<PAGE>   1
COVER COPY:

REVOLUTIONIZING LEARNING
BUILDING DOMINANT BRANDS
INFORMING THE INTERNET ECONOMY

1998 ANNUAL REPORT
IDG BOOKS WORLDWIDE, INC.


<PAGE>   2

INSIDE FRONT COVER:


<TABLE>
                                                FINANCIAL HIGHLIGHTS
<CAPTION>
--------------------------------------------- ---------------- ---------------------- ---------------------
<S>                                           <C>              <C>                    <C>     
NET REVENUE                                   $97,847          $120,688               $141,525
--------------------------------------------- ---------------- ---------------------- ---------------------
NET INCOME                                    6,488            7,035                  10,183
--------------------------------------------- ---------------- ---------------------- ---------------------
EBITDA1                                       12,351           13,586                 20,677
--------------------------------------------- ---------------- ---------------------- ---------------------
EARNINGS PER SHARE                            $0.58            $0.63                  $0.87
--------------------------------------------- ---------------- ---------------------- ---------------------
PRO FORMA EARNINGS PER SHARE2                 $0.47            $0.51                  $0.73
--------------------------------------------- ---------------- ---------------------- ---------------------
</TABLE>

EARNINGS PER SHARE
[GRAPH VISUAL]

NET REVENUE ($ IN MILLIONS)
[GRAPH VISUAL]

1. "EBITDA" IS DEFINED AS INCOME BEFORE PROVISION FOR INCOME TAXES, INTEREST
EXPENSE, DEPRECIATION AND AMORTIZATION. EBITDA IS NOT INTENDED TO REPRESENT CASH
FLOWS FROM OPERATIONS AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET
INCOME AS AN INDICATOR OF THE COMPANY'S OPERATING PERFORMANCE OR TO CASH FLOWS
AS A MEASURE OF LIQUIDITY.

2. THE PRO FORMA EARNINGS PER SHARE AMOUNTS SHOW THE PRO FORMA DILUTIVE EFFECT
OF THE NUMBER OF SHARES WHICH WERE REQUIRED TO BE SOLD IN THE COMPANY'S INITIAL
PUBLIC OFFERING TO REPAY THE NOTE PAYABLE ISSUED TO IDG, THE PARENT COMPANY, AS
A PRE-OFFERING DIVIDEND.


<PAGE>   3


                              INVESTED IN KNOWLEDGE

THE NEW INTERNET ECONOMY IS TRANSFORMING OUR LIVES: HOW WE WORK, ACQUIRE AND USE
INFORMATION, AND COMMUNICATE WITH THE WORLD AROUND US. THE NEED FOR QUALITY
TRAINING AND ON-THE-FLY SOLUTIONS IS BECOMING ONE OF THE MOST PRESSING BUSINESS
ISSUES TODAY. AS WE MOVE INTO THE 21ST CENTURY, WE WILL LOOK BEYOND TRADITIONAL
TRAINING ENVIRONMENTS SUCH AS THE CLASSROOM AND BECOME LIFELONG LEARNERS,
SEEKING QUICK ACCESS TO USEFUL INFORMATION THAT WILL HELP US TO LEAD MORE
PRODUCTIVE, REWARDING LIVES.

AT IDG BOOKS WORLDWIDE, INC., WE BELIEVE IN THE LIMITLESS POWER OF KNOWLEDGE TO
EXPAND HORIZONS, DELIVER COMPETITIVE ADVANTAGE, AND EMPOWER LIVES. FOUNDED IN
1990, WE'RE A LEADING GLOBAL KNOWLEDGE COMPANY WHOSE BEST-SELLING TECHNOLOGY,
BUSINESS, AND SELF-HELP PRODUCTS ARE DESIGNED TO MAKE LEARNING EASY, ACCESSIBLE,
AND FUN. WE'VE SUCCEEDED BY BUILDING STRONG BRANDS ACROSS CATEGORIES--A NEW
CONCEPT IN THE PUBLISHING INDUSTRY--AND SUPPORTING THEM WITH TARGETED CONTENT
AND EFFICIENT BUSINESS STRATEGIES.

INTELLECTUAL CURIOSITY, THE HUNGER FOR KNOWLEDGE, AND THE DRIVE TO EXCEL ARE
FUNDAMENTAL TO HUMAN NATURE. THEY ARE INCREASINGLY IMPORTANT IN THE KNOWLEDGE
ECONOMY, WHERE LEARNING TAKES PLACE CONTINUOUSLY. IDG BOOKS WORLDWIDE HAS BECOME
AN INDUSTRY PHENOMENON BY ANTICIPATING WHAT PEOPLE WANT TO KNOW NOW-AND WHAT
THEY NEED TO KNOW NEXT-AND DELIVERING RELIABLE CONTENT TARGETED TO DIVERSE
LEARNING STYLES.

FOR THE MILLIONS OF PEOPLE LOOKING TO ENHANCE THEIR SKILLS, IMPROVE THEIR
PRODUCTIVITY, AND SEEK PERSONAL ENRICHMENT, WE'LL PROVIDE EXCITING, FULFILLING
WAYS TO HELP THEM REALIZE THOSE GOALS.



<PAGE>   4

                           LETTER TO THE STOCKHOLDERS

TO OUR STOCKHOLDERS, CUSTOMERS, AND EMPLOYEES:

WELCOME TO OUR FIRST ANNUAL REPORT.

IN JUST EIGHT YEARS, IDG BOOKS WORLDWIDE HAS BECOME ONE OF THE MOST SUCCESSFUL
AND INNOVATIVE PUBLISHERS AND MASS MARKETERS OF THE DECADE. GREAT IDEAS,
NURTURED BY TALENTED PEOPLE, ARE THE FUELS THAT POWER OUR ENTERPRISE.

IN 1998 WE LAUNCHED 342 TITLES, INCLUDING THE LATEST RELEASE OF THE BEST-SELLING
COMPUTER BOOK EVER PUBLISHED: WINDOWS 98 FOR DUMMIES(R). IN FACT, IDGB PUBLISHED
THE TOP SIX BEST-SELLING WINDOWS 95 AND WINDOWS 98-RELATED TITLES, ACCORDING TO
THE RECENT OCTOBER 26, 1998 PUBLISHERS WEEKLY COMPUTER BEST-SELLER LIST; OTHER
IDGB TITLES EARNED THE #1 SLOT IN ALL REMAINING TECHNOLOGY CATEGORIES PUBLISHERS
WEEKLY TRACKS.

OUR FORMULA FOR CREATING A STRING OF BEST-SELLERS OVER THE YEARS IS SIMPLE: WE
HAVE CONSISTENTLY IDENTIFIED KEY TECHNOLOGY TRENDS AND DELIVERED PRODUCTS THAT
ENABLE CUSTOMERS TO QUICKLY GAIN COMPETITIVE ADVANTAGES AND INCREASE THEIR
SKILLS. WE'VE DELIVERED THOSE PRODUCTS THROUGH 18 BRANDED SERIES--INCLUDING OUR
FLAGSHIP ...FOR DUMMIES(R) BRAND, 3-D VISUAL(R), BIBLE, ...SECRETS(R), NOVELL
PRESS(TM), AND VARIOUS MICROSOFT CERTIFICATION SERIES--AND OUR THREE WEB SITES:
WWW.IDGBOOKS.COM, WWW.DUMMIES.COM, AND WWW.CLIFFS.COM. THIS DIVERSE RANGE OF
OFFERINGS AND CLEAR BRAND IDENTITY KEEP OUR CUSTOMERS COMING BACK FOR MORE.

FROM THE START, IDGB HAS SUCCESSFULLY BROUGHT BRANDING TO AN INDUSTRY THAT
TRADITIONALLY PUBLISHED "BOOK BY BOOK." THE BEST EXAMPLE OF THIS STRATEGIC FOCUS
OCCURRED IN NOVEMBER 1991 WHEN WE DEFIED CONVENTIONAL WISDOM AND LAUNCHED THE
REVOLUTIONARY KNOWLEDGE BRAND, ...FOR DUMMIES. WE HAVE GROWN THIS BRAND
RELENTLESSLY AND ARE PROUD TO HAVE FINISHED 1998 WITH MORE THAN 60 MILLION
COPIES IN PRINT IN THE ENGLISH LANGUAGE. IN ADDITION, WE HAVE TRANSLATIONS IN
MORE THAN 30 LANGUAGES.

IDGB HAS SUCCESSFULLY EXTENDED THE ...FOR DUMMIES BRAND BEYOND ITS ORIGINAL
TECHNOLOGY FOCUS INTO SUCH AREAS AS PERSONAL FINANCE, BUSINESS, REAL ESTATE,
COOKING, GARDENING, SPORTS AND FITNESS, TEST PREPARATION, MUSIC, AND MORE. THIS
YEAR, WE LAUNCHED 49 CONSUMER TITLES, WITH NEW ENTRIES IN THE CATEGORIES OF
SELF-HELP, SMALL BUSINESS, HOME IMPROVEMENT, AUTOMOTIVE REPAIR, PHOTOGRAPHY, AND
PERSONAL RELATIONSHIPS. BECAUSE OUR CORE MISSION IS TO MAKE LEARNING EASY AND
ACCESSIBLE WHATEVER THE TOPIC, WE BELIEVE OUR CONSUMER PUBLISHING OPPORTUNITIES
ARE LIMITLESS.


<PAGE>   5

We have identified several key growth initiatives that will drive us in 1999 and
beyond:

Increase Strategic Partnerships
We are already working with several customers to create custom products, and we
see this as an important growth area. Lotus, Siemens, and other companies have
contracted with us to provide printed product documentation and electronic
versions of our product. America Online, Excite, and Novell have also selected
IDGB to create exciting co-branded products.

Acquire Complementary Brands
The acquisition of Cliffs Notes(R) in December 1998 exemplifies our strategy to
extend our product portfolio with high-profile yet underdeveloped knowledge
brands with loyal repeat buyers and the potential for product expansion. We will
leverage these brands through our strong global sales, marketing, and
distribution network.

Launch New Products and Line Extensions
We see many growth opportunities for product launches into new markets such as
certification. In 1997, Microsoft reported that the Microsoft Certified Systems
Engineer and Microsoft Certified Solution Developer certifications saw growth of
over 250 percent in the prior year. The number of certified individuals doubled.

New software releases such as Microsoft Office 2000 give us the opportunity to
introduce a multitude of new titles and revisions of proven best-sellers. We
will have powerful promotional strategies, marketing programs, and retailer and
consumer incentives in place for the launch of these major software upgrades.

In 1999, we will also aggressively publish in the popular health category with
 ...For Dummies topics such as family health, alternative medicine, dieting, back
pain remedies, and stress management.

Expand Our Distribution Network
We see continued expansion in all our channels. Analysts are forecasting strong
growth for book superstores for 1999. In addition, many computer, membership
club, and office superstore chains are planning aggressive expansions. Our
sell-through efficiency, branding strategy, and solid relationships with the
market leaders will position us to capitalize on this growth.

We expect our growth from electronic commerce to continue to soar. Our 1998
sales through Amazon.com increased more than tenfold. Web-based sales are still
only a small percentage of our total business, so the impact of growth in this
channel will be significant.

International channels continue to be a source of growth potential. Currently,
14 percent of our revenues are from international business and we see
significant opportunity, especially as we launch local publishing ventures
around the world.

In our quest for the next big idea, we will focus on new platforms such as
electronic books, intranets, electronic downloads, and e-commerce as valuable
drivers of our business.

We are grateful to our talented staff, authors, customers, strategic partners
and, most importantly, to the tens of millions of IDGB consumers who continually
inspire us to innovate and grow. We are determined to build a diverse portfolio
of knowledge brands to help companies, students, families, and individuals
around the world learn, excel, compete, and improve the quality of their lives.
In short, we will continue to champion our core mission: helping people turn "I
can't" into "I can." By empowering our customers, we are fueling our future.

                               John J. Kilcullen
                              Steven H. Berkowitz
<PAGE>   6

RECOGNIZED BY READERS...

READER QUOTES:

RESUMES FOR DUMMIES(R), 2ND EDITION
"RESUMES FOR DUMMIES IS THE BEST RESUME BOOK I'VE EVER READ.  THE INFORMATION IS
DOOR-OPENING AND THE PRESENTATION IS ENTERTAINING."
          --JENNY LUKE, READER, OCEANSIDE, CA

WINDOWS(R) 95 SIMPLIFIED(R)

"THE BEST COMPUTER BOOK I'VE EVER READ; KEEP MAKING MORE!"

          --GINA M. BELLAFORE, ASSOCIATE
            FILM PRODUCER, BROOKLYN, NY


AUTOCAD(R) BIBLE
"CONGRATULATIONS ON WRITING THE BEST AUTOCAD REFERENCE/MANUAL THAT I'VE EVER
SEEN. I'VE BEEN AN AUTOCAD USER SINCE R10 AND I'VE SEEN AND USED MANY, MANY
AUTOCAD BOOKS. AUTOCAD 14 BIBLE IS AN EXCEPTIONAL WORK. IN ENGINEERING WE ARE
INFORMATION JUNKIES BY NECESSITY. THANK YOU FOR PROVIDING SUCH A COMPLETE
RESOURCE."

          --MIKE CAULEY, MECHANICAL
            DESIGNER, MONTEREY, CA

MCSE FOR DUMMIES(R)

"I RECENTLY FINISHED REVIEWING YOUR
NEW SET OF MCSE FOR DUMMIES BOOKS
AND WAS LEFT VERY IMPRESSED WITH
THE CONTENT. REGARDLESS OF WHAT THE TERM `DUMMIES' MEANS TO US, I THINK THAT
ANYONE WHO DOESN'T PICK UP A SET OF THESE FOR THEIR CERTIFICATION IS THE REAL
FOOL.

"I AM AN MCSE INSTRUCTOR FOR SENTO CORPORATION IN UTAH.
WE HELP STUDENTS BECOME CERTIFIED BY SHARING INFORMATION
WE HAVE DEVELOPED AND RESEARCHED. WITH ALL OF THE INFORMATION AVAILABLE TO ME, I
FEEL THAT THE MCSE DUMMIES BOOKS THAT I READ WERE BY FAR THE MOST FOCUSED ON
PASSING ALL OF THE EXAMS. I PARTICULARLY LIKE THE FORMAT OF THE BOOKS; THEY ARE
NOT ONLY EASY TO READ, BUT I WAS ABLE TO QUICKLY FIND THE EXACT INFORMATION ON
ANY TOPIC I NEEDED. I WOULD JUST LIKE TO COMPLIMENT YOUR ENTIRE MCSE TEAM FOR
TURNING OUT SUCH A BENEFICIAL AND USEFUL PRODUCT THAT IS WELL WORTH THE READ."

          --PAUL T. BUNKER, MCSE, SENIOR SENTO INSTRUCTOR,
                             SENTO CORPORATION


<PAGE>   7

 ...AND THE MEDIA

GOURMET COOKING  FOR DUMMIES(R)
"INFORMATION IS PACKED TIGHTER THAN 5 POUNDS OF MEAT LOAF IN A 3-POUND PATE
MOLD. SERIOUSLY, GOURMET COOKING FOR DUMMIES IS AN EASY-TO-FOLLOW BOOK THAT IS
CHOCK-A-BLOCK WITH USEFUL INFORMATION AND RECIPES."
          --CHICAGO SUN-TIMES, OCTOBER 29, 1997

COOL CAREERS FOR DUMMIES(R)
"...THIS BOOK IS FULL OF SMART ADVICE DESIGNED TO SIMPLIFY JOB HUNTING."
          --USA TODAY, SEPTEMBER 29, 1998

TAXES FOR DUMMIES(R), 1997 EDITION

"WITTY, DOWN-TO-EARTH WRITING THAT MIXES LINE-BY-LINE GUIDANCE ON YOUR TAX 
RETURN WITH GENERAL ADVICE."
          --U.S. NEWS & WORLD REPORT, MARCH 9, 1998


PHOTOSHOP 4(R) STUDIO SECRETS(TM)

"THE BOOK IS COPIOUSLY ILLUSTRATED WITH FULL-COLOR REPRODUCTIONS AND SCREEN
GRABS THROUGHOUT. INSTRUCTIONS ARE CLEAR AND, SINCE THEY ARE ALWAYS GROUNDED IN
REAL-WORLD ASSIGNMENTS AND APPLICATIONS, EASY TO FOLLOW."
          --COMMUNICATIONS ARTS, SEPT/OCT 1998

WINDOWS(R) 98 FOR DUMMIES(R)
"THE DUMMIES SERIES LONG AGO PROVED ITSELF AN EXCELLENT MEANS OF EXPLAINING THE
ELEMENTARY ASPECTS OF OPERATING SYSTEMS TO NEW USERS. WINDOWS 98 FOR DUMMIES
CONTINUES THE TRADITION WITH ITS COVERAGE OF MICROSOFT'S LATEST CONSUMER
OPERATING SYSTEM."
           --WWW.AMAZON.COM, JUNE 10, 1998





<PAGE>   8

POWERED BY PEOPLE

IT CAN START with a brainstorming session in an IDG Books Worldwide strategic
planning meeting. Or with new developments in technology or business that
require timely explanations--like the release of new software or hardware, or
the impending Year 2000 challenge. Or with an author's desire to share expertise
with readers.

Whatever its origin, every IDG Books Worldwide publication is a team effort from
start to finish.

Our authors are key partners in every publication. They include media
celebrities such as Gary McCord, author of the best-selling Golf For Dummies(R);
respected USA Today and Business Week best-selling author Eric Tyson, author of
eight ...For Dummies(R) titles on business, real estate and personal finance;
and computer and Internet gurus such as Brian Livingston, author of five
best-selling ...Secrets(R) titles on Windows. Each author brings a wealth of
practical experience and a compelling point of view to his or her subject.

Behind every new launch are the talents of more than 400 employees in four U.S.
offices. An idea for a new consumer title or series might come out of a planning
session in Chicago or New York, then be developed by the editorial group in
Indianapolis. The marketing staff in the San Francisco Bay Area plans public
relations and packaging strategies while teams in both the Bay Area and
Indianapolis coordinate production.



<PAGE>   9

                            POWERED BY PEOPLE, CON'T

From content acquisitions through editorial management, from design through
manufacturing, from sales through distribution, each stage is managed by
skilled, energetic professionals with a shared vision and a passion for high
quality.

When a book finally reaches the reader, it's a satisfying moment--but not the
end of the process. Our readers provide continuous feedback through our Web
sites, industry events, and our customer service and technical support hotlines.
Their active involvement keeps us continually searching for new areas to explore
and new ways to deliver knowledge that will make their lives easier and more
rewarding.




<PAGE>   10

                            BUILDING DOMINANT BRANDS

WHAT MAKES SOME BOOKS STAND OUT
amid in-store and online clutter? A strategic brand identity, superior content,
and targeted marketing that delivers repeat traffic and positive word-of-mouth.
That's the perfect definition of Cliffs Notes, the newest member of the IDG
Books Worldwide's family of knowledge products.

Founded in 1958 in Lincoln, Nebraska, Cliffs Notes has helped generations of
students study for courses, prepare for exams, and better understand literature.
The company currently publishes about 300 reference titles, including the
familiar Cliffs Notes. Each Cliffs Notes study guide is written by a teacher who
provides commentary and analysis of classic works. Other Cliffs Notes products
include: Cliffs Quick Review(R) for high school and college courses, Test
Preparation guides, Advanced Placement guides, and Test Preparation software.
Cliffs Notes' Web site, www.cliffs.com, launched in July 1998, sells electronic
downloadable products 24 hours a day at a premium price--a savvy strategy that
provides immediate value to students with pressing needs to obtain information
after bookstores and libraries are closed.

Until our December 1998 acquisition of Cliffs Notes, IDG Books Worldwide's
primary market was adults. With Cliffs Notes, we are able to reach a new
audience: brand-loyal, intellectually curious students aged 12 to 24. We look
forward to introducing these new customers to our other highly acclaimed
knowledge brands. In addition, we are excited about the opportunity to bring
former Cliffs Notes enthusiasts--now in their 30s, 40s, and beyond--back into
the fold with titles aimed at their current post-school needs and interests such
as technology and business.


<PAGE>   11

                         BUILDING DOMINANT BRANDS, CON'T

Cliffs Notes, like the ...For Dummies(R) series, has long been identified by its
trademarked yellow-and-black cover design. As the new parent of Cliffs Notes,
IDG Books Worldwide is proud to extend a yellow-and-black welcome to one of the
most venerable and successful knowledge brands in American history. We look
forward to revolutionizing learning together in the 21st century.



<PAGE>   12

                             MAKING IT FUN AND EASY!


IN THE PAST, learning a new subject was too often a matter of trial and error.
Now learning almost anything you're interested in can be fun and easy, thanks to
our ...For Dummies(R) product line, one of the most widely recognized self-help
brands in the United States and the world.

The Dummies promise is simple: to help our customers conquer the frustration
that often accompanies learning a new skill. Each book takes a challenging
topic--whether computers, cooking, the Internet, or investing--and makes it easy
for customers to quickly feel confident.

A few statistics convey the scope of the Dummies success. Approximately 60
million ...For Dummies titles are in print in the English language. The product
line includes more than 380 titles on technology and general-interest topics and
has translations in more than 30 languages. And in October 1998, 15 ...For
Dummies titles appeared on the Publishers Weekly top 40 Computer Book
Best-sellers list.


But numbers tell only a fraction of the story. The key to the Dummies phenomenon
is our expanding franchise of loyal customers who turn to us time and again to
solve problems and get up to speed quickly on important subjects that affect
their personal or professional lives.

The first step in making learning fun and easy for our customers is making our
books easy to find. We strive to have our Dummies products in as many shopping
outlets as possible. Dummies books enjoy a strong presence in large bookstore
chains such as Barnes & Noble, Borders, Walden, and B. Dalton and other channels
such as Price Costco, Sams, Staples, Office Max, and Office Depot. We've also
had remarkable success promoting the Dummies brand in the dynamic online
marketplace, with exceptional growth rates on Amazon. com, America Online,
barnesandnoble.com, and other e-commerce partners.

Through innovative licensing and expansion strategies, the Dummies brand extends
far beyond



<PAGE>   13

                         MAKING IT FUN AND EASY!, CON'T


books and booksellers. Created in partnership with PC World Online,
dummiesdaily.com, a daily online newletter, has over 15 million deliveries each
month. Subscribers receive daily tips in 19 subject areas, including online pop
quizzes for the new MCSE study guide field--the perfect daily preparation for
anyone preparing for a Microsoft certification exam.

Offline, our licensing accomplishments have been just as notable. In a June 1998
agreement with Pressman Toys, maker of such popular games as Othello and
MasterMind, we introduced three board games: Trivia For Dummies(TM), Charades
For Dummies(TM), and Crosswords For Dummies(TM). The games were promoted in
national television ads during the 1998 holiday season. Ongoing licensing
partnerships include Angel/EMI for classical music CDs; Harper Audio for a line
of acclaimed audio-cassette books; and Andrews-McMeel for day-to-day calendars.



<PAGE>   14

                           ANTICIPATING CUSTOMER NEEDS

COMPUTER NOVICE? Corporate manager? Software developer? The IDG Books Worldwide
Technology Group creates products for every experience level and every learning
style. Each series has a distinctive format that remains consistent from title
to title; as consumers progress through a series, they can rely on a product
that feels comfortable and accessible no matter how unfamiliar the content.

Because we specialize in anticipating market demands and trends, whether it's an
unfamiliar topic or new features of a subject, we continue to meet the needs of
our customers. On the day new software such as Microsoft Windows 98 is released,
a full array of IDG Books Worldwide technology titles hits the shelves. This
past June we debuted 17 Windows 98 titles, including eight ...For Dummies books,
concurrent with Microsoft's new product introduction. Just four months later, we
were proud to announce that six of our Windows 95 and Windows 98-related titles
held the top spots on the Publishers Weekly Computer Books Best-sellers list.
When we recognize a hot or emerging topic such as the LINUX operating system,
e-commerce, or Year 2000 solutions, our expert authors get to work on books that
demystify the subjects-and our sales, licensing, and marketing teams coordinate
efforts to ensure effective market penetration.

We also continually develop new products that appeal to untapped or underserved
markets. The certification-training market--worth an estimated $1.3 billion in
1997, according to Computerworld magazine, and growing exponentially--is an
increasingly important focus of our technology



<PAGE>   15

ANTICIPATING CUSTOMER NEEDS, CON'T

groups. We offer a range of options for information professionals preparing for
certification. In September 1998 we launched Ace It!(TM), written by Microsoft
exam experts, to complement our successful MCSE (Microsoft Certified Systems
Engineer) Study Guides.

Our best-selling and fastest growing line after ...For Dummies(R),
3-D Visual(R) comprises three reference/tutorial series: ...Simplified(TM),
Teach Yourself VISUALLY(TM), and Master VISUALLY(TM). All of the books use a
unique, award-winning visual format built around colorful graphics, with each
series addressing a different consumer level and learning style, from beginning
through advanced. The most sophisticated reference, Master VISUALLY(TM),
includes shareware as well as a CD-ROM with a searchable electronic version of
the book.

In December 1997 we acquired MIS: Press and M&T Books(TM) from
New York-based Henry Holt publishers, adding 80 new titles and five key brands
to our technology publishing program, including the original Teach Yourself(R)
series.

In 1999, we will introduce the redesigned Teach Yourself series. The new product
blends a text and visual approach to learning that lends itself to self-paced
instruction and instructor-led classes. Another new series, One Step at a
Time(TM), provides instant on-the-job training for busy professionals. This
combination book/CD-ROM creates a virtual classroom with On Demand software,
which turns the user's document into a personalized tutorial. Readers actually
learn new skills and get their work done at the same time.



<PAGE>   16

SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the IDG
Books Worldwide, Inc. Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
                                                              YEAR ENDED SEPTEMBER 30, (1)
                                                  --------------------------------------------------
                                                   1998       1997       1996       1995       1994
                                                  ------     ------     ------     ------     ------
                                                      (dollars in thousands except per share data)
INCOME STATEMENT DATA:
<S>                                              <C>        <C>        <C>        <C>        <C>     
Net revenue ..................................   $141,525   $120,688   $ 97,847   $ 72,523   $ 49,218
Operating income .............................     17,260     11,923     10,996     10,888     10,798
Net income ...................................     10,183      7,035      6,488      6,366      6,497

Net income per share (2)
    Basic ....................................   $    .88   $    .63   $    .58   $    .57   $    .59
    Diluted ..................................   $    .87   $    .63   $    .58   $    .57   $    .59
Weighted average common shares outstanding (2)
    Basic ....................................     11,633     11,100     11,100     11,100     11,100
    Diluted ..................................     11,701     11,100     11,100     11,100     11,100
Pro forma basic and diluted net income per
share(3) .....................................   $    .73   $    .51
Pro forma weighted average common shares
outstanding (3)
    Basic ....................................     13,941     13,873
    Diluted ..................................     14,009     13,873

BALANCE SHEET AND OTHER DATA:
Cash .........................................   $ 15,466   $     74   $     83   $     44   $     86
Working capital ..............................     32,207     18,708     18,778     13,662      5,377
Total assets .................................     88,254     57,163     43,636     39,101     20,199
Stockholders' equity .........................     46,590     26,443     23,991     16,889      7,457
EBITDA (4) ...................................     20,677     13,586     12,351     11,270     10,978
</TABLE>
---------- 

(1)  The Company's fiscal year ends on the last Saturday in September. Fiscal
     years 1996, 1997 and 1998 ended on September 28, 1996, September 27, 1997,
     and September 26, 1998, respectively. For convenience, fiscal year-ends are
     denoted as September 30.

(2)  See Note 2 of Notes to Financial Statements for an explanation of shares
     used to compute basic and diluted net income per share.

(3)  In May 1998, the Company paid a $38.4 million dividend by issuance of a
     note payable to IDG. The Company paid the note using a portion of the
     proceeds from its initial public offering. Unaudited pro forma basic and
     diluted net income per share amounts are calculated using common shares
     outstanding plus the number of shares whose proceeds were required to be
     used to pay such note.

(4)  "EBITDA" is defined as income before provision for income taxes, interest
     expense, depreciation and amortization. EBITDA is not intended to represent
     cash flows from operations and should not be considered as an alternative
     to net income as an indicator of the Company's operating performance or to
     cash flows as a measure of liquidity. The Company believes that EBITDA is a
     standard measure commonly reported and widely used by analysts, investors
     and other interested parties in the publishing and media industries,
     however, EBITDA as presented herein may not be comparable to similarly
     titled measures reported by other companies.


<PAGE>   17

FORWARD-LOOKING STATEMENTS

     The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
those reflected in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's opinion only as of the date hereof. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Potential risks and uncertainties include, among
others, those set forth under "Overview" and "Factor Affecting Future Operating
Results" included in this Management's Discussion and Analysis. The following
discussion also should be read in conjunction with the Financial Statements and
related Notes included in this Annual Report.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

     IDG Books Worldwide, Inc. is a leading global knowledge company featuring a
diverse portfolio of technology, business and self-help books and computer based
learning tools. The Company publishes and markets 18 book series under
well-known brand names, including its popular "...For Dummies(R)" series. These
books have created widespread recognition of the Company's brands by consumers
enabling it to successfully publish across a variety of categories in
technology, business and self-help. The Company's portfolio of brand names
includes more than 780 active titles. The Company has approximately 75 million
English-language books in print and has translated its books into 36 languages.
The Company believes that its readers value and trust its products and brands to
help obtain computer proficiency and professional certification, general
business know-how, career growth and personal enrichment.

     Sales of technology-related books account for a substantial majority of the
Company's net revenue. In this regard, sales of books devoted to the use of
software products sold by Microsoft, including its Windows operating system,
accounted for approximately one-half of the Company's net revenue for year ended
September 30, 1998. The Company expects to continue to depend upon sales of
technology books, particularly those related to Microsoft products, for a
substantial majority of the Company's net revenue for the foreseeable future.


<PAGE>   18

As of September 30, 1998 there were no significant modifications required for
our previously printed and sold Windows 98 books as a result of the federal
regulators request for an injunction relating to Windows 98 in its current form.

     In December 1998, the Company purchased all of the capital stock of Cliffs
Notes, Inc., a privately held publisher of the popular literary study guides.
Cliffs Notes currently publishes approximately 300 titles including its original
Notes plus Quick Reviews of high school and college courses, test preparation
guides, advanced placement study aids and test preparation software.

     The Company's customers consist principally of national retail chain
booksellers, wholesale distributors, office superstores, membership clubs and
computer/electronic superstores located primarily in the United States and
Canada. Over the last several years, there has been significant consolidation in
the distribution channels for books, including retail outlets, although
alternative distribution channels have emerged. As a result, the Company expects
that this trend will lead to increased concentration within each distribution
channel. During the year ended September 30, 1998, the Company's top three
customers accounted for approximately 39.4% of the Company's net revenue as
compared to 38.6% in 1997, and the Company's top ten customers accounted for
approximately 64.1% of the Company's net revenue in 1998 as compared to 62.5% in
1997.

      The Company's fiscal year ends on the last Saturday in September. Fiscal
years 1996, 1997 and 1998 ended on September 28, 1996, September 27, 1997 and
September 26, 1998, respectively and consisted of 52 weeks. For convenience,
throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations, the fiscal year-ends are denoted as September 30.


<PAGE>   19

RESULTS OF OPERATIONS

The following table summarizes the results of operations as a percentage of net
revenue for the periods shown:


<TABLE>
<CAPTION>
                                                        YEAR ENDED SEPTEMBER 30,
                                                        -------------------------
                                                         1998     1997     1996
                                                        -------  -------  -------
<S>                                                      <C>      <C>      <C>  
STATEMENT OF INCOME DATA:
Net Revenue:
"...For Dummies(R)"................................      63.1%    68.1%    69.9%
IDB Books Technology...............................      36.9     31.9     30.1
                                                       -------  -------  -------
Total net revenue..................................     100.0%   100.0%   100.0%
                                                       =======  =======  =======

Cost of sales......................................      52.3     52.3     56.9
Selling, general and administrative expenses.......      34.5     34.8     29.0
Parent corporate services fee......................       1.0      3.0      2.8
                                                       -------  -------  -------
Income before provision for income taxes...........      12.2      9.9     11.2
                                                       -------  -------  -------
Net income.........................................       7.2%     5.8%     6.6%
                                                       =======  =======  =======
</TABLE>




<PAGE>   20

YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997

     Net Revenue. Net revenue increased $20.8 million, or 17.3%, to $141.5
million for the fiscal year ended September 30, 1998 from $120.7 million for the
fiscal year ended September 30, 1997. This increase was primarily the result of
an increase in net revenues of $7.6 million, or 9.3%, for the "...For
Dummies(R)" Group and $13.2 million, or 33.8%, for the IDGB Technology Group. Of
the Company's net revenue for the fiscal year ended September 30, 1998, $56.7
million was attributable to sales of titles (including new editions) first
published during that period, as compared to $55.0 million for titles (including
new editions) first published during the same period for 1997.

     Cost of Sales. Cost of sales increased $10.9 million, or 17.3%, to $74.0
million for the fiscal year 1998 from $63.1 million for the fiscal year 1997.
Cost of sales as a percentage of net revenue was 52.3% for 1998 and 1997.
Product costs, including paper, printing and binding expenses, royalty expense
and inventory obsolescence expense increased as a percentage of net revenue to
32.2% for the fiscal year 1998 from 31.6% for the fiscal year 1997 as a result
of a small change in product mix. Product development costs increased as a
percentage of net revenue to 12.1% for the fiscal year 1998 from 11.3% for the
fiscal year 1997, reflecting the Company's planned increase in title output for
1998. Fulfillment and distribution expense decreased as a percentage of net
revenue to 8.0% for the fiscal year 1998 from 9.3% for the fiscal year 1997 as a
result of efficiencies achieved in the Company's distribution facilities.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.9 million, or 16.2%, to $48.9 million for
the fiscal year 1998 from $42.0 million for the fiscal year 1997. Approximately
38.2% or $2.6 million of this increase was attributable to increased selling and
marketing expenses including increases as a result of the implementation of a
new retail marketing incentive program and expenses for other marketing programs
where costs increase as net revenues increase. A significant portion of the
increase was also attributed to a $2.4 million increase in general and
administrative expenses, including costs assumed by the Company and previously
charged as parent corporate services fee, and costs incurred relating to the
upgrade of computer systems. The remainder of the increase was due to an
increase in depreciation and amortization of $1.8 million relating to a larger
depreciable asset base and amortization of publishing rights. Selling, general
and administrative expenses decreased as a percentage of net revenue to 34.5%
for the fiscal year 1998 from 34.8% for the fiscal year 1997. The Company's
selling and marketing costs as a percentage of net revenue decreased to 19.3%
for the fiscal year 1998 from 20.5% for the fiscal year 1997.

     Parent Corporate Services Fee. Parent corporate services fee decreased $2.2
million, or 60.3%, to $1.5 million for the fiscal year 1998 from $3.7 million
for the fiscal year 1997. Effective January 1, 1998, the Company assumed
responsibility for certain corporate administrative functions, as well as for
its own strategic marketing and brand-building, the costs for which had
constituted a significant portion of the parent corporate services fee. For the
fiscal year ended September 30, 1998, these costs were included with selling,
general and administrative expenses.



<PAGE>   21

     Income before provision for income taxes. Income before provision for
income taxes increased $5.4 million, or 44.8%, to $17.3 million for the fiscal
1998 from $11.9 million for the fiscal year 1997. Income before provision for
income taxes increased as a percentage of net revenue to 12.2% for the fiscal
year 1998 from 9.9% for the same period the prior year due to an increase in
sales, a decrease in selling, general and administrative expenses as a
percentage of net revenue and a decrease in parent corporate service fees which
were included in selling, general and administrative expenses as described
above.

     Net Income. Net income of $10.2 million for the fiscal year 1998 increased
$3.2 million, or 44.7%, from net income of $7.0 million for the fiscal year
1997. This increase was primarily the result of an increase in sales, a decrease
in selling, general and administrative expenses as a percentage of net revenue
and a decrease in parent corporate service fees, which were included in selling,
general, and administrative expenses as described above.

YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996

     Net Revenue. Net revenue increased $22.8 million, or 23.3%, to $120.7
million for the fiscal year ended September 30, 1997 from $97.8 million for the
fiscal year ended September 30, 1996. This increase was primarily the result of
an increase in net sales of $14.7 million, or 22.9%, for the "...For Dummies(R)"
Group and an increase of $8.4 million, or 28.6%, for the IDGB Technology Group.
Of the Company's net revenue for the fiscal year ended September 30, 1997, $55.0
million was attributable to sales of titles (including new editions) first
published during that period, as compared to $48.5 million for titles (including
new editions) first published during the same period for 1996.

     Cost of Sales. Cost of sales increased $7.4 million, or 13.2%, to $63.1
million for the fiscal year 1997 from $55.7 million for the fiscal year 1996.
Cost of sales as a percentage of net revenue was 52.3% and 56.9% for the fiscal
years ended September 30, 1997 and 1996, respectively. Cost of sales as a
percentage of net revenue decreased primarily because paper costs, fulfillment
expenses and inventory obsolescence all decreased as a percentage of net
revenue, though royalty expenses and, to a lesser extent, product development
costs increased as a percentage of net revenue. Product costs, including paper
and printing costs as a percentage of net revenue decreased to 31.6% for the
fiscal year 1997 from 35.1% for the fiscal year 1996 due to lower paper costs
and better printing rates resulting from higher volumes. Product development
costs increased as a percentage of net revenue to 11.3% for the fiscal year 1997
from 11.2% for the fiscal year 1996. Fulfillment and distribution expense
decreased as a percentage of net revenue to 9.3% for the fiscal year 1997 from
10.7% for the fiscal year 1996 as a result of efficiencies achieved in the
distribution, including increased shipments in carton quantities, a renegotiated
fulfillment contract with a third party vendor and lower returns and related
handling fees. Inventory obsolescence decreased to 4.3% of net revenue for the
fiscal year 1997 from 6.9% for the fiscal year 1996.



<PAGE>   22

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $13.6 million, or 48.2%, to $42.0 million
for the fiscal year 1997 from $28.4 million for the fiscal year 1996. This
increase was attributable to increased selling expenses of approximately $9.3
million, resulting primarily from more aggressive customer incentive programs,
and increased general and administrative expenses of approximately $4.3 million,
which reflected increased investments in infrastructure (salaries and bonuses
for additional headcount, occupancy and depreciation). Selling, general and
administrative expenses as a percentage of net revenue increased to 34.8% for
the fiscal year 1997 from 29.0% for the fiscal year 1996. Selling expenses
increased as a percentage of net revenue to 20.5% for the fiscal year 1997 from
15.7% for the fiscal year ended 1996, and general and administrative expenses
increased to 14.3% of net revenue for the fiscal year 1997 from 13.3% for the
fiscal year 1996.

     Parent Corporate Services Fee. Parent corporate services fee increased $.9
million, or 32.0% to $3.7 million for the fiscal year 1997 from $2.8 million for
the fiscal year 1996, primarily as a result of the increase in net sales.

     Income before provision for income taxes. Income before provision for
income taxes increased $.9 million, or 8.4%, to $11.9 million for the fiscal
year 1997 from $11.0 million for the fiscal year 1996. Income before provision
for income taxes decreased as a percentage of net revenue to 9.9% from 11.2% for
the same periods due to an increase in sales more than offset by higher selling,
general and administrative expenses.

     Net Income. Net income of $7.0 million for the fiscal year 1997 increased
$.5 million, or 8.4%, from net income of $6.5 million for the fiscal year 1996.
This increase was primarily the result of increased sales partially offset by
increased selling, general and administrative expenses as described above.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     In May 1998, the Company paid a $38.4 million dividend to IDG, the Parent,
in the form of a promissory note. This dividend represented substantially all of
the Company's retained earnings through April 1998. On July 31, 1998, the
Company completed its initial public offering of Class A common stock. The net
proceeds to the Company from its initial public offering, after deducting
expenses and underwriting discounts and commissions of $5.3 million, were $44.0
million. The Company used $38.4 million of the net proceeds from the offering
for the repayment of indebtedness owed to IDG pursuant to the May promissory
note. The Company used the remaining $5.6 million of net proceeds for general
corporate purposes.



<PAGE>   23

     Historically, the financing requirements of the Company were funded through
intercompany advances from IDG, its parent, while excess cash generated by the
Company was remitted to IDG. Accordingly, the Company maintained minimal cash
balances. In addition, balances owed to or due from IDG were non-interest
bearing and periodic settlements of the net amounts were not made. Accordingly,
such amounts were reflected as a component of stockholders' equity as of
September 30, 1997. As of June 22, 1998, IDG suspended the cash sweep process
allowing cash receipts and cash generated by the Company to be retained by the
Company. During the Company's fiscal fourth quarter ending September 30, 1998
the advances due to (from) Parent account balance was paid by IDG and reduced to
zero.

     As of September 30, 1998 the Company's working capital increased $13.5
million to $32.2 million from $18.7 million at September 30, 1997. The increase
in working capital at September 30, 1998 reflected a $15.4 million increase in
cash which included initial public offering proceeds of $5.6 million, a $2.4
million increase in net inventory, a $3.3 million increase in deferred tax
assets, a $2.4 million increase in other current assets and a $.9 million
increase in accounts receivable, offset by a $9.5 million increase in accrued
liabilities and a $1.4 million increase in accounts payable. The activity
relating to the increase in accrued liabilities consisted of accruals previously
accounted for in the advances due to (from) Parent account. As of September 30,
1998 the increase in accrued liabilities was primarily due a $2.4 million
increase in accrued marketing for the new retail marketing incentive program
which did not exist in the prior year, a $2.1 million increase in other accrued
liabilities and other general and administrative expenses, $2.1 million increase
in accrued royalties, a $1.7 million accrual for ESOP (Employee Stock Ownership
Plan), and a $1.2 million increase in accrued compensation.

     The Company's net cash provided by operations was $12.8 million for fiscal
1998 compared to $7.8 million for fiscal 1997. The $5.0 million increase in cash
provided by operations was primarily due to increased net income ($3.1 million),
an increase in depreciation and amortization ($1.8 million), a smaller increase
in accounts receivable ($3.8 million) and deferred taxes ($.7 million), and a
larger increase in accounts payable ($.9 million) for the year ended September
30, 1998 compared to the year ended September 30, 1997. This was partially
offset by an increase in a related party receivable ($1.5 million) over the
prior year, an increase in other current assets ($.9 million) for twelve months
ended September 30, 1998 compared to a decrease ($.4 million) in the prior year,
a larger increase in royalty advances ($.8 million) and a smaller increase in
accrued liabilities ($1.5 million) for the year ended September 30, 1998
compared to the year ended September 30, 1997. The Company's net cash provided
by operations increased $6.0 million for fiscal 1997 to $7.8 million from $1.8
million for fiscal 1996. This increase was primarily due to an increase in
accrued liabilities partially offset by increases in inventory, accounts
receivable and deferred taxes.

     The Company's net cash used in investing activities for the twelve months
ended September 30, 1998 was $7.4 million and included $3.4 million used to
acquire certain



<PAGE>   24

publishing rights and $4.0 million used for capital expenditures, including
purchases of computer equipment and software and leasehold improvements. The
Company's net cash used in investing activities for the twelve months ended
September 30, 1997 and 1996 was $3.2 million and $2.4 million, respectively, and
included capital expenditures for computer equipment and software and leasehold
improvements.

     The Company's net cash flow provided from financing activities for the
twelve months ended September 30, 1998 was $10.0 million and included net
proceeds of $44.0 million from the initial public offering. Aggregate initial
offering proceeds of $49.3 million were reduced by offering expenses of $5.3
million including underwriters' discounts and commissions of $3.5 million and
other expenses of $1.8 million. On July 31, 1998 the Company repaid the $38.4
million principal amount of the note owed to the Parent from the initial public
offering proceeds. The remainder of the financing activity for fiscal year 1998
related to $4.3 million in net intercompany advances from IDG or excess cash
generated by the Company and retained by IDG. The Company's net cash provided
(used) by financing activities was ($4.6 million) and $.6 million for the fiscal
years ended September 30, 1997 and 1996, respectively, and related solely to
changes in the net amount of intercompany advances from IDG or excess cash
generated by the Company and retained by IDG.

     The Company entered into a credit agreement on August 27, 1998 with a bank
regarding a revolving credit facility in an amount of up to $20.0 million, which
would be available to the Company for seasonal working capital requirements and
general corporate purposes. As of September 30, 1998 the credit facility had not
been used.

     The Company had $15.0 million in cash invested in short-term financial
instruments as of September 30, 1998. In December 1998, the Company purchased
all of the stock of Cliffs Notes, Inc. for $14.2 million plus approximately $3.3
million for net tangible assets delivered at closing. The purchase was funded
with cash and borrowings. The Company believes that its remaining borrowing
capacity, together with any cash generated from operations and any funds
available under any future credit facilities, will be sufficient to meet the
liquidity requirements of the Company for the foreseeable future. The Company's
future capital requirements will depend on many factors, including, but not
limited to, the levels at which the Company maintains inventory, the market
acceptance of the Company's products, the levels of promotional activities and
advertising required to launch the Company's products and any future
acquisitions. To the extent that the available cash, together with existing
resources and future earnings, are insufficient to fund the Company's future
activities, the Company may need to raise additional funds through public or
private financing. No assurance can be given that any such additional funding
will be available or that, if available, it can be obtained on terms favorable
to the Company.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
     See Note 2 of Notes to Financial Statements, for a discussion of the impact
of new accounting pronouncements.



<PAGE>   25

FACTORS AFFECTING FUTURE OPERATING RESULTS

     Dependence on the Computer Industry. The Company writes many of its books
for users of information technology, particularly personal computers and
software. Technology-related books accounted for a substantial majority of the
Company's net revenue in fiscal 1998, and it is expected that technology books
will continue to account for a substantial majority of the Company's book sales
for the foreseeable future. As a result, the Company's future success depends on
the growth and development of the market for personal computers and related
applications. If this grows at a rate less than expected, or if consumer demand
for technology-related books declines for any reason, the Company's future
financial results could be adversely affected.

     Dependence on Microsoft Products and Competition with Microsoft Press.
Sales of books devoted to the use of software products sold by Microsoft
Corporation ("Microsoft"), including its Windows operating system, accounted for
approximately half of the Company's net revenue in fiscal 1998. As a result,
future financial results will depend in large part on continued consumer demand
for Microsoft products. A decline in the use of Microsoft products would likely
result in decreased demand for the Company's books and could adversely affect
future financial results.

     In addition to relying on the sales of books devoted to Microsoft products,
the Company competes with Microsoft's publishing division, Microsoft Press, for
readers of computer-related books, including books covering Microsoft products.
Microsoft Press has substantially greater financial resources than the Company
and, because it is owned by Microsoft, may have better access to planned and new
Microsoft products. As a result, Microsoft Press may have a competitive
advantage over the Company in providing books devoted to the use of software
products sold by Microsoft.

     Dependence on " . . . For Dummies(R)" Publications. The Company derives a
substantial proportion of its net revenue from the sale of the " . . . For
Dummies(R)" family of books. In addition, the Company has devoted substantial
resources to the publication of these books and the development of the " . . .
For Dummies(R)" brand name. As a result, any change in reader preferences
leading to a decline in demand for the " . . . For Dummies(R)" books would
likely have a material adverse effect on future financial results.

     Risks of New Product Introductions. Generally as a particular book gets
older, the Company sells fewer copies of that book. Consequently, the Company's
future success depends on its ability to identify trends in the technology and
business and self-help markets and to offer new titles, as well as other
products and services, that address the changing needs of the target audiences.
To establish market acceptance of a new publication, the Company must dedicate
significant resources to research and editorial development, production and
sales and marketing. The Company incurs significant costs in developing,
publishing and selling a new book, which often significantly precede meaningful
revenues from its sale. Consequently, new publications can require significant
time and investment to achieve profitability. Investors should note, however,
that there can be no assurance that the Company's efforts to introduce new
publications or other products or services will be successful or profitable.



<PAGE>   26

     The Company records as an expense the costs related to the development of
new publications and products, other than author advances, as they are incurred.
As a result, the Company's profitability from quarter-to-quarter and from
year-to-year may be adversely affected by the number and timing of new
publications and product launches in any period and the level of acceptance
gained by such publications and products.

     Risks Associated with Fluctuations in Paper Costs; Dependence on a
Significant Supplier. Paper is the principal raw material used in the Company's
business. The Company generally purchases paper from merchants representing the
paper mills. The Company does not have long-term paper supply contracts with
these paper merchants. The arrangements with merchants are negotiated each year
and provide for quarterly price adjustments. Paper prices have been volatile
over the past several years and are affected by many factors, including demand,
mill capacity, pulp supply, energy costs and general economic conditions.
Consequently, the Company's cost of paper, relative to our net revenue, can vary
from period-to-period. In the past, paper has also been difficult to obtain due
to industry-wide shortages. Significant paper price increases, sustained over a
period of time, could adversely affect the Company's future financial condition
or operating results.

     The Company relies on a number of printing companies to print its books.
The Company's largest printing supplier accounted for approximately 25% of its
total printing and binding purchases in fiscal 1998. If the relationship with
this vendor were to be interrupted, or service from this or any other
significant supplier were to be delayed for any reason, the Company's future
financial or operating results could be adversely affected.

     Fluctuations in Quarterly Results and Cyclicality of Revenue. The Company's
operating expenses, which include product development costs and selling, general
and administrative expenses, are relatively fixed in the short-term and are
based on our long-term revenue expectations. If the Company sells fewer books or
otherwise has lower revenue than expected, the Company may not be able to
quickly reduce its spending. Any shortfall in the Company's revenue would have a
direct impact on its results of operations, and fluctuations in quarterly
results could affect the market price of its Class A common stock in a manner
unrelated to the Company's long-term operating performance. The Company
typically sells more books during the first and second quarters because of
increased sales during the Christmas season. In addition, the Company sells more
books in quarters in which software manufacturers release new or updated
versions of popular software products. Because a substantial portion of the
Company's selling, general and administrative expenses are incurred evenly
throughout the year, the Company generally experiences relatively lower net
profit during quarters not impacted by increases in net revenue due to seasonal
or other factors discussed above.

     In addition, the Company typically publishes books relating to new trends
and technologies. Accordingly, if general economic conditions worsen, people may
defer spending on these new trends and technologies, which could reduce the
number of books sold.



<PAGE>   27

     Risks Associated with Product Distribution Channels; Risk of Product
Returns. The Company sells its books primarily to large retail chains, large
wholesalers, warehouse clubs, office superstores and computer and electronics
superstores. In fiscal 1998, the Company's three largest customers, Barnes &
Noble, Inc., Ingram Book Company and Borders, Inc., accounted for approximately
14%, 13% and 12% of net revenue, respectively. The Company's future financial
results depend in large part on its relationships with its customers. Any
disruption in relationships with its customers could adversely affect financial
performance.

     The Company's sales policy generally permits book customers to return any
unsold or damaged books for full credit. The Company records as revenue all
books sold to its customers in a particular quarter and, at the same time,
records a provision for estimated returns. During fiscal year 1998, the Company
recorded a provision for returns of approximately 22% of its gross sales. If,
during any period, customers return more books than previously estimated, the
Company's financial results in that period would be adversely affected.

     Competition. The Company faces competition directly from other book
publishers and indirectly from non-print media. Competition in book publishing
stems mainly from editorial quality, timely introduction of new titles, product
positioning, pricing and brand name recognition. In addition to the Company,
Simon & Schuster, Microsoft Press and McGraw-Hill all have a strong market
presence in the United States and internationally in technology publishing. The
principal competitors for the Company's business and self-help titles include
Random House, Simon & Schuster and HarperCollins. Each of these competitors has
substantially greater financial resources than the Company.

     Non-print media, such as the Internet and CD-ROMs, may also present
substantial competition. If computer users increase their reliance on
instruction and other information disseminated on-line, the Company's business
could be adversely affected.

Potential Competition with IDG. IDG publishes magazines and on-line services
and, to a lesser extent, books that may be competitive with the Company's
publications. Certain of IDG's current publications and products compete with
our books. As a result, the Company may compete with IDG for certain readers.
IDG has substantially greater resources the Company. Any increased competition
from IDG for readers could have an adverse impact on the Company's business and
operating results.

Control by IDG; Potential Conflicts of Interests; Benefits to IDG. IDG owns all
of the shares of the Class B common stock, each share of which is entitled to
ten votes per share on most stockholder actions, and has approximately 77.77% of
the combined voting power of both classes of common stock as of September 30,
1998. The remaining holders of the shares of Class A common stock are entitled
to one vote per share and have approximately 22.23% of the combined voting
power. IDG has two representatives on the Company's Board of Directors and has
enough votes to elect all members of the Board of Directors.



<PAGE>   28

As a result of its stock ownership, IDG is in a position, without the approval
of the Company's public stockholders, to: amend the Company's charter or approve
a merger, sale of assets or other major corporate transaction; defeat any
non-negotiated takeover attempt that might otherwise benefit the public
stockholders; determine the amount and timing of dividends paid to itself and to
the Company's public stockholders; and otherwise control the Company's
management and operations and the outcome of all matters submitted for a
stockholder vote that could conflict with the interests of its public
stockholders.

     Dependence on Key Personnel. The Company relies, and will continue to rely,
on its senior executive officers and other key management personnel. If any of
these people leaves the Company, the relationships that these people have with
the Company's authors, customers or manufacturers could be lost, and the Company
would need to find people that could develop new relationships. In addition, the
Company expects that it will need to hire additional employees, including senior
executive officers for marketing, worldwide sales and information systems. The
competition for employees at all levels of the book publishing industry is
intense and is increasing. In our Northern California operations, in particular,
the Company has experienced increased turnover of employees and are experiencing
difficulty in attracting new employees. If the Company does not succeed in
attracting new employees or retaining and motivating current employees, the
Company's business could suffer significantly.

     Transition to New Computer System and New Distribution Service. The Company
is in the process of upgrading its existing computer system. The Company expects
the total cost for this upgrade to be $3.6 million, of which $2.2 million had
been spent through September 30, 1998. The Company outsources distribution and
fulfillment functions to retail and wholesale customers through two vendors. The
contracts with these vendors expire in September 1999. One of these vendors
accounted for more than 60% of our distribution and order fulfillment costs in
each of fiscal 1996, 1997 and 1998. The Company expects to select a
single-source vendor for distribution and fulfillment, but has not done so at
this time. Any difficulties in implementing the new computer system or
transitioning to a new distribution vendor could adversely impact day-to-day
operating performance and future financial results.

     Risks Associated with Acquisitions. As part of the Company's growth
strategy, it may buy, or make significant investments in, complementary
companies, publications or products. The Company recently completed the
acquisition of the Cliffs Notes, Inc. This acquisition as well as any future
acquisition will be accompanied by the risks commonly encountered in making
acquisitions of products, companies and technologies.



<PAGE>   29

For example, it could have difficulty assimilating the personnel and operations
of the acquired company. This could cause a disruption of its ongoing business,
distraction of management and other resources, and difficulty in maintaining
uniform standards, controls and procedures. There can be no assurance that the
Company would succeed in overcoming these risks or any other problems
encountered in connection with any acquisitions it may make. In addition, the
Company may be required to incur debt or issue equity to pay for any future
acquisitions.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in 2000, these
date code fields will need to accept four-digit entries in order to distinguish
21st century dates from 20th century dates. As a result, the computer systems
and/or software used by many companies will need to be upgraded to comply with
"Year 2000" requirements by the end of 1999. Significant uncertainty exists in
the software industry concerning the potential effects associated with such
compliance issues.

The Company has essentially completed the review of its computer systems to
determine the extent and impact of the Year 2000 issues. The Company uses and is
installing a number of computer software programs and operating systems,
including applications for its internal electronic communications network and
for various administrative and billing functions. The Company has begun testing
its systems for compliance in preparation for implementing the needed changes.
Many of the Company's systems are new and were designed to accommodate the Year
2000 issue when originally installed. The Company currently anticipates
completing corrective measures to its systems by mid-year of calendar 1999. The
Company has assessed the scope of its risks related to problems its computer
systems may have related to the Year 2000 issue and believes such risks are not
material. The estimated costs to modify or replace these applications are
included in the Company's cost for its computer system upgrade. The Company
currently does not have a contingency plan in the event that it is unable to
make its systems Year 2000 compliant. There can be no assurance, however, that
the Company's systems will be fully Year 2000 compliant in a timely manner, and
a failure by the Company to make its internal systems Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company is in the process of communicating with its customers, suppliers and
business partners in an effort to assess how they intend to resolve their Year
2000 issues. The Company at this time is not able to form an opinion as to
whether its customers or suppliers will be able to resolve their Year 2000
issues in a satisfactory and timely manner, or the magnitude of the adverse
impact it would have on the Company's operations, if they fail to do so. No
assurance can be given that all of these



<PAGE>   30

third party systems will be Year 2000 compliant. Any failure of the Company's
customers, suppliers or business partners to satisfactorily address their Year
2000 problems could have a material adverse effect on the Company's business,
financial condition and results of operations.

FINANCIAL MARKET RISKS

The Company is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. The Company has not used derivative
financial instruments to hedge such risks, or for speculative or trading
purposes. At September 30, 1998, substantially all the Company's cash
equivalents were invested in overnight repurchase agreements. If market rates
were to increase immediately by 10 percent from levels at September 30, 1998,
the fair value of this investment portfolio would decline by an immaterial
amount. The Company also receives certain payments from foreign distributors and
licensees (principally in Canada and Europe) which are calculated based on
foreign currency exchanges rates. The Company believes that a hypothetical 10
percent appreciation from September 30, 1998 in the U.S. Dollar relative to such
currencies would not have a material effect on net income or cash flows.
<PAGE>   31
                            IDG BOOKS WORLDWIDE, INC.

                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS
<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30,
                                                                        -------------------
                                                                          1998         1997
                                                                        --------     ------
<S>                                                                     <C>          <C>
Current Assets:
     Cash.............................................................  $ 15,466     $    74
     Accounts receivable - net........................................    27,477      26,561
     Inventory - net..................................................    10,367       7,927
     Receivable from parent...........................................     1,514           0
     Other current assets.............................................       903           6
     Deferred tax assets..............................................    18,144      14,860
                                                                        --------     -------
             Total current assets.....................................    73,871      49,428
Royalty advances - net................................................     5,195       3,078
Property and equipment - net..........................................     5,605       4,657
Publishing rights - net...............................................     3,583          --
                                                                        --------     -------
             TOTAL....................................................  $ 88,254     $57,163
                                                                        ========     =======


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts payable.................................................  $  5,885      $4,504
     Accrued liabilities..............................................    35,779      26,216
                                                                        --------     -------
             Total current liabilities................................    41,664      30,720
                                                                        --------     -------

Stockholders' Equity:
     Preferred stock, $.001 par value; authorized:
        5,000,000 shares; issued and outstanding: 0 shares............
     Common stock, $.001 par value; authorized:  25,000,000 Class A
        shares and 400,000 Class B shares; issued and outstanding:
        1998 - 14,080,000 Class A shares and 200,000
                Class B shares........................................        14          --
        1997 - 11,100,000 shares, undesignated........................        --          11
Additional Paid-in-Capital............................................    44,029          --
Retained Earnings.....................................................     2,547      30,764
Advances due to (from) Parent.........................................        --      (4,332)
                                                                        --------     -------
             Total stockholders' equity...............................    46,590      26,443
                                                                        --------     -------
             TOTAL....................................................   $88,254     $57,163
                                                                         =======     =======
</TABLE>


                        See notes to financial statements
<PAGE>   32
                            IDG BOOKS WORLDWIDE, INC.

                              STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                        YEARS ENDED SEPTEMBER 30,
                                                            --------------------------------------------
                                                               1998              1997           1996
                                                            ----------       ----------       ----------
<S>                                                         <C>              <C>              <C>
Revenue:
     Net sales............................................  $  136,650       $  116,488       $   93,435
     Licensing revenues and other.........................       4,875            4,200            4,412
                                                            ----------       ----------       ----------
       Net revenue........................................     141,525          120,688           97,847
Operating Costs and Expenses:
     Cost of sales........................................      73,952           63,064           55,703
     Selling, general and administrative..................      48,856           42,032           28,369
     Parent corporate services fee........................       1,457            3,669            2,779
                                                            ----------       ----------       ----------
           Total operating costs and expenses.............     124,265          108,765           86,851
                                                            ----------       ----------       ----------
Income Before Provision for Income Taxes..................      17,260           11,923           10,996
Provision for Income Taxes................................       7,077            4,888            4,508
                                                            ----------       ----------       ----------
Net Income................................................  $   10,183       $    7,035       $    6,488
                                                            ==========       ==========       ==========

Basic and Diluted Net Income per Share:
     -  Basic.............................................  $     0.88       $     0.63       $     0.58
                                                            ==========       ==========       ==========
     -  Diluted...........................................  $     0.87       $     0.63       $     0.58
                                                            ==========       ==========       ==========

Pro Forma Net Income per Share (Note 2):
     -  Basic.............................................  $     0.73       $     0.51
                                                            ==========       ==========
     -  Diluted...........................................  $     0.73       $     0.51
                                                            ==========       ==========

Shares Used in per Share Calculations:
     -  Basic net income..................................      11,633           11,100           11,100
                                                            ==========        =========       ==========
     -  Diluted net income................................      11,701           11,100           11,100
                                                            ==========        =========       ==========

Shares Used in Pro Forma per Share Calculations:
     -  Pro forma basic net income........................      13,941           13,873
                                                            ==========        =========
     -  Pro forma diluted net income......................      14,009           13,873
                                                            ==========        =========
</TABLE>




                        See notes to financial statements


<PAGE>   33

                            IDG BOOKS WORLDWIDE, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                 ADVANCES
                                     COMMON STOCK       ADDITIONAL                  DUE
                                 --------------------     PAID-IN    RETAINED    TO (FROM)
                                   SHARES     AMOUNT      CAPITAL    EARNINGS     PARENT      TOTAL
                                 --------  ----------  -----------   ---------   --------   ---------
<S>                              <C>
Balance, September 30, 1995.....   11,100  $       11  $        --   $  17,241   $   (363)   $ 16,889
   Net income...................                                         6,488                  6,488
   Changes in Advances due to
    (from) Parent...............                                                      614         614
                                 --------  ----------  -----------   ---------   --------   ---------
Balance, September 30, 1996.....   11,100          11           --      23,729        251      23,991
   Net income...................                                         7,035                  7,035
   Changes in Advances due to
    (from) Parent...............                                                   (4,583)     (4,583)
                                 --------  ----------  -----------   ---------   --------   ---------
Balance, September 30, 1997.....   11,100          11           --      30,764     (4,332)     26,443
   Net income...................                                        10,183                 10,183
   Proceeds from sale of Common
     Stock, net of offering costs   3,180           3       44,029                             44,032
   Dividend to Parent...........                                       (38,400)               (38,400)
   Changes in Advances due to
    (from) Parent...............                                                    4,332       4,332
                                 --------  ----------  -----------   ---------   --------    --------
Balance, September 30, 1998.....   14,280  $       14  $    44,029   $   2,547   $     --    $ 46,590
                                 ========  ==========  ===========   =========   ========    ========
</TABLE>




                        See notes to financial statements


<PAGE>   34

                            IDG BOOKS WORLDWIDE, INC.

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              YEARS ENDED SEPTEMBER 30,
                                                                        ------------------------------------
                                                                          1998          1997          1996
                                                                        --------      --------      --------

<S>                                                                     <C>           <C>           <C>
Cash Flows from Operating Activities:
    Net income.....................................................     $ 10,183      $  7,035      $  6,488
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Depreciation and amortization............................        3,415         1,663         1,355
          Deferred income taxes....................................       (3,284)       (4,000)       (2,017)
          Changes in operating assets and liabilities:
              Receivable...........................................       (1,866)       (5,646)       (3,460)
              Receivable from Parent...............................       (1,514)           --            --
              Inventory............................................       (1,940)       (1,808)        3,378
              Royalty advances.....................................       (1,717)         (939)         (910)
              Other current assets.................................         (897)          440          (412)
              Accounts payable.....................................        1,381           475            (6)
              Accrued liabilities..................................        9,052        10,600        (2,561)
                                                                        --------      --------      --------
              Net cash provided by operating activities............       12,813         7,820         1,855
                                                                        --------      --------      --------
Cash Flows from Investing Activities:
     Capital expenditures..........................................       (3,946)       (3,246)       (2,430)
     Acquisition of publishing rights and related assets...........       (3,439)           --            --
                                                                        --------      --------      --------

              Net cash used by investing activities................       (7,385)       (3,246)       (2,430)
                                                                        --------      --------      --------
Cash Flows from Financing Activities:
    Proceeds from Initial Public Offering..........................       44,032            --            --
    Payment of note to Parent......................................     (38,400)            --            --
    Advances due to (from) Parent -- net change....................        4,332        (4,583)          614
                                                                        --------      --------      --------
              Net cash provided (used) by financing activities.....        9,964        (4,583)          614
                                                                        --------      --------      --------
Increase (Decrease) in Cash and Equivalents........................       15,392            (9)           39
Cash and Equivalents, Beginning of Period..........................           74            83            44
                                                                        --------      --------      --------
Cash and Equivalents, End of Period................................     $ 15,466      $     74      $     83
                                                                        --------      --------      --------
Noncash Investing Activity:
     Acquisition of publishing rights and related assets (Note 9):
          Current assets...........................................     $  1,400
          Publishing rights........................................        4,000
          Less cash paid...........................................       (3,439)
                                                                        --------
          Liabilities assumed......................................     $  1,961
                                                                        --------
</TABLE>





                        See notes to financial statements
<PAGE>   35

                           IDG BOOKS WORLDWIDE, INC.
                         NOTES TO FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

     Organization and Description of Business -- IDG Books Worldwide, Inc., a
Massachusetts company, ("the Company"), was founded in 1990 as a wholly-owned
subsidiary (through intermediate companies) of International Data Group, Inc.
("Parent"). On March 24, 1998 the Company was reincorporated in Delaware. On
July 31, 1998, the Company consummated its initial public offering (the
"Offering") of 3,180,000 shares of Class A common stock at an offering price of
$15.50 per share pursuant to a Registration Statement declared effective by the
SEC on July 27, 1998. After deducting expense, the net proceeds to the Company
from the Offering were $44,032,000. The Company used $38,400,000 of the net
proceeds of the Offering to repay indebtedness owed to the Parent.

     The Company is a leading global knowledge company with best-selling
technology, business and self-help books and computer-based training tools
designed to make learning accessible and fun. The Company publishes and markets
its books under brand names, including the ". . . For Dummies("series.

     Basis of Presentation and Transactions with Parent -- The Company had
historically depended on the Parent (or affiliates thereof) for corporate
administrative functions, as well as for strategic marketing and brand-building,
financing, cash management, tax and payroll administration, property/casualty
insurance, employee benefits administration, and certain other services. The
fees for these services have been charged to the Company, and reflected in the
accompanying financial statements, through a parent corporate services fee based
on a percentage of budgeted net sales plus a fixed charge which is consistent
with the method that the Parent charges its other controlled subsidiaries.
Effective January 1, 1998, the Company assumed responsibility for certain
corporate administrative functions, as well as for the Company's strategic
marketing and brand-building, the costs for which had constituted a significant
portion of the parent corporate services fee. Accordingly, effective January
1998, the Parent corporate services fee decreased to approximately $150,000 per
quarter. In the opinion of management, the Parent corporate services fees
included in the accompanying financial statements reflect a reasonable amount
for the services received; however, such amounts were not established on an
arm's-length basis and may not be the same as would have been incurred had the
Company operated independent of its Parent. Nevertheless, management does not
believe the Company would have incurred materially different operating expenses
as an independent company.

     Reclassifications -- Certain amounts in prior years' financial statements
and related notes have been reclassified to conform to the fiscal 1998
presentation.

<PAGE>   36

2. SIGNIFICANT ACCOUNTING POLICIES

     Fiscal Year -- The Company's fiscal year ends on the last Saturday of each
September. Fiscal years 1996, 1997 and 1998 ended on September 28, 1996,
September 27, 1997 and September 26, 1998, respectively and consisted of 52
weeks. For convenience, fiscal year-ends are denoted in the accompanying
financial statements as September 30.

     Revenue Recognition -- Sales are recorded upon shipment of products, net of
provisions for estimated returns and allowances, which are estimated based on
historical experience by type of book. For the years ended September 30, 1996,
1997 and 1998, the provision for returns and allowances represented
approximately 22.3%, 20.9% and 21.9% of gross sales for the respective period.
The accompanying income statements do not reflect any material adjustments for
actual returns and allowances as compared to amounts estimated in prior periods.
Revenue from the licensing of titles, editorial content and design are
recognized when received.

     Concentrations of Credit Risk -- Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
accounts receivable. The Company's customers consist principally of retail chain
booksellers, wholesale distributors, office superstores, membership clubs and
computer/electronic superstores located primarily in the United States and
Canada. Certain customers account for over 10% of sales (Note 10). The Company
performs ongoing credit evaluations its customers and maintains allowances for
estimated probable credit losses.

     Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires the use of estimates. The
primary estimates underlying the Company's financial statements include
allowances for sales returns, doubtful accounts, inventory obsolescence,
reserves for royalty advances and recoverability of deferred tax assets. Actual
results could differ from those estimates.

     Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to be
cash equivalents.

     Inventory -- Inventory is stated at lower of cost or market. Cost is
determined using the first-in, first-out method.

     Royalty Advances -- Royalty advances are recorded as cash is advanced to
authors and are expensed as earned by authors or reserved when future recovery
appears doubtful. Royalty advances are reported net of reserves of $1,999,000
and $3,262,000 at September 30, 1997 and 1998, respectively.

     Property and Equipment -- Property and equipment are stated at cost.
Depreciation is provided using the straight- line method over the estimated
useful lives of the assets ranging from three to five years. Leasehold
improvements are amortized over the shorter of the lease term or the remaining
useful life of the related assets. The Company capitalizes internal-use software
in accordance with AICPA Statement of

<PAGE>   37

Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Such costs are amortized over a useful life of five
years.

     Long-Lived Assets -- Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For purposes of evaluating the recoverability of
long-lived assets, the Company evaluates the carrying value of its long-lived
assets on an ongoing basis and recognizes an impairment when the estimated
future undiscounted cash flows from operations are less than the carrying value
of the related assets.

     Advances due to (from) Parent are included as a component of stockholders'
equity at September 30, 1997, as no interest was charged for such balances and
there was no scheduled repayment. As of June 22, 1998, the Parent suspended the
cash sweep process allowing cash receipts and cash generated by the Company to
be retained by the Company.

     Income Taxes -- The Company's taxable income has been included in the
Parent's consolidated tax returns for 1996, 1997 and through the Offering
completion date of July 31, 1998. Subsequent to July 31, 1998, the Company will
file its own federal returns and most state returns. The Company may still be
required, or may find it advantageous, to file consolidated state returns and
other returns in certain states where combined or unitary tax returns are
available. The accompanying financial statements for 1997 include taxes paid
which approximates the current income tax provision, as if the Company were a
separate taxpayer. The Company accounts for deferred income taxes in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, which requires
that deferred tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial statement
carrying amount and the tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts, more likely than not, to be realized.

     Net Income Per Share -- Net income per share is computed using the basic
and diluted weighted average number of common shares outstanding during the year
in accordance with SFAS No. 128, Earnings Per Share. Basic net income per share
excludes dilution and is computed using the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (stock options) were exercised or converted into common stock. On
May 6, 1998 the Company granted options to purchase shares of Class A common
stock. For the year ended September 30, 1998, 68,000 shares, reflecting the
dilutive effects of outstanding stock options, were included in computing
diluted net income per share. See Note 8 for discussion of stock options.

<PAGE>   38

     Unaudited Pro Forma Earnings Per Share -- Unaudited pro forma basic net
income per share amounts were calculated using common shares outstanding plus
the number of shares (2,773,000) whose proceeds were used to repay a $38.4
million note payable (issued as a pre-offering dividend), at the $15.50 initial
public offering price reduced by per share offering costs. The pro forma diluted
net income per share amounts also reflect the dilutive effect of outstanding
stock options.

     Stock-Based Compensation is accounted for using the intrinsic value method
in accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, as allowed by SFAS No. 123, Accounting for Stock-Based
Compensation.

     New Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Management has
not yet determined its SFAS 131 reporting segments. This Statement will not
affect the Company's financial position, results of operations or cash flows.
This statement is effective for the Company in fiscal year 1999, with earlier
application permitted.

3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                   September 30,
                                          ------------------------------
                                             1998               1997
                                          -----------        -----------
<S>                                        <C>                <C>      
Accounts receivable....................    $  53,922          $  47,859
Allowance for doubtful accounts........       (4,555)            (3,465)
Allowance for sales returns............      (21,890)           (17,833)
                                          -----------        -----------
        Total..........................    $  27,477          $  26,561
                                          ===========        ===========
</TABLE>


4. INVENTORIES

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                   September 30,
                                          ------------------------------
                                             1998               1997
                                          -----------        -----------
<S>                                        <C>                <C>      
Books (finished goods).................    $  22,185          $  17,038
Paper..................................        2,560              2,823
                                          -----------        -----------
        Total Inventory................       24,745             19,861
Reserve for obsolescence...............      (14,378)           (11,934)
                                          -----------        -----------
        Net Inventory..................    $  10,367          $   7,927
                                          ===========        ===========
</TABLE>

<PAGE>   39

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                   September 30,
                                          ------------------------------
                                             1998               1997
                                          -----------        -----------
<S>                                        <C>                <C>      
Computers and equipment................    $  6,762           $  5,094
Furniture and fixtures.................       1,343              1,334
Leasehold improvements.................       2,368              1,286
Internal-use software..................       1,824                635
                                          -----------        -----------
        Total..........................      12,297              8,349
Less accumulated depreciation 
  and amortization.....................      (6,692)            (3,692)
                                          -----------        -----------
        Property and equipment - net...    $  5,605           $  4,657
                                          ===========        ===========
</TABLE>

6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                   September 30,
                                          ------------------------------
                                             1998               1997
                                          -----------        -----------
<S>                                        <C>                <C>      
Accrued royalties......................    $  11,545          $  9,403
Accrued compensation and benefits......        9,315             6,389
Accrued promotion......................        9,923             7,518
Other accrued liabilities..............        4,996             2,906
                                          -----------        -----------
        Total                              $  35,779          $ 26,216
                                          ===========        ===========
</TABLE>



7. INCOME TAXES

The provision for federal, state and foreign taxes consisted of the following
for the years ended September 30 (in thousands):

<TABLE>
<CAPTION>
                                             1998        1997        1996
                                          ---------   ---------   ---------    
<S>                                       <C>         <C>         <C>     
Current:
Federal ...............................   $  8,150    $  7,200    $  5,325
State .................................      2,003       1,539       1,048
Foreign ...............................        208         149         152
                                          ---------   ---------   ---------    
Total current .........................     10,361       8,888       6,525
                                          ---------   ---------   ---------    

Deferred:
Federal ...............................     (2,508)     (3,227)     (1,662)
State .................................       (776)       (773)       (355)
                                          ---------   ---------   ---------    
Total deferred ........................     (3,284)     (4,000)     (2,017)
                                          ---------   ---------   ---------    
        Total .........................   $  7,077    $  4,888    $  4,508
                                          =========   =========   =========    
</TABLE>

Federal and state income tax expense was allocated to the Company by the Parent
through the Advances due to (from) Parent account for 1996, 1997 and through
July 1998. During the remainder of 1998 these tax expenses were recorded by the
Company through its Accrued liabilities account.

<PAGE>   40

Deferred tax assets were comprised of the following at September 30 (in
thousands):

<TABLE>
<CAPTION>
                                                 1998               1997
                                              ----------         ----------
<S>                                            <C>                <C>     
Reserve for returns .......................    $  8,134           $  6,842
Reserve for obsolescence...................       5,628              4,558
Loss accruals..............................       2,802              2,221
Uniform capitalization.....................         855                582
Other......................................         725                657
                                              ----------         ----------
Deferred tax assets........................    $ 18,144           $ 14,860
                                              ==========         ==========
</TABLE>

The differences between the effective income tax rate and the statutory federal
tax rate were as follows for the years ended September 30:

<TABLE>
<CAPTION>
                                                1998        1997        1996
                                             ---------   ---------   ---------
<S>                                            <C>         <C>         <C>     
Statutory federal tax rate ................    35.0%       35.0%       35.0%
State taxes, net of federal tax benefit ...     4.6         4.2         4.1
Other .....................................     1.4         1.8         1.9
                                             ---------   ---------   ---------
Effective tax rate ........................    41.0%       41.0%       41.0%
                                             =========   =========   =========
</TABLE>

8. STOCKHOLDERS' EQUITY

Common Stock

     The Company is authorized to issue 25,400,000 shares of common stock,
consisting of 25,000,000 shares of Class A common stock and 400,000 shares of
Class B common stock, $.001 par value per share, of which a total of 14,080,000
Class A shares and 200,000 Class B shares were outstanding at September 30,
1998. Shares outstanding at September 30, 1997 consisted of 11,100,000 shares
which were undesignated as to class. In July 1998, the Company completed its
initial public offering of 3,180,000 shares of Class A common stock, raising net
proceeds of approximately $44,032,000.

     Each outstanding share of Class A common stock is entitled to one vote and
each outstanding share of Class B common stock is entitled to ten votes. Holders
of Class A common stock and Class B common stock are entitled to receive
dividends at the same rate and in such amounts as the Board of Directors may
from time to time determine.

     Class A common stock is not convertible. Class B common stock is
convertible at any time into Class A common stock on a share-for-share basis and
will automatically convert upon the transfer by the holder thereof.

<PAGE>   41

Stock Option Plan

     Effective May 6, 1998, the Company's Board of Directors approved a stock
option plan under which 2,850,000 shares of common stock are reserved for
issuance to employees, consultants and directors. Under the plan, both incentive
and nonstatutory stock options may be granted to purchase common stock at not
less than the fair market value of the common stock at the date of grant. On May
6, 1998, the Company granted options to purchase 1,500,900 shares of Class A
common stock at an exercise price of $11.88 per share and on July 27, 1998 the
Company granted options to purchase 49,500 shares of Class A common stock at an
exercise price of $15.50. Options generally vest over 4 years and expire ten
years after date of grant. As of September 30, 1998 options to purchase
1,477,800 shares of Class A common stock at a weighted average exercise price of
$12.00 were outstanding and options to purchase 1,372,200 shares were available
for future grants.

<TABLE>
<CAPTION>
                                                             Weighted
                                                              Average
                                        Shares            Exercise Price
                                     -------------      ------------------     
<S>                                    <C>                    <C>    
Balance, September 30, 1997                    0              $  0.00
        Granted (weighted average 
          fair value of $3.16)         1,550,400                12.00
        Exercised                              0                 0.00
        Cancelled                        (72,600)               11.88
                                     -------------      ------------------     
Balance, September 30, 1998            1,477,800              $ 12.00
                                     =============      ==================     
</TABLE>


     Additional information regarding options as of September 30, 1998 is as
follows:

<TABLE>
<CAPTION>
                            Options Outstanding                Options Exercisable
                   --------------------------------------   ------------------------
                                  Weighted
                                   Average       Weighted                  Weighted  
   Range of                       Remaining       Average                   Average
   Exercise           Number     Contractual     Exercise      Number      Exercise     
    Prices         Outstanding   Life (Years)     Price     Excercisable     Price
----------------   -----------   ------------   ---------   ------------   ---------
<S>                 <C>              <C>          <C>          <C>           <C>   
$11.88 - $15.50     1,477,800        9.59         $12.00       6,667         $15.50
================   ===========   ============   =========   ============   =========
</TABLE>

<PAGE>   42

Employee Stock Ownership Plan

     Prior to May 6, 1998 the Company's employees participated in the Parent's
unleveraged ESOP ("ESOP-P") and, as discussed in Note 11, the Company has
recorded the applicable plan contribution expense in its financial statements.
As of May 6, 1998, the Company adopted a new ESOP ("Books ESOP"). In connection
therewith, the accounts of the Company employees, and the shares of common stock
of the Parent attributable to such accounts, were transferred from ESOP-P to
Books ESOP. Such Parent common shares received by Books ESOP were tendered on
May 21, 1998 to the Parent in exchange for 394,251 shares of Company Class B
common stock, based on an exchange ratio determined by an independent valuation
firm of the relative fair value of one Company Class B common share to one
Parent common share. The shares of Class B common stock owned by Books ESOP were
transferred to an affiliate of the Parent in exchange for 394,251 shares of
Class A common stock in connection with the Company's initial public offering.
Effective May 6, 1998, employees of the Company participate in the Books ESOP
and no longer participate in ESOP-P.

Stock Based Compensation

     As permitted under Statement of Financial Accounting Standards Board No.
123, Accounting for Stock-Based Compensation (SFAS No. 123), and as discussed in
Note 2, the Company uses the intrinsic value method specified by APB Opinion No.
25 to calculate compensation expense associated with issuing stock options.
Accordingly, the Company has not recognized any compensation expense with
respect to such awards, since the exercise price of the stock options awarded
has been equal to the fair market value of the underlying security at the date
of grant.

<PAGE>   43

     SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share had the Company adopted the fair value method as prescribed by SFAS
123. Under SFAS No. 123, the fair value of the stock-based awards to employees
is calculated through the use of the minimum value method for all periods prior
to the initial public offering, and subsequently through the use of options
pricing models. The Company's stock option calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 12 months following vesting; stock volatility, 50%
subsequent to the initial public offering; risk-free interest rates, 5.82% in
1998; and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the stock-based awards had been
amortized to expense over the vesting period of the awards, net income would
have been $9,417,000 ($.80 per share) for the year ended September 30, 1998.
However, because options vest over several years, the pro forma adjustments for
the year ended September 30, 1998 are not indicative of future period pro forma
adjustments, assuming grants are made in those years, when the calculation will
apply to all applicable stock options.

9. PUBLISHING RIGHTS

     On December 1, 1997, the Company acquired from Henry Holt and Company the
publishing rights for the books published under the names "MIS:Press" and "M&T
Books," and the related inventory and other assets, for $5,400,000 in cash and
assumed liabilities. The cost of this acquisition was allocated to the assets
acquired, including $4,000,000 allocated to publishing rights which is being
amortized over eight years.

<PAGE>   44

10. MAJOR CUSTOMERS AND INTERNATIONAL SALES OPERATIONS

     Net sales to individual customers representing greater than 10% of the
Company's net sales were as follows for the years ended September 30 (in
thousands):

<TABLE>
<CAPTION>
                                            1998        1997        1996
                                          ---------   ---------   ---------    
<S>                                        <C>         <C>         <C>     
Company A .............................    $19,306     $14,942     $11,854
Company B .............................     17,644      17,805      10,876
Company C .............................     16,970      12,204      10,303
</TABLE>

     The Company operates in one business segment, namely publishing, and
develops, publishes and markets products including professional and reference
works, consumer books, for the educational, technical, professional and trade
markets around the world.

     Net sales to unaffiliated international customers were as follows (in
thousands):

<TABLE>
<CAPTION>
                                            1998        1997        1996
                                          ---------   ---------   ---------    
<S>                                        <C>         <C>         <C>     
Canada ................................    $ 7,409     $ 5,813     $ 5,481
Europe ................................      7,026       5,191       3,965
Other .................................      4,800       4,418       3,734
                                          ---------   ---------   ---------    
Total .................................    $19,325     $15,422     $13,180
                                          =========   =========   =========    
</TABLE>

<PAGE>   45
11. RELATED PARTY TRANSACTIONS

     Net revenue from affiliated customers amounted to approximately $188,000,
$700,000 and $1,275,00 in 1996, 1997, and 1998, respectively. Operating expenses
allocated from the Parent for 1996, 1997 and for the first 10 months of 1998
from the Parent consist of (1) Parent Corporate Services Fee (Note 1), (2)
Employee Stock Ownership Plan expenses, which are based on the applicable ESOP
contribution rate applied to Company salaries, and (3) income tax provisions,
which are calculated as though the Company were a separate taxpayer. Neither
party pays interest on intercompany balances, and, accordingly, no such interest
income or expense has been recorded in the accompanying financial statements.

     A summary of activity in the Advances due to (from) Parent is as follows
(in thousands):

                
<TABLE>
<CAPTION>
                                               Year Ended September 30,
                                          ---------------------------------    
                                            1998        1997        1996
                                          ---------   ---------   ---------    
<S>                                        <C>         <C>         <C>     
Balance at beginning of period...........  $ (4,332)   $    251    $   (363)
Parent corporate services fee............       971       3,669       2,779
Expense related to parent ESOP...........         0       1,811       1,307
Total current federal and state 
  income tax provision...................    11,027       8,739       6,373
Cash collections less trade disbursements, 
  transferred to Parent .................    (6,777)    (20,719)    (10,861)
Employee Benefits........................     2,092       1,980       1,379
Other, primarily transactions with 
  affiliates, net........................    (2,981)        (63)       (363)
                                          ---------   ---------   ---------    
Balance at end of period.................  $      0    $ (4,332)   $    251
                                          =========   =========   =========    
</TABLE>
<PAGE>   46
     Effective October 1, 1997, no further contributions were made to the
Parent's ESOP with respect to Company employees. For the year ended September
30, 1998, the Company accrued $1,700,000 of contributions to be made to the
newly established Books ESOP as described in Note 8.

     As of September 30, 1998, a $1.6 million receivable was due from the Parent
related to estimated tax payments made by the Company to the Parent during 1998.
The receivable is to be collected in full during 1999. As a separate taxpayer
the Company now pays its tax liabilities directly to the taxing authority (see
Note 2).

     Subsequent to the initial public offering in July 1998, the Advances due to
(from) Parent account included the parent corporate services fee, ESOP expense,
federal and state income tax provisions, employee benefits and other
transactions with affiliates and was paid by the Parent based on the outstanding
balance at that time. As of September 30, 1998, these expenses are accounted for
in the Accrued Liabilities account.

     In connection with the Company's initial public offering, the Parent agreed
to transfer to the Company certain trademarks owned by the Parent that relate to
publications and products of the Company. The Company agreed to pay all costs,
consisting primarily of required filing fees, in connection with such transfer.

<PAGE>   47

12. COMMITMENTS AND CONTINGENCIES

     Leases -- The Company leases equipment and facilities under operating
leases which expire at various dates through January 2000. Total rental expense
for operating leases amounted to approximately $1,861,000, $2,212,000 and
$3,154,000 in 1996, 1997 and 1998, respectively. At September 30, 1998, the
aggregate minimum rental commitments under noncancelable operating leases in
excess of one year were as follows (in thousands):

        Years ending September 30,
        --------------------------
               1999                                           $2,432
               2000                                              331
                         Total                                $2,763

     The Company is subject to various legal actions and claims which have
arisen in the ordinary course of business. In the opinion of management and
counsel, the ultimate resolution of such legal proceedings and claims will not
have a material effect on the financial position or results of operations of the
Company.

13. CREDIT AGREEMENT

     The Company has a $20.0 million line of credit agreement with a bank. The
facility is secured by the Company's accounts receivable, inventory and general
intangibles (excluding intellectual property rights which are subject to a
negative pledge); and borrowings are limited to the balance of eligible or net
accounts receivable. Based on the eligible accounts receivable at September 30,
1998, $19.2 million was available for borrowing. At September 30, 1998 there
were no outstanding borrowings under this agreement. The credit agreement bears
interest at the banks prime rate, or, for borrowings made longer than 30 days,
at LIBOR plus 1.5% and expires on March 31, 2000.

<PAGE>   48

14. QUARTERLY INFORMATION (UNAUDITED)

     The summarized quarterly financial data presented below reflect all
adjustments which, in the opinion of management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                 Quarter Ended
                             -------------------------------------------s-----  
                              Sept. 30      June 30      Mar. 31     Dec. 31
                             ----------   ----------   ----------   ----------  
<S>                           <C>           <C>         <C>         <C>     
    1998
Net revenue                   $ 35,317      $ 34,292    $ 38,945    $ 32,971
Net income                       1,371         1,942       4,335       2,535
Net income per share:
        Basic                     0.10          0.17        0.38        0.23
        Diluted                   0.10          0.17        0.38        0.23
Pro forma net income per share:
        Basic                     0.10          0.14        0.31        0.18
        Diluted                   0.10          0.14        0.31        0.18
                             ----------   ----------   ----------   ----------  

    1997
Net revenue                   $ 32,014      $ 26,210    $ 35,788    $ 26,676
Net income                         882         1,166       3,451       1,536
Net income per share:
        Basic                     0.08          0.11        0.31        0.14
        Diluted                   0.08          0.11        0.31        0.14
Pro forma net income per share:
        Basic                     0.06          0.08        0.25        0.11
        Diluted                   0.06          0.08        0.25        0.11
                             ----------   ----------   ----------   ----------  
</TABLE>

<PAGE>   49

15. SUBSEQUENT EVENTS

     On November 4, 1998, the Company signed a 10-year lease agreement for a new
Indianapolis office facility. The planned commencement date is November 1, 1999.
The annual basic rent payments range from $1.2 million to $1.4 million over the
term of the lease.

     On December 7, 1998 the Company signed a stock purchase agreement to
acquire all of the stock of Cliffs Notes, Inc., a privately-held publisher of
the popular literary study guides. Closing occurred on December 18, 1998. The
acquisition price was approximately $14.2 million, plus adjustments totaling
approximately $3.3 million for net tangible assets delivered at closing. Cliffs
Notes currently publishes approximately 300 reference titles including its
original Notes plus Quick Reviews of high school and college courses, test
preparation guides, advanced placement guides and test preparation software. Net
revenue for Cliffs fiscal year ended June 30, 1998 was approximately $12
million.

<PAGE>   50

INDEPENDENT AUDITORS' REPORT

     IDG Books Worldwide, Inc.:

     We have audited the accompanying balance sheets of IDG Books Worldwide,
Inc., Inc., as of September 30, 1998 and 1997 and the related statements of
income, stockholders' equity, and cash flows for each of the three fiscal years
in the period ended September 30, 1998. 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 generally accepted auditing
standards. 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, such financial statements present fairly, in all material
respects, the financial position of IDG Books Worldwide, Inc. as of September
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three fiscal years in the period ended September 30, 1998, in conformity
with generally accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP
-------------------------
Deloitte & Touche LLP

San Jose, California
November 9, 1998 (December 18, 1998 as to Note 15)

                     
<PAGE>   51


INSIDE BACK COVER

Board of Directors

John J. Kilcullen
Chairman of the Board of Directors
and Chief Executive Officer

Patrick J. McGovern
Founder and Chairman of the Board
International Data Group, Inc.

James A. Casella
Chief Operating Officer
International Data Group, Inc.

Jack A. Hoeft
Member of Supervisory Board
Random House, Inc.

Lawrence B. Levy
Executive Vice President
and Chief Financial Officer
Pixar


Officers

John J. Kilcullen
Chairman of the Board of Directors
and Chief Executive Officer

Steven H. Berkowitz
President and Publisher

John P. Ball
Executive Vice President, Operations
and Administration, and Secretary

Brenda L. McLaughlin
Senior Vice President and
Group Publisher

James A. Doehrman
Vice President and Chief Financial Officer

Executive Offices
IDG Books Worldwide, Inc.
919 East Hillsdale Blvd., Suite 400
Foster City, CA 94404
(650) 655-3000

Independent Auditors
Deloitte & Touche LLP
60 South Market Street, Suite 800
San Jose, CA 95113-2303

<PAGE>   52

Transfer Agent and Registrar
Boston EquiServe L.P.
c/o Bank Boston, NA
150 Royall Street
Canton, MA 02021
(781) 575-3400


Annual Meeting
The 1999 Annual Meeting of Stockholders will be held on February 9, 1999. A
notice of the meeting, together with the proxy statement and a form of proxy,
were mailed to stockholders with this annual report.

Stock Exchange Listing
IDG Books Worldwide Common Stock is traded on the NASDAQ National Market under
the symbol IDGB.

Investor Inquiries and Form 10-K
A copy of the Company's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended September 30, 1998, is available without
charge upon request. Please direct shareholder inquiries to:
Investor Relations Department
IDG Books Worldwide
919 E. Hillsdale Blvd., Suite 400
Foster City, CA 94404
(650) 655-3000

Internet Address
http://www.idgbooks.com
http://www.dummies.com
http://www.cliffs.com

IDG Books Worldwide, Inc. Trading Information as reported on the Nasdaq National
market under the trading symbol "IDGB" since July 28, 1998.

                                   Low       High
                                 -------    -------
      1998 Fourth Quarter        $10.38     $16.42