLP audited the consolidated financial statements of the Company and its subsidiaries. The aggregate fees Ernst & Young LLP billed the Company for these years for professional services rendered were as follows:

In addition, the policies and procedures contained in the Audit Committee Charter (which can be viewed and downloaded from the Corporate Governance Section of the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations) provide that the Committee must preapprove both the retention of the independent auditor for non-audit services and the fee for such services in accordance with the Company’s independence guidelines.

Directors’ Compensation

Directors who are employees receive no additional compensation for serving on the Board or its Committees.

The Company provides the following annual compensation to non-employee Directors:

Cash Compensation

Share Compensation

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Other Director Plans

EXECUTIVE COMPENSATION

This section contains information on various aspects of compensation of the Company’s executives. In particular, it contains information regarding the cash and equity compensation of Mr. Harold McGraw III and the four most highly

compensated executive officers other than Mr. McGraw who were serving as executive officers on December 31, 2004 (the “named executive officers”).

Compensation Committee Report on Executive Compensation

The following is a report of the Compensation Committee of the Board regarding executive compensation. The Committee’s functions and membership are described on pages 13 and 15, respectively, of this Proxy Statement.

Introduction

The McGraw-Hill Companies’ executive compensation program (the “Program”) is administered by the Compensation Committee of the Board of Directors (the “Committee”) which is composed of the individuals listed below, all of whom are non-employee Directors of the Company who meet the independence requirements of the

New York Stock Exchange. The Committee has sole responsibility for all compensation matters with respect to the Company’s senior management. The Committee regularly reports to the Board of Directors on its activities and decisions and meets in executive session with the independent Directors at year-end to review the CEO’s performance and compensation.

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Philosophy

The Program has been designed to enable the Company to attract, motivate and retain senior management by providing a fully competitive total compensation opportunity based on performance. The Program consists of three key elements: (1) base salaries, which reflect competitive marketplace data and evaluated individual performance; (2) annual incentives, which are payable for the achievement of annual financial performance goals established by the Committee; and (3) long-term stock-based incentives consisting of annual grants of restricted performance shares, which are payable for the achievement of three-year financial performance goals established by the Committee, and annual stock option grants. The stock-based incentives are intended to align the interests of senior management with those of the Company’s shareholders. The Program permits differentiation in total compensation opportunity based on assessments of sustained individual performance, current responsibilities and future potential. Further, the Program is structured so that at higher management levels a larger portion of annual compensation is variable, based on Company performance, and a larger portion of total compensation is composed of stock-based compensation.

The Committee’s policy with respect to the tax deductibility of executive compensation under Section 162(m) of the Internal Revenue Code (the “Code”) is to qualify such compensation for deductibility whenever practicable. The Key Executive Short-Term Incentive Compensation Plan and the Stock Incentive Plan have been approved by the Company’s shareholders pursuant to the requirements of Section 162(m) of the Internal Revenue Code so that the awards earned under these plans will qualify for tax deduction by the Company when paid. A new version of the Key Executive Short-Term Incentive Compensation Plan, to be effective for 2005 and future plan years, is being presented for shareholder approval at this Annual Meeting.

It is the Committee’s intent to fulfill its responsibilities according to the highest standards of corporate conduct and governance practices in the long-term best interests of the Company and its shareholders.

Program Competitiveness

The Program is intended to be fully competitive with the total executive compensation programs of competitor companies in the publishing, information and media industry when performance goals are met. Base salaries, annual incentive awards and long-term incentive grant guidelines are determined within the framework of position responsibility, individual performance and the external marketplace. Competitive market data are derived annually using a third-party consultant survey of the publishing, information and media industry, which includes reported data from companies in the peer group index of the Shareholder Return Performance Graph (the “Peer Group”).

The annual incentive awards are designed to be competitive with median incentive levels using available data for the competitor companies included in the Peer Group and data from a third-party media industry compensation survey of other publishing, information and media companies.

The long-term incentive grant guidelines provide competitive compensation opportunities in the form of restricted performance share and stock option grants. These guidelines are designed to reflect median grant practices of publishing, information and media industry companies including those in the Peer Group.

Following is a discussion of each of the elements of the Program and a description of the specific decisions and actions taken by the Committee with regard to 2004 compensation for the CEO.

Annual Salary and Incentive Compensation

Annual compensation for senior management consists of base salary and the annual incentive awards earned under the Key Executive Short-

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Term Incentive Compensation Plan. Base salary increases for senior executives other than the CEO are recommended annually by Mr. McGraw and are reviewed and approved by the Committee.

Target awards established under the Key Executive Short-Term Incentive Compensation Plan were established as a dollar amount for each executive at the beginning of the year. The maximum payment opportunity was set at 200% of the annual target award. Payment of the annual incentive awards for Mr. McGraw and the other executives named in the Summary Compensation Table was based on the Company’s performance in relation to minimum, target and maximum diluted Earnings Per Share goals which were approved by the Committee at the beginning of the plan year.

Long-Term Incentive Compensation

The long-term incentive compensation program for senior management consists of two types of annual stock awards: restricted performance shares and stock options. Restricted performance share awards are established for each executive and granted annually. They vest at the end of a three-year award cycle, with payment ranging up to a maximum of 200% of the shares awarded based on the achievement of cumulative compound diluted Earnings Per Share growth goals established by the Committee at the beginning of each award cycle. The restricted performance share awards are subject to forfeiture if the minimum performance goal is not attained, or if a participant’s employment is terminated for certain reasons before the shares become vested. During the award cycle, participants receive dividends on and have the right to vote the awarded shares.

The second component of the long-term incentive compensation program consists of stock options, which provide participants with the right to purchase shares of the Company’s common stock at its market value on the date of grant. Each stock option grant becomes exercisable in two equal annual installments commencing one year after grant and has a ten-year maximum term.

2004 CEO Compensation

Mr. McGraw’s base salary is reviewed annually by the Committee, which considers competitive CEO base salary information from the Peer Group companies, Mr. McGraw’s individual performance and contributions since his last review, and the merit increase guidelines in effect for other salaried employees during this period. Effective January 1, 2004, the Committee increased Mr. McGraw’s base salary by 5.0% to $1,116,000 based on its review and assessment of the factors and criteria described above.

In April 2004, stock-based long-term incentive awards were granted. Mr. McGraw received an award of 13,082 restricted performance shares which will mature on December 31, 2006, subject to the achievement of the Committee-approved diluted Earnings Per Share performance goals established for this award, and he received a stock option grant for 204,000 shares. These awards, along with those of the other proxy-named executives, are disclosed in the Long-Term Incentive Plan Awards Table and the Option Grants Table.

To calculate the degree of achievement of the Earnings Per Share performance goal for the 2004 Short-Term Incentive Compensation Award and the 2002, 2003 and 2004 Long-Term Restricted Performance Share Awards, the Committee determined that the reported 2004 income from continuing operations diluted Earnings Per Share adjusted to exclude the one-time, non-cash income tax benefit and the dilution associated with the acquisitions of Grow.net, Inc. and Capital IQ, Inc., would be used for purposes of determining the degree of achievement of these awards.

In early 2005, the Committee reviewed and approved the 2004 annual incentive award payment for Mr. McGraw under the Key Executive Short-Term Incentive Compensation Plan. Based on the Company’s adjusted diluted Earnings Per Share for 2004, as described above, the Earnings Per Share growth was 16.9% and measured against the Earnings Per Share performance goal established by the Committee at the beginning of the year,

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Mr. McGraw’s earned incentive payment was $1,764,000, representing 200% of his 2004 target opportunity.

In early 2005, the Committee reviewed and approved the degree of achievement and award payout to Mr. McGraw for the 2002 Long-Term Restricted Performance Share Award, which covered the years 2002, 2003 and 2004 and matured on December 31, 2004. The cumulative compound Earnings Per Share growth for the three-year award cycle was 12.67% under the performance goal originally established by the Committee for this Award. Mr. McGraw received a share payment of 20,255 shares representing 152.53% of his target award. The dollar value of Mr. McGraw’s 2002 Long-Term Restricted Performance Share Award payout is shown in the Long-Term Incentive Plan Payout Column of the Summary Compensation Table.

Closing Statement

The Committee believes that the caliber and motivation of the Company’s key employees and the quality of their leadership make a significant difference in the long-term performance of the Company. The Committee further believes that compensation should vary with the Company’s financial performance so that executives are well rewarded when performance exceeds the ambitious goals established by the Committee, and there should be commensurate risks to compensation when performance does not meet these goals.

In its view, the Committee believes that the Company’s executive compensation program is meeting the goals contained in the Program’s philosophy.

The foregoing report has been furnished on behalf of the Board of Directors by the members of its Compensation Committee.

Sidney Taurel (Chair)

Sir Winfried Bischoff

Douglas N. Daft

Linda Koch Lorimer

Edward B. Rust, Jr.

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Summary Compensation Table

The following table contains information concerning the named executive officers for services rendered in all capacities to the Company in 2002, 2003 and 2004:

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Option Grants In 2004

The following table includes all grants of stock options made in 2004 under the 2002 Stock Incentive Plan to the named executive officers:

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Aggregate Option Exercises in 2004 and 2004 Year-End Option Values

The following table contains information on options exercised by each of the named executive officers during 2004 and the number and value of unexercised options on December 31, 2004:

Long-Term Incentive Plan Awards in 2004

The following table contains information concerning long-term incentive awards granted during 2004 to the named executive officers under the 2002 Stock Incentive Plan:

In the event of a change in control of the Company, all of the financial goals are deemed to have been satisfied, and the recipient will receive the target amount no later than the normal maturity date of the award.

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The 2002 Plan is also governed by certain share recapture provisions. The aggregate number of shares of stock available under the 2002 Plan for issuance are increased by the number of shares of stock granted as an award under the 2002 Plan or 1993 Employee Stock Incentive Plan (the “1993 Plan”) (other than stock option, SAR or 1993 Plan stock option awards) or by one-third of the number of shares of stock in the case of stock option, SAR or 1993 Plan stock option awards that are, in each case: forfeited, settled in cash or property other than stock, or otherwise not distributable under an award under the Plan; tendered or withheld to pay the exercise or purchase price of an award under the 2002 or 1993 Plans or to satisfy applicable wage or other required tax withholding in connection with the exercise, vesting or payment of, or other event related to, an award under the 2002 or 1993 Plan; or repurchased by the Company with the option proceeds in respect of the exercise of a stock option under the 2002 or 1993 Plans.

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Retirement Benefits

The named executive officers are entitled to retirement benefits under two defined benefit plans of the Company: the Employee Retirement Plan (generally referred to as “ERP”) and the Employee Retirement Plan Supplement (generally referred to as “ERP Supplement”). In addition, Messrs. Harold McGraw III and Robert J. Bahash participate in the Senior Executive Supplemental Death, Disability and Retirement Benefit Plans (the “Supplemental Benefits Plan”).

Key features of ERP provide that:

Under ERP Supplement, participants receive retirement benefits that they would have received under ERP but for the limitations imposed by the Internal Revenue Code referred to above.

Key features of the Supplemental Benefits Plan provide that:

Under the Supplemental Benefits Plan, if a participant is involuntarily terminated without cause at any time after a change in control, or resigns for good reason within two years after a change in control, or resigns for any reason as defined in such plan during the 30-day period following the first anniversary of a change in control, the participant will receive a lump sum payment. This payment will range between 44% to 55% of the participant’s final monthly earnings and target opportunity under the Key Executive Short-Term Incentive Compensation Plan subject to reduction for other benefits. This payment will be actuarially calculated based upon the participant’s age on the date of termination.

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The table below is a calculation for each of the named executive officers of the aggregate annual benefits under ERP, ERP Supplement and the Supplemental Benefits Plan. These calculations are computed as a straight life annuity payment payable on retirement at 65. Further, the calculation uses the participant’s salary and, for the Supplemental Benefits Plan, the 2004 target opportunity under the Company’s Key Executive Short-Term Incentive Compensation Plan:

Annual Retirement Benefit

From the Company’s Contributions

Senior Executive Severance Plan

The Senior Executive Severance Plan provides that if the employment of a participating senior executive of the Company, including the named executive officers, is involuntarily terminated without cause or the executive resigns for good reason, the executive will receive a minimum severance payment of 12 months base salary and a maximum severance payment of 24 months base salary. The actual amount of severance will be based on (i) 1.6 multiplied by the number of years of continuous service with the Company plus (ii) if the participant has more than 7.5 years of continuous service, 10% of such participant’s monthly salary multiplied by the number of months of severance determined in (i) in excess of 12. In addition, each participant will continue to participate in the Company’s retirement, life, medical and other insurance benefit plans and programs during the period the participant receives severance payments.

Alternatively, a participant may receive a cash payment equal to 110% of the severance amount. The receipt of payments by participants under the Senior Executive Severance Plan is in lieu of receiving benefits pursuant to the Company’s other Separation Allowance Plans, which Plans are applicable to all full-time employees of the Company. The Plan provides that benefits will be payable to participants who voluntarily terminate their employment within a 30-day period one year after a change in control of the Company has occurred. The Senior Executive Severance Plan is administered by the Compensation Committee. The Committee approves participants who are recommended by the Company’s Chief Executive Officer.

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PERFORMANCE GRAPH

This graph compares the return on the Company’s common stock with that of the Standard & Poor’s 500 Stock Index and our Peer Group for the years 2000 through 2004. The graph assumes that, on December 31, 1999, a person invested $100 in each of the Company’s common stock, the S&P 500 Stock Index, and the Peer Group’s common stock. The graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends a company pays are reinvested in that company’s stock.

Shareholder Return Performance Graph

Five-Year Cumulative Total Return^1,2,3,4

(Through December 31, 2004)

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OWNERSHIP OF COMPANY STOCK (a), (b)

A beneficial owner of stock is a person who has voting power, meaning the power to control voting decisions, or investment power, meaning the power to cause the sale of the stock. The following table shows the number of shares of the Company’s common stock beneficially owned on February 1, 2005 by:

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SECTION 16(a) BENEFICIAL OWNERSHIP

REPORTING COMPLIANCE

Under SEC rules, our Directors, executive officers and holders of more than 10% of our stock, if any, are required to file with the SEC reports of holdings and changes in beneficial ownership of Company stock. We have reviewed copies of these SEC reports as well as other records and information. Based on that review, we believe that all reports were timely filed.

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ITEMS OF BUSINESS TO BE ACTED ON AT THE MEETING

Item 1. Election of Directors

The term for Directors elected this year will expire at the Annual Meeting held in 2008. Each nominee listed below has agreed to serve that term. If any Director is unable to stand for election, the individuals named as the proxies have the right to designate a substitute. If that happens, shares represented by proxies may be voted for a substitute Director.

The Board recommends that you vote FOR each of the following nominees:

Biographical information about these nominees, as well as the other seven incumbent Directors, can be found on pages 8 through 12 of this Proxy Statement.

Item 2. Proposal to Approve

Key Executive Short-Term Incentive Compensation Plan

On January 26, 2005, the Board of Directors unanimously adopted the Key Executive Short-Term Incentive Compensation Plan, as amended and restated effective as of January 1, 2005 (the “Plan”), subject to approval by the Company’s shareholders at this Annual Meeting. The Plan, originally adopted in 1996, and amended and restated in 2000, is intended to provide the opportunity for incentives and financial rewards to key employees of the Company who, because of the extent of their responsibilities, can make significant contributions to the Company’s performance by their ability, industry, loyalty, leadership and individual achievement. Providing recognition and financial rewards to such individuals based on the performance of the Company and their contributions will advance the interests of the Company and its shareholders and will assist in attracting and retaining management of the highest caliber and ability.

Purpose: Performance Culture

The proposed changes in the Plan are designed to provide greater flexibility in determining payments to individual participants and, as such, strengthen the goal of promoting a “performance culture” that identifies, encourages, and rewards the Company’s best performers. Towards that end, the Plan provides for the establishment of one or more annual performance pools at the start of each year. Participants in the Plan are allocated to the pool established for their organizational unit or business segment.

Under the existing version of the Plan, annual performance measures are set with respect to individuals. The principal change arising from the pool concept to be implemented by these amendments is that the size of each “pool” is determined by the degree to which certain financial and strategic objectives set at the start of a year have been met at year-end. Once such aggregate pool amounts are known, the allocation of such finite sums in the pool among the participants in such pool are to be made on the basis of individual performance. Since the funds allocated to a pool are limited, each dollar awarded to a strong performer will result in one less dollar to the rest of the pool, thus providing greater award differentiation than may currently be the case.

It is the Company’s belief that the implementation of such performance pools, combined with the ability of the Compensation Committee of the Board of Directors (the “Committee”) and senior executives to exercise greater discretion in making award decisions with respect to the performance of Plan participants, will provide the desired differentiation of performance between that which is truly excellent and that which is merely good or satisfactory. The performance pool concept has come to represent current or emerging “best practices” as to this aspect of executive compensation at an increasing number of companies.

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Section 162(m)

The Board of Directors has decided to seek shareholder approval for the Plan, so that compensation payable pursuant to the Plan can qualify for tax deductibility under Section 162(m) of the Code. Section 162(m) of the Code requires shareholder approval with respect to material changes to the Plan. The Company is seeking such approval at this Annual Meeting.

The Code provides that, with certain exceptions, a publicly held corporation such as the Company cannot take a federal income tax deduction for compensation paid to a “Covered Employee” in a taxable year to the extent that the compensation deduction exceeds $1,000,000. A “Covered Employee” is the chief executive officer and any other officer who is among the four highest compensated officers as reported in the Proxy Statement. Generally, these would be the same officers named each year in the Summary Compensation Table in the Proxy Statement.

The $1,000,000 limit on deductibility does not apply to compensation that meets the requirements for “qualified performance-based compensation” under regulations adopted under the Code. These requirements include the following: (i) the compensation must be paid solely on account of the attainment of one or more pre-established, objective performance goals; (ii) the performance goals must be timely established by a compensation committee comprised solely of two or more outside directors; (iii) the material terms of the performance goals must be disclosed to and approved by the shareholders; and (iv) the compensation committee must certify in writing prior to payment of the compensation that the performance goals and any other material terms were in fact satisfied.

No later than 90 days following the start of each calendar year, the Committee will select from among the Company’s executive officers or other eligible participants in the Plan those individuals who are to be designated as Covered Employees for that year. Awards under the Plan to Covered Employees for the year will not exceed specified percentages (see the discussion below) of the Company’s Net Income for that year, subject to the right of the Committee to exercise negative discretion and reduce the amount of such award in light of the other purposes and objectives of the Plan. Approval of the Plan by shareholders will constitute approval under Section 162(m) of the Code of the Plan’s formula for calculating the maximum bonus payable to Covered Employees and the method by which the Committee designates Covered Employees for each year.

If shareholder approval is not received, the prior version of the Plan will remain effective until further amended. In such case, the Committee has made no determination as to what action it might take with respect to the Covered Employees.

Summary of Plan Terms

The following summary of the Plan is subject to the complete terms of the Plan, a copy of which is attached to this Proxy Statement as Appendix A.

1. Eligible Employees. Key executives of the Company whose decisions and actions have a demonstrable impact on corporate profitability are eligible to participate. Currently, approximately 500 employees participate.

2. Administration. The Committee shall be responsible for the implementation and administration of the Plan. The Committee’s functions shall include, but not be limited to:

In reaching its decisions, the Committee shall consider recommendations made by the CEO and such other members of management as the CEO shall designate.

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3. Pools. At or near the start of each year, the Committee shall: (i) determine the number of pools and target amount of each pool for the year; (ii) specify the relevant performance objectives and the methodology to determine the actual amount of each pool; and (iii) identify the participants eligible to receive a share of each pool.

4. Performance Measures. Performance objectives may consist of financial objectives, non-financial objectives or a combination of financial and non-financial objectives. If more than one pool is established for a year, such pools may have the same or different performance objectives. Individual performance criteria may consist of financial objectives, non-financial objectives or a combination of financial and non-financial objectives and may include the results of a participant’s individual performance evaluation by the Company. Except in the case of the determination of Net Income, as defined below, under awards to Covered Employees (“Covered Awards”), the Committee in its sole discretion shall have the authority to alter or adjust financial objectives during the course of any year, or to alter or adjust the financial results otherwise reported or achieved by the Company during such year, if it is deemed appropriate to do so.

5. Payment. As soon as reasonably practicable following the conclusion of each year, the Committee shall determine the actual amount of each pool, based on the attainment of the applicable performance objectives for such year, and shall determine each participant’s share in the applicable pool based on the terms of the participant’s award and the participant’s attainment of the applicable individual performance criteria for the year. Each award payment shall, subject to any deferral required or permitted by the Committee, be paid to the participant following the end of the applicable year.

6. Covered Award Payment. The maximum award payable to any participant in the Plan who is designated as a Covered Employee for the applicable calendar year is 0.7% of Net Income for the CEO and 0.5% of Net Income for each other executive officer or participant in the Plan (the “Maximum”). The Maximum has been changed from a figure of $3,000,000 under the Plan as last amended in 2000. Net Income is defined in the Plan as the Company’s after-tax income as reported on a consolidated basis in the Company’s audited financial statements for the applicable year. Net Income shall be adjusted to eliminate the effects of charges for restructurings, charges for discontinued operations, charges for extraordinary items and other unusual or non-recurring items of loss or expense.

The payment in respect of each covered award shall be an amount equal to or less than such percentage of Net Income, as determined by the Committee in its sole discretion. Notwithstanding anything to the contrary in the Plan, however, the Committee shall not have any discretion or authority to increase the payment payable under a Covered Award.

It is anticipated that in any year the Committee, in determining an appropriate payment for Covered Employees, will award a payment considerably less than the Maximum. The Maximum has been inserted to satisfy the requirements of Section 162(m) of the Code, and should therefore not be taken as an indication of the level of payments under the Plan to be made to such Covered Employees.

7. Termination of Employment. If a participant’s employment with the Company terminates during any year because of death, disability, retirement or termination other than for cause, the participant (or the participant’s beneficiary) shall receive a termination award payment for the portion of the year during which the participant was employed by the Company and participating in the Plan. A participant whose employment with the Company terminates during a year or prior to the payment date for cause, or who voluntarily resigns during a year or prior to the payment date, shall not be eligible for any payment under the Plan for such year.

8. Change in Control. In the event of a Change in Control, as defined below, the Company shall pay to each participant for the year in which the Change in Control occurs a Change in Control award payment for the portion of the year elapsed to the date of the Change in Control. If the Committee so determines, the Company

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