MCGRAW-HILL COMPANIES INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
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Commission File Number 1-1023

THE MCGRAW-HILL companies, INC.
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(Exact name of registrant as specified in its charter)

New York 13-1026995
- --------------------------------- ----------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1221 Avenue of the Americas, New York, N.Y. 10020
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(Address of Principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 512-2000
------------------
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

On October 15, 2002 there were approximately 193.8 million shares of common
stock (par value $1.00 per share) outstanding.

The McGraw-Hill Companies, Inc.
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TABLE OF CONTENTS
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Page Number
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PART I. FINANCIAL INFORMATION
- ------------------------------

Item 1. Financial Statements
-------
Review Report of Independent Accountants 3

Consolidated Statement of Income for
the three and nine month periods ended
September 30, 2002 and 2001 4

Consolidated Balance Sheets at September 30, 2002,
December 31, 2001 and September 30, 2001 5-6

Consolidated Statement of Cash Flows for the nine
months ended September 30, 2002 and 2001 7

Notes to Consolidated Financial Statements 8-18

Item 2. Management's Discussion and Analysis of Operating
------ Results and Financial Condition 19-28

Item 3. Quantitative and Qualitative Disclosures
------ About Market Risk 28

Item 4. Controls and Procedures 29
------

Part II. OTHER INFORMATION
- ---------------------------

Item 1. Legal Proceedings 29
------

Item 6. Exhibits and Reports on Form 8-K 29-36
------

Independent Accountant's Review Report

The Board of Directors and Shareholders
of The McGraw-Hill Companies, Inc.

We have reviewed the accompanying consolidated balance sheet of The
McGraw-Hill Companies, Inc., as of September 30, 2002, and the related
consolidated statement of income for the three-month and nine-month periods
ended September 30, 2002 and 2001, and the consolidated statement of cash
flows for the nine-month periods ended September 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, which will be performed for the full year
with the objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of The
McGraw-Hill Companies, Inc. as of December 31, 2001, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the year then ended, not presented herein, and in our report dated January
29, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2001, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.

Ernst & Young

- ------/s/--------------

October 22, 2002

Part I

Financial Information
Item 1. Financial Statements
---------------------

The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
-------------------------------
Periods Ended September 30, 2002 and 2001
------------------------------------------

The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------

Sept. 30, Dec. 31, Sept. 30,
2002 2001 2001
---------- ----------- ----------
(in thousands)

ASSETS

Current assets:
Cash and equivalents $108,136 $ 53,535 $ 1,773
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 5) 1,150,101 1,038,308 1,335,628
Inventories (Note 5) 396,365 402,647 437,494
Deferred income taxes 220,642 218,676 196,274
Prepaid and other current assets (Note 6) 95,011 99,781 109,146
---------- ---------- ----------
Total current assets 1,970,255 1,812,947 2,080,315
---------- ---------- ----------

Prepublication costs (net of accumulated
amortization) (Note 5) 505,568 557,295 510,888

Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 115,967 105,538 103,272
Prepaid pension expense 249,726 211,582 198,883
Other 226,727 200,443 246,495
---------- ---------- ----------
Total investments and other assets 592,420 517,563 548,650
---------- ---------- ----------

Property and equipment - at cost 1,064,948 1,078,730 1,055,972
Less - accumulated depreciation 645,214 623,790 623,294
---------- ---------- ----------
Net property and equipment 419,734 454,940 432,678

Goodwill - net (Note 10) 1,249,954 1,231,028 1,290,923
Copyrights - net (Note 10) 331,035 353,252 374,104
Other intangible assets - net (Note 10) 226,761 234,166 234,653
---------- ---------- ----------
Total goodwill and intangible
assets 1,807,750 1,818,446 1,899,680
---------- ---------- ----------
Total assets $5,295,727 $5,161,191 $5,472,211
========== ========== ==========

The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------

The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Nine Months Ended September 30, 2002 and 2001
-----------------------------------------------------

2002 2001
---------- ----------

Cash flows from operating activities (in thousands)
- ---------------------------------------------------
Net income $441,891 $379,876
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 67,128 65,668
Amortization of goodwill and intangibles 29,070 67,222
Amortization of prepublication costs 233,538 197,342
Provision for losses on accounts receivable 27,312 39,302
Gain on sale of real estate - (6,925)
Loss on sale of MMS International 14,534 -
Other (7,263) (7,504)
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (141,921) (247,032)
Decrease/(increase) in inventories 6,425 (37,724)
Decrease in prepaid and other current assets 4,041 13,651
Decrease in accounts payable and accrued expenses (64,036) (56,639)
(Decrease)/increase in unearned revenue (4,966) 4,262
Decrease in other current liabilities (35,773) (13,264)
Increase in interest and income taxes
currently payable 167,531 201,138
(Increase)/decrease in deferred income taxes (4,304) 347
Net change in other assets and liabilities (6,616) (1,157)
- --------------------------------------------------- ---------- ---------
Cash provided by operating activities 726,591 598,563
- --------------------------------------------------- ---------- ---------
Investing activities
- ---------------------------------------------------
Investment in prepublication costs (182,602) (188,415)
Purchases of property and equipment (35,291) (69,921)
Additions to technology projects (47,513) (14,477)
Acquisition of businesses and equity investments (18,410) (332,957)
Disposition of businesses, property and equipment 24,070 17,904
Other 3,299 -
- --------------------------------------------------- ---------- ---------
Cash used for investing activities (256,447) (587,866)
- --------------------------------------------------- ---------- ---------
Financing activities
- ---------------------------------------------------
(Repayment of)/additions to short-term debt - net (265,896) 194,064
Dividends paid to shareholders (148,033) (142,619)
Exercise of stock options 59,777 52,804
Repurchase of treasury shares (64,929) (114,652)
Other (411) (278)
- --------------------------------------------------- ---------- ---------
Cash used for financing activities (419,492) (10,681)
- --------------------------------------------------- ---------- ---------
Effect of exchange rate fluctuations on cash 3,949 (1,414)
---------- ---------
Net change in cash and equivalents 54,601 (1,398)
Cash and equivalents at beginning of period 53,535 3,171
- --------------------------------------------------- ---------- ---------
Cash and equivalents at end of period $ 108,136 $ 1,773
========== =========

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

1. The financial information in this report has not been audited, but in
the opinion of management all adjustments (consisting only of normal
recurring adjustments) considered necessary to present fairly such
information have been included. The operating results for the three and
nine month periods ended September 30, 2002 and 2001 are not necessarily
indicative of results to be expected for the full year due to the seasonal
nature of some of the Company's businesses. The financial statements
included herein should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.

Certain prior year amounts have been reclassified for comparability
purposes.

The SEC issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
relating to the provision of additional disclosure and commentary on those
accounting policies of the Company considered most critical. FRR 60
considers an accounting policy to be critical if it is important to the
Company's financial condition and results, and requires significant
judgment and estimates on the part of management in its application. The
Company believes the following represent its critical accounting policies
as contemplated by FRR 60.

Revenue is generally recognized when goods are shipped to customers or
services are rendered. Units whose revenue is principally from service
contracts record revenue as earned. Revenue relating to agreements which
provide for more than one service is recognized based upon the fair value
to the customer of each service component and as each component is
earned. If the fair value to the customer for each service is not
objectively determinable, revenue will be recognized ratably over the
service period. Fair value is determined for each service component
through a bifurcation analysis which 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.

The accounts receivable reserve methodology is based on historical
analysis and a review of outstanding balances. A significant estimate in
the McGraw-Hill Education segment, and particularly within the Higher
Education, Professional and International Group, is the allowance for
sales returns, which is based on the historical rate of return and current
market conditions. Prepublication costs, principally outside preparation
costs, are amortized from the year of publication over their estimated
useful lives, primarily three to five years, using either the accelerated
or the straight-line method. The majority of the programs are amortized
using an accelerated methodology. It is the Company's policy to evaluate
the remaining lives and recoverability of such costs, which is sometimes
dependent upon program acceptance by state adoption authorities, based on

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

expected undiscounted cash flows. The Company reviews long-lived assets,
including intangible assets, and goodwill for impairment annually, or
sooner whenever events or changes in circumstances indicate the carrying
amounts of such assets may not be recoverable. Upon such an occurrence,
recoverability of these assets is determined as follows. For long-lived
assets that are held for use, the Company compares the forecasted
undiscounted net cash flows to the carrying amount. If the long-lived
asset is determined to be unable to recover the carrying amount, then it
is written down to fair value. For long-lived assets held for sale, assets
are written down to fair value. Fair value is determined based on
discounted cash flows, appraised values or management's estimates,
depending upon the nature of the assets. Intangibles with indefinite
lives are tested by comparing their carrying amounts to fair value.
Impairment within goodwill is tested using a two step method. The first
step is to compare the fair value of the reporting unit to its book value,
including goodwill. If the fair value of the unit is less than its book
value, the Company then determines the implied fair value of goodwill by
deducting the fair value of the reporting unit's net assets from the fair
value of the reporting unit. If the book value of goodwill is greater
than its implied fair value, the Company writes down goodwill to its
implied fair value.

Product revenue is comprised of the revenue from the McGraw-Hill Education
segment and the circulation revenue from Information and Media Services,
and represents primarily books and magazines. Service revenue represents
the revenue of the Financial Services segment and the remaining revenue of
Information and Media Services, and represents information related
services and advertising.

2. The following table is a reconciliation of the Company's net income to
comprehensive income for the three month and nine month periods ended
September 30:

3. The Company has three reportable segments: McGraw-Hill Education,
Financial Services, and Information and Media Services. McGraw-Hill
Education is one of the premier global educational publishers serving the
elementary and high school, college and university, professional and
international markets. The Financial Services segment consists of
Standard & Poor's operations including ratings, indexes, related
financial and investment analysis and information, and corporate value
services.

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
-------------------------------------------

The Information and Media Services segment includes business and
professional media offering information, insight and analysis.

Operating profit by segment is the primary basis for the chief operating
decision maker of the Company, the Executive Committee, to evaluate the
performance of each segment. A summary of operating results by segment
for the three months and nine months ended September 30, 2002 and 2001
follows:

*Income before taxes on income.

*Income before taxes on income.

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

4. In the fourth quarter of 2001, the Company announced a worldwide
restructuring program that includes the exiting of certain businesses,
product lines and markets in each of its operating segments. As part of
the restructuring program, the Company is focusing its resources on
those businesses and products with higher profit margins and improving
the effectiveness of the organization. As a result, the Company
recorded a restructuring and asset impairment charge of $159.0 million
pre-tax. This charge is comprised of $62.1 million for McGraw-Hill
Education, $43.1 million for Financial Services, $34.9 million for
Information and Media Services and $18.9 million for Corporate. The
after-tax charge recorded was $112.0 million, or 57 cents per diluted
share. $123.0 million of the restructuring expenses were classified as
operating expenses on the Consolidated Statement of Income for December
31, 2001 and $36.0 million were considered non-operating. The operating
expenses consisted of $30.2 million in employee severance and benefit
costs and $92.8 million in asset impairment losses. The non-operating
expenses consisted of $36.0 million related to the write-downs of
certain e-commerce and emerging technology investments.

The restructuring that was recorded at December 31, 2001 consisted of
the following:
(in millions)
Employee severance and benefit costs $ 30.2
Asset impairment losses 128.8
-------
Total $ 159.0
=======

Employee severance and benefit costs of $30.2 million includes a planned
workforce reduction of approximately 925 people related to the exiting
of certain business activities, product lines and publishing programs to
be discontinued or curtailed, and other efforts to improve the
effectiveness of the organization. Through September 30, 2002, all of
the employees under this restructuring program have been terminated and
$22.0 million of employee severance and benefit costs were paid.

Asset impairment losses of $128.8 million include $36.6 million
associated with the closing of the McGraw-Hill Education's business
training coursework operation, $37.2 million attributed to the disposing
of non-strategic properties in the investment services area in Financial
Services and costs associated with the disposal, $36.0 million primarily
arising from losses on the Construction Information Group's e-commerce
investments and emerging technology investments in the venture fund, and
$19.0 million on the write-off of certain assets.

Changes in the marketplace led to a shift to online learning solutions
which impacted McGraw-Hill Education's business training coursework
operations. As a result and as part of the restructuring, the Company
initiated a complete shutdown of the business training coursework
operations leading to a charge of approximately $36.6 million. This
charge is primarily comprised of write-offs of prepublication costs and
goodwill associated with the operation.

As a result of the Company's decision to dispose of the non-strategic
properties in the investment services area, losses of approximately
$37.2 million were recognized which comprised the complete write-off of
certain investments and the write-down of goodwill associated with

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

properties to be sold. As part of the restructuring plan, discussions were
initiated with potential buyers and the write-down of goodwill was
determined based upon the net realizable values. The remaining carrying
values of these assets approximate $22 million and the disposals are
expected to be completed within one year.

Also reflected in the total asset impairment losses is $36.0 million
primarily arising from losses on Construction Information Group's
e-commerce investments and the emerging technology investments in the
venture fund as the Company has decided to scale back on these
initiatives. These impairment losses reflect the permanent write-down
of the investments to fair value that was determined based upon the
earnings capability and expected cash flow of the related investments.

The $19.0 million is primarily attributed to the write-off of net assets
associated with the programs and product lines to be discontinued.

The restructuring is expected to be completed by December 31, 2002. At
September 30, 2002, the remaining reserve, which is included in other
current liabilities, was approximately $17.1 million and comprised $8.2
million for employee severance and benefit costs and $8.9 million for
other costs; primarily, contract termination costs.

5. The allowance for doubtful accounts and sales returns, the components of
inventory and the accumulated amortization of prepublication costs were
as follows:

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

6. A subsidiary of J.J. Kenny Co. acts as an undisclosed agent in the
purchase and sale of municipal securities for broker-dealers and dealer
banks and the company had $368.4 million of matched purchase and sale
commitments at September 30, 2002. Only those transactions not closed at
the settlement date are reflected in the balance sheet as other current
assets and other current liabilities.

7. A summary of long-term debt follows:

Commercial paper borrowings at September 30, 2002 totaled $777.2 million, a
decrease of $222.9 million from December 31, 2001. The Company's 364-day
revolving credit facility agreement, entered into on August 14, 2001,
provided that the Company could borrow until August 13, 2002, on which date
the facility commitment terminates and the maturity of such borrowings may
not be later than August 13, 2003. On July 23, 2002, the Company replaced
this credit facility with a new 364-day credit facility that allows it to
borrow until July 22, 2003, on which date the facility agreement terminates
and the maturity of such borrowings may not be later than July 22, 2004. The
Company continues to pay a facility fee of 5 basis points on the 364-day
facility (whether or not amounts have been borrowed) and borrowings may be
made at 15 basis points above LIBOR. The commercial paper borrowings are
also supported by a $625 million, 5-year revolving credit facility. The
Company pays a facility fee of seven basis points on the 5-year credit
facility whether or not amounts have been borrowed, and borrowings may be
made at 13 basis points above LIBOR. All of the facilities contain certain
covenants, and the only financial covenant requires that the Company not
exceed indebtedness to cash flow ratio, as defined, of 4 to 1 at any time.
This restriction has never been exceeded. At September 30, 2002 there were no
borrowings under any of the facilities. Eighty percent or $621.8 million of
the commercial paper borrowings outstanding are classified as long-term.

Extendible Commercial Notes (ECNs) replicate commercial paper, except that
the Company has 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 the Company's 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 ECNs outstanding at September 30,
2002.

In the third quarter 2002 the Company redeemed all of the outstanding
shares of $1.20 convertible preference stock. The redemption price of $40
per share, as provided by the terms of the preference stock, became
payable to holders, who did not otherwise convert their shares into the
Company's common stock, on September 1, 2002. Most holders elected
conversion prior to redemption. None of the convertible preference shares
provided a beneficial conversion feature at the time they were originally
issued.

9. Cash dividends per share declared during the periods were as follows:

The following table summarizes the activity in goodwill for the periods
indicated: (in thousands)

The following table summarizes net goodwill by segment: (in thousands)

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
-------------------------------------------

The following table summarizes the activity in goodwill for the periods
indicated: (in thousands)

There were no material acquisitions or dispositions for the periods
indicated, both individually and in the aggregate, and therefore pro
forma financial information is not required.

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

The following table summarizes other intangibles subject to
amortization at the dates indicated: (in thousands)

The following table summarizes other intangibles not subject to
amortization at the dates indicated: (in thousands)

Amortization expense for intangibles totaled $29.1 million and $24.7
million for the nine months ended September 30, 2002 and 2001,
respectively. Amortization expense for the twelve months ended
December 31, 2001, totaled $34.9 million. The weighted average life
of the intangible assets at September 30, 2002, is 17 years. The
projected amortization expense for intangible assets, assuming no
further acquisitions or dispositions, is approximately $38 million per
year over the next five years.

11. A reconciliation of the number of shares used for calculating basic
earnings per common share and diluted earnings per common share for
the three months and the nine months ended September 30, 2002 and 2001
follows:

The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------

Restricted performance shares outstanding at September 30, 2002 of
474,000 were not included in the computation of diluted earnings per
common shares because the necessary vesting conditions have not yet been
met.

12.In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires that the fair value of the liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective January 1, 2003. The
Company does not expect that the adoption will have a material impact on its
financial statements.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a
single accounting model for long-lived assets to be disposed of by sale
and to address significant implementation issues. The framework of SFAS
No. 144 was established in SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
Company does not expect that the adoption of SFAS No. 144 will have a
material impact on its financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." Under SFAS No. 146 companies recognize a
cost associated with an exit or disposal activity when a liability has
been incurred, while under EITF Issue No. 94-3 companies recognized
costs once management implemented a plan to exit an activity. SFAS No.
146 also introduces discounting the liability associated with the exit
or disposal activity for the time between the cost being incurred and
when the liability is ultimately settled. The Company does not expect
that the adoption will have a material impact on its financial
statements.

Item 2. Management's Discussion and Analysis of Operating Results and
- ------- -------------------------------------------------------------
Financial Condition
-------------------

Operating Results - Comparing Three Months Ended September 30, 2002 and 2001
- ----------------------------------------------------------------------------

Consolidated Review
- -------------------

The Segment Review that follows is incorporated herein by reference.

Operating revenue for the third quarter increased by 2.8% to $1.6 billion, as
compared to the prior year's third quarter. The revenue increase is primarily
attributable to growth in the Financial Services segment. Product revenue is
comprised of the revenue from the McGraw-Hill Education segment and the
circulation revenue from Information and Media Services, and represents
primarily books and magazines. Product revenue remained flat at $1.0 billion as
compared to the prior year's third quarter. Service revenue represents the
revenue of the Financial Services segment and the remaining revenue of
Information and Media Services, and represents information related services and
advertising. Service revenue increased to $559.8 million, 9.3%, as compared to
the prior year's third quarter. Results from operations reflect the acquisitions
of Corporate Value Consulting (CVC), in August 2001, recorded in Financial
Services and Financial Times Energy (FT Energy), in September 2001, recorded in
Information and Media Services. CVC added an incremental $16.6 million to the
revenue of the Financial Services segment for the third quarter of 2002. FT
Energy added an incremental $8.4 million to the revenue of the Information and
Media Services segment for the third quarter of 2002. Beginning January 2002, in
accordance with Statement of Financial Accounting Standards No. 142 (SFAS No.
142), Goodwill and Other Intangible Assets, the Company no longer amortizes
goodwill. The impact of SFAS No. 142 was $14.0 million pre-tax, or approximately
5 cents per diluted earnings per share, for the third quarter 2002. The quarter
also reflects the seasonal nature of the Company's educational publishing
operations, with the first quarter the least significant and the third quarter
the most significant. Other income decreased $16.3 million over the third
quarter 2001 primarily due to the pre-tax loss on the disposition of MMS
International.

Net income for the quarter increased $36.7 million over the comparable quarter
in the prior year. Diluted earnings per share for the quarter were $1.42 versus
$1.22 in the prior year, a 16.4% increase. In September 2002, the Financial
Services segment divested MMS International, which resulted in a pre-tax loss of
$14.5 million and an after-tax benefit of $2.0 million, 1 cent per diluted
share. The variance between the pre-tax loss on the sale of MMS International
and the after-tax benefit is the result of previous book write-downs and the
inability of the Company to take a tax benefit for the write-downs until the
unit was sold. The impact on the effective tax rate for the quarter from this
transaction is a reduction of 2.6 percentage points.

Total expenses in 2002 decreased modestly. Cost containment activities
contributed to this decrease. Operating expenses include the amortization of
prepublication costs of $128.7 million for the third quarter 2002. Amortization
of prepublication costs increased by $21.1 million as compared with the third
quarter of 2001. The decline in stock market performance for the last three
years has negatively impacted the return on the Company's pension assets. The
Company is currently evaluating its investment return and discount assumptions

and expects a decline in its net pension income for 2003 as compared
with 2002. Based on anticipated market recovery and negotiation with suppliers,
the Company expects product-related manufacturing prices to rise approximately
1.9% in 2003.

Interest expense decreased 56.0% to $6.0 million from $13.6 million in the third
quarter of 2001. The primary reason for the decrease is the reduction in the
average interest rate for the third quarter in 2002 as compared to the same
period in 2001. The average interest rate on commercial paper borrowings
decreased from 3.8% in 2001 to 1.9% in 2002.

The provision for taxes as a percent of income before taxes is 34.9%, 3.6% less
than the third quarter in 2001. The change in the effective tax rate is
primarily the result of the incremental tax benefit from the divestiture of MMS
International in 2002 with no comparable event in the third quarter of 2001.

Segment Review
- --------------

McGraw-Hill Education's revenue and operating profit were essentially flat with
the prior year. The results reflect the lighter adoption and open territory
opportunities in the School Education Group. The segment's operating results
include the impact of the accounting change pursuant to Statement of Financial
Accounting Standards No. 142 (SFAS No. 142) Goodwill and Other Intangible
Assets, a favorable $9.8 million. Solid revenue results in McGraw-Hill Higher
Education, Professional and International Group (HPI) offset the impact of the
School Education Group. The segment displayed the seasonal nature of its
business, with the first quarter the least significant and the third quarter the
most significant.

The McGraw-Hill School Education Group's revenue declined 5.9% to $588.4
million, as it was negatively impacted by the change in both adoption and open
territory opportunities within key states. According to the Association of
American Publishers adoption statistics for kindergarten through the twelfth
grade excluding testing, industry adoption and open territory sales declined
11.1% in July and 3.1% in August. 2002 was projected as a much lighter adoption
year and with cutbacks in fiscal year 2002 state budgets, which ran through June
30 in most states, the industry experienced further decline. Facing deficits
when their tax revenues fell short of projections, 33 states had to revise their
budgets during the first half of 2002 and 17 of those states made some cuts in
their kindergarten through twelfth grade spending, according to the National
Conference of State Legislatures. The state of Virginia canceled its reading
adoption. The McGraw-Hill School Education Group experienced reductions
primarily in the adoption opportunities within North Carolina and Texas. North
Carolina is adopting music and art in 2002, which represents a much smaller
market than reading and literature in 2001. Texas also has a smaller adoption,
science in 2002 versus reading and language arts in 2001. The McGraw-Hill
science program is expected to capture 40% of the Texas science adoption
opportunity. The McGraw-Hill basal reading program is not meeting expectations
in the Oklahoma and Florida adoptions, however, the research based reading
programs are performing well in Florida, California and the open territory. Open
Court Reading and Direct Instruction revenue also increased as a result of sales
to Detroit, Michigan. Custom testing contracts declined because of the timing of
contract fulfillment.

McGraw-Hill Higher Education, Professional and International Group (HPI) had
revenue increase by 9.1% to $407.3 million. Some of the more important titles
contributing to the increase in revenue were McConnell, Economics,

15/e; Larson, Fundamental Accounting Principles, 16/e; Garrison, Managerial
Accounting, 10/e; and Schiller, Economy Today, 9/e. The change to a "credit card
only" policy at the beginning of 2002 in the direct marketing channel depressed
2002 third quarter revenue but helped margins. Softness in
science/technical/medical and computer/technology markets dampened growth
domestically. Business, economics, math, science and engineering products
contributed to the growth in revenue internationally. Canada's 10.5% revenue
increase was due to strong higher education sales.

Financial Services' revenue increased 14.1% to $399.2 million and operating
profit increased 19.4% to $131.2 million over 2001 third quarter results. In
September 2002, the Financial Services segment divested MMS International which
resulted in a pre-tax loss of $14.5 million and an after-tax benefit of $2.0
million, 1 cent per diluted share. The variance between the pre-tax loss on the
sale of MMS International and the after tax benefit is the result of previous
book write-downs and the inability of the Company to take a tax benefit for the
write-downs until the unit was sold. The impact on the effective tax rate for
the quarter from this transaction is a reduction of 2.6 percentage points. The
SFAS No. 142 accounting change contributed $3.5 million to operating profit of
this segment. Results from operations reflect the acquisition of Corporate Value
Consulting (CVC) in August 2001. Corporate Value Consulting (CVC) added an
incremental $16.6 million to the revenue of the Financial Services' segment.

The Financial Services segment increased revenue primarily from the performance
of structured finance, representing approximately 41.6% of the growth, and the
acquisition of CVC. Operating profit grew primarily due to the growth in
Structured Finance. Cost containment initiatives occurred throughout the
segment. New issue dollar volume in the U.S. market was flat and unit volume
declined 2.5% in the third quarter, according to Securities Data. In Europe, new
dollar volume rose 3.0% and unit volume increased 1.1%, according to Bondware.
U.S. Corporate new issue dollar volume was off 40.1% in the third quarter while
U.S. municipal issuance rose 42.9% and U.S. mortgage-backed volume climbed
43.5%. U.S. asset-backed issuance grew 13.2%. The retail brokerage, internet
redistribution and foreign exchange markets remained soft. CVC was negatively
impacted by the lack of merger and acquisition activity. According to Bloomberg
Mergers and Acquisitions Database as of October 2002, the dollar volume and the
number of announced deals over $50 million, involving a U.S. company, declined
35.4% and 17.9%, respectively, as compared to the third quarter of 2001.

Information and Media Services' revenue decreased $3.9 million, or 2.1% to
$182.5 million from 2001 third quarter results. Operating profit increased $11.5
million, or 138.7%, to $19.8 million from 2001 third quarter results. The
acquisition of Financial Times Energy, (FT Energy) occurred in September 2001
and contributed an incremental $8.4 million to the revenue of the segment in the
period. The change in accounting pursuant to SFAS No. 142 contributed $0.7
million to operating profit. Revenue declined at the Business-to-Business Group,
by 4.0%, but increased at Broadcasting, by 10.5%. Both groups were negatively
impacted by the soft advertising market, but benefited from increasingly
favorable comparisons to the prior year. Broadcasting also benefited from
political advertising that was not present in 2001, a non-election year. At
BusinessWeek, advertising pages in the third quarter were up slightly according
to the Publishers Information Bureau, with one more issue published than in
2001, but with the same number of issues for revenue recognition purposes. At
Broadcasting for the third quarter, national gross time sales were up a total of
28%, while local gross time sales were down approximately 4% year-to-year. All
groups within Information and Media Services significantly contained costs.

Nine Months
- -----------
Consolidated Review
- -------------------

The Segment Review that follows is incorporated herein by reference.

For the nine months ended September 30, 2002, revenue increased 2.4%, or $84.4
million to $3.6 billion as compared to the nine month period ended September 30,
2001. The revenue increase reflects the solid performance of the Financial
Services segment. Product revenue is comprised of the revenue from the
McGraw-Hill Education segment and the circulation revenue from Information and
Media Services, and represents primarily books and magazines. Product revenue
remained flat at $1.9 billion as compared to the prior year's nine month period
ended September 30, 2001. Service revenue represents the revenue of the
Financial Services segment and the remaining revenue of the Information and
Media Services segment, and represents information related services and
advertising. Service revenue increased to $1.7 billion, 6.4%, as compared to the
prior year's nine month period ended September 30, 2001. Net income was $441.9
million, an increase of $62.0 million over the nine month period ended September
30, 2001. Diluted earnings per share for the nine months ended were $2.27 as
compared to $1.93 in 2001. In September 2002 the Financial Services segment
divested MMS International which resulted in a pre-tax loss of $14.5 million and
an after-tax benefit of $2.0 million, 1 cent per diluted share. The variance
between the pre-tax loss on the sale of MMS International and the after-tax
benefit is the result of previous book write-downs and the inability of the
Company to take a tax benefit for the write-downs until the unit was sold. The
impact on the effective tax rate for the nine month period ended September 30th
from this transaction is a reduction of 1.6 percentage points. The Company
purchased Corporate Value Consulting (CVC) in August 2001, recorded in Financial
Services, and Financial Times Energy (FT Energy), in September 2001, recorded in
Information and Media Services. Corporate Value Consulting (CVC) added $59.1
million of incremental revenue to the Financial Services segment. FT Energy
contributed $29.1 million of incremental revenue to Information and Media
Services. Beginning January 2002, in accordance with Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible
Assets, the Company no longer amortizes goodwill. The impact of SFAS No. 142 was
$42.5 million pre-tax, or approximately 14 cents per diluted earnings per share,
for the nine months ended September 30, 2002. In May 2001, the Company divested
DRI, which resulted in a $26.3 million after-tax gain (13 cents per diluted
share, $8.8 million pre-tax), recorded within the Financial Services segment.
The variance between the pre-tax gain recognized on the sale of DRI of $8.8
million and the after-tax benefit of $26.3 million is the result of previous
book write-downs and the inability of the Company to take a tax benefit for the
write-downs until the unit was sold. The impact on the nine months ended
September 30, 2001 effective tax rate for this transaction was a reduction of
3.5 percentage points. Also included in net income in 2001 in the Financial
Services segment was the write-down of certain assets, the shutdown of the Blue
List and the contribution of Rational Investors to mPower.com in exchange for an
equity position in the online investment advisory service for the retirement
market. The total charge for these items was $21.9 million after tax, (11 cents
per diluted share, $22.8 million pre-tax). The impact on the nine months ended
September 30, 2001 effective tax rate from these actions was an increase of 1.3
percentage points due to the inability of the Company to take a benefit for
these write-downs. Net income also included $6.9 million pre-tax, 2 cents per
diluted share, related to a gain on the sale of real estate in the first quarter
of 2001, which was recorded as other income on the consolidated statement of
income. Other income in 2002 declined $21.6 million as no similar gain occurred
in the current year and due to the loss on the disposition of MMS International.

Total expenses decreased modestly. Cost containment activities contributed to
this decrease. Operating expenses include the amortization of prepublication
costs of $233.5 million. Prepublication amortization increased $36.2 million as
compared with the prior year comparable nine month period. The decline in stock
market performance for the last three years has negatively impacted the return
on the Company's pension assets. The Company is currently evaluating its
investment return and discount assumptions and expects a decline in its net
pension income for 2003 as compared with 2002. Based on anticipated market
recovery and negotiation with suppliers, the Company expects product-related
manufacturing prices to rise approximately 1.9% in 2003.

Interest expense decreased 57.9% to $19.5 million from $46.5 million for the
nine months ended September 30, 2002. The primary reason for the decrease is the
reduction in the average interest rate as compared to the corresponding period
in 2001. The average interest rate on commercial paper borrowing decreased from
5.0% in 2001 to 1.9% in 2002.

The provision for taxes as a percent of income before taxes was 35.9%, 0.4% less
than the nine months period ended September 30, 2001. The change in the
effective tax rate is primarily the result of the additional tax benefit from
the MMS International divestiture in 2002, as compared with the impact of the
benefit of the DRI divestiture in 2001, partially offset by the write-down of
certain assets without tax benefit.

Segment Review
- --------------

McGraw-Hill Education's revenue of $1.9 billion was 1.0% lower than the prior
year's nine month period ended September 30, 2001. Operating profit declined by
$19.2 million to $296.1 million for the first nine months of 2002. The softness
in operating performance came from the School Education Group, which experienced
lighter adoption and open territory opportunities. The segment's operating
results include the impact of the accounting change pursuant to Statement of
Financial Accounting Standard No. 142 (SFAS No. 142) Goodwill and Other
Intangible Assets. The impact of SFAS No. 142 on this segment was a favorable
$29.6 million.

The McGraw-Hill School Education Group had revenue decline by 4.6% to $1.1
billion. The McGraw-Hill School Education Group was negatively impacted by the
change in both adoption and open territory opportunities within key states. The
McGraw-Hill School Education Group experienced reductions primarily in the
adoption opportunities within North Carolina, California and Texas. In
California in 2001, a large sale to the Los Angeles school district of Open
Court Reading, will not be repeated in 2002. The McGraw-Hill basal reading
program is not meeting expectations in the Oklahoma and Florida adoptions;
however, the research-based reading programs are performing well in Florida,
California and the open territory. According to the Association of American
Publishers year-to-date statistics through August for the kindergarten through
twelfth grade excluding testing, total adoption and open territory sales for the
industry decreased by 9.9%. 2002 was projected as a much lighter adoption year,
and with cutbacks in fiscal year 2002 state budgets, which ran through June 30
in most states, the industry experienced further decline. Facing deficits when
their tax revenues fell short of projections, 33 states had to revise their
budgets during the first half of 2002 and 17 of those states made some cuts in
their kindergarten through twelfth grade spending, according to the National
Conference of State Legislatures. The state of Virginia cancelled its reading
adoption.

The McGraw-Hill Higher Education, Professional and International Group increased
revenue by $37.0 million to $715.1 million primarily from the performance of its
frontlist sales. Some of the more important titles include McConnell, Economics,
15/e; Larson, Fundamental Accounting Principles, 16/e; Garrison, Managerial
Accounting, 10/e; and Schiller, Economy Today, 9/e. The successful release of
Harrison's Principles of Internal Medicine, 15/e, in the first quarter 2001 will
not be repeated in 2002. The change to a "credit card only" policy at the
beginning of 2002 in the direct marketing channel depressed 2002 revenue but
increased margins. Softness in the investing/business and computer/technology
markets negatively impacted the Group both domestically and internationally.
While the domestic economy started to weaken in the first quarter of 2001, the
dramatic decline that occurred in the latter half of the year is still being
felt in both these markets.

Financial Services' revenue increased 12.8% to $1.2 billion and operating profit
increased 28.3% to $418.9 million over 2001 for the nine months ended September
30, 2002. The SFAS No. 142 accounting change contributed an incremental $10.6
million to the operating profit of this segment. In September 2002, the
Financial Services segment divested MMS International which resulted in a
pre-tax loss of $14.5 million and an after-tax benefit of $2.0 million, 1 cent
per diluted share. The variance between the pre-tax loss on the sale of MMS
International and the after-tax benefit is the result of previous book
write-downs and the inability of the Company to take a tax benefit for the
write-downs until the unit was sold. The impact on the effective tax rate for
the nine months from this transaction is a reduction of 1.6 percentage points.
The acquisition of CVC contributed an incremental $59.1 million to revenue of
the segment for the period ended September 30, 2002. Structured finance
accounted for approximately 40.8% of the growth in revenue for the segment for
the nine months period. In May 2001, the Company divested DRI, which resulted in
a $26.3 million after-tax gain (13 cents per diluted share, $8.8 million
pre-tax), recorded within the Financial Services segment. The variance between
the pre-tax gain recognized on the sale of DRI of $8.8 million and the after-tax
benefit of $26.3 million is the result of previous book write-downs and the
inability of the Company to take a tax benefit for the write-downs until the
unit was sold. The impact on the nine months ended September 30, 2001 effective
tax rate for this transaction was a reduction of 3.5 percentage points. Also
included in net income in 2001 in the Financial Services segment was the
write-down of certain assets, the shutdown of the Blue List and the contribution
of Rational Investors to mPower.com in exchange for an equity position in the
online investment advisory service for the retirement market. The total charge
for these items was $21.9 million after tax, (11 cents per diluted share, $22.8
million pre-tax). The impact on the nine months ended September 30, 2001
effective tax rate from these actions was an increase of 1.3 percentage points
due to the inability of the Company to take a benefit for these write-downs. New
issue dollar volume in the U.S. market was off 4.9% and unit volume was flat for
the nine months ended September 30, 2002 according to Securities Data. In
Europe, new issue dollar volume fell 10.9% and unit volume was off 4.5%,
according to Bondware. U.S. Corporate new issue dollar volume was off 31.9% for
the nine months ended September 30, 2002 while U.S. municipal issuance was up
28.2% and U.S. mortgage-backed volume climbed 29.3%. U.S. asset-backed issuance
was up 15.4%. The retail brokerage, internet redistribution and foreign exchange
markets continued to be soft. CVC was negatively impacted by the lack of merger
and acquisitions activity. According to Bloomberg Mergers and Acquisitions
Database as of October 2002, the dollar volume and the number of announced deals
over $50 million, involving a U.S. company, declined 38.9% and 24.2%,
respectively, as compared to the nine months ended September 30, 2001. Cost
containment initiatives occurred throughout the segment.

Information and Media Services' revenue decreased $33.0 million, or 5.5%, to
$564.3 million for the period ended September 30, 2002 as compared with 2001.
Operating profit increased $3.3 million, or 5.9%, to $58.3 million for the
period ended September 30, 2002 as compared with 2001. The acquisition of
Financial Times Energy (FT Energy) in September 2001 contributed an incremental
$29.1 million to revenue for the period ended September 30, 2002 as compared
with 2001. The change in accounting pursuant to SFAS No. 142 contributed $2.3
million to operating profit for the period. Revenue at the Business-to-Business
Group declined by $31.9 million and at the Broadcasting Group by $1.1 million as
compared to the first nine months of 2001. Softness in advertising was
experienced in both groups. At BusinessWeek, advertising pages for the period
ended September 30, 2002 were off 18.7%, according to the Publishers Information
Bureau. At Broadcasting, weakness in the local gross time sales offset the
growth in national gross time sales.

Critical Accounting Policies
- ----------------------------

The SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), relating to the
provision of additional disclosure and commentary on those accounting policies
of the Company considered most critical. FRR 60 considers an accounting policy
to be critical if it is important to the Company's financial condition and
results, and requires significant judgment and estimates on the part of
management in its application. The Company believes the following represent its
critical accounting policies as contemplated by FRR 60.

Revenue is generally recognized when goods are shipped to customers or services
are rendered. Units whose revenue is principally from service contracts record
revenue as earned. Revenue relating to agreements which provide for more than
one service is recognized based upon the fair value to the customer of each
service component and as each component is earned. If the fair value to the
customer for each service is not objectively determinable, revenue will be
recognized ratably over the service period. Fair value is determined for each
service component through a bifurcation analysis which 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.

The accounts receivable reserve methodology is based on historical analysis and
a review of outstanding balances. A significant estimate in the McGraw-Hill
Education segment, and particularly within the Higher Education, Professional
and International Group, is the allowance for sales returns, which is based on
the historical rate of return and current market conditions. Prepublication
costs, principally outside preparation costs, are amortized primarily from the
year of publication over their estimated useful lives, generally three to five
years, using either an accelerated or straight-line method. The majority of the
programs are amortized using an accelerated methodology. The Company
periodically evaluates the remaining lives and recoverability of such costs,
which is sometimes dependent upon program acceptance by state adoption
authorities, based on expected undiscounted cash flows. The Company reviews
long-lived assets, including intangible assets, and goodwill for impairment
annually, or sooner whenever events or changes in circumstances indicate the
carrying amounts of such assets may not be recoverable. Upon such an occurrence,
recoverability of these assets is determined as follows. For long-lived assets
that are held for use, the Company compares the forecasted undiscounted net cash
flows to the carrying amount. If the long-lived asset is determined to be

unable to recover the carrying amount, then it is written down to fair value.
For long-lived assets held for sale, assets are written down to fair value. Fair
value is determined based on discounted cash flows, appraised values or
management's estimates, depending upon the nature of the assets. Intangibles
with indefinite lives are tested by comparing their carrying amounts to fair
value. Impairment within goodwill is tested using a two step method. The first
step is to compare the fair value of the reporting unit to its book value,
including goodwill. If the fair value of the unit is less than its book value,
the Company then determines the implied fair value of goodwill by deducting the
fair value of the reporting unit's net assets from the fair value of the
reporting unit. If the book value of goodwill is greater than its implied fair
value, the Company writes down goodwill to its implied fair value.

Financial Condition
- -------------------

The Company continues to maintain a strong financial position. Cash flow from
operations of $726.6 million increased by $128.0 million in 2002 compared with
$598.6 million for the period ended September 30, 2001. The increase in cash
provided by operating activities primarily relates to the improvement in the
management of accounts receivable and inventory. Total debt decreased $266.4
million since year-end, reflecting the seasonal nature of the business. Included
in other current liabilities in 2002 is the offset of current assets to
previously established reserves for the final closedown of the former Continuing
Education Center, resulting in no cash or income statement impact. The Company's
strong presence in the school and higher education markets significantly impacts
the seasonality of its earnings and borrowing patterns during the year, with the
Company borrowing during the first half of the year and generating cash in the
second half of the year.

Commercial paper borrowings at September 30, 2002 totaled $777.2 million, a
decrease of $222.9 million from December 31, 2001. The Company's 364-day
revolving credit facility agreement, entered into on August 14, 2001, provided
that the Company could borrow until August 13, 2002, on which date the facility
commitment terminates and the maturity of such borrowings may not be later than
August 13, 2003. On July 23, 2002, the Company replaced this credit facility
with a new 364-day credit facility that allows it to borrow until July 22, 2003,
on which date the facility agreement terminates and the maturity of such
borrowings may not be later than July 22, 2004. The Company continues to pay a
facility fee of 5 basis points on the 364-day facility (whether or not amounts
have been borrowed) and borrowings may be made at 15 basis points above LIBOR.
The commercial paper borrowings are also supported by a $625 million, 5-year
revolving credit facility. The Company pays a facility fee of seven basis points
on the 5-year credit facility whether or not amounts have been borrowed, and
borrowings may be made at 13 basis points above LIBOR. All of the facilities
contain certain covenants, and the only financial covenant requires that the
Company not exceed indebtedness to cash flow ratio, as defined, of 4 to 1 at any
time. This restriction has never been exceeded. At September 30, 2002 there were
no borrowings under any of the facilities. Eighty percent or $621.8 million of
the commercial paper borrowings outstanding are classified as long-term.

Extendible Commercial Notes (ECNs) replicate commercial paper, except that the
Company has 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 the Company's 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 ECNs outstanding at September 30, 2002.

In the third quarter of 2002 the Company redeemed all of the outstanding shares
of $1.20 convertible preference stock. The redemption price of $40 per share, as
provided by the terms of the preference stock, became payable to holders, who
did not otherwise convert their shares into the Company's common stock, on
September 1, 2002. Most holders elected conversion prior to redemption. None of
the convertible preference shares provided a beneficial conversion feature at
the time they were originally issued.

Under a shelf registration that became effective with the Securities and
Exchange Commission in 1990, an additional $250 million of debt securities can
be issued. Debt could be used to replace a portion of the commercial paper
borrowings with longer-term securities if and when market conditions warrant.

Gross accounts receivable of $1.4 billion increased $91.4 million from the end
of 2001 primarily from the seasonality of the educational publishing business.
Inventory decreased $6.3 million from the end of 2001 to $396.4 million as the
Company improved its inventory management.

Net prepublication costs decreased $51.7 million from the end of 2001 to $505.6
million, as amortization expense exceeded spending. Prepublication cost spending
in the first nine months of 2002 totaled $182.6 million which was $5.8 million
less than the spending for the same period of 2001. Prepublication cost spending
is expected to increase over the remainder of the year totaling an estimated
$300.0 million for the full year. Purchases of property and equipment were $35.3
million, $34.6 million lower than the prior year. Spending is expected to be
lower than the comparative prior year period for the remainder of the year.

The Board of the Directors approved a 4.1% increase in the quarterly common
stock dividend to 25.5 cents per share in January 2002. In 1999, the Board of
Directors authorized a stock repurchase program of up to 15 million shares. The
repurchased shares may be used for general corporate purposes, including the
issuance of shares for the exercise of employee stock options. Purchases under
this program may be made from time to time on the open market and in private
transactions depending on market conditions. Approximately 10.4 million shares
have been repurchased under this program through September 30, 2002.

In the fourth quarter of 2001, the Company announced a worldwide restructuring
program that includes the exiting of certain businesses, product lines and
markets in each of its operating segments. $123.0 million of the restructuring
expenses were classified as operating expenses on the Consolidated Statement of
Income for the year ended December 31, 2001 and $36.0 million were considered
non-operating. The operating expenses consisted of $30.2 million in employee
severance and benefit costs and $92.8 million in asset impairment losses. The
non-operating expenses consisted of $36.0 million related to the write-downs of
certain e-commerce and emerging technology investments. The planned workforce
reduction of 925 people related to the exiting of certain business activities,
product lines and publishing programs to be discontinued or curtailed, and other
efforts to improve the effectiveness of the organization. Through September 30,
2002, all the employees under this restructuring program have been terminated
and $22.0 million of employee severance and benefit costs were paid. The
restructuring is expected to be completed by December 31, 2002. At September 30,
2002 the remaining reserve, which is included in other current liabilities, was

approximately $17.1 million and comprised $8.2 million for employee severance
and benefit costs and $8.9 million for other costs, primarily contract
termination costs.

Market Risk
- -----------
The Company has operations in various foreign countries. The functional currency
is the local currency for all locations, except in the McGraw-Hill Education
segment where operations that are extensions of the parent have the U.S. dollar
as the functional currency. In the normal course of business, these operations
are exposed to fluctuations in currency values. The Company does not generally
enter into derivative financial instruments in the normal course of business,
nor are such instruments used for speculative purposes. The Company has
naturally hedged positions in most countries with a local currency perspective
and asset and liability offsets. The gross amount of the Company's foreign
exchange positions is $185.9 million, and management has estimated using a value
at risk analysis with 90% certainty that based on the historical volatilities of
the portfolio that the foreign exchange gains and losses will not exceed $18.7
million over the next year. The Company's interest expense is sensitive to
changes in the general level of U.S. interest rates. Based on average debt
outstanding over the past six months, the following is the projected impact on
interest expense on current operations:

-------------------------------------------------------------------------
Percent change in interest rates Projected impact on operations
(+/-) (millions)
-------------------------------------------------------------------------
1% $10.1
-------------------------------------------------------------------------

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
- ----
The foregoing sections, as well as other portions of this document, includes
certain forward-looking statements about the Company's business, new products,
sales, expenses, cash flows, spending, and operating and capital requirements.
Such forward-looking statements include, but are not limited to: Educational
Publishing's level of success in 2002 adoptions and open territories; the level
of educational funding; the strength of higher education, professional and
international publishing markets; the level of interest rates and the strength
of profit levels and the capital markets in the U.S. and abroad with respect to
Standard & Poor's Credit Market Services; the strength of the domestic and
international advertising markets; Broadcasting's level of advertising; and the
level of future cash flow, debt levels, product related manufacturing increases,
pension income, capital and other expenditures and prepublication cost
investment.

Actual results may differ materially from those in any forward-looking
statements because any such statements involve risks and uncertainties and are
subject to change based upon various important factors, including, but not
limited to, worldwide economic, financial and political conditions, currency and
foreign exchange volatility, the health of capital and equity markets, including
future interest rate changes, the level of funding in the education market (both
domestically and internationally), the pace of recovery of the economy and in
advertising, the successful marketing of new products, and the effect of
competitive products and pricing.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------ ----------------------------------------------------------
The Company has no material changes to the disclosure made on this matter in the
Company's report on Form 10-K for the year ended December 31, 2001. Please see
the financial condition section of this 10-Q for additional market risk
disclosures in Item 2.

Item 4. Controls and Procedures
- ------ -----------------------
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to September 30, 2002.

Part II
Other Information

Item 1. Legal Proceedings
- ------ -----------------
While the Registrant and its subsidiaries are defendants in numerous legal
proceedings in the United States and abroad, neither the Registrant nor its
subsidiaries are a party to, or any of their properties subject to, any known
material pending legal proceedings which Registrant believes will result in a
material adverse effect on its financial statements or business operations.

Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits

(10) 364-Day Credit Agreement dated as of July
23, 2002 among the Registrant, the lenders
listed therein, and JP Morgan Chase Bank,
as administrative agent, incorporated by
reference from the Registrant's Form 8-K
dated August 1, 2002.

(12) Computation of Ratio of Earnings to Fixed
Charges; 35

(99) Quarterly Certifications of the Chief
Executive Officer and the Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 36

(b) Reports on Form 8-K
-------------------
A form 8-K was filed on, and dated, (i)
July 31, 2002 with respect to item 5 of
said Form, (ii) August 5, 2002 with respect
to item 9 of said Form, and (iii) August
15, 2002 with respect to item 9 of said
Form. In addition, a Form 8-K/A was filed
on, and dated, August 1, 2002 with respect
to item 5 of said Form.

Signatures
----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

The McGraw-Hill Companies, Inc.
-------------------------------

Date: November 1, 2002 By
------------/s/------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer

Date: November 1, 2002 By
-----------/s/-------------------
Kenneth M. Vittor
Executive Vice President
and General Counsel

Date: November 1, 2002 By
------------/s/---------------
Talia M. Griep
Senior Vice President
and Corporate Controller

Quarterly Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Harold W. McGraw III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The McGraw-Hill
Companies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee or registrant's board of directors
(or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

Quarterly Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: November 1, 2002
------------/s/----------------
Harold W. McGraw III
Chairman, President and
Chief Executive Officer

Quarterly Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert J. Bahash, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The McGraw-Hill
Companies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee or registrant's board of
directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and

Quarterly Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: November 1, 2002 ------------/s/----------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer

Exhibit (12)

The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------

Sept. 30, 2002 Sept. 30, 2001
-------------------- --------------
Nine Twelve Nine
Months Months Months
-------- -------- --------

Earnings
Earnings from continuing operations
before income tax expense (Note) $678,846 $ 695,041 $ 589,187
Fixed charges 57,032 77,373 79,131
--------- --------- ---------
Total Earnings $ 735,878 $ 772,414 $ 668,318
========= ========= =========
Fixed Charges (Note)
Gross interest expense $20,775 $30,131 $48,620
Portion of rental payments deemed to be
interest 36,257 47,242 30,511
--------- --------- ---------
Total Fixed Charges $57,032 $77,373 $79,131
========= ========= =========
Ratio of Earnings to Fixed Charges 12.9x 10.0x 8.4x

Note) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income taxes"
excludes undistributed equity in income of less than 50%-owned
companies, primarily the Company's earnings in its 45% interest
in Rock-McGraw, Inc. Rock-McGraw earnings for the nine and
twelve months periods ended September 30, 2002 and the nine month
period ended September 30, 2001, are $10.4 million, $12.7 million
and $7.4 million, respectively. "Fixed charges" consist of (1)
interest on debt, and (2) the portion of the Company's rental
expense deemed representative of the interest factor in rental
expense.

Earnings from continuing operations before income taxes for the
twelve month period ended September 30, 2002 includes a $159.0
million provision for restructuring and asset write-down.

Exhibit (99)

Quarterly Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of
the undersigned officers of The McGraw-Hill Companies, Inc. (the "Company"),
does hereby certify, to such officer's knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
of the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Company.

Dated: November 1, 2002
-----------/s/---------------
Harold W. McGraw III
Chairman, President and
Chief Executive Officer

Dated: November 1, 2002
------------/s/---------------
Robert J. Bahash
Executive Vice President and
Chief Financial Officer