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                                             [QUAKER LOGO]

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                                             THE QUAKER OATS
                                             COMPANY
                                             FORM 10-K
                                             ANNUAL REPORT
                                             2000
                                             Fiscal Year Ended December 31, 2000
<PAGE>

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 [QUAKER LOGO]

                                   FORM 10-K

           [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
         [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                          COMMISSION FILE NUMBER 1-12

                            THE QUAKER OATS COMPANY
             (Exact name of registrant as specified in its charter)

                                   NEW JERSEY
                        (State or other jurisdiction of
                         incorporation or organization)
                                  QUAKER TOWER
                       P.O. BOX 049001 CHICAGO, ILLINOIS
                    (Address of principal executive office)
                                   36-1655315
                                (I.R.S. Employer
                              Identification No.)
                                   60604-9001
                                   (Zip Code)

       Registrant's telephone number, including area code: (312) 222-7111
          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
            TITLE OF EACH CLASS                     NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------------------------------       --------------------------------------------
<S>                                                <C>
       Common Stock ($5.00 Par Value)                        New York Stock Exchange
                                                              Chicago Stock Exchange

      Preferred Stock Purchase Rights                        New York Stock Exchange
                                                              Chicago Stock Exchange
</TABLE>

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
     The aggregate market value of Common Stock held by non-affiliates of the
registrant as of the close of business on January 31, 2001, was $12,533,657,990.
The liquidation value of Series B ESOP Convertible Preferred Stock, all of which
is held in The Quaker 401(k) Plan for Salaried Employees, at the close of
business on January 31, 2001, totaled $172,750,750, plus related dividends. The
number of shares of Common Stock, $5.00 par value, outstanding as of the close
of business on January 31, 2001, was 131,933,242.
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<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>              <C>                                                             <C>
PART I
     ITEM 1.     Business....................................................      1-3
     ITEM 2.     Properties..................................................        3
     ITEM 3.     Legal Proceedings...........................................        4
     ITEM 4.     Submission of Matters to a Vote of Security-Holders.........        4
PART II
     ITEM 5.     Market for Registrant's Common Equity and Related
                 Stockholder Matters.........................................        5
     ITEM 6.     Selected Financial Data.....................................        5
     ITEM 7.     Management's Discussion and Analysis of Financial Condition
                 and Results of Operations...................................     6-17
     ITEM 7A.    Quantitative and Qualitative Disclosures about Market
                 Risk........................................................       17
     ITEM 8.     Financial Statements and Supplementary Data.................    18-54
     ITEM 9.     Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure....................................       54
PART III
     ITEM 10.    Directors and Executive Officers of the Registrant..........    55-57
     ITEM 11.    Executive Compensation......................................    57-64
     ITEM 12.    Security Ownership of Certain Beneficial Owners and
                 Management..................................................    65-66
     ITEM 13.    Certain Relationships and Related Transactions..............       66
PART IV
     ITEM 14.    Exhibits, Financial Statement Schedules and Reports on Form
                 8-K.........................................................       67
SIGNATURES...................................................................       68
EXHIBIT INDEX
</TABLE>
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

(A) GENERAL DEVELOPMENTS OF BUSINESS

     The Quaker Oats Company and Subsidiaries (Company) is an international
manufacturer and marketer of food and beverage products.

     On December 2, 2000, the Company, PepsiCo, Inc. (PepsiCo) and BeverageCo,
Inc., a direct wholly-owned subsidiary of PepsiCo, entered into a merger
agreement (the merger agreement). Pursuant to the merger agreement and subject
to the terms and conditions set forth therein, the Company will merge with
BeverageCo, Inc. and become a wholly-owned subsidiary of PepsiCo. The merger is
a stock-for-stock transaction intended to be tax-free and accounted for as a
pooling of interests. The merger agreement has been approved by the boards of
directors of each company and is subject to approval by PepsiCo and Quaker
shareholders, certain regulatory approvals and satisfaction of other closing
conditions.

     In 2000, the Company and Novartis Consumer Health, Inc. formed a joint
venture, Altus Food Company, LLC (Altus), to develop and market functional food
brands in North America. The Company holds a 50 percent interest in this new
company, which is accounted for using the equity method of accounting.

     The information set forth under the captions "Note 2, Restructuring
Charges, Asset Impairment Losses and Divestitures" and "Note 18, Proposed Merger
with PepsiCo," found under Item 8 of this Form 10-K, is incorporated herein by
reference.

(B) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS

     The information set forth under the captions "Operating Segment
Information," "Operating Segment Data" and "Enterprise and Geographic
Information," found under Item 8 of this Form 10-K, is incorporated herein by
reference.

(C) DESCRIPTION OF BUSINESS

BUSINESS SEGMENT DESCRIPTIONS

     Business segment operating results may be affected by certain risk factors,
which are discussed in more detail in Item 7 of this Form 10-K. The information
set forth under the caption "Cautionary Statement on Forward-Looking
Statements," found under Item 7 of this Form 10-K, is incorporated herein by
reference.

     U.S. AND CANADIAN FOODS -- The Company is a major participant in the
competitive packaged food industry in the United States and Canada and is a
leading manufacturer of hot cereals, pancake syrups, grain-based snacks,
cornmeal, hominy grits and flavored rice products. In the United States, the
Company is the second-largest manufacturer of pancake mixes and flavored pasta
products and is among the four largest manufacturers of ready-to-eat cereals.

     LATIN AMERICAN FOODS -- The Company manufactures and markets its products
in many countries throughout Latin America and is broadly diversified by product
line. Brazil and Mexico are the Company's largest Latin American markets, with
smaller businesses in the Caribbean, Central America, Colombia, Argentina and
Venezuela. The Company is the leading brand-name hot cereals producer in many
countries and has other leading category positions for products in a number of
countries. In Brazil, the Company is the leading producer of ready-to-drink
chocolate beverages and the leading canned fish processor.

     OTHER FOODS -- The Company's European and Asia/Pacific foods businesses are
broadly diversified geographically and primarily market cereals and grain-based
snacks. The Company manufactures and markets its products in many countries
throughout Europe and the Asia/Pacific region. It is the leading oat-based
cereal producer in many European countries.

                                        1
<PAGE>

     U.S. AND CANADIAN BEVERAGES -- The Company is the leading manufacturer and
distributor of sports beverages in the United States and Canada, with its
Gatorade thirst quencher products accounting for about 85 percent of sales in
the sports drink category. More than 65 percent of Gatorade sales occur in the
second and third quarters during the spring and summer beverage season. Propel
fitness water, a new beverage product line, is now available in 25 percent of
the United States.

     LATIN AMERICAN BEVERAGES AND OTHER BEVERAGES -- The Company manufactures
and markets Gatorade thirst quencher in Latin America, Europe and the
Asia/Pacific region. The combined European and Asia/Pacific businesses are
reported within the Company's Other Beverages business segment. Gatorade thirst
quencher is sold in more than 55 countries and is the leading sports drink brand
in Mexico, Argentina, Brazil, Venezuela, Colombia and Italy. Gatorade thirst
quencher is also one of the leading sports drink brands in Korea and Australia,
where it is sold through license arrangements.

GO-TO-MARKET INFORMATION

     The Company competes with a significant number of large and small companies
on the basis of price, value, innovation, quality and convenience, among other
attributes. The Company's food and beverage products are purchased by consumers
through a wide range of distributors. In the United States and Canada, the
Company utilizes both its own and broker sales forces and has multiple
distribution centers, each of which carries an inventory of most of the
Company's food and beverage products. The majority of international businesses
use their own sales forces and distribution centers to sell and distribute food
and beverage products. In certain foreign countries, the Company's products are
manufactured or sold through license arrangements or third-party distributors.
Sales to the Company's largest worldwide customer, Wal-Mart Corp. and its
subsidiaries, including Sam's Club, accounted for approximately 12 percent of
consolidated net sales in 2000.

TRADEMARKS

     The Company owns a number of trademarks and is not aware of any
circumstances that could materially adversely affect the continued use of these
trademarks. Among the most important of the domestic trademarks owned by the
Company are: Quaker, Cap'n Crunch, Life, Quaker Toasted Oatmeal, Quaker 100%
Natural, Quaker Oatmeal Squares and Mother's for breakfast cereals; Gatorade,
Gatorade Fierce and Gatorade Frost for thirst-quenching beverages; Propel for
fitness water; Gatorade for energy bars; Quaker, Quaker Chewy and Quaker Crispy
Mini's for grain-based snacks; Rice-A-Roni and Near East for flavored rice and
grain products; Pasta Roni for flavored pasta; Golden Grain and Mission for
pasta; and Quaker and Aunt Jemima for mixes, syrups and corn goods. Many of the
grocery product trademarks owned by the Company in the United States are also
registered in foreign countries in which the Company does substantial business.
Internationally, key trademarks owned include: Quaker, Quaker Oatso Simple,
Cruesli, Honey Monster, Sugar Puffs and Scott's for breakfast cereals;
Snack-A-Jacks for rice snacks; Coqueiro for canned fish; Toddy and ToddYnho for
chocolate powder and beverages; FrescAvena for oat-based beverage powders; and
Gatorade for thirst-quenching beverages.

RAW MATERIALS

     Raw materials used in manufacturing include oats, wheat, corn, rice,
sweeteners, almonds, fruit, cocoa, vegetable oil and fish, as well as a variety
of other raw and packaging materials. Key packaging materials include P.E.T.
resin, used for plastic bottles, and cardboard. These products are purchased
mainly in the open market. Supplies of all raw materials and packaging have been
adequate and continuous.

EMPLOYEES

     The total number of Quaker employees as of December 31, 2000, was 11,858.

OTHER

     The information set forth under Item 7 and under the captions "Six-Year
Selected Financial Data," "Note 11, Lease and Other Commitments," "Note 12,
Supplementary Income Statement Information" and "Note 17, Quarterly Financial
Data," found under Item 8 of this Form 10-K, is incorporated herein by
reference.
                                        2
<PAGE>

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

     The information set forth under the captions "Operating Segment
Information," "Operating Segment Data" and "Enterprise and Geographic
Information," found under Item 8 of this Form 10-K, is incorporated herein by
reference.

ITEM 2.  PROPERTIES

     As of December 31, 2000, the Company operated 39 manufacturing plants in 11
states and 13 foreign countries and owned or leased distribution centers and
sales offices in 14 states and 19 foreign countries.

<TABLE>
<CAPTION>
                                                                FOODS    BEVERAGES    SHARED    TOTAL
                                                                -----    ---------    ------    -----
<S>                                                             <C>      <C>          <C>       <C>
Owned and Leased Manufacturing Locations:
U.S. and Canadian...........................................      10          8         --        18
Latin American..............................................       8          3          1        12
Other.......................................................       6          3         --         9
                                                                 ---        ---        ---       ---
Owned and Leased Distribution Centers:
U.S. and Canadian...........................................      --         --          9         9
Latin American..............................................       3          1         15        19
Other.......................................................       1          3         --         4
                                                                 ---        ---        ---       ---
Owned and Leased Sales Offices:
U.S. and Canadian...........................................       4          3          6        13
Latin American..............................................       2         --         15        17
Other.......................................................       6          6          1        13
                                                                 ---        ---        ---       ---
</TABLE>

     The Company owns a research and development laboratory in Barrington,
Illinois, and leases corporate office space in downtown Chicago, Illinois. In
March 2000, the Company signed a ten-year lease for office space in a new
building to be constructed in Chicago, Illinois. This new site is intended to
replace the Company's current Chicago headquarters, which is leased through
August of 2002. The new Chicago office is currently in development and is
expected to be completed in 2002. The Company's obligations under the lease are
contingent upon completion of the building and satisfaction of certain other
obligations by the lessor. Management believes that the manufacturing,
distribution and office space owned and leased by the Company are suitable and
appropriately utilized for the intended business purpose.

                                        3
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     On November 10, 1994, two purported class actions commenced in the United
States District Court for the District of New Jersey (the District Court) on
behalf of all purchasers of the common stock of the Company during the period
between September 1, 1994 and November 2, 1994 (the Weiner Action). On January
20, 1995, plaintiffs filed an amended consolidated class action complaint, and
on May 2, 1995, plaintiffs filed a second amended consolidated class action
complaint. As amended, the Weiner Action purports to be brought on behalf of all
purchasers of the Company's common stock during the period between August 4,
1994 and November 1, 1994. Named as defendants are the Company and William D.
Smithburg. Plaintiffs allege, among other things, that defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection
with the Company's disclosure concerning its earnings growth goals and
indebtedness guideline. Damages in an unspecified amount are sought. On May 23,
1996, the District Court dismissed this action. On November 6, 1997, the United
States Court of Appeals for the Third Circuit issued a decision in which it
affirmed the District Court's dismissal of plaintiffs' claims relating to
Quaker's earnings growth goals, and reversed the District Court's dismissal of
plaintiffs' claims relating to Quaker's indebtedness guideline. The Court of
Appeals remanded the action to the District Court for further proceedings in
connection with plaintiffs' claims concerning Quaker's indebtedness guideline.

     On May 1, 1998, the case was transferred to the United States District
Court for the Northern District of Illinois. On September 29, 1999, a class
consisting of all individuals who purchased Quaker common stock during the
period between August 4, 1994 and November 1, 1994 was certified. Factual
discovery in the case has been completed. On November 9, 2000, Quaker's motion
for summary judgment was denied. The Court has set a trial date for April 9,
2001.

     On November 3, 2000, a purported class action on behalf of shareholders of
the Company was filed in the New Jersey Superior Court for Mercer County, naming
as defendants the Company and the individual members of the Company's Board of
Directors. The plaintiff alleges that the Company and the directors breached
their fiduciary duty by failing to either accept an offer of PepsiCo, Inc. to
purchase the Company, or to take other action to sell the Company. To date, no
further action has been taken in connection with this case.

     The Company believes it has strong defenses to the actions described above.
Although the ultimate outcome of the actions described above cannot be
ascertained at this time and the results of legal proceedings cannot be
predicted with certainty, it is the opinion of the management of the Company
that the resolution of these actions will not have a material adverse effect on
the financial condition or the results of operations of the Company as set forth
in the accompanying consolidated financial statements.

     The Company is also a party to a number of other lawsuits and claims, which
it is vigorously defending. Such matters arise out of the normal course of
business. While the results of litigation cannot be predicted with certainty,
management believes that the final outcome of such litigation will not have a
material effect on the Company's consolidated financial position or results of
operations. Changes in assumptions, as well as actual experience, could cause
the estimates made by management to change.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

     None.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The information set forth under Item 10 of this Form 10-K, listing the
executive officers of the registrant, is incorporated herein by reference.

                                        4
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     The New York Stock Exchange (NYSE) is the principle market in which the
Company's common stock is traded. The Company's common stock is listed on the
NYSE and the Chicago Stock Exchange under the ticker symbol OAT. The quarterly
stock price information set forth under the caption "Note 17, Quarterly
Financial Data," found under Item 8 of this Form 10-K, is incorporated herein by
reference.

SHAREHOLDERS

     The number of shareholders of record at December 31, 2000, was 22,605.

DIVIDENDS

     The Company paid regular quarterly dividends of $0.285 per common share in
2000 and 1999.

ITEM 6.  SELECTED FINANCIAL DATA

     The information set forth under the caption "Six-Year Selected Financial
Data," found under Item 8 of this Form 10-K, is incorporated herein by
reference.

                                        5
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

PROPOSED MERGER WITH PEPSICO

     On December 2, 2000, the Company, PepsiCo and BeverageCo, Inc., a direct
wholly-owned subsidiary of PepsiCo, entered into a merger agreement. Pursuant to
the merger agreement and subject to the terms and conditions set forth therein,
the Company will merge with BeverageCo, Inc. and become a wholly-owned
subsidiary of PepsiCo. The merger is a stock-for-stock transaction intended to
be tax-free and accounted for as a pooling of interests. The merger agreement
has been approved by the boards of directors of each company and is subject to
approval by PepsiCo and Quaker shareholders, certain regulatory approvals and
satisfaction of other closing conditions. Upon completion of the merger, holders
of Quaker common stock will receive, for each share of Quaker common stock, 2.3
shares of PepsiCo common stock, subject to adjustment as described in the merger
agreement. See Note 18, under Item 8 of this Form 10-K, for additional
information. The following discussion of business results and forward-looking
statements does not take into account business changes that may be made
following the completion of the proposed merger with PepsiCo. The Company
currently expects the merger to be completed in the first half of 2001.

INTRODUCTION

     The following discussion addresses the operating results and financial
condition of the Company for the years ended December 31, 2000, 1999 and 1998.
The Company divested a Brazilian pasta business in March 1999 and several
businesses during 1998, including a soup-cup business and several food service
businesses. As a result of these divestitures, 1999 to 1998 financial
comparisons do not easily provide an understanding of the operating results of
ongoing businesses. To assist in the understanding of operating results, this
discussion will address total consolidated Company results, describe the impact
of divested businesses and review the results of ongoing businesses by operating
segment. Previously reported amounts have been restated to conform to the
current presentation.

     In accordance with Statement of Financial Accounting Standards (SFAS) No.
131, the discussion of results by business segment is consistent with how the
Company's management assesses performance. The Company reports several foods,
beverages and divested business segments. In determining the operating income or
loss of each segment, restructuring charges, asset impairment losses,
divestiture gains and losses and certain other expenses, such as income taxes,
general corporate expenses and net financing costs, are not allocated to
operating segments.

     The Company's foods business segments include a portfolio of food brands,
which together represent approximately 60 percent of total business segment
results. U.S. and Canadian Foods includes hot and ready-to-eat cereals,
grain-based snacks, flavored rice and pasta, mixes, syrups, corn products and
results from Altus. Latin American Foods includes Quaker brand cereals and
snacks; Coqueiro brand canned fish; Toddy and ToddYnho chocolate powder and
beverages; and FrescAvena oat-based beverage powders. Other Foods includes the
combined results of the European and Asia/Pacific foods businesses. The
Company's beverages segments primarily represent results from Gatorade thirst
quencher, the Company's largest and fastest growing brand. U.S. and Canadian
Beverages, Latin American Beverages and Other Beverages (the combined European
and Asia/Pacific businesses) all include results from Gatorade thirst quencher.
U.S. and Canadian Beverages also includes results from Propel fitness water. The
Divested Businesses segment includes historical results for businesses that have
been sold by the Company.

                                        6
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

2000 COMPARED WITH 1999

     Consolidated volume and net sales increased 9 percent and 7 percent,
respectively. Total Beverages sales increased 15 percent to $2.10 billion and
total Foods sales increased 2 percent to $2.94 billion. Fluctuations in foreign
currency exchange rates, particularly in Europe, and certain price increases
affected the comparison of 2000 and 1999 net sales for several operating
segments, as described in the operating segment results. However, on a
consolidated basis, the net impact of these changes was not material.

       Ongoing Businesses Segment Sales Growth:

<TABLE>
<CAPTION>
                                                                2000
                                                                ----
<S>                                                             <C>
U.S. and Canadian Foods.....................................     1%
Latin American Foods........................................    12%
Other Foods.................................................    (3%)
Total Foods.................................................     2%
U.S. and Canadian Beverages.................................    15%
Latin American Beverages....................................    20%
Other Beverages.............................................    (2%)
Total Beverages.............................................    15%
Total.......................................................     7%
</TABLE>

     The consolidated gross profit margin decreased slightly from 54.8 percent
in 1999 to 54.6 percent in 2000, reflecting the impact of increased P.E.T. resin
(used for plastic bottles) and transportation costs within the U.S. and Canadian
Beverages business. These higher costs in 2000 were partly offset by price
increases on selected beverage products, supply-chain management cost savings,
primarily within the U.S. and Canadian Foods business, and lower U.S. employee
benefit costs than in 1999. See Note 10 for more information on the Company's
pension plans.

     Selling, general and administrative (SG&A) expenses increased $64.7
million, or 3 percent, which represented a decline in SG&A expenses as a
percentage of sales. The largest component of SG&A expenses, advertising and
merchandising (A&M), decreased as a percentage of sales from 28.0 percent in
1999 to 27.8 percent in 2000. A&M expenses totaled $1.40 billion and were $79.5
million, or 6 percent, greater than in 1999. The lower employee benefit costs,
due to the Company's U.S. pension plan, and restructuring savings partly offset
the increase in SG&A expenses in 2000.

     Consolidated operating results included expenses of $182.5 million in 2000
and income of $2.3 million in 1999, for restructuring charges, asset impairment
losses and divestiture gains. The following summarizes the charges, net of
reserve adjustments, recorded in 2000:

<TABLE>
<CAPTION>
                                                                RESTRUCTURING      ASSET                       TOTAL
                                                                   CHARGES       IMPAIRMENT    DIVESTITURE    LOSSES
                                                                   (GAINS)         LOSSES        (GAINS)      (GAINS)
DOLLARS IN MILLIONS                                             -------------    ----------    -----------    -------
<S>                                                             <C>              <C>           <C>            <C>
Supply chain reconfiguration project........................        $64.4          $120.1         $  --       $184.5
Other U.S. organization alignments..........................          9.4              --            --          9.4
Other Beverages Europe restructuring........................          0.4              --            --          0.4
                                                                    -----          ------         -----       ------
  Charges before reserve adjustments........................         74.2           120.1            --        194.3
                                                                    -----          ------         -----       ------
Adjustments to prior-period reserves........................         (9.0)             --          (2.8)       (11.8)
                                                                    -----          ------         -----       ------
Total.......................................................        $65.2          $120.1         $(2.8)      $182.5
                                                                    =====          ======         =====       ======
</TABLE>

     SUPPLY CHAIN RECONFIGURATION PROJECT -- Total charges of $184.5 million
were recognized in 2000 related to a supply chain reconfiguration project
announced in September 1999. The three-year project to upgrade and optimize the
Company's manufacturing and distribution capabilities in North America involves
the rationalization of U.S. and Canadian Foods operations, an expansion of U.S.
beverage manufacturing and a reconfiguration of the Company's food and beverage
logistics network.

                                        7
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

     In 2000, the Company adopted plans to close two cereal manufacturing
facilities and two distribution centers in the United States, which resulted in
restructuring charges of $64.4 million in 2000. The restructuring charges,
primarily attributable to the Company's U.S. and Canadian Foods operations, were
comprised of severance and termination benefits and other shut-down costs. In
addition, the Company recognized asset impairment losses of $120.1 million
attributable to the U.S. and Canadian Foods operations. As a result of the
negotiation of a significant contract manufacturing agreement and completion of
decisional and effects bargaining required to close the two cereal manufacturing
facilities, the Company evaluated the recoverability of its affected long-lived
assets pursuant to the provisions of SFAS No. 121. The affected assets (land,
buildings and production machinery and equipment) were determined to be held for
use, as they are integral to the Company's operations until the migration of
production activity to other facilities is completed. Because the carrying value
of the affected long-lived assets exceeded the projected future undiscounted
cash flows, the Company was required to reduce the carrying value of the
long-lived assets to fair value and recognize asset impairment losses. The fair
value of affected assets was determined based on analyses of the current
liquidation values of similar assets.

     As of December 31, 2000, the Company recognized total charges of $192.5
million, consisting of $184.5 million in 2000 and $8.0 million in 1999, related
to this project. Total charges for this project are expected to be approximately
$200 million, including additional charges expected to be recorded over the next
two years. Ongoing cost savings resulting from this project were approximately
$5 million in 1999 and rose approximately $13 million to approximately $18
million in 2000. Ongoing cost savings are expected to increase to approximately
$40 million in 2001 and to reach the full amount of approximately $65 million
annually beginning in 2002 and going forward. Eighty percent of the savings are
expected to be in cash.

     OTHER 2000 RESTRUCTURING ACTIONS -- During 2000, the Company restructured
its human resources department, closed an administrative office in California
and a small leased Gatorade manufacturing facility in Puerto Rico, and
decentralized certain U.S. customer service functions. As a result of these
actions, the Company eliminated approximately 55 positions. Restructuring
charges of $9.4 million were recognized in 2000 for severance and termination
benefits and shut-down costs. Annual savings from these actions, approximately
$10 million, began mid-year 2000 and are expected to be primarily in cash. The
Company recognized restructuring charges of $0.4 million, primarily for
severance benefits due to the elimination of several positions in Spain. Annual
savings are not material. The Company continues to evaluate strategies and
cost-savings initiatives, which could result in future charges.

     Net financing costs (net interest expense and foreign exchange losses)
decreased $18.0 million in 2000. Net foreign exchange losses decreased $12.8
million, as the Brazilian real remained relatively stable in 2000 compared to
the severe devaluation in the first quarter of 1999. Net interest expense
decreased $5.2 million, primarily because of lower long-term debt balances.

     The Company's effective tax rate for 2000 and 1999 was 36.0 percent and
36.1 percent, respectively, excluding the tax effects of restructuring charges,
asset impairment losses and divestiture gains, and tax adjustments in 1999. The
tax adjustments were made to reduce previously recorded tax accruals and tax
assets and resulted in a $59.3 million reduction in the tax provision in 1999.

                                        8
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

OPERATING SEGMENT RESULTS

     Total segment operating income increased 14 percent, or $98.1 million, to
$808.3 million in 2000. Business segment operating income margin expanded to 16
percent of sales from 15 percent of sales in 1999.

       Segment Operating Income (Loss):

<TABLE>
<CAPTION>
                                                                                    PERCENT
                                                                 2000      1999     CHANGE
DOLLARS IN MILLIONS                                              ----      ----     -------
<S>                                                             <C>       <C>       <C>
U.S. and Canadian Foods.....................................    $458.5    $399.8      15%
Latin American Foods........................................      26.8      26.2       2%
Other Foods.................................................      25.2      21.1      19%
                                                                ------    ------      ---
Total Foods.................................................     510.5     447.1      14%
                                                                ------    ------      ---
U.S. and Canadian Beverages.................................     273.7     253.9       8%
Latin American Beverages....................................      30.9      16.5      87%
Other Beverages.............................................      (6.8)     (7.3)     N/M
                                                                ------    ------      ---
Total Beverages.............................................     297.8     263.1      13%
                                                                ------    ------      ---
Total.......................................................    $808.3    $710.2      14%
                                                                ======    ======      ===
</TABLE>

       --------------------------------
       N/M: Not Meaningful

FOODS

     U.S. AND CANADIAN FOODS -- Volume declined 1 percent and net sales
increased 1 percent, reflecting mixed results from individual product lines.
Successful new varieties of Quaker Chewy granola bars, Quaker Crispy Mini's rice
snacks and Quaker instant oatmeal drove sales and operating income growth for
these lines. Although ready-to-eat cereal sales declined amid heavy price
competition, profits grew because of greater manufacturing efficiencies and
lower marketing spending. Operating income increased 15 percent, reflecting
increases for all major product lines. Operating margin expanded to 19.3
percent, compared to 16.9 percent in 1999, due to a lower rate of A&M spending,
savings from supply-chain cost management initiatives and lower employee benefit
costs compared to 1999.

       U.S. and Canadian Foods Net Sales by Product Line:

<TABLE>
<CAPTION>
                                                                  2000        GROWTH
DOLLARS IN MILLIONS                                               ----        ------
<S>                                                             <C>           <C>
Hot Cereals.................................................    $  514.6        6%
Ready-to-Eat Cereals........................................       689.7       (5%)
Flavored Rice and Pasta.....................................       334.9       (3%)
Grain-based Snacks..........................................       341.3       12%
Other.......................................................       500.7        --
                                                                --------       ---
Total.......................................................    $2,381.2        1%
                                                                ========       ===
</TABLE>

     LATIN AMERICAN FOODS -- Volume and net sales increased 12 percent,
reflecting strong growth in most countries in the region, led by sales of
ToddYnho chocolate beverages and Coqueiro canned fish in Brazil. Operating
income increased 2 percent to $26.8 million. The moderate operating income
increase reflects a lower operating margin due to higher A&M spending to promote
several Brazilian food brands.

     OTHER FOODS -- Volume increased 2 percent and net sales decreased 3 percent
due to the negative impact of foreign currency fluctuations. In local currency
terms, Europe sales increased 5 percent due to successful new snack and hot
cereal products. In Asia, sales increased 3 percent, reflecting growth from hot
cereals. Despite the negative impact exchange rates had on sales, operating
income rose 19 percent to $25.2 million.

                                        9
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

BEVERAGES

     U.S. AND CANADIAN BEVERAGES -- Volume and net sales grew 13 percent and 15
percent, respectively, reflecting the strength of the Gatorade brand. Gatorade
sales were driven by two new flavors of Gatorade Fierce, new multiple packs and
new points of distribution in 2000. The Company increased prices on selected
Gatorade products in 2000 to lessen the negative impact of packaging and
transportation cost increases. Price increases accounted for approximately 3
percentage points of sales growth. In addition, the regional introduction of
Propel fitness water, now available in about 25 percent of the United States,
contributed 1 percentage point to sales growth. Operating income increased $19.8
million, or 8 percent. Operating income grew less than sales because of
increased marketing expenses to support the launch of Propel. Therefore,
operating margin decreased to 15.8 percent from 16.9 percent in 1999.

     LATIN AMERICAN BEVERAGES -- Volume and net sales increased 13 percent and
20 percent, respectively. Mexico led the region's sales growth, although sales
also grew in Venezuela, the Caribbean, Colombia and Argentina. In Mexico, new
flavors and package offerings and certain price increases contributed to strong
sales and operating income growth. Operating income increased 87 percent, or
$14.4 million, and operating margin expanded to 11.3 percent in 2000 from 7.2
percent in 1999.

     OTHER BEVERAGES -- Volume increased 17 percent, while net sales declined 2
percent due to the negative impact of foreign currency fluctuations. In Europe,
Gatorade volume increased 9 percent. In Asia, where the Company has been
investing to grow the Gatorade brand in China, sales increased 18 percent
overall and increased 48 percent in China alone. In total, operating losses
decreased $0.5 million to $6.8 million.

DIVESTED BUSINESSES

     1999 operating results from Divested Businesses reflect the Brazilian pasta
business through its March 1, 1999, divestiture date.

1999 COMPARED WITH 1998

     Consolidated volume was even with the prior year and net sales decreased 2
percent, due to business divestitures and weaker exchange rates, particularly in
Brazil. For ongoing businesses, volume and net sales increased 7 percent and 4
percent, respectively, primarily driven by double-digit growth in the U.S. and
Canadian Beverages business. Excluding the impact of foreign currency exchange
rate changes, net sales from ongoing businesses increased approximately 6
percent. Price changes did not significantly affect the comparison of 1999 and
1998 net sales.

       Ongoing Businesses Segment Sales Growth:

<TABLE>
<CAPTION>
                                                                1999
                                                                ----
<S>                                                             <C>
U.S. and Canadian Foods.....................................      4%
Latin American Foods........................................    (17%)
Other Foods.................................................      6%
Total Foods.................................................      1%
U.S. and Canadian Beverages.................................     12%
Latin American Beverages....................................    (14%)
Other Beverages.............................................      1%
Total Beverages.............................................      7%
Total.......................................................      4%
</TABLE>

     The consolidated gross profit margin expanded to 54.8 percent in 1999
compared to 51.0 percent in 1998. More than one-half of the gross margin
improvement was driven by ongoing businesses, primarily due to lower raw
material costs and supply chain cost-reduction efforts. The remaining margin
improvement reflects the divestiture of low-margin businesses.

                                       10
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

     SG&A expenses increased $31.6 million to $1.90 billion. The largest
component of SG&A expense was A&M, which totaled $1.32 billion in 1999.
Increased investment in brand-building activities, such as media and new product
marketing support, led to an $81.9 million increase in A&M spending compared to
1998. Total Company A&M expenses as a percent of sales increased to 28.0 percent
in 1999 compared to 25.6 percent in 1998. The increase in A&M expenses was
largely offset by lower overheads due to business divestitures, savings from
1998 restructuring actions and other cost-reduction efforts.

     Consolidated operating results included a combined gain of $2.3 million in
1999 related to gains from divestiture and reserve adjustments, net of
restructuring charges. 1998 results included a combined loss of $128.5 million
for divestiture gains and losses, restructuring charges and asset impairment
losses.

     A $5.1 million divestiture gain was recognized when the Company sold its
Brazilian pasta business on March 1, 1999. Adjustments were recorded in 1999 to
reduce prior restructuring and divestiture reserves by $8.8 million and $1.1
million, respectively. These adjustments were primarily due to higher than
anticipated proceeds on the sale of closed facilities and certain other changes
from previously estimated amounts. 1999 restructuring charges totaled $12.7
million. Two sales offices were closed, and approximately 45 positions were
eliminated, resulting in restructuring charges of $4.7 million for severance and
termination benefits, asset write-offs and losses on leases. Annual savings
resulting from this action of approximately $5 million were reflected in the
U.S. and Canadian Foods and Beverages businesses beginning in 2000. The Company
also recorded $8.0 million of restructuring charges related to the previously
discussed supply chain reconfiguration project announced in September 1999.
Several cereal manufacturing lines were consolidated and early retirement was
offered to certain employees to eliminate approximately 68 positions.

     In 1998, the Company initiated numerous actions to improve future
profitability. These actions resulted in $89.7 million in restructuring charges
and were divided into three categories: organization alignment, plant
consolidations and a reorganization in Asia. Charges for organization alignment
activities totaled $41.5 million. The Company aligned its foods and beverages
businesses, combining sales, supply chain and certain administrative functions
to realize synergies and maximize scale. These actions resulted in the
elimination of approximately 550 positions worldwide, as a layer of executive
management was removed and sales and administrative offices and functions were
consolidated. Plant consolidations in the United States and Latin America
resulted in charges of $18.3 million and $0.9 million, respectively, and the
elimination of approximately 300 positions. In light of disappointing
performance and a weak economic environment, the Company revised its operational
strategy for Asia. The going-forward focus was shifted toward building the
Gatorade business in China. The Asia reorganization resulted in $29.0 million in
charges for plant and sales and administrative office closures, restructuring of
certain joint ventures and the elimination of approximately 450 positions. The
1998 restructuring charges were composed of severance and other termination
benefits, asset write-offs, losses on leases and other shut-down costs. Savings
from these actions of approximately $65 million primarily began in 1999, with
approximately 90 percent of the savings in cash.

     In 1998, the Company recorded $38.1 million of asset impairment losses
related to ongoing businesses. In conjunction with the Company's ongoing review
of underperforming businesses, certain assets were reviewed for impairment
pursuant to the provisions of SFAS No. 121. During 1998, the China foods and
Brazilian pasta businesses were determined to be impaired. Accordingly, losses
of $15.1 million and $23.0 million on these impaired Chinese and Brazilian
businesses, respectively, were recorded in order to adjust the carrying value of
the long-lived assets of these businesses to fair value. The estimated fair
value of these assets was based on various methodologies, including a discounted
value of estimated future cash flows and liquidation analyses.

                                       11
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

     Charges for asset impairment losses related to divested businesses were
also recorded in 1998. The Company divested the following U.S. food businesses
in 1998 for a total of $192.7 million and realized a combined loss of $0.7
million, including related impairment losses:

<TABLE>
<CAPTION>
                                                                                   ASSET       (GAINS)     TOTAL
                                                                DIVESTITURE      IMPAIRMENT    LOSSES     (GAINS)
                                                                    DATE           LOSSES      ON SALE    LOSSES
DOLLARS IN MILLIONS                                             -----------      ----------    -------    -------
<S>                                                            <C>               <C>           <C>        <C>
Ardmore Farms juice........................................       August 1998      $  --       $ (2.5)    $ (2.5)
Continental Coffee.........................................    September 1998       40.0         (5.1)      34.9
Nile Spice soup cup........................................     December 1998       25.4          3.1       28.5
Liqui-Dri biscuit..........................................     December 1998         --        (60.2)     (60.2)
                                                                                   -----       ------     ------
Total Losses (Gains).......................................                        $65.4       $(64.7)    $  0.7
                                                                                   =====       ======     ======
</TABLE>

     Net financing costs decreased $2.2 million in 1999. Lower interest expense,
which resulted from lower debt levels, was partly offset by higher net foreign
exchange losses. In Brazil, losses increased $6.9 million due to the 1999
currency devaluation.

     In 1999, the Company adjusted its tax accruals and tax assets to reflect
developments and information received during that year. The net effect of these
adjustments was to reduce the 1999 tax provision by $59.3 million. Excluding
these tax adjustments and the tax impact of gains and losses on divestitures,
restructuring charges and asset impairments, the effective tax rate was 36.1
percent in 1999 versus 36.3 percent in 1998.

OPERATING SEGMENT RESULTS

     Total segment operating income increased 13 percent, or $82.7 million, to
$710.2 million in 1999. Business segment operating margin expanded to 15 percent
of sales from 13 percent of sales in 1998.

       Segment Operating Income (Loss):

<TABLE>
<CAPTION>
                                                                                         PERCENT
                                                                1999         1998        CHANGE
DOLLARS IN MILLIONS                                             ----         ----        -------
<S>                                                            <C>          <C>          <C>
U.S. and Canadian Foods.................................       $399.8       $369.8          8%
Latin American Foods....................................         26.2         28.2         (7%)
Other Foods.............................................         21.1         (1.2)        N/M
                                                               ------       ------         ---
Total Foods.............................................        447.1        396.8         13%
                                                               ------       ------         ---
U.S. and Canadian Beverages.............................        253.9        214.9         18%
Latin American Beverages................................         16.5         25.6        (36%)
Other Beverages.........................................         (7.3)        (7.4)        N/M
                                                               ------       ------         ---
Total Beverages.........................................        263.1        233.1         13%
                                                               ------       ------         ---
Divested Businesses.....................................           --         (2.4)        N/M
                                                               ------       ------         ---
Total...................................................       $710.2       $627.5         13%
                                                               ======       ======         ===
</TABLE>

       --------------------------------
       N/M: Not Meaningful

FOODS

     U.S. AND CANADIAN FOODS -- 1999 operating income of $399.8 million
increased $30.0 million compared to 1998. Volume and sales increased 1 percent
and 4 percent, respectively. Sales increased in virtually all major food product
lines, led by 13 percent sales growth in Quaker oatmeal, driven by new product
introductions and effective advertising. Ready-to-eat cereal sales increased 2
percent, and profitability improved. Total U.S. flavored rice and pasta sales
grew 1 percent, despite increased competition in the category. U.S. snacks sales
grew on the strength of Quaker Chewy granola bars and

                                       12
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

Quaker Fruit & Oatmeal cereal bars, while rice snacks sales declined 11 percent.
Gross margins improved across all product lines due to lower raw material costs
and supply chain cost-savings initiatives. Increased sales and expanded gross
margins enabled the business to invest in new products and increase advertising,
while delivering operating income growth of 8 percent. A&M increases were
focused on investments for hot cereals, snacks and flavored rice and pasta.

       U.S. and Canadian Foods Net Sales by Product Line:

<TABLE>
<CAPTION>
                                                                  1999        GROWTH
DOLLARS IN MILLIONS                                               ----        ------
<S>                                                             <C>           <C>
Hot Cereals.................................................    $  485.5       13%
Ready-to-Eat Cereals........................................       724.5        2%
Flavored Rice and Pasta.....................................       344.3        1%
Grain-based Snacks..........................................       304.6        5%
Other.......................................................       500.6        --
                                                                --------       ---
Total.......................................................    $2,359.5        4%
                                                                ========       ===
</TABLE>

     LATIN AMERICAN FOODS -- Financial results were negatively affected by a
severe currency devaluation and recession in Brazil, lowering 1999 sales
substantially and impacting operating income to a lesser extent. Although 1999
volume was even with 1998, sales declined $64.5 million, or 17 percent.
Operating income of $26.2 million decreased $2.0 million from 1998, or 7
percent. Declines in Brazil, Latin American Foods' largest business, were partly
offset by double-digit sales and operating income growth in the smaller Mexican
and Caribbean businesses, and by savings from 1998 restructuring actions.

     OTHER FOODS -- The combined European and Asia/Pacific foods businesses
reported operating income of $21.1 million, a $22.3 million improvement,
primarily due to savings from the 1998 restructuring of the Asia business.
Volume and sales increased 5 percent and 6 percent, respectively, reflecting
growth in both businesses. In Europe, sales and profit increased, driven by new
cereals products. In Asia, extensive restructuring and increased sales of hot
cereals allowed the business to operate at a modest profit, following several
years of operating losses.

BEVERAGES

     U.S. AND CANADIAN BEVERAGES -- Volume, sales and operating income all grew
at double-digit rates for the second consecutive year, reflecting the strength
of the Gatorade brand. In 1999, Gatorade volume and sales increased 16 percent
and 12 percent, respectively, driven by new flavors, such as Gatorade Fierce,
and new packaging, such as a redesigned sports bottle and a 20-ounce wide-mouth
bottle. Gatorade continued to grow through expanded distribution and
availability outside traditional retail channels. Operating income grew 18
percent to $253.9 million, an increase of $39.0 million from 1998, reflecting
strong sales growth and SG&A overhead efficiencies, partly offset by increased
A&M spending.

     LATIN AMERICAN BEVERAGES -- Financial results were negatively affected by
currency devaluations and recessions in Brazil and Colombia, resulting in
volume, sales and operating income declines. Volume and sales decreased 10
percent and 14 percent, respectively. Depressed sales and demand due to the
recessions in Brazil and Colombia more than offset double-digit growth in
Mexico. As a result, 1999 operating income declined $9.1 million to $16.5
million.

     OTHER BEVERAGES -- The combined European and Asia/Pacific Gatorade
businesses reported volume and sales growth of 3 percent and 1 percent,
respectively. The Company significantly restructured its Asia Gatorade business
in 1998 to focus on building the brand in China. Volume and sales increased in
China due to new flavors and packaging, which were supported by increased media
spending. In Europe, Gatorade sales declined modestly compared to the prior
year. Operating losses in the Asia/Pacific business more than offset profits
from the European business, totaling to a loss of $7.3 million in 1999 compared
to $7.4 million in 1998.

                                       13
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

DIVESTED BUSINESSES

     Operating results from divested businesses reflect the Brazilian pasta
business through its March 1, 1999 divestiture date. 1998 includes operating
results of the Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri
businesses through their divestiture dates, and a full year of operating results
of the Brazilian pasta business.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities was $522.5 million in 2000, a
decrease of $108.6 million compared to 1999, primarily due to higher working
capital balances. The increase in trade accounts receivable in 2000 relates to
higher sales and a decline in collection efficiency in December 2000. The
increase in other current assets was partly due to $19.1 million of deferred
software development costs incurred related to a multi-year project to upgrade
the Company's enterprise reporting systems that began in 2000. In 2000, current
deferred tax assets increased $39.2 million, compared to a decrease of $42.8
million in 1999. Net cash provided by operating activities in 1999 and 1998 was
$631.1 million and $513.5 million, respectively.

     Capital expenditures were $285.6 million, $222.4 million and $204.7 million
for 2000, 1999 and 1998, respectively. In 2000, the Company expanded Gatorade
production capacity in the United States, Latin America and Europe. Construction
of two new Gatorade manufacturing facilities, one in Indianapolis, Indiana and
another in Mexico, was completed in 2000. Capital expenditures in 2001 are
expected to be in the range of $230 million to $260 million. The Company plans
to continue to invest, although at a lower rate, to expand Gatorade production
capacity and to support cost-reduction projects. The Company expects capital
expenditures and cash dividends to be financed through cash flow from operating
activities.

     Cash proceeds from business divestitures in 1999 and 1998 were $14.3
million and $265.9 million, respectively. Over the last three years, cash
proceeds from business divestitures were primarily used to reduce total debt and
repurchase shares of the Company's outstanding common stock. In 1998, the
Company received cash proceeds of $73.2 million from the 1997 sale of certain
food service businesses and recovered $240.0 million in Federal income taxes,
previously paid on capital gains from business divestitures, related to a 1997
loss on the divestiture of the Snapple beverages business.

     Financing activities used cash of $351.6 million, $516.3 million and $556.6
million in 2000, 1999 and 1998, respectively, primarily reflecting the Company's
stock repurchase programs and the reduction of total debt in all three years.
The Company's activity in share repurchase programs used cash of $242.0 million,
$373.2 million and $377.3 million in 2000, 1999 and 1998, respectively. During
2000, the Company repurchased 3.6 million shares of its outstanding common stock
for $235.9 million under the $1 billion repurchase program announced in March
1998. On December 4, 2000, the date the Company announced the discontinuance of
its $1 billion repurchase program, total repurchases under the plan were $870.8
million.

     The Company's debt ratings were upgraded in the first half of 2000. The
Company's current debt and commercial paper ratings are as follows: Standard &
Poor's (A- and A2); Moody's (A3 and P2); and Fitch (A- and F2). The total
debt-to-total-capitalization ratio was 67.8 percent, 79.8 percent and 84.4
percent as of December 31, 2000, 1999 and 1998, respectively.

Debt:

<TABLE>
<CAPTION>
                                                  2000      1999      1998
DOLLARS IN MILLIONS                               ----      ----      ----
<S>                                              <C>       <C>       <C>
Short-term debt..............................    $ 81.6    $ 73.3    $ 41.3
Current portion of long-term debt............      48.0      81.2      95.2
                                                 ------    ------    ------
  Sub-total..................................     129.6     154.5     136.5
                                                 ------    ------    ------
Long-term debt...............................     664.1     715.0     795.1
                                                 ------    ------    ------
Total Debt...................................    $793.7    $869.5    $931.6
                                                 ======    ======    ======
</TABLE>

                                       14
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

     Total debt decreased $75.8 million in 2000. Short-term debt over the past
three years primarily consisted of notes payable to banks in foreign countries.
The Company currently has a $335.0 million annually extendible five-year
revolving credit facility and a $165.0 million, 364-day extendible revolving
credit facility which may, at the Company's option, be converted into a two-year
term loan. Both facilities are with various banks. The Company's level of
revolving credit facilities remained unchanged versus 1999.

DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS

     The Company actively monitors its exposure to commodity price, foreign
currency exchange rate and interest rate risks and uses derivative financial and
commodity instruments to manage the impact of certain of these risks. The
Company uses derivatives only for purposes of managing risk associated with
underlying exposures. The Company does not trade or use instruments with the
objective of earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where there are
not underlying exposures. Complex instruments involving leverage or multipliers
are not used. Management believes that its use of derivative instruments to
manage risk is in the Company's best interest.

     The Company has estimated its market risk exposures using sensitivity
analyses. Market risk exposure has been defined as the change in fair value of a
derivative commodity or financial instrument assuming a hypothetical 10 percent
adverse change in market prices or rates. Fair value was determined using quoted
market prices, if available. Actual changes in market prices or rates may differ
from hypothetical changes presented in sensitivity analyses.

     FOREIGN EXCHANGE -- The Company uses forward contracts, purchased options
and currency swap agreements to manage foreign currency exchange rate risk
related to certain projected cash flows from foreign operations and net
investments in foreign subsidiaries. The Company's market risk exposure to
foreign currency exchange rates exists primarily with the following currencies
versus the U.S. dollar: Brazilian real, Canadian dollar, Chinese renmimbi, Euro
and Mexican peso. The foreign exchange sensitivity analysis included currency
forward and option contracts and other financial instruments affected by foreign
exchange risk, including cash and foreign currency denominated debt. The
sensitivity analysis excluded the underlying projected cash flows and net
investment exposures, which have a high degree of inverse correlation with the
financial instruments used to hedge them. Based on the results of the
sensitivity analysis, the estimated quarter-end market risk exposure on an
average, high and low basis was $3.6 million, $6.3 million and $1.1 million
during 2000 and $2.1 million, $7.6 million and zero during 1999, respectively.

     COMMODITIES -- The Company uses commodity futures and options to manage
price exposures on commodity inventories or anticipated commodity purchases. The
Company typically purchases certain commodities such as oats, corn, corn
sweetener and wheat. The commodity instruments sensitivity analysis excludes the
underlying commodity positions that are being hedged by derivative commodity
instruments, which have a high degree of inverse correlation with changes in the
fair value of the commodity instruments. Based on the results of the sensitivity
analysis, the estimated quarter-end market risk exposure on an average, high and
low basis was $1.3 million, $2.2 million and $0.8 million during 2000 and $2.4
million, $3.7 million and $0.7 million during 1999, respectively.

     INTEREST RATES -- The Company uses interest rate swap agreements to manage
its exposure to fluctuations in interest rates. In 2000 and 1999, the Company
entered into fixed-to-floating interest rate swap agreements to increase
floating rate exposure. The Company's interest-rate-related financial
instruments consist primarily of debt. Based on the results of the sensitivity
analysis, the estimated market risk exposure for interest-rate-related financial
instruments was approximately $36 million and $40 million as of December 31,
2000 and 1999, respectively. Derivative financial instruments related to
interest rate risk outstanding as of December 31, 2000, were not material to the
results of this sensitivity analysis.

     In 2000, the Company entered into an interest rate swap agreement with a
notional value of $13.4 million to exchange fixed for floating-rate debt. This
swap agreement matures in May 2006. In 1999, the Company entered into cancelable
interest rate swap agreements with a notional value of $80.0 million. In 2000,
the counterparties exercised the options to cancel these agreements effective
March 15, 2001.

                                       15
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

CURRENT AND PENDING ACCOUNTING CHANGES

     In 2000, the Emerging Issues Task Force (EITF), a subcommittee of the
Financial Accounting Standards Board (FASB), discussed a number of topics
related to certain expenses that the Company reports in merchandising expense, a
component of SG&A expenses. In January 2001, the EITF issued No. 00-22,
"Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future." This guidance requires certain rebate offers and free products that
are delivered subsequent to a single exchange transaction to be recognized when
incurred and reported as a reduction of revenue. EITF No. 00-14, "Accounting for
Certain Sales Incentives," was issued in May 2000 and subsequently amended in
November 2000. This guidance requires certain coupons, rebate offers and free
products offered concurrently with a single exchange transaction with a customer
to be recognized when incurred and reported as a reduction of revenue. The
Company is required to adopt EITF No. 00-22 and No. 00-14 for the first quarter
ending March 31, 2001, and the second quarter ending June 30, 2001,
respectively. The Company expects the adoptions of EITF No. 00-22 and No. 00-14
to result in a reclassification of expenses and a restatement to reduce
previously reported net sales and SG&A expenses. As the Company has not tracked
the components of merchandising expenses discussed above separate from certain
other merchandising expenses, the amount of these changes has not been
finalized. The Company expects that these reclassifications may result in up to
a $60 million reduction in net sales and a corresponding decrease in SG&A
expenses in each of the three years ended December 31, 2000, 1999 and 1998. In
each of these three years, this reduction is expected to lower net sales by
approximately 1 percent. Earnings will not be affected and the Company does not
expect the adoption of these accounting changes to have a material effect on
reported growth rates.

     In July 2000, the EITF issued No. 00-15, "Classification in the Statement
of Cash Flows of the Income Tax Benefit Realized by a Company upon Employee
Exercise of a Nonqualified Stock Option." The EITF concluded that the tax
deduction received by the Company upon exercise of a nonqualified stock option
by an employee should be classified in the statement of cash flows as a cash
flow from operations and disclosed if material. EITF No. 00-15 was adopted in
September 2000. As a result, the Company updated the presentation of cash flows
from operating activities to disclose this amount as a separate line item for
all periods presented.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133." In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Instruments and Certain Hedging Activity," to amend SFAS
No. 133. Collectively, these statements are intended to represent the
comprehensive guidance on accounting for derivatives and hedging activities.
These statements establish accounting and reporting standards requiring that
certain derivative instruments (including certain derivative instruments
imbedded in other contracts) be recorded in the balance sheet as either an asset
or a liability measured at its fair value. These statements require that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The accounting provisions for
qualifying hedges allow a derivative's gains and losses to offset related
results of the hedged item in the income statement, and require that the Company
must formally document, designate and assess the effectiveness of transactions
that qualify for hedge accounting.

     The Company completed its detailed implementation plan to adopt these new
hedge accounting standards. The Company adopted these new standards on January
1, 2001, and will record the effect of the transition to these new accounting
requirements in the results for the first quarter of 2001. The effect of
adopting these accounting changes will not be material to the Company's results
of operations. Once adopted, these new standards could increase volatility in
reported earnings and other comprehensive income of the Company.

YEAR 2000

     The Company spent approximately $12 million, primarily in 1999, to address
issues with the year 2000 date change. The Company did not experience business
disruption or incur significant expenses in 2000 related to the date change.

                                       16
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
              MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

     Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis. Statements that are not historical facts, including
statements about expectations or projected results, are forward-looking
statements.

     The Company's results may differ materially from those suggested by the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that could
significantly affect expected results. For example, operating results may be
affected by factors such as: actions of competitors; changes in laws and
regulations (including changes in governmental interpretations of regulations
and changes in accounting standards); customer and consumer demand (including
customer and consumer responses to marketing); effectiveness of spending,
investments or programs (including cost-reduction projects); changes in market
prices or rates; fluctuations in the cost and availability of supply chain
resources; foreign economic conditions, including currency rate fluctuations
(and with respect to Latin America, the fact that the majority of this business
is concentrated in Brazil, Mexico and Venezuela); weather; the ability of the
Company to execute manufacturing, distribution and outsourcing initiatives and
plant consolidations; and costs related to the proposed merger with PepsiCo. In
addition, capital expenditures and cash dividends may be affected by the amount
of cash flow from operating activities; and the Company's market risk exposures
may be affected by actual changes in market prices of derivative financial and
commodity instruments if actual changes differ from the hypothetical changes
used in sensitivity analyses.

     The forward-looking statements concerning the Company's proposed merger
with PepsiCo are subject to a number of factors, including: the inability to
obtain, or meet conditions imposed for, regulatory or governmental approvals;
customary closing conditions; and failure of the Company's or PepsiCo's
shareholders to approve the merger and related matters.

     Forward-looking statements speak only as of the date they were made, and
the Company undertakes no obligation to update them.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Quantitative and qualitative disclosures about market risk information set
forth under the caption "Derivative Financial and Commodity Instruments," found
under Item 7 of this Form 10-K, are incorporated herein by reference.

                                       17
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                --------------------------------
                                                                  2000        1999        1998
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)                       ----        ----        ----
<S>                                                             <C>         <C>         <C>
NET SALES...................................................    $5,041.0    $4,725.2    $4,842.5
Cost of goods sold..........................................     2,288.3     2,136.8     2,374.4
                                                                --------    --------    --------
Gross profit................................................     2,752.7     2,588.4     2,468.1
Selling, general and administrative expenses................     1,968.8     1,904.1     1,872.5
Restructuring charges, asset impairments and (gains) losses
  on divestitures -- net....................................       182.5        (2.3)      128.5
Interest expense............................................        54.0        61.9        69.6
Interest income.............................................        (9.0)      (11.7)      (10.7)
Foreign exchange loss -- net................................         5.3        18.1        11.6
                                                                --------    --------    --------
INCOME BEFORE INCOME TAXES..................................       551.1       618.3       396.6
Provision for income taxes..................................       190.5       163.3       112.1
                                                                --------    --------    --------
Net Income..................................................       360.6       455.0       284.5
Preferred dividends -- net of tax...........................         4.2         4.4         4.5
                                                                --------    --------    --------
NET INCOME AVAILABLE FOR COMMON.............................    $  356.4    $  450.6    $  280.0
                                                                ========    ========    ========
PER COMMON SHARE:
  Net income................................................    $   2.71    $   3.36    $   2.04
  Net income -- diluted.....................................    $   2.61    $   3.23    $   1.97
  Dividends declared........................................    $   1.14    $   1.14    $   1.14
                                                                --------    --------    --------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN
  THOUSANDS)................................................     131,689     134,027     137,185
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       18
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2000       1999       1998
DOLLARS IN MILLIONS                                              ----       ----       ----
<S>                                                             <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................    $ 360.6    $ 455.0    $ 284.5
  Adjustments to reconcile net income to net cash provided
     by operating activities:
       Depreciation and amortization........................      133.0      123.8      132.5
       Deferred income taxes................................       19.8       14.2      (31.1)
       Gains on divestitures -- net of tax of $(0.2), $1.7
        and $(27.4) in 2000, 1999 and 1998, respectively....       (3.0)      (4.5)     (26.7)
       Restructuring charges................................       65.2        3.9       89.7
       Asset impairment losses..............................      120.1         --       38.1
       Loss on disposition of property and equipment........        6.9       12.9       11.9
       (Increase) decrease in trade accounts receivable.....      (50.0)      14.8        5.6
       Increase in inventories..............................      (24.8)     (15.3)     (32.8)
       (Increase) decrease in other current assets..........      (63.2)      20.3      (15.1)
       Increase (decrease) in trade accounts payable........        2.0       49.7      (20.0)
       (Decrease) increase in other current liabilities.....     (102.9)    (107.1)      21.3
       Change in deferred compensation......................       35.6       32.0       32.2
       Tax benefit from employee stock option exercises.....       45.0       22.8       34.2
       Other items..........................................      (21.8)       8.6      (10.8)
                                                                -------    -------    -------
          NET CASH PROVIDED BY OPERATING ACTIVITIES.........      522.5      631.1      513.5
                                                                -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities........................     (414.1)    (185.1)    (165.5)
  Proceeds from sales of marketable securities..............      418.8      219.0      143.1
  Business divestitures.....................................         --       14.3      265.9
  Additions to property, plant and equipment................     (285.6)    (222.4)    (204.7)
  Proceeds from sales of property, plant and equipment......        6.4       13.8        7.7
  Capital gains tax recovery................................         --         --      240.0
                                                                -------    -------    -------
          NET CASH (USED IN) PROVIDED BY INVESTING
           ACTIVITIES.......................................     (274.5)    (160.4)     286.5
                                                                -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash dividends............................................     (153.5)    (156.2)    (159.7)
  Change in short-term debt.................................       10.1       34.2      (17.2)
  Proceeds from long-term debt..............................        1.5        1.2        1.9
  Reduction of long-term debt...............................      (86.6)     (95.8)    (108.7)
  Issuance of common treasury stock.........................      131.1       82.6      112.0
  Repurchases of common stock...............................     (242.0)    (373.2)    (377.3)
  Repurchases of preferred stock............................      (12.2)      (9.1)      (7.6)
                                                                -------    -------    -------
          NET CASH USED IN FINANCING ACTIVITIES.............     (351.6)    (516.3)    (556.6)
                                                                -------    -------    -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS...............................................       (5.0)       1.9       (1.0)
                                                                -------    -------    -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........     (108.6)     (43.7)     242.4
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............      282.9      326.6       84.2
                                                                -------    -------    -------
CASH AND CASH EQUIVALENTS -- END OF PERIOD..................    $ 174.3    $ 282.9    $ 326.6
                                                                =======    =======    =======
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       19
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                                ----------------------
                                                                  2000         1999
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)                       ----         ----
<S>                                                             <C>          <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................    $   174.3    $   282.9
  Marketable securities.....................................          0.3          0.3
  Trade accounts receivable -- net of allowances............        298.0        254.3
  Inventories:
     Finished goods.........................................        213.9        186.6
     Raw materials..........................................         39.0         50.0
     Packaging materials and supplies.......................         34.5         29.6
                                                                ---------    ---------
       Total inventories....................................        287.4        266.2
  Other current assets......................................        253.7        193.0
                                                                ---------    ---------
          TOTAL CURRENT ASSETS..............................      1,013.7        996.7
PROPERTY, PLANT AND EQUIPMENT:
  Land......................................................         27.1         28.2
  Buildings and improvements................................        430.6        407.6
  Machinery and equipment...................................      1,469.9      1,416.1
                                                                ---------    ---------
  Property, plant and equipment.............................      1,927.6      1,851.9
  Less: Accumulated depreciation............................        807.6        745.2
                                                                ---------    ---------
     PROPERTY -- NET........................................      1,120.0      1,106.7
INTANGIBLE ASSETS -- NET OF AMORTIZATION....................        229.2        236.9
OTHER ASSETS................................................         55.9         55.9
                                                                ---------    ---------
          TOTAL ASSETS......................................    $ 2,418.8    $ 2,396.2
                                                                =========    =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Short-term debt...........................................    $    81.6    $    73.3
  Current portion of long-term debt.........................         48.0         81.2
  Trade accounts payable....................................        212.3        213.6
  Accrued payroll, benefits and bonus.......................        135.9        139.1
  Accrued advertising and merchandising.....................        126.7        138.7
  Income taxes payable......................................         15.6         40.1
  Other accrued liabilities.................................        240.3        252.3
                                                                ---------    ---------
          TOTAL CURRENT LIABILITIES.........................        860.4        938.3
LONG-TERM DEBT..............................................        664.1        715.0
OTHER LIABILITIES...........................................        518.0        523.1
PREFERRED STOCK, SERIES B, no par value, authorized
  1,750,000 shares; issued 1,282,051 of $5.46 cumulative
  convertible shares (liquidating preference of $78 per
  share)....................................................        100.0        100.0
DEFERRED COMPENSATION.......................................        (27.2)       (38.5)
TREASURY PREFERRED STOCK, at cost, 441,469 and 366,069
  shares, respectively......................................        (51.2)       (39.0)
COMMON SHAREHOLDERS' EQUITY:
  Common stock, $5 par value, authorized 400 million
     shares.................................................        840.0        840.0
  Additional paid-in capital................................        136.4        100.7
  Reinvested earnings.......................................      1,061.7        854.6
  Accumulated other comprehensive income....................       (111.3)       (95.1)
  Deferred compensation.....................................        (21.2)       (45.5)
  Treasury common stock, at cost............................     (1,550.9)    (1,457.4)
                                                                ---------    ---------
       TOTAL COMMON SHAREHOLDERS' EQUITY....................        354.7        197.3
                                                                ---------    ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........    $ 2,418.8    $ 2,396.2
                                                                =========    =========
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       20
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                             COMMON STOCK
                                                ISSUED            COMMON      ADDITIONAL
                                         --------------------     SHARES       PAID-IN     REINVESTED     DEFERRED
                                           SHARES      AMOUNT   OUTSTANDING    CAPITAL      EARNINGS    COMPENSATION
DOLLARS IN MILLIONS                        ------      ------   -----------   ----------   ----------   ------------
<S>                                      <C>           <C>      <C>           <C>          <C>          <C>
Balance as of December 31, 1997........  167,978,792   $840.0   138,813,100     $ 29.0      $  431.0       $(91.0)
 Net income............................                                                        284.5
 Other comprehensive income:
   Foreign currency translation
     adjustments -- net of allocated
     income tax benefits of $0.3.......
   Unrealized gains on marketable
     securities -- net of
     reclassification adjustments
     (b)...............................
Total comprehensive income.............
Cash dividends declared on common
 stock.................................                                                       (155.2)
Cash dividends declared on preferred
 stock.................................                                                         (4.5)
Common stock issued for stock purchase
 and incentive plans...................                          3,375,088        15.7
Repurchases of common stock............                         (6,865,680)
Deferred compensation..................                                                                      23.4
Tax benefits from employee stock option
 exercises.............................                                           34.2
Balance as of December 31, 1998........  167,978,792   $840.0   135,322,508     $ 78.9      $  555.8       $(67.6)
 Net income............................                                                        455.0
 Other comprehensive income:
   Foreign currency translation
     adjustments -- net of allocated
     income tax provision of $2.4......
   Unrealized gains on marketable
     securities -- net of
     reclassification adjustments
     (b)...............................
Total comprehensive income.............
Cash dividends declared on common
 stock.................................                                                       (151.8)
Cash dividends declared on preferred
 stock.................................                                                         (4.4)
Common stock issued for stock purchase
 and incentive plans...................                          2,392,609        (1.0)
Repurchases of common stock............                         (5,779,663)
Deferred compensation..................                                                                      22.1
Tax benefits from employee stock option
 exercises.............................                                           22.8
Balance as of December 31, 1999........  167,978,792   $840.0   131,935,454     $100.7      $  854.6       $(45.5)
 NET INCOME............................                                                        360.6
 OTHER COMPREHENSIVE INCOME:
   FOREIGN CURRENCY TRANSLATION
     ADJUSTMENTS -- NET OF ALLOCATED
     INCOME TAX BENEFITS OF $4.3.......
TOTAL COMPREHENSIVE INCOME.............
CASH DIVIDENDS DECLARED ON COMMON
 STOCK.................................                                                       (149.3)
CASH DIVIDENDS DECLARED ON PREFERRED
 STOCK.................................                                                         (4.2)
COMMON STOCK ISSUED FOR STOCK PURCHASE
 AND INCENTIVE PLANS...................                          3,440,918        (9.3)
REPURCHASES OF COMMON STOCK............                         (3,605,975)
DEFERRED COMPENSATION..................                                                                      24.3
TAX BENEFITS FROM EMPLOYEE STOCK OPTION
 EXERCISES.............................                                           45.0
BALANCE AS OF DECEMBER 31, 2000........  167,978,792   $840.0   131,770,397     $136.4      $1,061.7       $(21.2)
                                         ===========   ======   ===========     ======      ========       ======

<CAPTION>
                                                                   ACCUMULATED
                                            TREASURY COMMON           OTHER
                                                 STOCK            COMPREHENSIVE
                                         ----------------------      INCOME
                                           SHARES      AMOUNTS       (A)(B)        TOTAL
DOLLARS IN MILLIONS                        ------      -------    -------------    -----
<S>                                      <C>          <C>         <C>             <C>
Balance as of December 31, 1997........  29,165,692   $  (898.6)     $ (82.4)     $ 228.0
 Net income............................                                           $ 284.5
 Other comprehensive income:
   Foreign currency translation
     adjustments -- net of allocated
     income tax benefits of $0.3.......                                  1.9          1.9
   Unrealized gains on marketable
     securities -- net of
     reclassification adjustments
     (b)...............................                                  0.4          0.4
                                                                                  -------
Total comprehensive income.............                                           $ 286.8
                                                                                  -------
Cash dividends declared on common
 stock.................................                                            (155.2)
Cash dividends declared on preferred
 stock.................................                                              (4.5)
Common stock issued for stock purchase
 and incentive plans...................  (3,375,088)      109.3                     125.0
Repurchases of common stock............   6,865,680      (386.7)                   (386.7)
Deferred compensation..................                                              23.4
Tax benefits from employee stock option
 exercises.............................                                              34.2
Balance as of December 31, 1998........  32,656,284   $(1,176.0)     $ (80.1)     $ 151.0
 Net income............................                                           $ 455.0
 Other comprehensive income:
   Foreign currency translation
     adjustments -- net of allocated
     income tax provision of $2.4......                                (14.6)       (14.6)
   Unrealized gains on marketable
     securities -- net of
     reclassification adjustments
     (b)...............................                                 (0.4)        (0.4)
                                                                                  -------
Total comprehensive income.............                                           $ 440.0
                                                                                  -------
Cash dividends declared on common
 stock.................................                                            (151.8)
Cash dividends declared on preferred
 stock.................................                                              (4.4)
Common stock issued for stock purchase
 and incentive plans...................  (2,392,609)       88.5                      87.5
Repurchases of common stock............   5,779,663      (369.9)                   (369.9)
Deferred compensation..................                                              22.1
Tax benefits from employee stock option
 exercises.............................                                              22.8
Balance as of December 31, 1999........  36,043,338   $(1,457.4)     $ (95.1)     $ 197.3
 NET INCOME............................                                           $ 360.6
 OTHER COMPREHENSIVE INCOME:
   FOREIGN CURRENCY TRANSLATION
     ADJUSTMENTS -- NET OF ALLOCATED
     INCOME TAX BENEFITS OF $4.3.......                                (16.2)       (16.2)
                                                                                  -------
TOTAL COMPREHENSIVE INCOME.............                                           $ 344.4
                                                                                  -------
CASH DIVIDENDS DECLARED ON COMMON
 STOCK.................................                                            (149.3)
CASH DIVIDENDS DECLARED ON PREFERRED
 STOCK.................................                                              (4.2)
COMMON STOCK ISSUED FOR STOCK PURCHASE
 AND INCENTIVE PLANS...................  (3,440,918)      142.4                     133.1
REPURCHASES OF COMMON STOCK............   3,605,975      (235.9)                   (235.9)
DEFERRED COMPENSATION..................                                              24.3
TAX BENEFITS FROM EMPLOYEE STOCK OPTION
 EXERCISES.............................                                              45.0
BALANCE AS OF DECEMBER 31, 2000........  36,208,395   $(1,550.9)     $(111.3)     $ 354.7
                                         ==========   =========      =======      =======
</TABLE>

-------------------------
(a) Cumulative translation adjustments as of December 31, 2000, 1999, 1998 and
    1997, were $(111.3) million, $(95.1) million, $(80.5) million and $(82.4)
    million, respectively.

(b) See Note 4 to the consolidated financial statements for further discussion
    of other comprehensive income and accumulated other comprehensive income.

        See accompanying notes to the consolidated financial statements.

                                       21
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                         OPERATING SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                --------------------------------
                                                                  2000        1999        1998
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)                       ----        ----        ----
<S>                                                             <C>         <C>         <C>
NET SALES (a)
Foods:
  U.S. and Canadian.........................................    $2,381.2    $2,359.5    $2,274.1
  Latin American............................................       345.9       308.4       372.9
  Other (b).................................................       210.0       215.4       202.9
                                                                --------    --------    --------
Total Foods.................................................     2,937.1     2,883.3     2,849.9
                                                                --------    --------    --------
Beverages:
  U.S. and Canadian.........................................     1,728.4     1,502.3     1,338.2
  Latin American............................................       273.9       229.1       267.7
  Other (b).................................................       101.6       103.8       103.1
                                                                --------    --------    --------
Total Beverages.............................................     2,103.9     1,835.2     1,709.0
                                                                --------    --------    --------
Total Ongoing Businesses....................................     5,041.0     4,718.5     4,558.9
                                                                --------    --------    --------
Total Divested Businesses (c)...............................          --         6.7       283.6
                                                                --------    --------    --------
TOTAL SALES (d).............................................    $5,041.0    $4,725.2    $4,842.5
                                                                ========    ========    ========
OPERATING INCOME (LOSS) (e)
Foods:
  U.S. and Canadian.........................................    $  458.5    $  399.8    $  369.8
  Latin American............................................        26.8        26.2        28.2
  Other (b).................................................        25.2        21.1        (1.2)
                                                                --------    --------    --------
Total Foods.................................................       510.5       447.1       396.8
                                                                --------    --------    --------
Beverages:
  U.S. and Canadian.........................................       273.7       253.9       214.9
  Latin American............................................        30.9        16.5        25.6
  Other (b).................................................        (6.8)       (7.3)       (7.4)
                                                                --------    --------    --------
Total Beverages.............................................       297.8       263.1       233.1
                                                                --------    --------    --------
Total Ongoing Businesses....................................       808.3       710.2       629.9
                                                                --------    --------    --------
Total Divested Businesses (c)...............................          --          --        (2.4)
                                                                --------    --------    --------
TOTAL OPERATING INCOME......................................    $  808.3    $  710.2    $  627.5
                                                                ========    ========    ========
Less: Restructuring charges, asset impairments and (gains)
      losses on divestitures -- net (f)(g)(h)(i)............       182.5        (2.3)      128.5
      General corporate expenses............................        24.4        25.9        31.9
      Interest expense -- net...............................        45.0        50.2        58.9
      Foreign exchange loss -- net..........................         5.3        18.1        11.6
                                                                --------    --------    --------
Income before income taxes..................................       551.1       618.3       396.6
                                                                --------    --------    --------
Provision for income taxes (j)..............................       190.5       163.3       112.1
                                                                --------    --------    --------
Net Income..................................................    $  360.6    $  455.0    $  284.5
                                                                --------    --------    --------
Per Common Share:
  Net income (f)(g)(h)(i)(j)................................    $   2.71    $   3.36    $   2.04
  Net income -- diluted (f)(g)..............................    $   2.61    $   3.23    $   1.97
                                                                ========    ========    ========
</TABLE>

                                                      See Footnotes on next page

                                       22
<PAGE>

-------------------------
(a) Intersegment revenue is not material.

(b) Other includes European and Asia/Pacific businesses.

(c) 1999 includes net sales and operating results (through the divestiture date)
    for the Brazilian pasta business. 1998 includes net sales and operating
    results (through the divestiture date) for the Ardmore Farms, Continental
    Coffee, Nile Spice and Liqui-Dri businesses and the business divested in
    1999.

(d) In 2000, revenues of $580.2 million were from transactions with a single
    external customer and amounted to more than 10 percent of consolidated net
    sales. All of the Company's business segments include sales to this
    customer.

(e) Operating results exclude restructuring and asset impairment charges, gains
    and losses on divestitures and certain other expenses not allocated to
    operating segments such as income taxes, general corporate expenses and net
    financing costs.

(f) 2000 includes pretax restructuring charges of $74.2 million, or $0.33 per
    share ($0.31 per diluted share); pretax income to reduce prior restructuring
    and divestiture reserves of $11.8 million, or $0.05 per share; and pretax
    asset impairment losses of $120.1 million, or $0.55 per share ($0.53 per
    diluted share).

(g) 1999 includes pretax restructuring charges of $12.7 million, or $0.06 per
    share; a pretax divestiture gain of $5.1 million, or $0.03 per share; pretax
    income of $9.9 million, or $0.04 per share, to reduce prior restructuring
    and divestiture reserves; and reductions in the provision for income taxes
    of $59.3 million, or $0.44 per share ($0.42 per diluted share), related to
    previously recorded tax accruals and tax assets.

(h) 1998 includes pretax restructuring charges of $89.7 million, or $0.38 per
    share; pretax asset impairment losses of $38.1 million, or $0.18 per share;
    and a combined pretax divestiture loss of $0.7 million, or a gain of $0.20
    per share, due to certain tax benefits.

(i) See Note 2 to the consolidated financial statements for further discussion
    of 1998 through 2000 restructuring and impairment charges and gains and
    losses on divestitures.

(j) 1999 includes reductions in the provision for income taxes of $59.3 million,
    or $0.44 per share, related to previously recorded tax accruals and tax
    assets.

                                       23
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                             OPERATING SEGMENT DATA

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                --------------------------------
                                                                  2000        1999        1998
DOLLARS IN MILLIONS                                               ----        ----        ----
<S>                                                             <C>         <C>         <C>
IDENTIFIABLE ASSETS
Foods:
  U.S. and Canadian.........................................    $1,120.8    $1,124.6    $1,187.0
  Latin American............................................       187.4       174.0       167.7
  Other (a).................................................       110.2       110.1        92.1
                                                                --------    --------    --------
Total Foods.................................................     1,418.4     1,408.7     1,446.8
                                                                --------    --------    --------
Beverages:
  U.S. and Canadian.........................................       684.5       522.7       464.2
  Latin American............................................       105.0       105.4        94.6
  Other (a).................................................        77.4        79.6       109.5
                                                                --------    --------    --------
Total Beverages.............................................       866.9       707.7       668.3
                                                                --------    --------    --------
Total Ongoing Businesses....................................     2,285.3     2,116.4     2,115.1
                                                                --------    --------    --------
Total Divested Businesses (b)...............................          --          --        37.5
                                                                --------    --------    --------
Total Operating Segments....................................     2,285.3     2,116.4     2,152.6
                                                                --------    --------    --------
Corporate (c)...............................................       133.5       279.8       357.7
                                                                --------    --------    --------
Total Consolidated..........................................    $2,418.8    $2,396.2    $2,510.3
                                                                ========    ========    ========
CAPITAL EXPENDITURES
Foods:
  U.S. and Canadian.........................................    $  117.6    $   70.6    $  102.7
  Latin American............................................        10.3         9.6        13.2
  Other (a).................................................         3.9         3.7         5.7
                                                                --------    --------    --------
Total Foods.................................................       131.8        83.9       121.6
                                                                --------    --------    --------
Beverages:
  U.S. and Canadian.........................................       140.2       106.0        57.6
  Latin American............................................        11.5        25.4        12.1
  Other (a).................................................         2.1         7.1         5.5
                                                                --------    --------    --------
Total Beverages.............................................       153.8       138.5        75.2
                                                                --------    --------    --------
Total Ongoing Businesses....................................       285.6       222.4       196.8
                                                                --------    --------    --------
Total Divested Businesses (b)...............................          --          --         7.9
                                                                --------    --------    --------
Total Consolidated..........................................    $  285.6    $  222.4    $  204.7
                                                                ========    ========    ========
DEPRECIATION AND AMORTIZATION
Foods:
  U.S. and Canadian.........................................    $   67.0    $   66.9    $   65.2
  Latin American............................................         6.0         5.9         6.7
  Other (a).................................................         4.3         3.5         6.3
                                                                --------    --------    --------
Total Foods.................................................        77.3        76.3        78.2
                                                                --------    --------    --------
Beverages:
  U.S. and Canadian.........................................        45.0        36.2        31.5
  Latin American............................................         6.3         5.0         5.8
  Other (a).................................................         4.4         5.4         4.7
                                                                --------    --------    --------
Total Beverages.............................................        55.7        46.6        42.0
                                                                --------    --------    --------
Total Ongoing Businesses....................................       133.0       122.9       120.2
                                                                --------    --------    --------
Total Divested Businesses (b)...............................          --          --        11.4
                                                                --------    --------    --------
Total Operating Segments....................................       133.0       122.9       131.6
                                                                --------    --------    --------
Corporate...................................................          --         0.9         0.9
                                                                --------    --------    --------
Total Consolidated..........................................    $  133.0    $  123.8    $  132.5
                                                                ========    ========    ========
</TABLE>

-------------------------
(a) Other includes European and Asia/Pacific businesses.

(b) Includes the following Divested Businesses: in 1999, the Brazilian pasta
    business; in 1998, Ardmore Farms, Continental Coffee, Nile Spice, Liqui-Dri
    and the business divested in 1999.

(c) Includes corporate cash and cash equivalents, short-term investments and
    certain miscellaneous receivables, prepaid expenses, investments and
    intangible assets.

                                       24
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                     ENTERPRISE AND GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                --------------------------------
                                                                  2000        1999        1998
DOLLARS IN MILLIONS                                               ----        ----        ----
<S>                                                             <C>         <C>         <C>
ENTERPRISE NET SALES (a)
U.S. Hot Cereals............................................    $  514.6    $  485.5    $  430.8
U.S. Ready-to-Eat Cereals...................................       689.7       724.5       711.9
U.S. Grain-based Snacks.....................................       341.3       304.6       290.8
U.S. Flavored Rice and Pasta................................       334.9       344.3       340.5
U.S. Other Foods............................................       298.2       306.0       318.3
                                                                --------    --------    --------
Total U.S. Foods............................................     2,178.7     2,164.9     2,092.3
                                                                --------    --------    --------
Canadian Foods..............................................       202.5       194.6       181.8
Latin American Foods........................................       345.9       308.4       372.9
European and Asia/Pacific Foods.............................       210.0       215.4       202.9
                                                                --------    --------    --------
Total Foods.................................................     2,937.1     2,883.3     2,849.9
                                                                --------    --------    --------
U.S. Beverages..............................................     1,693.0     1,469.0     1,306.8
Canadian Beverages..........................................        35.4        33.3        31.4
Latin American Beverages....................................       273.9       229.1       267.7
European and Asia/Pacific Beverages.........................       101.6       103.8       103.1
                                                                --------    --------    --------
Total Beverages.............................................     2,103.9     1,835.2     1,709.0
                                                                --------    --------    --------
Total Ongoing Businesses....................................     5,041.0     4,718.5     4,558.9
                                                                --------    --------    --------
U.S. Divested...............................................          --          --       206.7
Foreign Divested............................................          --         6.7        76.9
                                                                --------    --------    --------
Total Divested Businesses...................................          --         6.7       283.6
                                                                --------    --------    --------
Total Consolidated..........................................    $5,041.0    $4,725.2    $4,842.5
                                                                ========    ========    ========
GEOGRAPHIC NET SALES (a)
Total U.S...................................................    $3,871.7    $3,633.9    $3,605.8
Total Foreign...............................................     1,169.3     1,091.3     1,236.7
                                                                --------    --------    --------
Total Consolidated..........................................    $5,041.0    $4,725.2    $4,842.5
                                                                ========    ========    ========
LONG-LIVED ASSETS (b)
Total U.S...................................................    $1,104.7    $1,111.5    $1,078.1
Total Foreign...............................................       244.5       232.1       237.8
                                                                --------    --------    --------
Total Consolidated..........................................    $1,349.2    $1,343.6    $1,315.9
                                                                ========    ========    ========
</TABLE>

-------------------------
(a) Represents net sales to unaffiliated customers.

(b) Long-lived assets include net intangible assets and net property, plant and
    equipment. 1998 assets include assets related to the business divested in
    1999.

                                       25
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
                        SIX-YEAR SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31
                                                   -----------------------------------------------------------------------
                                                     2000        1999        1998        1997           1996        1995
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)          ----        ----        ----        ----           ----        ----
<S>                                                <C>         <C>         <C>         <C>            <C>         <C>
OPERATING RESULTS (a)(b)(c)(d)(e)(f)(g)
Net sales........................................  $5,041.0    $4,725.2    $4,842.5    $ 5,015.7      $5,199.0    $5,954.0
Gross profit.....................................   2,752.7     2,588.4     2,468.1      2,450.8       2,391.5     2,659.6
Income (loss) before income taxes................     551.1       618.3       396.6     (1,064.3)        415.6     1,220.5
Provision (benefit) for income taxes.............     190.5       163.3       112.1       (133.4)        167.7       496.5
                                                   --------    --------    --------    ---------      --------    --------
Net income (loss)................................  $  360.6    $  455.0    $  284.5    $  (930.9)     $  247.9    $  724.0
                                                   --------    --------    --------    ---------      --------    --------
Per common share:
  Net income (loss)..............................  $   2.71    $   3.36    $   2.04    $   (6.80)     $   1.80    $   5.39
  Net income (loss) -- diluted...................  $   2.61    $   3.23    $   1.97    $   (6.80)     $   1.78    $   5.23
                                                   --------    --------    --------    ---------      --------    --------
Dividends declared:
  Common stock...................................  $  149.3    $  151.8    $  155.2    $   155.9      $  153.3    $  150.8
  Per common share...............................  $   1.14    $   1.14    $   1.14    $    1.14      $   1.14    $   1.14
  Convertible preferred and redeemable preference
    stock........................................  $    4.2    $    4.4    $    4.5    $     3.5      $    3.7    $    4.0
                                                   --------    --------    --------    ---------      --------    --------
Average number of common shares outstanding (in
  thousands).....................................   131,689     134,027     137,185      137,460       135,466     134,149
                                                   ========    ========    ========    =========      ========    ========
FINANCIAL STATISTICS
Current ratio....................................       1.2         1.1         1.1          1.2           0.7         0.6
Working capital..................................  $  153.3    $   58.4    $  105.9    $   187.3      $ (465.0)   $ (621.6)
Property, plant and equipment -- net.............  $1,120.0    $1,106.7    $1,070.2    $ 1,164.7      $1,200.7    $1,167.8
Depreciation expense.............................  $  123.5    $  114.0    $  116.3    $   122.0      $  119.1    $  115.3
Total assets.....................................  $2,418.8    $2,396.2    $2,510.3    $ 2,697.0      $4,394.4    $4,620.4
                                                   --------    --------    --------    ---------      --------    --------
Long-term debt...................................  $  664.1    $  715.0    $  795.1    $   887.6      $  993.5    $1,051.8
Convertible preferred stock (net of deferred
  compensation) and redeemable preference
  stock..........................................  $   21.6    $   22.5    $   21.7    $    20.5      $   19.0    $   17.7
Common shareholders' equity......................  $  354.7    $  197.3    $  151.0    $   228.0      $1,229.9    $1,079.3
Net cash provided by operating activities........  $  522.5    $  631.1    $  513.5    $   490.0      $  410.4    $  407.1
                                                   --------    --------    --------    ---------      --------    --------
Operating return on assets (h)...................      36.7%       33.3%       29.0%        17.8%         10.6%        7.9%
Gross profit as a percentage of sales............      54.6%       54.8%       51.0%        48.9%         46.0%       44.7%
Advertising and merchandising as a percentage of
  sales..........................................      27.8%       28.0%       25.6%        24.5%         23.1%       24.6%
Income (loss) as a percentage of sales...........       7.2%        9.6%        5.9%       (18.6%)         4.8%       12.2%
                                                   --------    --------    --------    ---------      --------    --------
Total debt-to-total-capitalization ratio (i).....      67.8%       79.8%       84.4%        81.0%         55.6%       61.7%
Common dividends per share as a percentage of
  income (loss) available for common shares......      42.1%       33.9%       55.9%       (16.8%)        63.3%       21.2%
                                                   --------    --------    --------    ---------      --------    --------
Number of common shareholders....................    22,605      24,727      26,352       27,838        29,690      30,353
Number of employees worldwide....................    11,858      11,666      11,860       14,123        14,800      16,100
                                                   --------    --------    --------    ---------      --------    --------
Market price range of common stock:
  High...........................................  $98 15/16   $     71    $65 9/16    $  55 1/8      $ 39 1/2    $ 37 1/2
  Low............................................  $45 13/16   $ 50 7/8    $ 48 1/2    $  34 3/8      $ 30 3/8    $ 30 1/4
</TABLE>

                                                      See Footnotes on next page

                                       26
<PAGE>

-------------------------
(a) 2000 operating results include pretax restructuring charges of $74.2
    million, or $0.33 per share ($0.31 per diluted share); pretax income of
    $11.8 million, or $0.05 per share, to reduce prior year restructuring and
    divestiture reserves; and pretax asset impairment losses of $120.1 million,
    or $0.55 per share ($0.53 per diluted share).

(b) 1999 operating results include pretax restructuring charges of $12.7
    million, or $0.06 per share; a pretax divestiture gain of $5.1 million, or
    $0.03 per share; pretax income of $9.9 million, or $0.04 per share, to
    reduce prior restructuring and divestiture reserves; and reductions in the
    provision for income taxes of $59.3 million, or $0.44 per share ($0.42 per
    diluted share), related to previously recorded tax accruals and tax assets.

(c) 1998 operating results include pretax restructuring charges of $89.7
    million, or $0.38 per share; pretax asset impairment losses of $38.1
    million, or $0.18 per share; and a combined pretax divestiture loss of $0.7
    million, or a gain of $0.20 per share, due to certain tax benefits.

(d) 1997 operating results include pretax restructuring charges of $65.9
    million, or $0.27 per share, and a combined pretax loss of $1.42 billion, or
    $8.41 per share, for business divestitures.

(e) 1996 operating results include pretax restructuring charges of $23.0
    million, or $0.14 per share, and pretax gains of $136.4 million, or $0.60
    per share, for business divestitures.

(f) 1995 operating results include pretax restructuring charges of $117.3
    million, or $0.53 per share, and pretax gains of $1.17 billion, or $5.20 per
    share, for business divestitures.

(g) See Note 2 to the consolidated financial statements for further discussion
    of 1998 through 2000 restructuring and asset impairment charges and gains
    and losses on divestitures.

(h) Operating income divided by average identifiable assets of the consolidated
    total (excluding corporate).

(i) Total debt divided by total debt plus total shareholders' equity including
    convertible preferred stock (net of deferred compensation) and redeemable
    preference stock.

                                       27
<PAGE>

                    THE QUAKER OATS COMPANY AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CONSOLIDATION -- The consolidated financial statements include The Quaker
Oats Company and all of its subsidiaries. All significant intercompany
transactions have been eliminated. Divested businesses are included in the
results of operations until their divestiture dates.

     CASH AND CASH EQUIVALENTS -- Cash equivalents are composed of all highly
liquid investments with an original maturity of three months or less. As a
result of the Company's cash management system, checks issued but not presented
to the banks for payment may create negative book cash balances. Such negative
balances are included in trade accounts payable and totaled $50.1 million and
$55.0 million as of December 31, 2000 and 1999, respectively.

     INVENTORIES -- Inventories are valued at the lower of cost or market, using
various cost methods, and include the cost of raw materials, labor and overhead.
The percentages of year-end inventories valued using each of the methods were as
follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                   -----------
                                                                  2000      1999
                                                                  ----      ----
<S>                                                               <C>       <C>
Last-in, first-out (LIFO)...................................       53%       54%
Average quarterly cost......................................       45%       44%
First-in, first-out (FIFO)..................................        2%        2%
</TABLE>

     If the LIFO method of valuing these inventories was not used, total
inventories would have been $4.2 million and $1.8 million lower than reported as
of December 31, 2000 and 1999, respectively.

     LONG-LIVED ASSETS -- Long-lived assets are comprised of intangible assets
and property, plant and equipment. Long-lived assets, including certain
identifiable intangibles and goodwill related to those assets to be held and
used, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. An
estimate of undiscounted future cash flows produced by the asset, or the
appropriate grouping of assets, is compared to the carrying value to determine
whether an impairment exists, pursuant to the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." If an asset is determined to be impaired, the loss is measured
based on quoted market prices in active markets, if available. If quoted market
prices are not available, the estimate of fair value is based on various
valuation techniques, including a discounted value of estimated future cash
flows and fundamental analysis. The Company reports an asset to be disposed of
at the lower of its carrying value or its estimated net realizable value.

     INTANGIBLES -- Intangible assets consist principally of excess purchase
price over net tangible assets of businesses acquired (goodwill) and trademarks.
Intangible assets are amortized on a straight-line basis over periods primarily
ranging from three to 40 years.

     Intangible assets, net of amortization, and their estimated useful lives
consisted of the following at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                             ESTIMATED USEFUL
                                                             LIVES (IN YEARS)     2000      1999
DOLLARS IN MILLIONS                                          ----------------     ----      ----
<S>                                                          <C>                 <C>       <C>
Goodwill.................................................        10 to 40        $367.7    $370.3
Trademarks and other.....................................         3 to 40          18.0      19.5
                                                                                 ------    ------
Intangible assets........................................                         385.7     389.8
Less: Accumulated amortization...........................                         156.5     152.9
                                                                                 ------    ------
Intangible assets -- net of amortization.................                        $229.2    $236.9
                                                                                 ======    ======
</TABLE>

                                       28
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     PROPERTY AND DEPRECIATION -- Property, plant and equipment are carried at
cost and depreciated primarily on a straight-line basis over their estimated
useful lives. Useful lives range from 20 to 50 years for buildings and
improvements and from three to 17 years for machinery and equipment.

     SOFTWARE COSTS -- The Company defers significant software development
project costs and amortizes them over their estimated useful lives beginning
with the project's completion. As of December 31, 2000, the Company deferred
$19.1 million of costs for software that is being developed. These costs are
expected to be amortized over a five-year period. As of December 31, 1999, all
previously deferred software costs were fully amortized.

     DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS -- The Company uses a
variety of futures, swaps, options and forward contracts in its management of
foreign currency exchange rate, commodity price and interest rate exposures.
Instruments used as hedges must be effective at reducing the risks associated
with the underlying exposure and must be designated as a hedge at the inception
of the contract. Accordingly, changes in the market value of the instruments
must have a high degree of inverse correlation with changes in the market value
or cash flows of the underlying hedged item. Summarized below are the specific
accounting policies by market risk category.

     FOREIGN CURRENCY EXCHANGE RATE RISK -- The Company uses forward contracts,
purchased options and currency swap agreements to manage foreign currency
exchange rate risk related to certain projected cash flows from foreign
operations and net investments in foreign subsidiaries. The fair value method is
used to account for these instruments. Under the fair value method, the
instruments are carried at fair value in the consolidated balance sheets as a
component of other current assets (deferred charges) or other accrued
liabilities (deferred revenue). Changes in the fair value of derivative
instruments that are used to manage exchange rate risk in foreign currency
denominated cash flows and net investments in highly inflationary economies are
recognized in the consolidated statements of income as foreign exchange loss or
gain. Changes in the fair value of such instruments used to manage exchange rate
risk on net investments in economies that are not highly inflationary are
recognized in the consolidated balance sheets as a component of accumulated
other comprehensive income in common shareholders' equity. To the extent an
instrument is no longer effective as a hedge of a net investment due to a change
in the underlying exposure, losses and gains are recognized currently in the
consolidated statements of income as foreign exchange loss or gain.

     COMMODITY PRICE RISK -- The Company uses commodity futures and options to
reduce price exposures on commodity inventories or anticipated purchases of
commodities. The deferral method is used to account for those instruments that
effectively hedge the Company's price exposures. For hedges of anticipated
transactions, the significant characteristics and terms of the anticipated
transaction must be identified, and the transaction must be probable of
occurring to qualify for deferral method accounting. Under the deferral method,
gains and losses on derivative instruments are deferred in the consolidated
balance sheets as a component of other current assets (if a loss) or other
accrued liabilities (if a gain) until the underlying inventory being hedged is
sold. As the hedged inventory is sold, the deferred gains and losses are
recognized in the consolidated statements of income as a component of cost of
goods sold. Derivative instruments that do not meet the above criteria required
for deferral treatment are accounted for under the fair value method, with gains
and losses recognized currently in the consolidated statements of income as a
component of cost of goods sold.

     INTEREST RATE RISK -- The Company uses interest rate swap agreements to
manage its exposure to changes in interest rates and to balance the mix of its
fixed and floating rate debt. The settlement costs of terminated swap agreements
are reported in the consolidated balance sheets as a component of other assets
and are amortized over the life of the original swap agreements. The
amortization of the settlement amounts is reported in the consolidated
statements of income as a component of interest expense.

                                       29
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of the Company's
foreign subsidiaries, other than those located in highly inflationary countries,
are translated at current exchange rates, while income and expense are
translated at average rates for the period. For entities in countries designated
as highly inflationary, a combination of current and historical rates is used to
determine foreign currency gains and losses resulting from financial statement
translation. Translation gains and losses are reported as a component of
accumulated other comprehensive income in common shareholders' equity, except
for those associated with countries designated as highly inflationary, which are
reported directly in the consolidated statements of income.

     REVENUE -- In accordance with Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," the Company recognizes sales to
unaffiliated customers consistent with customer terms. Customers generally do
not have the right to return products. Net sales include adjustments for cash
discounts and other customer offers, which involve the use of estimates.

     ADVERTISING AND MERCHANDISING EXPENSES -- In accordance with Statement of
Position No. 93-7, "Reporting on Advertising Costs," the Company expenses all
advertising expenditures as incurred except for production costs which are
deferred and expensed when advertisements run for the first time. The amount of
production costs deferred and included in the consolidated balance sheets as of
December 31, 2000 and 1999, was $15.8 million and $7.7 million, respectively.
Merchandising expenses include the costs of coupons, trade promotions, in-store
displays, product sampling, contests and certain other expenses to support
consumer promotions, often in conjunction with customers. The Company expenses
merchandising costs as incurred.

     INCOME TAXES -- The Company uses an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income taxes are
provided when tax laws and financial accounting standards differ with respect to
the amount of income for a year and the bases of assets and liabilities. Current
deferred tax assets and liabilities are netted in the consolidated balance
sheets as are long-term deferred tax assets and liabilities. Income taxes have
been provided on all of the $165.3 million of unremitted earnings from foreign
subsidiaries. Taxes are not provided on earnings expected to be indefinitely
reinvested. Income taxes have also been provided for potential tax assessments
and the related tax accruals are in the consolidated balance sheets. To the
extent tax accruals differ from actual payments or assessments, the accruals
will be adjusted through the provision for income taxes.

     SEGMENT REPORTING -- In accordance with Statement of Financial Accounting
Standards (SFAS) No. 131, the discussion of results by business segment is
consistent with how the Company's management assesses performance. The Company
reports several foods, beverages and divested business segments. In determining
the operating income or loss of each segment, restructuring charges, asset
impairment losses, divestiture gains and losses and certain other expenses, such
as income taxes, general corporate expenses and net financing costs, are not
allocated to operating segments. The Company's foods business segments include a
portfolio of food brands, which together represent approximately 60 percent of
total business segment results. U.S. and Canadian Foods includes hot and
ready-to-eat cereals, grain-based snacks, flavored rice and pasta, mixes,
syrups, corn products and results from Altus. Latin American Foods includes
Quaker brand cereals and snacks; Coqueiro brand canned fish; Toddy and ToddYnho
chocolate powder and beverages; and FrescAvena oat-based beverage powders. Other
Foods includes the combined results of the European and Asia/Pacific foods
businesses. The Company's beverages segments primarily represent results from
Gatorade thirst quencher, the Company's largest and fastest growing brand. U.S.
and Canadian Beverages, Latin American Beverages and Other Beverages (the
combined European and Asia/Pacific businesses) all include results from Gatorade
thirst quencher. U.S. and Canadian Beverages also includes results from Propel
fitness water. The Divested Businesses segment includes historical results for
businesses that have been sold by the Company.

                                       30
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     CURRENT AND PENDING ACCOUNTING CHANGES -- In 2000, the EITF discussed a
number of topics related to certain expenses that the Company reports in
merchandising expense, a component of SG&A expenses. In January 2001, the EITF
issued No. 00-22, which requires certain rebate offers and free products that
are delivered subsequent to a single exchange transaction to be recognized when
incurred and reported as a reduction of revenue. EITF No. 00-14 was issued in
May 2000 and subsequently amended in November 2000. This guidance requires
certain coupons, rebate offers and free products offered concurrently with a
single exchange transaction with a customer to be recognized when incurred and
reported as a reduction of revenue. The Company is required to adopt EITF No.
00-22 and No. 00-14 for the first quarter ending March 31, 2001, and the second
quarter ending June 30, 2001, respectively. The Company expects the adoptions of
EITF No. 00-22 and No. 00-14 to result in a reclassification of expenses and a
restatement to reduce previously reported net sales and SG&A expenses. As the
Company has not tracked the components of merchandising expenses discussed above
separate from certain other merchandising expenses, the amount of these changes
has not been finalized. The Company expects that these reclassifications may
result in up to a $60 million reduction in net sales and a corresponding
decrease in SG&A expenses in each of the three years ended December 31, 2000,
1999 and 1998. In each of these three years, this reduction is expected to lower
net sales by approximately 1 percent. Earnings will not be affected and the
Company does not expect the adoption of these accounting changes to have a
material effect on reported growth rates.

     In July 2000, the EITF issued No. 00-15, which concluded that the tax
deduction received by the Company upon exercise of a nonqualified stock option
by an employee should be classified in the statement of cash flows as a cash
flow from operations and disclosed if material. EITF No. 00-15 was adopted in
September 2000. As a result, the Company updated the presentation of cash flows
from operating activities to disclose this amount as a separate line item for
all periods presented.

     In June of 1998 and 1999, the FASB issued SFAS No. 133 and No. 137,
respectively. The FASB issued SFAS No. 138 to amend SFAS No. 133, in June 2000.
Collectively, these statements are intended to represent the comprehensive
guidance on accounting for derivatives and hedging activities. These statements
establish accounting and reporting standards requiring that certain derivative
instruments (including certain derivative instruments imbedded in other
contracts) be recorded in the balance sheet as either an asset or a liability
measured at its fair value. These statements require that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The accounting provisions for qualifying
hedges allow a derivative's gains and losses to offset related results of the
hedged item in the income statement, and require that the Company must formally
document, designate and assess the effectiveness of transactions that qualify
for hedge accounting.

     The Company completed its detailed implementation plan to adopt these new
hedge accounting standards. The Company adopted these new standards on January
1, 2001, and will record the effect of the transition to these new accounting
requirements in the results for the first quarter of 2001. The effect of
adopting these accounting changes will not be material to the Company's results
of operations. Once adopted, these new standards could increase volatility in
reported earnings and other comprehensive income of the Company.

     ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

                                       31
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2
RESTRUCTURING CHARGES, ASSET IMPAIRMENT LOSSES AND DIVESTITURES

     The following summarizes the charges, net of reserve adjustments, recorded
in 2000:

<TABLE>
<CAPTION>
                                                                RESTRUCTURING      ASSET                       TOTAL
                                                                   CHARGES       IMPAIRMENT    DIVESTITURE    LOSSES
                                                                   (GAINS)         LOSSES        (GAINS)      (GAINS)
DOLLARS IN MILLIONS                                             -------------    ----------    -----------    -------
<S>                                                             <C>              <C>           <C>            <C>
Supply chain reconfiguration project........................        $64.4          $120.1         $  --       $184.5
Other U.S. organization alignments..........................          9.4              --            --          9.4
Other Beverages Europe restructuring........................          0.4              --            --          0.4
                                                                    -----          ------         -----       ------
  Charges before reserve adjustments........................         74.2           120.1            --        194.3
                                                                    -----          ------         -----       ------
Adjustments to prior-period reserves........................         (9.0)             --          (2.8)       (11.8)
                                                                    -----          ------         -----       ------
Total.......................................................        $65.2          $120.1         $(2.8)      $182.5
                                                                    =====          ======         =====       ======
</TABLE>

     SUPPLY CHAIN RECONFIGURATION PROJECT -- Total charges of $184.5 million
were recognized in 2000 related to a supply chain reconfiguration project
announced in September 1999. The three-year project to upgrade and optimize the
Company's manufacturing and distribution capabilities in North America involves
the rationalization of U.S. and Canadian Foods operations, an expansion of U.S.
beverage manufacturing and a reconfiguration of the Company's food and beverage
logistics network.

     In 2000, the Company adopted plans to close two cereal manufacturing
facilities and two distribution centers in the United States, which resulted in
restructuring charges of $64.4 million in 2000. The restructuring charges,
primarily attributable to the Company's U.S. and Canadian Foods operations, were
comprised of severance and termination benefits and other shut-down costs. In
addition, the Company recognized asset impairment losses of $120.1 million
attributable to the U.S. and Canadian Foods operations. As a result of the
negotiation of a significant contract manufacturing agreement and completion of
decisional and effects bargaining required to close the two cereal manufacturing
facilities, the Company evaluated the recoverability of its affected long-lived
assets pursuant to the provisions of SFAS No. 121. The affected assets (land,
buildings and production machinery and equipment) were determined to be held for
use, as they are integral to the Company's operations until the migration of
production activity to other facilities is completed. Because the carrying value
of the affected long-lived assets exceeded the projected future undiscounted
cash flows, the Company was required to reduce the carrying value of the
long-lived assets to fair value and recognize asset impairment losses. The fair
value of affected assets was determined based on analyses of the current
liquidation values of similar assets.

     As of December 31, 2000, the Company recognized total charges of $192.5
million, consisting of $184.5 million in 2000 and $8.0 million in 1999, related
to this project. Total charges for this project are expected to be approximately
$200 million, including additional charges expected to be recorded over the next
two years. Ongoing cost savings resulting from this project were approximately
$5 million in 1999 and rose approximately $13 million to approximately $18
million in 2000. Ongoing cost savings are expected to increase to approximately
$40 million in 2001 and to reach the full amount of approximately $65 million
annually beginning in 2002 and going forward. Eighty percent of the savings are
expected to be in cash.

     OTHER 2000 RESTRUCTURING ACTIONS -- During 2000, the Company restructured
its human resources department, closed an administrative office in California
and a small leased Gatorade manufacturing facility in Puerto Rico, and
decentralized certain U.S. customer service functions. As a result of these
actions, the Company eliminated approximately 55 positions. Restructuring
charges of $9.4 million were recognized in 2000 for severance and termination
benefits and shut-down costs. Annual savings from these actions, approximately
$10 million, began mid-year 2000 and are expected to be primarily in cash. The
Company recognized restructuring charges of $0.4 million, primarily for
severance benefits due to the elimination of several positions in Spain. Annual
savings are not material. The Company continues to evaluate strategies and
cost-savings initiatives, which could result in future charges.

                                       32
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following summarizes restructuring charges and divestiture gains, net
of reserve adjustments, in 1999:

<TABLE>
<CAPTION>
                                                                RESTRUCTURING                    TOTAL
                                                                   CHARGES       DIVESTITURE    LOSSES
                                                                   (GAINS)         (GAINS)      (GAINS)
DOLLARS IN MILLIONS                                             -------------    -----------    -------
<S>                                                             <C>              <C>            <C>
Supply chain reconfiguration project........................        $ 8.0           $  --        $ 8.0
U.S. customer organization alignment........................          4.7              --          4.7
Brazilian pasta business, divested April 1999...............           --            (5.1)        (5.1)
                                                                    -----           -----        -----
  Charges (gains) before reserve adjustments................        $12.7           $(5.1)       $ 7.6
                                                                    -----           -----        -----
Adjustments to prior-period reserves........................         (8.8)           (1.1)        (9.9)
                                                                    -----           -----        -----
Total.......................................................        $ 3.9           $(6.2)       $(2.3)
                                                                    =====           =====        =====
</TABLE>

     1999 restructuring charges totaled $12.7 million. Two sales offices were
closed, and approximately 45 positions were eliminated, resulting in
restructuring charges of $4.7 million for severance and termination benefits,
asset write-offs and losses on leases. Annual savings resulting from this action
of approximately $5 million were reflected in the U.S. and Canadian Foods and
Beverages businesses beginning in 2000. The Company also recorded $8.0 million
of restructuring charges related to the previously discussed supply chain
reconfiguration project announced in September 1999. Several cereal
manufacturing lines were consolidated and early retirement was offered to
certain employees to eliminate approximately 68 positions.

     In 1999, the Company divested its Brazilian pasta business for $14.3
million and recognized a divestiture gain of $5.1 million.

     The following summarizes restructuring charges, asset impairment losses and
combined divestiture losses in 1998:

<TABLE>
<CAPTION>
                                                                                   ASSET           NET
                                                                RESTRUCTURING    IMPAIRMENT    DIVESTITURE    TOTAL
                                                                   CHARGES         LOSSES        LOSSES       LOSSES
DOLLARS IN MILLIONS                                             -------------    ----------    -----------    ------
<S>                                                             <C>              <C>           <C>            <C>
Organization alignment......................................        $41.5          $  --          $ --        $ 41.5
Plant consolidations........................................         19.2             --            --          19.2
Asian reorganization........................................         29.0           15.1            --          44.1
Brazilian pasta business impairment.........................           --           23.0            --          23.0
Several business divestitures and related impairments.......           --             --           0.7           0.7
                                                                    -----          -----          ----        ------
Total.......................................................        $89.7          $38.1          $0.7        $128.5
                                                                    =====          =====          ====        ======
</TABLE>

     In 1998, the Company initiated numerous actions to improve future
profitability. These actions resulted in $89.7 million in restructuring charges
and were divided into three categories: organization alignment, plant
consolidations and a reorganization in Asia. Charges for organization alignment
activities totaled $41.5 million. The Company aligned its foods and beverages
businesses, combining sales, supply chain and certain administrative functions
to realize synergies and maximize scale. These actions resulted in the
elimination of approximately 550 positions worldwide, as a layer of executive
management was removed and sales and administrative offices and functions were
consolidated. Plant consolidations in the United States and Latin America
resulted in charges of $18.3 million and $0.9 million, respectively, and the
elimination of approximately 300 positions. In light of disappointing
performance and a weak economic environment, the Company revised its operational
strategy for Asia. The going-forward focus was shifted toward building the
Gatorade business in China. The Asia reorganization resulted in $29.0 million in
charges for plant and sales and administrative office closures, restructuring of
certain joint ventures and the elimination of approximately 450 positions. The
1998 restructuring charges were composed of severance and other termination
benefits, asset write-offs, losses on leases and other shut-down costs. Savings
from these actions primarily began in 1999 and were estimated to be $65 million
annually, with approximately 90 percent of the savings in cash.

                                       33
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In 1998, the Company recorded $38.1 million of asset impairment losses
related to ongoing businesses. In conjunction with the Company's ongoing review
of underperforming businesses, certain assets were reviewed for impairment
pursuant to the provisions of SFAS No. 121. During 1998, the China foods and
Brazilian pasta businesses were determined to be impaired. Accordingly, losses
of $15.1 million and $23.0 million on these impaired Chinese and Brazilian
businesses, respectively, were recorded in order to adjust the carrying value of
the long-lived assets of these businesses to fair value. The estimated fair
value of these assets was based on various methodologies, including a discounted
value of estimated future cash flows and liquidation analyses.

     Charges for asset impairment losses related to divested businesses were
also recorded in 1998. The Company divested the following U.S. food businesses
in 1998 for a total of $192.7 million and realized a combined loss of $0.7
million, including related impairment losses:

<TABLE>
<CAPTION>
                                                                                   ASSET       (GAINS)     TOTAL
                                                                DIVESTITURE      IMPAIRMENT    LOSSES     (GAINS)
                                                                    DATE           LOSSES      ON SALE    LOSSES
DOLLARS IN MILLIONS                                             -----------      ----------    -------    -------
<S>                                                            <C>               <C>           <C>        <C>
Ardmore Farms juice........................................       August 1998      $  --       $ (2.5)    $ (2.5)
Continental Coffee.........................................    September 1998       40.0         (5.1)      34.9
Nile Spice soup cup........................................     December 1998       25.4          3.1       28.5
Liqui-Dri biscuit..........................................     December 1998         --        (60.2)     (60.2)
                                                                                   -----       ------     ------
Total Losses (Gains).......................................                        $65.4       $(64.7)    $  0.7
                                                                                   =====       ======     ======
</TABLE>

                                       34
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     RESTRUCTURING RESERVES -- Restructuring provisions were determined based on
estimates prepared at the time the restructuring actions were approved by
management and the Board of Directors. Adjustments to reduce prior-period
restructuring reserves were $9.0 million and $8.8 million in 2000 and 1999,
respectively. These adjustments were primarily due to higher than anticipated
proceeds on the sales of closed facilities and certain other changes from
previously estimated amounts. The remaining restructuring reserve balances are
considered adequate to cover committed restructuring actions.

     The restructuring reserve balances as of December 31, 2000, and utilization
to date were as follows:

<TABLE>
<CAPTION>
                                                                                          AS OF DECEMBER 31, 2000
                                                           AMOUNTS CHARGED           ---------------------------------
                                                     ----------------------------    AMOUNTS     AMOUNTS     REMAINING
                                                      CASH     NON-CASH    TOTAL     UTILIZED    ADJUSTED     RESERVE
DOLLARS IN MILLIONS                                   ----     --------    -----     --------    --------    ---------
<S>                                                  <C>       <C>         <C>       <C>         <C>         <C>
2000
Severance and termination benefits...............    $ 43.3     $  --      $ 43.3    $  (8.8)     $   --       $34.5
Asset write-offs.................................        --       5.7         5.7       (4.6)         --         1.1
Loss on leases and other.........................      25.2        --        25.2      (18.5)         --         6.7
                                                     ------     -----      ------    -------      ------       -----
Sub-total........................................      68.5       5.7        74.2      (31.9)         --        42.3
                                                     ------     -----      ------    -------      ------       -----
1999
Severance and termination benefits...............       2.1        --         2.1       (2.1)         --          --
Asset write-offs.................................        --       5.6         5.6       (3.7)       (1.9)         --
Loss on leases and other.........................       2.8       2.2         5.0       (3.5)       (1.5)         --
                                                     ------     -----      ------    -------      ------       -----
Sub-total........................................       4.9       7.8        12.7       (9.3)       (3.4)         --
                                                     ------     -----      ------    -------      ------       -----
1998
Severance and termination benefits...............      41.3        --        41.3      (40.5)       (0.5)        0.3
Asset write-offs.................................        --      29.6        29.6      (24.6)       (5.0)         --
Loss on leases and other.........................      17.8       1.0        18.8      (14.0)       (3.1)        1.7
                                                     ------     -----      ------    -------      ------       -----
Sub-total........................................      59.1      30.6        89.7      (79.1)       (8.6)        2.0
                                                     ------     -----      ------    -------      ------       -----
1997
Severance and termination benefits...............      12.6        --        12.6      (12.1)       (0.5)         --
Asset write-offs.................................        --      49.1        49.1      (43.8)       (5.3)         --
Loss on leases and other.........................       4.2        --         4.2       (3.4)         --         0.8
                                                     ------     -----      ------    -------      ------       -----
Sub-total........................................      16.8      49.1        65.9      (59.3)       (5.8)        0.8
                                                     ------     -----      ------    -------      ------       -----
Total............................................    $149.3     $93.2      $242.5    $(179.6)     $(17.8)      $45.1
                                                     ======     =====      ======    =======      ======       =====
</TABLE>

NOTE 3
TRADE ACCOUNTS RECEIVABLE ALLOWANCES

<TABLE>
<CAPTION>
                                                                  2000        1999        1998
DOLLARS IN MILLIONS                                               ----        ----        ----
<S>                                                               <C>        <C>         <C>
Balance at beginning of year................................      $24.5      $ 21.2      $ 22.3
Provision for doubtful accounts.............................        2.3         6.0         4.0
Provision for discounts and allowances......................       43.2        41.8        30.0
Write-offs of doubtful accounts -- net of recoveries........       (1.1)       (2.5)       (3.6)
Discounts and allowances taken..............................      (45.1)      (40.6)      (31.0)
Effect of divestitures......................................         --         0.1        (0.3)
Effect of exchange rate changes and other...................       (2.2)       (1.5)       (0.2)
                                                                  -----      ------      ------
Balance at end of year......................................      $21.6      $ 24.5      $ 21.2
                                                                  =====      ======      ======
</TABLE>

                                       35
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4
COMPREHENSIVE INCOME

     Total comprehensive income for the years ended December 31, 2000, 1999 and
1998, was $344.4 million, $440.0 million and $286.8 million, respectively. Total
comprehensive income for the Company includes net income; foreign currency
translation adjustments, net of tax; and unrealized gains on marketable
securities, net of reclassification adjustments for realized gains included in
net income.

     Accumulated other comprehensive income included in the consolidated
statements of common shareholders' equity as of December 31, 2000 and 1999,
consisted solely of cumulative translation adjustments. As of December 31, 1998,
accumulated other comprehensive income included cumulative translation
adjustment losses of $80.5 million and unrealized gains on marketable securities
of $0.4 million.

     The unrealized gains on marketable securities, net of reclassification
adjustments, included in the consolidated statements of common shareholders'
equity for the years ended December 31, 2000, 1999 and 1998, were determined as
follows:

<TABLE>
<CAPTION>
                                                                2000     1999     1998
DOLLARS IN MILLIONS                                             ----     ----     ----
<S>                                                             <C>      <C>      <C>
Unrealized holding gains arising during period..............    $ 4.7    $ 6.7    $ 5.1
Less: adjustments to reclassify realized gains to net
  income....................................................     (4.7)    (7.1)    (4.7)
                                                                -----    -----    -----
Net unrealized gains on marketable securities...............    $  --    $(0.4)   $ 0.4
                                                                =====    =====    =====
</TABLE>

NOTE 5
FINANCIAL INSTRUMENTS

     The Company uses various financial instruments in the course of its
operations, including certain components of working capital such as cash and
cash equivalents, trade accounts receivable and trade accounts payable. In
addition, the Company uses short-term and long-term debt to fund operating
requirements and derivative financial and commodity instruments to manage its
exposure to foreign currency exchange rate, commodity price and interest rate
risks. The counterparties to the Company's financial instruments are primarily
major financial institutions. The Company continually evaluates the
creditworthiness of these major financial institutions and has never
experienced, nor does it anticipate, nonperformance by any of these
institutions.

     MARKETABLE SECURITIES -- During 2000 and 1999, the Company made investments
in marketable securities. These marketable securities were available for sale
and primarily consisted of investments in mutual funds in 2000 and mutual funds
and preferred stock in 1999. These investments were held less than 12 months and
classified as marketable securities in the consolidated balance sheets. Realized
gains on the sales of marketable securities of $4.7 million and $7.1 million in
2000 and 1999, respectively, were included in selling, general and
administrative expenses. As of December 31, 2000 and 1999, the Company's
investments in marketable securities totaled $0.3 million and approximated fair
value.

DEBT INSTRUMENTS

     REVOLVING CREDIT FACILITIES AND SHORT-TERM DEBT -- The Company currently
has a $335.0 million annually extendible five-year revolving credit facility and
a $165.0 million, 364-day extendible revolving credit facility which may, at the
Company's option, be converted into a two-year term loan. Both facilities are
with various banks. Credit facilities are also available for direct borrowings.
There were no direct borrowings in 2000 or in 1999. The revolving credit
facilities require the Company and certain domestic subsidiaries to maintain
certain financial ratios.

                                       36
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Short-term debt consists of notes payable to banks in foreign countries,
which totaled $81.6 million and $73.3 million as of December 31, 2000 and 1999,
respectively. The carrying value of short-term debt approximates fair value due
to the short-term maturity of the instruments. The weighted average interest
rate on all short-term debt outstanding was 6.7 percent as of December 31, 2000
and 1999. Nominal interest rates in countries designated as highly inflationary
have been adjusted for currency devaluation to express interest rates in U.S.
dollar terms.

     LONG-TERM DEBT -- The carrying value of long-term debt, including current
maturities, as of December 31, 2000 and 1999, is summarized below:

<TABLE>
<CAPTION>
                                                                                2000        1999
DOLLARS IN MILLIONS                                                             ----        ----
<S>                                                                            <C>         <C>
7.76% Senior ESOP notes due through 2001...................................    $ 27.2      $ 38.5
8.00% Senior ESOP notes due through 2001...................................      13.2        39.0
7.80% -- 7.90% Series A medium-term notes due through 2000.................        --        10.0
8.63% -- 9.34% Series B medium-term notes due through 2019.................     118.0       121.2
6.50% -- 7.48% Series C medium-term notes due through 2024.................     200.0       200.0
6.45% -- 7.78% Series D medium-term notes due through 2026.................     320.0       350.0
11.70% Chinese renmimbi notes due 2001.....................................        --         4.8
5.70% -- 6.63% Industrial Revenue Bonds due through 2009, tax-exempt.......      19.4        19.4
Non-interest bearing installment note due 2014.............................      10.2         9.0
Other......................................................................       4.1         4.3
                                                                               ------      ------
Sub-total..................................................................     712.1       796.2
Less: Current portion of long-term debt....................................      48.0        81.2
                                                                               ------      ------
Long-term debt.............................................................    $664.1      $715.0
                                                                               ======      ======
</TABLE>

     The fair value of long-term debt, including current maturities, was $757.0
million and $785.6 million as of December 31, 2000 and 1999, respectively. Fair
value was based on market prices for the same or similar issues, or on the
current rates offered to the Company for similar debt of the same maturities.

     The non-interest bearing installment note due 2014, with a face value of
$55.5 million, had an unamortized discount of $45.3 million and $46.5 million as
of December 31, 2000 and 1999, respectively, based on an imputed interest rate
of 13 percent.

     Total required payments for long-term debt maturing over the next five
years are as follows:

<TABLE>
<CAPTION>
                                                                2001     2002     2003     2004      2005
DOLLARS IN MILLIONS                                             ----     ----     ----     ----      ----
<S>                                                             <C>      <C>      <C>      <C>      <C>
Required payments...........................................    $47.9    $48.6    $27.9    $47.4    $106.2
                                                                =====    =====    =====    =====    ======
</TABLE>

     DERIVATIVE INSTRUMENTS -- The primary derivative instruments used by the
Company are foreign exchange forward contracts, purchased foreign currency
options, interest rate swap agreements and commodity options and futures
contracts. The Company actively monitors its exposure to foreign currency
exchange rate, commodity price and interest rate risks and uses derivative
financial and commodity instruments to manage the impact of certain of these
risks. The Company's policy is to use derivatives only for purposes of managing
risk associated with underlying exposures. The Company does not trade or use
these instruments with the objective of earning financial gains on the exchange
rate, commodity price or interest rate fluctuations alone, nor does it use
instruments where there are not underlying exposures. Complex instruments
involving leverage or multipliers are not used. Management believes that its use
of derivative instruments to manage risk is in the Company's best interest.

     During 2000, the Company executed certain hedging instruments to manage
exposure to Canadian, European and Mexican currency movements. The Company plans
to continue to use foreign currency hedge instruments, where appropriate, to
manage exposure to potentially significant currency movements. Where hedging
opportunities are not available, the exposures are addressed through managing
net asset positions and borrowing or investing in a combination of local
currency and U.S. dollars.

                                       37
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

BALANCE SHEET HEDGES

     NET INVESTMENT HEDGES -- The Company's significant net investment hedges
and the related foreign currency net investments and net exposures as of
December 31, 2000, were as follows:

<TABLE>
<CAPTION>
                                                                NET INVESTMENT    NET HEDGE    NET EXPOSURE
DOLLARS IN MILLIONS                                             --------------    ---------    ------------
<S>                                                             <C>               <C>          <C>
Currency:
  German marks..............................................        $18.0           $11.2         $ 6.8
  Dutch guilders............................................        $14.8           $ 8.5         $ 6.3
  Italian liras.............................................        $34.9           $ 2.0         $32.9
</TABLE>

     The Company actively monitors its net exposures and adjusts the hedge
amounts as appropriate. The net hedges are stated on an after-tax basis. The net
exposures are subject to gain or loss if foreign currency exchange rates
fluctuate.

     The Company had no outstanding balance sheet forward contract hedges as of
December 31, 2000 and 1999.

INCOME STATEMENT HEDGES

     FOREIGN CURRENCY HEDGES -- The Company uses foreign currency options and
forward contracts to manage the impact of foreign currency fluctuations
recognized in the Company's operating results. Included in the consolidated
statements of income were losses (gains) from foreign currency hedge instruments
of $3.7 million, $1.0 million and $(0.8) million in 2000, 1999 and 1998,
respectively. As of December 31, 2000, the Company had $8.2 million in forward
contracts outstanding to manage exposure to foreign currency movements. These
contracts mature in 2001.

     COMMODITY OPTIONS AND FUTURES -- The Company uses commodity options and
futures contracts to manage price exposures on commodity inventories or
anticipated purchases of commodities. The Company regularly hedges purchases of
oats, corn, corn sweetener and wheat. Of the $2.29 billion in cost of goods
sold, approximately $95 million to $125 million is in commodities that may be
hedged. The Company's strategy is typically to hedge certain production
requirements for various periods up to 12 months. As of December 31, 2000 and
1999, approximately 15 percent and 55 percent, respectively, of hedgeable
production requirements for the next 12 months were hedged. Deferred
unrecognized losses related to commodity options and futures contracts as of
December 31, 2000 and 1999, were $0.1 million and $0.9 million, respectively.
Realized losses charged to cost of goods sold in 2000, 1999 and 1998, were $2.0
million, $2.5 million and $13.5 million, respectively.

     The fair values of these commodity instruments as of December 31, 2000 and
1999, based on quotes from brokers, were net gains of $0.6 million and net
losses of $1.0 million, respectively.

     INTEREST RATE HEDGES -- The Company actively monitors its interest rate
exposure. The Company uses swap agreements to manage its exposure to
fluctuations in interest rates. In 2000 and 1999, the Company entered into
fixed-to-floating interest rate swap agreements to increase floating rate
exposure. In 2000, the Company entered into an interest rate swap agreement with
a notional value of $13.4 million, to exchange fixed for floating-rate debt.
This swap agreement matures in May 2006. In 1999, the Company entered into
cancelable interest rate swap agreements with a notional value of $80.0 million.
In 2000, the counterparties exercised the options to cancel these agreements
effective March 15, 2001. Interest differentials to be received or paid on the
swaps are recognized in the consolidated statements of income as a reduction or
increase in interest expense, respectively.

     In 1995, the Company entered into interest rate swap agreements with a
notional value of $150.0 million. The swap agreements were used to hedge fixed
interest rate risk related to anticipated issuance of long-term debt. The swap
agreements were subsequently terminated at a cost of $11.9 million as long-term
debt was issued. Included in the consolidated balance sheets as of December 31,
2000 and 1999, were $3.5 million and $4.5 million, respectively, of prepaid
interest expense as settlement of the 1995 interest rate swap agreements.
Prepaid interest expense is recognized in the consolidated statements of income
on a straight-line basis over the original term of the swap agreements, which
ranged from three to 10 years. The carrying value of the settled interest rate
swap agreements approximates the fair value of the swap at the settlement date
less amortized interest. Amounts included in interest expense related to the
interest rate swap agreements were $1.0 million, $1.2 million and $1.4 million
in 2000, 1999 and 1998, respectively.
                                       38
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6
CAPITAL STOCK

     During 2000, the Company repurchased 3.6 million shares of its outstanding
common stock for $235.9 million under its $1 billion repurchase program
announced in March 1998. On December 4, 2000, the date the Company announced the
discontinuance of its $1 billion repurchase program, total repurchases under the
plan were $870.8 million.

     The Company is authorized to issue 10 million shares of preferred stock in
series, with terms fixed by resolution of the Board of Directors. Four million
shares of Series C Junior Participating Preferred Stock have been reserved for
issuance in connection with the Shareholder Rights Plan. See Note 9 for further
discussion.

     An additional 1,750,000 shares of Series B Employee Stock Ownership Plan
(ESOP) Convertible Preferred Stock (Series B Stock) have been reserved for
issuance in connection with the Company's ESOP. As of December 31, 2000,
1,282,051 shares of the Series B Stock had been issued and 840,582 shares were
outstanding, which are each convertible into 2.1576 shares of the Company's
common stock. The Series B Stock will be issued only for the ESOP and will not
be traded on the open market.

     The Company is also authorized to issue one million shares of redeemable
preference stock, none of which had been issued as of December 31, 2000.

     On December 2, 2000, in connection with the execution of the merger
agreement, PepsiCo and the Company entered into a stock option agreement. The
Company granted PepsiCo an option to purchase up to 26,129,000 shares of the
Company's common stock, or approximately 19.9 percent of the Company's common
stock issued and outstanding, at a price per share of $95.00. The exercise price
and number of option shares are subject to certain antidilution and other
adjustments specified in the stock option agreement. PepsiCo can exercise the
option in whole or in part at any time after the occurrence (but prior to the
termination of the option) of any event obligating the Company to pay the cash
termination fee payable to PepsiCo pursuant to the merger agreement.

NOTE 7
DEFERRED COMPENSATION

     The ESOP was established to issue debt and to use the proceeds of such debt
to acquire shares of the Company's stock for future allocation to ESOP
participants. The ESOP borrowings are included in long-term debt in the
Company's consolidated balance sheets. See Note 5 for further discussion of ESOP
notes.

     Deferred compensation of $48.4 million as of December 31, 2000, primarily
represents the Company's payment of future compensation expense related to the
ESOP. As the Company makes annual contributions to the ESOP, these
contributions, along with the dividends accumulated on the common and preferred
stock held by the ESOP, are used to repay the outstanding loans. As the loans
are repaid, common and preferred stock are allocated to ESOP participants and
deferred compensation is reduced by the amount of the principal payments on the
loans.

     The following table presents the ESOP loan payments:

<TABLE>
<CAPTION>
                                                                2000          1999
DOLLARS IN MILLIONS                                             ----          ----
<S>                                                             <C>           <C>
Principal payments..........................................    $37.1         $33.0
Interest payments...........................................      5.9           8.5
                                                                -----         -----
Total ESOP payments.........................................    $43.0         $41.5
                                                                =====         =====
</TABLE>

     As of December 31, 2000, 4,806,229 shares of common stock and 625,018
shares of preferred stock were held in the accounts of ESOP participants. The
final ESOP award will be made in 2001.

                                       39
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8
EMPLOYEE STOCK OPTION AND AWARD PLANS

     In May 1998, the Company's shareholders adopted The Quaker Long Term
Incentive Plan of 1999 (Plan) to replace the Quaker Long Term Incentive Plan of
1990. The purpose of the Plan is to promote the interests of the Company and its
shareholders by providing the officers and other key employees with additional
incentives and the opportunity, through stock ownership, to increase their
proprietary interest in the Company and their personal interest in its continued
success. The Plan provides for benefits to be awarded in a variety of ways, with
stock options being used most frequently. Approximately 12 million shares of
common stock have been authorized for grant under the Plan.

     Stock options may be granted for the purchase of common stock at a price
not less than the fair market value on the date of grant. Generally, the
exercise price of each stock option equals the market price of the Company's
stock on the date of grant. Options are generally exercisable after one or more
years and expire no later than 10 years from the date of grant. As of December
31, 2000, 747 persons held such options.

     The Company has elected to disclose the pro forma effects of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
this statement, the Company will continue to apply Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for the stock options
awarded under the Plan. Accordingly, no compensation cost has been recognized
for these stock options.

     All options and restricted stock awarded under the Plan are subject to
change in control provisions which are generally described under "Termination
and Change in Control Benefits" in Part III of this Form 10-K. The specific
treatment of options and restricted stock in connection with the Company's
proposed merger transaction with PepsiCo, Inc. is described under "Change in
Control Arrangements" in Part III of this Form 10-K.

     Had compensation cost for the Plan been determined consistent with SFAS No.
123, the Company's net income and net income per share would have been the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                      2000           1999           1998
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)                           ----           ----           ----
<S>                                                                  <C>            <C>            <C>
Net income:
  As reported...............................................         $360.6         $455.0         $284.5
  Pro forma.................................................         $342.4         $439.0         $272.5
                                                                     ------         ------         ------
Net income per share:
  As reported...............................................         $ 2.71         $ 3.36         $ 2.04
  Pro forma.................................................         $ 2.57         $ 3.24         $ 1.95
                                                                     ------         ------         ------
Net income per share -- diluted:
  As reported...............................................         $ 2.61         $ 3.23         $ 1.97
  Pro forma.................................................         $ 2.47         $ 3.12         $ 1.89
                                                                     ------         ------         ------
</TABLE>

                                       40
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The fair value of each option granted during the year is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
range of assumptions:

<TABLE>
<CAPTION>
                                                                2000               1999               1998
                                                                ----               ----               ----
<S>                                                         <C>                <C>                <C>
Dividend yield........................................        1.5% - 2.3%        1.7% - 2.1%        1.9% - 2.0%
Expected volatility...................................      20.3% - 24.4%      26.2% - 30.3%      18.6% - 20.8%
Risk-free interest rates..............................        5.9% - 6.7%        5.0% - 6.0%        4.7% - 5.7%
Expected lives........................................       4 TO 9 YEARS       3 to 9 years       3 to 8 years
</TABLE>

     A summary of the status of the Company's option activity is presented
below:

<TABLE>
<CAPTION>
                                                      2000                     1999                     1998
                                             ----------------------   ----------------------   ----------------------
                                                          WEIGHTED-                WEIGHTED-                WEIGHTED-
                                                           AVERAGE                  AVERAGE                  AVERAGE
                                                          EXERCISE                 EXERCISE                 EXERCISE
                                               SHARES       PRICE       SHARES       PRICE       SHARES       PRICE
                                               ------     ---------     ------     ---------     ------     ---------
<S>                                          <C>          <C>         <C>          <C>         <C>          <C>
Outstanding at beginning of year.........    10,990,659    $44.20     11,608,894    $40.88     13,017,621    $36.25
  Granted................................     2,412,833    $50.28      2,041,050    $53.49      2,399,000    $57.16
  Exercised..............................     3,258,087    $37.48      2,261,364    $34.87      3,326,292    $33.88
  Forfeited..............................       217,787    $53.90        397,921    $48.14        481,435    $45.13
                                             ----------               ----------               ----------
  Outstanding at end of year.............     9,927,618    $47.67     10,990,659    $44.20     11,608,894    $40.88
                                             ==========               ==========               ==========
  Exercisable at end of year.............     5,423,043    $43.93      6,861,634    $39.22      7,842,314    $36.44
Weighted-average fair value of options
  granted during the year................                  $13.87                   $15.42                   $13.84
</TABLE>

     The following summarizes information about stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                                                  OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                                       -----------------------------------------      ------------------------
                                                                        AVERAGE        WEIGHTED-                     WEIGHTED-
                                                                       REMAINING        AVERAGE                       AVERAGE
                                                                      CONTRACTUAL      EXERCISE                      EXERCISE
            RANGE OF EXERCISE PRICES                    SHARES           LIFE            PRICE         SHARES          PRICE
            ------------------------                    ------        -----------      ---------      ---------      ---------
<S>                                                    <C>            <C>              <C>            <C>            <C>
$22.79 - $44.18..................................      3,079,585      4.14 YEARS        $36.83        3,079,585       $36.83
$48.03 - $49.34..................................      3,267,749      8.46 YEARS        $48.94          780,000       $48.03
$53.34 - $75.75..................................      3,580,284      7.81 YEARS        $55.83        1,563,458       $55.88
                                                       ---------                                      ---------
$22.79 - $75.75..................................      9,927,618      6.88 YEARS        $47.67        5,423,043       $43.93
                                                       =========                                      =========
</TABLE>

     Under the Plan, restricted stock awards grant shares of the Company's
common stock to key officers and employees. These shares are subject to a
restriction period from the date of grant, during which time they may not be
sold, assigned, pledged or otherwise encumbered. The number of shares or stock
units of the Company's common stock awarded in 2000, 1999 and 1998, were 89,653,
87,046 and 55,981, respectively. Restrictions on these awards lapse after a
period of time designated by the Compensation Committee of the Board of
Directors.

                                       41
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9
SHAREHOLDER RIGHTS PLAN

     The Company's Shareholder Rights Plan (Plan) is designed to deter coercive
or unfair takeover tactics and to prevent a person or group from gaining control
of the Company without offering a fair price to all shareholders. Under the
terms of the Plan, all common shareholders own one "Right" per outstanding share
of common stock entitling them to purchase from the Company one one-hundredth of
a share of Series C Junior Participating Preferred Stock at an exercise price of
$150.00. The Rights become exercisable 10 days after a public announcement that
a person or group has acquired shares representing 15 percent or more of the
outstanding shares of common stock, or 15 business days following commencement
of a tender offer for 15 percent or more of such outstanding shares of common
stock.

     The Company can redeem the Rights for $0.01 per Right at any time prior to
their becoming exercisable. The Rights will expire on July 31, 2006, unless
redeemed earlier by the Company or exchanged for common stock. If after the
Rights become exercisable the Company is involved in a merger or other business
combination at any time when there is a holder of 15 percent or more of the
Company's stock, the Rights will then entitle holders, upon exercise of the
Rights, to receive shares of common stock of the acquiring or surviving company
with a market value equal to twice the exercise price of each Right. There is an
exemption for any issuance of common stock by the Company directly to any
person, even if that person would become the beneficial owner of 15 percent or
more of the common stock, provided that such person does not acquire any
additional shares of common stock. The Rights described in this paragraph shall
not apply to an acquisition, merger, or consolidation which is determined by a
majority of the Company's independent directors, after consulting one or more
investment banking firms, to be fair and otherwise in the best interest of the
Company and its shareholders. The Rights do not apply to the proposed merger
with PepsiCo, which was approved by the Company's Board of Directors.

NOTE 10
PENSION AND POSTRETIREMENT PLANS

     The Company has various pension plans covering substantially all U.S.
employees and certain foreign employees. Plan benefits (Pension Benefits) are
based on compensation paid to employees and their years of service. Company
policy is to make contributions to its U.S. plans within the maximum amount
deductible for Federal income tax purposes. Plan assets consist primarily of
equity securities and government, corporate and other fixed-income obligations.

     The Company also has various postretirement health care plans covering
substantially all U.S. employees and certain foreign employees. The plans
provide for the payment of certain health care and life insurance benefits
(Postretirement Benefits) for retired employees who meet certain service-related
eligibility requirements. The Company funds only the plans' annual cash
requirements.

     Changes in the balances of prepaid assets and long-term liabilities related
to pension and postretirement benefits resulted in income of $28.8 million in
2000, which primarily impacted U.S. and Canadian operations and was reflected
approximately 50 percent in cost of goods sold and 50 percent in selling,
general and administrative expenses. In 1999 and 1998, changes in balances
resulted in an expense of $3.3 million and $14.7 million, respectively.

                                       42
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TOTAL COMPANY BENEFIT COSTS

     The components of net periodic benefit (income) costs for the plans were as
follows:

<TABLE>
<CAPTION>
                                                                            PENSION BENEFITS
                                                                   -----------------------------------
                                                                    2000          1999          1998
DOLLARS IN MILLIONS                                                 ----          ----          ----
<S>                                                                <C>           <C>           <C>
Components of net periodic benefit (income) costs:
  Service cost..............................................       $  28.1       $  34.2       $  33.7
  Interest cost.............................................          83.6          80.1          76.3
  Expected return on plan assets............................        (126.5)       (112.8)       (102.5)
  Amortization of prior service cost........................           6.5           3.2           4.2
  Amortization of transitional asset........................          (0.8)         (0.9)         (0.9)
  Recognized net actuarial gain.............................         (24.6)         (0.2)         (0.8)
  Multi-employer plans......................................           0.4           0.4           0.3
  Termination benefits/curtailment losses...................           5.9           2.2           1.1
                                                                   -------       -------       -------
Net periodic benefit (income) costs.........................       $ (27.4)      $   6.2       $  11.4
                                                                   =======       =======       =======
</TABLE>

<TABLE>
<CAPTION>
                                                                         POSTRETIREMENT BENEFITS
                                                                   -----------------------------------
                                                                    2000          1999          1998
DOLLARS IN MILLIONS                                                 ----          ----          ----
<S>                                                                <C>           <C>           <C>
Components of net periodic benefit costs:
  Service cost..............................................       $   6.2       $   7.1       $   7.2
  Interest cost.............................................          20.8          19.2          19.5
  Amortization of prior service cost........................           0.5           0.5           0.6
  Recognized net actuarial gain.............................          (0.8)         (0.1)         (0.1)
  Loss (gain) from curtailment..............................           2.1          (0.1)         (0.1)
                                                                   -------       -------       -------
Net periodic benefit costs..................................       $  28.8       $  26.6       $  27.1
                                                                   =======       =======       =======
</TABLE>

     The Company incurred $3.8 million, $3.6 million and $5.3 million in costs
in 2000, 1999 and 1998, respectively, for defined contribution benefit plans.
These costs are not included in the net periodic benefit costs summarized above.

                                       43
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DOMESTIC OBLIGATIONS AND FUNDED STATUS

     The changes in the benefit obligations and the reconciliations of the
funded status of the Company's domestic plans to the statement of financial
position were as follows:

<TABLE>
<CAPTION>
                                                                 PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                                              ----------------------      -----------------------
                                                                2000          1999          2000           1999
DOLLARS IN MILLIONS                                             ----          ----          ----           ----
<S>                                                           <C>           <C>           <C>            <C>
Change in benefit obligations:
  Benefit obligation at beginning of year...................  $  965.4      $1,049.8      $ 263.3        $ 292.5
  Service cost..............................................      22.2          27.0          5.9            6.8
  Interest cost.............................................      73.8          70.3         20.2           18.6
  Benefits paid.............................................     (52.8)        (49.5)       (18.3)         (17.3)
  Actuarial loss (gain).....................................      33.5        (142.8)        18.8          (38.5)
  Plan participant contributions............................        --            --          1.2            1.2
  Plan curtailments.........................................       5.9            --          8.8             --
  Plan amendments...........................................        --          10.6           --             --
                                                              --------      --------      -------        -------
Benefit obligation at end of year...........................  $1,048.0      $  965.4      $ 299.9        $ 263.3
                                                              --------      --------      -------        -------
Change in plan assets:
  Fair value of plan assets at beginning of year............  $1,269.4      $1,141.4      $    --        $    --
  Actual return on assets...................................     (22.3)        173.9           --             --
  Company contributions.....................................       3.9           3.6         17.1           16.1
  Benefits paid.............................................     (52.8)        (49.5)       (18.3)         (17.3)
  Plan participant contributions............................        --            --          1.2            1.2
                                                              --------      --------      -------        -------
Fair value of plan assets at end of year....................  $1,198.2      $1,269.4      $    --        $    --
                                                              --------      --------      -------        -------
Fair value of plan assets greater (less) than benefit
  obligation................................................  $  150.2      $  304.0      $(299.9)       $(263.3)
Unrecognized net actuarial gain.............................    (218.6)       (415.5)        (7.5)         (33.7)
Unrecognized prior service cost.............................      14.9          22.0          3.0            3.4
Unrecognized net liability at transition....................       0.4           0.5           --             --
                                                              --------      --------      -------        -------
Net amounts recognized......................................  $  (53.1)     $  (89.0)     $(304.4)       $(293.6)
                                                              --------      --------      -------        -------
Net amounts recognized consist of:
  Accrued benefit liability.................................  $  (65.1)     $  (89.0)     $(304.4)       $(293.6)
  Prepaid benefit costs.....................................      12.0            --           --             --
                                                              --------      --------      -------        -------
Net amounts recognized......................................  $  (53.1)     $  (89.0)     $(304.4)       $(293.6)
                                                              ========      ========      =======        =======
</TABLE>

     The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the defined benefit pension plans with accumulated
benefit obligations in excess of plan assets were $91.4 million, $85.1 million
and $27.4 million, respectively, as of December 31, 2000, and $60.5 million,
$43.4 million and zero, respectively, as of December 31, 1999.

<TABLE>
<CAPTION>
                                                                 PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                                                -------------------       -----------------------
                                                                2000           1999        2000             1999
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31                  ----           ----        ----             ----
<S>                                                             <C>            <C>        <C>              <C>
Discount rate...............................................    7.50%          8.00%       7.50%            8.00%
Expected long-term rate of return on plan assets............    9.75%          9.75%        N/A              N/A
Rate of future compensation increases.......................    4.50%          4.50%        N/A              N/A
</TABLE>

-------------------------
N/A: Not applicable

     For measurement purposes, a 6.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2001. The rate was
assumed to decrease gradually to 4.5 percent for 2006 and remain at that level
thereafter.

                                       44
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     If the health care trend rate was increased one percentage point,
postretirement benefit costs for the year ended December 31, 2000, would have
been $3.8 million higher, and the accumulated postretirement benefit obligation
as of December 31, 2000, would have been $43.0 million higher. If the health
care trend rate was decreased one percentage point, postretirement benefit costs
for the year ended December 31, 2000, would have been $3.1 million lower, and
the accumulated postretirement benefit obligation as of December 31, 2000, would
have been $40.0 million lower.

FOREIGN OBLIGATIONS AND FUNDED STATUS

     The changes in the benefit obligations and the reconciliations of the
funded status of the Company's foreign plans to the statement of financial
position were as follows:

<TABLE>
<CAPTION>
                                                                 PENSION BENEFITS        POSTRETIREMENT BENEFITS
                                                                -------------------      -----------------------
                                                                 2000         1999        2000            1999
DOLLARS IN MILLIONS                                              ----         ----        ----            ----
<S>                                                             <C>          <C>         <C>             <C>
Change in benefit obligations:
  Benefit obligation at beginning of year...................    $171.1       $169.0      $  8.4          $ 10.1
  Service cost..............................................       5.9          7.2         0.3             0.3
  Interest cost.............................................       9.8          9.8         0.6             0.6
  Benefits paid.............................................      (9.2)       (10.8)       (0.2)           (0.2)
  Actuarial loss (gain).....................................       1.1         (1.9)        2.2            (2.9)
  Plan participant contributions............................       0.6          0.6          --              --
  Plan amendments...........................................        --          1.5          --              --
  Foreign currency exchange rate change.....................     (10.4)        (4.3)       (0.3)            0.5
                                                                ------       ------      ------          ------
Benefit obligation at end of year...........................    $168.9       $171.1      $ 11.0          $  8.4
                                                                ------       ------      ------          ------
Change in plan assets:
  Fair value of plan assets at beginning of year............    $168.7       $158.3      $   --          $   --
  Actual return on assets...................................      18.2         15.8          --              --
  Company contributions.....................................       7.4          7.4         0.2             0.2
  Benefits paid.............................................      (9.2)       (10.8)       (0.2)           (0.2)
  Plan participant contributions............................       0.4          0.5          --              --
  Foreign currency exchange rate changes....................     (10.2)        (2.5)         --              --
                                                                ------       ------      ------          ------
Fair value of plan assets at end of year....................    $175.3       $168.7      $   --          $   --
                                                                ------       ------      ------          ------
Fair value of plan assets greater (less) than benefit
  obligation................................................    $  6.4       $ (2.4)     $(11.0)         $ (8.4)
Unrecognized net actuarial gain.............................      (9.2)        (3.0)       (1.7)           (4.2)
Unrecognized prior service cost.............................       4.1          4.8         0.7             0.8
Unrecognized net asset at transition........................      (2.8)        (4.0)         --              --
                                                                ------       ------      ------          ------
Net amounts recognized......................................    $ (1.5)      $ (4.6)     $(12.0)         $(11.8)
                                                                ------       ------      ------          ------
Net amounts recognized consist of:
  Accrued benefit liability.................................    $(13.1)      $(13.0)     $(12.0)         $(11.8)
  Prepaid benefit costs.....................................      11.6          8.4          --              --
                                                                ------       ------      ------          ------
Net amounts recognized......................................    $ (1.5)      $ (4.6)     $(12.0)         $(11.8)
                                                                ======       ======      ======          ======
</TABLE>

                                       45
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the defined benefit pension plans with accumulated
benefit obligations in excess of plan assets were $7.0 million, $6.6 million and
zero, respectively, as of December 31, 2000, and $6.5 million, $5.9 million and
zero, respectively, as of December 31, 1999.

<TABLE>
<CAPTION>
                                                                 PENSION BENEFITS         POSTRETIREMENT BENEFITS
                                                                -------------------       -----------------------
                                                                2000           1999        2000             1999
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31                  ----           ----        ----             ----
<S>                                                             <C>            <C>        <C>              <C>
Discount rate...............................................    6.30%          6.00%       7.00%            7.50%
Expected long-term rate of return on plan assets............    6.90%          6.70%        N/A              N/A
Rate of future compensation increases.......................    4.20%          3.90%        N/A              N/A
</TABLE>

-------------------------
N/A: Not applicable

     For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2001. The rate was
assumed to decrease gradually to 4.5 percent for 2009 and remain at that level
thereafter.

     If the health care trend rate was increased one percentage point,
postretirement benefit costs for the year ended December 31, 2000, would have
been $0.3 million higher, and the accumulated postretirement benefit obligation
as of December 31, 2000, would have been $2.6 million higher. If the health care
trend rate was decreased one percentage point, postretirement benefit costs for
the year ended December 31, 2000, would have been $0.3 million lower, and the
accumulated postretirement benefit obligation as of December 31, 2000, would
have been $2.1 million lower.

NOTE 11
LEASE AND OTHER COMMITMENTS

     In March 2000, the Company signed a ten-year lease for office space in a
new headquarters building to be constructed in Chicago, Illinois. This new site
is intended to replace the Company's current Chicago headquarters, which is
leased through August of 2002. The new Chicago office is currently in
development and expected to be completed in 2002. The Company's obligations
under the lease are contingent upon completion of the building and satisfaction
of certain other obligations by the lessor.

     Certain equipment and operating properties are rented under non-cancelable
and cancelable operating leases. Total rental expense under operating leases was
$51.7 million, $45.0 million and $38.5 million for the years ended December 31,
2000, 1999 and 1998, respectively.

     The following is a schedule of future minimum annual rentals on
non-cancelable operating leases, primarily for sales offices, distribution
centers, the current corporate headquarters and the new Chicago office, in
effect as of December 31, 2000.

<TABLE>
<CAPTION>
                                                     2001     2002     2003     2004     2005     THEREAFTER    TOTAL
DOLLARS IN MILLIONS                                  -----    -----    -----    -----    -----    ----------    ------
<S>                                                  <C>      <C>      <C>      <C>      <C>      <C>           <C>
Total payments...................................    $26.1    $21.7    $22.2    $21.9    $18.0      $72.1       $182.0
                                                     =====    =====    =====    =====    =====      =====       ======
</TABLE>

     The Company enters into executory contracts to obtain inventory and promote
various products. As of December 31, 2000, future commitments under these
contracts were $929.4 million.

                                       46
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12
SUPPLEMENTARY INCOME STATEMENT INFORMATION

<TABLE>
<CAPTION>
                                                                  2000        1999        1998
DOLLARS IN MILLIONS                                               ----        ----        ----
<S>                                                             <C>         <C>         <C>
Advertising, media and production...........................    $  352.6    $  345.9    $  281.9
Merchandising...............................................     1,050.6       977.8       959.9
                                                                --------    --------    --------
Total advertising and merchandising.........................    $1,403.2    $1,323.7    $1,241.8
                                                                ========    ========    ========
Depreciation expense........................................    $  123.5    $  114.0    $  116.3
Amortization of intangibles.................................    $    9.5    $    9.8    $   12.8
Research and development....................................    $   29.2    $   28.8    $   31.0
</TABLE>

NOTE 13
INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                                2000         1999         1998
DOLLARS IN MILLIONS                                             ----         ----         ----
<S>                                                             <C>         <C>          <C>
Interest expense............................................    $59.2       $ 65.1       $ 72.0
Interest expense capitalized................................     (5.2)        (3.2)        (2.4)
                                                                -----       ------       ------
Sub-total...................................................     54.0         61.9         69.6
Interest income.............................................     (9.0)       (11.7)       (10.7)
                                                                -----       ------       ------
Interest expense -- net.....................................    $45.0       $ 50.2       $ 58.9
                                                                =====       ======       ======
</TABLE>

     Interest paid in the years ended December 31, 2000, 1999 and 1998, was
$56.1 million, $62.8 million and $68.8 million, respectively.

NOTE 14
INCOME TAXES

     The Company uses an asset and liability approach to financial accounting
and reporting for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." Income tax provisions were as follows:

<TABLE>
<CAPTION>
                                                                 2000        1999         1998
DOLLARS IN MILLIONS                                              ----        ----         ----
<S>                                                             <C>         <C>          <C>
Currently payable:
  Federal...................................................    $186.7      $ 88.1       $147.4
  Foreign...................................................       7.8        15.6         21.2
  State.....................................................      26.0        16.0         27.0
                                                                ------      ------       ------
Total currently payable.....................................     220.5       119.7        195.6
                                                                ------      ------       ------
Deferred -- net:
  Federal...................................................     (28.9)       40.7        (62.7)
  Foreign...................................................       3.0        (4.7)       (12.6)
  State.....................................................      (4.1)        7.6         (8.2)
                                                                ------      ------       ------
Total deferred -- net.......................................     (30.0)       43.6        (83.5)
                                                                ------      ------       ------
Income tax provision........................................    $190.5      $163.3       $112.1
                                                                ======      ======       ======
</TABLE>

     In 1998, as a result of the loss on the 1997 divestiture of the Snapple
business, the Company recovered $240.0 million in Federal taxes paid on previous
capital gains from business divestitures.

                                       47
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Income taxes paid (refunded) during 2000, 1999 and 1998, were $182.5
million, $159.2 million and $(110.4) million, respectively. The net amount
refunded in 1998 includes the $240.0 million recovery of Federal taxes paid on
previous capital gains.

     The components of the deferred income tax provision (benefit) were as
follows:

<TABLE>
<CAPTION>
                                                                 2000     1999      1998
DOLLARS IN MILLIONS                                              ----     ----      ----
<S>                                                             <C>       <C>      <C>
Accelerated tax depreciation................................    $ 12.0    $13.0    $(10.9)
Postretirement benefits.....................................      (3.7)    (4.3)     (3.9)
Accrued expenses including restructuring charges............       1.8     16.7     (34.6)
Loss carryforwards -- net of valuation allowances...........       0.5      2.9       4.4
Foreign gain deferral.......................................        --     (1.8)     (3.7)
Asset impairment losses.....................................     (42.4)    (0.6)    (39.8)
Other.......................................................       1.8     17.7       5.0
                                                                ------    -----    ------
(Benefit) provision for deferred income taxes...............    $(30.0)   $43.6    $(83.5)
                                                                ======    =====    ======
</TABLE>

     Total income tax provisions (benefits) were allocated as follows:

<TABLE>
<CAPTION>
                                                                 2000      1999      1998
DOLLARS IN MILLIONS                                              ----      ----      ----
<S>                                                             <C>       <C>       <C>
Continuing operations.......................................    $190.5    $163.3    $112.1
Items charged directly to common shareholders' equity.......    $(45.9)   $(30.7)   $(43.8)
</TABLE>

     The sources of pretax income (loss) were as follows:

<TABLE>
<CAPTION>
                                                                 2000      1999      1998
DOLLARS IN MILLIONS                                              ----      ----      ----
<S>                                                             <C>       <C>       <C>
U.S. sources................................................    $448.3    $579.2    $435.3
Foreign sources.............................................     102.8      39.1     (38.7)
                                                                ------    ------    ------
Income before income taxes..................................    $551.1    $618.3    $396.6
                                                                ======    ======    ======
</TABLE>

     Reconciliations of the statutory Federal income tax rates to the effective
income tax rates were as follows:

<TABLE>
<CAPTION>
                                                                   2000                1999                1998
                                                             ----------------    ----------------    ----------------
                                                                        % OF                % OF                % OF
                                                                       PRETAX              PRETAX              PRETAX
                                                             AMOUNT    INCOME    AMOUNT    INCOME    AMOUNT    INCOME
DOLLARS IN MILLIONS                                          ------    ------    ------    ------    ------    ------
<S>                                                          <C>       <C>       <C>       <C>       <C>       <C>
Tax provision based on the Federal statutory rate........    $192.9     35.0%    $216.4     35.0%    $138.8     35.0%
State and local income tax provision -- net of Federal
  income taxes...........................................      17.4      3.2       19.7      3.2        9.2      2.3
Repatriation of foreign earnings.........................      (5.4)   (1.0)       (6.6)    (1.1)      (2.9)    (0.7)
Foreign tax rate differential............................      (3.9)   (0.7)        4.9      0.8        3.5      0.9
Capital loss valuation allowance.........................      (1.6)   (0.3)       (2.4)    (0.4)     (25.4)    (6.4)
Miscellaneous items......................................      (8.9)   (1.6)      (68.7)   (11.1)     (11.1)    (2.8)
                                                             ------     ----     ------    -----     ------    -----
Income tax provision.....................................    $190.5     34.6%    $163.3     26.4%    $112.1     28.3%
                                                             ======     ====     ======    =====     ======    =====
</TABLE>

     In 1999, the Company adjusted its tax accruals and tax assets to reflect
developments and information received during the year. The net effect of these
adjustments, which are included above in miscellaneous items, was to reduce the
1999 income tax provision by $59.3 million.

                                       48
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred tax assets and deferred tax liabilities were as follows:

<TABLE>
<CAPTION>
                                                                         2000                      1999
                                                                ----------------------    ----------------------
                                                                ASSETS     LIABILITIES    ASSETS     LIABILITIES
DOLLARS IN MILLIONS                                             ------     -----------    ------     -----------
<S>                                                             <C>        <C>            <C>        <C>
Depreciation and amortization...............................    $  29.0      $226.2       $  38.6      $211.5
Postretirement benefits.....................................      123.9          --         122.8          --
Other benefit plans.........................................       66.1         3.7          60.0         5.8
Accrued expenses including restructuring charges............       82.5        26.2          86.4        14.5
Loss carryforwards..........................................      302.6          --         301.7          --
Asset impairment losses.....................................       42.4          --            --          --
Other.......................................................        9.3         4.4          11.0         4.8
                                                                -------      ------       -------      ------
Sub-total...................................................      655.8       260.5         620.5       236.6
Valuation allowance.........................................     (288.1)         --        (296.3)         --
                                                                -------      ------       -------      ------
Total.......................................................    $ 367.7      $260.5       $ 324.2      $236.6
                                                                =======      ======       =======      ======
</TABLE>

     Included in other current assets were deferred tax assets of $113.0 million
and $73.8 million as of December 31, 2000 and 1999, respectively. Included in
other liabilities were deferred tax liabilities of $5.8 million as of December
31, 2000, and included in other assets were deferred tax assets of $13.8 million
as of December 31, 1999.

     As of December 31, 2000 and 1999, the Company had approximately $705
million and $710 million, respectively, of capital loss carryforwards available
to reduce future capital gains in the United States. The capital loss
carryforwards are primarily the result of the Company's 1997 loss on divestiture
of the Snapple beverages business. Therefore, the majority of those capital loss
carryforwards currently are expected to expire in 2002. A valuation allowance
has been provided for the full value of the deferred tax assets related to these
carryforwards.

     As of December 31, 2000, the Company had $62.2 million of operating and
capital loss carryforwards available to reduce future taxable income of certain
international subsidiaries. The majority of international loss carryforwards
have no expiration restrictions. Those with restrictions expire primarily in
five years. A valuation allowance has been provided for approximately 50 percent
of the deferred tax assets related to the loss carryforwards.

NOTE 15
LITIGATION

     The Company is a party to a number of lawsuits and claims, which it is
vigorously defending. Such matters arise out of the normal course of business
and relate to the Company's past acquisition activity and other issues. Certain
of these actions seek damages in large amounts. While the results of litigation
cannot be predicted with certainty, management believes that the final outcome
of such litigation will not have a material adverse effect on the Company's
consolidated financial position or results of operations. Changes in
assumptions, as well as actual experience, could cause the estimates made by
management to change.

                                       49
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16
EARNINGS PER SHARE

     Reconciliations of basic earnings per share (EPS) to diluted EPS were as
follows:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31
                                                      ------------------------------------------------------------
                                                            2000                 1999                  1998
                                                      -----------------    -----------------    ------------------
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)           INCOME    SHARES     INCOME    SHARES     INCOME     SHARES
AND SHARES IN THOUSANDS                               ------    ------     ------    ------     ------     ------
<S>                                                   <C>       <C>        <C>       <C>        <C>        <C>
Net income........................................    $360.6               $455.0               $ 284.5
Less: Preferred dividends.........................       4.2                  4.4                   4.5
                                                      ------               ------               -------
Net income available for common...................    $356.4    131,689    $450.6    134,027    $ 280.0    137,185
                                                      ------    -------    ------    -------    -------    -------
Net income per common share.......................    $ 2.71               $ 3.36               $  2.04
                                                      ======               ======               =======
Net income available for common...................    $356.4    131,689    $450.6    134,027    $ 280.0    137,185
Effect of dilutive securities:
  Stock options...................................        --      3,652        --      3,625         --      3,613
  ESOP Convertible Preferred Stock................       1.9      1,901       2.0      2,042        2.0      2,180
  Non-vested awards...............................        --        249        --        226         --        219
                                                      ------    -------    ------    -------    -------    -------
Diluted...........................................    $358.3    137,491    $452.6    139,920    $ 282.0    143,197
                                                      ------    -------    ------    -------    -------    -------
Net income per common share -- diluted............    $ 2.61               $ 3.23               $  1.97
                                                      ======               ======               =======
</TABLE>

     As of December 31, 1999 and 1998, certain stock options were excluded from
the computation of diluted EPS because the exercise prices were higher than the
average market price. See Note 8 for more information on outstanding options.
Historical adjustments for potentially dilutive securities are not necessarily
indicative of future trends.

                                       50
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17
QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                        2000
                                                           ---------------------------------------------------------------
                                                              FIRST            SECOND            THIRD           FOURTH
                                                           QUARTER (A)       QUARTER (B)      QUARTER (C)      QUARTER (D)
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)                -----------       -----------      -----------      -----------
<S>                                                        <C>               <C>              <C>              <C>
Net sales............................................        $1,172.1         $1,397.9         $1,475.1         $  995.9
Cost of goods sold...................................           522.9            637.5            644.5            483.4
                                                             --------         --------         --------         --------
GROSS PROFIT.........................................        $  649.2         $  760.4         $  830.6         $  512.5
Net income...........................................        $    1.8         $  151.1         $  159.2         $   48.5
Per common share:
  Net income.........................................        $   0.01         $   1.13         $   1.20         $   0.37
  Net income -- diluted (a)(b)(c)(d).................        $   0.01         $   1.10         $   1.15         $   0.35
  Cash dividends declared............................        $  0.285         $  0.285         $  0.285         $  0.285
  Market price range:
     High............................................        $     68         $ 76 3/4         $80 11/16        $98 15/16
     Low.............................................        $45 13/16        $ 59 7/8         $     66         $75 11/16
</TABLE>

-------------------------
(a) Includes restructuring charges of $56.8 million pretax ($34.1 million after
    tax), or $0.25 per share; income to reduce prior restructuring reserves of
    $3.2 million pretax ($2.0 million after tax), or $0.02 per share; and asset
    impairment losses of $120.1 million pretax ($72.1 million after tax), or
    $0.53 per share, related to the supply chain reconfiguration project.

(b) Includes restructuring charges of $6.2 million pretax ($3.8 million after
    tax), or $0.02 per share, and income to reduce prior restructuring and
    divestiture reserves of $2.5 million pretax ($1.9 million after tax), or
    $0.01 per share.

(c) Includes restructuring charges of $4.2 million pretax ($2.5 million after
    tax), or $0.02 per share, and income to reduce prior restructuring and
    divestiture reserves of $5.1 million pretax ($3.0 million after tax), or
    $0.02 per share.

(d) Includes restructuring charges of $7.0 million pretax ($4.2 million after
    tax), or $0.02 per share, and income to reduce prior restructuring reserves
    of $1.0 million pretax ($0.6 million after tax), not material per share.

<TABLE>
<CAPTION>
                                                                                        1999
                                                           ---------------------------------------------------------------
                                                              FIRST            SECOND            THIRD           FOURTH
                                                           QUARTER (A)       QUARTER (B)      QUARTER (C)      QUARTER (D)
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)                -----------       -----------      -----------      -----------
<S>                                                        <C>               <C>              <C>              <C>
Net sales............................................        $1,074.6         $1,317.5         $1,384.0          $ 949.1
Cost of goods sold...................................           488.3            594.1            600.9            453.5
                                                             --------         --------         --------          -------
Gross profit.........................................        $  586.3         $  723.4         $  783.1          $ 495.6
Net income...........................................        $   86.7         $  172.0         $  137.3          $  59.0
Per common share:
  Net income.........................................        $   0.63         $   1.27         $   1.02          $  0.44
  Net income -- diluted (a)(b)(c)(d).................        $   0.61         $   1.22         $   0.98          $  0.42
  Cash dividends declared............................        $  0.285         $  0.285         $  0.285          $ 0.285
  Market price range:
     High............................................        $ 63 3/8         $ 70 3/4         $     71          $    71
     Low.............................................        $ 50 7/8         $ 59 1/2         $ 60 1/2          $59 5/16
</TABLE>

-------------------------
(a) Includes a divestiture gain of $5.1 million pretax ($3.4 million after tax),
    or $0.03 per share, on the divestiture of the Brazilian pasta business;
    income of $3.3 million pretax ($2.0 million after tax), or $0.01 per share,
    to reduce prior restructuring and divestiture reserves; and reductions in
    the provision for income taxes of $8.4 million, or $0.06 per share, related
    to previously recorded tax accruals and tax assets.

(b) Includes reductions in the provision for income taxes of $37.7 million, or
    $0.27 per share, related to previously recorded tax accruals.

(c) Includes restructuring charges of $6.7 million pretax ($4.0 million after
    tax), or $0.03 per share, for the supply chain reconfiguration project, and
    income of $0.1 million pretax ($0.2 million after tax), not material per
    share, to reduce prior divestiture reserves.

(d) Includes restructuring charges of $6.0 million pretax ($3.6 million after
    tax), or $0.03 per share, for the supply chain reconfiguration project and
    customer organization alignment; income of $6.5 million pretax ($3.9 million
    after tax), or $0.03 per share, to reduce prior restructuring reserves; and
    reductions in the provision for income taxes of $13.2 million, or $0.09 per
    share, related to previously recorded tax accruals.

                                       51
<PAGE>
                    THE QUAKER OATS COMPANY AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 18
PROPOSED MERGER WITH PEPSICO

     On December 2, 2000, the Company, PepsiCo, Inc. and BeverageCo, Inc., a
direct wholly-owned subsidiary of PepsiCo, entered into an Agreement and Plan of
Merger. Pursuant to the merger agreement and subject to the terms and conditions
set forth therein, BeverageCo, Inc. will be merged with and into the Company,
with the Company being the surviving corporation of such merger. As a result of
the merger, the Company will become a wholly-owned subsidiary of PepsiCo. The
merger has been structured as a stock-for-stock tax-free reorganization and is
intended to qualify as a pooling of interests business combination for
accounting purposes. In connection with the execution of the merger agreement,
PepsiCo and the Company entered into a Stock Option Agreement pursuant to which
the Company granted PepsiCo an option to purchase up to approximately 19.9
percent of the outstanding shares of Company common stock exercisable in the
circumstances specified in the option agreement. Completion of the merger is
subject to approval by the shareholders of the Company and PepsiCo, receipt of
certain regulatory approvals, and satisfaction of other closing conditions
provided in the merger agreement.

     At the effective time of the merger, each issued and outstanding share of
Company common stock will be converted into the right to receive 2.3 shares of
PepsiCo common stock, subject to adjustment as provided in the merger agreement
(and as summarized below). Holders of Company common stock will not be entitled
to receive, in exchange for each share of Company common stock they hold, shares
of PepsiCo common stock with a value in excess of $105.00, determined on the
basis of the PepsiCo market price (as described below). In the event that the
value to be received would exceed $105.00, each share of Company common stock
will be exchanged for shares of PepsiCo common stock with a value of $105.00,
based on the PepsiCo market price. This will be accomplished by adjusting the
exchange ratio of 2.3 to a number equal to (a) $105.00, divided by (b) the
PepsiCo market price. The PepsiCo market price is the average of the closing
prices of PepsiCo capital stock on the NYSE composite tape for the ten trading
days randomly selected by lot by PepsiCo and the Company together from the
thirty trading days ending on and including the third NYSE trading day preceding
the closing date of the merger.

     If the PepsiCo market price is less than $40.00, the Company may terminate
the merger agreement within the 24-hour period following determination of the
PepsiCo market price, subject to PepsiCo's right to avoid the termination by
adjusting the exchange ratio so that each share of Company common stock will be
exchanged for shares of PepsiCo common stock with a value of $92.00 based on the
PepsiCo market price. This is accomplished by adjusting the exchange ratio of
2.3 to a number equal to (a) $92.00, divided by (b) the PepsiCo market price.

     For more information regarding this transaction, see the caption "Change in
Control Arrangements" found under Part III of this Form 10-K.

                                       52
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of The Quaker Oats Company:

     We have audited the accompanying consolidated balance sheets of The Quaker
Oats Company (a New Jersey corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, common
shareholders' equity and cash flows for the years ended December 31, 2000, 1999
and 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Quaker Oats Company and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years ended December 31, 2000, 1999 and
1998, in conformity with accounting principles generally accepted in the United
States.

/s/Arthur Andersen LLP

Chicago, Illinois
January 30, 2001

                                       53
<PAGE>

                              REPORT OF MANAGEMENT

     Management is responsible for the preparation and integrity of the
Company's financial statements. The financial statements have been prepared in
accordance with generally accepted accounting principles and necessarily include
some amounts that are based on management's estimates and judgment.

     To fulfill its responsibility, management's goal is to maintain strong
systems of internal controls, supported by formal policies and procedures that
are communicated throughout the Company. Management regularly evaluates its
systems of internal controls, with an eye toward improvement. Management also
maintains a staff of internal auditors who evaluate the adequacy of and
investigate the adherence to these controls, policies and procedures.

     Our independent public accountants, Arthur Andersen LLP, have audited the
financial statements and have rendered an opinion as to the statements' fairness
in all material respects. During the audit, they obtain an understanding of the
Company's internal control systems and perform tests and other procedures to the
extent required by generally accepted auditing standards.

     The Board of Directors pursues its oversight role with respect to the
Company's financial statements through the Audit Committee, which is composed
solely of non-management directors. The Audit Committee meets periodically with
the independent public accountants, internal auditors and management to assure
that all are properly discharging their responsibilities. The Audit Committee
approves the scope of the annual audit and reviews the recommendations the
independent public accountants have for improving internal accounting controls.
The Board of Directors, on recommendation of the Audit Committee, engages the
independent public accountants, subject to shareholder approval.

     Both Arthur Andersen LLP and the internal auditors have unrestricted access
to the Audit Committee.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     None.

                                       54
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

     The Restated Certificate of Incorporation of The Quaker Oats Company
provides that the members of the Board of Directors shall be divided into three
classes with staggered terms. The following table sets forth information
concerning the directors as of January 31, 2001.

<TABLE>
<CAPTION>
  NAME AND PERIOD OF SERVICE                  PRINCIPAL OCCUPATION AND DIRECTORSHIPS                    AGE
  --------------------------                  --------------------------------------                    ---
<S>                                <C>                                                                  <C>
Class III Directors with Terms Expiring in 2001

FRANK C. CARLUCCI                  Chairman, The Carlyle Group (merchant banking). Also a               70
Director 1983 - 1987 and           director of Ashland Inc.; Kaman Corporation; Neurogen
then since 1989                    Corporation; Nortel Networks Corporation; Pharmacia
                                   Corporation; Sun Resorts Ltd. N.V.; and Texas Biotechnology
                                   Corporation.

VERNON R. LOUCKS, JR.              Chairman, Retired, Baxter International Inc. (healthcare             66
Director since 1981                products) since January, 2000; formerly Chairman (1999) and
                                   Chairman and Chief Executive Officer (1980-1998) of Baxter
                                   International Inc.; and Chairman, InLight, Inc. (medical
                                   care service) (2000). Also a director of Affymetrix, Inc.;
                                   Anheuser-Busch Companies, Inc.; Emerson Electric Co.; and
                                   GeneSoft, Inc.

ROBERT S. MORRISON                 Chairman, President and Chief Executive Officer of the               58
Director since 1997                Company since 1997; formerly Chairman and Chief Executive
                                   Officer of Kraft Foods, Inc., a division of Philip Morris
                                   Companies Inc. (1994-1997); and President of General Foods
                                   U.S.A. of Philip Morris Companies Inc. (1991-1994). Also a
                                   director of Aon Corporation.
Class I Directors with Terms Expiring in 2002

ARMANDO M. CODINA                  Chairman and Chief Executive Officer, Codina Group, Inc.             54
Director since 1999                (real estate). Also a director of AMR Corporation; BellSouth
                                   Corporation; FPL Group, Inc.; and Winn-Dixie Stores, Inc.

J. MICHAEL LOSH                    Chairman of Metaldyne Corporation (supplier of metal                 54
Director since 1998                components to the transportation industry) since 2000;
                                   formerly Executive Vice President and Chief Financial
                                   Officer, General Motors Corporation (automotive
                                   manufacturing) (1994-2000). Also a director of Cardinal
                                   Health, Inc.

WALTER J. SALMON                   Stanley Roth Sr. Professor of Retailing, Emeritus, Harvard           70
Director since 1971                Business School since 1997; formerly Stanley Roth, Sr.
                                   Professor of Retailing (1980-1997) and Senior Associate
                                   Dean, External Relations (1989-1994). Also a director of
                                   Circuit City Stores, Inc.; Cole National Corporation;
                                   Harrah's Entertainment, Inc.; Luby's, Inc.; The Neiman
                                   Marcus Group, Inc.; and PETsMart Inc.
Class II Directors with Terms Expiring in 2003

W. JAMES FARRELL                   Chairman and Chief Executive Officer, Illinois Tool Works            58
Director since 1998                Inc. (engineering and industrial components) since 1996;
                                   formerly President and Chief Executive Officer (1995-1996);
                                   and Executive Vice President (1983-1994). Also a director of
                                   The Allstate Corporation and Sears, Roebuck and Co.

JUDY C. LEWENT                     Senior Vice President and Chief Financial Officer, Merck &           52
Director since 1994                Co., Inc. (pharmaceuticals). Also a director of Johnson &
                                   Johnson Merck Consumer Pharmaceuticals Company; Merck
                                   Capital Ventures; Merck/Schering-Plough Partnerships; Merial
                                   Limited; and Motorola, Inc.

LINDA JOHNSON RICE                 President and Chief Operating Officer, Johnson Publishing            42
Director since March, 2000         Company, Inc. (publishing). Also a director of Bausch & Lomb
                                   Incorporated; Kimberly-Clark Corporation; Northwestern
                                   Memorial Corporation; and Viad Corp.
</TABLE>

                                       55
<PAGE>

EXECUTIVE OFFICERS

     The following table sets forth information concerning the executive
officers of the Company as of January 31, 2001. Such executive officers serve at
the pleasure of the Board of Directors. Unless otherwise noted, all such
executive officers have been employed by the Company in an executive capacity
for five years or more.

<TABLE>
<CAPTION>
             NAME                           PRINCIPAL OCCUPATION AND PERIOD OF SERVICE                  AGE
             ----                           ------------------------------------------                  ---
<S>                                <C>                                                                  <C>
ROBERT S. MORRISON.............    See information with respect to Mr. Morrison set forth above         58
                                   under "Board of Directors."

WILLIAM G. BARKER..............    Vice President and Corporate Controller since January, 2000.         42
                                   Mr. Barker joined Quaker in 1996. Prior to joining Quaker,
                                   Mr. Barker was Assistant Treasurer, International for Fruit
                                   of the Loom, Inc. (apparel manufacturing) (1994-1995).

CASSIAN K. S. CHEUNG...........    Vice President and President -- Quaker Asia since 1998. Mr.          45
                                   Cheung joined Quaker in 1994.

MARGARET M. EICHMAN............    Vice President -- Investor Relations and Corporate Affairs           42
                                   since 1997. Ms. Eichman joined Quaker in 1980.

THOMAS L. GETTINGS.............    Vice President -- Treasurer and Tax since 1998. Mr. Gettings         44
                                   joined Quaker in 1987.

RICHARD M. GUNST...............    Vice President -- Planning, Analysis and Controls since              44
                                   January, 2000. Mr. Gunst joined Quaker in 1992.

PAMELA S. HEWITT...............    Senior Vice President -- Human Resources since 1998. Ms.             48
                                   Hewitt joined Quaker in 1992.

JOHN G. JARTZ..................    Senior Vice President -- General Counsel, Business                   47
                                   Development and Corporate Secretary since 1997. Mr. Jartz
                                   joined Quaker in 1980.

POLLY B. KAWALEK...............    Vice President and President -- Hot Breakfast since 1998.            46
                                   Ms. Kawalek joined Quaker in 1979.

CHARLES I. MANISCALCO..........    Vice President and President -- Convenience Foods since              47
                                   January, 2000. Mr. Maniscalco joined Quaker in 1980.

TERENCE D. MARTIN..............    Senior Vice President and Chief Financial Officer since              57
                                   1998. Prior to joining Quaker, Mr. Martin was Executive Vice
                                   President and Chief Financial Officer of General Signal
                                   Corporation (industrial manufacturing) (1995-1998) and Chief
                                   Financial Officer of American Cyanamid Company
                                   (pharmaceutical, agricultural and chemical products)
                                   (1991-1995).

TERRENCE B. MOHR...............    Senior Vice President -- Sales since 1998. Mr. Mohr joined           57
                                   Quaker in 1987.

MARK A. SHAPIRO................    Senior Vice President -- Corporate Strategy and Development          45
                                   since January, 2000. Mr. Shapiro joined Quaker in 1983.

MARGARET A. STENDER............    Vice President and President -- Ready-to-Eat Cereals since           43
                                   September, 2000. Prior to joining Quaker, Ms. Stender was
                                   Senior Vice President, Consumer Travel Solutions at Rand
                                   McNally (geographic and travel information) (1999-2000) and
                                   Vice President of Marketing and Business Development for
                                   Ameritech New Media, a subsidiary of Ameritech Corporation
                                   (telecommunications) (1996-1999).

SUSAN D. WELLINGTON............    Vice President and President -- U.S. Beverages since 1998.           41
                                   Ms. Wellington joined Quaker in 1981.

BERNARDO WOLFSON...............    Vice President and President -- Quaker Latin America since           47
                                   1998. Mr. Wolfson joined Quaker in 1983.

RUSSELL A. YOUNG...............    Senior Vice President -- Supply Chain since 1998. Mr. Young          52
                                   joined Quaker in 1971.
</TABLE>

                                       56
<PAGE>

COMPLIANCE WITH SECTION 16(a)

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who beneficially own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(SEC) and NYSE. To the best of the Company's knowledge, all such required
reports were timely filed.

ITEM 11. EXECUTIVE COMPENSATION

     The following table details annual and long-term compensation paid to the
Company's Chairman, President and Chief Executive Officer for 2000 and the
Company's four other most highly compensated executive officers for 2000 (Named
Executives). Information is provided for the last three Fiscal Years that the
Named Executive served as an executive officer of the Company.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                LONG TERM
                                                  ANNUAL COMPENSATION                          COMPENSATION
                                   --------------------------------------------------    ------------------------
                                                                            OTHER        RESTRICTED    SECURITIES        ALL
                                                                            ANNUAL         STOCK       UNDERLYING       OTHER
            NAME AND               FISCAL      SALARY        BONUS       COMPENSATION      AWARDS       OPTIONS      COMPENSATION
       PRINCIPAL POSITION           YEAR        ($)          ($)(A)         ($)(B)         ($)(C)        (#)(D)         ($)(E)
       ------------------          ------      ------        ------      ------------    ----------    ----------    ------------
<S>                                <C>       <C>           <C>           <C>             <C>           <C>           <C>
Robert S. Morrison...............   2000     $1,049,838    $      N/A      $145,196       $424,985      375,000        $766,202
Chairman, President                 1999     $  995,674    $1,700,000      $ 27,251       $349,989      340,000        $593,000
and Chief Executive Officer         1998     $  952,004    $1,400,000      $ 25,959       $     --      300,000        $118,131

Terence D. Martin................   2000     $  479,008    $      N/A      $    374       $123,452       55,000        $273,072
Senior Vice President               1999     $  479,008    $  493,800      $ 89,006       $ 18,244       50,000        $ 94,051
and Chief Financial Officer         1998     $   64,857    $   73,000      $     --       $     --      250,000        $     --

Russell A. Young.................   2000     $  341,840    $      N/A      $    678       $ 73,364       44,200        $217,496
Senior Vice President --            1999     $  328,168    $  440,300      $    277       $     --       38,000        $160,128
Supply Chain                        1998     $  306,762    $  323,400      $     --       $     --       38,000        $188,905

Susan D. Wellington..............   2000     $  289,670    $      N/A      $  1,358       $ 66,292      136,200        $188,953
Vice President and President --     1999     $  264,000    $  397,700      $  1,007       $ 49,716       25,000        $148,058
U.S. Beverages                      1998     $  234,014    $  342,900      $     --       $287,656       21,000        $ 65,276

John G. Jartz....................   2000     $  311,334    $      N/A      $  1,357       $ 23,857       36,900        $183,560
Senior Vice President --            1999     $  285,720    $  357,900      $  1,374       $ 52,917       32,000        $148,400
General Counsel,                    1998     $  269,750    $  317,400      $     --       $ 43,835       32,000        $ 93,783
Business Development
and Corporate Secretary
</TABLE>

-------------------------
N/A: Not available

(a) Amounts include the cash awards that have been paid under the Executive or
    Management Incentive Bonus Plan based on the Company's financial performance
    and the Named Executive's personal performance for each Fiscal Year. Bonus
    amounts for 2000 are not included, as such amounts for the individual Named
    Executives have not yet been finalized by the Compensation Committee of the
    Board of Directors.

(b) Of the amount shown for Mr. Morrison for 2000, $95,499 is attributable to
    personal use of corporate transportation. Of the amount shown for Mr. Martin
    for 1999, $50,203 is attributable to relocation expenses.

(c) Restricted stock award values reflect the fair market value of the Company's
    common stock on the date of each grant. Dividends on restricted shares are
    paid on an ongoing basis at the same rate as paid to all shareholders of
    common stock. The number and value of currently restricted shares held by
    the Named Executives as of December 31, 2000 were as follows: Mr. Morrison,
    14,613 and $1,422,941; Mr. Martin, 2,681 and $261,062; Mr. Young, 2,009 and
    $195,626; Ms. Wellington, 6,256 and $609,178; and Mr. Jartz, 2,457 and
    $239,250.

                                       57
<PAGE>

(d) All stock option awards were granted with an exercise price equal to the
    fair market value of the Company's common stock on the date of grant.

(e) Amounts shown are the total of the value of the stock allocations to the
    Named Executives' employee stock ownership accounts and cash awards to the
    Named Executives based on earnings in excess of the Internal Revenue Code
    limits on the amount of earnings deemed eligible for purposes of the annual
    stock allocations made directly under The Quaker 401(k) Plan for Salaried
    Employees. Of the amounts shown for Mr. Young for 1998, $80,345 is
    attributable to a special incentive award.

     The following table contains information covering the grant of stock
options to the Named Executives during Fiscal Year 2000. The exercise price for
all options granted is equal to the fair market value of the Company's common
stock on the date of grant.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                          INDIVIDUAL GRANTS (a)
                                         -------------------------------------------------------
                                                        % OF TOTAL                                   Potential Realizable Value
                                          NUMBER OF      OPTIONS                                      at Assumed Annual Rates
                                         SECURITIES     GRANTED TO                                  of Stock Price Appreciation
                                         UNDERLYING     EMPLOYEES                                       for Option Term (b)
                                           OPTIONS      IN FISCAL       EXERCISE      EXPIRATION    ----------------------------
                NAME                     GRANTED (#)       YEAR       PRICE ($/SH)       DATE            5%             10%
                ----                     -----------    ----------    ------------    ----------         --             ---
<S>                                      <C>            <C>           <C>             <C>           <C>             <C>
Robert S. Morrison...................      375,000         15.5%         $49.34         3/7/10      $11,636,123     $29,488,220
Terence D. Martin....................       55,000          2.3%         $49.34         3/7/10      $ 1,706,631     $ 4,324,939
Russell A. Young.....................       44,200          1.8%         $49.34         3/7/10      $ 1,371,511     $ 3,475,678
Susan D. Wellington..................      136,200(c)       5.6%         $49.34         3/7/10      $ 4,226,240     $10,710,121
John G. Jartz........................       36,900          1.5%         $49.34         3/7/10      $ 1,144,994     $ 2,901,641
</TABLE>

-------------------------
(a) All options were granted on March 8, 2000. Except as indicated in note (c)
    below, one-third of the options granted on March 8, 2000 will vest on each
    of the three anniversaries following the date of grant. These options are
    subject to change in control provisions which are generally described under
    "Termination and Change in Control Benefits" on page 62. The specific
    treatment of options in connection with the Company's proposed merger
    transaction with PepsiCo, Inc. is described under "Change in Control
    Arrangements" on page 64.

(b) Based on fair market value on the date of grant and an annual appreciation
    at the rate stated (compounded annually) of such fair market value through
    the expiration date of such options. The dollar amounts under these columns
    are the result of calculations at the 5% and 10% stock price appreciation
    rates set by the SEC and therefore do not forecast possible future
    appreciation, if any, of the Company's stock price. In addition, such dollar
    amounts do not purport to represent the appreciation rates that have been,
    or in the future may be, attributable to the proposed merger transaction
    with PepsiCo, Inc. See "Change in Control Arrangements" on page 64 for
    additional details regarding that transaction.

(c) Amount includes a special option award to purchase 100,000 shares of Company
    common stock. This special award will be vested as follows: 33% after 3
    years, 66% after 4 years and 100% after 5 years. These options are subject
    to change in control provisions which are generally described under
    "Termination and Change in Control Benefits" on page 62. The specific
    treatment of options in connection with the Company's proposed merger
    transaction with PepsiCo, Inc. is described under "Change in Control
    Arrangements" on page 64.

                                       58
<PAGE>

     The following table contains information covering the exercise of options
by the Named Executives during Fiscal Year 2000 and unexercised options held as
of the end of 2000.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                                          Number of                  Value of Securities
                                                                    Securities Underlying          Underlying Unexercised,
                                                                     Unexercised Options             In-the-Money Options
                                      SHARES          VALUE         at Fiscal Year End (#)       at Fiscal Year End ($)(b)(c)
                                   ACQUIRED ON       REALIZED    ----------------------------    ----------------------------
              NAME                 EXERCISE (#)       ($)(A)     EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
              ----                 ------------      --------    -----------    -------------    -----------    -------------
<S>                                <C>               <C>         <C>            <C>              <C>            <C>
Robert S. Morrison...............         --         $     --     1,090,200        924,800       $51,466,973     $43,039,900
Terence D. Martin................         --         $     --       116,500        238,500       $ 4,423,395     $ 9,662,290
Russell A. Young.................     23,000         $881,130       177,620         82,580       $10,168,334     $ 3,768,653
Susan D. Wellington..............     17,700         $605,618        56,610        160,090       $ 2,974,205     $ 7,569,730
John G. Jartz....................     11,318         $436,938       121,180         69,220       $ 6,756,988     $ 3,158,181
</TABLE>

-------------------------
(a) Represents the difference between the option exercise price and the fair
    market value of the Company's common stock on the date of exercise,
    multiplied by the number of shares covered by each such option exercised.

(b) Represents the difference between the option exercise price and the fair
    market value of the Company's common stock on December 31, 2000, multiplied
    by the number of shares covered by each such option held on that date.

(c) All outstanding options will become fully vested and exercisable upon
    approval by the Company's shareholders of the proposed merger transaction
    with PepsiCo, Inc.

PENSION PLANS

     The Company and its subsidiaries maintain several pension plans. The Quaker
Retirement Plan (Retirement Plan), which is the principal pension plan, is a
noncontributory, defined benefit plan covering eligible salaried and hourly
employees of the Company who have completed one year of service as defined by
the Retirement Plan.

     Under the Retirement Plan, the participant accrues a benefit based upon the
greater of a Years-of-Service Formula and an Earnings/Service Formula. Under the
Years-of-Service Formula, participants accrue annual benefits equivalent to
credited years of service times $216. Under the Earnings/Service Formula, a
participant's benefit is the sum of two parts:

     1. Pre-1994 Service Accrual -- Benefits accrued through December 31, 1993,
        are set at the greater of (a) those accrued under the Retirement Plan
        prior to December 31, 1993; or (b) 1% of average annual earnings for the
        five years through December 31, 1993 up to $22,700 plus 1.65% of such
        average annual earnings above $22,700, times credited years of service;
        and

     2. Post-1993 Service Accrual -- For each year beginning January 1, 1994,
        and after, participants accrue benefits of 1.75% of annual earnings for
        such year up to 80% of the Social Security wage base plus 2.5% of annual
        earnings above 80% of the Social Security wage base.

     Eligible earnings used to calculate retirement benefits include wages,
salaries, bonuses, contributions to The Quaker 401(k) Plan for Salaried
Employees, allocations to the employee stock ownership accounts and cash
equivalency payments made as a result of certain Internal Revenue Code
limitations on such allocations. Normal retirement age under the Retirement Plan
is age 65. The Retirement Plan provides for early retirement benefits.

     Benefit amounts payable under the Retirement Plan are limited to the extent
required by the Employee Retirement Income Security Act of 1974, as amended, and
the Internal Revenue Code of 1986, as amended. If the benefit formula produces
an amount in excess of those limitations, the excess will be paid out of general
corporate funds in accordance with the terms of The Quaker 415 Excess Benefit
Plan and The Quaker Eligible Earnings Adjustment Plan. The Quaker Eligible
Earnings Adjustment Plan also provides for payment out of general corporate
funds, based upon benefit amounts which would otherwise have been payable under
the Retirement Plan and The Quaker 415 Excess Benefit Plan if the executive had
not previously elected to defer compensation under the Executive Deferred
Compensation Plan.

                                       59
<PAGE>

     The total estimated annual retirement benefits under the above-described
plans that the Named Executives would receive are as follows: Russell A. Young,
$515,891; Susan D. Wellington, $601,606; and John G. Jartz, $482,195. The
amounts assume that the Named Executives will continue to work for the Company
until their normal retirement dates, that their earnings will remain the same as
in calendar 2000 and that each will elect a straight-lifetime benefit without
survivor benefits. (Payment options such as a lump sum or other annuities are
available.) Mr. Morrison and Mr. Martin will be provided retirement benefits in
accordance with their Employment Agreements as described under the heading
"Employment Agreements" on pages 62 - 64.

     The Quaker Supplemental Executive Retirement Program (Supplemental
Executive Retirement Program) may also provide retirement benefits for officers
of the Company designated as participants by the Compensation Committee. Benefit
amounts payable under the Supplemental Executive Retirement Program are intended
to provide a minimum base retirement benefit and are therefore offset by the
total of amounts payable under the Retirement Plan, The Quaker 415 Excess
Benefit Plan and The Quaker Eligible Earnings Adjustment Plan. The Supplemental
Executive Retirement Program benefit is based upon a participant's average
annual earnings for the five consecutive calendar years during which earnings
were highest within the last ten years of service multiplied by a percentage
based upon the participant's age at his termination date. This percentage ranges
from 35% to 50% (based upon the participant's age at termination).

COMPENSATION OF DIRECTORS

     The nonemployee directors' compensation and benefits program is intended to
closely align the interests of directors and shareholders. The annual cash
retainer for nonemployee directors is $35,000. Nonemployee directors also
receive annual stock option grants with an estimated value of $35,000 under The
Quaker Oats Company Stock Option Plan for Outside Directors (Stock Option Plan)
and annual common stock unit awards valued at $35,000 under The Quaker Oats
Company Stock Compensation Plan for Outside Directors (Stock Compensation Plan).
Each Committee chairperson receives an additional $5,000 award which, at the
director's option, is credited under the Stock Option Plan or the Stock
Compensation Plan. Nonemployee directors may elect to convert all or a portion
of their cash retainers and/or common stock units received under the Stock
Compensation Plan into stock options under the Stock Option Plan. In addition to
the compensation and benefits described above, nonemployee directors are
reimbursed for appropriate travel and lodging expenses. Directors who are
employees receive no additional compensation or benefits for Board or Committee
service.

     Under the Deferred Compensation Plan for Directors of The Quaker Oats
Company (Deferred Compensation Plan), each nonemployee director may elect to
defer the receipt of all or a portion of his/her annual retainer until ceasing
to be a director. Prior to 1999, directors could elect to carry such deferred
amounts as cash units or common stock units. Deferred amounts credited on or
after January 1, 1999 must be carried as common stock units. Existing cash units
are credited with interest on a monthly basis, at the new issue 10-year "A"
rated industrial bond rate. Amounts deferred as common stock units under the
Deferred Compensation Plan are converted quarterly into common stock units by
dividing the deferred amount by the fair market value of the Company's common
stock. Common stock units are also credited with dividend equivalents which are
converted into additional common stock units. After a director leaves the Board,
deferred amounts may be distributed in a lump-sum or in annual installments (not
exceeding 15), as elected by the director. The accumulated deferred amounts will
be distributed in kind if held as common stock units or cash if held as cash
units. If a director has not attained age 55 prior to leaving the Board, the
distribution of deferred amounts will begin following the director's attainment
of age 55. Payment of deferred amounts may be accelerated by the Compensation
Committee for any reason following a change in control.

     Under the Stock Option Plan, all nonemployee director stock options are
granted at an exercise price equal to the fair market value of the Company's
common stock on the date of grant. The options vest when granted, but they may
not be exercised for at least one year. They remain exercisable until the
earlier of ten years from the date of grant or five years after a director
leaves the Board. Upon the occurrence of a change in control, outstanding
options are cancelled and an immediate lump sum payment will be paid to the
director, equal to the product of: (1) the amount by which the higher of (a) the
closing price of the Company's common stock as reported on the NYSE Composite
Index on or nearest the date of payment (or, if not listed on such exchange, on
a nationally recognized exchange or quotation system on which trading volume in
the common stock is highest), or (b) the highest per share price for the
Company's common stock actually paid in connection with the change in control,
exceeds the purchase price of each such option held, times (2) the number

                                       60
<PAGE>

of shares covered by each such option (whether or not then fully exercisable).
Notwithstanding the foregoing, options outstanding on the date of a change in
control which is intended to qualify as a pooling of interests transaction shall
become fully vested and exercisable on such date, but shall not otherwise be
subject to the cancellation and payment procedures described in the previous
sentence.

     Under the Stock Compensation Plan, all outstanding common stock units are
credited with dividend equivalents which are converted into additional common
stock units. After a director leaves the Board, common stock units held under
the Stock Compensation Plan will be distributed in kind in a single distribution
or in annual installments (not exceeding 15), as elected by the director. The
Compensation Committee may accelerate the distribution of common stock units for
any reason following a change in control.

     For more specific information regarding the treatment of director stock
options and common stock units in connection with the Company's proposed merger
transaction with PepsiCo, Inc., see "Change in Control Arrangements" on page 64.

TERMINATION AND CHANGE IN CONTROL BENEFITS

     The Company's Retirement Plan currently provides that the accrued benefits
of participants who are involuntarily terminated during the two-year period
following a change in control will be increased. For a five-year period
following a change in control of the Company, the accrual of benefits for
service during such period cannot be decreased while there are excess assets (as
defined in the Retirement Plan). Subject to amendment at any time, for so long
as there are excess assets during that five-year period, if the Retirement Plan
is merged with any other plan, the accrued benefit of each member and the amount
payable to retired or deceased members shall be increased until there are no
excess assets. If during that five-year period the Retirement Plan is
terminated, to the extent that assets remain after satisfaction of liabilities,
the accrued benefits of members shall be increased so that no assets of the
Retirement Plan will directly or indirectly revert to the Company.

     The Company has entered into change in control agreements, known as
separation agreements, with certain executives and officers. The separation
agreements provide for separation pay should a change in control of the Company
occur and the executive's employment be terminated thereafter.

     For separation pay to be available under the separation agreements, the
executive's employment must be terminated involuntarily, without cause, or
voluntarily after certain changes in the terms of the executive's employment
(generally a significant change in the nature or scope of the executive's
authorities, reduction in total compensation, certain other changes in the
executive's terms of employment short of actual termination or breach of the
agreement by the Company), following a change in control. Under the separation
agreement for Mr. Martin, separation pay is also available upon voluntary
termination for any reason occurring during the thirteenth month following a
change in control.

     Under the separation agreements, separation pay equals two years' projected
base salary and projected bonuses under the Company's Executive or Management
Incentive Bonus Plan and the value of life and health insurance coverage and
pension and other benefits as if each executive remained in the Company's
employment for a period of two years. The separation agreements provide that all
or a portion of the amount of tax penalties, if any, paid under Section 4999 of
the Internal Revenue Code shall be reimbursed to the executive by the Company,
including the amount of any taxes on such reimbursements. In the event of a
change in control, each of the separation agreements terminates on the third
anniversary of the date on which the executive declares his or her separation
agreement effective.

     The Company's officers also participate in The Quaker Salaried Employees
Compensation and Benefits Protection Plan (the Protection Plan). Under the
Protection Plan, severance pay and benefits are provided should a change in
control occur and an officer's employment be terminated within two years
thereafter for any reason other than death, physical or mental incapacity,
voluntary resignation (unless preceded by one of certain significant changes in
the terms and conditions of the officer's employment), retirement or gross
misconduct. Severance payments may be paid in a lump sum or monthly
installments, as determined by the Protection Plan's Administrative Committee.
Severance payments are equal to nine months of pay, plus bonus. Severance
benefits include the continuation of all medical, dental and life insurance
coverage during the severance period. An officer who has attained age 50 upon
termination of employment within two years after a change in control will be
credited with an additional five years of service for purposes of the Company's
retiree health plans and, if such officer meets the minimum service requirement,
will be entitled to retiree benefits at age 55.

                                       61
<PAGE>

     The Company's officers also participate in the Quaker Officers Severance
Program (the Officers Severance Program). Under the Officers Severance Program,
severance benefits are payable if an officer's employment is terminated for any
reason other than death, physical or mental incapacity, voluntary resignation
(unless preceded by one of certain significant changes in the terms and
conditions of the officer's employment), retirement or gross misconduct, and the
officer signs a waiver and release of claims against the Company and agrees to
non-compete, non-raiding and non-disclosure restrictions. Severance benefits
will continue for one year or be paid in a lump sum as determined by the
Severance Program Committee. Severance benefits to be continued are the
executive's base salary at the time of termination, the average bonus for the
past two years under the Company's Executive or Management Incentive Bonus Plan,
and medical, dental and life insurance coverage as in effect at the time of
severance. If an officer's severance period ends within one year of attainment
of age 55 and the officer has at least eight years of service, the officer will
be eligible for retiree health benefits.

     Only the greater of the severance payment and benefits to be provided under
the Officers Severance Program or the Protection Plan will be provided to an
officer eligible under both, following a change in control. Severance payments
and benefits under the separation agreements are in addition to those provided
under either the Officers Severance Program or the Protection Plan following a
change in control.

     Under the Company's 1984 Long Term Incentive Plan, 1990 Long Term Incentive
Plan, and 1999 Long Term Incentive Plan, upon the occurrence of a change in
control, options and restricted stock outstanding on the date on which the
change in control occurs shall be cancelled, and an immediate lump sum cash
payment shall be paid to the participant equal to the product of: (1) the higher
of (a) the closing price of the Company's common stock as reported on the NYSE
Composite Index on or nearest the date of payment (or, if not listed on such
exchange, on a nationally recognized exchange or quotation system on which
trading volume in the Company's common stock is highest), or (b) the highest per
share price for the Company's common stock actually paid in connection with the
change in control (and with respect to options, reduced by the per share option
price of each such option held, whether or not then fully exercisable); and (2)
the number of shares covered by each such option or shares of restricted stock.
Notwithstanding the foregoing, previously unvested options and restricted stock
outstanding on the date of a change in control which is intended to qualify as a
pooling of interests transaction shall become fully vested and the options
exercisable on such date, but shall not otherwise be subject to the cancellation
and payment procedures described in the previous sentence. For more specific
information regarding the treatment of options and restricted stock in
connection with the proposed merger transaction with PepsiCo, Inc., see "Change
in Control Arrangements" on page 64.

     Under the Company's Deferred Compensation Plan for Executives, upon a
change in control the compensation committee which administers such plan may, in
its discretion for any reason deemed appropriate, accelerate the payment of
benefits under the plan to its participants.

EMPLOYMENT AGREEMENTS

     Terence D. Martin's Employment Agreement with Quaker. The Company entered
into an employment agreement with Terence D. Martin on November 11, 1998 that
provides him with an annual salary of at least $475,000 as well as an annual
bonus and stock option grant consistent with company practice. Mr. Martin's
agreement also provides for annual retirement benefits on a single-life annuity
basis equal to the greater of:

     - the amount Mr. Martin would receive under the Supplemental Executive
       Retirement Program if he was a participant in that program; or

     - $300,000

     These retirement benefits are subject to reduction in certain cases of
termination of employment before reaching age 60, and are reduced by all other
retirement benefits to which Mr. Martin is entitled from all other employers.
These retirement benefits vest after 60 months of active service. If, however,
Mr. Martin's employment terminates prior to such vesting for any reason that
triggers benefits under the Officers Severance Program, he will receive a
prorated benefit based upon the ratio of his number of full months of active
service to 30. His employment agreement also provides for severance benefits to
be paid in a lump sum in the event of specified terminations, which shall
consist of an additional amount equal to one year's payments under the Officers
Severance Program. These severance benefits are not payable, however, if
                                       62
<PAGE>

Mr. Martin is entitled to benefits under his separation agreement. Mr. Martin's
agreement also provides for his waiver and release of claims against the Company
and non-compete, non-raiding and non-disclosure restrictions upon him in order
to be qualified for these benefits.

     Robert Morrison's Employment Agreement and Separation Agreement with
Quaker. In 1997, the Company entered into an employment agreement with Mr.
Morrison, which is currently in effect. In addition, Mr. Morrison is currently a
party to a separation agreement with the Company on the same terms as Mr.
Martin. See "Termination and Change in Control Benefits" on page 61.

     Mr. Morrison's employment agreement with the Company provides for aggregate
annual retirement benefits on a single life annuity basis equal to the greater
of:

     - 50% of his average cash compensation for the highest five consecutive
       calendar years; or

     - $950,000

     These retirement benefits are subject to reduction in certain cases of
termination of employment before reaching age 60. Mr. Morrison's employment
agreement also provides him with restricted stock units and options. His
employment agreement also provides for severance benefits in the event of
specified terminations which shall consist of the compensation and benefits for
the remaining two-year term of his employment agreement and full vesting of all
options and restricted stock units on his last day of active service. These
severance benefits will continue to be payable even if Mr. Morrison is entitled
to benefits under his separation agreement. Mr. Morrison's employment agreement
also provides for his waiver and release of claims against the Company and
non-compete, non-raiding of employees and non-disclosure restrictions upon him
in order to be qualified for these severance benefits.

     Robert Morrison's Employment Agreement with Quaker and PepsiCo. On December
2, 2000, the Company and PepsiCo, Inc. entered into an Agreement and Plan of
Merger, as described under "Change in Control Arrangements" on page 64. In
connection with the merger agreement, the Company and PepsiCo entered into an
employment agreement with Mr. Morrison that becomes effective upon the closing
of the merger. The agreement has an initial term of eighteen months, which term
is automatically extended in one year increments unless PepsiCo or Mr. Morrison
provides the other with notice to the contrary. Under the agreement, Mr.
Morrison will serve as Chairman, President and Chief Executive Officer of the
Company and as Vice Chairman of PepsiCo. Consistent with his current
compensation from the Company, Mr. Morrison will be entitled to an annual base
salary of no less than $1,107,750 and will have an annual bonus target equal to
at least 100% of base salary, with a maximum payout of 200% of base salary. In
light of Mr. Morrison's current entitlements under the Company's benefit plans
and the non-competition, non-raiding of employees and non-disclosure of
information restrictions under the agreement, Mr. Morrison will also be entitled
to a supplemental payment of approximately $19,250,000 within thirty days after
the expiration of the initial term; provided, however, that if Mr. Morrison
voluntarily resigns (other than for good reason, as defined in the agreement),
Mr. Morrison will forfeit his right to the supplemental payment. In the event
PepsiCo involuntarily terminates Mr. Morrison or Mr. Morrison terminates his
employment for good reason prior to the expiration of the initial term, the
supplemental payment will be payable to Mr. Morrison within thirty days after
the date of termination.

     Under the agreement, Mr. Morrison is entitled to a grant of not less than
300,000 PepsiCo stock options within thirty days after the closing of the merger
and another grant of not less than 300,000 PepsiCo stock options in 2002. The
stock options will be granted with an exercise price equal to the fair market
value of PepsiCo common stock on the date of grant and will become fully
exercisable on the third anniversary of the grant date. The options will
immediately vest and become fully exercisable in the event of Mr. Morrison's
death or a change in control of PepsiCo. The options will also immediately vest
in the event that PepsiCo terminates Mr. Morrison other than for cause or Mr.
Morrison voluntarily terminates his employment for good reason.

     Upon Mr. Morrison's request, PepsiCo will lend him up to $10,000,000 within
five days after the closing of the merger or such later date as requested by Mr.
Morrison. Such loan shall be interest bearing and shall be due and payable
thirty days after the earlier of the expiration of the initial term or Mr.
Morrison's termination of employment. Consistent with Mr. Morrison's current
agreement with the Company, at age 60, Mr. Morrison will continue to be entitled
to an annual supplemental retirement benefit equal to not less than $950,000,
which amount shall be offset by any other

                                       63
<PAGE>

retirement benefits to which Mr. Morrison is entitled. Under the agreement, Mr.
Morrison will also continue to be entitled to a "gross up" payment in the event
that any amount payable to Mr. Morrison becomes subject to tax under Section
4999 of the Internal Revenue Code. During his employment, Mr. Morrison will be
entitled to participate in all employee benefit plans, including deferred
compensation plans that are available to similarly situated PepsiCo executives.

     At the effective time of the merger, Mr. Morrison's agreement with PepsiCo
and the Company will supersede all other employment and/or severance agreements
that Mr. Morrison has with the Company.

CHANGE IN CONTROL ARRANGEMENTS

     On December 2, 2000, the Company, PepsiCo, Inc. and BeverageCo, Inc., a
direct wholly owned subsidiary of PepsiCo, entered into an Agreement and Plan of
Merger. Pursuant to the merger agreement and subject to the terms and conditions
set forth therein, BeverageCo, Inc. will be merged with and into the Company,
with the Company being the surviving corporation of such merger. As a result of
the merger, the Company will become a wholly owned subsidiary of PepsiCo. The
merger has been structured as a stock-for-stock tax-free reorganization and is
intended to qualify as a pooling of interests business combination for
accounting purposes. In connection with the execution of the merger agreement,
PepsiCo and the Company entered into a Stock Option Agreement pursuant to which
the Company granted PepsiCo an option to purchase up to approximately 19.9
percent of the outstanding shares of Company common stock exercisable in the
circumstances specified in the Option Agreement. Completion of the merger is
subject to approval by the shareholders of the Company and PepsiCo, receipt of
certain regulatory approvals, and satisfaction of other closing conditions
provided in the merger agreement.

     Since the merger is intended to qualify as a pooling of interests business
combination, all then-outstanding stock options and restricted stock granted
under the Company's long term incentive plans and the directors' Stock Option
Plan shall become fully vested and the options exercisable upon the change in
control (which, under the terms of such plans, shall be deemed to occur upon
approval of the merger by the Company's shareholders). At the effective time of
the merger, each then-outstanding stock option granted under the Company's long
term incentive plans and the directors' Stock Option Plan will be converted into
fully vested options to purchase shares of PepsiCo common stock. The number of
shares underlying the new PepsiCo options will equal the number of shares of
Company common stock to which the corresponding Company option was subject
immediately prior to the effective date, multiplied by the exchange ratio
specified in the merger agreement. The per share exercise price of each new
PepsiCo option will equal the exercise price of the corresponding Company
options, divided by the exchange ratio. All other terms of the Company stock
options will remain unchanged.

     Restricted shares of Company common stock granted under the Company's long
term incentive plans which are outstanding immediately prior to the effective
time of the merger will be fully vested and free of restrictions at the
effective time of the merger in accordance with their terms. Each award will be
converted into shares of PepsiCo common stock equal to the number of shares
subject to the award, multiplied by the exchange ratio.

     At the effective time of the merger, each outstanding Company stock unit
which is payable in common shares (including common stock units issued under the
Stock Compensation Plan and the Deferred Compensation Plan) will be deemed to
constitute a number of PepsiCo stock units, each of which will be payable in
shares of PepsiCo common stock, equal to the number of Company stock units,
multiplied by the exchange ratio. Each PepsiCo stock unit will be subject to the
same terms and conditions as the Company stock units and will be payable to the
holders in shares of PepsiCo common stock at the same time as the Company stock
units would have been payable in shares of Company common stock.

                                       64
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERS OF MORE THAN 5 PERCENT

     The following table sets forth information as of January 31, 2001 with
respect to each person or entity known to have beneficial ownership of more than
5 percent of the Company's outstanding common stock based upon information
furnished to the Company.

<TABLE>
<CAPTION>
NAME AND ADDRESS OF                                                AMOUNT AND NATURE            PERCENT
BENEFICIAL OWNER                                                OF BENEFICIAL OWNERSHIP         OF CLASS
-------------------                                             -----------------------         --------
<S>                                                             <C>                             <C>
Fidelity Management Trust Co.
82 Devonshire Ct.
Boston, MA 02109 (a)........................................            9,868,173(b)               7.38%

FMR Corp.
82 Devonshire Ct.
Boston, MA 02109............................................           10,938,493                  8.18%
</TABLE>

-------------------------
(a) In accordance with applicable rules of the SEC, all shares beneficially
    owned by Fidelity Management Trust Co., including those beneficially owned
    as Trustee of The Quaker Oats Company 401(k) Plans Master Trust, are
    required to be disclosed.

(b) This amount includes 8,068,342 shares of common stock and 834,182 shares of
    ESOP Convertible Preferred Stock (at the conversion rate of 2.16 shares of
    common stock for each share of ESOP Convertible Preferred Stock and
    representing 100% of the issued and outstanding stock of that class), which
    ESOP Convertible Preferred Stock is included in determining the percent of
    class owned.

                                       65
<PAGE>

DIRECTORS AND MANAGEMENT

     As of January 31, 2001, each director, each Named Executive (see page 57)
and all directors and executive officers of the Company as a group beneficially
owned the number of shares of the Company's common stock set forth in the
following table. Shares subject to acquisition within 60 days through the
exercise of stock options are included in the first column and are shown
separately in the second column.

<TABLE>
<CAPTION>
                                                                                                   Shares Subject
                NAME OF INDIVIDUAL                      AMOUNT AND NATURE OF                       TO ACQUISITION
               OR PERSONS IN GROUP                    BENEFICIAL OWNERSHIP (A)                   WITHIN 60 DAYS (A)
               -------------------                    ------------------------                   ------------------
<S>                                                   <C>                      <C>          <C>
Frank C. Carlucci.................................              35,535         (b)(c)(d)                  3,385
Armando M. Codina.................................              11,760         (e)                        7,260
W. James Farrell..................................               6,541         (c)                        3,385
John G. Jartz.....................................             178,995         (f)(g)                   154,797
Judy C. Lewent....................................              10,755         (c)                        6,769
J. Michael Losh...................................               6,260         (c)(d)                     3,385
Vernon R. Loucks, Jr..............................              20,127         (c)                        3,385
Linda Johnson Rice................................               2,730         (c)                        1,773
Terence D. Martin.................................             183,956         (f)(g)(h)                151,150
Robert S. Morrison................................           1,635,621         (f)(g)(h)              1,428,150
Walter J. Salmon..................................              26,761         (c)                        3,385
Susan D. Wellington...............................             100,618         (f)(g)                    83,946
Russell A. Young..................................             247,992         (f)(g)                   217,666
                                                             ---------                                ---------
All directors and officers as a group.............           3,607,477         (f)(g)                 3,026,684
                                                             =========                                =========
</TABLE>

-------------------------
(a) Unless otherwise indicated, each named individual and each person in the
    group has sole voting and investment power with respect to the shares shown.
    Of the total shares outstanding (including shares subject to acquisition
    within 60 days after January 31, 2001), each person other than Mr. Morrison
    beneficially owns less than 1% of the total shares and the group in total
    beneficially owns approximately 2.6% of the total shares. Mr. Morrison
    beneficially owns approximately 1.2% of all outstanding shares.

(b) Of these shares, 300 are held in a custodial account for Mr. Carlucci's
    daughter, through which he shares voting and investment power with his wife.

(c) The figures shown for all directors include an aggregate of 50,972 common
    stock units credited to them under The Quaker Oats Company Stock
    Compensation Plan for Outside Directors.

(d) The figures shown for all directors include an aggregate of 21,042 common
    stock units credited to them under the Deferred Compensation Plan for
    Directors of The Quaker Oats Company.

(e) Includes 4,500 shares owned by Codina Investments, Inc., which is
    wholly-owned by Mr. Codina.

(f) The figures shown for all executive officers include an aggregate of 94,549
    shares allocated to them under The Quaker 401(k) Plan for Salaried
    Employees, which includes 18,388 shares on the basis of the conversion of
    shares of ESOP Convertible Preferred Stock at the conversion rate of 2.16.
    The Named Executives hold the following numbers of shares under this Plan:
    Mr. Morrison, 1,761; Mr. Martin, 1,634; Mr. Young, 10,235; Ms. Wellington,
    7,377; and Mr. Jartz, 9,964.

(g) The figures shown for all executive officers include an aggregate of 62,857
    shares granted to them under the 1990 LTIP and 1999 LTIP for which the
    restricted period has not lapsed. The Named Executives hold the following
    numbers of restricted shares or stock units under this Plan: Mr. Morrison,
    14,613; Mr. Martin, 2,681; Mr. Young, 2,009; Ms. Wellington, 6,256; and Mr.
    Jartz, 2,457.

(h) The respective figures shown for Messrs. Martin and Morrison include the
    following numbers of common stock units credited to them under the Deferred
    Compensation Plan for Executives of The Quaker Oats Company: Mr. Martin,
    12,844; and Mr. Morrison, 15,750.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None.

                                       66
<PAGE>

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

     The audited consolidated financial statements of The Quaker Oats Company
and its subsidiaries and the Report of Independent Public Accountants thereon
are found under Item 8 of this Form 10-K.

     The following audited financial statements are included under Item 8:

     1. Consolidated Statements of Income for the years ended December 31, 2000,
        1999 and 1998

     2. Consolidated Statements of Cash Flows for the years ended December 31,
        2000, 1999 and 1998

     3. Consolidated Balance Sheets as of December 31, 2000 and 1999

     4. Consolidated Statements of Common Shareholders' Equity for the years
        ended December 31, 2000, 1999 and 1998

     5. Operating Segment Information for the years ended December 31, 2000,
        1999 and 1998

     6. Operating Segment Data for the years ended December 31, 2000, 1999 and
        1998

     7. Enterprise and Geographic Information for the years ended December 31,
        2000, 1999 and 1998

     8. Six-Year Selected Financial Data for the six years ended December 31,
        2000, 1999, 1998, 1997, 1996 and 1995

(a)(2) FINANCIAL STATEMENT SCHEDULES
& (d)

     All required financial statement schedules are included in the audited
consolidated financial statements or notes, found under Item 8 of this Form
10-K.

(a)(3) EXHIBITS
& (c)

     The exhibits required to be filed are listed on the Exhibit Index attached
hereto, which is incorporated herein by reference.

(b) REPORTS ON FORM 8-K

     A Form 8-K was filed by the Company on February 8, 2001, concerning the
Federal Trade Commission's request for additional information in connection with
its antitrust review of the Company's proposed merger with PepsiCo, Inc.

     A Form 8-K was filed by the Company on February 1, 2001, under Item 5,
concerning the Company's Fourth Quarter Earnings Release and related prepared
conference call comments of February 1, 2001.

     A Form 8-K was filed by the Company on December 7, 2000, with respect to
the Agreement and Plan of Merger, dated December 2, 2000, between PepsiCo Inc.,
BeverageCo, Inc. and the Company, and the related Stock Option Agreement.

     A Form 8-K was filed by the Company on December 5, 2000, to announce the
discontinuance of the Company's $1 billion stock repurchase program.

                                       67
<PAGE>

                                   SIGNATURES

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

THE QUAKER OATS COMPANY

<TABLE>
<S>                                                 <C>
By: /s/ ROBERT S. MORRISON                          Date: February 15, 2001
    ----------------------------------------------
    Robert S. Morrison, Chairman, President and
    Chief Executive Officer
</TABLE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 15th day of February 2001, by the following
persons on behalf of the Registrant and in the capacities indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                                   TITLE
                      ---------                                                   -----
<S>                                                      <C>

         /s/ ROBERT S. MORRISON                          Chairman, President and Chief Executive Officer
-----------------------------------------------------
               Robert S. Morrison

         /s/ TERENCE D. MARTIN                           Senior Vice President and Chief Financial Officer
-----------------------------------------------------
               Terence D. Martin

         /s/ WILLIAM G. BARKER                           Vice President and Corporate Controller
-----------------------------------------------------
               William G. Barker

         /s/ FRANK C. CARLUCCI                           Director
-----------------------------------------------------
               Frank C. Carlucci

         /s/ ARMANDO M. CODINA                           Director
-----------------------------------------------------
               Armando M. Codina

         /s/ W. JAMES FARRELL                            Director
-----------------------------------------------------
               W. James Farrell

         /s/ JUDY C. LEWENT                              Director
-----------------------------------------------------
               Judy C. Lewent

         /s/ J. MICHAEL LOSH                             Director
-----------------------------------------------------
               J. Michael Losh

         /s/ VERNON R. LOUCKS, JR.                       Director
-----------------------------------------------------
               Vernon R. Loucks, Jr.

         /s/ LINDA JOHNSON RICE                          Director
-----------------------------------------------------
               Linda Johnson Rice

         /s/ WALTER J. SALMON                            Director
-----------------------------------------------------
               Walter J. Salmon
</TABLE>

                                       68
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                              ELECTRONIC (E) OR
                                                                               INCORPORATED BY
EXHIBIT NO.                           DESCRIPTION                             REFERENCE (IBRF)
-----------                           -----------                             -----------------
<S>           <C>                                                             <C>
2(a)          Agreement and Plan of Merger, dated as of December 2, 2000,         IBRF
              between PepsiCo, Inc., BeverageCo, Inc. and The Quaker Oats
              Company (incorporated by reference to the Company's Form 8-K
              filed on December 7, 2000, file number 1-12)
2(b)          Stock Option Agreement, dated as of December 2, 2000,               IBRF
              between PepsiCo, Inc. and The Quaker Oats Company
              (incorporated by reference to the Company's Form 8-K filed
              on December 7, 2000, file number 1-12)
3(a)          Restated Certificate of Incorporation (incorporated by              IBRF
              reference to the Company's Form 10-K for the fiscal year
              ended December 31, 1996, file number 1-12)
3(b)          Bylaws of The Quaker Oats Company, as amended effective             IBRF
              September 9, 1998 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1998, file number 1-12)
4(a)          Shareholder Rights Plan effective May 8, 1996 (incorporated         IBRF
              by reference to the Company's Form 8-K filed on May 20,
              1996, file number 1-12)
4(b)          First Amendment to the Shareholder Rights Plan effective            IBRF
              November 21, 2000, (incorporated by reference to the
              Company's Form 8-A12B/A, filed on December 5, 2000, file
              number 1-12)
4(c)          Second Amendment to the Shareholder Rights Plan effective           IBRF
              December 2, 2000, (incorporated by reference to the
              Company's Form 8-A12B/A, filed on December 5, 2000, file
              number 1-12)
4(d)          Registrant undertakes to furnish to the Commission, upon            IBRF
              request, a copy of any instrument defining the rights of
              holders of long-term debt of the registrant and all of its
              subsidiaries for which consolidated or unconsolidated
              financial statements are required to be filed.
10(a)(1)*     The Quaker Long Term Incentive Plan of 1990 (incorporated by        IBRF
              reference to the Company's Form 10-Q for the fiscal quarter
              ended September 30, 1996, file number 1-12)
10(a)(2)*     First Amendment to The Quaker Long Term Incentive Plan of           IBRF
              1990 (as amended and restated effective as of September 1,
              1996) (incorporated by reference to the Company's Form 10-Q
              for the fiscal quarter ended September 30, 1999, file number
              1-12)
10(a)(3)*     Second Amendment to The Quaker Long Term Incentive Plan of           E
              1990 (as  amended and restated effective as of September 1,
              1996)
10(a)(4)*     The Quaker Long Term Incentive Plan of 1999 (incorporated by        IBRF
              reference to the Company's Form 10-K for the fiscal year
              ended December 31, 1997, file number 1-12)
10(a)(5)*     First Amendment to The Quaker Long Term Incentive Plan of            E
              1999
10(b)*        Deferred Compensation Plan for Executives of The Quaker Oats        IBRF
              Company, as amended and restated effective as of December 1,
              1999 (incorporated by reference to the Company's Form 10-K
              for the fiscal year ended December 31, 1999, file number
              1-12)
10(c)*        Management Incentive Bonus Plan of The Quaker Oats Company,         IBRF
              as amended and restated effective as of May 13, 1998
              (incorporated by reference to the Company's Form 10-Q for
              the fiscal quarter ended September 30, 1999, file number
              1-12)
10(d)*        Executive Incentive Bonus Plan of The Quaker Oats Company           IBRF
              (incorporated by reference to the Company's Form 10-K for
              the fiscal year ended December 31, 1998, file number 1-12)
</TABLE>

                                       69
<PAGE>

<TABLE>
<CAPTION>
                                                                              ELECTRONIC (E) OR
                                                                               INCORPORATED BY
EXHIBIT NO.                           DESCRIPTION                             REFERENCE (IBRF)
-----------                           -----------                             -----------------
<S>           <C>                                                             <C>
10(e)(1)*     Deferred Compensation Plan for Directors of The Quaker Oats         IBRF
              Company, as restated effective November 1, 1996
              (incorporated by reference to the Company's Form 10-K for
              the fiscal year ended December 31, 1996, file number 1-12)
10(e)(2)*     First Amendment to the Deferred Compensation Plan for               IBRF
              Directors of The Quaker Oats Company effective May 13, 1998
              (incorporated by reference to the Company's Form 10-K for
              the fiscal year ended December 31, 1998, file number 1-12)
10(e)(3)*     Second Amendment to the Deferred Compensation Plan for              IBRF
              Directors of The Quaker Oats Company effective January 1,
              1999 (incorporated by reference to the Company's Form 10-K
              for the fiscal year ended December 31, 1998, file number 1-
              12)
10(f)(1)*     Directors' Stock Compensation Plan, as restated effective           IBRF
              November 1, 1996 (incorporated by reference to the Company's
              Form 10-K for the fiscal year ended December 31, 1996, file
              number 1-12)
10(f)(2)*     First Amendment to the Directors' Stock Compensation Plan           IBRF
              effective May 13, 1998 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1998, file number 1-12)
10(f)(3)*     Second Amendment to the Directors' Stock Compensation Plan          IBRF
              effective January 1, 1999 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1998, file number 1-12)
10(g)(1)*     The Quaker Oats Stock Option Plan for Outside Directors             IBRF
              effective January 1, 1999 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1998, file number 1-12)
10(g)(2)*     First Amendment to The Quaker Oats Stock Option Plan for             E
              Outside Directors
10(h)(1)*     Employment Agreement with Robert S. Morrison effective as of        IBRF
              October 22, 1997 (incorporated by reference to the Company's
              Form 10-K for the fiscal year ended December 31, 1997, file
              number 1-12)
10(h)(2)*     Employment Agreement with Terence D. Martin, first effective        IBRF
              for the fiscal quarter ended December 31, 1998 (incorporated
              by reference to the Company's Form 10-K for the fiscal year
              ended December 31, 1998, file number 1-12)
10(h)(3)*     Employment Agreement, dated as of December 2, 2000, among            E
              The Quaker Oats Company, PepsiCo, Inc. and Robert S.
              Morrison
10(h)(4)*     Form of Executive Separation Agreement entered into with            IBRF
              Robert S. Morrison and Terence D. Martin (incorporated by
              reference to the Company's Form 10-K for the fiscal year
              ended December 31, 1998, file number 1-12)
10(h)(5)*     Form of Amendment of Executive Separation Agreement entered          E
              into with Robert S. Morrison and Terence D. Martin
10(h)(6)*     Form of Executive Separation Agreement with certain                 IBRF
              Executive Officers (incorporated by reference to the
              Company's Form 10-Q for the fiscal quarter ended September
              30, 1998, file number 1-12)
10(h)(7)*     Form of Amendment of Executive Separation Agreement entered          E
              into with certain Executive Officers
10(i)(1)*     The Quaker Supplemental Executive Retirement Program, as            IBRF
              restated effective November 1, 1996 (incorporated by
              reference to the Company's Form 10-K for the fiscal year
              ended December 31, 1996, file number 1-12)
10(i)(2)*     First Amendment to The Quaker Supplemental Executive                IBRF
              Retirement Program, as amended and restated effective as of
              November 1, 1996 (incorporated by reference to the Company's
              Form 10-Q for the fiscal quarter ended September 30, 1999,
              file number 1-12)
</TABLE>

                                       70
<PAGE>

<TABLE>
<CAPTION>
                                                                              ELECTRONIC (E) OR
                                                                               INCORPORATED BY
EXHIBIT NO.                           DESCRIPTION                             REFERENCE (IBRF)
-----------                           -----------                             -----------------
<S>           <C>                                                             <C>
10(j)(1)*     The Quaker Oats Company Benefits Protection Trust                   IBRF
              (incorporated by reference to the Company's Form 10-K for
              the fiscal year ended June 30, 1989, file number 1-12)
10(j)(2)*     First Amendment to The Quaker Oats Company Benefits                 IBRF
              Protection Trust (incorporated by reference to the Company's
              Form 10-K for the fiscal year ended June 30, 1992, file
              number 1-12)
10(j)(3)*     Second Amendment to The Quaker Oats Company Benefits                IBRF
              Protection Trust (incorporated by reference to the Company's
              Form 10-K for the fiscal year ended June 30, 1992, file
              number 1-12)
10(k)(1)*     Quaker Salaried Employees Compensation and Benefits                 IBRF
              Protection Plan, as restated effective November 1, 1996
              (incorporated by reference to the Company's Form 10-K for
              the fiscal year ended December 31, 1996, file number 1-12)
10(k)(2)*     First Amendment to the Quaker Salaried Employees                    IBRF
              Compensation and Benefits Protection Plan, as amended and
              restated effective as of November 1, 1996 (incorporated by
              reference to the Company's Form 10-Q for the fiscal quarter
              ended September 30, 1999, file number 1-12)
10(l)(1)*     The Quaker Eligible Earnings Adjustment Plan, as restated           IBRF
              effective November 1, 1996 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1996, file number 1-12)
10(l)(2)*     First Amendment to the Quaker Eligible Earnings Adjustment          IBRF
              Plan, as amended and restated effective as of November 1,
              1996 (incorporated by reference to the Company's Form 10-Q
              for the fiscal quarter ended September 30, 1999, file number
              1-12)
10(m)(1)*     Quaker Officers Severance Program, as amended and restated          IBRF
              effective July 9, 1997 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1997, file number 1-12)
10(m)(2)*     First Amendment to the Quaker Officers Severance Program, as        IBRF
              amended and restated effective July 9, 1997 (incorporated by
              reference to the Company's Form 10-K for the fiscal year
              ended December 31, 1997, file number 1-12)
10(m)(3)*     Second Amendment to the Quaker Officers Severance Program,          IBRF
              as amended and restated effective as of July 9, 1997
              (incorporated by reference to the Company's Form 10-Q for
              the fiscal quarter ended September 30, 1999, file number
              1-12)
10(n)(1)*     The Quaker 415 Excess Benefit Plan, as amended and restated         IBRF
              effective November 1, 1996 (incorporated by reference to the
              Company's Form 10-K for the fiscal year ended December 31,
              1996, file number 1-12)
10(n)(2)*     First Amendment to The Quaker 415 Excess Benefit Plan, as           IBRF
              amended and restated effective as of November 1, 1996
              (incorporated by reference to the Company's Form 10-Q for
              the fiscal quarter ended September 30, 1999, file number
              1-12)
12            Statements re: Computation of Ratios                                 E
21            List of Subsidiaries of the Registrant                               E
23            Consent of Auditors                                                  E
</TABLE>

-------------------------
* Denotes a management contract or compensatory plan or arrangement required to
  be filed as an exhibit to this Form 10-K.

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<PAGE>

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