The information included in the foregoing interim financial statements is unaudited. In the opinion of management, all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. Readers are referred to the company's Form 10-K for the year ended June 30, 2002 for complete financial statements and related notes. Certain prior-year amounts have been reclassified to conform with current-year presentation.

The following table presents the calculations of earnings per share:

Antidilutive options excluded from the above calculations totaled 94,000 options at December 31, 2002 (with a weighted average exercise price of $45.31) and 1,391,000 options at December 31, 2001 (with a weighted average exercise price of $37.08).

Options to purchase 488,000 shares were exercised during the six months ended December 31, 2002 (128,000 options were exercised in the six months ended December 31, 2001).

Meredith does not have any off-balance sheet arrangements. The Company's use of special-purpose entities is limited to Meredith Funding Corporation, whose activities are fully consolidated in Meredith's Condensed Consolidated Financial Statements.

On December 5, 2002, Meredith purchased American Baby magazine and related assets from Primedia Inc., for $115.0 million plus the assumption of certain liabilities, for a total cost of $119.9 million. Operating results of the properties are included in Meredith's Condensed Consolidated Statement of Earnings from that date forward. American Baby magazine, which was launched in 1938, is currently published monthly and has a circulation of 2 million. Other American Baby group properties acquired include Childbirth and First Year of Life magazines, three Hispanic titles and related marketing programs, the American Baby and Healthy Kids television programs currently shown on the Discovery television network, websites, custom publications and other related programs.

The acquisition of the American Baby group of assets builds on Meredith's strategy to expand its home and family leadership position to a younger and more culturally diverse demographic spectrum of the family marketplace. Management believes this multi-tier franchise will help the Company reach young families who are just beginning to build their home and family lives. The American Baby group is a well-established large-scale brand with a strong array of products that reaches younger women and the Hispanic market -- two areas that management believes will enhance the Company's already strong presence in the home and family arena.

The purchase price of $115.0 million represents a multiple of approximately 10 times the American Baby group's projected calendar 2003 EBITDA (earnings before interest, taxes and depreciation and amortization). The acquisition was financed with existing credit facilities and cash on hand.

Pro forma results of operations as if this asset purchase had occurred at the beginning of the fiscal year for each period presented are as follows:

Meredith adopted Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized to earnings, but be reviewed at least annually for impairment. The adoption of this standard has eliminated much of Meredith's amortization expense related to intangible assets and goodwill. The Company expects intangible asset amortization expense to be $2.4 million in fiscal 2003. This estimate includes $2.3 million of amortization resulting from the acquisition of the American Baby group of assets in December 2002. Fiscal 2002 amortization expense related to intangible assets and goodwill totaled $25.6 million.

SFAS No. 142 also establishes requirements for the periodic impairment review of goodwill and intangible assets with indefinite lives. Reviews are based on a fair-value approach as described in SFAS No. 142. SFAS No. 142 requires an initial review of goodwill and intangible assets with indefinite lives as of the beginning of the fiscal year of adoption. The Company has completed this initial review and it resulted in transitional impairment losses of $139.9 million ($85.7 million after-tax), or $1.68 per diluted share. This charge was recorded net of tax as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003. The impairment losses relate to certain television Federal Communication Commission (FCC) licenses/network affiliation agreements ($33.7 million) and goodwill at certain television stations ($106.2 million). The fair values of the FCC licenses/network affiliation agreements and goodwill were determined by developing discounted cash flow analyses. The impairm ents are primarily the result of lower revenues and cash flows at television station WGCL-TV in Atlanta as compared to the projections on which the purchase price was based.

Intangible assets and goodwill at December 31, 2002, consisted of the following:

On December 5, 2002, Meredith acquired American Baby magazine and related assets from Primedia, Inc. This acquisition resulted in the recognition of $4.9 million in intangible assets subject to amortization, $38.9 million in other intangible assets and $76.1 million in goodwill, based on preliminary valuations.

Amortization expense was $128,000 for the six months ended December 31, 2002. Estimated annual amortization expense is $2.4 million in fiscal 2003. This estimate includes $2.3 million of amortization resulting from the acquisition of the American Baby group of assets in December 2002. The majority of this amortization will occur in the fiscal third quarter. Future amortization expense for intangible assets is expected to be as follows: $0.8 million in fiscal 2004, $0.7 million in fiscal 2005, $0.5 million in fiscal 2006, $0.4 million in fiscal 2007, and $0.2 million in fiscal 2008.

The noncompete agreements are being amortized on a straight-line basis over periods of 3, 5 or 15 years. The noncompete agreement with a 15 year life will become fully amortized in fiscal 2003. The customer lists are being amortized over periods of one year or less, primarily on a straight-line basis.

As part of the adoption of SFAS No. 142, $0.6 million in previously recorded intangible assets were reclassified as goodwill. The carrying amount of goodwill was reduced by $106.2 million for transitional impairment losses recorded as part of the adoption of SFAS No. 142. In addition, goodwill was increased by $2.9 million because of adjustments to preliminary valuations of broadcast rights recorded as part of the June 2002 acquisition of KPTV in Portland, OR, and by $76.1 million for the acquisition of the American Baby group of assets.

In fiscal 2001, Meredith took steps to reduce the number of employees through a one-time, special voluntary early retirement program and additional selective workforce reductions through attrition, realignments and job eliminations. In addition, the company wrote-off certain Internet investments. These actions resulted in a fiscal 2001 net nonrecurring charge of $25.3 million ($15.4 million after tax), or 30 cents per share, for personnel costs ($18.4 million) and asset write-downs and other ($8.2 million), offset by the reversal of excess accruals ($1.3 million). The nonrecurring charge resulted in balance sheet adjustments of $8.5 million and cash payments of $1.1 million in fiscal 2001, leaving an accrual balance of $15.7 million for personnel costs at June 30, 2001. Details of the activities affecting the accrual since that date follow:

Payments made during the quarter were for enhanced retirement benefits and severance. Payments for certain early retirement benefit costs will continue for approximately six years.

At June 30, 2002, Meredith also had an accrual of $0.4 million related to contractual obligations from a nonrecurring charge recorded in fiscal 2000. There has been no change in that accrual since June 30, 2002.

Major components of inventories are summarized below. Of total inventory values shown, approximately 37 percent are under the LIFO method at December 31, 2002 and June 30, 2002.

In April 2002 Meredith entered into an agreement to sell all of its rights, title and interest in the majority of its accounts receivable related to advertising, book and miscellaneous revenues to Meredith Funding Corporation, a special purpose entity established to purchase accounts receivable from Meredith. At December 31, 2002, $113.6 million of accounts receivable, net of reserves, were outstanding under the agreement. Meredith Funding Corporation in turn sells receivable interests to an asset-backed commercial paper conduit administered by Bank One, N.A. In consideration of the sale, Meredith receives cash and a subordinated note, bearing interest at the prime rate (4.25 percent at December 31, 2002), from Meredith Funding Corporation. At December 31, 2002, the subordinated note balance was $31.1 million. The agreement is structured as a true sale under which the creditors of Meredith Funding Corporation will be entitled to be satisfied out of the assets of Meredith Funding Corporation prior to any value being returned to Meredith or its creditors. The accounts of Meredith Funding Corporation are fully consolidated in Meredith's Condensed Consolidated Financial Statements. At December 31, 2002, $79.0 million was outstanding under the asset-backed commercial paper facility and reflected in long-term debt on Meredith's Condensed Consolidated Balance Sheet. The asset-backed commercial paper facility renews annually in April. Meredith has the ability and the intent to renew the facility each year and, therefore, the principal is reflected as due on April 9, 2007, the facility termination date.

At December 31, 2002, Meredith had interest rate swap contracts to pay fixed-rates of interest (average 5.3 percent) and receive variable-rates of interest (average 3-month LIBOR rate of 1.4 percent) on $168.8 million notional amount of indebtedness. These contracts expire in June 2004. The notional amount varies over the terms of the contracts. The average notional amount of indebtedness outstanding under the contracts is $166 million in fiscal 2003 and $132 million in fiscal 2004.

The fair market value of the interest rate swap contracts was a liability of $8.0 million at December 31, 2002. Assuming no change in interest rates, the estimated amount of the loss expected to be reclassified into earnings over the next 12 months is $5.7 million.

As a result of the April 2002 debt refinancing and a reduction in variable-rate obligations, Meredith has interest rate swap contracts that no longer hedge variable-rate obligations. These contracts have been dedesignated as hedge contracts. Therefore, all changes in the fair market value of these contracts are recorded in interest expense. Fair market value changes resulted in income of $0.5 million in the quarter ended December 31, 2002, and expense of $0.8 million in the six-months ended December 31, 2002.

Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The company's comprehensive income includes foreign currency translation adjustments and changes in the fair market value of interest rate swap contracts in addition to net earnings. Total comprehensive income (in thousands) for the three-month periods ended December 31, 2002 and 2001, was $19,453 and $9,573, respectively. Total comprehensive (loss) income (in thousands) for the six-month periods ended December 31, 2002 and 2001, was $(50,204) and $14,541, respectively.

Segment Information (continued)