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<SEC-DOCUMENT>0000950123-01-002226.txt : 20010313
<SEC-HEADER>0000950123-01-002226.hdr.sgml : 20010313
ACCESSION NUMBER:		0000950123-01-002226
CONFORMED SUBMISSION TYPE:	10-K405
PUBLIC DOCUMENT COUNT:		13
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010312

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			MCGRAW-HILL COMPANIES INC
		CENTRAL INDEX KEY:			0000064040
		STANDARD INDUSTRIAL CLASSIFICATION:	BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731]
		IRS NUMBER:				131026995
		STATE OF INCORPORATION:			NY
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K405
		SEC ACT:		
		SEC FILE NUMBER:	001-01023
		FILM NUMBER:		1566732

	BUSINESS ADDRESS:	
		STREET 1:		1221 AVENUE OF THE AMERICAS
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10020
		BUSINESS PHONE:		2125122000

	MAIL ADDRESS:	
		STREET 1:		1221 AVENUE OF THE AMERICAS
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10020

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	MCGRAW HILL INC
		DATE OF NAME CHANGE:	19920703

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	HILL PUBLISHING CO
		DATE OF NAME CHANGE:	19670327

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	MCGRAW PUBLISHING CO
		DATE OF NAME CHANGE:	19670327
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>y46387e10-k405.txt
<DESCRIPTION>THE MCGRAW-HILL COMPANIES, INC
<TEXT>

<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    FORM 10-K


                   For the fiscal year ended December 31, 2000

                          Commission File Number 1-1023

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

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

1221 AVENUE OF THE AMERICAS, NEW YORK, N.Y.                        10020
- -------------------------------------------                    --------------
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code             (212) 512-2000
                                                               --------------

Securities registered pursuant to Section 12(b) of the Act:
                                                     Name of each exchange
   Title of each class                               on which registered
   -------------------                               ---------------------
Common stock - $1 par value                          New York Stock Exchange
                                                     Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:

                                      None
                                ----------------
                                (Title of class)

         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 if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
                    X
                   ---

         The aggregate market value of voting stock held by nonaffiliates of the
registrant as of February 28, 2001, was $11,437,135,559.

         The number of shares of common stock of the registrant outstanding as
of February 28, 2001 was 194,915,339 shares.

         Part I, Part II and Part IV incorporate information by reference from
the Annual Report to Shareholders for the year ended December 31, 2000. Part III
incorporates information by reference from the definitive proxy statement mailed
to shareholders March 26, 2001 for the annual meeting of shareholders to be held
on April 25, 2001.
<PAGE>   2
                                TABLE OF CONTENTS
                                -----------------
                                     PART I
                                   -----------
<TABLE>
<CAPTION>
Item                                                                                   Page
- ----                                                                                   ----
<S>                                                                                   <C>
  1. Business...................................................................        1

  2. Properties.................................................................      2 - 3

  3. Legal proceedings..........................................................         4

  4. Submission of matters to a vote of security holders .......................         4

   Executive officers of the registrant .......................................          5

                                     PART II
                                   -----------
  5. Market for the registrant's common stock and related
     stockholder matters ......................................................          6

  6. Selected financial data....................................................         6

  7. Management's discussion and analysis of financial
     condition and results of operations ......................................          6

 7A. Market Risk................................................................         6

  8. Consolidated financial statements and supplementary
     data .....................................................................          6

  9. Changes in and disagreements with accountants on accounting
     and financial disclosure .................................................          6

                                    PART III
                                   -----------
 10. Directors and executive officers of the registrant.........................         7

 11. Executive compensation.....................................................         7

 12. Security ownership of certain beneficial owners
     and management ...........................................................          7

 13. Certain relationships and related transactions.............................         7

                                     PART IV
                                   ----------
 14. Exhibits, financial statement schedules, and
     reports on Form 8-K                                                              8 - 11

  Signatures                                                                         12 - 14

           Exhibits.............................................................     15 - 30

           Consent of Independent Auditors - Ernst & Young LLP..................        31

           Financial Data Schedule..............................................     32 - 35

   Supplementary schedule .....................................................        36
</TABLE>
<PAGE>   3
                                     PART I


Item 1.     Business

The Registrant, incorporated in December 1925, serves business, professional and
educational markets around the world with information products and services. Key
markets include finance, business, education, construction, medical and health,
aerospace and defense. As a multimedia publishing and information company, the
Registrant employs a broad range of media, including books, magazines,
newsletters, software, on-line data services, CD-ROMs, facsimile and television
broadcasting. Most of the Registrant's products and services face substantial
competition from a variety of sources.

The Registrant's 16,761 employees are located worldwide. They perform the vital
functions of analyzing the nature of changing demands for information and of
channeling the resources necessary to fill those demands. By virtue of the
numerous copyrights and licensing, trade, and other agreements, which are
essential to such a business, the Registrant is able to collect, compile, and
disseminate this information. Most book manufacturing and magazine printing is
handled through a number of independent contractors. The Registrant's principal
raw material is paper, and the Registrant has assured sources of supply, at
competitive prices, adequate for its business needs.

Descriptions of the company's principal products, broad services and markets,
and significant achievements are hereby incorporated by reference from Exhibit
(13), pages 6 through 23, containing textual material of the Registrant's 2000
Annual Report to Shareholders.

Information as to Operating Segments

The relative contribution of the operating segments of the Registrant and its
subsidiaries to operating revenue, operating profit, long-lived assets and
geographic information for the three years ended December 31, 2000 at the end of
each year, are included in Exhibit (13), on pages 46 and 47 in the Registrant's
2000 Annual Report to Shareholders and is hereby incorporated by reference.


                                        1
<PAGE>   4
Item 2.     Properties


The Registrant leases office facilities at 314 locations: 230 are in the United
States. In addition, the Registrant owns real property at 15 locations: 12 are
in the United States. The principal facilities of the Registrant are as follows:

<TABLE>
<CAPTION>
                                            OWNED                SQUARE
                                             OR                   FEET
              LOCATIONS                     LEASED             (THOUSANDS)          BUSINESS UNIT
              ---------                     ------             -----------          -------------
       DOMESTIC

<S>                                         <C>                <C>              <C>
       New York, NY                         leased                1,028         Various Units: 1221 Avenue of the Americas

       New York, NY                         leased                  946         Standard & Poor's: 55 Water

       New York, NY                         leased                  506         Various Units: 2 Penn Plaza
                                                                                (See Below)

       Hightstown, NJ                       owned
         Office and Data Center                                     490         Various Units
         Warehouse                                                  412         Leased to non-McGraw-Hill
                                                                                tenant

       Blacklick (Gahanna), OH              owned                               Various operating units
          Book Distr. Ctr.                                          558
          Office                                                     67

       Desoto, TX
          Book Dist. Ctr.                   leased                  382         School

       Dallas, TX                           leased                  418         School
          Assembly Plant

       Dubuque, IA                          owned                   107         Higher Education
          Office Warehouse                                          279

       Grove City, OH
          Warehouse                         leased                  305         School

       Columbus, OH                         owned                   170         School

       Monterey, CA                         owned                   215         CTB

       Englewood, CO                        owned                   133         Financial Services

       Lexington, MA                        leased                  132         Various operating units
                                                                                and non-McGraw-Hill subtenants

       Lexington, MA                        owned                    53         Partially occupied
                                                                                with non-McGraw-Hill tenant

       Burr Ridge IL                        leased                  122         Various publishing units

       Denver, CO                           owned                    88         Broadcasting

       Indianapolis, IN                     leased                   54         Broadcasting

       Indianapolis, IN                     leased                  127         CTB

       Washington, DC                       leased                   73         Various operating units
</TABLE>


                                        2
<PAGE>   5
<TABLE>
<S>                                         <C>                      <C>        <C>
       Chicago, IL                          leased                   80         Various operating units
                                                                                and McGraw-Hill subtenants

       Mather, CA                           leased                   56         CTB


       FOREIGN

       Whitby, Canada                       owned                               McGraw-Hill Ryerson, Ltd./
          Office                                                     80         non-McGraw-Hill tenant
          Book Distribution Ctr.                                     80

       Maidenhead, England                  leased                   85         McGraw-Hill International
                                                                                (U.K.) Ltd.

       Jurong, Singapore                    leased                   30         Various Operating Units
         Office                             leased                   91         Various Publishing Units
</TABLE>


During 2000, the divestiture of the Tower Group decreased the number of
facilities by 75.

The acquisition of Tribune Education during 2000 added approximately 40
facilities (1 owned).

During the first quarter of 2001, we will be selling the owned facility at 29
Hartwell Ave in Lexington Massachusetts.

Beginning July 2001, we will lease an additional floor at 2 Penn Plaza, totaling
58,770 square feet. The lease will be through the period ending March 31, 2020.


                                        3
<PAGE>   6
Item 3.      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, nor are 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 4.      Submission of Matters to a Vote of Security Holders

             No matters were submitted to a vote of Registrant's security
             holders during the last quarter of the period covered by this
             Report.


                                        4
<PAGE>   7
                        Executive Officers of Registrant
                        --------------------------------

<TABLE>
<CAPTION>
               Name                       Age                 Position
               ----                       ---                 --------
<S>                                       <C>              <C>
     Harold McGraw III                    52               Chairman of the Board
                                                                       President and Chief Executive Officer

     Robert J. Bahash                     55               Executive Vice President and
                                                                       Chief Financial Officer

     Barbara B. Maddock                   50               Executive Vice President, Organizational
                                                                       Effectiveness

     John Negroponte                      61               Executive Vice President, Global Markets

     Kenneth M. Vittor                    51               Executive Vice President and General Counsel

     Peter Watkins                        53               Executive Vice President, Information
                                                                       Management and Chief Technology Officer

     Scott L. Bennett                     51               Senior Vice President, Associate General
                                                                       Counsel and Secretary

     Glenn S. Goldberg                    42               Senior Vice President, Corporate Affairs
                                                                       and Assistant to the Chairman,
                                                                       President and Chief Executive Officer

     Frank J. Kaufman                     56               Senior Vice President, Taxes

     Frank D. Penglase                    60               Senior Vice President, Treasury Operations

     Talia M. Griep                       38               Corporate Controller
</TABLE>


All of the above executive officers of the Registrant have been full-time
employees of the Registrant for more than five years except for John Negroponte
and Peter Watkins.

Mr. Negroponte, prior to his becoming an officer of the Registrant on September
2, 1997, was with the United States Diplomatic Corps for 37 years where he held
numerous senior positions, including ambassador to Mexico, the Philippines, and
Honduras.

Mr. Watkins, prior to his becoming an officer of the Registrant on February 1,
2000, was executive vice president and chief information officer for the
Canadian Imperial Bank of Commerce for two and one-half years. Prior to that he
was with Ernst & Young Canada for ten years.

                                       5
<PAGE>   8
                                     PART II


Item 5.     Market for the Registrant's Common Stock and Related Stockholder
            Matters

The approximate number of holders of the Company's common stock as of February
28, 2001 was 5,246.

<TABLE>
<CAPTION>
                                                                                2000                 1999
                                                                                ----                 ----
<S>                                                                             <C>                  <C>
     Dividends per share of common stock:
     $.235 per quarter in 2000                                                  $0.94
     $.215 per quarter in 1999                                                                       $0.86
</TABLE>

Information concerning other matters is incorporated herein by reference from
Exhibit (13), from page 53 of the 2000 Annual Report to Shareholders.

Item 6.     Selected Financial Data

Incorporated herein by reference from Exhibit (13), from the 2000 Annual Report
to Shareholders, page 54 and page 55.

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations

Incorporated herein by reference from Exhibit (13), from the 2000 Annual Report
to Shareholders, pages 26 to 38.

Item 7A.    Market Risk

Incorporated herein by reference from Exhibit (13), from the 2000 Annual Report
to Shareholders, page 38.

 Item 8.    Consolidated Financial Statements and Supplementary Data

Incorporated herein by reference from Exhibit (13), from the 2000 Annual Report
to Shareholders, pages 39 to 51 and page 53.

Item 9.     Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure

     None


                                        6
<PAGE>   9
                                    PART III


Item 10.    Directors and Executive Officers of the Registrant

Information concerning directors is incorporated herein by reference from the
Registrant's definitive proxy statement dated March 26, 2001 for the annual
meeting of shareholders to be held on April 25, 2001.


Item 11.    Executive Compensation

Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 26, 2001 for the annual meeting of shareholders to be held
on April 25, 2001.


Item 12.    Security Ownership of Certain Beneficial Owners and Management


Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 26, 2001 for the annual meeting of shareholders to be held
April 25, 2001.


Item 13.    Certain Relationships and Related Transactions

Incorporated herein by reference from the Registrant's definitive proxy
statement dated March 26, 2001 for the annual meeting of shareholders to be held
April 25, 2001.


                                        7
<PAGE>   10
                                     PART IV


Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

 (a)     1.   Financial Statements.

      2. Financial Statement Schedules.

           The McGraw-Hill Companies
         Index to Financial Statements
       And Financial Statement Schedules

<TABLE>
<CAPTION>
                                                                                             Reference
                                                                                  -----------------------------
                                                                                                 Annual Report
                                                                                  Form               to Share-
                                                                                  10-K           holders (page)
                                                                                  ----           --------------
<S>                                                                               <C>            <C>
Data incorporated by reference from Annual Report to Shareholders:

     Report of Independent Auditors.............................................                        52
     Consolidated balance sheet at
         December 31, 2000 and 1999.............................................                       40-41
     Consolidated statement of income
         for each of the three years in
         the period ended December 31, 2000.....................................                        39
     Consolidated statement of cash flows
         for each of the three years in the
         period ended December 31, 2000.........................................                        42
     Consolidated statement of shareholders'
         equity for each of the three years in
         the period ended December 31, 2000.....................................                        43
     Notes to consolidated financial
         statements.............................................................                       44-51
     Quarterly financial information............................................                        53

     Consent of Independent Auditors............................................    31

     Consolidated schedule for each of the three
     years in the period ended December 31, 2000

       II - Reserves for doubtful accounts
                 and sales returns ............................................     36
</TABLE>


                                        8
<PAGE>   11
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.

The financial statements listed in the above index which are included in the
Annual Report to Shareholders for the year ended December 31, 2000 are hereby
incorporated by reference in Exhibit (13). With the exception of the pages
listed in the above index, the 2000 Annual Report to Shareholders is not to be
deemed filed as part of Item 14 (a)(1).

(a)      (3) Exhibits.

(2)      Stock Purchase Agreement, dated as of June 22, 2000, among Tribune
         Company and Registrant, incorporated by reference from the Registrant's
         Form 8-K dated June 30, 2000.

(3)      Articles of Incorporation of Registrant incorporated by reference from
         Registrant's Form 10-K for the year ended December 31, 1995 and Form
         10-Q for the quarter ended June 30, 1998.

(3)      By-laws of Registrant incorporated by reference from Registrant's Form
         10-Q for the quarter ended March 31, 2000.

(10)     Indenture dated as of June 15, 1990 between the Registrant, as issuer,
         and the Bank of New York, as trustee, incorporated by reference from
         Registrant's Form SE filed August 3, 1990 in connection with
         Registrant's Form 10-Q for the quarter ended June 30, 1990.

(10)     Instrument defining the rights of security holders, certificate setting
         forth the terms of the Registrant's Medium-Term Notes, Series A,
         incorporated by reference from Registrant's Form SE filed November 15,
         1990 in connection with Registrant's Form 10-Q for the quarter ended
         September 30, 1990.

(10)     Rights Agreement dated as of July 29, 1998 between Registrant and
         ChaseMellon Shareholder Services, L.L.C., incorporated by reference
         from Registrant's Form 8A filed August 3, 1998.

(10)*    Restricted Performance Share Award dated January 2, 1997, incorporated
         by reference from Registrant's Form 10-K for the year ended December
         31, 1996.

(10)     Indemnification Agreements between Registrant and each of its directors
         and certain of its executive officers relating to said directors' and
         executive officers' services to the Registrant, incorporated by
         reference from Registrant's Form SE filed March 27, 1987 in connection
         with Registrant's Form 10-K for the year ended December 31, 1986.

(10)*    Registrant's 1983 Stock Option Plan for Officers and Key Employees,
         incorporated by reference from Registrant's Form SE filed March 29,
         1990 in connection with Registrant's Form 10-K for the year ended
         December 31, 1989.

(10)*    Registrant's 1987 Key Employee Stock Incentive Plan, incorporated by
         reference from Registrant's Form 10-K for the year ended December 31,
         1993.

(10)*    Registrant's Amended and Restated 1993 Employee Stock Incentive Plan,
         incorporated by reference from Registrant's Proxy Statement dated March
         23, 2000.


                                        9
<PAGE>   12
(10)*    Registrant's Amended and Restated 1996 Key Executive Short Term
         Incentive Compensation Plan, incorporated by reference from
         Registrant's Proxy Statement dated March 23, 2000.

(10)*    Registrant's Key Executive Short-Term Incentive Deferred Compensation
         Plan incorporated by reference from Registrant's Form 10-K for the year
         ended December 31, 1996.

(10)*    Registrant's Executive Deferred Compensation Plan, incorporated by
         reference from Registrant's Form SE filed March 28, 1991 in connection
         with Registrant's Form 10-K for the year ended December 31, 1990.

(10)*    Registrant's Senior Executive Severance Plan.

(10)     364-Day Credit Agreement dated as of August 15, 2000 among the
         Registrant, the lenders listed therein, and The Chase Manhattan Bank,
         as administrative agent, incorporated by reference from the
         Registrant's Form 8-K dated August 21, 2000.

(10)     Five-Year Credit Agreement dated as of August 15, 2000 among the
         Registrant, the lenders listed therein, and The Chase Manhattan Bank,
         as a administrative agent, incorporated by reference from the
         Registrant's Form 8-K dated August 21, 2000.

(10)*    Registrant's Employee Retirement Account Plan Supplement, incorporated
         by reference from Registrant's Form SE filed March 28, 1991 in
         connection with Registrant's Form 10-K for the year ended December 31,
         1990.

(10)*    Registrant's Employee Retirement Plan Supplement, incorporated by
         reference from Registrant's Form SE filed March 28, 1991 in connection
         with Registrant's Form 10-K for the year ended December 31, 1990.

(10)*    Registrant's Savings Incentive Plan Supplement, incorporated by
         reference from Registrant's Form SE filed March 28, 1991 in connection
         with Registrant's Form 10-K for the year ended December 31, 1990.

(10)*    Registrant's Senior Executive Supplemental Death, Disability &
         Retirement Benefits Plan, incorporated by reference from Registrant's
         Form SE filed March 26, 1992 in connection with Registrant's Form 10-K
         for the year ended December 31, 1991.

(10)*    Registrant's 1993 Stock Payment Plan for Directors, incorporated by
         reference from Registrant's Proxy Statement dated March 21, 1993.

(10)*    Resolutions Terminating Registrant's 1993 Stock Payment Plan for
         Directors, as adopted on January 31, 1996, incorporated by reference
         from Registrant's Form 10-K for the year ended December 31, 1996.

(10)*    Resolutions amending certain of Registrant's equity and compensation
         plans, as adopted on February 23, 2000, with respect to definitions of
         "Cause" and "Change of Control" contained therein.

(10)*    Registrant's Director Retirement Plan, incorporated by reference from
         Registrant's Form SE filed March 29, 1990 in connection with
         Registrant's Form 10-K for the year ended December 31, 1989.


                                       10
<PAGE>   13
(10)*    Resolutions Freezing Existing Benefits and Terminating Additional
         Benefits under Registrant's Directors Retirement Plan, as adopted on
         January 31, 1996, incorporated by reference from Registrant's Form 10-K
         for the year ended December 31, 1996.

(10)*    Registrant's Director Deferred Compensation Plan, incorporated by
         reference from Registrant's Form 10-K for the year ended December 31,
         1993.

(10)*    Director Deferred Stock Ownership Plan, incorporated by reference from
         Registrant's Proxy Statement dated March 21, 1996.

(12)     Computation of ratio of earnings to fixed charges.

(13)     Registrant's 2000 Annual Report to Shareholders. Such Report, except
         for those portions thereof which are expressly incorporated by
         reference in this Form 10-K, is furnished for the information of the
         Commission and is not deemed "filed" as part of this Form 10-K.

(21)     Subsidiaries of the Registrant.

(23)     Consent of Ernst & Young LLP, Independent Auditors.

(27)     Financial Data Schedule.

(b)      Reports on Form 8-K.

         A report on Form 8-K was filed on October 27, 2000, and dated October
         24, 2000. Item 9, Regulation of FD Disclosure, was reported.


- ----------------
*        These exhibits relate to management contracts or compensatory plan
         arrangements.

                                       11
<PAGE>   14
                                   Signatures
                                   ----------


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.

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


By:   /s/ Kenneth M. Vittor
      ------------------------------------------
      Kenneth M. Vittor
      Executive Vice President and General Counsel
      March 12, 2001


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 12, 2001 on behalf of Registrant by the following
persons who signed in the capacities as set forth below under their respective
names. Registrant's board of directors is comprised of eleven members and the
signatures set forth below of individual board members, constitute at least a
majority of such board.

      /s/ Harold McGraw III
      ------------------------------------------
      Harold McGraw III
      Chairman of the Board
      President and Chief Executive Officer
      Director

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


                                       12
<PAGE>   15
      /s/ Talia M. Griep
      ------------------------------------------
      Talia M. Griep
      Corporate Controller

      /s/ Pedro Aspe
      ------------------------------------------
      Pedro Aspe
      Director

      /s/  Sir Winfried Bischoff
      -------------------------------------------
      Sir Winfried Bischoff
      Director

      /s/ Vartan Gregorian
      -------------------------------------------
      Vartan Gregorian
      Director

      /s/ George B. Harvey
      -------------------------------------------
      George B. Harvey
      Director

      /s/ Linda Koch Lorimer
      -------------------------------------------
      Linda Koch Lorimer
      Director

     /s/ Robert P. McGraw
     --------------------------------------------
     Robert P. McGraw
     Director

     /s/ Lois Dickson Rice
     --------------------------------------------
     Lois Dickson Rice
     Director


                                       13
<PAGE>   16
     /s/ James H. Ross
     --------------------------------------------
     James H. Ross
     Director

     /s/ Edward B. Rust, Jr.
     --------------------------------------------
     Edward B. Rust, Jr.
     Director

     /s/ Sidney Taurel
     --------------------------------------------
     Sidney Taurel
     Director


                                       14
<PAGE>   17
                                Table of Contents
                                -----------------

                        EXHIBITS AND FINANCIAL STATEMENTS
                       ----------------------------------


<TABLE>
<CAPTION>
EXHIBIT                                                                                                          PAGE
- -------                                                                                                          ----
<S>                                                                                                              <C>
(10.1)         Registrant's Senior Executive Severance Plan....................................................  15-23

(10.2)         Resolutions amending certain of Registrant's equity and
                  compensation plans, as adopted on February 23, 2000, with
                  respect to definitions of "Cause" and "Change of Control"
                  contained therein............................................................................  24-26

(12)           Computation of Ratio of Earnings to Fixed Charges...............................................  27-28

(13)           Registrant's 2000 Annual Report to Shareholders.................................................    -

(21)           Subsidiaries of Registrant......................................................................  29-30

(23)           Consent of Ernst & Young LLP Independent Auditors...............................................    31

(27)           Financial Data Schedules........................................................................  32-35

Schedule II Reserves for Doubtful Accounts and Sales Returns...................................................    36
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>y46387ex10-1.txt
<DESCRIPTION>SENIOR EXECUTIVE SEVERANCE PLAN
<TEXT>

<PAGE>   1
                                                                    Exhibit 10.1


                         THE MCGRAW-HILL COMPANIES, INC.

                         SENIOR EXECUTIVE SEVERANCE PLAN

               (As Amended and Restated Effective April 26, 2000)


                                       15
<PAGE>   2
                                                           Exhibit 10.1 (cont'd)

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
Section 1.        Purpose..................................................................................     21
Section 2.        Effective Date...........................................................................     21
Section 3.        Administration...........................................................................     21
Section 4.        Participation............................................................................     21
Section 5.        Payments Upon Qualified Termination of Employment........................................     22
Section 6.        Unfunded Status of Plan..................................................................     25
Section 7.        Termination and Amendment of the Plan....................................................     25
Section 8.        Benefit of Plan..........................................................................     25
Section 9.        Non-Assignability........................................................................     26
Section 10.       Effect of Other Plans....................................................................     26
Section 11.       Mitigation and Offset....................................................................     26
Section 12.       Termination of Employment................................................................     26
Section 13.       Severability.............................................................................     26
Section 14.       Disputed Claim...........................................................................     27
Section 15.       Governing Law; Section Headings..........................................................     27
Section 16.       Named Fiduciary and Claims Procedure.....................................................     27
</TABLE>


                                       16
<PAGE>   3
                                                           Exhibit 10.1 (cont'd)


         THE McGRAW-HILL COMPANIES, INC. SENIOR EXECUTIVE SEVERANCE PLAN


Section 1.   Purpose.

             The purpose of the Senior Executive Severance Plan (the "Plan") is
to provide senior executives who are in a position to contribute materially to
the success of The McGraw-Hill Companies, Inc., or any subsidiary at least 50%
of whose voting shares are owned directly or indirectly by The McGraw-Hill
Companies, Inc. (collectively, the "Company"), with reasonable compensation in
the event of their termination of employment with the Company.

Section 2.   Effective Date.

             The Plan is effective as of January 28, 1987.

Section 3.   Administration.

             The Plan shall be administered (i) by the Compensation Committee of
the Board of Directors of the Company (the "Board") or by such other committee
of non-employee directors as the Board shall appoint (the "Committee"), or (ii)
in the absence of such Committee or if the Committee is unable to act, by the
Board. Subject to the express provisions of this Plan and to the rights of
participants pursuant to said express provisions, the Committee shall have the
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the Plan as it shall, from time to time, deem advisable; to
interpret the terms and provisions of the Plan (and any notices or agreements
relating thereto); and to otherwise supervise the administration of the Plan in
accordance with the terms hereof.

             All decisions made by the Committee pursuant to the provisions of
the Plan shall be final and binding on all persons, including the Company and
Plan participants. All decisions made by the CEO, as hereinafter defined, which
may personally benefit, directly or indirectly, the CEO shall be subject to the
approval of the Committee.

Section 4.   Participation.

             The Chief Executive Officer (the "CEO") of the Company shall from
time to time select, subject to the approval of the Committee, the employees who
are to participate in the Plan (the "Participants") from among those employees
who are determined by the CEO to be in a position to contribute materially to
the success of the Company. The Company shall notify each Participant in writing
of his participation in the Plan, and such notice shall also set forth the
payments and benefits to which the Participant may become entitled. The Company
may also enter into such agreements as the Committee deems necessary or
appropriate with respect to a Participant's rights under the Plan. Any such
notice or agreement may contain such terms, provisions and conditions not
inconsistent with the Plan, including but not limited to provisions for the
extension or renewal of any such agreement, as shall be determined by the
Committee, in its sole discretion.


                                       17
<PAGE>   4
                                                           Exhibit 10.1 (cont'd)

             A Participant shall cease to be a Participant in the Plan upon the
earliest of (i) his receipt of all of the payments, if any, to which he is or
becomes entitled under the terms of this Plan and the terms of any notice or
agreement issued by the Company with respect to his participation hereunder, or
(ii) the termination of his employment with the Company under circumstances not
requiring payments under the terms of this Plan.

Section 5.   Payments Upon Qualified Termination of Employment.

                            (a) In the event of a Qualified Termination of
Employment, the Participant shall be entitled, as compensation for services
rendered, subject to any applicable payroll or other taxes required to be
withheld, to:

                                          (i) continue to receive an amount
              equal to his Monthly Base Salary for a period following his
              termination of employment, based upon the following formula, but
              in no event for less than 12 months: the number of full and
              partial years of the Participant's continuous service with the
              Company, up to a maximum of 15 years, multiplied by 1.6; provided
              that if the foregoing formula yields a period exceeding 12 months,
              the Participant shall be entitled to salary continuation for only
              12 months and, in addition, shall be entitled to a single lump sum
              cash payment equal to the product of the Participant's Monthly
              Base Salary and the number of months under the formula in excess
              of 12, to be paid 12 months after the Participant's termination of
              employment, or as soon thereafter as practicable; and

                                          (ii) remain an active participant in
              all Company-sponsored retirement, life, medical, dental,
              accidental death and disability insurance benefit plans or
              programs in which he was participating at the time of his
              termination for the duration of the salary continuation period
              described in Section 5(a)(i) above (not in excess of 12 months),
              but only to the extent permitted by applicable law, as determined
              by the Company, it being understood that continued participation
              in Company-sponsored retirement plans or programs shall be limited
              to such plans or programs that are not intended to be qualified
              under Section 401(a) or 401(k) of the Internal Revenue Code of
              1986, as amended, and, in addition, if the formula in Section
              5(a)(i) above yields a period exceeding 12 months, the Participant
              shall be entitled to a single lump sum cash payment equal to 10%
              of the product of the Participant's Monthly Base Salary and the
              number of months under the formula in excess of 12, to be paid 12
              months after the Participant's termination of employment, or as
              soon thereafter as practicable;

provided that the CEO may authorize, in his sole discretion, in lieu of the
payments and benefits provided under Section 5(a)(i) and (ii) above, payment to
the Participant of a single lump sum equal to 110% of the Participant's Monthly
Base Salary for the period under the formula specified under Section 5(a)(i), or
for 12 months, if longer (100% of Monthly Base Salary for such period in lieu of
salary continuation, and 10% of Monthly Base Salary for such period in lieu of
benefits continuation).


                                       18
<PAGE>   5
                                                           Exhibit 10.1 (cont'd)

Such payments shall be in lieu of any other payments under the Plan or under any
other severance pay or separation allowance plan, program or policy of the
Company including the Company's Separation Pay Plan; provided, however, if
payments pursuant to the terms and conditions of the Company's Separation Pay
Plan would result in greater payments to a Participant than would be payable
under this Plan, said Participant shall in such event receive payments pursuant
to the terms and conditions of the Company's Separation Pay Plan in lieu of
payments pursuant to this Plan.

                           (b) For purposes of this Section 5, the following
definitions shall apply:

                                          (i) A "Qualified Termination of
              Employment" shall mean termination of employment with the Company,
              (other than by reason of death, Disability, voluntary resignation
              by a Participant under circumstances not qualifying under (B)
              below, or lawful Company mandated retirement at normal retirement
              age)

                                                      (A) by the Company for any
              reason other than for Cause, or

                                                      (B) by the Participant
              after an Adverse Change in Conditions of Employment or for any
              reason during the 30-day period following the first anniversary of
              a Change of Control.

                                          (ii) "Cause" shall mean serious,
              willful misconduct in respect of the Participant's obligations to
              the Company (including, but not limited to, conviction for a
              felony or perpetration of a common law fraud).

                                          (iii) An "Adverse Change in Conditions
              of Employment" shall mean the occurrence of any of the following
              events:

                                                      (A) an adverse change by
              the Company in the Participant's functions, duties or
              responsibilities, which change would cause the Executive's
              position with the Company to become one of substantially less
              responsibility, importance or scope; or

                                                      (B) a 10% or larger
                            reduction by the Company (in one or more steps) of
                            the Participant's Monthly Base Salary.

         Notwithstanding the foregoing the Participant's failure to object to
the Company in writing to a change described in (A) or (B) above within 120 days
after such change shall constitute a waiver of such change as an Adverse Change
in Conditions of Employment.

                                          (iv) "Disability" shall mean a
              Participant's long-term disability as defined under the Company's
              Long-Term Disability Plan.


                                       19
<PAGE>   6
                                                           Exhibit 10.1 (cont'd)

                                          (v) "Monthly Base Salary" shall mean a
              Participant's highest regular monthly salary during the preceding
              24-month period, excluding any of the following: year-end or other
              bonuses, incentive compensation, whether short term or long term,
              commissions, reimbursed expenses, and any payments on account of
              premiums on insurance or other contributions made to other Company
              welfare or benefit plans.

                                          (vi) "Change of Control" shall mean
              any of the following:

                                                      (A) The acquisition (other
              than from the Company) by any person, entity or "group," within
              the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
              Exchange Act of 1934 (the "Exchange Act") (excluding, for this
              purpose, the Company or its subsidiaries, or any employee benefit
              plan of the Company or its subsidiaries) of beneficial ownership
              (within the meaning of Rule 13d-3 promulgated under the Exchange
              Act) of 20% or more of either the then outstanding shares of
              common stock or the combined voting power of the Company's then
              outstanding voting securities entitled to vote generally in the
              election of directors; or

                                                      (B) Individuals who, as of
              the date hereof, constitute the Board (as of the date hereof the
              "Incumbent Board") cease for any reason to constitute at least a
              majority of the Board, provided that any person becoming a
              director subsequent to the date hereof whose election, or
              nomination for election by the Company's shareholders, was
              approved by a vote of at least a majority of the directors then
              comprising the Incumbent Board (other than an election or
              nomination of an individual whose initial assumption of office is
              in connection with an actual or threatened election contest
              relating to the election of the Directors of the Company, as such
              terms are used in Rule 14a-11 of Regulation 14A promulgated under
              the Exchange Act) shall be, for purposes of this Plan, considered
              as though such person were a member of the Incumbent Board; or

                                                      (C) Approval by the
              stockholders of the Company of a reorganization, merger, or
              consolidation, in each case, with respect to which persons who
              were the stockholders of the Company immediately prior to such
              reorganization, merger or consolidation do not, immediately
              thereafter, own, directly or indirectly, more than 50% of the
              combined voting power entitled to vote generally in the election
              of directors of the reorganized, merged or consolidated company's
              then outstanding voting securities, or a liquidation or
              dissolution of the Company or of the sale of all or substantially
              all of the assets of the Company.


                                       20
<PAGE>   7
                                                           Exhibit 10.1 (cont'd)

                                          (c) (i) In the event a Participant
              dies after the commencement of payments pursuant to Section 5(a)
              above, the balance of said payments shall be payable to said
              Participant's estate.

                                          (ii) It is the intent of this Plan
              that a Participant's transfer to another location shall not by
              itself constitute an "Adverse Change in Conditions of Employment";
              provided, however, that such an "Adverse Change in Conditions of
              Employment" will be deemed to exist if, after a Change of Control,
              a Participant is transferred to a principal business location so
              as to increase the distance between the principal business
              location and such Participant's place of residence at the time of
              the Change of Control by more than thirty-five miles.

                                          (iii) It is the intent of this Plan
              that a Participant shall not receive payments hereunder in the
              event of a sale of the business unit of the Company with which the
              Participant is associated as an executive, provided that the
              Participant is offered a position and salary with the buyer or the
              Company comparable to the position and salary of the Participant
              immediately prior to said sale, whether or not such offer is
              accepted by the Participant. If, however, the Participant is not
              offered a comparable position and salary, the Participant shall be
              entitled to payments hereunder.

Section 6.   Unfunded Status of Plan.

         The Plan is intended to constitute an "unfunded" compensation
arrangement. With respect to any payments required to be made, but not yet made
to a Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company. In its sole discretion, the Company may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver payments in lieu of or with respect to amounts payable hereunder,
provided, however, that the existence of such trusts or other arrangements is
consistent with the unfunded status of the Plan.

Section 7.   Termination and Amendment of the Plan.

         The Board shall have the right at any time, in its discretion, to amend
the Plan, in whole or in part, or to terminate the Plan, except that no
amendment or termination shall impair or abridge the obligations of the Company
and the rights of Participants under any notices or agreements previously issued
pursuant to the Plan.

Section 8.   Benefit of Plan.

         The Plan shall be binding upon and shall inure to the benefit of the
Participant, his heirs and legal representatives, and the Company and its
successors. The term "successor" shall mean any person, firm, corporation or
other business entity that, at any time, whether by merger, acquisition or
otherwise, acquires all or substantially all of the stock, assets or business of
the Company.


                                       21
<PAGE>   8
                                                           Exhibit 10.1 (cont'd)

Section 9.   Non-Assignability.

         Each Participant's rights under this Plan shall be non-transferable
except by will or by the laws of descent and distribution and except insofar as
applicable law may otherwise require. Subject to the foregoing, no right,
benefit or interest hereunder, shall be subject to anticipation, alienation,
sale, assignment, encumbrance, charge, pledge, hypothecation, or set-off in
respect of any claim, debt or obligation, or to execution, attachment, levy or
similar process, or assignment by operation of law, and any attempt, voluntary
or involuntary, to effect any such action shall, to the full extent permitted by
law, be null, void and of no effect.

Section 10.  Effect of Other Plans.

         Except as expressly provided in Section 5 with respect to the Company's
Separation Pay Plan, (i) nothing in the Plan shall affect the level of benefits
provided to or received by any Participant (or the Participant's estate or
beneficiaries) as part of any employee benefit plan of the Company, and (ii) the
Plan shall not be construed to affect in any way a Participant's rights and
obligations under any other plan maintained by the Company on behalf of
employees.

Section 11.  Mitigation and Offset.

         No Participant shall be required to mitigate the amount of any payment
under the Plan by seeking employment or otherwise, and there shall be no right
of set-off or counterclaim, in respect of any claim, debt or obligation, against
any payments to the Participant, his dependents, beneficiaries or estate
provided for in the Plan.

         If, after a Participant's termination of employment with the Company,
the Participant is employed by another entity or becomes self-employed, the
amounts (if any) payable under this Plan to the Participant shall not be offset
by the amounts (if any) payable to the Participant from such new employment with
respect to services rendered during the severance period applicable to such
Participant under this Plan.

Section 12.  Termination of Employment.

         Nothing in the Plan shall be deemed to entitle a Participant to
continued employment with the Company, and the rights of the Company to
terminate the employment of a Participant shall continue as fully as though this
Plan were not in effect.

Section 13.  Severability.

         In the event that any provision or portion of the Plan shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions and portions of the Plan shall be unaffected thereby and shall remain
in full force and effect to the fullest extent permitted by law.


                                       22
<PAGE>   9
                                                           Exhibit 10.1 (cont'd)

Section 14.         Disputed Claim.

         If a Participant makes a claim for payments under this Plan and such
claim is disputed by the Company, the Company shall reimburse the Participant
for any reasonable attorney's fees and disbursements incurred in pursuing such
claim, whether or not the Participant is successful in enforcing his/her rights
or whether or not the matter is settled.

Section 15.  Governing Law; Section Headings.

         All questions pertaining to the construction, regulation, validity and
effect of the provisions of the Plan shall be determined in accordance with the
laws of the State of New York.

         The section headings used in this document are for ease of reference
only and shall not be controlling with respect to the application and
interpretation of this Plan.

Section 16.  Named Fiduciary and Claims Procedure.

         The Named Fiduciary of the Plan and for purposes of the claims
procedure under this Plan is the Chief Human Resources Officer of the Company.

                            (a) The business address and telephone number of the
Named Fiduciary under this Plan is:

                            The McGraw-Hill Companies, Inc.
                            1221 Avenue of the Americas
                            New York, New York  10020
                            (212) 512-2000

                            (b) The Company shall have the right to change the
Named Fiduciary of the Plan created under this Plan. The Company shall also have
the right to change the address and telephone number of the Named Fiduciary. The
Company shall give the Participants written notice of any change of the Named
Fiduciary, or any change in the address and telephone number of the Named
Fiduciary.

                            (c) Benefits shall be paid in accordance with the
provisions of this Plan. The Participant, or the Participant's beneficiary or
contingent beneficiary (hereinafter collectively referred to as the "Claimant")
shall make a written request for the benefits provided under this Plan. This
written claim shall be mailed or delivered to the Named Fiduciary by registered
mail.

                            (d) If the claim is denied, either wholly or
partially, notice of the decision shall be sent by registered mail to the
Claimant within a reasonable time period. This time period shall not exceed 90
days after the receipt of the claim by the Named Fiduciary.


January 28, 1987

As amended:       March 25, 1987
                  September 30, 1987
                  September 28, 1988
                  April 26, 2000


                                       23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>y46387ex10-2.txt
<DESCRIPTION>RESOLUTIONS
<TEXT>

<PAGE>   1
                                                                    Exhibit 10.2


RESOLVED: that with respect to those benefit plans listed on Schedule A attached
hereto, the definition of "Change in Control" or "Change of Control", as the
case may be, contained in each such plan is hereby deleted and replaced with the
following definition:

         "(i) An acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or

14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (1) the then outstanding shares of common stock of the Corporation (the
"Outstanding Corporation Common Stock") or (2) the combined voting power of the
then outstanding voting securities of the Corporation entitled to vote generally
in the election of directors (the "Outstanding Corporation Voting Securities");
excluding, however, the following: (1) any acquisition directly from the
Corporation, other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired directly
from the Corporation; (2) any acquisition by the Corporation; (3) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Corporation or any entity controlled by the Corporation; or
(4) any acquisition pursuant to a transaction which complies with clauses (1),
(2) and (3) of subsection (iii) of this definition; or

(ii) A change in the composition of the Board of Directors such that the
individuals who, as of the effective date of the Plan, constitute the Board of
Directors (such Board of Directors shall be hereinafter referred to as the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board of Directors; provided, however, for purposes of this definition, that any
individual who becomes a member of the Board of Directors subsequent to the
effective date of the Plan, whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of at least a majority of
those individuals who are members of the Board of Directors and who were also
members of the Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the Incumbent
Board; but, provided further, that any such individual whose initial assumption
of office occurs as a result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors shall not be so
considered as a member of the Incumbent Board; or

         (iii) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the
Corporation ("Corporate Transaction"); excluding, however, such a Corporate
Transaction pursuant to which (1) all or substantially all of the individuals
and entities who are the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities
immediately prior to such Corporate Transaction will beneficially own, directly
or indirectly, more than 50% of, respectively, the outstanding shares of common
stock, and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Corporate Transaction (including, without
limitation, a


                                       24
<PAGE>   2
                                                           Exhibit 10.2 (cont'd)


corporation which as a result of such transaction owns the Corporation or all or
substantially all of the Corporation's assets either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities, as the case may be,
(2) no Person (other than the Corporation, any employee benefit plan (or related
trust) of the Corporation or such corporation resulting from such Corporate
Transaction) will beneficially own, directly or indirectly, 20% or more of,
respectively, the outstanding shares of common stock of the corporation
resulting from such Corporate Transaction or the combined voting power of the
outstanding voting securities of such corporation entitled to vote generally in
the election of directors except to the extent that such ownership existed prior
to the Corporate Transaction, and (3) individuals who were members of the
Incumbent Board will constitute at least a majority of the members of the board
of directors of the corporation resulting from such Corporate Transaction; or

         (iv) The approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation."

FURTHER RESOLVED, that with respect to those benefit plans listed on Schedule B
attached hereto, the definition of "Cause" contained in each such plan is hereby
deleted and replaced with the following definition:

" `Cause' shall mean the employee's misconduct in respect of the employee's
obligations to the Company or other acts of misconduct by the employee occurring
during the course of the employee's employment, which in either case results in
or could reasonably be expected to result in material damage to the property,
business or reputation of the Company; provided, that in no event shall
unsatisfactory job performance alone be deemed to be "Cause"; and provided,
further, that no termination of employment that is carried out at the request of
a person seeking to accomplish a Change in Control or otherwise in anticipation
of a Change in Control shall be deemed to be for `Cause'."


                                       25
<PAGE>   3
                                                           Exhibit 10.2 (cont'd)


FURTHER RESOLVED, that in all other respects, such Plans shall remain in full
force and effect without modification.

                                   Schedule A

Director Deferred Compensation Plan
Directors Retirement Plan
Director Deferred Stock Ownership Plan
Key Executive Short-Term Incentive Deferred Compensation Plan
Senior Executive Supplemental Death, Disability & Retirement
  Benefits Plan
Management Supplemental Death and Disability Benefits Plan
Senior Executive Severance Plan
Executive Severance Plan
Management Severance Plan

                                   Schedule B

Senior Executive Supplemental Death, Disability
  & Retirement Benefit Plan
Senior Executive Severance Plan
Executive Severance Plan
Management Severance Plan


                                       26
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>4
<FILENAME>y46387ex12.txt
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>

<PAGE>   1
                                                                    Exhibit (12)

                         THE McGRAW-HILL COMPANIES, INC.
                COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                                   (RESTATED)

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                      -----------------------------------------------------------------
                                                      2000           1999            1998           1997           1996
                                                      ----           ----            ----           ----           ----
                                                                          (In thousands of dollars)
<S>                                                   <C>            <C>             <C>            <C>            <C>
Earnings
   Earnings from operations
     before income tax expense,
     extraordinary item (net of
     taxes) and cumulative change in                   $757,477       $691,059        $549,146       $462,544        $806,107
     accounting (net of taxes)
     (a)(b)(c)(d)(e)
   Fixed charges (f)                                     92,098         78,198          79,618         83,840          77,563
   Capitalized interest                                       -              -               -              -               -
                                                       --------       --------        --------       --------        --------
     Total Earnings                                    $849,575        $769,257       $628,764       $546,384        $883,670
                                                       ========        ========       ========       ========        ========


   Fixed Charges(f)
     Interest expense                                   $56,434       $ 44,953        $ 51,857       $ 56,771        $ 51,347
     Portion of rental payments
      Deemed to be interest                              35,664         33,245          27,761         27,069          26,216
                                                       --------       --------        --------       --------        --------
     Total Fixed Charges                               $ 92,098       $ 78,198        $ 79,618       $ 83,840        $ 77,563
                                                      =========       ========        ========       ========        ========


   Ratio of Earnings to Fixed charges:

     Earnings from operations
     before income tax expense,
     cumulative adjustment,
     extraordinary item and net of                          9.2x           9.8x            7.9x           6.5x           11.4x
     taxes (a)(b)(c)(d)(e)(f)
</TABLE>

(a)      2000 includes a $16.6 million pre-tax one-time gain on the sale of the
         company's Tower Group International Division.

(b)      1999 includes a $39.7 million pre-tax one-time gain on the sale of the
         company's Petrochemical publications.

(c)      1998 includes the impact from the early extinguishment of $155 million
         of the company's 9.43% Notes in 1998, a $26.7 million gain on the sale
         of a building at 65 Broadway and a $16.0 million charge for the
         write-down of assets at the Continuing Education Center.

(d)      1997 includes a $33.2 million pre-tax one-time provision for real
         estate write-downs related to the consolidation of office space in New
         York City and a $20.4 million pre-tax gain on the sale of Datapro
         Information Services.


                                       27
<PAGE>   2
(e)      On October 15, 1996, the company completed the exchange of its
         Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher
         Education Group. The 1996 results include a pre-tax gain of $418.7
         million and a one-time charge of $25 million for costs of integrating
         the company's College division with the acquired higher education
         business.

(f)      For purposes of computing the ratio of earnings to fixed charges,
         "earnings from continuing operations before income tax expense"
         excludes undistributed equity in income of less than 50%-owned
         companies. "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.


                                       28
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>y46387ex13.txt
<DESCRIPTION>2000 ANNUAL REPORT TO SHAREHOLDERS
<TEXT>

<PAGE>   1
This is the company...
        ANNUAL REPORT 2000


[PHOTO OF BUILDING WITH PEOPLE IN FRONT OF IT]
<PAGE>   2
> that's
    rea





      TABLE OF CONTENTS

 2    Financial Highlights
 3    To our Shareholders
 6    This is the company...
22    The McGraw-Hill Companies At a Glance
25    Financial Review
57    Directors and Principal Executives
<PAGE>   3
dy for
  tomorrow



The McGraw-Hill Companies is ready for tomorrow - today. We hold leading
positions in three critical markets driving economic growth worldwide -
financial services, education and business information.

In financial services, Standard & Poor's plays a pivotal role in the world's
burgeoning capital markets. McGraw-Hill Education is at the center of providing
innovative learning solutions, which recognize that education at all stages of
life is key to economic opportunity. We have expanded our leading positions in
the global energy, aviation and construction industries by establishing
unparalleled Internet portals that provide professionals with comprehensive
Web-enabled business solutions. And through its unmatched excellence,
BusinessWeek continues to expand its position as the world's leading business
information resource, online and in print.

Most importantly, we have the intellectual capital - a wealth of bright,
energetic and talented individuals driving our vision and success in more than
300 offices worldwide. Thanks to them, this is the company that's ready for
tomorrow.


                               [GRAPHIC OF PEOPLE AND MCGRAW-HILL PRODUCT LOGOS]
<PAGE>   4
OPERATING REVENUE
(dollars in millions)

[LINE CHART]

<TABLE>
<CAPTION>
YEAR
<S>            <C>
 96            3,071
 97            3,531
 98            3,725
 99            3,992
 00            4,281
</TABLE>


DIVIDENDS PER SHARE
(dollars)

[LINE CHART]

<TABLE>
<CAPTION>
YEAR
<S>            <C>
 96            0.66
 97            0.72
 98            0.78
 99            0.86
 00            0.94
</TABLE>


SHAREHOLDER RETURN
Five-Year Cumulative Total Return
(1/1/96 - 12/31/00)

[LINE CHART]

<TABLE>
<CAPTION>
YEAR        PEER GROUP       S&P 500        MHP
<S>         <C>              <C>           <C>
 96          $ 100            $ 100        $ 100
 97            179              164          179
 98            187              211          252
 99            245              255          310
 00          $ 215            $ 232        $ 300
</TABLE>


YEAR-END SHARE PRICE
(dollars)

[LINE CHART]

<TABLE>
<CAPTION>
YEAR
<S>           <C>
 96           23.06
 97           37.00
 98           50.94
 99           61.63
 00           58.63
</TABLE>


financial highlights
<TABLE>
<CAPTION>
(dollars in millions, except per-share data)                        2000           1999       % Change
- ------------------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>             <C>
Operating revenue                                              $ 4,281.0      $ 3,991.7            7.2
Net income:
  Before cumulative change in accounting(a)                        471.9          425.6           10.9
  As reported                                                      403.8          425.6           (5.1)
                                                               ---------------------------------------
Diluted earnings per common share
  Before cumulative change in accounting(a)                         2.41           2.14           12.6
  As reported                                                       2.06           2.14           (3.7)
                                                               ---------------------------------------
Dividends per share of common stock -
  $.235 per quarter in 2000 and $.215 per quarter in 1999           0.94           0.86            9.3
                                                               ---------------------------------------
Total assets                                                   $ 4,931.4      $ 4,118.1           19.8
Capital expenditures(b)                                            347.7          400.7          (13.2)
Total debt                                                       1,045.4          536.4           94.9
Shareholders' equity                                             1,761.0        1,648.5            6.8
</TABLE>

(a) In 2000, under Staff Accounting Bulletin No. 101, the company modified its
    revenue recognition policies for various service contracts. For further
    details, see page 26.

(b) Includes purchases of property and equipment and investment in
    prepublication costs.
<PAGE>   5
To
  our
shareholders

TOMORROW. Some say its promise is limited only by imagination. In business,
tomorrow's promise depends on whether a company is ready. Has it established a
sound business plan? Does it have trusted brands with loyal customers? Is it
financially viable? Is there a disciplined and experienced management team? Is
it serving its markets well? Can it respond quickly with innovative products and
services to meet customers' changing needs?

I am pleased to tell you that for The McGraw-Hill Companies the answer to all of
these questions is a resounding "yes."

OUR COMPANY IS WELL PREPARED TO PROFIT FROM TOMORROW'S OPPORTUNITIES because we
have aligned each of our businesses with powerful global trends and rapidly
growing markets that will continue to yield strong returns for our shareholders:

- - IN FINANCIAL SERVICES,the worldwide growth of capital markets and global
trends toward privatization, securitization and disintermediation are creating
new opportunities for Standard & Poor's to service investors, issuers and
intermediaries.

- - IN EDUCATION,record funding,growing enrollments and the recognition that
lifelong learning is key to economic growth are driving expanded worldwide
demand for our McGraw-Hill Education products.

- - IN INFORMATION AND MEDIA SERVICES,an expanding global economy has broadened
the audience of decision-makers who rely on the critical news, insight and
solutions provided by BusinessWeek and our broadcasting, aviation, energy and
construction information businesses.

WE HAVE RESPONDED AGGRESSIVELY TO MARKET NEEDS and strengthened our businesses
to increase revenue growth. Product diversification and global expansion at
Standard & Poor's have spurred strong growth and significantly reduced the
impact of interest rate fluctuations on our performance. Through investments and
key acquisitions, we have built McGraw-Hill Education into a world leader in
virtually every major education market, creating a resilient business that
produces steadily, even in times of economic uncertainty. BusinessWeek and our
construction, energy and aviation information businesses have achieved
leadership positions in each of their growing markets. And, by pruning the
portfolio where necessary, we are directing our resources to build businesses
with the greatest potential for growth.

IN 2000 WE ACHIEVED OUR EIGHTH CONSECUTIVE YEAR OF RECORD PERFORMANCE. Before
the cumulative effect of accounting changes required by Staff Accounting
Bulletin 101:

- - REVENUE ROSE 7.2% TO AN ALL-TIME HIGH OF $4.3 BILLION

- - NET INCOME ROSE 10.9% TO $471.9 MILLION

- - EARNINGS PER SHARE INCREASED 12.6% TO $2.41 PER SHARE

- - OPERATING MARGINS REACHED 17.8%

Since 1995, our total return to shareholders has averaged 24.5% annually,
exceeding the performance of the S&P 500 (18.3%) and our proxy peer group
companies (17.0%).

Our continued success allowed the Board of Directors in January 2001 to once
again demonstrate its commitment to shareholders by approving our 28th
consecutive annual dividend increase - to an annual rate of $.98 per share.That
represents a compound annual growth rate of 10.7% since 1974.


MARKET LEADERSHIP DRIVES ONLINE SUCCESS

Over the past year, it has become clear that much of the Internet's long-term
economic promise is with established market leaders - companies such as ours
with solid franchises, strong brands, superior content, customer relationships,
global reach and financial strength, which are adapting those leadership
qualities to the emerging online universe.

IN EACH OF OUR BUSINESSES,WE ARE AGGRESSIVELY USING THEWEB and other new
technologies as potent tools to expand our customer base, to provide better
products at lower costs and to create significant revenue growth. We have
invested vigorously, but responsibly, and as a result we have firmly established
our online presence as soundly as we are established in more traditional media.

We have created a digital asset management strategy that is transforming our
businesses, focused on five critical points:

- - INCREASING THE VALUE OF OUR CONTENT.

We are using technology to create new ways of organizing and packaging
information across our businesses, providing customers with improved, customized
and continually updated products. The McGraw-Hill Learning Network (mhln.com),
launched in January 2001, is the nation's first K-12 online learning program,
offering interactive


                                                                               3
<PAGE>   6
e-textbooks plus comprehensive support services that link students, teachers,
parents and administrators together in the learning process - providing an
unprecedented opportunity to enhance educational performance.

- - EMBEDDING MCGRAW-HILL SOLUTIONS FOR OUR CUSTOMERS AND IN THEIR PRODUCTS.

We continue expanding our universe of customers who create products based upon
our information - for instance, online brokers and major Web portals feature
Standard & Poor's proprietary news, analysis and commentary. By deepening and
strengthening these relationships, we become an indispensable element in our
customers' business models and success.

- - HARNESSING INTERNET-ENABLED DISTRIBUTION CHANNELS TO MAXIMIZE OUR REACH.

Technology is allowing us to reach new audiences not only faster and cheaper,
but also with greater flexibility and far beyond the boundaries of print media.
BusinessWeek Online - delivered over the Web to personal computers and by
wireless technology to handheld personal digital assistants - receives 20
million monthly page views and can reach customers in virtually every corner of
the world.

- - DEVELOPING ONLINE MARKETPLACES.

Our business-to-business portals - BusinessWeek.com, Construction.com,
Platts.com and AviationNow.com - have become the most-visited online
destinations for millions of business, construction, energy and aviation
professionals who rely on our enabling information to complete their jobs.

OUR NEAR-TERM OUTLOOK IS BRIGHT, AND WE ARE EQUALLY FOCUSED
            ON SUSTAINING GROWTH WELL INTO THE 21ST CENTURY.


[PHOTO OF HAROLD MCGRAW III]

HAROLD MCGRAW III
CHAIRMAN, PRESIDENT AND CEO


For example, online trading in the energy industry is expected to grow more than
800% over the next four years, and Platts.com is already playing a key role,
using its proprietary market and pricing information to facilitate online
transactions.

- - CREATING NEW WAYS TO MONETIZE OUR COMMUNITIES.

We are continuing to attract new audiences for our online content, creating
important new revenue streams. We have already introduced several successful
models in McGraw-Hill Professional Publishing, such as offering subscriptions to
popular and continually updated online medical textbooks and science reference
products to replace the one-time sale of dated printed materials.

2001: STRONG MARKETS, STRONG PROSPECTS

In the year ahead we expect to continue profiting from leadership positions we
have built in strong markets with excellent growth opportunities.

STANDARD & POOR'S IS WELL-POSITIONED FOR CONTINUED SUCCESS. We expect
significant international growth in our ratings operations, spurred by the
strong growth in euro-denominated securities and the continued growth of the
structured finance market. Since 1994, revenue from Standard & Poor's
international ratings operations has grown at an annual compound rate of 23.3%.
Additionally, a more favorable U.S. interest rate environment should provide a
boost to bond market activity.
<PAGE>   7
EXTENDING THE STANDARD & POOR'S FRANCHISE by using our expertise in credit
evaluation and risk analysis will continue to drive our product development
efforts. Our corporate evaluation services, school evaluation services, bank
loan ratings and derivative product company ratings will be important growth
drivers.

We are also excited about our opportunities for Standard & Poor's Information
Services in 2001. Worldwide demand for new investable index-related products,
such as the S&P Global 1200, and iShares - a class of exchange-traded funds
launched by Barclays Global Investors - will generate new business based on our
existing strengths. So will fee-generating portfolios based on Standard & Poor's
analytic and research expertise. And through technology, we are quickly closing
in on our goal of serving all our financial information customers electronically
and deriving 100% of our information revenue from e-commerce services.

MCGRAW-HILL EDUCATION WILL CARRY ITS STRONG MOMENTUM INTO 2001, where the
outlook is favorable. In the United States, record funding, rising enrollments
and an accelerated focus on standards, assessment and accountability - now
prominent items on President Bush's national education agenda - all play to our
strengths as the nation's largest provider of K-12 learning materials and the
industry leader in testing and assessment. Our elementary-high school business
continues to outperform its competitors in a market where spending for learning
materials is expected to increase by roughly 10% in 2001.

In higher education and professional publishing, our e-books, online tutoring,
customized course Web sites and subscription services - covering virtually every
subject - are revolutionizing the way that teaching and learning take place.
PageOut, which easily enables college professors to create personalized Web
sites, complete with customized course materials and online testing, is less
than two years old and is already being used by 50,000 professors in the United
States and Canada. As Internet access grows, we will continue to combine our
superior education products with the best technology to enhance learning at all
ages, in any format and on any device.

INFORMATION AND MEDIA SERVICES WILL CONTINUE TO STRENGTHEN ITS CENTRAL ROLE in
serving the information needs of global business professionals. BusinessWeek,
which increased its advertising pages by 17% in 2000 and achieved its seventh
consecutive year of record revenue, will broaden its print and online offerings
to a growing global audience of advertisers and subscribers.

WE INTEND TO ACCELERATE OUR B-TO-B INTERNET INITIATIVES through our online hubs,
and will continue adding new services and greater functionality to achieve
larger audiences and deeper market penetration. And by expanding its Web
capabilities, investing in technology and building local market share, our
Broadcasting Group will continue to create new revenue streams.

ACQUISITIONS CONTINUED TO HELP US BUILD our size and scale. We acquired Tribune
Education and Mayfield Publishing Company, aiding McGraw-Hill Education's
efforts to capture new sales in new subject areas. Standard & Poor's acquired
Canadian Bond Rating Services and Portfolio Management Data, which expanded its
global reach and enhanced our bank-loan ratings ability. We also initiated
alliances with many established and new technology companies to help us deliver
the most robust Web capabilities in the markets we serve.


READY FOR TOMORROW...TODAY

The near term outlook for the Corporation is bright, and we are equally focused
on sustaining growth well into the 21st century. Each of our businesses sit in
the heart of three vital markets that will drive economic and personal growth
worldwide for years to come.

We have achieved this position of strength through the efforts of many.

I want to thank our Board of Directors for its guidance, support and commitment
to The McGraw-Hill Companies. I'd like to thank George B. Harvey, who will
retire from the Board after 16 years of service, for his thoughtful and
effective leadership.

I ESPECIALLY WANT TO THANK OUR EMPLOYEES - the 17,000 men and women of The
McGraw-Hill Companies whose dedication drives our performance, and whose
creativity keeps uncovering new ways to help our customers reach their
potential. I am pleased that we have been able to translate their efforts into
rewards that benefit our customers and shareholders. Thanks to them, like never
before in our 113-year history, The McGraw-Hill Companies is ready for tomorrow.

Thank you for your continued support.



Sincerely,


                       /s/ Harold McGraw III

                       HAROLD MCGRAW III
                       CHAIRMAN, PRESIDENT AND CEO
                       FEBRUARY 21, 2001


                                                                               5
<PAGE>   8
                             This is the company >

                    [PHOTO LOOKING UP BETWEEN TWO BUILDINGS]
<PAGE>   9
                      [PHOTO OF MAN HOLDING UP PALM PILOT]

                        >  that  creates  the
                                       information >




Every day countless people are buried in a blizzard of information. The
McGraw-Hill Companies helps them plow a clear path to success. How? Just ask the
millions of investors, government leaders, parents, students, teachers and
business professionals who rely on us. People with important jobs to do. People
who need accurate, timely and insightful information they can trust when making
critical decisions. In short, people who need answers.

Through Standard & Poor's, we've become one of the world's largest and most
trusted providers of financial ratings and analysis. McGraw-Hill Education is
the world's leading resource for students and teachers eager to learn at all
stages of life. Business, construction, aviation and energy professionals rely
on BusinessWeek and our end-to-end business solutions to remain competitive in
their fields and in the global economy.

Globalization. Privatization. The explosion of the Internet, e-commerce and
wireless technology. Our world continues to change at record speed. That's
nothing new for The McGraw-Hill Companies. For more than a century we have
helped our customers understand, adapt to and profit from change. It's what we
do. The opportunities have never been better for The McGraw-Hill Companies, our
customers and our shareholders. We're charging forward, ahead of the crowd and
ready for success.



                                                                               7
<PAGE>   10
                               >  that
                                    enables
                                        the  archi

Our customers want more than information. They want solutions. That's what we
give them. Every day, architects and other construction professionals the world
over rely on F.W. Dodge, Sweet's, Engineering News-Record and Architectural
Record to help them build, manage and complete projects on time and on budget.

Across The McGraw-Hill Companies, we provide our customers with customized
information solutions in any format they want, whether in print, online or
wireless. We're harnessing the Internet to maximize our reach, develop new
marketplaces and help our customers work better and smarter.

Financial professionals need breaking news, commentary, analysis and real-time
market data - all at once. That's what Advisor Insight provides to more than
55,000 brokers, analysts and investors, with online content from Standard &
Poor's and BusinessWeek. Buyers in the aviation and aerospace community seek
instant access to news, parts, products and materials and AviationNow.com, the
only total B-to-B portal in that industry, provides access to breaking industry
news and 15,000 suppliers worldwide. Each day around the world, doctors need
information to provide up-to-the-minute treatment options. They find it with a
click-and-search through Harrison's Online, our continually updated digital
version of the world's leading internal medical reference.

We continue to expand our online offerings of professional reference products.
In 2000, we introduced AccessScience.com, built around the renowned McGraw-Hill
Encyclopedia of Science and Technology, which enables 23 million scientists,
engineers and other users to conduct research faster than ever. And to serve a
growing global medical audience, in 2001 we'll launch AccessMedicine.com.
<PAGE>   11
tect    >


                            [PHOTO OF A MAN WALKING]
<PAGE>   12
>  to
         BUILD
                  the
                          SCHOOLS  >


                   [PHOTO OF A GIRL WITH A CHICK ON HER HEAD]
<PAGE>   13
                         [COLLAGE OF COMPUTER MONITORS]


                        >  that  EDUCATE  the  people   >

At The McGraw-Hill Companies, we love schools. We rate the bonds that finance
them, help builders build them, and provide the educational materials that help
students learn and teachers teach.

We're the number one pre-K-12 publisher in the U.S., a growing market where
enrollments and public funding are setting new records. Our acquisition in 2000
of Tribune Education - a leader in supplementary materials - strengthened our
offerings in this robust market. Our educational products serve every teaching
method across the education spectrum. Last year Macmillan/McGraw-Hill earned the
top spot in reading sales - which accounts for 40% of the elementary school
market - by capturing a major share in such key states as Texas, Arkansas and
Oregon. While achieving another strong year in sales of its supplemental reading
materials, SRA/McGraw-Hill won the largest reading adoption ever recorded, in
Los Angeles. Glencoe/McGraw-Hill, the nation's leading secondary school
publisher, performed superbly in secondary science, capturing 80% of the Florida
market and 70% in North Carolina. In addition, Glencoe/McGraw-Hill successfully
penetrated the lucrative literature market for the first time. A growing need
for standardized testing spelled success for CTB/McGraw-Hill, the nation's
leading testing company, which was awarded several new state contracts, and is
positioned to profit from the move toward greater accountability in education.

Our learning tools - which are available in any medium - are redefining the
classroom and transforming the education process. We've just launched
McGraw-Hill Learning Network (mhln.com) to forge the critical link between
teachers, students and parents in a seamless connection that delivers online
instructional materials and teaching tools, and allows interactive communication
between school and home. We are confident it will improve student performance
and help define the future of education.



                                                                              11
<PAGE>   14
                                         [WORLD MAP WITH STANDARD & POOR'S LOGO]


Which country? Any country, developed or emerging. As nations turn toward free
markets, they turn to Standard & Poor's. Our credit evaluations are essential to
capital-raising efforts of governments and private enterprise virtually
everywhere. Simply put, Standard & Poor's Credit Market Services is the biggest,
most diverse, fastest growing credit rating service in the world.

In 2000 we continued to expand globally, a key initiative. We grew aggressively
in Europe as more companies privatized and demand the for ratings and analyses
of euro-denominated securities rose sharply. To capture the growth in Canada's
capital markets, we acquired Canadian Bond Rating Services, merging it with our
existing Toronto operations. We also continued to expand and diversify our
revenue stream to lessen our dependence on bond issuance. We again satisfied
strong demand for our bank loan ratings and corporate evaluation services. In
addition, our Structured Finance unit continued to lead the way in facilitating
the rapid growth of securitized debt with ratings on than $3.3 trillion of
transactions globally. We also introduced School Evaluation Services, a new tool
that combines our expertise in public finance and education to enable U.S.
cities and states to judge the effectiveness of their educational spending. In
2001, we'll extend our reach and tap new markets with our Risk Solutions Group
to help customers manage their credit risk in trade credit, banking and
insurance.

In 2000, we migrated more Standard & Poor's products to the Web, such as our
enhanced version of RatingsDirect, which provides fixed-income professionals
with credit risk assessment for more then 225,000 different bond issues,
evaluating over $11 trillion of debt in more than 80 nations.

>  WHO  LIVE  in  the
                  COUNTRY  >


12
<PAGE>   15
               [PICTURE OF A MAN WORKING WITH A WORLD MAP OVERLAY]
<PAGE>   16
               [PICTURE OF A WOMAN WORKING IN THE STOCK EXCHANGE]
<PAGE>   17
                                                               >  that  RAISES
                                                                    the  CAPITAL




Accurate information and thorough analysis is the lifeblood of expanding capital
markets. That's why investors look to Standard & Poor's to help them make
critical decisions.

We continue to leverage our world-renowned financial indexes, such as the S&P
500, to provide investors worldwide with a global array of new investment
options. In 2000, Standard & Poor's inaugurated the investable S&P Global 100
Index - representing the world's 100 largest companies - forged jointly with the
New York Stock Exchange, Tokyo Stock Exchange and the Deutsche Bourse. Barclays
Global Investors launched iShares, a new class of exchange-traded funds - based
on S&P indexes - that allow investors to participate in a broad basket of stocks
representing key industries and global markets. We partnered with the Australian
Stock Exchange to operate the ASX index, and continued to build our portfolio
management services, sold through investment houses, in which stock selection is
based on Standard & Poor's widely respected STARS system of objective equity
research.

The Web is creating new ways to expand our reach and customize our products. Our
Standard & Poor's Funds Services, launched on the Web in June 2000, provides
valuable insight on 55,000 mutual funds in 52 countries. Market Insight covers
more than 20,000 global companies and aggregates our stock reports, industry
surveys and Compustat financial data, among other features. Advisor Insight
provides Web-based support tools for more than 60,000 financial planners. Retail
and online brokers build Standard & Poor's quotes, charts, analysis and
recommendations in their Web sites for their clients' convenience. And, Standard
& Poor's ComStock provides more quotes to Web users than any other source.

                                                                               >


                                                                              15
<PAGE>   18
        >                          to DEVELOP

             [PICTURE OF A WOMAN STANDING IN FRONT OF TWO WINDMILLS]
<PAGE>   19
                           [PICTURE OF TWO WINDMILLS]


                               THE  MARKETS  >

Platts is the world's largest and most authoritative provider of energy market
information, and each day more than $10 billion of global trading activity and
contracts are based on Platts' price assessments. Electronic trading is expected
to grow by roughly 800% over the next four years. By providing information to
all the new online energy exchanges, Platts is perfectly positioned to meet the
needs of this growing industry. Launched in 2000, Platts.com, the energy
industry's premier portal, promotes reliable standards, transparency and
increased speed of trade execution throughout the energy markets.

AviationNow.com, also launched in 2000, leverages Aviation Week & Space
Technology's long-standing leadership into the rapidly expanding
aviation/aerospace market. Tapping a trillion-dollar industry with one million
professionals worldwide, AviationNow.com offers news, publications, community
forums, events, career information, and an exchange where companies and
individuals can buy anything from spare parts to used aircraft.

In a bold step to drive innovation in the rapidly growing construction industry,
we created Construction.com. It combines the project expertise of F.W. Dodge and
product expertise of Sweet's with the editorial strengths of Engineering
News-Record and Architectural Record. Through F.W. Dodge's database of more than
500,000 construction projects, we formed e.leads, which gives small contractors
everywhere - a new audience for us - a way to uncover, track and bid on
construction jobs quickly and easily. Through partnerships with leading
e-commerce companies, Construction.com firmly established itself as the top
online destination and e-marketplace serving the $1.7 trillion commercial
construction industry.
<PAGE>   20
                  [PICTURE OF MAN WORKING ON A CAR'S PAINT JOB]
<PAGE>   21
                            that   GROW
                                     the   businesses  >

Ultimately, every business is our business. BusinessWeek - which explores every
industry and enterprise - is the world's most widely read business magazine in
print and online, with a global print circulation of almost 1.2 million and a
readership surpassing five million. Why? Because of its cutting-edge story
selection, in-depth reporting, experienced point of view and global analysis,
provided through its regional and international editions. BusinessWeek continues
to build its worldwide audience. The proof: in 2000, circulation rose almost 10%
in Europe and more than 10% in Asia, while ad revenues hit record highs in the
United States.

BusinessWeek Online - which won the prestigious National Magazine Award for
General Excellence in New Media for 2000 - is far more than the print version.
It offers up-to-the-minute news and daily briefings combined with a variety of
services focusing on personal investment tracking, career advice, business
schools and much more. BusinessWeek Online ended 2000 with more than one million
registered users - up 60% from the beginning of the previous year. It is fast
becoming a leading online business information resource for high-income business
professionals.

Globalization and the Internet revolution are driving more and more readers to
learn about the latest developments affecting them. That's why we expanded
e.biz, our hugely successful supplement within BusinessWeek focused on
e-business, to appear more frequently. In 2000, we published ninee.biz
supplements in North America, seven in Europe and six in Asia; in 2001, we'll
publish 12 times in North America and Europe, six times in Asia and two times in
China. And we're expanding thee.biz concept to our construction, aviation and
health care publications.


                                                                              19
<PAGE>   22
          [PICTURE OF PEOPLE RIDING A BUS READING MCGRAW-HILL PRODUCTS]


                                >                                    that employ
                                                                             THE


For today's workforce, learning is no longer an option, it's a necessity. At The
McGraw-Hill Companies we're always blending content and technology to create
innovative products that help people improve their knowledge and skills.

In higher education, we're the leading publisher in numerous disciplines,
especially business and economics. We invented PageOut, PowerWeb and Primis
Online to enrich instruction through the Internet. More than 50,000 college
instructors worldwide have personal accounts on PageOut to create custom Web
sites for their courses. PowerWeb lets professors update their courses with the
latest content found on the Web, and Primis Online allows them to create
customized e-books from our vast online database.

E-books represent a whole new market area where we are forging ahead
aggressively, ensuring our leadership in technology-based education. In
addition, we introduced ALEKS(R), - "Assessment and Learning in Knowledge
Spaces" - a breakthrough, automated online tutor that adapts to individual
student needs through the use of artificial intelligence.

Global sales of our professional publishing products - in fields such as
science, engineering, computers, medicine and business - grew almost 20% in
2000. To further accelerate sales, we're changing our business model - from
selling printed resource books updated every few years, to selling subscriptions
for continuous online publishing, so our customers always have the most current
information. To meet strong global demand for professional training, our
Lifetime Learning business is designing 300 hours of new courseware to meet the
needs of this burgeoning market.

<PAGE>   23
                  PEOPLE

                       who  rely  on  the  products  >


       [PICTURE OF MORE PEOPLE RIDING A BUS READING MCGRAW-HILL PRODUCTS]
<PAGE>   24
[COLLAGE OF MCGRAW-HILL PRODUCTS]


THE MCGRAW-HILL COMPANIES AT A GLANCE

    Since our founding more than a century ago,The McGraw-Hill Companies has
    enabled customers to anticipate, manage and profit from change. At the same
    time, our company is changing too. We are focused on three markets that are
    driving global growth: Financial Services, Education and Business
    Information. By offering a vastly expanded array of products and services,
    and by aggressively using technology to pioneer new ways of delivery, we
    have achieved the market leadership that produces consistent, sustainable
    earnings growth.

    To drive our progress, we are building the size and scale needed to succeed
    on a global basis. By digitizing all our content, we are profiting from
    innovations that harness the power of today's revolution in communications
    and technology.

    It's an exciting time to be in business, and it's an exciting time at The
    McGraw-Hill Companies. We never stop learning.We never stop leading.That's
    how and why we're the company that's ready for tomorrow.

> that  The  MCGRAW-HILL
                        COMPANIES



FINANCIAL SERVICES


KEY MARKETS

Global financial markets. Customers include debt issuers, investors,
intermediaries, corporations, government agencies, financial institutions,
portfolio managers, brokers, fund managers and commodities, securities and
foreign exchange traders.

2000 HIGHLIGHTS

Standard & Poor's Credit Market Services achieved significant global growth in
traditional ratings services, especially in Europe. Introduced several new
non-traditional ratings services, including products to evaluate emerging market
corporate governance and educational spending. Added new products to S&P's Index
franchise, including investable global benchmarks and exchange-traded funds.
Strong sales of information services accompanied the upgrade and migration of
all products to the Web.Acquisitions, alliances and new offices expanded global
reach.


GROWTH STRATEGY

Continue expansion in both traditional and non-traditional ratings areas;
capitalize on momentum in Europe and selected emerging markets; introduce new
capabilities such as Risk Solutions. Increase income from licensing
index-related products and participating in actively managing assets based on
Standard & Poor's research and systems. Focus on providing customized Web-based
solutions that integrate content from across the company.


KEY BUSINESSES

STANDARD & POOR'S
Corporate & Government Ratings Services
E-Business Services
Fund Services
Portfolio Services
Institutional Market Services
Retail Market Services
Risk Solutions
Structured Finance Ratings Services
<PAGE>   25
MCGRAW-HILL EDUCATION

KEY MARKETS

U.S. markets for elementary, secondary, testing,
supplemental materials, college, vocational and postsecondary fields.
International education markets, and global markets in engineering, science,
medicine, health care, computer technology, business, government and training.

2000 HIGHLIGHTS

Increased market share in K-12 education business and added capabilities in
supplementary materials. Outstanding performance in reading, social studies and
science. Introduced new literature curriculum. Signed major contracts in
educational testing. In Higher Education, introduced new online learning
products while current offerings gained in acceptance; introduced new
subscription-based online products based on popular references in key fields;
announced acquisition of Mayfield Publishing Company, a leading college niche
publisher, and acquired Tribune Education, a leading publisher of supplementary
educational materials. Achieved strong growth in international publishing.

GROWTH STRATEGY

Pursue opportunities presented by heavy adoption schedule. Become preferred
e-learning solution for teachers and school systems. Satisfy increased national
demand for standardized testing. Forge alliances with technology leaders to
expand reach. Further develop online programs in higher education and push
cutting-edge technologies like e-books and ALEKS(R). Expand national presence of
the McGraw-Hill Learning Network (mhln.com).

KEY BUSINESSES

SCHOOL EDUCATION GROUP              MCGRAW-HILL PROFESSIONAL
CTB/McGraw-Hill                     Business/General Reference
Glencoe/McGraw-Hill                 Scientific,Technical & Medical
Macmillan/McGraw-Hill               McGraw-Hill/Osborne
McGraw-Hill Children's Publishing     Media Group
SRA/McGraw-Hill
Wright Group/McGraw-Hill            MCGRAW-HILL LIFETIME
                                    LEARNING
HIGHER EDUCATION, PROFESSIONAL      Xebec McGraw-Hill
AND INTERNATIONAL GROUP             McGraw-Hill Education
McGraw-Hill Higher Education          Latin America
McGraw-Hill/Irwin                     Europe
McGraw-Hill Science, Engineering      Asia
 & Mathematics                        Australia/New Zealand
McGraw-Hill Humanities, Social      McGraw-Hill Ryerson (Canada)
 Sciences & World Languages         Tata/McGraw-Hill (India)
McGraw-Hill Dushkin
McGraw-Hill/Primis Custom
 Publishing
McGraw-Hill/Contemporary


PROVIDE.


INFORMATION AND MEDIA SERVICES

KEY MARKETS

Business and financial professionals, investors, advertisers and consumers
worldwide. Professionals in aviation, construction, energy and health care.
Television audiences in Denver, Indianapolis, San Diego and Bakersfield,
California.

2000 HIGHLIGHTS

BusinessWeek achieved record ad sales and substantial international growth,
accompanied by expansion of popular e.biz and Frontier supplement-within-a-
magazine formats. BusinessWeek Online drew record traffic, now exceeding 20
million monthly page views. Launched aviation and energy portals, which
attracted large user audiences, while construction portal continued growth.
Established numerous e-commerce partnerships and alliances. Sold Tower
Group International.

GROWTH STRATEGY

Continue expanding global franchise for BusinessWeek and BusinessWeek
Online, with focus on building readership, ad sales and new revenue. Increase
depth and breadth of business-to-business portals to advance their preeminent
industry positions. Develop e-commerce opportunities by creating online
marketplaces, offering value-added products and customized services, licensing
content and providing benchmarks. Promote multimedia connection between print
media and Web sites. Enhance local TV audience share.

KEY BUSINESSES                      The Physician and Sportsmedicine
AVIATION WEEK                       Postgraduate Medicine
Conferences & Exhibitions           Healthcare Informatics
Custom Media                        e.MD
Education                           Your Patient & Fitness
Interactive
Magazines                           MCGRAW-HILL CONSTRUCTION
Newsletters                         INFORMATION GROUP
References & Directories            F.W. Dodge
Television & Video                  Sweet's
                                    Architectural Record
BROADCASTING GROUP                  Engineering News-Record
(All ABC Affiliates)                Design-Build
KMGH-TV (Denver)
KGTV (San Diego)                    PLATTS
KERO-TV (Bakersfield)               Oil
WRTV (Indianapolis)                 Natural Gas
                                    Electric Power
BUSINESSWEEK GROUP                  Nuclear
BusinessWeek Magazine               Petrochemicals
BusinessWeek Online                 Metals
(BusinessWeek.com)                  Coal
BusinessWeek Executive Programs     Energy Information Technology
                                    Power Engineering
HEALTHCARE INFORMATION GROUP        Energy Policy
Hospital Practice                   Utility Data Institute


                                                                              23
<PAGE>   26
[PICTURE OF CHILD AT SYMPHONY]

This is a Company that's
       involved in the COMMUNITY.

At every level - from supporting our employees' volunteer efforts, to partnering
with local civic and cultural institutions, to participating in the debate on
key public policy issues facing our businesses - we are guided by a deep
commitment to community involvement.

We focus on what we do best: helping people reach their potential. Our efforts
are geographically diverse: in Monterey, we support projects that provide grants
to assist schools with art education for students and with training for
teachers; in Ohio, we join the Columbus Symphony Orchestra in furthering music
education; and in New York, our employees mentor at-risk children. We foster
financial literacy among the nation's youth and provide economics training for
teachers around the U.S. through a variety of partnerships.

For more than a decade, the Harold W. McGraw, Jr. Prize in Education has been
recognized as one of the country's most prestigious awards for individuals who
demonstrate exemplary leadership in education. In 2000, we honored Sanford I.
Weill, Chairman and CEO of Citigroup, Inc., Maryland State Superintendent of
Schools Nancy S. Grasmick, and Houston Independent School District
Superintendent Rod Paige. We were especially proud when Superintendent Paige was
subsequently appointed by President Bush to be our nation's new Secretary of
Education.

In the public affairs arena, we are working to unlock the potential of the
Internet while protecting intellectual property rights and safeguarding privacy.
We are also working to promote improvements in education, and to help foster a
national consensus on the benefits of trade liberalization.


[PICTURE OF GROUP NAMED TO LEFT]   Chairman, President and CEO Harold McGraw III
                                        (second from left) and Chairman Emeritus
                                    Harold W. McGraw, Jr. (seated) are joined by
                                         the 2000 Harold W. McGraw, Jr. Prize in
                                        Education winners (from left) Rod Paige,
                                              Secretary of Education (and former
                                             Superintendent, Houston Independent
                                              School District); Sanford I.Weill,
                                              Chairman and CEO, Citigroup, Inc.,
                                                 and Nancy S. Grasmick, Maryland
                                                State Superintendent of Schools.
<PAGE>   27
OPERATING PROFIT
BY SEGMENT
(dollars in millions)

[BAR GRAPH]

<TABLE>
<CAPTION>
         Information and     Financial     McGraw-Hill
YEAR     Media Services      Services       Education      Total
<S>      <C>                 <C>           <C>             <C>
 98            127              356            202          685
 99            179              370            274          823
 00            208              396            308          912
</TABLE>

Includes the following items:
2000 - Gain on the sale of
       Tower Group International
1999 - Gain on the sale of the
       Petrochemical publications
1998 - Gain on the sale of a building
     - Write-down of Continuing
       Education Center's assets


CAPITAL EXPENDITURES
BY SEGMENT
(dollars in millions)

[BAR GRAPH]

<TABLE>
<CAPTION>
         Information and     Financial     McGraw-Hill
YEAR     Media Services      Services       Education      Total
<S>      <C>                 <C>           <C>             <C>
 98            66               50             258          374
 99            45               58             298          401
 00            29               32             287          348
</TABLE>

Includes investments in prepublication
costs and purchases of fixed assets


EBITDA BY SEGMENT
(dollars in millions)

[BAR GRAPH]

<TABLE>
<CAPTION>
         Information and     Financial     McGraw-Hill
YEAR     Media Services      Services       Education      Total
<S>      <C>                 <C>           <C>             <C>
 98            162              391            429           982
 99            212              411            506         1,129
 00            236              446            588         1,270
</TABLE>

Earnings before interest, taxes,
depreciation and amortization,
excluding corporate expenses


OPERATING REVENUE BY SEGMENT
(dollars in millions)

[BAR GRAPH]

<TABLE>
<CAPTION>
         Information and     Financial     McGraw-Hill
YEAR     Media Services      Services       Education      Total
<S>      <C>                 <C>           <C>             <C>
 98           1,017            1,088          1,620        3,725
 99           1,032            1,225          1,735        3,992
 00           1,008            1,280          1,993        4,281
</TABLE>



FINANCIAL REVIEW


      FINANCIAL CONTENTS

26    Management's Discussion and Analysis
39    Consolidated Statement of Income
40    Consolidated Balance Sheet
42    Consolidated Statement of Cash Flows
43    Consolidated Statement of Shareholders' Equity
44    Notes to Consolidated Financial Statements
52    Report of Management/Report of Independent Auditors
53    Supplemental Financial Information
54    Eleven-Year Financial Review
56    Shareholder Information


                                                                              25
<PAGE>   28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS


CONSOLIDATED REVIEW

<TABLE>
<CAPTION>
(in millions)                                   2000         1999          1998
- --------------------------------------------------------------------------------
<S>                                         <C>          <C>           <C>
Operating Revenue                           $4,281.0     $3,991.7      $3,725.0
% Increase                                       7.2          7.2           5.5
- --------------------------------------------------------------------------------
Operating Profit                            $  911.5     $  823.0      $  684.9
% Increase (Decrease)                           10.8         20.2          14.9
- --------------------------------------------------------------------------------
% Operating Margin                                21           21            18
- --------------------------------------------------------------------------------
Income Before Taxes                         $  767.3     $  697.7      $  556.2
- --------------------------------------------------------------------------------
Cumulative change in
  accounting, net of tax                    $  (68.1)          --            --
- --------------------------------------------------------------------------------
Net Income                                  $  403.8     $  425.6      $  330.6
- --------------------------------------------------------------------------------
</TABLE>

Operating profit is income before taxes on income, interest expense and
corporate expense. Includes unusual items as described below.


2000 COMPARED WITH 1999

The Segment Review that follows is incorporated herein by reference.

REVENUE AND EARNINGS

The company adopted Staff Accounting Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements, effective January 1, 2000. Under SAB 101,
the company is modifying its revenue recognition policies for various service
contracts. Under SAB 101, the company will recognize revenue relating to
agreements where it provides more than one service based upon the fair value to
the customer of each service, rather than recognizing revenue based on the level
of service effort to fulfill such contracts. If the fair value to the customer
for each service is not objectively determinable, revenue will be recognized
ratably over the service period. The cumulative impact of the accounting change
as of January 1, 2000 is $68.1 million, net of tax of $46.7 million. The change
has no impact on cash flow.

    The company also restated its financial statements for all years presented.
Previously, subscription income was generally recognized as received at
publications where advertising is the principal source of revenue. As part of
the restatement, such income is being deferred and recognized over the related
subscription periods.

    Operating revenue, including the impact of SAB 101 and the restatement for
subscription income, for 2000 increased $289.3 million, or 7.2%, over 1999 due
to the strong performances of the School Education Group, the Financial Services
segment, and BusinessWeek. The SAB 101 adjustment and the restatement reduced
revenue by $26.6 million, or 0.6%, in 2000. On a pro forma basis, making 1999
comparable for SAB 101 adjustments, revenue would have grown 8.1% versus 1999's
comparable revenue of $3,959.2 million. In the third quarter of 2000, the
McGraw-Hill Education segment purchased from the Tribune Company all of the
outstanding capital shares of the Tribune Education Company and Landoll, Inc.
("Tribune Education"). The Tribune Education acquisition accounted for 2.2% of
the growth in revenue.

    Operating profit of $911.5 million increased 10.8% over 1999 including the
adjustments for SAB 101 and the restatement for subscription income. The impact
of SAB 101 and the restatement was to (decrease) increase operating profit
$(15.0) million and $(0.3) million respectively; $(20.4) million and $(2.7)
million for the quarter ended March 31, 2000, $(5.9) million and $4.2 million
for the quarter ended June 30, 2000, $(4.1) million and $0.6 million for the
quarter ended September 30, 2000, and $15.4 million and $(2.4) million for the
quarter ended December 31, 2000, respectively. On a pro forma basis the growth
in operating profit would be 13.5% on comparable 1999 operating profit of $802.9
million. The Tribune Education acquisition depressed operating profit growth by
2.0%.

    In the first quarter of 2000, a $16.6 million pre-tax gain was recorded on
the sale of Tower Group International ($10.2 million after-tax, or 5 cents per
diluted common share) and is reflected in the Information and Media Services
segment. In the third quarter of 2000, the McGraw-Hill Education segment
purchased from the Tribune Company all of the outstanding capital shares of
Tribune Education. The purchase price was $671.8 million in cash. The Tribune
Education acquisition resulted in 3 cents dilution in the third quarter and 6
cents dilution in the fourth quarter of 2000. In the fourth quarter of 1999, a
$39.7 million pre-tax gain was recorded on the sale of McGraw-Hill's
Petrochemical publications ($24.2 million after-tax, or 12 cents per diluted
common share) and is reflected in the Information and Media Services segment for
1999.

    Net income was $403.8 million and includes a $68.1 million cumulative
adjustment for the effect of the change in accounting required by SAB 101 and a
$9.2 million current year reduction for the change in accounting. Additionally,
net income includes a $0.2 million reduction due to the restatement of
subscription revenue. Net income in 2000 therefore declined 5.1%. On a pro forma
basis, net income grew 17.8%.

    Earnings per share for 2000 included a 35 cent impact due to the cumulative
adjustment for the effect of the change in accounting required by SAB 101 and a
4 cent impact for the current year adjustment due to SAB 101. The impact of the
restatement of subscription revenue was not meaningful to earnings per share.
Earnings per share decreased 3.7% including the impact of SAB 101 both from the
cumulative effect of the accounting change and the effect of the change on
current year earnings. On a pro forma basis, earnings per share increased 15.9%.


26
<PAGE>   29
EXPENSES

Operating expenses for 2000 increased 1.4%. Acquisitions and divestitures caused
operating expenses to increase an additional 2.7%. The increase in operating
expenses reflects investments in new products and technology and modest
inflation increases in key categories, such as compensation, somewhat offset by
best practice efforts and an increase in pension income from the company's
retirement plans. In 2000, combined paper, printing and distribution prices
increased approximately 2.7%. This increase was primarily due to late 1999 paper
price increases. In late 2000, price reductions were negotiated as a result of a
weakening paper marketplace due to increased imports. Negotiated savings for
Tribune Education minimally impacted 2000 costs. Combined paper, printing and
distribution expenses represent 28% of operating expenses.

    Selling and general expenses increased 9.5%, reflecting increased volume.
Acquisitions and divestitures caused selling and general expense to increase an
additional 3.1%. A significant portion of both operating and selling and general
expense is compensation, which increased approximately 4.2% to $1.13 billion.
Due to the robust economy over the past several years in the primary markets in
which the company operates, the job market remains tight. To continue to attract
and retain talent, the company has increased the use of performance-based pay
and stock-based compensation to enhance its flexibility to adjust to market
conditions.

    Depreciation and amortization expense, including amortization of goodwill,
intangible assets and prepublication costs, increased $54.0 million, or 17.5%,
primarily due to the acquisition of Tribune Education. Starting in 2002, various
real estate leases in New York, primarily the company's headquarters, have been
renewed at higher rental rates. Starting in 2003, the consolidation of London
facilities to Canary Wharf will result in increased rates.

    In 2001, combined printing, paper and distribution prices are expected to
increase approximately 1.4%. While the U.S. Postal increase, combined with air
freight and trucking increases, will result in a 9% increase in distribution
expense, negotiated savings from the Tribune Education acquisition contributed
to the modest increase overall.Merit increases will approximate 4%.


INTEREST EXPENSE

Net interest expense in 2000 was $52.8 million versus $42.0 million in 1999, a
$10.8 million, or 25.8%, increase primarily due to increased average borrowings
for the Tribune Education acquisition and an increase in borrowing rates. The
average commercial paper rate was 6.4% in 2000 and 5.2% in 1999.

    In 2001, interest expense will increase due to higher average debt levels
partially offset by expected lower interest rates.


PROVISION FOR INCOME TAXES

The provision for income taxes as a percent of income before taxes was 38.5% in
2000 and 39.0% in 1999. In 2001, the effective tax rate is expected to
approximate the current year's rate.


1999 COMPARED WITH 1998

The Segment Review that follows is incorporated herein by reference.

REVENUE AND EARNINGS

Operating revenue for 1999 increased $266.7 million, 7.2% over 1998 due to the
strong performances of the Financial Services segment and the McGraw-Hill
Education segment and the outstanding performance by BusinessWeek within the
Information and Media Services segment. Operating revenue includes an impact of
$3.9 million, 0.1%, due to the restatement of subscription income.

    Operating profit of $823.0 million increased 20.2% over 1998. Included in
each of the respective periods are the following one-time items: in the fourth
quarter of 1999, a $39.7 million pre-tax gain was recorded on the sale of
McGraw-Hill's Petrochemical publications ($24.2 million after-tax, or 12 cents
per diluted common share) and is reflected in the Information and Media Services
segment; in the third quarter of 1998, the company recorded a $26.7 million
pre-tax gain ($16.3 million after-tax, or 8 cents per diluted common share) on
the sale of an office building, reflected in the Financial Services segment; an
$8.7 million extraordinary loss after taxes of $5.6 million on the early
extinguishment of debt; (4 cents per diluted common share); and a pre-tax charge
of $16.0 million ($9.8 million after-tax, or 5 cents per diluted common share)
for the write-down of assets at the Continuing Education Center, reflected in
the McGraw-Hill Education segment. In the second quarter of 1998, the company
sold the remainder of its Information Technology and Communications Group; the
proceeds of $28.6 million approximated book value. Also included in operating
profit in 1999 is a $0.3 million decrease in operating profit due to the
restatement of subscription revenue. Net income in 1999 was $425.6 million,
28.7% higher than full-year 1998.

    Earnings per share for 1999 increased 28.9% over 1998 to $2.14. Earnings per
share before the extraordinary item in 1998 grew 25.9%. The restatement had no
impact on earnings per share for 1999 and caused a reduction in earnings per
share by 1 cent in 1998.


                                                                              27
<PAGE>   30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS (CONTINUED)


EXPENSES

Operating expenses for the year increased 4.6%. Divestitures caused operating
expenses to decrease by an additional 1.7%. The increase in expense reflects
investments in new products, technology and facilities. Modest inflation
occurred in most of the expense categories; however, continued best practice
efforts mitigated the impact of these increases. Combined paper, printing and
distribution prices decreased 1.2%, due primarily to favorable marketplace
conditions. Combined paper, printing and distribution expenses represent 23% of
operating expenses.

    Selling and general expenses increased 4.3%, reflecting increased volume.
Divestitures caused selling and general expenses to decrease by 1.9%. A
significant portion of both operating and selling and general expenses is
compensation, which increased 7.3% to $1.1 billion.

    Depreciation and amortization expense, including the amortization of
goodwill, intangible assets and prepublication costs, increased $9.1 million, or
3.0%, due primarily to the amortization of prepublication costs, associated with
1999 el-hi adoptions.


INTEREST EXPENSE

Net interest expense in 1999 was $42.0 million, compared with $48.0 million in
1998, a $6.0 million, or 12.4%, decrease due to lower average interest rates on
borrowings throughout the year. The lower interest expense reflects the
company's decision to repurchase $155 million of its 9.43% Notes in September
1998, which were replaced with commercial paper borrowings at lower interest
rates. The average commercial paper rate was 5.2% in 1999 and 5.6% in 1998.


PROVISION FOR INCOME TAXES

The provision for income taxes as a percent of income before taxes was 39% in
1999 and 1998.


SEGMENT REVIEW

MCGRAW-HILL EDUCATION

<TABLE>
<CAPTION>
(in millions)                                 2000         1999          1998
- --------------------------------------------------------------------------------
<S>                                       <C>          <C>           <C>
Operating Revenue                         $1,993.2     $1,734.9      $1,620.3
% Increase                                    14.9          7.1           3.0
- --------------------------------------------------------------------------------
Operating Profit                          $  307.7     $  273.7      $  202.1(a)
% Increase                                    12.4         35.4           7.6
- --------------------------------------------------------------------------------
% Operating Margin                              15           16            12
- --------------------------------------------------------------------------------
</TABLE>

(a) Includes a $16.0 million pre-tax provision at the Continuing Education
Center for the write-down of assets due to a continuing decline in enrollments.


The McGraw-Hill Education segment was renamed in 2000 to underscore its strong
connection to education at all levels, from pre-school to lifelong learning, and
to capitalize upon the widely recognized McGraw-Hill name. Two operating groups
are included under McGraw-Hill Education: the School Education Group and the
Higher Education, Professional and International Group. Included in 2000's
performance are results from Tribune Education, which was acquired in September
2000 and which will be fully integrated in 2001 throughout the various business
units of the segment, but predominantly within the School Education Group. The
implementation of SAB 101 had a minimal impact on the segment and its quarterly
reporting. On January 3, 2001, the Company purchased Mayfield Publishing, which
will be integrated into the Higher Education, Professional and International
Group.

    McGraw-Hill Education enjoyed another year of solid growth with revenue
increasing 14.9%. Revenue included $86.4 million from Tribune Education which
was acquired on September 5, 2000. Operating profit increased by 12.4%. Tribune
Education negatively impacted 2000 operating profit by 5.4%.

    In 1999, the McGraw-Hill Education segment grew revenue 7.1%, with both
operating groups contributing to the increase. Included in the 1999 performance
are results from Appleton & Lange, which was acquired in June 1999 and became
part of the Higher Education, Professional and International Group. The
Continuing Education Center (CEC) was part of the then Higher Education,
Professional Book, and International Publishing Group, but in 1999, McGraw-Hill
began a teach out of the CEC programs and discontinued its operations. Operating
profit in 1999 increased by 35.4% including the effect of the CEC write-down.
The write-down, which took place in 1998, favorably impacted 1999's operating
profit growth by 9.9%.


SCHOOL EDUCATION GROUP

The School Education Group comprises five divisions: SRA/McGraw-Hill, publisher
of supplementary and specialized research-based educational programs for the
elementary market; Macmillan/McGraw-Hill, publisher of instructional programs
for the K-6 market; Glencoe/McGraw-Hill, secondary school and post-secondary
publisher; CTB/McGraw-Hill, publisher of customized and standardized testing
materials and provider of scoring services for a variety of tests; and
McGraw-Hill Children's Publishing, publisher of educational products for home
use. In 2001, a sixth division will be added to the group, Wright
Group/McGraw-Hill, publisher of innovative supplementary products for the early
childhood, elementary and remedial markets.

    Despite an economy that showed signs of weakening in 2000, several other
trends affecting the K-12 market remained positive throughout the year,
including enrollment increases, a strong adoption cycle, record funding in
California with solid funding elsewhere,


28
<PAGE>   31
continuing emphasis on curriculum reform, and a focus on testing and
accountability. The School Education Group responded well to these trends
enabling it to post a 21.9% increase in revenue over 1999 growing to $1.11
billion. Tribune Education represented 7.6% of the revenue growth. All business
units within the group contributed to the increase. The group's sales account
for nearly 55.8% of the total segment's 2000 revenue.

    The growth in the School Education Group is primarily attributed to
SRA/McGraw-Hill, Macmillan/McGraw-Hill and CTB/McGraw-Hill. The growth was more
dramatic at SRA/McGraw-Hill, where sales increased substantially over 1999. Open
Court Reading, Collections for Young Scholars, Open Court Math, Art Connections,
Supplemental Reading, and Direct Instruction programs all sold well in
California, benefiting from the state's special funding via AB 2519.
SRA/McGraw-Hill's Open Court Reading program also succeeded in Texas and in open
territories in the Midwest. Reading played an important part in
Macmillan/McGraw-Hill's increase over prior year as well. Reading was very
strong in Texas, where SRA/McGraw-Hill together with Macmillan/McGraw-Hill
captured 37% of the K-3 reading adoption. Other programs contributing to
Macmillan/McGraw-Hill's performance include Social Studies in California and in
open territories, McGraw-Hill Science in Texas, Florida, and open territories,
and Language Arts in Alabama.

    Glencoe/McGraw-Hill, the acknowledged market leader in middle schools and
high schools, experienced a modest increase over prior year. Math adoptions in
1999 were robust and did not recur at that level in 2000. This loss of business,
however, was largely mitigated by the success of Glencoe Literature, The
Reader's Choice, Glencoe/McGraw-Hill's initial effort to enter the last major
market where it had not participated previously. With this launch in 2000,
Glencoe/McGraw-Hill is now competitive in virtually every subject area. CTB/
McGraw-Hill maintained a leadership position in the educational testing industry
in 2000 with sales increasing double digits. Well designed products, especially
TerraNova, a standardized achievement test, and its success in securing
statewide testing contracts, have enabled CTB/McGraw-Hill to achieve this
growth. CTB/McGraw-Hill has contracts in 21 states, many of which are multiple
year contracts. Currently 17 states use TerraNova as a component of their
statewide testing programs. Children's Publishing, formerly named Consumer
Products, also grew nicely in 2000 comparing favorably to the overall children's
retail book market growth rate of 12%. Product sales to trade and educational
dealer markets, which increased substantially, and the introduction of new
supplemental products contributed to this performance.

    With a record 53 million students entering public and private schools over
the next year and with demographic trends expected to remain positive over the
next 10 years, the School Education Group anticipates continued growth in 2001.
Possible softness in the economy and a developing fuel shortage, however, may
slightly dampen the general outlook for 2001. Nonetheless, the adoption cycle
remains strong with major adoptions occurring again, including Science and Math
in California, and Language Arts and Literature in Texas and Florida. At
SRA/McGraw-Hill, sales from business as usual will decline despite upcoming
adoptions in a variety of states since the extraordinary opportunities that
occurred in California in 2000 will not recur in 2001. SRA/McGraw-Hill has
obtained, as part of the Tribune Education acquisition, product which will give
it entree into the World Languages market and will significantly bolster its
existing math offering. Glencoe/McGraw-Hill will also benefit from the Tribune
Education purchase by integrating products from the acquisition that will give
it for the first time access to the remedial reading market as well as broaden
its math and social studies offerings. In addition, Glencoe/McGraw-Hill will be
bidding on major adoptions in Texas, California, Florida, Georgia, and North
Carolina. Macmillan/McGraw-Hill will assume responsibility for the elementary
component of the well-established Meeks-Heit Health program, part of the Tribune
Education acquisition, and will also participate in adoptions in the same states
as Glencoe/ McGraw-Hill, bidding at the elementary level.

    Children's Publishing will experience the biggest impact from the Tribune
Education acquisition, which will propel it from a small, organically grown unit
to one of the top 10 children's publishers. The greatly expanded division will
publish in higher-end, more profitable categories of children's publishing:
education, supplementary materials, religious, picture book, and nonfiction. The
division will continue to sell through bookstores, mass merchants, educational
dealers, and direct-to-consumers. A new division, acquired from Tribune
Education, will be part of the School Education Group in 2001. Headquartered in
the state of Washington, with several smaller international offices, the Wright
Group specializes in supplementary and remedial products directed at the
elementary market. Its math and reading products use an innovative approach that
provides a counter balance to the back-to-basics methodology used in
SRA/McGraw-Hill's supplementary products.

    CTB/McGraw-Hill, the only business unit within the School Education Group
that will not be directly affected by the Tribune Education acquisition, still
anticipates significant growth in 2001. Statewide testing contracts, scoring
operations, and the second edition of


                                                                              29
<PAGE>   32
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEGMENT REVIEW (CONTINUED)

TerraNova, published in the fall of 2000, will all be important contributors to
this increase. In addition, in response to an increasingly competitive industry,
CTB/McGraw-Hill will continue to pursue technological advances in test delivery
and scoring that will improve performance and profitability.

    In 1999, market conditions were strong, a favorable political environment
existed, and overall adoption opportunities were comparable to 2000 and 1998.
Benefiting from these trends, the School Education Group revenue grew 9.8% to
$913 million, nearly 53% of segment revenue in 1999. Strength in reading at the
elementary level, the expansion of statewide testing contracts, and the
popularity of educational books in the retail market contributed substantially
to the growth. SRA/McGraw-Hill grew largely on the success of its skill-based,
phonics-intensive reading programs. The mathematics and social studies programs
at Glencoe/McGraw-Hill played a significant role in the School Education Group's
performance. CTB/McGraw-Hill generated a healthy increase in sales and profit in
1999, due to the continued success of its standardized achievement test series,
TerraNova, and its significant presence in the statewide testing market.


HIGHER EDUCATION, PROFESSIONAL AND INTERNATIONAL GROUP

The Higher Education, Professional and International Group comprises four
operating units that serve the higher education, professional, international,
and lifetime learning and training markets. In 2001 a fifth operation, dedicated
to English as a Second Language and Adult Basic Education will be added, created
largely from product lines derived from the Tribune Education acquisition.
Revenue in 2000 for the group rose 7.1% to $880.4 million, which represents
44.2% of the segment's total sales. The increase was fueled by growth in the
higher education and selected international divisions. Tribune Education
represented 2.1% of the revenue growth.

    With a strong growth rate, the Higher Education division had the highest
year-over-year increase for the group. The Humanities, Social Science and World
Languages imprint, with a strong performance from its frontlist, made a
significant contribution. Key frontlist titles include Lucas: Art of Public
Speaking, 7e; Van Patten: Sabias Que, 3e; and Kamien: Music, An Appreciation,
7e. Other notable titles within the Business and Economics and Science,
Engineering, and Mathematics imprints also added to the operation's growth.
Among them are Garrison: Managerial Accounting, 9e; O'Leary: Microsoft Office
2000 Applications, 1e; Mader: Biology, 7e; and Silberberg: Chemistry, Molecular
Nature of Matter Exchange, 2e. Operating profit increased substantially,
reflecting both the sales increase and operating efficiencies, and profit
margins as a percentage of sales improved for the seventh consecutive year.

    McGraw-Hill Professional's results, which include a full year of sales from
Appleton & Lange, acquired at the end of June 1999, were nearly flat with the
prior year. All three major imprints experienced difficulty in achieving growth.
The Business/General Reference group was seriously affected by the year-to-year
fall-off in its successful Electronic Day Trader series, which was not offset by
publication of the best-selling title by Joan Lunden, Wake-up Calls. The
Scientific, Technical and Medical group weathered the bankruptcy of a major
medical jobber and light orders from the remaining jobbers. The Osborne Media
Group, which publishes titles on computing, was impacted by a lack of major new
software releases, which is a key driver of its business. In addition,
competition intensified, not only for retail shelf space but also from an
inundation of business books devoted to e-commerce.

    In contrast, McGraw-Hill International enjoyed solid growth over prior year
with exceptional improvements seen in the Latin America and Asia/Pacific
regions. For Latin America increased translations of Higher Education product
and the expansion of elementary school product sales in Puerto Rico and Mexico
were important factors in its success. Asia profited from healthy sales of
English language product from both Higher Education and Professional.
Disappointing results were noted, however, in other regions, including Canada,
where there is considerable uncertainty in the retail trade market, Ibero, which
was affected by high returns, and Europe, which also experienced softness in its
retail markets. In addition, the U.S. dollar strengthened in 2000 compared to
the euro, Australian dollar, and the UK pound. The weakening local currency led
to lower margins on imported product and adverse translation differences on both
foreign currency revenue and earnings.

    The Higher Education, Professional and International Group anticipates both
revenue increase and profit margin improvements in 2001 overall and for each
individual unit. Higher Education's growth will be substantial in 2001 due to
several factors. Enrollments, the major driver of industry sales, are expected
to grow by approximately 2% over the next few years. Technology will also
enhance sales as it is increasingly used for course management and content
delivery. Higher Education's initial success using PageOut, a proprietary
software, to assist professors in developing course Web sites, and the Online
Learning Center, which is a course-based Web product supporting major titles,
underscores the importance of technology in the competitive college industry.
Higher Education's 2001 operations will also reflect two additional
acquisitions,


30
<PAGE>   33
one being a relatively small part of Tribune Education, and the second being
Mayfield Publishing Company, which was acquired on January 3, 2001. Mayfield's
publishing program fits exceptionally well with Higher Education's Humanities
and Social Science imprint and will be integrated into it during the upcoming
year. The Mayfield acquisition should add 92 new and revised titles to Higher
Education's product list in 2001.

    Professional plans to maximize growth in core businesses and markets in
2001, extend the core book business into new market segments, and aggressively
pursue digital product development and digital distribution. E-book initiatives
will also be executed but carefully monitored as this market is still somewhat
unpredictable. Professional will also be integrating a piece of the Tribune
Education acquisition, the NTC/Contemporary trade product line, which will
become a part of the Business/General Reference Group. International will also
plan on increased sales in 2001 derived from Tribune Education, but the greatest
growth for this division comes from continued success in Latin America and
Asia/Pacific and from increased publications in Europe.

    Lifetime Learning will continue to make strategic investments in Web-based
corporate training and educational content. This content is currently focused at
the corporate market for basic business skills and supervisory training, but
technological advances will enable these products to be offered eventually in
all educational markets. As noted earlier, the Higher Education, Professional
and International Group will be adding a fifth business unit in 2001,
McGraw-Hill/Contemporary, which will service the English as a Second Language,
Adult Basic Education, and General Equivalency Diploma markets. The division was
formed by combining the English as a Second Language product line previously
included in Higher Education with the Adult Basic Education, and General
Equivalency Diploma product lines acquired from Tribune Education. Since this is
a highly specialized niche market, a separate operation was established to
provide better focus and ensure future success for this new operation.

    Revenue for the Higher Education, Professional and International Group in
1999 grew 4.3% to $821.9 million, which represented 47% of total segment sales.
Higher Education produced a 9.4% gain in revenue in 1999 on an outstanding year
with all imprints exceeding expectations. Results for 1999 were led by the
McGraw-Hill Science, Engineering and Mathematics imprint due to strong
performance of its frontlist and backlist titles. Operating profit increased
substantially and margins improved. Revenue for Professional in 1999 was
affected by the phaseout of the book club operations during the first quarter of
1999 and by the acquisition of Appleton & Lange at the end of June 1999. The
Group achieved strong growth in the retail bookstore marketplace, especially via
national chains and also through the rapidly expanding online retailer channel.
All product groups experienced revenue increases, led by robust sales in the
computer product line, where titles addressing high-level subject areas and the
computer certification market performed well. In 1999, International performed
well in many of its key markets resulting in revenue and profit increases over
the prior year. Two regions that generated significant increases included
Canada, where School, Trade, and Medical product sales were strong, and Asia
where the economy has been recovering. The Latin America region also improved,
with strong sales of Higher Education product occurring in Mexico, while Europe
showed moderate increases in revenue. Partially offsetting these favorable
results were several factors including the weakness of the euro and the ongoing
economic difficulties in South America.


FINANCIAL SERVICES

<TABLE>
<CAPTION>
(in millions)                                 2000         1999          1998
- --------------------------------------------------------------------------------
<S>                                       <C>          <C>           <C>
Operating Revenue                         $1,280.3     $1,224.6      $1,087.8
% Increase                                     4.6         12.6          18.1
- --------------------------------------------------------------------------------
Operating Profit                          $  395.5     $  369.7      $  355.9(a)
% Increase                                     7.0          3.9          39.0
- --------------------------------------------------------------------------------
% Operating Margin                              31           30            33
- --------------------------------------------------------------------------------
</TABLE>

(a) Includes a $26.7 million pre-tax gain on the sale of an office building in
New York City.

The Financial Services segment plays a central role in the global investment and
capital markets through its ratings, indexes, and related financial and
investment analysis and information. Financial Services operates under the
Standard & Poor's brand through two operating divisions: Credit Market Services
and Information Services. Credit Market Services provides credit ratings and
analyses globally on corporations, financial institutions, securitized and
project financings, and local, state and sovereign governments. It accounts for
a proportionately larger share of the segment's revenue and operating profits.
Information Services provides a wide range of investment information, analyses,
and opinions to institutional and individual investors globally.

    In 2000, the Financial Services segment revenue increased 4.6%. In
consideration of the views expressed under SAB 101 and related interpretations,
the company modified its revenue recognition policies. The effect of this
accounting change on the Financial Services segment revenue was to decrease 2000
revenue by $14.1 million, 1.1%. On a pro forma basis, segment revenue grew by
6.3%. Operating profit in 2000 increased 7.0%. The effect of the accounting
changes as required


                                                                              31
<PAGE>   34
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEGMENT REVIEW (CONTINUED)


by SAB 101 was to reduce operating profit by $14.1 million, 3.8%. On a pro forma
basis operating profit grew by 13.0%. The operating margin improved to 31% from
30% in 1999, reflecting stronger revenue growth in the higher margin Credit
Market Services business.

    In 1999, Financial Services segment revenue increased 12.6%. Operating
profit increased 3.9%, however the gain on the sale of a building in 1998
negatively impacted the growth by 8.4%. Operating margins for 1999 and 1998 were
30% and 33%, respectively. The gain on the sale of the building improved 1998's
margin by approximately 3%.


CREDIT MARKET SERVICES

In 2000, Standard & Poor's Ratings Services was renamed Credit Market Services
reflecting the organization's repositioning and growth in non-traditional
products and services. In 2000, revenue rose despite weakness in the public bond
market due to non-traditional revenue growth in the U.S., and strong
double-digit growth internationally. U.S. corporate bond issuance and
securitized financings were essentially flat while municipal bond issuance was
off 11%, resulting in a decline in U.S. revenue tied to bond market volumes.

    Growth from Corporate debt ratings increased significantly in the
international markets, most notably Europe. In addition, revenue from issuer
credit ratings, bank loan ratings and rating evaluation services increased
substantially. Revenue at the Structured Finance unit grew primarily due to a
strong U.S. asset backed market and continued strong demand in Europe. Financial
Services (Financial Institutions and Insurance) posted solid revenue increases,
led by growth in international markets. Public Finance revenue declined slightly
as the impact from lower U.S. municipal bond issuance offset double-digit
revenue increases in international markets and non-traditional products such as
School Evaluation Services.

    International revenue grew at double-digit rates in Europe, Asia and Latin
America. Revenue from outside the U.S. represented 32.2% of total revenue in
2000 versus 29.0% in 1999. The global network continued to expand with the
acquisition of Canadian Bond Rating Service, a leading domestic rating agency in
Canada, and the opening of a representative office in Seoul in 2000. Operating
profits grew on the strength of international revenue growth and the performance
of non-traditional revenue.

    Standard & Poor's Credit Market Services remains the market leader in the
global credit market services industry. In 2000, Standard & Poor's further
secured its leading position in the bank loan market with the acquisition of
Portfolio Management Data, the leading provider of default and recovery
information. Standard & Poor's also enhanced its position in the commercial real
estate market in 2000 by making minority equity investments in MortgageRamp.com
and Precept Corporation, two newly formed Internet commercial mortgage
origination and trading exchanges. Standard & Poor's will work with these new
exchanges to provide underwriting and credit reviews online for the auction of
commercial real estate loans. To bolster its e-commerce position in the
municipal and global securities processing markets, Standard & Poor's also made
a minority investment in DPC Data, a major provider of Web-based municipal bond
information.

    In 2000, there were significant changes in the industry's competitive
landscape as Moody's Investors Service was spun off by Dun & Bradstreet
Corporation and is now an independent public company. In addition, Fitch IBCA
merged with Duff & Phelps Credit Rating Company and acquired Thomson Financial
Bankwatch in 2000.

    In 2001, Standard & Poor's anticipates more robust public bond issuance in
both the U.S. and European bond markets. The European Monetary Union should
continue to facilitate the migration of European financing from traditional
banking relationships to public debt markets. Continued international expansion,
acceptance of structured financing techniques abroad, and the introduction of
non-traditional products are expected to contribute to revenue growth in 2001.

    Standard & Poor's revenue from Credit Market Services rose in 1999 in part
on a strong European bond market. European bond (Eurobonds, foreign bonds and
domestic bonds) issuance rose 27% as the number of issues denominated in the
then newly launched euro rose 42%. U.S. corporate bond issuance was essentially
flat while tax exempt and structured finance issuance in the U.S. were off 22%
and 15%, respectively. Corporate ratings growth in 1999 came from the
outstanding performance in Europe, and the acceptance of new products such as
Corporate Credit Ratings and Bank Loan Ratings and fee increases on large
transactions. Structured Finance grew primarily from continued strong global
demand in the asset-backed and commercial real estate markets. Structured
Finance also increased market share in the U.S. from ratings of collateralized
loan obligations, asset backed securities and the commercial mortgage backed
securities. Public Finance revenue was essentially unchanged as compared to 1998
as the introduction of new ratings services offset the impact from lower bond
issuance. Insurance and Financial Institutions both had double-digit revenue
growth. International revenue grew, reflecting the expansion in Europe as
financing began to move away from the traditional banking relationships and as
the structured finance market continued to develop. The global network expanded
in 1999 with an


32
<PAGE>   35
office opening in Milan, Italy. International revenue represented 29.0% of total
revenue in 1999 versus 26.0% in 1998. Non-traditional revenue growth was driven
by Bank Loan Ratings, Corporate Credit Ratings and Ratings Evaluation Services.
Operating profit grew on the strength of international and domestic markets and
the performance of non-traditional products, offset by investments in
international expansion and technology.


INFORMATION SERVICES

The economy in 2000 as a whole was favorable, but showed signs of weakness
towards the end of the year as consumer confidence waned and the equity markets
struggled after successive increases in interest rates by the Federal Reserve.
Around the world, the economies in Europe, Latin America, and Asia also showed
growth and broader retail equities markets began developing in many countries.
The environment for the financial information industry continues to change
dramatically due to technology and industry consolidation. Technology has
empowered investors to manage their own investments spurring growth in
electronic communications networks and Internet trading. The number of online
trading accounts and number of households trading online have grown
significantly. While these changes have altered the business model for
investment management and commoditized some financial data, the need for
unbiased and objective investment analysis continues to be very strong.
Consolidation continues to affect the marketplace through mergers of dealing
rooms, brokerage networks and asset management efforts. This trend reinforces
the importance of major financial market customers for Standard & Poor's future
as the world's leading provider of unbiased financial analysis, opinions and
solutions.

    In 2000, Standard & Poor's Information Services revenue grew due to the
continued worldwide strength in equity markets. Portfolio Services, Internet
quote provider ComStock, Compustat, Index Services, and Fund Services all showed
strong revenue growth offsetting difficult conditions in the economic,
fixed-income and foreign exchange commentary businesses.

    Standard & Poor's Portfolio Services, which provides investment
recommendations to investors, continued its track record of successful stock
selection. Standard & Poor's U.S. Equity Analysts' 5-STAR Picks significantly
outperformed the S&P 500 in 2000 and for the tenth time in 14 years. In 2000,
the assets under management based on licensing of Standard & Poor's analyses
grew to $9.9 billion through growth in existing portfolios with partners such as
Bear Stearns and new portfolios with distribution partners such as Citigroup.
Standard & Poor's ComStock, the world's leading quote provider to Internet
sites, continued to experience strong growth from that sector. In 2000, this
group continued to expand its U.S. and European activities off the strength of
modern ticker plants and further developed its Internet distribution
capabilities through the creation of a new Web Solutions business. The Web
Solutions group works with clients to develop Internet sites, hosted either by
Standard & Poor's or the client, using Standard & Poor's data. Standard & Poor's
Compustat, the market's leading source of standardized financial information,
experienced strong revenue growth in 2000. Coverage continues to expand in the
Compustat database and the content also powers new generations of Research
Insight and Market Insight products, which allow clients to more easily analyze
company financial information for making investment decisions. Standard & Poor's
also entered into an exclusive relationship with Stern Stewart & Co. that allows
asset managers and equity analysts to screen investments using EVA(R) (Economic
Value Added) as a selection criterion.

    Standard & Poor's Index Services business continued to expand rapidly both
domestically and internationally. On the international front in 2000, Standard &
Poor's purchased the Emerging Markets Database from the IFC at year-end 1999 and
has created alliances with a number of international exchanges to operate their
index businesses: Australia (S&P/ASX), Canada (S&P/TSE) and Japan (S&P/TOPIX).
Index Services also created a European Index Services Group, whose promotional
efforts are focused on the S&P Euro 350 and related industry sectors. In
addition, the S&P Global 100 Index was unveiled and a new exchange-traded fund
(ETF) based on that index was launched in December on the New York Stock
Exchange. In the U.S., the Index business benefited from fees on index-based
derivative products and ETFs, including S&P depository receipts (SPDRs). The
various SPDR ETFs have consistently been among the most actively traded
securities on the American Stock Exchange. At year end, the aggregate trust size
of all SPDR ETFs exceeded $30 billion, up significantly from 1999 levels. In
2000, Standard & Poor's further leveraged its indices by partnering with
Barclays Global Investors to launch 14 new ETFs in the U.S. and Canada;
aggregate trust size at year-end was $6.8 billion.

    Mutual funds continued to be a popular asset class for individuals to invest
in and this interest continued to drive strong revenue growth for the
information, analytics and ratings provided by Standard & Poor's Fund Services.
Fund Services provides mutual fund data and performance information, as well as
forward-looking fund ratings on mutual funds and asset managers. Standard &
Poor's MMS experienced a decline in revenue due to extremely difficult markets
and continued industry consolidation. In 2000, the Standard & Poor's MMS product
line was paired with Compustat to leverage


                                                                              33
<PAGE>   36
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEGMENT REVIEW (CONTINUED)


resources and content from both businesses to better serve the institutional
market. Standard & Poor's DRI, a provider of economic analysis and information,
experienced a decline in revenue due to stagnant demand for macroeconomic
information and analysis. The evaluations business, historically known as J.J.
Kenny, provider of pricing and information to the fixed-income markets,
experienced a moderate decline in revenue primarily due to weak conditions in
the U.S. municipal market.

    In aggregate, revenue and operating profit for Standard & Poor's Information
Services increased as the benefits from the strong equity markets offset the
weakness in the secondary market for municipal fixed-income securities and the
deteriorating conditions in the markets served by Standard & Poor's MMS and
Standard & Poor's DRI. In addition, Standard & Poor's Information Services
continued to make investments in international expansion as well as Web-based
services and capabilities in 2000.

    In 2001, Standard & Poor's will continue to focus on providing top-quality,
independent investment analysis. Standard & Poor's will also continue to expand
its analytical capabilities, coverage and content as well as its technological
capabilities to support that objective. In addition to launching new
Internet-based products and services, Standard & Poor's will continue to seek
partners, both traditional and non-traditional, to distribute its information
and analysis. Global expansion also remains a priority, particularly in Europe
and Asia where Standard & Poor's sees strong equity markets developing. Standard
& Poor's will continue to invest in infrastructure and new products in support
of growth opportunities in those regions.

    In 1999, Standard & Poor's Information Services revenue increased, primarily
due to the booming U.S. equity market, a revitalization of the international
markets, offset by weakness in the secondary municipal market. Index Services,
S&P Retail Market Services and Fund Services all showed strong growth offsetting
difficult conditions in the fixed-income and commodity businesses. Index
Services benefited from fees on index-based derivative products, including S&P
depository receipts, which consistently held the highest trading volume of any
security on the American Stock Exchange. Internationally, this unit launched the
S&P Global 1200 index, incorporating the S&P Euro 350, the S&P Topix 150, the
S&P Asia Pacific 100, the S&P Canada 60 and the S&P Latin America 40 as
components. In 1999, assets under management in Standard & Poor's fee generating
portfolios reached $6.2 billion. Standard & Poor's Fund Services showed strong
revenue growth. Standard & Poor's Compustat benefited from market equity
volatility and increased demand for fundamental data and analysis. Standard &
Poor's MMS had a decline in revenue due to industry consolidation and lower
foreign currency trading volumes. Standard & Poor's DRI showed softness due to
declining subscription and data revenue for macroeconomic information. Operating
profit in 1999 decreased as the benefits of the soaring equity market could not
offset the weakness in the secondary market for fixed income securities, and in
particular municipal bond securities. In addition, continued investment in
international expansion in Europe, along with technology investments in new
Web-based services, had a dampening effect on operating profit.


INFORMATION AND MEDIA SERVICES

<TABLE>
<CAPTION>
(in millions)                                  2000          1999          1998
- --------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>
Operating Revenue                          $1,007.5      $1,032.2      $1,016.9
% Increase (Decrease)                          (2.4)          1.5          (1.8)
- --------------------------------------------------------------------------------
Operating Profit                           $  208.3(a)   $  179.6(b)   $  126.9
% Increase (Decrease)                          16.0          41.4         (16.5)
- --------------------------------------------------------------------------------
% Operating Margin                               21            17            12
- --------------------------------------------------------------------------------
</TABLE>

(a) Includes a one-time gain of $16.6 million from the sale of Tower Group
International.

(b) Includes a one-time gain of $39.7 million from the sale of the Petrochemical
publications.

The Information and Media Services segment comprises two operating groups, which
include business and professional media offering information, insight and
analysis: the Business-to-Business Group (comprising BusinessWeek, Aviation
Week, Platts, Construction Information Group and Healthcare Information Group)
and Broadcasting.

    The Information and Media Services segment's revenue declined 2.4% to $1.0
billion in 2000 and operating profit grew 16.0%. In the first quarter of 2000, a
$16.6 million pre-tax gain was recorded on the sale of Tower Group International
($10.2 million after tax or 5 cents per diluted common share). In the fourth
quarter of 1999, a $39.7 million pre-tax gain was recorded on the sale of
McGraw-Hill's Petrochemical publications ($24.2 million after-tax, or 12 cents
per diluted common share). These divestitures depressed the operating revenue
growth by 13.0% or $18.5 million and improved the growth in operating results by
15.6%, or $14.3 million. The impact of the SAB 101 adjustment and the
subscription restatement were not material to the segment's operating profit.

    In 1999, the Information and Media Services segment's revenue grew 1.5% to
$1,032.2 million and operating profit grew 41.4%. The company sold its
Petrochemical publications in 1999 and the remainder of its Information
Technology and Communications Group in 1998. The divested businesses negatively
impacted the growth in revenue by 4.1% and improved the growth in operating
profit by 5.0%. The impact of the restatement of subscription income improved
the growth in revenue by 0.4% and improved the growth in


34
<PAGE>   37
operating profit by 4.2%. On a pro forma basis, adjusting 1999 and 1998 for SAB
101, operating profit would have increased 42.3% over 1998. On a pro forma basis
revenue would have increased 1.6% over 1998.


BUSINESS-TO-BUSINESS GROUP

The economy and the business environment were generally favorable for the
group's businesses. A combination of strong corporate profits and a robust
economy drove BusinessWeek's advertising to an historical high. Revenue
increased 7.6% to $862.3 million and operating profit increased 2.4% over 1999
for the Business-to-Business Group. The divestiture of the Petrochemical
publications depressed the growth in revenue by $21.9 million, 3.1%, and
depressed the growth in operating profit by $40.9 million, 39.8%.

    BusinessWeek had another record year and a sixth consecutive year of
double-digit operating profit growth. The results reflect solid gains in the
North American and International editions as well as online initiatives.
Circulation reached an all-time high. North American advertising pages, as
measured by the Publishers' Information Bureau, grew 17% in 2000, well above the
industry average. Corporate profits from the booming economy drove advertising
growth to the highest levels ever experienced by BusinessWeek. The influx of new
advertisers increased revenue per page. Successful programs include e.biz, a
supplement on e-businesses, and frontier, for small business owners. Total
advertising pages in frontier grew 33% and e.biz pages more than doubled
compared with 1999. Advertising revenue growth showed strong gains in Europe and
Asia, with non-U.S. source revenue growing at a double-digit rate. BusinessWeek
Online continues to expand its traffic and revenue base. Revenue increased by
71%, the number of registered users grew 60% and the level of traffic increased
23% in 2000.

    Market conditions for Aviation Week were better than expected, although
airline profits, airliner deliveries and orders all declined. The defense market
was stable after a decade-long downtrend, and the robust economy in the U.S.
drove the corporate aviation sector to record sales. Aviation Week's operating
profits on its core publishing business grew in 2000, continuing a five-year
growth trend, but overall group operating profit declined due to investment in
the launch of AviationNow.com and softness in the directory and newsletter
operations. Aviation Week made healthy strides in the introduction and
development of its portal, AviationNow.com. The portal is the largest media Web
site for aviation and aerospace professionals, with almost 800,000 user sessions
per month. Site sponsors include customers from the United States, Canada,
Europe and Asia.

    Platts, formerly the Energy Information Group, is comprised of Platts and
magazines, newsletters, databases and directories serving the electric-power,
natural gas, nuclear, and coal industries. Platts is a provider of real-time
information and analysis in the global energy services market. The energy
industry plays a significant role in the world economy and the recent supply and
demand dynamics resulted in upward pressure on oil and natural gas prices. This
resulted in an increased demand for the energy commodity news and information
provided by Platts. In 2000, Platts benefited from the volatility of the energy
commodities markets, which spurred demand for its services, especially its
petroleum products. The group saw healthy growth in revenue and operating
profit. Platts continued investing in the development of Platts.com, a provider
of real-time news, analysis and pricing information for all sectors of the
energy industry.

    Business conditions were not as favorable in the Construction and Healthcare
Information Groups. In 2000, the initial signs of slower growth for the
construction industry began as total construction contract values increased by
only about 3% compared to a 10% gain experienced in 1999. Fewer, FDA drug
approvals as well as the withdrawal of approvals for several products impacted
performance in the Healthcare Information Group. The Construction Information
Group continued the migration of its established brands and products to digital
media with significant investments in Construction.com. The Construction
Information Group's revenue grew modestly in 2000. The most significant gains
occurred in advertising revenue in Architectural Record and Engineering
News-Record, and in the Sweet's product line. These revenue gains were offset by
a decline in revenue at F.W. Dodge. Expenses were essentially flat for the
Construction Information Group due to significant cost rationalization measures.

    The Construction Information Group will continue its cost rationalization
efforts in 2001. Slowing growth became evident in the construction industry
earlier in 2000. In 2001, total construction contract values are expected to
stabilize. Public works construction and manufacturing building are expected to
show growth but single family unit construction will decline. The Construction
Information Group will continue its current strategies by improving its
products' position in both the traditional and non-traditional marketplaces and
continue to expand Construction.com.

    In 2001, slower earnings in the technology sector and cyclical industries,
the current dot.com shakeout, as well as increasing paper and postage cost will
create a challenging operating environment for the Business-to-Business Group.
BusinessWeek will continue to stress


                                                                              35
<PAGE>   38
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEGMENT REVIEW (CONTINUED)


international growth and an aggressive online strategy. Aviation Week will focus
on its multimedia growth strategy and development of nonadvertising revenue
streams. A new conference and exhibition product will be launched in Asia and a
new air show publication will be introduced in Europe. Platts will exploit the
growing preference for electronic, real-time news and information and will
continue to invest in its e-commerce initiative. Economic forces in the energy
markets are expected to sustain demand for Platts' products as marketplace
volatility continues. In 2001, strategic alliances with NYMEX and Trade Capture
will further position Platts in the energy commodities markets. Healthcare will
expand its ancillary product revenue in the exhibition, conference and custom
publishing areas. The pharmaceutical marketplace is expected to improve in the
latter half of 2001 as a result of an increase in new drug approvals.

    In 1999 revenue for the Business-to-Business Group increased 5.5% to $800.3
million, and operating profit increased 45.3% over 1998. The restatement of
subscription revenue resulted in an incremental increase of $3.8 million in
operating profit over 1998. In the third quarter of 1999, the company divested
its Petrochemical publications and recognized a $39.7 million gain. Strong
performances by BusinessWeek and Aviation Week were offset by weaknesses
elsewhere in the group.

    BusinessWeek also had a record year in 1999, with revenue increasing 19.0%
and a fifth consecutive year of double-digit operating profit growth. The
results reflected solid gains in the North American and International editions
as well as online initiatives. Domestic advertising pages, as measured by the
Publishers' Information Bureau, grew 22.9% in 1999, while an influx of new
advertisers increased the revenue per page. Aviation Week's operating profit
grew in 1999, continuing a growth trend that expanded profits by 61% since 1995.
This growth resulted from increased market share, effective cost management, and
the development of new products and services. In 1999, Platts had declines in
both revenue and operating profit as compared to 1998 as continued industry
consolidation negatively impacted Platts' magazine advertising revenue and
newsletter subscribers. In addition, the newsletter operation experienced
attrition in its print product subscriber base as customers sought lower cost or
no cost information on the Internet. In 1999, the Construction Information
Group's revenue increased 1.6% over 1998 to $290.5 million, but operating
profits declined modestly due to investments in digital platforms and the costs
of rolling out a major new Internet product. Year-to-year declines in Sweet's
revenue, mainly in catalogue file revenue and certain electronic products,
offset increases in revenue from F.W. Dodge, Architectural Record and
Engineering News-Record.

    The Healthcare Information Group's revenue decreased in 1999. The major
reason for the softness in advertising revenue was the delay in FDA approval of
new drugs and associated advertising programs.


BROADCASTING

The Broadcasting Group operates four television stations, all ABC affiliates in
Denver, Indianapolis, San Diego and Bakersfield, California. The Broadcasting
Group revenue increased 10.6% from 1999 to $127.8 million. Operating profit also
improved at a double-digit rate. The current political cycle drove the
Broadcasting stations' revenue, as did the Super Bowl, which aired on ABC in
January 2000. During 2000, Broadcasting partnered with Internet Broadcast
Systems, a network of broadcast station Web sites. All affiliated stations
receive a turnkey Web site and an associated sales organization.

    In 2001, the Broadcasting Group will not have the same political environment
as 2000 nor will it have the Super Bowl. The Group expects that base market
growth and improved local selling efforts coupled with lower syndicated
programming costs and productivity improvement from a Group-wide automation
project will offset the revenue loss. Additionally, the Broadcasting Group will
continue to develop and bolster its stations' brands in order to improve local
ratings and enhance its revenue streams.

    In 1999, the Broadcasting Group revenue declined 3.3% from 1998 to $115.5
million, which was consistent with an overall decline in the entire broadcasting
industry. Broadcasting did not have the strong political advertising that
existed in 1998. Effective expense management helped offset part of the revenue
softness.


TOWER GROUP INTERNATIONAL

The company sold Tower Group International in the first quarter of 2000 and
recognized a $16.6 million gain ($10.2 million after tax, or 5 cents per diluted
share) on the sale. Tower Group International revenue increased 4.4% to $116.4
million, and operating profit improved in 1999, due to growth in the non-border
business, the expansion of existing major customer relationships and the full
year impact of offices opened in the prior year.


36
<PAGE>   39
LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
(in millions)                                                2000          1999
- --------------------------------------------------------------------------------
<S>                                                      <C>           <C>
Working Capital                                          $   20.9      $  (14.7)
- --------------------------------------------------------------------------------
Total Debt                                               $1,045.4      $  536.4
- --------------------------------------------------------------------------------
Accounts Receivable (before reserves)                    $1,351.4      $1,281.5
% Increase                                                      5            10
- --------------------------------------------------------------------------------
Inventories                                              $  388.9      $  295.3
% Increase (Decrease)                                          32             4
- --------------------------------------------------------------------------------
Investment in Prepublication Costs                       $  250.0      $  246.3
% Increase (Decrease)                                           1            26
- --------------------------------------------------------------------------------
Capital Expenditures                                     $   97.7      $  154.3
% Decrease                                                    (37)          (14)
- --------------------------------------------------------------------------------
</TABLE>

The company continues to maintain a strong financial position. Cash flow from
operations remained constant, $706 million in 2000 compared with $708 million in
1999. Cash flows from operations more than covered dividends, investment in
publishing programs and capital expenditures.

    In 2000, total debt increased $509.0 million, primarily from acquisitions,
including Tribune Education, and share purchases under the share repurchase
program. Shares repurchased under the repurchase program were used for general
corporate purposes including the issuance of shares for stock compensation
plans.

    In 1999, total debt included $95.0 million of 9.43% Notes due in September
2000. These notes matured and were replaced with commercial paper borrowings at
a lower interest rate. 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, when and if interest
rates are attractive and markets are favorable. Total debt as a percentage of
total capital increased to 37.2% at the end of 2000 from 24.6% at the end of
1999.

    Commercial paper borrowings at December 31, 2000 were $1.02 billion. On
August 15, 2000, the company retired its existing revolving credit facility that
was due to expire on February 13, 2002 and replaced it with two new revolving
credit facilities. The two revolving credit facility agreements, each with the
same 11 domestic and international banks, supports the commercial paper debt and
consist of a $625 million, Five-year revolving credit facility ("New Five-year
Facility") and a $625 million 364-day revolving credit facility ("New 364-day
Facility"). The New Five-year Facility provides that the company may borrow at
any time until August 15, 2005, when the commitment terminates and any
outstanding loans mature. The New 364-day Facility agreement provides that the
company may borrow until August 14, 2001, on which date the facility commitment
terminates and the maturity of such borrowings may not be later than August 14,
2002. The company pays a facility fee of five and seven basis points on the New
364-day Facility and New Five-year Facility, respectively (whether or not
amounts have been borrowed), and borrowings may be made at a range of 13 to 20
basis points above LIBOR at the company's current credit rating. The fees and
spreads on the New Five-year Facility fluctuate based upon a schedule related to
the company's long-term credit rating by Moody's and Fitch. The facility
agreements each contain certain covenants, and the only financial covenant
requires that the company not exceed an indebtedness to cash flow ratio, as
defined, of four to one at any time. This restriction, which was also in place
under the retired facility, has never been exceeded. At December 31, 2000, there
were no borrowings under either facility. The commercial paper borrowings
outstanding are supported by the new revolving credit facilities, and 80% of
these borrowings have been classified as long-term.

    Earnings and cash flow are significantly impacted by the seasonality of
businesses, particularly educational publishing. The first quarter is the least
significant, accounting for 18% of revenue and, before the cumulative effect of
the accounting change, only 9% of net earnings in 2000. The third quarter is the
most significant, generating over 46% of 2000 annual earnings. This seasonality
in revenue also impacts cash flow and related borrowing patterns. The company
typically borrows in the first half of the fiscal year, and generates cash in
the second half of the year, primarily from fourth quarter collections from
customers in the education markets. This pattern will be magnified in future
years due to the acquisitions, including Tribune Education, in the McGraw-Hill
Education segment.

    Working capital at the end of 2000 of $20.9 million was $35.6 million higher
than the level at the end of 1999, primarily because of the acquisition of
Tribune Education, which had a significant impact on the assets of the company.

    Accounts receivable (before reserves) increased $69.9 million, or 5%. The
year-to-year increase was due to higher sales, particularly in international
markets, and timing of collections. Number of day's sales outstanding decreased
one day in 2000.

    Total inventories increased $93.7 million, or 31.7%, from prior year due
primarily to the acquisition of Tribune Education, which increased the year end
balance by approximately $66.0 million.

    Capital expenditures totaled $97.7 million, primarily the purchase of
property and equipment, compared with $154.3 million in 1999. The decrease in
2000 relates to the completion of the initial phase of the new leased office
space in New York City and the completion of construction of a building in
Columbus, Ohio. For 2001,


                                                                              37
<PAGE>   40
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)


capital expenditures are expected to be approximately $145 million, reflecting
increased spending for the next phase of the New York City office space
consolidation and investments in infrastructure for the McGraw-Hill Education
segment.

    Net prepublication costs increased to $518.0 million at December 31, 2000.
Prepublication investment totaled $250.0 million in 2000, $3.7 million more than
1999, reflecting an increase in investment for the 2001 adoption year. For 2001,
prepublication spending is expected to further increase by approximately 24% for
upcoming adoption years.

    On January 27, 1999, the Board of Directors approved a two-for-one stock
split for distribution on March 8, 1999 to shareholders of record on February
24, 1999. Additionally, the Board of Directors approved a stock repurchase
program authorizing the purchase of up to 15 million shares, or 7.5% of the
outstanding common stock on a post-split basis. In 1999, the company repurchased
3.2 million shares for $173.8 million, and in 2000 repurchased 3.1 million
shares for $167.6 million.

    On January 31, 2001, an increase in the quarterly common stock dividend of
$0.01, or 4.3%, to $0.245 per share was announced.

    In 2001, cash flow from operations is expected to be sufficient to cover
dividends, investment in publishing programs and capital expenditures. Debt
levels will be impacted by the continuation of the stock repurchase program.

    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. Management does not
consider the impact of currency fluctuations to represent a significant risk.
The company has naturally hedged positions in most countries with a local
currency perspective and asset and liability offsets. The company's interest
expense is sensitive to changes in the general level of U.S. interest rates. In
this regard, changes in the U.S. rates affect the interest paid on its debt. The
company does not generally enter into derivative financial instruments in the
normal course of business, nor are such instruments used for speculative
purposes.


"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

This section, as well as other portions of this document, includes certain
forward-looking statements about the company's business, new products, sales,
expenses cash flows, and operating and capital requirements. Such
forward-looking statements include, but are not limited to: future paper,
printing and distribution prices; pay merit increase rates; Educational
Publishing's level of success in 2001 adoptions and enrollment and demographic
trends, the level of educational funding; the strength of higher education,
professional and international publishing markets and the impact of technology
on them; 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 level of
success of new product development and global expansion and strength of domestic
and international markets at Standard & Poor's Information Services;
BusinessWeek's success in expansion into international markets; the strength of
the domestic and international advertising markets; the volatility of the energy
marketplace; the strength of the pharmaceutical marketplace; the contract value
of public works, manufacturing and single family unit construction;
Broadcasting's level of political advertising and the cost of syndicated
programming; and the level of future cash flow, debt levels, capital
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 (including the
lack of a serious economic downturn in the U.S. and global economy), currency
and foreign exchange volatility, the health of capital and equity markets,
continued strength and funding in the education market (both domestically and
internationally), continued strength in advertising, continued investment by the
construction, computer and aviation industry, the successful marketing of new
products, and the effect of competitive products and pricing.


38
<PAGE>   41
CONSOLIDATED STATEMENT OF INCOME
(RESTATED)

<TABLE>
<CAPTION>
Years ended December 31 (in thousands, except per-share data)             2000             1999             1998
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>              <C>
OPERATING REVENUE (Note 1, 4 and 12)                                $4,280,968       $3,991,685       $3,724,971
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Operating                                                            1,762,721        1,738,125        1,661,615
Selling and general                                                  1,390,262        1,269,479        1,216,686
Depreciation and amortization (Note 1)                                 362,325          308,355          299,240
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES                                                       3,515,308        3,315,959        3,177,541
Other income - net (Note 2)                                             54,523           63,949           56,779
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS                                                 820,183          739,675          604,209
Interest expense - net                                                  52,841           42,013           47,961
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME                                          767,342          697,662          556,248
Provision for taxes on income (Note 5)                                 295,426          272,088          216,937
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE ADJUSTMENT             471,916          425,574          339,311
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT OF
  DEBT, NET OF TAX (Note 3)                                                 --               --           (8,716)
CUMULATIVE CHANGE IN ACCOUNTING, NET OF TAX (Note 12)                  (68,122)              --               --
- ----------------------------------------------------------------------------------------------------------------
NET INCOME                                                          $  403,794       $  425,574       $  330,595
- ----------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE (Note 11)
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE ADJUSTMENT          $     2.43       $     2.17       $     1.72
NET INCOME                                                          $     2.08       $     2.17       $     1.68
================================================================================================================
DILUTED EARNINGS PER COMMON SHARE (Note 11)
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE ADJUSTMENT          $     2.41       $     2.14       $     1.70
NET INCOME                                                          $     2.06       $     2.14       $     1.66
================================================================================================================
</TABLE>
See accompanying notes.


                                                                              39
<PAGE>   42
CONSOLIDATED BALANCE SHEET
(RESTATED)

<TABLE>
<CAPTION>
December 31 (in thousands, except share data)                                              2000          1999
- -------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>           <C>
ASSETS

CURRENT ASSETS
Cash and equivalents (Note 1)                                                        $    3,171    $    6,489
Accounts receivable (net of allowances for doubtful accounts and sales returns:
   2000 - $256,263; 1999 - $232,526)                                                  1,095,118     1,048,991
- -------------------------------------------------------------------------------------------------------------
Inventories:
Finished goods                                                                          324,852       239,139
Work-in-process                                                                          24,231        25,205
Paper and other materials                                                                39,864        30,911
- -------------------------------------------------------------------------------------------------------------
Total inventories (Note 1)                                                              388,947       295,255
Deferred income taxes (Note 5)                                                          192,789       142,520
Prepaid and other current assets (Note 1)                                               121,665        89,784
- -------------------------------------------------------------------------------------------------------------
Total current assets                                                                  1,801,690     1,583,039
- -------------------------------------------------------------------------------------------------------------
PREPUBLICATION COSTS (net of accumulated amortization:
   2000 - $757,034; 1999 - $661,207) (Note 1)                                           518,031       439,351
INVESTMENTS AND OTHER ASSETS
Investment in Rock-McGraw, Inc. - at equity (Note 1)                                     95,862        85,997
Prepaid pension expense (Note 9)                                                        159,598       119,495
Other                                                                                   226,910       206,770
- -------------------------------------------------------------------------------------------------------------
Total investments and other assets                                                      482,370       412,262
- -------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT - AT COST
Land                                                                                     13,685        12,654
Buildings and leasehold improvements                                                    299,639       300,898
Equipment and furniture                                                                 733,045       680,152
- -------------------------------------------------------------------------------------------------------------
Total property and equipment                                                          1,046,369       993,704
Less - accumulated depreciation                                                         614,464       563,296
- -------------------------------------------------------------------------------------------------------------
Net property and equipment                                                              431,905       430,408
- -------------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS - AT COST
   (net of accumulated amortization:
   2000 - $586,127; 1999 - $555,346) (Notes 1 and 2)                                  1,697,448     1,253,051
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                         $4,931,444    $4,118,111
- -------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.


40
<PAGE>   43
<TABLE>
<CAPTION>
                                                                                 2000          1999
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                                                        <C>           <C>
CURRENT LIABILITIES
Notes payable (Note 3)                                                     $  227,848    $   86,631
Current portion of long-term debt (Note 3)                                         --        95,043
Accounts payable                                                              313,286       340,220
Accrued royalties                                                             115,022        99,468
Accrued compensation and contributions to retirement plans                    243,252       245,871
Income taxes currently payable                                                 55,388       105,066
Unearned revenue (Note 12)                                                    475,559       314,811
Other current liabilities (Note 1)                                            350,430       310,660
- ---------------------------------------------------------------------------------------------------
Total current liabilities                                                   1,780,785     1,597,770
- ---------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt (Note 3)                                                       817,529       354,775
Deferred income taxes                                                         163,231       135,426
Accrued postretirement healthcare and other benefits (Note 10)                178,525       187,485
Other non-current liabilities                                                 230,330       194,165
- ---------------------------------------------------------------------------------------------------
Total other liabilities                                                     1,389,615       871,851
- ---------------------------------------------------------------------------------------------------
Total liabilities                                                           3,170,400     2,469,621
- ---------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
- ---------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 7 and 8)
$1.20 preference stock, $10 par value: authorized - 891,256 shares;
   outstanding - 1,328 and 1,352 shares in 2000 and 1999                           13            14
Common stock, $1 par value: authorized - 300,000,000 shares;
   issued - 205,838,910 and 205,838,594 shares in 2000 and 1999               205,839       205,838
Additional paid-in capital                                                     44,176        24,305
Retained income (Note 12)                                                   2,105,145     1,883,813
Accumulated other comprehensive income                                       (110,358)      (87,731)
- ---------------------------------------------------------------------------------------------------
Less - common stock in treasury - at cost
   (11,553,707 shares in 2000 and 10,129,840 shares in 1999)                  470,903       363,728
   Unearned compensation on restricted stock                                   12,868        14,021
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity                                                  1,761,044     1,648,490
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                 $4,931,444    $4,118,111
- ---------------------------------------------------------------------------------------------------
</TABLE>


                                                                              41
<PAGE>   44
CONSOLIDATED STATEMENT OF CASH FLOWS
(RESTATED)

<TABLE>
<CAPTION>
Years ended December 31 (in thousands)                                                    2000           1999           1998
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
<S>                                                                                  <C>            <C>            <C>
Net income                                                                           $ 403,794      $ 425,574      $ 330,595
   Cumulative change in accounting principle                                            68,122             --             --
Adjustments to reconcile net income to cash provided by operating activities:
   Depreciation                                                                         86,993         82,110         77,168
   Amortization of goodwill and intangibles                                             66,715         55,586         52,530
   Amortization of prepublication costs                                                208,617        170,653        169,542
   Provision for losses on accounts receivable                                          47,589         68,657        104,597
   Gain on sale of building                                                                 --             --        (26,656)
   Gain on sale of Petrochemical publications                                               --        (39,668)            --
   Gain on sale of Tower Group International                                           (16,587)            --             --
   Extraordinary loss on early extinguishment of debt                                       --             --         14,289
     Other                                                                              (9,173)         1,372         (4,595)
Change in assets and liabilities net of effect of acquisitions and dispositions:
   Increase in accounts receivable and inventory                                      (117,031)      (166,872)       (73,990)
   Increase in prepaid and other current assets                                        (19,707)          (948)          (161)
   (Decrease)/increase in accounts payable and accrued expenses                        (19,717)        54,906         66,500
   Increase in unearned revenue and other current liabilities                           31,346         22,197         47,339
   (Decrease)/increase in interest and income taxes currently payable                  (29,848)        67,254        (20,050)
   Net change in deferred income taxes                                                  34,680         (8,428)        33,339
   Net change in other assets and liabilities                                          (30,233)       (24,340)       (15,377)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities                                                  705,560        708,053        755,070
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in prepublication costs                                                    (250,005)      (246,341)      (194,978)
Purchase of property and equipment                                                     (97,721)      (154,324)      (178,889)
Acquisition of businesses and equity interests                                        (703,719)       (67,085)       (24,720)
Proceeds from disposition of property, equipment and businesses                        142,418         67,244         66,479
- ----------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities                                                    (909,027)      (400,506)      (332,108)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to shareholders                                                        (182,462)      (169,049)      (154,386)
Additions to/(repayment of) commercial paper and other short-term debt - net           606,276         11,899         (1,660)
Repayment of long-term debt                                                            (95,043)            --       (154,988)
Repurchase of treasury shares                                                         (167,611)      (173,784)      (105,637)
Exercise of stock options                                                               45,317         22,813         16,080
Other                                                                                   (3,239)        (1,709)       (14,973)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by/(used for) financing activities                                       203,238       (309,830)      (415,564)
- ----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                 (3,089)        (1,679)        (1,715)
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents                                                      (3,318)        (3,962)         5,683
Cash and equivalents at beginning of year                                                6,489         10,451          4,768
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR                                                  $   3,171      $   6,489      $  10,451
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.


42
<PAGE>   45
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(RESTATED)


<TABLE>
<CAPTION>
                                                                                           Accumulated        Less -
                                                                                                 other        common
Years ended                                   $1.20              Additional                    compre-         stock
December 31, 2000, 1999 and 1998         preference     Common      paid-in     Retained       hensive   in treasury
(in thousands, except per-share data)       $10 par     $1 par      capital       income        income       at cost
- --------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>        <C>          <C>          <C>           <C>
BALANCE AT DECEMBER 31, 1997                    $14   $102,919      $35,469   $1,502,587      $(74,247)     $159,447
Net income                                       --         --           --      330,595            --            --
Other comprehensive income,
   net of tax - foreign currency
   translation adjustments                       --         --           --           --        (1,715)           --

COMPREHENSIVE INCOME
Dividends ($.78 per share)                       --         --           --     (154,386)           --            --
Share repurchase                                 --         --           --           --            --       105,637
Employee stock plans                             --         --       15,840           --            --       (30,275)
Other                                            --         --          102           --            --          (136)
Two-for-one stock split at par value             --    102,919      (51,411)     (51,508)           --            --
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                     14    205,838           --    1,627,288       (75,962)      234,673
Net income                                       --         --           --      425,574            --            --
Other comprehensive income,
   net of tax - foreign currency
   translation adjustments                       --         --           --           --       (11,769)           --

COMPREHENSIVE INCOME
Dividends ($.86 per share)                       --         --           --     (169,049)           --            --
Share repurchase                                 --         --           --           --            --       173,784
Employee stock plans                             --         --       24,121           --            --       (44,646)
Other                                            --         --          184           --            --           (83)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                     14    205,838       24,305    1,883,813       (87,731)      363,728
Net income                                       --         --           --      403,794            --            --
Other comprehensive income,
   net of tax - foreign currency
   translation adjustments                       --         --           --           --       (22,627)           --

COMPREHENSIVE INCOME
Dividends ($.94 per share)                       --         --           --     (182,462)           --            --
Share repurchase                                 --         --           --           --            --       167,611
Employee stock plans                             --         --       19,828           --            --       (60,348)
Other                                            (1)         1           43           --            --           (88)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000                    $13   $205,839      $44,176   $2,105,145     $(110,358)     $470,903
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                  Less -
                                                unearned
Years ended                                 compensation
December 31, 2000, 1999 and 1998           on restricted
(in thousands, except per-share data)              stock         Total
<S>                                        <C>              <C>
- ----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                     $12,911    $1,394,384
Net income                                            --       330,595
Other comprehensive income,
   net of tax - foreign currency
   translation adjustments                            --        (1,715)
                                                            ----------
COMPREHENSIVE INCOME                                           328,880
Dividends ($.78 per share)                            --      (154,386)
Share repurchase                                      --      (105,637)
Employee stock plans                                 599        45,516
Other                                                 --           238
Two-for-one stock split at par value                  --            --
- ----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                      13,510     1,508,995
Net income                                            --       425,574
Other comprehensive income,
   net of tax - foreign currency
   translation adjustments                            --       (11,769)
                                                            ----------
COMPREHENSIVE INCOME                                           413,805
Dividends ($.86 per share)                            --      (169,049)
Share repurchase                                      --      (173,784)
Employee stock plans                                 511        68,256
Other                                                 --           267
- ----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                      14,021     1,648,490
Net income                                            --       403,794
Other comprehensive income,
   net of tax - foreign currency
   translation adjustments                            --       (22,627)
                                                            ----------
COMPREHENSIVE INCOME                                           381,167
Dividends ($.94 per share)                            --      (182,462)
Share repurchase                                      --      (167,611)
Employee stock plans                              (1,153)       81,329
Other                                                 --           131
- ----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000                     $12,868    $1,761,044
- ----------------------------------------------------------------------
</TABLE>

See accompanying notes.


                                                                              43
<PAGE>   46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ACCOUNTING POLICIES

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

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

CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with
maturities of three months or less at the time of purchase.

INVENTORIES. Inventories are stated at the lower of cost (principally first-in,
first-out) or market.

PREPUBLICATION COSTS. 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 an accelerated or the
straight-line method. It is the company's policy to evaluate the remaining lives
and recoverability of such costs, which is often dependent upon program
acceptance by state adoption authorities.

INVESTMENT IN ROCK-MCGRAW, INC. Rock-McGraw owns the company's headquarters
building in New York City. Rock-McGraw is owned 45% by the company and 55% by
Rockefeller Group, Inc. The company accounts for this investment under the
equity method of accounting.

GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible assets that
arose from acquisitions either consummated or initiated prior to November 1,
1970 are not amortized unless there has been a reduction in the value of the
related assets. Goodwill and other intangible assets arising subsequent to
November 1, 1970 of $1.7 billion at December 31, 2000 and 1999 are being
amortized over periods of up to 40 years. The company periodically reviews its
goodwill to determine if any impairment exists based upon projected,
undiscounted net cash flows of the related business unit.

RECEIVABLE FROM/PAYABLE 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, and the company had matched
purchase and sale commitments of $98.2 million and $66.0 million at December 31,
2000 and 1999, respectively. Only those transactions not closed at the
settlement date are reflected in the balance sheet as a component of other
current assets and liabilities.

FOREIGN CURRENCY TRANSLATION. Assets and liabilities are translated using
current exchange rates, except certain accounts of units whose functional
currency is the U.S. dollar, and translation adjustments are accumulated in a
separate component of shareholders' equity. Revenue and expenses are translated
at average monthly exchange rates. Inventory, prepublication costs and property
and equipment accounts of units whose functional currency is the U.S. dollar are
translated using historical exchange rates and translation adjustments are
charged and credited to income.

REVENUE. Revenue is generally recognized when goods are shipped to customers or
services are rendered. Units whose revenue is principally from subscription
income and service contracts record revenue as earned. Subscription income is
recognized over the related subscription period. For further details on the
company's change of revenue recognition policy, see Note 12.

DEPRECIATION. The costs of property and equipment are depreciated using the
straight-line method based upon the following estimated useful lives:
    Buildings and leasehold improvements - 15 to 40 years
    Equipment and furniture - three to 10 years

ADVERTISING EXPENSE. The cost of advertising is expensed as incurred. The
company incurred $104 million, $101 million and $107 million in advertising
costs in 2000, 1999 and 1998, respectively.

STOCK-BASED COMPENSATION. As permitted by Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation, the
company measures compensation expense for its stock-based employee compensation
plans using the intrinsic method prescribed by Accounting Principles Board
Opinion No. 25 (APBO No. 25), Accounting for Stock Issued to Employees, and has
provided in Note 8 pro forma disclosures of the effect on net income and
earnings per share as if the fair value-based method prescribed by SFAS No. 123
had been applied in measuring compensation expense.

RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The new standard is effective January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities, requiring companies to recognize all derivatives as
either assets or liabilities on their balance sheet and measuring them at fair
value. The adoption of SFAS No. 133 did not have a material impact on the
company's financial statements.

    The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, in December 1999


44
<PAGE>   47
and updated the Bulletin in 2000 (SAB 101). The new standard was effective
January 1, 2000, with implementation required by the fourth quarter of 2000.
This pronouncement summarizes the SEC's views of revenue recognition practices
in financial statements and how they apply to generally accepted accounting
principles. For further discussion on the impact of SAB 101 on the company's
financial statements refer to Note 12.

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


2. ACQUISITIONS AND DISPOSITIONS

ACQUISITIONS. In 2000, the company acquired three companies, principally Tribune
Education and CBRS, for $703.7 million, net of cash acquired. In 1999, the
company acquired six companies, principally Appleton & Lange, Rational Investor
and Emerging Markets Database, for $67.1 million, net of cash acquired. In 1998,
the company acquired Xebec Multi Media Solutions, Ltd. and Optical Data
Corporation for $24.7 million, net of cash acquired. All of these acquisitions
were accounted for under the purchase method. Goodwill recorded for all current
transactions is amortized using the straight-line method for periods not
exceeding 25 years.

NONCASH INVESTING ACTIVITIES. Liabilities assumed in conjunction with the
acquisition of businesses:

<TABLE>
<CAPTION>
(in millions)                                      2000        1999        1998
- --------------------------------------------------------------------------------
<S>                                              <C>          <C>         <C>
Fair value of assets acquired                    $840.5       $70.7       $28.0
Cash paid (net of cash acquired)                  703.7        67.1        24.7
- --------------------------------------------------------------------------------
Liabilities assumed                              $136.8       $ 3.6       $ 3.3
================================================================================
</TABLE>

DISPOSITIONS. In 2000, the company sold Tower Group International for $138.2
million. As a result of this transaction a pre-tax gain of $16.6 million ($10.2
million after-tax, or 5 cents per diluted share) was recognized. In 1999, the
company sold its Petrochemical publications for $62.8 million. As a result of
this transaction a pre-tax gain of $39.7 million, ($24.2 million after-tax, or
12 cents per diluted share) was recognized. In 1998, the company sold the
remainder of its Information Technology and Communications Group for $28.6
million. There was no gain or loss on the divestiture as the net proceeds minus
disposition costs approximated the net book value of the Group's assets.


3. DEBT

At December 31, 2000, the company had short-term borrowings of $1.043 billion,
primarily representing domestic commercial paper borrowings of $1.019 billion
maturing at various dates during 2001, and acquisition related debt of $24
million at an average interest rate of 6.4%.The commercial paper borrowings in
2000 are supported by the revolving credit agreement described below, and
approximately $816 million and $350 million have been classified as long-term in
2000 and 1999, respectively.

    On August 15, 2000, the company retired its existing revolving credit
facility that was due to expire on February 13, 2002, and replaced it with two
new revolving credit facilities. The two revolving credit facility agreements,
each with the same 11 domestic and international banks, consisting of a $625
million, five-year revolving credit facility ("New Five-year Facility") and a
$625 million, 364-day revolving credit facility ("New 364-day Facility"). The
New Five-year Facility provides that the company may borrow at any time until
August 15, 2005, when the commitment terminates and any outstanding loans
mature. The New 364-day Facility agreement provides that the company may borrow
until August 14, 2001, on which date the facility commitment terminates and the
maturity of such borrowings may not be later than August 14, 2002. The company
pays a facility fee of five and seven basis points on the New 364-day Facility
and New Five-year Facility, respectively (whether or not amounts have been
borrowed), and borrowings may be made at a range of 13 to 20 basis points above
LIBOR at the company's current credit rating. The fees and spreads on the New
Five-year Facility fluctuate based upon a schedule related to the company's
long-term credit rating by Moody's and Fitch. The facility agreements each
contain certain covenants, and the only financial covenant requires that the
company not exceed an indebtedness to cash flow ratio, as defined, of four to
one at any time. This restriction, which was also in place under the retired
facility, has never been exceeded. At December 31, 2000, there were no
borrowings under either facility. The commercial paper borrowings outstanding is
supported by the new revolving credit facilities, and 80% of these borrowings
have been classified as long-term.

    A summary of long-term debt at December 31 follows:

<TABLE>
<CAPTION>
(in millions)                                                   2000        1999
- --------------------------------------------------------------------------------
<S>                                                           <C>        <C>
9.43% Notes due 2000                                          $   --     $  95.0
Commercial paper supported
   by bank revolving credit agreement                          815.6       350.0
Other (primarily acquisition related notes)                      1.9         4.8
- --------------------------------------------------------------------------------
                                                               817.5       449.8
Less: current portion of long-term debt                           --       (95.0)
- --------------------------------------------------------------------------------
Total long-term debt                                          $817.5      $354.8
================================================================================
</TABLE>

The company paid interest on its debt totaling $56.3 million in 2000, $42.8
million in 1999 and $48.9 million in 1998.

    The carrying amount of the company's commercial paper borrowings
approximates fair value. The fair value of the company's 9.43% Notes and other
long-term debt at December 31, 1999, based on current borrowing rates for debt
with similar terms and maturities, was estimated to be $99.7 million.


                                                                              45
<PAGE>   48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)


4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

The company has three reportable segments: McGraw-Hill Education, Financial
Services and Information and Media Services. The McGraw-Hill Education segment
provides education, training and lifetime learning textbooks and instructional
materials for students and professionals. The Financial Services segment
consists of Standard & Poor's operations, which provide financial information,
ratings and analyses, enabling access to capital markets. The Information and
Media Services segment includes business and professional media offering
information, insight and analysis.

    Information as to the operations of the three segments of the company is set
forth below based on the nature of the products and services offered. The CEO
Council, comprising the company's principal corporate and operations executives,
is the company's chief operating decision maker and evaluates performance based
primarily on operating profit. The accounting policies of the operating segments
are the same as those described in the summary of significant accounting
policies - refer to Note 1 of the financial statements for the company's
significant accounting policies.

<TABLE>
<CAPTION>
                                                                   Information
                                   McGraw-Hill       Financial       and Media         Segment                    Consolidated
(in millions)                        Education        Services        Services          Totals     Adjustments           Total
- ------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>               <C>           <C>                <C>          <C>            <C>
2000
Operating revenue                     $1,993.2        $1,280.3        $1,007.5        $4,281.0        $     --        $4,281.0
Operating profit                         307.7           395.5           208.3           911.5          (144.2)          767.3*
Depreciation and amortization+           281.0            51.3            27.5           359.8             2.5           362.3
Assets                                 3,004.1           827.9           452.4         4,284.4           647.0         4,931.4
Capital expenditures++                   286.7            32.4            28.6           347.7              --           347.7
- ------------------------------------------------------------------------------------------------------------------------------
1999
Operating revenue                     $1,734.9        $1,224.6        $1,032.2        $3,991.7$             --        $3,991.7
Operating profit                         273.7           369.7           179.6           823.0          (125.3)          697.7*
Depreciation and amortization+           232.8            40.8            32.6           306.2             2.2           308.4
Assets                                 2,172.0           827.1           592.1         3,591.2           526.9         4,118.1
Capital expenditures++                   298.2            57.8            44.7           400.7              --           400.7
- ------------------------------------------------------------------------------------------------------------------------------
1998
Operating revenue                     $1,620.3        $1,087.8        $1,016.9        $3,725.0$             --        $3,725.0
Operating profit                         202.1           355.9           126.9           684.9          (128.7)          556.2*
Depreciation and amortization+           226.9            35.5            34.6           297.0             2.2           299.2
Assets                                 2,049.4           729.7           606.0         3,385.1           432.2         3,817.3
Capital expenditures++                   257.4            50.1            66.4           373.9              --           373.9
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*  Income before taxes on income.
+  Includes amortization of goodwill and intangible assets and prepublication
   costs.
++ Includes purchase of property and equipment and investments in prepublication
    costs.

The operating profit adjustments listed above relate to the operating results of
the corporate entity, which is not considered an operating segment, and includes
all corporate expenses of $91.4 million, $83.3 million and $80.7 million,
respectively, for 2000, 1999 and 1998, and net interest expense of $52.8
million, $42.0 million, and $48.0 million, respectively, of the company.
Corporate assets consist principally of cash and equivalents, investment in
Rock-McGraw, Inc., prepaid pension expense, deferred income taxes and leasehold
improvements related to subleased areas.

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

<TABLE>
<CAPTION>
(in millions)                   2000                            1999                            1998
- ---------------------------------------------------------------------------------------------------------------
                                     LONG-LIVED                      Long-lived                      Long-lived
                        REVENUE          ASSETS         Revenue          assets         Revenue          assets
- ---------------------------------------------------------------------------------------------------------------
<S>                    <C>           <C>               <C>           <C>               <C>           <C>
United States          $3,492.9        $2,685.7        $3,243.5        $2,171.2        $3,041.2        $2,018.8
European region           406.9            69.9           372.7            67.8           330.3            67.3
Rest of world             381.2            57.7           375.5            67.7           353.5            60.3
- ---------------------------------------------------------------------------------------------------------------
   Total               $4,281.0        $2,813.3        $3,991.7        $2,306.7        $3,725.0        $2,146.4
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

Foreign operating profit from our continuing businesses were $143.5 million,
$138.8 million, and $119.4 million in 2000, 1999 and 1998, respectively. Foreign
revenue, operating profit and long-lived assets include operations in 33
countries. The company does not have operations in any foreign country that
represents more


46
<PAGE>   49
than 5% of its consolidated revenues. Transfers between geographic areas are
recorded at agreed upon prices and intercompany revenue and profit are
eliminated.


5. TAXES ON INCOME

Income before taxes on income resulted from domestic operations (including
foreign branches) and foreign subsidiaries' operations as follows:

<TABLE>
<CAPTION>
(in millions)                                      2000        1999        1998
- --------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>
Domestic operations                              $724.8      $642.0      $509.3
Foreign operations                                 42.5        55.7        46.9
- --------------------------------------------------------------------------------
Total income before taxes                        $767.3      $697.7      $556.2
================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                  2000        1999        1998
- --------------------------------------------------------------------------------
<S>                                               <C>         <C>         <C>
U.S. statutory rate                               35.0%       35.0%       35.0%
- --------------------------------------------------------------------------------
Goodwill amortization                              0.9         0.9         1.2
Effect of state and local income taxes             3.9         4.1         4.1
Other - net                                       (1.3)       (1.0)       (1.3)
- --------------------------------------------------------------------------------
Effective tax rate                                38.5%       39.0%       39.0%
================================================================================
</TABLE>

The provision for taxes on income consists of the following:

<TABLE>
<CAPTION>
(in millions)                                     2000        1999        1998
- --------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>
Federal:
Current                                         $235.5      $216.3      $135.6
Deferred                                          (3.9)       (6.5)       27.7
- --------------------------------------------------------------------------------
Total federal                                    231.6       209.8       163.3
- --------------------------------------------------------------------------------
Foreign:
Current                                           17.9        18.6        21.8
Deferred                                           0.1        (0.6)       (3.0)
- --------------------------------------------------------------------------------
Total foreign                                     18.0        18.0        18.8
- --------------------------------------------------------------------------------
State and local:
Current                                           46.9        45.7        25.9
Deferred                                          (1.1)       (1.4)        8.9
- --------------------------------------------------------------------------------
Total state and local                             45.8        44.3        34.8
- --------------------------------------------------------------------------------
Total provision for taxes                       $295.4      $272.1      $216.9
================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
(in millions)                                             2000            1999
- --------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Fixed assets and intangible assets                     $(177.7)        $(135.9)
Prepaid pension and other expenses                      (101.4)          (93.5)
Unearned revenue                                         (23.5)          (16.4)
Reserves and accruals                                    219.5           165.1
Postretirement and postemployment benefits                90.2            90.5
Other - net                                               22.5            (2.7)
- --------------------------------------------------------------------------------
Deferred tax asset - net                               $  29.6         $   7.1
================================================================================
</TABLE>

    The company made net income tax payments totaling $290.3 million in 2000,
$215.0 million in 1999, and $193.0 million in 1998.

    The company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $77
million at December 31, 2000, excluding amounts that, if remitted, generally
would not result in any additional U.S. income taxes because of available
foreign tax credits. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of approximately $20 million
would have been required.


6. RENTAL EXPENSE AND LEASE OBLIGATIONS

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

<TABLE>
<CAPTION>
(in millions)                                      2000        1999        1998
- --------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>
Gross rental expense                             $134.4      $130.2      $113.3
Less: sublease revenue                             28.5        30.4        30.0
- --------------------------------------------------------------------------------
Net rental expense                               $105.9      $ 99.8      $ 83.3
================================================================================
</TABLE>

The company is committed under lease arrangements covering property, computer
systems and office equipment. Certain lease arrangements contain escalation
clauses covering increased costs for various defined real estate taxes and
operating services.

    The company entered into a lease agreement in 1998 for its headquarters
building, referred to in Note 1, covering approximately 0.4 million square feet
starting in 2002.

    Minimum rental commitments under existing noncancelable leases with a
remaining term of more than one year, including the company's headquarters
building, are shown in the following table. The annual rental commitments for
real estate through the year 2003 have been reduced by approximately $11 million
of rental income from existing noncancelable subleases.

<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
<S>                                                                    <C>
2001                                                                   $   95.4
2002                                                                      100.4
2003                                                                       99.6
2004                                                                       83.8
2005                                                                       76.8
2006 and beyond                                                           920.5
- --------------------------------------------------------------------------------
Total                                                                  $1,376.5
================================================================================
</TABLE>


                                                                              47
<PAGE>   50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

7. CAPITAL STOCK

On January 27, 1999, the Board of Directors declared a two-for-one stock split
of the company's common stock, payable on March 8, 1999, to stockholders of
record on February 24, 1999. The Board of Directors also approved a share
repurchase program authorizing the repurchase of up to 15 million shares,
approximately 7.5% of the company's outstanding common stock. The company
implemented the program through open market purchases and private transactions.
Through December 31, 2000, the company had repurchased approximately 6.3 million
shares of common stock from the 1999 program at a total cost of $341.5 million.
The repurchased shares will be used for general corporate purposes, including
the issuance of shares for stock compensation plans. In the event of a
significant investment opportunity, the company may slow the pace of repurchase
activity.

    The number of common shares reserved for issuance for employee stock plan
awards was 23,162,119 at December 31, 2000 and 15,628,036 at December 31, 1999.
Under the Director Deferred Stock Ownership Plan, 312,023 and 313,095 common
shares were reserved for issuance at December 31, 2000 and 1999.

    The $1.20 convertible preference stock may be converted into common stock at
the option of the shareholder at the rate of one share of preference stock for
13.2 shares of common stock.

    Two million shares of preferred stock, par value $1 per share, are
authorized; none have been issued. 600,000 shares have been reserved for
issuance under a Preferred Share Purchase Rights Plan adopted by the company's
Board of Directors on July 29, 1998. Under the 1998 Rights Plan,one Right for
each share of common stock outstanding was issued to shareholders of record on
August 14, 1998. These Rights will become exercisable only if a person or group
acquires 20% or more of the company's common stock or announces a tender offer
that would result in the ownership of 20% or more of the common stock. Each
Right will then entitle the holder to buy a 1/400th interest in a share of
Series A preferred stock at an exercise price of $150. The Rights are redeemable
by the company's Board of Directors for one-quarter cent each prior to a 20%
acquisition by a third party. The 1998 Plan also gives the Board of Directors
the option to exchange one share of common stock of the company for each Right
(not owned by the acquirer) after an acquirer holds 20% but less than 50% of the
outstanding shares of common stock. In the event, after a person or group
acquires 20% or more of the company's stock, that the company is acquired in a
merger or other business combination transaction of 50% or more of its
consolidated assets or earning power are sold, each Right becomes exercisable
for common stock equivalent to two times the exercise price of the Right.

    Dividends were paid at the quarterly rate of $0.235 per common share and
$0.30 per preference share. All dividends on preference stock are cumulative.
Total dividends paid in 2000, 1999, and 1998 were $182.5 million, $169.0 million
and $154.4 million, respectively.

8. STOCK PLAN AWARDS

The company applies the provisions of APBO No. 25, Accounting for Stock Issued
to Employees, in accounting for its stock-based awards. Accordingly, no
compensation cost has been recognized for its stock option plans other than for
its restricted stock performance awards.

    The company has two stock option plans: the 1993 and 1987 Employee Stock
Incentive Plans.

    The plans provide for the granting of incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock awards, deferred
stock (applicable to the 1987 Plan only) or other stock-based awards to purchase
a total of 37.8 million shares of the company's common stock - 9.2 million
shares under the 1987 Plan and 28.6 million shares under the 1993 Plan, as
amended.

    Stock options, which may not be granted at a price less than the fair market
value of the company's common stock at date of grant, vest in two years in equal
annual installments and have a maximum term of ten years.

    Beginning in 1997, participants who exercise an option by tendering
previously owned shares of common stock of the company may elect to receive a
one-time restoration option covering the number of shares tendered. Restoration
options are granted at fair market value of the company's common stock on the
date of the grant, have a maximum term equal to the remainder of the original
option term, and are subject to a six-month vesting period.

    Under the fair value based method of accounting in SFAS No. 123, Accounting
for Stock-Based Compensation, net income would have been reduced by $23.1
million, or $0.12 per diluted share for 2000, $16.2 million, or $0.08 per
diluted share for 1999 and $1.9 million, or $0.01 per diluted share for 1998,
after accounting for stock-based compensation effective for awards made January
1, 1995 and thereafter.

    The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for 2000,
1999, and 1998, respectively: risk-free average interest rate of 6.6%, 5.1% and
5.6%; dividend yield of 1.7%, 1.7%, and 2.1%; volatility of 28%, 24%, and 22%;
and expected life of five years for all years.


48
<PAGE>   51
    A summary of the status of the company's stock option plans as of December
31 and activity during the year follows:

<TABLE>
<CAPTION>
                                                                       Weighted
                                                                        average
                                                                       exercise
(in thousands of shares)                                  Shares          price
- --------------------------------------------------------------------------------
<S>                                                       <C>          <C>
Outstanding at December 31, 1997                           7,130         $20.46
- --------------------------------------------------------------------------------
Options granted                                            3,825          37.74
Options exercised                                         (1,871)         19.93
Options cancelled and expired                               (216)         28.41
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998                           8,868         $27.79
- --------------------------------------------------------------------------------
Options granted                                            4,100          53.71
Options exercised                                         (2,260)         23.05
Options cancelled and expired                               (358)         46.58
- --------------------------------------------------------------------------------
Outstanding at December 31, 1999                          10,350         $38.41
- --------------------------------------------------------------------------------
Options granted                                            4,154          49.96
Options exercised                                         (1,847)         31.20
Options cancelled and expired                               (451)         50.32
- --------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2000                          12,206         $42.97
================================================================================
</TABLE>

At December 31, 2000, 1999 and 1998, options for 6,841,000, 5,328,000 and
4,644,000 shares of common stock were exercisable. The weighted average fair
value of options granted during 2000, 1999 and 1998 was $15.70, $13.69 and
$8.95, respectively.

    A summary of information about stock options outstanding and options
exercisable at December 31, 2000 follows:

<TABLE>
<CAPTION>
                                           Options                Options
(in thousands of shares)                 Outstanding            Exercisable
- --------------------------------------------------------------------------------
                                     Weighted    Weighted              Weighted
                                      average     average               average
Range of                            remaining    exercise              exercise
exercise prices          Shares          term       price    Shares       price
- --------------------------------------------------------------------------------
<S>                      <C>       <C>           <C>         <C>       <C>
$14.25 to $17.44            853    2.99 years      $16.27       853      $16.27
$21.19 to $31.16          1,365    5.58 years      $22.97     1,365      $22.97
$33.55 to $49.66          4,963    8.15 years      $40.98     2,628      $37.53
$50.41 to $66.84          5,025    8.54 years      $54.89     1,995      $54.29
- --------------------------------------------------------------------------------
$14.25 TO $66.84         12,206    7.67 years      $42.97     6,841      $36.86
- --------------------------------------------------------------------------------
</TABLE>

Under the Director Deferred Stock Ownership Plan, a total of 312,023 shares of
common stock was reserved as of December 31, 2000, and may be credited to
deferred stock accounts for eligible Directors. In general, the Plan requires
that 50% of eligible Directors' annual compensation plus dividend equivalents be
credited to deferred stock accounts. Each Director may also elect to defer all
or a portion of the remaining compensation and have an equivalent number of
shares credited to the deferred stock account. Recipients under this Plan are
not required to provide consideration to the company other than rendering
service. Shares will be delivered as of the date a recipient ceases to be a
member of the Board of Directors or within five years thereafter, if so elected.
The Plan will remain in effect until terminated by the Board of Directors or
until no shares of stock remain available under the Plan.

    Restricted stock performance awards have been granted under the 1993 and
1987 Plans. These restricted stock awards will vest only if the company achieves
certain financial goals over various vesting periods. Recipients are not
required to provide consideration to the company other than rendering service
and have the right to vote the shares and to receive dividends.

    A total of 270,176 restricted shares were issued at an average market value
of $51.77 in 2000, 280,405 shares at an average market value of $52.70 in 1999
and 373,596 shares at an average market value of $37.54 in 1998. The awards are
recorded at the market value on the date of grant. Initially, the total market
value of the shares is treated as unearned compensation and is charged to
expense over the respective vesting periods. Under APBO No. 25, for performance
incentive shares, adjustments are also made to expense for changes in market
value and achievement of financial goals. Restricted stock compensation charged
to expense was $31.5 million for 2000, $33.0 million for 1999 and $37.0 million
for 1998. Restricted shares outstanding at the end of the year were 690,307 in
2000, 868,039 in 1999, and 1,121,750 in 1998.


9. RETIREMENT PLANS

    The company and its subsidiaries have a number of defined benefit pension
plans and defined contribution plans covering substantially all employees. The
company's primary pension plan is a noncontributory plan under which benefits
are based on employee career employment compensation. The company also has a
voluntary deferred compensation plan under which the company matches employee
contributions up to certain levels of compensation and an Employee Retirement
Account Plan under which the company contributes a percentage of eligible
employees' compensation to the employees' accounts.

    For purposes of determining annual pension cost, prior service costs and the
net asset at January 1, 1986 are being amortized straight-line over the average
remaining service period of employees expected to receive benefits. The assumed
return on plan assets of 9.5% is based on a calculated market-related value of
assets, which recognizes changes in market value over five years.


                                                                              49
<PAGE>   52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

    A summary of pension income for the company's domestic defined benefit plans
follows:

<TABLE>
<CAPTION>
(in millions)                                  2000          1999         1998
- ------------------------------------------------------------------------------
<S>                                          <C>           <C>           <C>
Service cost                                 $ 18.2        $ 20.2        $17.6
Interest cost                                  41.2          38.2         36.1
Expected return on assets                     (84.1)        (69.4)       (60.8)
Curtailment credit                             (2.0)           --           --
Settlement charge                               0.5            --           --
Amortization of:
   Transitional net asset                        --          (0.1)        (0.7)
   Prior service cost                           1.1           1.1          1.0
   Actuarial (gain)/loss                      (15.0)         (1.5)        (0.7)
- ------------------------------------------------------------------------------
Net pension income                           $(40.1)       $(11.5)       $(7.5)
==============================================================================
Assumed rates - January 1:
Discount rate                                 7 1/2%        6 3/4%       7 1/4%
Compensation increase factor                  5 1/2         5 1/2        5 1/2
Return on assets                              9 1/2         9 1/2        9 1/2
==============================================================================
</TABLE>

    The company also has unfunded supplemental benefit plans to provide senior
management with supplemental retirement, disability and death benefits.
Supplemental retirement benefits are based on final monthly earnings. Pension
cost was approximately $6 million for 2000 and 1999 and $4 million for 1998. The
accrued benefit obligation as of December 31, 2000 was $32.1 million.

    Total retirement plans cost was $26.3 million for 2000, $48.6 million for
1999 and $45.3 million for 1998.

    The funded status of the domestic defined benefit plans as of December 31
follows:

<TABLE>
<CAPTION>
(in millions)                                             2000            1999
- --------------------------------------------------------------------------------
<S>                                                  <C>             <C>
Change in benefit obligation
Net benefit obligation at beginning of year           $  540.8        $  557.5
Service cost                                              18.2            20.2
Plan amendments                                            0.9              --
Interest cost                                             41.2            38.2
Actuarial loss/(gain)                                     24.0           (39.5)
Curtailments                                              (2.4)             --
Settlements                                                0.5              --
Gross benefits paid                                      (37.4)          (35.6)
- --------------------------------------------------------------------------------
Net benefit obligation at end of year                 $  585.8        $  540.8
Change in plan assets
Fair value of plan assets at beginning of year         1,190.4           905.5
Actual return on plan assets                             (57.5)          320.5
Employer contributions                                      --              --
Gross benefits paid                                      (37.4)          (35.6)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year              $1,095.5        $1,190.4
Funded status at end of year                             509.7           649.7
Unrecognized net actuarial (gain)/loss                  (353.2)         (533.9)
Unrecognized prior service costs                           3.1             3.7
Unrecognized net transition obligation/(asset)              --              --
- --------------------------------------------------------------------------------
Prepaid pension cost                                  $  159.6        $  119.5
================================================================================
Assumed rates - December 31:
Discount rate                                            7 1/2%          7 1/2%
Compensation increase factor                             5 1/2           5 1/2
================================================================================
</TABLE>

The company has several foreign pension plans that do not determine the
accumulated benefits or net assets available for benefits as disclosed above.
The amounts involved are not material and are therefore not included.

10. POSTRETIREMENT HEALTHCARE AND OTHER BENEFITS

The company and some of its domestic subsidiaries provide certain medical,
dental and life insurance benefits for retired employees and eligible
dependents. The medical and dental plans are contributory while the life
insurance plan is noncontributory. The company currently does not fund any of
these plans.

    Postretirement benefits cost was $3.4 million in 2000, $5.5 million in 1999,
and $6.9 million in 1998. A summary of the components of the cost in 2000, 1999
and 1998 follows:

<TABLE>
<CAPTION>
(in millions)                                     2000        1999        1998
- ------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>
Service cost                                     $ 2.3       $ 2.4       $ 2.5
Interest cost                                      9.0         8.7         9.4
Curtailment credit                                (0.8)         --          --
Settlement gain                                   (1.4)         --          --
Amortization of:
   Prior service cost                             (2.6)       (3.4)       (2.6)
   Actuarial (gain)/loss                          (3.1)       (2.2)       (2.4)
- ------------------------------------------------------------------------------
Postretirement benefits cost                     $ 3.4       $ 5.5       $ 6.9
==============================================================================
</TABLE>

A summary of the components of the unfunded postretirement benefit obligation as
of December 31 follows:

<TABLE>
<CAPTION>
(in millions)                                                  2000        1999
- --------------------------------------------------------------------------------
<S>                                                         <C>         <C>
Change in benefit obligation
Net benefit obligation at beginning of year                 $ 128.2     $ 142.7
Service cost                                                    2.3         2.4
Interest cost                                                   9.0         8.7
Plan participants contributions                                 1.5         2.0
Plan amendments                                                  --         2.1
Settlements                                                    (1.0)         --
Actuarial (gain)/loss                                           9.1       (16.9)
Gross benefits paid                                           (13.9)      (12.8)
- --------------------------------------------------------------------------------
Net benefit obligation at end of year                       $ 135.2     $ 128.2
Change in plan assets
Fair value of plan assets at beginning of year                   --          --
Employer contributions                                         12.4        10.8
Plan participants contributions                                 1.5         2.0
Gross benefits paid                                           (13.9)      (12.8)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year                         --          --
Funded status at end of year                                $(135.2)    $(128.2)
Unrecognized net actuarial (gain)/loss                        (37.7)      (50.3)
Unrecognized prior service costs                               (5.6)       (9.0)
- --------------------------------------------------------------------------------
Accrued benefit cost                                        $(178.5)    $(187.5)
================================================================================
</TABLE>

The assumed weighted average healthcare cost trend rate ranges from 6.0% in 2000
decreasing ratably to 5.5% in 2002 and remaining at that level thereafter. The
weighted average discount rate used to measure expense was 7.5% in 2000 and
6.75% in 1999; the rate used to measure the accumulated postretirement


50
<PAGE>   53
benefit obligation was 7.50% in 2000 and 1999. Assumed healthcare cost trends
have a significant effect on the amounts reported for the healthcare plans. A
one-percentage point change in assumed healthcare cost trend creates the
following effects:

<TABLE>
<CAPTION>
                                               One-Percentage   One-Percentage
(in millions)                                  Point Increase   Point Decrease
- --------------------------------------------------------------------------------
<S>                                            <C>              <C>
Effect on total of service and interest cost            $ 0.9           $ (0.8)
Effect on postretirement benefit obligation             $10.8           $(10.0)
- --------------------------------------------------------------------------------
</TABLE>

11. EARNINGS PER SHARE

A reconciliation of the number of shares used for calculating basic earnings per
common share and diluted earnings per common share follows:

<TABLE>
<CAPTION>
(in thousands)                                       2000       1999       1998
- --------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>
Net income                                       $403,794   $425,574   $330,595
- --------------------------------------------------------------------------------
Average number of common shares outstanding       194,099    196,311    197,206
Effect of stock options and other
   dilutive securities                              1,973      2,246      1,898
- --------------------------------------------------------------------------------
Average number of common shares outstanding
   including effect of dilutive securities        196,072    198,557    199,104
- --------------------------------------------------------------------------------
</TABLE>

Restricted performance shares outstanding at December 31, 2000 of 633,000 were
not included in the computation of diluted earnings per common share because the
necessary vesting conditions have not yet been met.

    As stated in Note 1, the company restated the prior-year financial
statements to reflect a change in recording certain subscription revenue from
the cash basis to the accrual basis of accounting. The impact of the restatement
on 1999 and 1998 net income was a decrease of $0.2 million and $2.5 million,
respectively. The restatement resulted in a $0.01 dilution of basic and diluted
earnings per share in 1998. Refer to Note 12 for further information.


12. ACCOUNTING CHANGE AND RESTATEMENT

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which
summarized the Staff's views regarding the recognition and reporting of revenue
and related expenses in certain transactions. SAB 101, which was further
clarified in 2000, was required to be implemented by the fourth quarter
retroactive to January 1, 2000.

    In consideration of the views expressed in SAB 101 and related
interpretations, the company modified its revenue recognition policies related
to various service contracts. Under SAB 101, the company will recognize revenue
relating to agreements where it provides more than one service based upon the
fair value to the customer of each service, rather than recognizing revenue
based on the level of service effort to fulfill such contracts. If the fair
value to the customer for each service is not objectively determinable, revenue
will be recognized ratably over the service period.

    The cumulative effect of the accounting change as of January 1, 2000 results
in a charge to income of $68.1 million (net of income taxes of $46.7 million).
The effect of the change on the year ended December 31, 2000 was to decrease net
income before the cumulative effect of the accounting change by $(9.2) million,
or $(0.04) per diluted share. On a pro forma basis, the impact for the years
ended December 31, 1999 and December 31, 1998 is $(12.2) million, ($0.06 per
diluted share) and $(10.5) million ($0.05 per diluted share), respectively. For
the quarters ended March 31, June 30, September 30 and December 31, 2000, the
impact of the accounting change was to (decrease)/increase revenue by $(15.5)
million, $(7.5) million, $2.1 million and $(5.5) million, respectively and to
(decrease)/increase net income by $(12.5) million, $(3.6) million, $(2.5)
million and $9.4 million, respectively.

    For the quarters ended March 31, June 30, September 30, and December 31,
2000 the company recognized $43.4 million, $31.8 million, $18.6 million and $5.9
million, in revenue, respectively, that was included in the cumulative effect
adjustment as of January 1, 2000. The effect on the first, second, third and
fourth quarters was to increase net income by $26.5 million, $19.4 million,
$11.3 million and $3.6 million, respectively (after reduction for income taxes
of $16.9 million, $12.4 million, $7.3 million and $2.3 million, respectively),
during those periods.

    In addition, the company also restated its consolidated financial
statements. Previously, subscription income for units whose revenue was
principally from advertising was recognized as received. As part of the
restatement, such income is being deferred over the related subscription
periods.

    As a result, the consolidated financial statements were restated to defer
revenue of $0.3 million and $4.2 million for the years ended December 31, 1999
and 1998, respectively. The impact of the restatement was to reduce net income
by $0.2 million ($0.00 per diluted share) and $2.5 million (or $0.01 per diluted
share) for 1999 and 1998, respectively. The effect of that revenue for the
first, second, third and fourth quarters of the year ended December 31, 2000 was
to (decrease) increase net income by $(1.7) million, $2.6 million, $0.4 million
and $(1.5) million, respectively, (after an (expense) benefit for income taxes
of $(1.0) million, $1.6 million, $0.2 million and $(0.9) million, respectively)
during those periods. The cumulative effect of the restatement to opening
retained income at January 1, 1998 was $40.2 million.


                                                                              51
<PAGE>   54
REPORT OF MANAGEMENT


TO THE SHAREHOLDERS OF THE MCGRAW-HILL COMPANIES, INC.

The financial statements in this report were prepared by the management of The
McGraw-Hill Companies, Inc., which is responsible for their integrity and
objectivity.

    These statements, prepared in conformity with generally accepted accounting
principles and including amounts based on management's best estimates and
judgments, present fairly The McGraw-Hill Companies' financial condition and the
results of the company's operations. Other financial information given in this
report is consistent with these statements.

    The McGraw-Hill Companies' management maintains a system of internal
accounting controls designed to provide reasonable assurance that the financial
records accurately reflect the company's operations and that the company's
assets are protected against loss. Consistent with the concept of reasonable
assurance, the company recognizes that the relative costs of these controls
should not exceed the expected benefits in maintaining these controls. It
further assures the quality of the financial records in several ways: a program
of internal audits, the careful selection and training of management personnel,
maintaining an organizational structure that provides an appropriate division of
financial responsibilities, and communicating financial and other relevant
policies throughout the corporation. The financial statements in this report
have been audited by Ernst & Young LLP, independent auditors, in accordance with
auditing standards generally accepted in the United States. The independent
auditors were retained to express an opinion on the financial statements, which
appears in the next column.

    The McGraw-Hill Companies' Board of Directors, through its Audit Committee,
composed entirely of outside directors, is responsible for reviewing and
monitoring the company's financial reporting and accounting practices. The Audit
Committee meets periodically with management, the company's internal auditors
and the independent auditors to ensure that each group is carrying out its
respective responsibilities. In addition, the independent auditors have full and
free access to the Audit Committee and meet with it with no representatives from
management present.


/s/ Harold McGraw III

Harold McGraw III
Chairman of the Board, President and Chief Executive Officer


/s/ Robert J. Bahash

Robert J. Bahash
Executive Vice President and Chief Financial Officer



REPORT OF INDEPENDENT AUDITORS


THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE MCGRAW-HILL COMPANIES, INC.

    We have audited the accompanying consolidated balance sheets of The
McGraw-Hill Companies, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The McGraw-Hill Companies, Inc. at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

    As discussed in Note 12 to the consolidated financial statements, effective
January 1, 2000, the company changed its method of accounting for revenue
recognition on certain service contracts. In addition, the consolidated
financial statements have been restated.



/s/ Ernest & Young LLP

New York, New York
February 14, 2001


52
<PAGE>   55
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(RESTATED)


<TABLE>
<CAPTION>
                                                            First         Second         Third         Fourth         Total
(in thousands, except per-share data)                     quarter        quarter       quarter        quarter          year
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>           <C>            <C>           <C>
2000
Operating revenue  (Note 12)                             $784,214     $1,015,924    $1,394,470     $1,086,360    $4,280,968
Income before taxes and cumulative adjustment              70,561        173,710       350,588        172,483       767,342
Income before cumulative adjustment (Note 12)              43,395        106,832       215,611        106,078       471,916
Net income                                                (24,727)       106,832       215,611        106,078       403,794
Earnings per share:
   Basic:
     Income before cumulative adjustment                     0.22           0.55          1.11           0.55          2.43
     Net income                                             (0.13)          0.55          1.11           0.55          2.08
   Diluted:
     Income before cumulative adjustment                     0.22           0.55          1.10           0.54          2.41
     Net income                                             (0.13)          0.55          1.10           0.54          2.06
- ---------------------------------------------------------------------------------------------------------------------------
1999
Operating revenue (Note 12)                              $716,830       $915,951    $1,324,332     $1,034,572    $3,991,685
Income before taxes                                        40,437        140,803       318,218        198,204       697,662
Net income                                                 24,667         85,889       194,113        120,905       425,574
Earnings per share:
   Basic                                                     0.12           0.44          0.99           0.62          2.17
   Diluted                                                   0.12           0.43          0.98           0.61          2.14
- ---------------------------------------------------------------------------------------------------------------------------
1998
Operating revenue  (Note 12)                             $703,230       $884,868    $1,207,626       $929,247    $3,724,971
Income before taxes and extraordinary item (Note 3)        32,824        131,355       278,914        113,155       556,248
Net income                                                 20,023         80,126       161,422         69,024       330,595
Earnings per share:
   Basic:
     Income before extraordinary item                        0.10           0.41          0.86           0.35          1.72
     Net income                                              0.10           0.41          0.82           0.35          1.68
   Diluted:
     Income before extraordinary item                        0.10           0.40          0.85           0.35          1.70
     Net income                                              0.10           0.40          0.81           0.35          1.66
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

HIGH AND LOW SALES PRICES OF THE MCGRAW-HILL COMPANIES COMMON STOCK ON THE NEW
YORK STOCK EXCHANGE*

<TABLE>
<CAPTION>
                                     2000**            1999**            1998**
- --------------------------------------------------------------------------------
<S>                          <C>               <C>               <C>
First quarter                $61.69 - 43.50    $59.13 - 48.88    $39.00 - 34.25
Second quarter                59.88 - 41.88     60.75 - 50.44     41.50 - 36.38
Third quarter                 67.69 - 54.25     54.13 - 47.13     43.50 - 37.06
Fourth quarter                66.00 - 52.00     63.13 - 49.00     51.69 - 36.13
- --------------------------------------------------------------------------------
Year**                        67.69 - 41.88     63.13 - 47.13     51.69 - 34.25
- --------------------------------------------------------------------------------
</TABLE>

* The New York Stock Exchange is the principal market on which the Corporation's
shares are traded.
** All high and low prices reflect the two-for-one stock split approved by the
Corporation's Board of Directors on January 27, 1999.


                                                                              53
<PAGE>   56
ELEVEN-YEAR FINANCIAL REVIEW
(RESTATED)
<TABLE>
<CAPTION>
(in thousands, except per-share data)                                2000              1999              1998              1997
- -------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>               <C>               <C>
OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS
OPERATING REVENUE
McGraw-Hill Education                                         $ 1,993,189       $ 1,734,922       $ 1,620,343       $ 1,573,797
Financial Services                                              1,280,349         1,224,605         1,087,817           921,135
Information and Media Services                                  1,007,430         1,032,158         1,016,811         1,035,834
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE                                         4,280,968         3,991,685         3,724,971         3,530,766
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT
McGraw-Hill Education                                             307,712           273,667           202,076           187,722
Financial Services                                                395,509           369,740           355,869           256,078
Information and Media Services                                    208,342           179,548           126,949           152,021
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT                                                  911,563           822,955           684,894           595,821
Share of profit of Macmillan/McGraw-Hill
   School Publishing Company(g)                                        --                --                --                --
Unusual charges(e, h)                                                  --                --                --                --
Gain on exchange of Shepard's/McGraw-Hill(f)                           --                --                --                --
General corporate (expense)/income                                (91,380)          (83,280)          (80,685)          (75,342)
Interest (expense)/income - net                                   (52,841)          (42,013)          (47,961)          (52,542)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME(a, b, c, d and f)                   767,342           697,662           556,248           467,937
Provision for taxes on income                                     295,426           272,088           216,937           179,238
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE ADJUSTMENT        471,916           425,574           339,311           288,699
- -------------------------------------------------------------------------------------------------------------------------------
Early extinguishment of debt, net of tax(i)                            --                --            (8,716)               --
Cumulative effect on prior years of changes
   in accounting(i)                                               (68,122)               --                --                --
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                    $   403,794       $   425,574       $   330,595       $   288,699
- -------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before extraordinary item cumulative adjustment        $      2.43       $      2.17       $      1.72       $      1.46
Extraordinary item and cumulative adjustment(i)                     (0.35)               --             (0.04)               --
- -------------------------------------------------------------------------------------------------------------------------------
Net income                                                    $      2.08       $      2.17       $      1.68       $      1.46
DILUTIVE EARNINGS PER SHARE
Income before extraordinary item and cumulative adjustment    $      2.41       $      2.14       $      1.70       $      1.45
Extraordinary item and cumulative adjustment(i)                     (0.35)               --             (0.04)               --
- -------------------------------------------------------------------------------------------------------------------------------
Net income                                                    $      2.06       $      2.14       $      1.66       $      1.45
Dividends per share of common stock                           $      0.94       $      0.86       $      0.78       $      0.72
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity                               23.5%             26.7%             22.9%             20.8%
Income before taxes as a percent of revenue                          17.9              17.5              14.9              13.3
Income before extraordinary item and
   cumulative adjustment as a percent of revenue                     11.0              10.7               9.1               8.2
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital                                               $    20,905       $   (14,731)      $    94,497       $   217,912
Total assets                                                    4,931,444         4,118,111         3,817,336         3,740,569
Total debt                                                      1,045,377           536,449           527,597           684,425
Shareholders' equity                                            1,761,044         1,648,490         1,508,995         1,394,384
- -------------------------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES                                                16,761            16,376            15,897            15,690
===============================================================================================================================
</TABLE>

(a) 2000 income before taxes reflects a $16.6 million gain on the sale of Tower
Group.
(b) 1999 income before taxes on income reflects a $39.7 million gain on the sale
of the Petrochemical publications.
(c) 1998 income before taxes on income reflects a $26.7 million gain on sale of
a building and a $16.0 million charge at Continuing Education Center for
write-down of assets due to a continuing decline in enrollments.
(d) 1997 income before taxes on income reflects a $33.2 million provision for
the consolidation of office space in New York City and a $20.4 million gain on
the sale of Datapro Information Services.
(e) 1996 operating profit excludes a net gain on the exchange of Shepard's/
McGraw-Hill for the Times Mirror Higher Education group comprising a $418.7
million gain on the exchange and a $25 million one-time charge for integration
costs.


54
<PAGE>   57
<TABLE>
<CAPTION>
      1996               1995               1994               1993               1992               1991               1990
- ----------------------------------------------------------------------------------------------------------------------------
<S>                <C>                <C>                <C>                <C>                <C>                <C>
$1,277,895         $1,235,578         $1,162,157         $  667,444         $  567,363         $  532,438         $  534,724
   802,280            736,788            699,436            651,601            573,864            515,218            470,689
   990,924            962,379            896,960            876,098            905,184            895,327            930,399
- ----------------------------------------------------------------------------------------------------------------------------
 3,071,099          2,934,745          2,758,553          2,195,143          2,046,411          1,942,983          1,935,812
- ----------------------------------------------------------------------------------------------------------------------------
   151,921            162,604            125,765             49,374             62,746             48,928             70,196
   243,889            215,320            202,757            186,148            155,186            131,683            115,796
   131,397            130,145            120,482            116,751            122,326            131,586            176,165
   527,207            508,069            449,004            352,273            340,258            312,197            362,157

        --                 --                 --             28,376             11,280             27,483             21,601
   (25,000)                --                 --           (229,800)                --                 --                 --
   418,731                 --                 --                 --                 --                 --                 --
   (62,073)           (63,570)           (54,134)           (48,538)           (50,774)           (34,415)           (28,370)
   (47,656)           (58,766)           (51,746)           (36,342)           (37,557)           (46,987)           (55,627)
- ----------------------------------------------------------------------------------------------------------------------------
   811,209            385,733            343,124             65,969            263,207            258,278            299,761
   317,665            158,922            141,367             54,582            112,390            110,285            128,897
- ----------------------------------------------------------------------------------------------------------------------------
   493,544            226,811            201,757             11,387            150,817            147,993            170,864
- ----------------------------------------------------------------------------------------------------------------------------
        --                 --                 --                 --                 --                 --                 --

        --                 --                 --                 --           (124,587)                --                 --
- ----------------------------------------------------------------------------------------------------------------------------
$  493,544         $  226,811         $  201,757         $   11,387         $   26,230         $  147,993         $  170,864
- ----------------------------------------------------------------------------------------------------------------------------
$     2.48         $     1.14         $     1.02         $     0.06         $     0.77         $     0.76         $     0.88
        --                 --                 --                 --              (0.64)                --                 --
- ----------------------------------------------------------------------------------------------------------------------------
$     2.48         $     1.14         $     1.02         $     0.06         $     0.13         $     0.76         $     0.88


$     2.47         $     1.14         $     1.02         $     0.06         $     0.77         $     0.76         $     0.88
        --                 --                 --                 --              (0.64)                --                 --
- ----------------------------------------------------------------------------------------------------------------------------
$     2.47         $     1.14         $     1.02         $     0.06         $     0.13         $     0.76         $     0.88
$     0.66         $     0.60         $     0.58         $     0.57         $     0.56         $     0.55         $     0.54
- ----------------------------------------------------------------------------------------------------------------------------
      41.4%              23.3%              23.4%               1.3%               3.0%              15.2%              18.8%
      26.4               13.1               12.4                3.0               12.9               13.3               15.5

      16.1                7.7                7.3                0.5                7.4                7.6                8.8
- ----------------------------------------------------------------------------------------------------------------------------


$   92,629         $  157,244         $   94,486         $   28,463         $  (53,966)        $   (2,489)        $   12,178
 3,668,381          3,081,846          2,984,745          3,066,750          2,496,413          2,504,412          2,522,851
   581,368            628,664            762,805            928,710            482,991            568,159            622,372
 1,322,827            998,964            877,266            788,584            874,390            966,943            922,245
- ----------------------------------------------------------------------------------------------------------------------------
    16,220             15,452             15,339             15,661             13,393             13,539             13,868
============================================================================================================================
</TABLE>

(f) 1995 income before taxes on income reflects a $26.8 million provision for
best practices initiatives and a $23.8 million gain on sale of the topical
publishing division of Shepard's/McGraw-Hill.
(g) Reflects The McGraw-Hill Companies' share of profit of Macmillan/
McGraw-Hill School Publishing company through September 30, 1993.
Macmillan/McGraw-Hill results are consolidated effective October 1, 1993 in the
Educational and Professional Publishing segment.
(h) 1993 amount reflects unusual charges in connection with the acquisition of
the additional 50% interest in Macmillan/McGraw-Hill.
(i) The cumulative adjustment in 2000 reflects the adoption of SAB 101, Revenue
Recognition in Financial Statements. The cumulative adjustment in 1992 reflects
the adoption of the provisions of SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The extraordinary item in 1998 relates
to costs for the early extinguishment of $155 million of the company's 9.43%
Notes during the third quarter.


                                                                              55
<PAGE>   58
SHAREHOLDER INFORMATION


INVESTOR RELATIONS WEB SITE

At www.mcgraw-hill.com/investor_relations, you can find information on dividend
payments, stock quotes and charts, speeches by senior management, earnings
announcements and conference calls, as well as the annual report, proxy
statement, and other SEC filings. Links are also provided for online shareholder
account access.


ANNUAL MEETING

The 2001 annual meeting will be held at 11 a.m. on Wednesday, April 25 at the
Corporation's world headquarters:
1221 Avenue of the Americas
New York, NY 10020-1095


STOCK EXCHANGE LISTING

Shares of the Corporation's common stock are traded primarily on the New York
Stock Exchange. MHP is the ticker symbol for the Corporation's common stock.


SHAREHOLDER ACCOUNT INQUIRIES

Shareholder account changes or questions may be directed to the Corporation's
transfer agent:
By mail:
Mellon Investor Services
PO Box 3316
South Hackensack, NJ 07606-1937
By phone: 888-201-5538
For online account access, go to:
https://vault.mellon-investor.com/isd


DIGITAL INVESTOR KIT

To view the kit, including reports filed with the U.S. Securities and Exchange
Commission, go to the Digital Investor Kit on the Corporation's investor
relations Web site. To request a printed copy of the annual report or Form 10-K,
send an e-mail to: webmaster@mcgraw-hill.com or call 212-512-2365.


INVESTOR INQUIRIES

Investor inquiries can be sent by e-mail to: investor_relations@mcgraw-hill.com
or by phone, 212-512-2192.


NEWS MEDIA INQUIRIES

To view our press kit or make an e-mail inquiry, go to:
www.mcgraw-hill.com/media/presskit.html Telephone inquiries should be directed
to the Corporate Affairs department at 212-512-3203.

- --------------------------------------------------------------------------------

DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN

This program offers a convenient, low-cost way to invest in the Corporation's
common stock. Participants can purchase and sell shares directly through the
program, make optional cash investments weekly (up to a maximum of $10,000 per
month), reinvest dividends and send certificates to the transfer agent for
safekeeping.

To order an information packet and enrollment forms, please call the automated
request line at 800-842-7629. For specific questions about the program, call
Mellon Investor Services at 888-201-5538.

- --------------------------------------------------------------------------------

56
<PAGE>   59
                                                 DIRECTORS
                                                    AND
                                            PRINCIPAL EXECUTIVES

BOARD OF DIRECTORS

HAROLD MCGRAW III(E)
Chairman, President and
Chief Executive Officer
The McGraw-Hill Companies

PEDRO ASPE(A,F)
Chairman
Vector Casa de Bolsa, S.A. de C.V.

SIR WINFRIED F. W. BISCHOFF(A,F)
Chairman
Citigroup Europe

VARTAN GREGORIAN(C,E,N)
President
Carnegie Corporation of New York

GEORGE B. HARVEY(A,E,F,N)
Retired Chairman of the Board
and President
Pitney Bowes Inc.

LINDA KOCH LORIMER(C,N)
Vice President and Secretary
Yale University


ROBERT P. MCGRAW(F)
President
Averdale International, LLC

LOIS DICKSON RICE(A,C)
Guest Scholar
The Brookings Institution

JAMES H. ROSS(E,F,N)
Chairman
National Grid Group Plc

EDWARD B. RUST, JR.(A,C)
Chairman and Chief Executive Officer
State Farm Insurance Companies

SIDNEY TAUREL(C,E,N)
Chairman, President and
Chief Executive Officer
Eli Lilly and Company

HAROLD W. MCGRAW, JR.
Chairman Emeritus
The McGraw-Hill Companies


(A) Audit Committee
(C) Compensation Committee
(E) Executive Committee
(F) Financial Policy Committee
(N) Nominating and Corporate
    Governance Committee


PRINCIPAL CORPORATE EXECUTIVES

HAROLD MCGRAW III
Chairman, President and
Chief Executive Officer

ROBERT J. BAHASH
Executive Vice President and
Chief Financial Officer

BARBARA B. MADDOCK
Executive Vice President
Organizational Effectiveness

JOHN D. NEGROPONTE
Executive Vice President
Global Markets

KENNETH M. VITTOR
Executive Vice President and
General Counsel

PETER WATKINS
Executive Vice President and
Chief Technology Officer

GLENN S. GOLDBERG
Senior Vice President
Corporate Affairs,
Assistant to the Chairman
and Chief Executive Officer


PRINCIPAL OPERATIONS EXECUTIVES

ROBERT E. EVANSON
President
McGraw-Hill Education

LEO C. O'NEILL
President
McGraw-Hill Financial Services

ROBERT J. BAHASH
Acting President
McGraw-Hill Information and
Media Services


Executives Design:Addison www.addison.com Photography:Brad Trent page 4; Dan
Bigelow pages 8-9; David Katzenstein cover (people), pages 1, 7, 19-20; Rick
Maiman cover (building)


[RECYCLE LOGO] Printed on recycled paper                 [PICTURE OF A BUILDING]
<PAGE>   60
The McGraw-Hill Companies


FINANCIAL SERVICES

     STANDARD & POOR'S
StandardandPoors.com


McGRAW-HILL EDUCATION
MHEducation.com

     MCGRAW-HILL LEARNING NETWORK
mhln.com

     SCHOOL EDUCATION GROUP

     HIGHER EDUCATION, PROFESSIONAL
     AND INTERNATIONAL GROUP


INFORMATION AND MEDIA SERVICES

     AVIATION WEEK
AviationNow.com

     BUSINESSWEEK GROUP
BusinessWeek.com

     MCGRAW-HILL CONSTRUCTION INFORMATION GROUP
Construction.com

     PLATTS
 Platts.com

     BROADCASTING GROUP
     (All ABC affiliates)
     KMGH-TV (Denver)
kmgh.com
     KGTV (San Diego)
kgtv.com
     KERO-TV (Bakersfield)
kero.com
     WRTV (Indianapolis)
wrtv.com

     HEALTHCARE INFORMATION GROUP


                                                [THE MCGRAW-HILL COMPANIES LOGO]
                                                1221 Avenue of the Americas
                                                New York, NY 10020-1095
                                                212-512-2000
                                                www.mcgraw-hill.com



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>y46387ex21.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>

<PAGE>   1
                                                                      Exhibit 21

                         THE McGRAW-HILL COMPANIES, INC.


Subsidiaries of Registrant

Listed below are all the subsidiaries of Registrant, except certain inactive
subsidiaries and certain other McGraw-Hill's subsidiaries which are not included
in the listing because considered in the aggregate they do not constitute a
significant subsidiary as of the end of the year covered by this Report.

<TABLE>
<CAPTION>
                                                                           State or                     Percentage
                                                                         Jurisdiction                   of Voting
                                                                              of                        Securities
                                                                         Incorporation                    Owned
                                                                         -------------                  ----------
<S>                                                                      <C>                            <C>
The McGraw-Hill Companies, Inc.                                            New York                     Registrant
International Advertising/McGraw-Hill, Inc.                                Delaware                        100
J.J. Kenny Co., Inc.                                                       New York                        100
  *J.J. Kenny Drake, Inc.                                                  New York                        100
  *Kenny Services, Inc.                                                    New York                        100
Landoll, Inc.                                                              Ohio                            100
McGraw-Hill Broadcasting Company, Inc.                                     New York                        100
McGraw-Hill Capital, Inc.                                                  New York                        100
  *International Valuation Services, Inc.                                  Delaware                         40
McGraw-Hill Interamericana, Inc.                                           New York                        100
McGraw-Hill International Enterprises, Inc.                                New York                        100
  *Editora McGraw-Hill Interamericana do                                   Brazil                          100
    Brasil Ltda.
  *McGraw-Hill Korea, Inc.                                                 Korea                           100
  *McGraw-Hill (Malaysia) Sdn.Bhd                                          Malaysia                        100
McGraw-Hill New York, Inc.                                                 New York                        100
McGraw-Hill Publications Overseas Corporation                              New York                        100
McGraw-Hill Real Estate, Inc.                                              New York                        100
McGraw-Hill Ventures, Inc.                                                 Delaware                        100
MMS International                                                          Nevada                          100
Money Market Directories, Inc.                                             New York                        100
National Radio Institute                                                   Delaware                        100
Rational Investors, Inc.                                                   Massachusetts                   100
Rock-McGraw, Inc.                                                          New York                         45
S&P ComStock, Inc.                                                         New York                        100
Standard & Poor's Europe, Inc.                                             Delaware                        100
Standard & Poor's International Ratings, LLC                               Delaware                        100
  *Credit Rating Information Services
    of India Limited                                                       India                             9.6
  *Taiwan Ratings Corporation                                              Taiwan                           50
Standard & Poor's Investment Advisory
    Services LLC                                                           Delaware                        100
Standard & Poor's, LLC                                                     Delaware                        100
Standard & Poor's Securities, Inc.                                         Delaware                        100
Sunshine International, Inc.                                               Delaware                        100
</TABLE>


                                       29
<PAGE>   2
<TABLE>
<CAPTION>
                                                                           State or                     Percentage
                                                                         Jurisdiction                   of Voting
                                                                              of                        Securities
                                                                         Incorporation                    Owned
                                                                         -------------                  ----------
<S>                                                                      <C>                            <C>
Editora McGraw-Hill de Portugal, Ltda.                                     Portugal                        100
Editorial Interamericana, S.A.                                             Colombia                        100
Lands End Publishing                                                       New Zealand                     100
McGraw-Hill Australia Pty Limited                                          Australia                       100
 *McGraw-Hill Book Company
  New Zealand Limited                                                      New Zealand                     100
 *Standard & Poor's (Australia) Pty Ltd.                                   Australia                       100
McGraw-Hill Data Services - Ireland, Ltd.                                  Ireland                         100
McGraw-Hill Holdings Europe, Ltd.                                          United Kingdom                  100
 *McGraw-Hill International (U.K.) Limited                                 United Kingdom                  100
 *Standard & Poor's AB                                                     Sweden                          100
 *The McGraw-Hill Companies, GmbH                                          Germany                         100
 *The McGraw-Hill Companies, SA                                            France                          100
 *The McGraw-Hill Companies, SRL                                           Italy                           100
 *The McGraw-Hill Companies, Limited                                       United Kingdom                  100
  *Micropal Accounting Portfolio Services Inc.                             Delaware                        100
  *Standard & Poor's Fund Services Asia Ltd.                               Hong Kong                       100
  *Standard & Poor's Fund Services, GmbH                                   Germany                         100
  *Standard & Poor's Fund Services, SaRL                                   France                          100
  *Standard & Poor's Micropal, Inc.                                        Massachusetts                   100
  *The McGraw-Hill Companies Switzerland GmbH                              Switzerland                     100
McGraw-Hill Information Systems
  Company of Canada Limited                                                Ontario, Canada                 100
McGraw-Hill/Interamericana de Chile Limitada                               Chile                           100
McGraw-Hill/Interamericana de Espana, S.A.                                 Spain                           100
  *Standard & Poor's Espana, S.A.                                          Spain                           100
McGraw-Hill/Interamericana de Venezuela S.A.                               Venezuela                       100
McGraw-Hill/Interamericana Editores, S.A. de C.V.                          Mexico                          100
McGraw-Hill/Interamericana, S.A.                                           Panama                          100
McGraw-Hill Ryerson Limited                                                Ontario, Canada                  70
MHFSCO, Ltd.                                                               U.S. Virgin Islands             100
Mimosa Publications Pty Ltd.                                               Australia                       100
  *Carringbush Publications Pty Ltd.                                       Australia                       100
  *Dragon Media International Pty Ltd.                                     Australia                       100
  *Platypus Media Pty Ltd.                                                 Australia                       100
  *Yarra Pty Ltd.                                                          Australia                       100
Shortland Publications                                                     New Zealand                     100
Standard & Poor's, S.A. de C.V.                                            Mexico                          100
Tata McGraw-Hill Publishing Company
  Private Limited                                                          India                            66.25
The McGraw-Hill Companies (Canada) Corp.                                   Nova Scotia, Canada             100
</TABLE>

*        Subsidiary of a subsidiary.


                                       30
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>y46387ex23.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP
<TEXT>

<PAGE>   1
                                                                    Exhibit (23)


                         CONSENT OF INDEPENDENT AUDITORS
                         -------------------------------

We consent to the incorporation by reference in this Annual Report on Form 10-K
of The McGraw-Hill Companies, Inc. ("Company") of our report dated February 14,
2001, included in the 2000 Annual Report to Shareholders of The McGraw-Hill
Companies, Inc.

Our audits also included the consolidated financial statement schedule of The
McGraw-Hill Companies, Inc. listed in Item 14 (a). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the consolidated financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

We also consent to 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 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 & Poor's Employee Retirement
Account Plan for Represented Employees, The Employees' Investment Plan of
McGraw-Hill Broadcasting Company, Inc. and its Subsidiaries (No. 33-50856) and
in the related prospectuses of our report dated February 14, 2001 with respect
to the consolidated financial statements incorporated therein by reference, and
our report included above with respect to the consolidated financial statement
schedule included in this Annual Report (Form 10-K) of The McGraw-Hill
Companies, Inc.


     ERNST & YOUNG LLP


New York, New York
March 12, 2001


                                       31
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>8
<FILENAME>y46387ex27-1.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S>                              <C>
<PERIOD-TYPE>                    YEAR
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-END>                               DEC-31-2000
<CASH>                                           3,171
<SECURITIES>                                         0
<RECEIVABLES>                                1,351,381
<ALLOWANCES>                                   256,263
<INVENTORY>                                    388,947
<CURRENT-ASSETS>                             1,801,690
<PP&E>                                       1,046,369
<DEPRECIATION>                                 614,464
<TOTAL-ASSETS>                               4,931,444
<CURRENT-LIABILITIES>                        1,780,785
<BONDS>                                              0
<COMMON>                                       205,839
<PREFERRED-MANDATORY>                               13
<PREFERRED>                                          0
<OTHER-SE>                                           0
<TOTAL-LIABILITY-AND-EQUITY>                 4,931,444
<SALES>                                      4,280,968
<TOTAL-REVENUES>                             4,280,968
<CGS>                                        3,515,308
<TOTAL-COSTS>                                3,515,308
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                47,589
<INTEREST-EXPENSE>                              52,841
<INCOME-PRETAX>                                767,342
<INCOME-TAX>                                   295,426
<INCOME-CONTINUING>                            471,916
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                     (68,122)
<NET-INCOME>                                   403,794
<EPS-BASIC>                                       2.08<F1>
<EPS-DILUTED>                                     2.06<F2>
<FN>
<F1>Amount reported is EPS-BASIC.
<F2>Amount reported is EPS-DILUTED.
</FN>


</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.2
<SEQUENCE>9
<FILENAME>y46387ex27-2.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S>                               <C>                     <C>
<PERIOD-TYPE>                     YEAR                    YEAR
<FISCAL-YEAR-END>                           DEC-31-1999        DEC-31-1998
<PERIOD-END>                                DEC-31-1999        DEC-31-1998
<CASH>                                            6,489             10,451
<SECURITIES>                                          0                  0
<RECEIVABLES>                                 1,281,517          1,162,719
<ALLOWANCES>                                    232,526            212,423
<INVENTORY>                                     295,255            284,729
<CURRENT-ASSETS>                              1,583,039          1,458,075
<PP&E>                                          993,704            914,805
<DEPRECIATION>                                  563,296            550,781
<TOTAL-ASSETS>                                4,118,111          3,815,761
<CURRENT-LIABILITIES>                         1,597,770          1,363,434
<BONDS>                                               0                  0
<COMMON>                                        205,838            205,838
<PREFERRED-MANDATORY>                                14                 14
<PREFERRED>                                           0                  0
<OTHER-SE>                                            0                  0
<TOTAL-LIABILITY-AND-EQUITY>                  4,118,111          3,817,458
<SALES>                                       3,991,685          3,724,971
<TOTAL-REVENUES>                              3,991,685          3,724,971
<CGS>                                         3,315,959          3,177,541
<TOTAL-COSTS>                                 3,315,959          3,177,541
<OTHER-EXPENSES>                                      0                  0
<LOSS-PROVISION>                                 68,657            104,597
<INTEREST-EXPENSE>                               42,013             47,961
<INCOME-PRETAX>                                 697,662            556,248
<INCOME-TAX>                                    272,088            216,937
<INCOME-CONTINUING>                             425,574            339,311
<DISCONTINUED>                                        0                  0
<EXTRAORDINARY>                                       0            (8,716)
<CHANGES>                                             0                  0
<NET-INCOME>                                    425,574            330,595
<EPS-BASIC>                                        2.17               1.68
<EPS-DILUTED>                                      2.14               1.66




</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.3
<SEQUENCE>10
<FILENAME>y46387ex27-3.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   9-MOS                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-2000             DEC-31-1999
<PERIOD-END>                               SEP-30-2000             SEP-30-1999
<CASH>                                          36,758                  15,356
<SECURITIES>                                         0                       0
<RECEIVABLES>                                1,586,214               1,269,738
<ALLOWANCES>                                   261,257                 228,409
<INVENTORY>                                    441,738                 313,383
<CURRENT-ASSETS>                             1,995,560               1,773,837
<PP&E>                                       1,018,515                 976,460
<DEPRECIATION>                                 607,246                 552,957
<TOTAL-ASSETS>                               5,029,685               4,242,043
<CURRENT-LIABILITIES>                        1,606,692               1,695,661
<BONDS>                                              0                       0
<COMMON>                                       205,839                 205,838
<PREFERRED-MANDATORY>                               13                      14
<PREFERRED>                                          0                       0
<OTHER-SE>                                           0                       0
<TOTAL-LIABILITY-AND-EQUITY>                 5,029,685               4,242,043
<SALES>                                      3,194,608               2,957,113
<TOTAL-REVENUES>                             3,194,608               2,957,113
<CGS>                                        2,594,090               2,441,654
<TOTAL-COSTS>                                2,594,090               2,441,654
<OTHER-EXPENSES>                                     0                       0
<LOSS-PROVISION>                                34,341                  41,458
<INTEREST-EXPENSE>                              35,618                  32,328
<INCOME-PRETAX>                                594,859                 499,458
<INCOME-TAX>                                   229,021                 194,788
<INCOME-CONTINUING>                            365,838                 304,670
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                               (68,122)                       0
<CHANGES>                                      297,716                       0
<NET-INCOME>                                   297,716                 304,670
<EPS-BASIC>                                       1.53                    1.55
<EPS-DILUTED>                                     1.52                    1.53


</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.4
<SEQUENCE>11
<FILENAME>y46387ex27-4.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   6-MOS                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-2000             DEC-31-1999
<PERIOD-END>                               JUN-30-2000             JUN-30-1999
<CASH>                                           8,726                  23,003
<SECURITIES>                                         0                       0
<RECEIVABLES>                                1,156,055               1,094,749
<ALLOWANCES>                                   191,792                 173,330
<INVENTORY>                                    410,607                 337,797
<CURRENT-ASSETS>                             1,556,055               1,462,309
<PP&E>                                         953,739                 996,748
<DEPRECIATION>                                 548,773                 575,506
<TOTAL-ASSETS>                               4,053,636               3,946,179
<CURRENT-LIABILITIES>                        1,492,492               1,439,705
<BONDS>                                              0                       0
<COMMON>                                       205,838                 205,838
<PREFERRED-MANDATORY>                               14                      14
<PREFERRED>                                          0                       0
<OTHER-SE>                                           0                       0
<TOTAL-LIABILITY-AND-EQUITY>                 4,053,636               3,946,179
<SALES>                                      1,800,138               1,632,781
<TOTAL-REVENUES>                             1,800,138               1,632,781
<CGS>                                        1,562,007               1,441,230
<TOTAL-COSTS>                                1,562,007               1,441,230
<OTHER-EXPENSES>                                     0                       0
<LOSS-PROVISION>                                21,065                  25,019
<INTEREST-EXPENSE>                              20,583                  19,737
<INCOME-PRETAX>                                244,271                 181,240
<INCOME-TAX>                                    94,044                  70,683
<INCOME-CONTINUING>                            150,227                 110,557
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                               (68,122)                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                    82,105                 110,557
<EPS-BASIC>                                       0.42                    0.56
<EPS-DILUTED>                                     0.42                    0.55


</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.5
<SEQUENCE>12
<FILENAME>y46387ex27-5.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-2000             DEC-31-1999
<PERIOD-END>                               MAR-31-2000             MAR-31-1999
<CASH>                                           6,812                  36,041
<SECURITIES>                                         0                       0
<RECEIVABLES>                                1,000,855                 964,264
<ALLOWANCES>                                   214,808                 190,597
<INVENTORY>                                    356,301                 300,318
<CURRENT-ASSETS>                             1,344,689               1,317,285
<PP&E>                                         949,210                 962,471
<DEPRECIATION>                                 539,034                 568,103
<TOTAL-ASSETS>                               3,828,269               3,700,827
<CURRENT-LIABILITIES>                        1,333,105               1,215,010
<BONDS>                                              0                       0
<COMMON>                                       205,838                 205,838
<PREFERRED-MANDATORY>                               14                      14
<PREFERRED>                                          0                       0
<OTHER-SE>                                           0                       0
<TOTAL-LIABILITY-AND-EQUITY>                 3,828,269               3,700,827
<SALES>                                        784,214                 716,830
<TOTAL-REVENUES>                               784,214                 716,830
<CGS>                                          719,754                 671,538
<TOTAL-COSTS>                                  719,754                 671,538
<OTHER-EXPENSES>                                     0                       0
<LOSS-PROVISION>                                14,505                  10,033
<INTEREST-EXPENSE>                               9,345                   9,441
<INCOME-PRETAX>                                 70,561                  40,437
<INCOME-TAX>                                    27,165                  15,770
<INCOME-CONTINUING>                             43,395                  24,667
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                               (68,122)                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                  (24,727)                  24,667
<EPS-BASIC>                                     (0.13)                    0.12
<EPS-DILUTED>                                   (0.13)                    0.12


</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>13
<FILENAME>y46387ex99.txt
<DESCRIPTION>SCHEDULE II
<TEXT>

<PAGE>   1
                         THE McGRAW-HILL COMPANIES, INC.

         SCHEDULE II - RESERVES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS

                             (Thousands of dollars)


<TABLE>
<CAPTION>
                                      Balance at       Additions                                     Balance
                                      beginning        charged                                       at end
                                       of year        to income        Deductions       Other        of year
                                      ---------       ---------        ----------       -----        -------
                                                                          (A)
<S>                                   <C>              <C>             <C>              <C>          <C>
Year ended 12/31/00
 Allowance for doubtful
  accounts                            $125,144         $ 47,589        $ 34,992         $            $137,741
 Allowance for returns                 107,382           11,140                                       118,522
                                      --------         --------        --------         -------      --------
                                      $232,526         $ 58,729        $ 34,992         $            $256,263
                                      ========         ========        ========         =======      ========

Year ended 12/31/99
 Allowance for doubtful
  accounts                            $113,639         $ 68,657        $ 57,152         $            $125,144
 Allowance for returns                  98,784            8,598                                       107,382
                                      --------         --------        --------         -------      --------
                                      $212,423         $ 77,255        $ 57,152         $            $232,526
                                      ========         ========        ========         =======      ========

Year ended 12/31/98
 Allowance for doubtful
  accounts                            $ 98,321         $104,597        $ 89,279         $            $113,639
 Allowance for returns                  84,308           14,476                                        98,784
                                      --------         --------        --------         -------      --------
                                      $182,629         $119,073        $ 89,279         $            $212,423
                                      ========         ========        ========         =======      ========
</TABLE>

(A)      Accounts written off, less recoveries.


                                       36
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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