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, 2003

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
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(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 [ ]

Indicate by check mark whether the Registrant is an accelerated filer.

YES [X] NO [ ]

On October 15, 2003 there were approximately 191.6 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
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Item 1. Financial Statements
------
Independent Accountant's Review Report 3

Consolidated Statement of Income for the three and
nine month periods ended September 30, 2003 and 2002 4

Consolidated Balance Sheet at September 30, 2003,
December 31, 2002 and September 30, 2002 5-6

Consolidated Statement of Cash Flows for the nine 7
months ended September 30, 2003 and 2002

Notes to Consolidated Financial Statements 8-14

Item 2. Management's Discussion and Analysis of Financial
------ Condition and Results of Operations 15-25

Item 3. Quantitative and Qualitative Disclosures About
------ Market Risk 26

Item 4. Controls and Procedures 26
------

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

Item 1. Legal Proceedings 26
------

Item 6. Exhibits and Reports on Form 8-K 26-34
------

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, 2003, and the related consolidated
statements of income for the three and nine month periods ended September 30,
2003 and 2002, and the consolidated statements of cash flows for the nine month
periods ended September 30, 2003 and 2002. 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, 2002, 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 28, 2003, 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, 2002, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.

Ernst & Young LLP

October 23, 2003

Part I. Financial Information
-----------------------------
Item 1. Financial Statements

The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
--------------------------------
Periods Ended September 30, 2003 and 2002
-----------------------------------------

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

Sept. 30, Dec. 31, Sept. 30,
2003 2002 2002
---------- ----------- ----------
(in thousands)

ASSETS

Current assets:
Cash and equivalents $ 199,113 $ 58,186 $ 108,136
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 5) 1,138,344 991,806 1,150,101
Inventories (Note 5) 354,465 360,757 396,365
Deferred income taxes 166,947 169,829 220,642
Prepaid and other current assets
(Note 6) 114,603 93,729 95,011
---------- ---------- ----------
Total current assets 1,973,472 1,674,307 1,970,255
---------- ---------- ----------

Prepublication costs (net of
accumulated amortization) (Note 5) 440,044 534,835 505,568

Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 131,667 119,442 115,967
Prepaid pension expense 281,119 261,243 249,726
Other 221,398 205,243 226,727
---------- ---------- ----------
Total investments and other assets 634,184 585,928 592,420
---------- ---------- ----------

Property and equipment - at cost 1,076,399 1,071,953 1,064,948
Less - accumulated depreciation 643,328 640,493 645,214
---------- ---------- ----------
Net property and equipment 433,071 431,460 419,734

Goodwill and Intangible Assets - at
cost: (Note 11)
Goodwill - net 1,294,585 1,294,831 1,249,954
Copyrights - net 254,458 272,243 331,035
Other intangible assets - net 223,113 238,578 226,761
---------- ---------- ----------
Net goodwill and intangible assets 1,772,156 1,805,652 1,807,750
---------- ---------- ----------
Total assets $5,252,927 $5,032,182 $5,295,727
========== ========== ==========

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

The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For the Nine Months Ended September 30, 2003 and 2002
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The McGraw-Hill Companies, Inc.
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Notes to Consolidated Financial Statements
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1. Basis of Presentation

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, 2003 and 2002 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, 2002.

Certain prior year amounts have been reclassified for comparability
purposes.

In December 2002, The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123."
This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation, and requires additional disclosures in interim and
annual financial statements. The disclosure in interim periods requires pro
forma net income and net income per share as if the Company adopted the
fair value method of accounting for stock-based awards. Pro forma net
income and earnings per share primarily reflecting compensation cost for
the fair value of stock options for the three and nine months periods ended
September 30 were as follows:

(in thousands except earnings per share data)

Three Months Nine Months
------------ -----------
2003 2002 2003 2002
-------- -------- -------- --------

Net income, as reported $290,296 $276,219 $527,726 $441,891
Stock-based compensation cost
included in net income, net
of tax 2,993 4,359 9,866 10,078
Fair value of stock based
compensation cost, net of tax (12,788) (18,012) (43,056) (47,700)
-------- -------- -------- --------
Pro forma net income $280,501 $262,566 $494,536 $404,269
======== ========= ======== ========

Basic earnings per common share
As reported $ 1.52 $ 1.43 $ 2.77 $ 2.29
Pro forma $ 1.47 $ 1.36 $ 2.60 $ 2.09
Diluted earnings per common share
As reported $ 1.51 $ 1.42 $ 2.75 $ 2.27
Pro forma $ 1.46 $ 1.35 $ 2.58 $ 2.08

Basic weighted average shares
Outstanding 190,524 193,030 190,447 192,993
Diluted weighted average shares
Outstanding 192,055 194,461 191,788 194,758

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

Notes to Consolidated Financial Statements
------------------------------------------

2. Comprehensive Income

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

3. Segment and Related Information

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 valuation services. The Information
and Media Services segment includes business and professional media
offering information, insight and analysis. In February 2003 the Company
divested S&P ComStock, which was formerly part of the Financial Services
segment. S&P ComStock is reflected as a discontinued operation on the face
of the income statement.

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 and nine months ended September 30, 2003 and
2002 follows:

2003 2002
------------------- -------------------
Operating Operating
Revenue Profit Revenue Profit
--------- --------- --------- ---------

Three Months (in thousands)
------------
McGraw-Hill Education $1,005,951 $ 297,901 $ 995,655 $ 303,861
Financial Services 440,525 171,618 382,814 128,493
Information and Media Services 176,130 19,311 182,461 19,791
------------------------------ ---------- --------- ---------- --------
Total operating segments 1,622,606 488,830 1,560,930 452,145
General corporate expense - (26,016) - (24,651)
Interest expense - (2,026) - (5,965)
------------------------------ ---------- --------- ----------- ----------
Total Company $1,622,606 $ 460,788* $ 1,560,930 $ 421,529*
========== ========= =========== ==========

*Income from continuing operations before taxes on income.

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

2003 2002
------------------- -------------------
Operating Operating
Revenue Profit Revenue Profit
---------- --------- -------------------

Nine Months (in thousands)
-----------
McGraw-Hill Education $1,844,805 $ 279,516 $ 1,854,239 $ 296,093
Financial Services 1,274,785 488,166 1,148,169 413,519
Information and Media Services 540,037 56,230 564,337 58,309
------------------------------ ---------- --------- ------------ ---------
Total operating segments 3,659,627 823,912 3,566,745 767,921
General corporate expense - (69,646) - (64,452)
Interest expense - (7,378) - (19,538)
------------------------------ ---------- --------- ----------- ----------
Total Company $3,659,627 $ 746,888* $ 3,566,745 $ 683,931*
========== ========= =========== ==========

*Income from continuing operations before taxes on income.

4. Sale of S&P Comstock

In February 2003, the Company divested S&P ComStock (ComStock), the
real-time market data unit of Standard & Poor's. The sale resulted in a
$56.8 million after-tax gain (30 cents per diluted share), $87.0 million
pre-tax, recorded as part of the discontinued operations reflected on the
face of the income statement. ComStock was formerly part of the Financial
Services segment. The sale of ComStock to Interactive Data Corporation
resulted in $115.0 million in cash acquired, an after-tax cash flow impact
of $78.7 million, and a reduction in net assets of $28.0 million, which
includes a reduction in net goodwill and intangible assets of $14.3
million. The revenue recorded from ComStock for the three months ended
September 30, 2002 was $16.4 million. The revenue recorded from ComStock
for the nine months ended September 30, 2003 and September 30, 2002 was
$11.1 million and $48.6 million, respectively. Under the agreement with
Interactive Data Corporation, the Company's Financial Services segment will
continue to feature ComStock market data in a variety of its products and
services, and ComStock will continue to serve as a distributor of Standard
& Poor's information.

ComStock provides market data to Institutional Investors, Retail Brokers,
Financial Advisors and other users. The decision to sell ComStock is
consistent with the Financial Services strategy of leveraging the strength
of its equity and fund research information to provide unique data and
analysis to investment managers and investment advisors. As a result of
this refined strategy, the market data ComStock provides fell outside the
core capabilities that Financial Services is committed to growing.

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

5. Allowances, Inventories and Accumulated Amortization of Prepublication Cost

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

6. Receivables from/Payables to Broker-dealers and Dealer Banks

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. The
Company had $383.8 million, $238.9 million, and $368.4 million of matched
purchase and sale commitments at September 30, 2003, December 31, 2002 and
September 30, 2002, respectively. Only those transactions not closed at the
settlement date are reflected in the balance sheet as receivables and
payables.

7. Long-term Debt

A summary of long-term debt follows:

Sept. 30, Dec. 31, Sept. 30,
2003 2002 2002
---------- ---------- ----------
(in thousands)

Commercial paper supported by
bank revolving credit agreements $168,160 $458,480 $621,760
Other 393 443 484
---------- ---------- ----------
Total long-term debt $168,553 $458,923 $622,244
========== ========== ==========

The Company's $675 million, 364-day revolving facility agreement, entered
into on July 23, 2002 expired on July 22, 2003. On July 22, 2003, the
Company replaced this credit facility with a new 364-day credit facility of
$575 million that allows it to borrow until July 20, 2004, on which date the
facility agreement will terminate and the maturity of such borrowings may

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

not be later than July 20, 2005. The Company continues to pay a facility fee
of five 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, which expires August 15, 2005. 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, 2003 there were no borrowings under
any of the facilities. Eighty percent or $168.2 million of the commercial
paper borrowings outstanding are classified as long-term.

8. Capital Structure

In the third quarter of 2002 the Company redeemed all of the outstanding
shares of $1.20 convertible preference stock. The redemption price of
$40.00 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. The number of common shares reserved for issuance for employee
stock plan awards and under the Director Deferred Stock Ownership Plan were
as follows:

Sept. 30, Dec. 31, Sept. 30,
2003 2002 2002
---------- ---------- ----------
(in thousands)

Stock based awards 27,002 28,647 28,945
========== ========== ==========

9. Cash Dividends

Cash dividends per share declared during the three and nine months ended
September 30, 2003 and 2002 were as follows:

Three Months Nine Months
------------ -----------
2003 2002 2003 2002
---- ---- ---- ----
Common stock $0.27 $0.255 $0.81 $0.765
Preference stock - $0.200 - $0.800

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

10.Common Shares Outstanding

A reconciliation of the number of shares used for calculating basic
earnings per common share and diluted earnings per common share for the
three and nine months ended September 30, 2003 and 2002 follows:

Restricted performance shares outstanding at September 30, 2003 and 2002 of
751,000 and 474,000 were not included in the computation of diluted
earnings per common shares because the necessary vesting conditions have
not yet been met.

11.Other Intangible Assets

Intangible assets subject to amortization were as follows:

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

12.Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin (ARB) No. 51." The
Interpretation introduces a new consolidation model, the variable interests
model, based on potential variability in gains and losses of the entity
being evaluated for consolidation. It provides guidance for determining
whether an entity lacks sufficient equity or the entity's equity holders
lack adequate decision-making ability. These entities, variable interest
entities (VIE), are evaluated for consolidation based on their variable
interests. Variable interests are contractual, ownership or other interests
in an entity that expose their holders to the risks and rewards of the VIE.
On October 8, 2003, the FASB agreed to defer the effective date so that a
public company would not need to apply the provisions of the interpretation
to VIE interests acquired before February 1, 2003, until the end of the
first interim or annual period ending after December 15, 2003. Management
does not believe that this will have a material impact on the Company's
financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached consensus
on EITF 00-21, "Accounting for Revenue Relationships with Multiple
Deliverables." This pronouncement addresses how to account for
multiple-element revenue arrangements and focuses on when a revenue
arrangement should be separated into components or deliverables, or
alternatively, when smaller deliverables or elements should be combined for
purposes of recognizing revenue. The final consensus is applicable to
agreements entered into for fiscal periods beginning after June 15, 2003
with early adoption permitted. Management reviewed its revenue recognition
practices with respect to multiple deliverables, and has determined that
EITF No. 00-21 did not have any material impact to the Company's current
revenue recognition practices and did not have any material impact on the
consolidated financial statements.

At its September 9, 2003 meeting, The Accounting Standards Executive
Committee (AcSEC) voted to approve the Statement of Position (SOP),
"Accounting for Certain Costs and Activities Related to Property, Plant,
and Equipment". The SOP would provide guidance for certain costs and
activities relating to property, plant, and equipment (PP&E). The proposal
addresses which costs related to PP&E assets should be capitalized as
improvements and which costs should be charged to expense as repairs and
maintenance and uses a project stage or timeline framework with PP&E assets
accounted for at a component level. Under the SOP, enterprises would also
be required to select an accounting policy for post-adoption acquisition of
assets that can differ from the componentization policy for pre-adoption
assets. AcSEC also concluded that companies be required to disclose
meaningful ranges with respect to PP&E depreciable lives. The final SOP
will require companies to segregate PP&E depreciable life disclosures into
ranges, similar to the concept used by companies when disclosing ranges of
outstanding stock option exercise prices.

The SOP is expected to be presented for FASB clearance late in the fourth
quarter and would be applicable for fiscal years beginning after December
15, 2004. Management is currently evaluating the impact of this
pronouncement.

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

Results of Operations - Comparing Three Months Ended September 30, 2003 and
- ---------------------------------------------------------------------------
2002
- ----

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

The Segment Review that follows is incorporated herein by reference.

Operating revenue for the third quarter increased by 4.0% 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. Favorable foreign
exchange rates with respect to the Corporation's non-U.S. businesses contributed
to the growth in operating revenue and income from continuing operations.
Product revenue increased by $25.1 million as compared to the prior year's third
quarter, primarily due to an increase in revenue at McGraw-Hill Education. The
quarter 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. Service revenue increased to $586.8 million, an increase
of 6.7%, as compared to the prior year's third quarter, due primarily to the
growth in Financial Services. 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 in 2002. 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. MMS International
revenue had a negligible impact on consolidated revenue and operating profit for
the third quarter.

Other income increased to $16.0 million from ($0.5) million in the third
quarter of 2002. This increase is primarily due to the pre-tax loss of $14.5
million on the disposition of MMS International which is included in the prior
year.

Income from continuing operations increased $15.7 million to $290.3 million
over 2002 third quarter results. Income from continuing operations in the prior
year includes an after-tax benefit of $2.0 million on the sale of MMS
International. Excluded from the results of continuing operations is ComStock,
which was disposed of in February 2003. ComStock was formerly part of the
Financial Services segment.

Net income for the quarter increased $14.1 million over the comparable quarter
in the prior year. Diluted earnings per share for the quarter were $1.51 versus
$1.42 in the prior year.

Total expenses in the third quarter of 2003 increased only 3.8% due to cost
containment activities. Operating expenses include the amortization of
prepublication costs of $129.7 million for the third quarter 2003. Amortization
of prepublication costs increased by $0.9 million as compared with the third
quarter of 2002. Product operating expenses decreased slightly due to cost
containment activities at McGraw-Hill Education. Service operating expenses
increased 3.3% due to growth in the Financial Services segment. Selling and
general product expenses increased $11.2 million because of technology spending.
Selling and general service expenses increased $27.1 million from the prior year
third quarter, primarily from the growth of the Financial Services segment. The
decline in stock market performance for the last three years has negatively
impacted the return on the Company's pension assets. Additionally, the Company
has changed its investment return and discount rate assumptions for the
Company's U.S. retirement plans effective January 1, 2003 resulting in a decline

in net pension income for the third quarter 2003 as compared with 2002. For
2003, combined printing, paper and distribution costs on product-related
manufacturing items are expected to decrease modestly.

Interest expense decreased 66.0% to $2.0 million from $6.0 million in the third
quarter of 2002. The primary reasons for the decrease are the reduced average
debt outstanding and the reduction in the average interest rate for the third
quarter of 2003 as compared to the same period in 2002. Average commercial paper
levels decreased from $973.5 million for the third quarter of 2002 to $380.5
million for the third quarter of 2003. The average interest rate on commercial
paper borrowings decreased from 1.9% in 2002 to 1.1% in 2003. Lower average debt
levels accounted for $2.8 million of the decrease and lower average interest
rates for $0.8 million. Interest income on higher foreign cash levels
represented most of the remaining reduction in interest expense.

The provision for taxes as a percent of income before taxes is 37.0%, compared
to 34.9% in the prior year. This increase is attributable to the prior year
benefiting from the incremental tax benefit from the divestiture of MMS
International.

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

McGraw-Hill Education

McGraw-Hill Education's revenue was up 1.0% and operating profit declined 2.0%,
as compared with the third quarter of 2002. The results reflect state and local
budget shortfalls. The segment's performance also reflects the seasonal nature
of the business, with the first quarter being less significant and the third
quarter the most significant.

Expenditures related to the Global Transformation Project for the third quarter
of 2003 and 2002 were $8.9 million and $8.2 million, respectively. The Global
Transformation Project will support the segment's global growth objectives,
provide technological enhancements that support the infrastructure of management
information and customer-centric services, enable process and production
improvements throughout the organization, and position McGraw-Hill Education to
support the advancement of digital products as an emerging growth opportunity.

The McGraw-Hill School Education Group's revenue increased modestly to $574.4
million as compared to the third quarter of 2002. Some cancellations and delays
in ordering due to state budget pressures created by falling tax receipts curbed
opportunities for growth in the third quarter, especially in open territories.
However, increased sales of alternative basal and supplemental educational
products, such as Everyday Mathematics and Open Court Reading, enabled the group
to produce a modest gain in revenue despite capturing only 7% of the elementary
Texas social studies adoption. Softening sales of children's supplemental
educational materials through dealer and direct-to-teacher channels and a
decline in older copyright supplemental products, also served to offset the
gains from alternative basal and supplemental educational products.

The School Education Group's major adoption opportunity was Texas. Due to a
strong showing in the secondary market, the McGraw-Hill School Education Group
took approximately a 28% share of the kindergarten through twelfth grade Texas
social studies adoption despite a lower than expected performance in the
kindergarten through sixth grade social studies adoption. Developmental Learning
Materials performed well in the Texas pre-kindergarten adoption. New York City
adopted Everyday Mathematics and Impact Mathematics which contributed positively
to the School Education Group's open territory sales. Custom contract testing
grew in the third quarter, and the School Education Group continues to invest in
testing technology. Higher custom contract revenue was driven by the California,
Kentucky, Connecticut, New York State and Colorado programs.

McGraw-Hill Higher Education, Professional and International Group's revenue
increased by 1.8% to $431.5 million for the third quarter of 2003. The results
reflect the growth in Humanities, Social Sciences and Languages, and the
Science, Engineering, and Math imprints domestically. The higher education
market will continue to be driven by increases in enrollment, but it will be
tempered by state cutbacks resulting in a reduction in the number of courses on
state campuses. Key titles contributing to the third quarter performance
include:

o Lucas, The Art of Public Speaking, 8/e
o Shier, Hole's Human Anatomy & Physiology, 10/e
o Mader, Biology, 8/e
o Saladin, Anatomy and Physiology, 3/e
o Silberberg, Chemistry: The Molecular Nature of Matter And Change, 3/e
o Libby, Financial Accounting, 4/e
o Santrock, Life-Span Development, 9/e
o Insel, Core Concepts in Health UPD, 9/e
o Garrison, Managerial Accounting, 10/e
o Brinkley, American History: A Survey, 11/e

Despite demand for trade titles, professional product weakness continued in the
computer and technology imprints reflecting continued weakness in the global
technology sector. In 2002, the Group benefited from the release of The
McGraw-Hill Encyclopedia of Science and Technology, 9/e.

Favorable foreign exchange rates contributed $5.2 million of the quarter's
revenue growth and favorably impacted operating profit growth by $2.5 million.

Financial Services

Financial Services' revenue increased 15.1% to $440.5 million and operating
profit increased 33.6% to $171.6 million over 2002 third quarter results. In
February 2003, ComStock was disposed of and this divestiture is reflected as a
discontinued operation. 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 in 2002. 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. MMS International
accounted for a 2.0% decrease in revenue and a negligible decrease in operating
profit for the third quarter of 2003 as compared to the third quarter of 2002.
Favorable foreign exchange rates contributed $8.1 million and $5.6 million, to
revenue and operating profit growth for the third quarter.

The Financial Services segment increased revenue and operating profit due
primarily to the performance of corporate finance and structured finance
ratings, which represented approximately 78.5% of the growth in revenue. Total
U.S. structured finance new issue dollar volume for the third quarter of 2003
increased 44.2%, driven primarily by residential mortgage-backed securities
issuance, which grew 53.7%, according to Harrison Scott Publications. Overall,
new issue dollar volume in the U.S. market was up 27.7% in the third quarter,
according to Securities Data and Harrison Scott Publications. U.S. new issue
dollar volume for corporates for the third quarter of 2003 increased 38.8% while
public finance declined 12.7%. The momentum in the U.S. high yield issuance also
continued with an increase of over 600% in the quarter according to Securities
Data. European new issue dollar volume rose 107.4% according to Securities Data
and Harrison Scott Publications. Low interest rates, narrowing spreads and an
improving economic environment resulted in the continued growth in issuance,
which led to positive U.S. ratings product results. Despite rising mortgage
rates, these conditions should continue to drive positive issuance growth for
the remainder of the year. Bank loan ratings, counterparty credit ratings and

global infrastructure ratings experienced higher growth rates than traditional
ratings products. Conditions in the financial services marketplace continued to
show improvement although demand for retail information & brokerage products
remains weak. However, index-related products and services continue to
experience robust growth. Fund information and company-specific data sales
performed well. Revenue related to the Standard and Poor's indices increased as
assets under management for Exchange Traded Funds rose to $66.6 billion at
September 30, 2003 from $49.1 billion at September 30, 2002. Assets under
management at December 31, 2002 were $63.2 billion. While the number of total
merger and acquisition deals increased 14.4% according to the Bloomberg Mergers
and Acquisitions Database as of September 30, 2003, the dollar volume of deals
declined 24.5%. The reduced size of deals negatively impacted the sale of
valuations.

Information and Media Services

Information and Media Services' revenue decreased $6.3 million, or 3.5%, to
$176.1 million from 2002 third quarter results. Operating profit decreased $0.5
million, or 2.4%, to $19.3 million from 2002 third quarter results. Revenue
declined at the Business-to-Business Group by 2.8% and at Broadcasting by 7.5%.
Both groups were negatively impacted by the continued soft business-to-business
advertising market.

At BusinessWeek, advertising pages in the North American edition in the third
quarter were down by 13.3% according to the Publishers Information Bureau, with
one less issue published than in 2002 third quarter, but with the same number of
issues for revenue recognition purposes. Weakness was also experienced in
BusinessWeek's other editions, with the exception of the Asia editions.

Softness continued in the Aviation sector, resulting in a decrease in
advertising pages. Also, the Farnborough Air Show occurred in the third quarter
of 2002 with no comparable event in 2003. U.S. power markets remained weak.

Sales to building product manufacturers increased on higher Sweet's web and CD
product delivery. Sales to construction contractors and service providers
declined due to the weak commercial construction contractor sector. The shutdown
of Dodge Scan in the latter part of 2002 also contributed to the decline.
Competitive pressure and the weak economy have negatively affected advertising
page yields in the construction publications. The Healthcare sector saw
decreased pages and page yields. All groups in the Business-to-Business group
contained costs.

At Broadcasting, for the third quarter, the weak ratings position of the ABC
network and the general economic malaise, negatively impacted the performance of
the stations. The services and consumer products categories in advertising
contributed to growth while political, retailing, automotive and leisure time
categories remained weak.

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

The Segment Review that follows is incorporated herein by reference.

For the first nine months of the year, operating revenue increased 2.6%, or
$92.9 million to $3.7 billion, as compared to the nine month period ended
September 30, 2002. The revenue increase is primarily attributable to growth in
the Financial Services segment. Favorable foreign exchange rates contributed to
the growth in operating revenue and income from continuing operations. Product
revenue increased 0.7% to $1.9 billion as compared to the prior year's first
nine months due primarily to increased circulation revenue from Information and
Media Services. Service revenue increased to $1.7 billion, an increase of 4.9%,
as compared to the prior year's first nine months. The growth in service revenue

is primarily attributable to the growth in the Financial Services segment. In
September 2002, the Financial Services segment divested MMS International, which
had a negligible effect on current period results.

Other income increased $16.7 million to $32.7 million for the nine months ended
September 30, 2003 as compared with the same period in 2002. In 2002, other
income includes a $14.5 million pre-tax loss on the disposition of MMS
International. There was no similar transaction in 2003.

Income from continuing operations increased $32.0 million to $470.5 million
over 2002 nine months results. Excluded from the results of continuing
operations is ComStock, which was disposed of in February 2003. ComStock was
formerly part of the Financial Services segment. The disposition contributed
$87.5 million pre-tax and $57.2 million after-tax or 30 cents per diluted share.
Net income for the period increased $85.8 million over the comparable nine
months in the prior year. Diluted earnings per share for the nine month period
were $2.75 versus $2.27 in the prior year.

Total expenses in the first nine months of 2003 increased only 2.0% due to cost
containment activities. Operating expenses include the amortization of
prepublication costs of $230.7 million for the nine month period in 2003.
Amortization of prepublication costs decreased by $2.8 million as compared with
the first nine months period of 2002. Product operating expenses declined 1.1%
as compared with the prior year nine month period due primarily to cost
containment initiatives. Service operating expenses increased only slightly
primarily due to cost containment efforts at Information and Media Services.
Selling and general product expenses increased 2.9% because of technology
spending. Selling and general service expenses increased 10.1% primarily from
the growth of the Financial Services segment. The decline in stock market
performance for the last three years has negatively impacted the return on the
Company's pension assets. Additionally, the Company has changed its investment
return and discount rate assumptions for the Company's U.S. retirement plans
effective January 1, 2003 resulting in a decline in net pension income for the
first nine months of 2003 as compared with the prior year. For 2003, combined
printing paper and distribution prices on product-related manufacturing items
are expected to decrease modestly.

Interest expense decreased 62.2% to $7.4 million from $19.5 million reported in
the first nine months of 2002. The primary reasons for the decrease are the
reduced average debt outstanding and the reduction in the average interest rate
for the first nine month period in 2003 as compared to the same period in 2002.
Average commercial paper levels decreased from $1.0 billion for the first nine
months of 2002 to $490.9 million in 2003. The average interest rate on
commercial paper borrowings decreased from 1.9% in 2002 to 1.2% in 2003. Lower
average debt levels accounted for $7.8 million of the decrease and lower average
interest rates for $2.6 million. Interest on higher foreign cash levels
represented most of the remaining reduction in interest expense.

The provision for taxes as a percent of income before taxes is 37.0%, for the
first nine months of 2003 compared to 35.9% in the same period in 2002. The
change in the effective tax rate is primarily the result of the additional tax
benefit from the MMS International divestiture in 2002.

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

McGraw-Hill Education

McGraw-Hill Education's revenue and operating profit declined $9.4 million and
$16.6 million, respectively, as compared with the first nine months of 2002. The
results reflect the weak economic conditions impacting the School Education
Group. Some cancellations and delays in ordering due to state budget pressures
created by falling tax receipts curbed opportunities, especially in open
territories. Nonetheless there were several notable successes including a strong

performance in the Texas middle and high school social studies adoption, a large
open territory adoption for elementary and middle school math programs in New
York City and growth in testing. These gains were offset by aging supplemental
lines and a disappointing performance in elementary social studies in Texas. The
segment's performance also reflects the seasonal nature of its business, with
the first half being less significant.

Expenditures related to the Global Transformation Project for the nine months
ended September 30, 2003 and 2002 were $30.2 million and $44.1 million,
respectively.

The McGraw-Hill School Education Group's revenue declined 1.7% to $1.1 billion.
Economic conditions negatively impacted adoption and open territory
opportunities early in the year. Increased sales of alternative basal and
supplemental educational products, such as Everyday Mathematics and Open Court
Reading, were offset by certain aging supplemental lines. Sales of children's
supplemental educational materials through the educational dealer and trade
markets have been affected by decreased traffic in retail and specialty stores,
as consumers react to a struggling economy and an uncertain economic future by
reducing purchases. In addition, prior year first nine months sales included
coloring and activity books and magazines, product lines which were discontinued
in the latter part of 2001 with residual sales winding down in the latter part
of 2002. The School Education Group's major adoption opportunity was in Texas.
The McGraw-Hill School Education Group took a 28% share of the kindergarten
through twelfth grade Texas social studies adoption owing to a strong showing in
the secondary market which effectively offset a lower than expected performance
in the kindergarten through sixth grade social studies adoption. Developmental
Learning Materials performed well in the Texas pre-kindergarten adoption. New
York City adopted Everyday Mathematics and Impact Mathematics which contributed
positively to the School Education Group's open territory sales. Custom contract
testing increased in the first nine months, and the School Education Group
continues to invest in testing technology. Higher custom contract revenue was
driven by the Colorado, California, Missouri, West Virginia and Indiana
programs.

McGraw-Hill Higher Education, Professional and International Group's revenue
increased by $8.9 million to $756.3 million for the first nine months of 2003.
The results reflect the growth in the sales of higher education titles both
domestically and internationally, and, in contrast, continued weakness in
certain professional titles. Growth in the higher education market will be
driven by continued enrollment increases but will be tempered by the state
cutbacks resulting in a reduction in the number of courses on state campuses.
The sales of Humanities, Social Sciences and Languages, and Science, Engineering
and Mathematics imprints increased in the period. Key titles contributing to
year-to-date sales increases include:

o Lucas, The Art of Public Speaking, 8/e
o Shier, Hole's Human Anatomy & Physiology, 10/e
o Saladin, Anatomy and Physiology, 3/e
o Mader, Biology, 8/e
o Silberberg, Chemistry: The Molecular Nature of Matter And Change, 3/e
o Libby, Financial Accounting, 4/e
o Garrison, Managerial Accounting, 10/e
o Santrock, Life-Span Development, 9/e
o Brinkley, American History: A Survey, 11/e
o Shier, Hole's Essentials of Human A&P, 8/e

Professional products declined as the computer and technology imprints still
experienced softness due specifically to continued weakness in the global
technology sector.

Foreign exchange rates favorably impacted revenue and operating profit growth
by $8.4 million and $5.9 million, respectively.

Financial Services

Financial Services' revenue increased 11.0% to $1.3 billion and operating
profit increased 18.1% to $488.2 million over 2002 nine months results. In
February 2003, ComStock was disposed of and this divestiture is reflected as a
discontinued operation. 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 in 2002. MMS International accounted
for a 2.5% decrease in revenue and a negligible decrease in operating profit for
the nine months ended September 30, 2003 as compared to the same period of 2002.
Favorable foreign exchange rates contributed $26.4 million and $7.5 million,
respectively, to revenue and operating profit growth for the nine month period.

The Financial Services segment's increased revenue and operating profit were
due primarily to the performance of structured finance ratings, which
represented approximately 50.1% of the growth in revenue. Total U.S. structured
finance new issue dollar volume for the first nine months of 2003 increased
33.1%, driven by residential mortgage-backed securities issuance, which grew
50.4%, according to Harrison Scott Publications. New issue dollar volume in the
U.S. market overall was up 20.3% in the first nine month period, according to
Securities Data and Harrison Scott Publications. U.S. new issue dollar volume
for corporates for the first nine months of 2003 increased 13.2% while public
finance grew 9.4%. European new issue dollar volume rose 53.8% according to
Securities Data and Harrison Scott Publications. The return of investor
confidence, improving credit quality and low interest rates, especially mortgage
rates, generated the positive growth in U.S. issuance volumes. Bank loan
ratings, counterparty credit ratings, and global infrastructure ratings all
experienced higher growth rates than traditional ratings products. The overall
financial services industry, which experienced adverse market conditions and
profit pressures during most of the first half of 2003, is now showing modest
improvement. Fund ratings, index related products and services as well as
company specific information products continue to experience robust growth,
despite the general decline in demand for information products, especially those
related to the retail brokerage sector. Revenue related to the Standard & Poor's
indices increased as assets under management for Exchange Traded Funds rose to
$66.6 billion at September 30, 2003 from $49.1 billion at September 30, 2002.
Assets under management at December 31, 2002 were $63.2 billion. Although
valuations were negatively impacted by the minimal merger and acquisition
activity, revenue increased from the sale of non-valuation services, such as
litigation support and real estate services. According to Bloomberg Mergers and
Acquisitions Database as of September 2003, the dollar volume of announced deals
involving a U.S. company declined 13.3%, and the number of deals increased 4.0%,
as compared to the first nine months of 2002.

Information and Media Services

Information and Media Services' revenue decreased $24.3 million, or 4.3%, for
the first nine months of 2003 as compared to the first nine months of 2002.
Operating profit decreased $2.1 million, or 3.6%, to $56.2 million for the
comparable period. Revenue declined at the Business-to-Business Group by 4.5%
and at Broadcasting by 3.1%. Both groups were negatively impacted by the
continued soft advertising market.

At BusinessWeek, advertising pages in the North American edition for the first
nine months were down 10.2% in 2003 according to the Publishers Information
Bureau. Weakness was experienced in the North American and International
editions related to international advertisers, particularly European
advertisers. The lack of targeted BusinessWeek demographic editions, which were
discontinued in the third quarter of the prior year, negatively impacted the
sales of the Business-to-Business Group. U.S. power markets were negatively
impacted by the fallout from ENRON and remained weak. The softness in the
Aviation industry has resulted in decreased advertising pages, but increased
page yields. The Singapore Air Show which occurred in the first quarter of 2002

did not occur in 2003, while the Paris Air Show occurred in the second quarter
of 2003 and did not occur in 2002. Due to geopolitical tensions, the Paris Air
Show was a much smaller show than previous Paris events. Additionally, the
Farnborough Air Show occurred in the third quarter of 2002 with no comparable
event in 2003.

Sales to building product manufacturers increased on favorable Sweet's web & CD
product delivery, while sales to construction contractors and service providers
declined due to the weak commercial contractor sector. The discontinuation of
Dodge SCAN in the latter part of 2002 also created a negative revenue comparison
but improved margins. Competitive pressure and the weak economy have negatively
affected page yields for the construction publications.

At Broadcasting, for the first nine months of 2003, the airing of the Super
Bowl during the first quarter of 2003 contributed positively to performance, but
could not offset the lack of political advertising. The weak ratings position of
the ABC network, preemptions caused by war coverage and the general economic
malaise negatively impacted the performance of the stations. The services and
consumer products categories of advertisers contributed to growth while the
retailing, automotive and leisure time categories remained weak.

Liquidity and Capital Resources
- -------------------------------

The Company continues to maintain a strong financial position. Cash flow from
operations of $819.9 million increased by $93.3 million in 2003 compared with
$726.6 million for the period ended September 30, 2002. The increase in cash
provided by operating activities primarily relates to the change in accrued
expenses related to discontinued operations and educational spending, and
increases in taxes payable. Unearned revenue increased as a result of the growth
in the Financial Services segment's ratings products. Matched Broker-dealer
receivables and payables increased which resulted in offsetting increases in
other current assets and other current liabilities. Included in other current
liabilities at September 30, 2002 is the offset of current assets to previously
established reserves for the final closedown of the former Continuing
Educational Center, resulting in no cash or income statement impact. Total debt
decreased by $363.4 million since year-end reflecting the results of operations
and the impact of dispositions, somewhat offset by increased share repurchases
and dividends. 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.

Commercial paper borrowings at September 30, 2003 totaled $210.2 million, a
decrease of $362.9 million from December 31, 2002. The Company's $675 million,
364-day revolving facility agreement, entered into on July 23, 2002 expired on
July 22, 2003. On July 22, 2003, the Company replaced this credit facility with
a new 364-day credit facility of $575 million that allows it to borrow until
July 20, 2004, on which date the facility agreement will terminate and the
maturity of such borrowings may not be later than July 20, 2005. The Company
continues to pay a facility fee of five 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, which expires August 15, 2005.
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. The Company also has the capacity to issue
Extendible Commercial Notes (ECN's) of $240 million. 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 the extension. As a result of the extension option,
no back up facilities for these borrowings are required. Like commercial paper
ECNs have no financial covenants. At September 30, 2003 there were no borrowings
under any of the facilities. Eighty percent or $168.2 million of the commercial
paper borrowings outstanding are classified as long-term.

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.

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 $164.4 million from the end
of 2002 primarily from the seasonality of the educational publishing business.
Inventory decreased $6.3 million from the end of 2002 to $354.5 million as the
Company improves its inventory management.

Additions to technology projects were $20.0 million in the first nine months of
2003 versus $47.5 million for the same period in 2002. Additions to technology
projects for 2003 are expected to approximate $60 million to $65 million.

Net prepublication costs decreased $94.8 million from the end of 2002 to $440.0
million, due to cost management and delayed spending. Prepublication cost
spending is expected to decrease over the remainder of the year totaling an
estimated $225.0 million for the full year. Prepublication cost spending in the
first nine months of 2003 totaled $140.3 million which was $42.3 million less
than the spending for the same period of 2002.

Purchases of property and equipment were $62.0 million, $26.8 million higher
than the first nine months of the prior year. Spending is expected to be higher
than the comparative prior year period for the remainder of the year due to the
Canary Wharf real estate project in London, England.

The Board of Directors approved a 5.9% increase in the quarterly common stock
dividend to 27.0 cents per share in January 2003. 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 in connection with 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 14.3
million shares have been repurchased under this program through September 30,
2003. During 2003, a total of 1.6 million shares were repurchased at an average
price of $53.57 per share. On January 29, 2003 the Board of Directors approved a
new stock repurchase program authorizing the purchase of up to 15 million
additional shares. In addition, there remains available 0.7 million shares under
the original stock repurchase program.

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

The Company's discussion and analysis of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.

On an ongoing basis, the Company evaluates its estimates and assumptions,
including those related to revenue recognition, allowance for doubtful accounts,
valuation of inventories, prepublication costs, valuation of long-lived assets,
goodwill and other intangible assets, and pension plan assumptions. The Company
bases its estimates on historical experience and on various other assumptions
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about carrying values of assets and
liabilities that can not readily be determined from other sources. There can be
no assurance that actual results will not differ from those estimates.

Retirement Plans and Postretirement Healthcare and Other Benefits

The Company's pension plans and postretirement benefit plans are accounted for
using actuarial valuations required by SFAS No. 87, "Employers' Accounting for
Pensions", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions".

The Company's employee pension and other post-retirement benefit costs and
obligations are dependent on assumptions concerning the outcome of future events
and circumstances, including compensation increases, long-term return on pension
plan assets, health care cost trends, discount rates and other factors. In
determining such assumptions, the Company consults with outside actuaries and
other advisors where deemed appropriate. In accordance with relevant accounting
standards, if actual results differ from the Company's assumptions, such
differences are deferred and amortized over the estimated future working life of
the plan participants. While the Company believes that the assumptions used in
these calculations are reasonable, differences in actual experience or changes
in assumptions could affect the expenses and liabilities related to the
Company's pension and other post-retirement benefits.

Following is a discussion of some significant assumptions that the Company
makes in determining costs and obligations for pension and other post-retirement
benefits:

o Discount rate assumptions are based on current yields on high
grade corporate long-term bonds.

o Salary growth assumptions are based on the Company's long-term
actual experience and future outlook.

o Health care cost trend assumptions are based on historical market
data,the near-term outlook and an assessment of likely long-term
trends.

o Long-term return on pension plan assets is based on a calculated
market-related value of assets, which recognizes changes in market
value over five years.

In 2003, for the purpose of determining net periodic pension expense, the
Company uses a return on plan assets assumption of 8.75%. The 2003 return
assumption was reduced from 9.5% on January 1, 2003, to reflect lower expected
returns on investments due to market weakness. Additionally, effective January
1, 2003, the Company changed its discount rate assumption on its retirement
plans to 6.75% from 7.25% utilized in 2002.

Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, in the Company's annual report on Form 10-K for the year ended
December 31, 2002, includes descriptions of some of the judgments that the
Company makes in applying its accounting policies in these areas. Since the date
of the annual report on Form 10-K, there have been no material changes to the
Company's critical accounting policies.

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. For hyperinflationary economies, such as
Venezuela, the functional currency is the U.S. dollar. 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 $183.3 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 $21.4 million on an undiversified value at risk basis
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 nine months, the following is the projected impact on interest expense
on current operations:

- ------------------------------------------------------------------------------
Percent change in interest rates Projected impact on operations
(+/-) (millions)
- ------------------------------------------------------------------------------
1% $4.9
- ------------------------------------------------------------------------------

Recently Issued Accounting Standards
- ------------------------------------

See note 12 to our consolidated financial statements for disclosure of the
impact that recently issued accounting standards will have on our financial
statements.

"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 2003 adoptions and open territory sales; the
level of educational funding; the strength of higher education, professional and
international publishing markets; the level of interest rates and debt issuance
and the strength of profit levels and the capital markets in the U.S. and abroad
with respect to Standard & Poor's; 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 expenses,
pension income, capital, technology 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 economies 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, 2002. Please
see the financial condition section in Item 2 of this Form 10-Q for additional
market risk disclosures.

Item 4. Controls and Procedures
- ------ -----------------------
As of September 30, 2003, 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, 2003. There have been no changes
in the Company's internal controls over financial reporting during the most
recent quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.

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 the 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
22, 2003 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 July 24, 2003.

(12) Computation of Ratio of Earnings to Fixed
Charges 28

(15) Letter on Unaudited Interim Financial
Information 29

(31.1) Quarterly Certification of the Chief
Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. 30-31

(31.2) Quarterly Certification of the Chief
Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. 32-33

(32) Quarterly Certification of the Chief
Executive Officer and the Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 34

(b) Reports on Form 8-K. A Form 8-K was filed on,
and dated, (i) July 24, 2003 with respect to
Item 5 of said Form and ii) July 29, 2003
with respect to Item 9 (and furnished
pursuant to Item 12) 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: October 31, 2003 By
------------/s/---------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer

Date: October 31, 2003 By
------------/s/---------------
Kenneth M. Vittor
Executive Vice President
and General Counsel

Date: October 31, 2003 By
------------/s/---------------
Talia M. Griep
Corporate Controller
and Senior Vice President,
Global Business Services

Exhibit (12)

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

(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 month
periods ended September 30, 2003 and the nine month period ended
September 30, 2002 are $12.2 million, $15.7 million and $10.4 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 tax expense for the
nine month period ended September 30, 2002 includes a $14.5 million
pre-tax loss on the disposition of MMS International.

Exhibit (15)

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

We are aware of the incorporation by reference in the Registration Statement on
Form S-3 (No. 33-33667) pertaining to the Debt Securities of The McGraw-Hill
Companies, Inc. and in the Registration Statements on Form S-8 pertaining to the
1983 Stock Option Plan for Officers and Key Employees (No. 2-84058), the 1987
Key Employee Stock Incentive Plan (No. 33-22344), the 1993 Employee Stock
Incentive Plan (No. 33-49743, No. 33-30043 and No. 33-40502), the 2002 Stock
Incentive Plan (No. 33-92224), the Director Deferred Stock Ownership Plan (No.
33-06871) and The Savings Incentive Plan of McGraw-Hill, Inc. and its
Subsidiaries, The Employee Retirement Account Plan of McGraw-Hill, Inc. and its
Subsidiaries, The Standard & Poor's Savings Incentive Plan for Represented
Employees, The Standard and Poor's Employee Retirement Account Plan for
Represented Employees and The Employee's Investment Plan of McGraw-Hill
Broadcasting Company, Inc. and its Subsidiaries (No. 33-50856) of our report
dated October 23, 2003 relating to the unaudited consolidated interim financial
statements of The McGraw-Hill Companies, Inc. that are included in its Form 10-Q
for the quarter ended September 30, 2003.

ERNST & YOUNG LLP

New York, New York
October 31, 2003

Exhibit (31.1)

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 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 report;

3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

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

a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and

c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.

Date: October 31, 2003

------------/s/----------------
Harold W. McGraw III
Chairman, President and
Chief Executive Officer

Exhibit (31.2)

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 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 report;

3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

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

a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and

c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.

Date: October 31, 2003

------------/s/---------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer

Exhibit (32)

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, 2003
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: October 31, 2003
------------/s/-----------------
Harold W. McGraw III
Chairman, President and
Chief Executive Officer

Dated: October 31, 2003
-----------/s/-------------------
Robert J. Bahash
Executive Vice President and
Chief Financial Officer

A signed original of this written statement required by Section 906 has been
provided to The McGraw-Hill Companies and will be retained by The McGraw-Hill
Companies and furnished to the Securities and Exchange Commission or its staff
upon request.