**FORM
      10-Q**





**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended March 31, 2006





OR





[
      ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from _______ to _______





Commission
      file number: 1-10434





**THE
      READER'S DIGEST ASSOCIATION, INC.**


(Exact
      name of registrant as specified in its charter)






**Delaware**
              
              **13-1726769**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)**Pleasantville,
                  New York**
              
              **10570-7000**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 **(914)
                  238-1000**(Registrant's
                  telephone number, including area code)


Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes [X] No [ ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes [ ] No [X]





As
      of
      April 28, 2006, 96,369,633 shares of the registrant's common stock were
      outstanding.










Page
      1 of
      30 pages.


-1-





**THE
      READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES**





**Index
      to Form 10-Q**








**March
      31, 2006**











**Part
                I - Financial Information**
            **Page
                No.****Item
                1.****Financial
                Statements****The
                Reader's Digest Association, Inc. and Subsidiaries**
              **Consolidated
                Condensed Financial Statements (unaudited):**Consolidated
                Condensed Statements of
                Operations
              for
                the three-month and nine-month periods ended March 31, 2006 and
                2005
            3Consolidated
                Condensed Balance Sheets
              as
                of March 31, 2006 and June 30, 2005
            4Consolidated
                Condensed Statements of Cash
                Flows
              for
                the nine-month periods ended March 31, 2006 and
                2005
            5Notes
                to Consolidated Condensed Financial
                Statements
            6**Item
                2.****Management's
                Discussion and Analysis of Financial Condition**
              **and
                Results of Operations**
            16**Item
                4.****Controls
                and Procedures**
            28**Part
                II - Other Information**
            29**Item
                2.****Unregistered
                Sales of Equity Securities and Use of Proceeds**
            29**Item
                6.****Exhibits**
            29








-2-





**TheReader's
      Digest Association, Inc. and
      Subsidiaries**


**Consolidated
      Condensed Statements of Operations**


**Three-month
      and nine-month periods ended March 31, 2006 and 2005**


*(In
      millions, except per share data)*


*(unaudited)*





**Three-month
                period ended**
            
            **Nine-month
                period ended****March
                31,**
            
            **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenues
            
            **$**
            **547.4**
            
            $
            544.9
            
            **$**
            **1,829.0**
            
            $
            1,832.9Product,
                distribution and editorial expenses
            
            
            **(236.7**
            **)**
            
            (232.5
            )
            
            **(759.0**
            **)**
            
            (743.9
            )Promotion,
                marketing and administrative
              expenses
            
            
            **(300.7**
            **)**
            
            (309.5
            )
            
            **(958.6**
            **)**
            
            (1,033.8
            )Goodwill
                charge
            
            
            **---**
            
            
            (129.0
            )
            
            **(187.8**
            **)**
            
            (129.0
            )Other
                operating items, net
            
            
            **---**
            
            
            5.2
            
            
            **3.4**
            
            
            12.4**Operating
                (loss) profit**
            
            
            **10.0**
            
            
            (120.9
            )
            
            **(73.0**
            **)**
            
            (61.4
            )Other
                expense, net
            
            
            **(9.1**
            **)**
            
            (9.0
            )
            
            **(28.7**
            **)**
            
            (30.7
            )**(Loss)
                income before provision for income taxes**
            
            
            **0.9**
            
            
            (129.9
            )
            
            **(101.7**
            **)**
            
            (92.1
            )Income
                tax benefit (provision)
            
            
            **0.1**
            
            
            0.3
            
            
            **(27.9**
            **)**
            
            (9.9
            )**Net
                (loss) income**
            
            **$**
            **1.0**
            
            $
            (129.6
            )
            **$**
            **(129.6**
            **)**
            $
            (102.0
            )**Basic
                (loss) earnings per share:**Weighted
                average common shares
              outstanding
            
            
            **95.3**
            
            
            97.6
            
            
            **96.5**
            
            
            97.4**Basic (loss) earnings per share**
            
            **$**
            **0.01**
            
            $
            (1.33
            )
            **$**
            **(1.35**
            **)**
            $
            (1.06
            )**Diluted
                (loss) earnings per share:**Adjusted
                weighted average common
              shares
                outstanding
            
            
            **96.7**
            
            
            97.6
            
            
            **96.5**
            
            
            97.4**Diluted
                (loss) earnings per share**
            
            **$**
            **0.01**
            
            $
            (1.33
            )
            **$**
            **(1.35**
            **)**
            $
            (1.06
            )**Dividends
                per common share**
            
            **$**
            **0.10**
            
            $
            0.10
            
            **$**
            **0.30**
            
            $
            0.20



































*See
      accompanying Notes to Consolidated Condensed Financial
      Statements.*





-3-


**TheReader's
      Digest Association, Inc. and
      Subsidiaries**


**Consolidated
      Condensed Balance Sheets**


**As
      of March 31, 2006 and June 30, 2005**


*(In
      millions)*








**March
                31,**
            
            **June
                30,****2006**
              *(unaudited)*
            
            **2005****Assets**Cash
                and cash equivalents
            
            **$**
            **59.9**
            
            $
            37.7Accounts
                receivable, net
            
            
            **273.3**
            
            
            233.9Inventories
            
            
            **198.5**
            
            
            162.4Prepaid
                and deferred promotion costs
            
            
            **39.1**
            
            
            53.8Prepaid
                expenses and other current assets
            
            
            **186.0**
            
            
            144.9**Total
                current assets**
            
            
            **756.8**
            
            
            **632.7**Property,
                plant and equipment, net
            
            
            **117.1**
            
            
            119.3Goodwill
            
            
            **693.4**
            
            
            880.9Other
                intangible assets, net
            
            
            **126.1**
            
            
            137.8Prepaid
                pension assets
            
            
            **320.5**
            
            
            307.9Other
                noncurrent assets
            
            
            **90.2**
            
            
            102.0**Total
                assets**
            
            **$**
            **2,104.1**
            
            **$**
            **2,180.6****Liabilities
                and stockholders' equity**Accounts
                payable
            
            **$**
            **135.3**
            
            
            109.8Loans
                and notes payable
            
            
            **0.6**
            
            
            ---Accrued
                expenses
            
            
            **236.0**
            
            
            267.4Income
                taxes payable
            
            
            **29.2**
            
            
            34.5Unearned
                revenue
            
            
            **437.9**
            
            
            395.5Other
                current liabilities
            
            
            **10.4**
            
            
            12.4**Total
                current liabilities**
            
            
            **849.4**
            
            
            **819.6**Long-term
                debt
            
            
            **612.4**
            
            
            559.2Unearned
                revenue
            
            
            **141.0**
            
            
            133.0Accrued
                pension
            
            
            **117.8**
            
            
            121.5Postretirement
                and postemployment benefits other than pensions
            
            
            **95.2**
            
            
            96.7Other
                noncurrent liabilities
            
            
            **112.1**
            
            
            84.4**Total
                liabilities**
            
            
            **1,927.9**
            
            
            **1,814.4**Capital
                stock
            
            
            **30.4**
            
            
            21.2Paid-in
                capital
            
            
            **204.3**
            
            
            206.8Retained
                earnings
            
            
            **1,061.7**
            
            
            1,221.6Accumulated
                other comprehensive loss
            
            
            **(79.4**
            **)**
            
            (84.1
            )Treasury
                stock, at cost
            
            
            **(1,040.8**
            **)**
            
            (999.3
            )**Total
                stockholders' equity**
            
            
            **176.2**
            
            
            **366.2****Total
                liabilities and stockholders' equity**
            
            **$**
            **2,104.1**
            
            **$**
            **2,180.6***See
                accompanying Notes to Consolidated Condensed Financial
                Statements.*


-4-


**TheReader's
      Digest Association, Inc. and
      Subsidiaries**


**Consolidated
      Condensed Statements of Cash Flows**


**Nine-month
      periods ended March 31, 2006 and 2005**


*(In
      millions)*


*(unaudited)*




**Nine-month
                  period ended****March
                  31,****2006**
              
              **2005****Cash
                  flows from operating activities**Net
                  loss
              
              **$**
              **(129.6**
              **)**
              $
              (102.0
              )Depreciation
                  and amortization
              
              
              **28.1**
              
              
              45.0Goodwill
                  charge
              
              
              **187.8**
              
              
              129.0Amortization
                  of debt issue costs
              
              
              **1.1**
              
              
              3.1Stock-based
                  compensation
              
              
              **11.0**
              
              
              8.2Net
                  gains on sales of long-term assets
              
              
              **(3.6**
              **)**
              
              (12.6
              )Changes
                  in operating assets and liabilities, net of effects of
                  dispositions:Accounts
                  receivable, net
              
              
              **(37.5**
              **)**
              
              (22.7
              )Inventories
              
              
              **(35.8**
              **)**
              
              (27.1
              )Prepaid
                  and deferred promotion costs
              
              
              **14.7**
              
              
              60.4Other
                  assets
              
              
              **(26.5**
              **)**
              
              5.0Unearned
                  revenues
              
              
              **49.2**
              
              
              29.0Deferred
                  taxes
              
              
              **6.5**
              
              
              3.4Accounts
                  payable and accrued expenses
              
              
              **(4.8**
              **)**
              
              3.6Other
                  liabilities
              
              
              **(3.5**
              **)**
              
              (8.4
              )**Net
                  change in cash due to operating activities**
              
              
              **57.1**
              
              
              **113.9****Cash
                  flows from investing activities**Proceeds
                  from other long-term investments and sales of businesses
              
              
              **0.4**
              
              
              4.1Proceeds
                  from sales of property, plant and equipment
              
              
              **3.7**
              
              
              58.0Purchase
                  of intangible assets
              
              
              **(0.5**
              **)**
              
              ---Capital
                  expenditures
              
              
              **(14.6**
              **)**
              
              (13.0
              )**Net
                  change in cash due to investing activities**
              
              
              **(11.0**
              **)**
              
              **49.1****Cash
                  flows from financing activities**Proceeds
                  / (repayments) from borrowings, net
              
              
              **53.8**
              
              
              (36.5
              )Repayments
                  of term loan
              
              
              **---**
              
              
              (111.0
              )Dividends
                  paid
              
              
              **(30.0**
              **)**
              
              (20.5
              )Cash
                  paid for financing fees
              
              
              **---**
              
              
              (0.5
              )Treasury
                  stock repurchases
              
              
              **(45.5**
              **)**
              
              ---Proceeds
                  from employee stock purchase plan and exercise
                of
                  stock options
              
              
              **1.5**
              
              
              1.4Other,
                  net
              
              
              **(3.8**
              **)**
              
              (2.3
              )**Net
                  change in cash due to financing activities**
              
              
              **(24.0**
              **)**
              
              **(169.4**
              **)**Effect
                  of exchange rate changes on cash
              
              
              **0.1**
              
              
              **4.8****Net
                  change in cash and cash equivalents**
              
              
              **22.2**
              
              
              **(1.6**
              **)**Cash
                  and cash equivalents at beginning of period
              
              
              **37.7**
              
              
              50.3**Cash
                  and cash equivalents at end of period**
              
              **$**
              **59.9**
              
              **$**
              **48.7**
 *See
        accompanying Notes to Consolidated Condensed Financial
        Statements.*


-5-


**TheReader's
      Digest Association, Inc. and
      Subsidiaries**


**Notes
      to Consolidated Condensed Financial Statements**


*(Dollars
      in millions, except per share data)*


*(unaudited)*











*Unless
      indicated otherwise, references in Notes to Consolidated Condensed Financial
      Statements to “we,” “us” and “our” are to The Reader’s Digest Association, Inc.
      and subsidiaries. All references to 2006 and 2005, unless otherwise indicated,
      are to fiscal 2006 and fiscal 2005, respectively. Our fiscal year is the period
      from July 1 through June 30.*








**(1)**  **Basis
      of Presentation and Use of Estimates**





The
      accompanying consolidated condensed financial statements include the accounts
      of
      The Reader’s Digest Association, Inc. and its majority-owned subsidiaries. All
      significant intercompany accounts and transactions have been eliminated in
      consolidation. These statements and accompanying notes have not been audited
      but, in the opinion of management, have been prepared in conformity with U.S.
      generally accepted accounting principles, applying certain assumptions and
      estimates, including all adjustments considered necessary to present such
      information fairly. Included in the adjustments for the nine-month period ended
      March 31, 2006 is a goodwill charge related to Books Are Fun. See Note 8,
      Goodwill and Other Intangible Assets, Net, for further information. All other
      adjustments are of a normal recurring nature. Although these estimates are
      based
      on management’s knowledge of current events and actions that we may undertake in
      the future, actual results may ultimately differ from those estimates. The
      accompanying consolidated condensed financial statements should be read in
      conjunction with the audited consolidated financial statements included in
      our
      2005 Annual Report to Stockholders.





We
      report
      on a fiscal year that begins July 1. The three-month periods ended March 31,
      2006 and 2005 are the third fiscal quarters of 2006 and 2005, respectively.
      Operating results for any interim period are not necessarily indicative of
      the
      results for an entire year due to the seasonality of our business.





In
      some
      instances certain prior period amounts have been reclassified to conform to
      the
      current year presentation.





**Recent
      Accounting Standards**





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based
      Payment” (SFAS No. 123R). This statement supersedes SFAS No. 123, “Accounting
      for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based
      Compensation-Transition and Disclosure-an amendment of FASB Statement No.
      123, *”* and
      Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued
      to Employees.” The statement is effective for interim or annual periods
      beginning after June 15, 2005. Accordingly, effective July 1, 2005, we adopted
      the fair-value recognition provisions of SFAS No. 123R. See Note 3, Stock-Based
      Compensation, for further information on the adoption of SFAS No. 123R.








-6-


**(2)**  **Basic
      and Diluted (Loss) Earnings Per Share**





Basic
      (loss) earnings per share is computed by dividing net (loss) income less
      preferred stock dividend requirements by the weighted average number of common
      shares outstanding during the period. The preferred stock dividend requirements
      were $0.3 for each of the three-month periods ended March 31, 2006 and 2005
      and
      $1.0 for each of the nine-month periods ended March 31, 2006 and 2005.





Diluted
      earnings per share is computed in the same manner except that the weighted
      average number of common shares outstanding assumes the exercise and conversion
      of certain stock options and vesting of certain restricted stock. For the
      three-month period ended March 31, 2006, the incremental weighted average shares
      attributed to the assumed exercise, conversion and vesting of stock options
      and
      restricted stock were 1.4 million. In addition, options to purchase 10.8 million
      shares were not included in the calculation of diluted earnings per share for
      the three-month period ended March 31, 2006 since the effect of including these
      options would have been anti-dilutive. For the nine-month period ended March
      31,
      2006, 15.0 million stock options and restricted stock outstanding were excluded
      from the diluted loss per share calculations since the effect of including
      these
      options would have been anti-dilutive. Accordingly, our diluted loss per share
      for the nine-month period ended March 31, 2006 is calculated using the basic
      weighted average number of common shares outstanding.





For
      the
      three- and nine-month periods ended March 31, 2005, 15.4 million stock options
      and restricted stock outstanding were excluded from the diluted loss per share
      calculations since the effect of including these options and restricted stock
      would have been anti-dilutive. Accordingly, our diluted loss per share for
      the
      three- and nine- month periods ended March 31, 2005 is calculated using the
      basic weighted average number of common shares outstanding.








**(3)**  **Stock-Based
      Compensation**





As
      of
      July 1, 2005, we maintain certain stock-based compensation plans that are
      described in Note 9 to the Consolidated Financial Statements included in our
      2005 Annual Report to Stockholders. In addition to these plans, the Compensation
      and Nominating Committee of the Board of Directors (the Committee) approved
      the
      2005 Key Employee Long-Term Incentive Plan (the 2005 Plan) in August 2005.
      Under
      the 2005 Plan, the Committee may grant stock options, stock appreciation rights,
      restricted stock, restricted stock units, deferred stock, performance units,
      performance shares and other stock-based awards to eligible employees. The
      Committee may grant up to a maximum of 2,900,000 underlying shares of Common
      Stock under the 2005 Plan. In addition, 661,440 underlying shares available
      for
      grant under the 2002 Key Employee Long-Term Incentive Plan became available
      for
      issuance under the 2005 Plan.





Prior
      to
      July 1, 2005, we accounted for these plans under SFAS No. 123. As permitted
      under this standard, compensation cost was recognized using the intrinsic value
      method described in APB No. 25. Effective July 1, 2005, we adopted the
      fair-value recognition provisions of SFAS No. 123R and Securities and Exchange
      Commission Staff Accounting Bulletin No. 107 using the modified prospective
      transition method; therefore, prior periods have not been restated. Compensation
      cost recognized in the three- and nine-month periods ended March 31, 2006
      includes compensation cost for all share-based payments granted prior to, but
      not yet vested as of July 1, 2005, based on the grant date fair value
      estimated in accordance with the original provisions of SFAS No. 123, and
      compensation cost for all share-based payments granted subsequent to July 1,
      2005, based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123R.




*Stock
      Options*





Stock
      options are granted with exercise prices not less than the fair market value
      of
      our Common Stock at the time of the grant, and with an exercise term (as
      determined by the Committee) not to exceed 10 years. The Committee determines
      the vesting period for our stock options. Generally, such stock options become
      exercisable over four years. Option awards usually provide for accelerated
      vesting upon retirement, death or disability. During the nine-month periods
      ended March 31, 2006 and 2005 we granted 1.3 million and 1.9 million options,
      respectively.


-7-





No
      stock-based compensation cost related to stock options was recognized in the
      statements of operations for the years ended June 30, 2005 and 2004, as all
      options granted in these periods had an exercise price equal to the market
      price
      at the date of grant. As a result of adopting SFAS No. 123R, our income before
      taxes and net income for the three-month period ended March 31, 2006 are $1.7
      and $1.1 lower, respectively, than if we had continued to account for
      stock-based compensation under APB No. 25. For the nine-month period ended
      March
      31, 2006, our loss before taxes and net loss are $5.0 and $3.1 higher,
      respectively. This resulted in a decrease in our reported basic and diluted
      income per share of $0.01 for the three-month period ended March 31, 2006 and
      an
      increase in our reported basic loss per share of $0.03 for the nine-month period
      ended March 31, 2006. Compensation expense is recognized in the promotion,
      marketing and administrative expenses line item of our statements of operations
      on a ratable basis over the vesting periods. There were no capitalized
      stock-based compensation costs at March 31, 2006 and 2005. As of March 31,
      2006,
      there was $8.2 of total unrecognized compensation cost related to nonvested
      stock options to be recognized over a weighted-average period of 1.5
      years.





The
      intrinsic values of options exercised during the nine-month periods ended March
      31, 2006 and 2005 were not significant. The total cash received from the
      exercise of stock options was $0.5 and $0.7 for the nine-month periods ended
      March 31, 2006 and 2005, respectively, and is classified as financing cash
      flows. Shares are issued from treasury stock upon exercise of the options.
      Prior
      to the adoption of SFAS No. 123R, we presented all tax benefits of deductions
      resulting from the exercise of stock options as operating cash flows in the
      statements of cash flows. SFAS No. 123R requires that cash flows from tax
      benefits attributable to tax deductions in excess of the compensation cost
      recognized for those options (excess tax benefits) be classified as financing
      cash flows. We did not have any significant excess tax benefits for the
      nine-month period ended March 31, 2006.





The
      fair
      values of the options granted during the nine-month periods ended March 31,
      2006
      and 2005 were estimated on the dates of their grants using the Black-Scholes
      option-pricing model on the basis of the following weighted average
      assumptions:





**March
                31, 2006**
            
            March
                31, 2005Risk-free
                interest rate
            
            
            **4.2**
            **%**
            
            3.4
            %Expected
                life
            
            
            **6.25
                years**
            
            
            4.1
                yearsExpected
                volatility
            
            
            **31.7**
            **%**
            
            32.9
            %Expected
                dividend yield
            
            
            **2.6**
            **%**
            
            1.2
            %Weighted-average
                fair value of options granted
            
            **$**
            **4.39**
            
            $
            4.43





The
      risk-free interest rate for the periods within the expected life of the option
      is based on the U.S. Treasury yield curve in effect at the time of grant. In
      fiscal 2005, the expected life was based on historical exercises and
      terminations. Due to the insignificant number of stock option exercises during
      the past three fiscal years, in 2006 we have estimated the expected life of
      options granted to be the midpoint between the average vesting term and the
      contractual term. The expected volatility for the periods with the expected
      life
      of the option is determined using historical volatilities based on historical
      closing stock prices. The expected dividend yield is based on our annual
      dividend in relation to our historical average stock price. The increase in
      the
      dividend yield is attributed to the increased quarterly dividend beginning
      February 15, 2005.


-8-





Changes
      in outstanding options are as follows:


Options
              (000’s)
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual Term (yrs.)
            
            Aggregate
                Intrinsic Value**Outstanding
                at June 30, 2005**
            
            
            **12,757**
            
            **$**
            **23.76**Granted
            
            
            1,327
            
            $
            15.13Exercised
            
            
            (39
            )
            $
            14.41Canceled
            
            
            (753
            )
            $
            29.74**Options
                outstanding at March 31, 2006**
            
            
            **13,292**
            
            **$**
            **22.59**
            
            
            **5.21**
            
            **$**
            **2.1****Options
                vested or expected to vest at March 31, 2006**
            
            
            **12,793**
            
            **$**
            **22.89**
            
            
            **5.10**
            
            **$**
            **1.9****Options
                exercisable at March 31, 2006**
            
            
            **9,640**
            
            **$**
            **25.42**
            
            
            **4.10**
            
            **$**
            **1.0****Options
                available for grant at March 31, 2006**
            
            
            **3,485**





The
      table
      below presents the pro forma effect on net loss and basic and diluted losses
      per
      share if we had applied the fair value recognition provision to options granted
      under our stock option plans for the three- and nine-month periods ended March
      31, 2005. For purposes of this pro forma disclosure, the value of the options
      is
      estimated using the Black-Scholes option-pricing model and amortized to expense
      over the options’ vesting periods.





**Three-month
                period ended March 31, 2005**
            
            **Nine-month
                period ended March 31, 2005****Net
                loss, as reported**
            
            **$**
            **(129.6**
            **)**
            **$**
            **(102.0**
            **)**Less:
                stock-based compensation expense determined using the fair value
                based
                method, net of tax
            
            
            **(1.4**
            **)**
            
            **(5.0**
            **)****Net
                loss, pro forma**
            
            **$**
            **(131.0**
            **)**
            **$**
            **(107.0**
            **)****Basic
                loss per share, as reported**
            
            **$**
            **(1.33**
            **)**
            **$**
            **(1.06**
            **)****Basic
                loss per share, pro forma**
            
            **$**
            **(1.35**
            **)**
            **$**
            **(1.11**
            **)****Diluted
                loss per share, as reported**
            
            **$**
            **(1.33**
            **)**
            **$**
            **(1.06**
            **)****Diluted
                loss per share, pro forma**
            
            **$**
            **(1.35**
            **)**
            **$**
            **(1.11**
            **)**





For
      the
      three- and nine-month periods ended March 31, 2005, $1.8 and $5.4, net of tax,
      respectively, of expenses related to restricted and deferred stock are included
      in our net loss and losses per share, as reported.





*Restricted
      Stock and Deferred Stock*





**Restricted
      Stock** -
      Restricted stock are shares of Common Stock that are subject to restrictions
      on
      transfer and risk of forfeiture until the fulfillment of specified conditions.
      In 2005, the market value of restricted stock awards on the date of grant was
      recorded as a reduction of capital stock. In connection with the adoption of
      SFAS No. 123R in 2006, we reclassified the unamortized restricted stock to
      paid-in capital. Restricted stock is expensed ratably over the term of the
      restriction period, ranging from two to four years. Restricted stock expense
      for
      the three-month periods ended March 31, 2006 and 2005, amounted to $1.6 and
      $2.5, respectively, before taxes of $0.6 and $1.0, respectively. Restricted
      stock expense for the nine-month periods ended March 31, 2006 and 2005,
      amounted to $4.8 and $7.0, respectively, before taxes of $1.8 and $2.3,
      respectively.


-9-





**Deferred
      Stock** -
      Deferred stock are rights to receive shares of Common Stock upon the fulfillment
      of specified conditions. We offer deferred stock outside the United States.
      Deferred stock is similar to restricted stock in all respects, except that
      deferred stock is issued to the employee at the completion of the vesting
      period. We recognized expense of $0.5 before taxes of $0.2, during both
      three-month periods ended March 31, 2006 and 2005, respectively, related to
      these awards. We recognized expense of $1.2, before taxes of $0.5, during both
      nine-month periods ended March 31, 2006 and 2005 related to those
      awards.





A
      summary
      of the status of our nonvested shares for both restricted and deferred stock
      as
      of March 31, 2006 and changes during the nine-months ended March 31, 2006,
      is as
      follows:





**Nonvested
                Shares**
            
            Shares
              (000’s)
            
            Weighted
                Average Grant Date Fair ValueNonvested
                at June 30, 2005
            
            
            2,416
            
            $
            15.01Granted
            
            
            174
            
            $
            15.09Vested(1)
            
            
            (798
            )
            $
            13.17Forfeitures
            
            
            (63
            )
            $
            14.79Nonvested
                at March 31, 2006
            
            
            **1,729**
            
            **$**
            **14.77**


(1)
      The
      shares vested during the nine-months ended March 31, 2006 includes approximately
      236,426 shares of our Common Stock surrendered by employees in order to fulfill
      their tax withholding obligations.





The
      fair
      value of nonvested shares is determined based on the average of the high and
      low
      stock price of our Common Stock on the grant date. The weighted-average grant
      date fair values of nonvested shares granted during the nine-month periods
      ended
      March 31, 2006 and 2005 were $15.09 and $15.64, respectively. As of March 31,
      2006, there was $6.9 of total unrecognized compensation cost related to
      nonvested restricted and deferred stock arrangements to be recognized over
      a
      weighted-average period of 1.6 years.








**(4)**  **Revenues
      and Operating (Loss) Profit by Reportable Segment**





Reportable
      segments are based on our method of internal reporting. We present our segment
      revenues as if the transactions were with third parties. Revenues and expenses
      attributable to intercompany transactions are eliminated (under the intercompany
      eliminations caption below) to reconcile our reportable segment amounts to
      consolidated amounts, as reported in our statements of operations.





The
      accounting policies of our segments are the same as those described in Note
      1 to
      the Consolidated Financial Statements included in our 2005 Annual Report to
      Stockholders.


-10-





**Three-month
                period ended**
            
            **Nine-month
                period ended****March
                31,**
            
            **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenues**Reader’s
                Digest North America
            
            **$**
            **219.8**
            
            $
            211.2
            
            **$**
            **694.5**
            
            $
            689.2Reader’s
                Digest International
            
            
            **236.5**
            
            
            238.8
            
            
            **772.3**
            
            
            759.8Consumer
                Business Services
            
            
            **96.9**
            
            
            99.3
            
            
            **385.5**
            
            
            404.6Intercompany
                eliminations
            
            
            **(5.8**
            **)**
            
            (4.4
            )
            
            **(23.3**
            **)**
            
            (20.7
            )**Total
                revenues**
            
            **$**
            **547.4**
            
            **$**
            **544.9**
            
            **$**
            **1,829.0**
            
            **$**
            **1,832.9****Operating
                (loss) profit**Reader’s
                Digest North America
            
            **$**
            **24.1**
            
            $
            21.9
            
            **$**
            **68.2**
            
            $
            63.0Reader’s
                Digest International
            
            
            **4.9**
            
            
            7.3
            
            
            **44.9**
            
            
            49.2Consumer
                Business Services
            
            
            **(8.9**
            **)**
            
            (4.1
            )
            
            **27.4**
            
            
            38.6Magazine
                deferred promotion
              amortization(1)
            
            
            **---**
            
            
            (13.1
            )
            
            **---**
            
            
            (64.7
            )Goodwill
                charge(2)
            
            
            **---**
            
            
            (129.0
            )
            
            **(187.8**
            **)**
            
            (129.0
            )Corporate
                Unallocated(3)
            
            
            **(10.1**
            **)**
            
            (9.1
            )
            
            **(29.1**
            **)**
            
            (30.9
            )Other
                operating items, net(4)
            
            
            **---**
            
            
            5.2
            
            
            **3.4**
            
            
            12.4**Operating
                (loss) profit**
            
            **$**
            **10.0**
            
            **$**
            **(120.9**
            **)**
            **$**
            **(73.0**
            **)**
            **$**
            **(61.4**
            **)****Intercompany
                eliminations**Reader’s
                Digest North America
            
            **$**
            **(2.5**
            **)**
            $
            (1.8
            )
            **$**
            **(8.9**
            **)**
            $
            (7.5
            )Reader’s
                Digest International
            
            
            **(1.7**
            **)**
            
            (0.9
            )
            
            **(4.9**
            **)**
            
            (2.9
            )Consumer
                Business Services
            
            
            **(1.6**
            **)**
            
            (1.7
            )
            
            **(9.5**
            **)**
            
            (10.3
            )**Total
                intercompany eliminations**
            
            **$**
            **(5.8**
            **)**
            **$**
            **(4.4**
            **)**
            **$**
            **(23.3**
            **)**
            **$**
            **(20.7**
            **)**





**(1)**
            In
                connection with our change to expensing magazine deferred promotion
                costs
                when the promotion is mailed to prospective customers, our reportable
                segment operating (loss) profit in 2005 includes such expenses as
                incurred. Amortization of previously deferred promotion costs is
                not
                included in segment results reviewed by our chief operating decision
                maker. For the three-month period ended March 31, 2005, magazine
                deferred
                promotion amortization relates: 89% to Reader’s Digest North America and
                11% to Reader’s Digest International. For the nine-month period ended
                March 31, 2005, magazine deferred promotion amortization relates
                88% to
                Reader’s Digest North America and 12% to Reader’s Digest
                International.





**(2)**
            The
                goodwill charge related to Books Are Fun, part of the Consumer Business
                Services reportable segment, is a non-cash item and, therefore, is
                not
                included in segment results reviewed by our chief operating decision
                maker. See Note 8, Goodwill and Other Intangible Assets, Net, for
                further
                information.





**(3)**
            Corporate
                Unallocated includes expenses for the cost of governance and centrally
                managed expenses, as well as the accounting for U.S. pension plans,
                postretirement healthcare costs, and stock and executive compensation
                programs that are not allocated to the reportable segments. Governance
                and
                centrally managed expenses include costs for departments such as
                corporate
                finance, general corporate management, investor relations, legal,
                public
                relations and treasury and for related information technology and
                facility
                costs incurred by these
                departments.





**(4)**
            Other
                operating items include gains on sales of certain non-strategic assets
                and, therefore, are not included in segment results reviewed by our
                chief
                operating decision maker. See Note 6, Other Operating Items and
                Restructuring Charges, for further information. In previous periods,
                such
                amounts were included in other expense, net, and have been reclassified
                to
                other operating items to conform to the current period
                presentation.


-11-





**(5)**  **Comprehensive
      (Loss) Income**





Accumulated
      other comprehensive loss as reported in our balance sheets primarily represents
      foreign currency translation adjustments. The components of comprehensive (loss)
      income, net of related tax, for the three- and nine-month periods ended March
      31, 2006 and 2005 were as follows:





**Three-month
                period ended**
            
            **Nine-month
                period ended****March
                31,**
            
            **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                (loss) income
            
            **$**
            **1.0**
            
            $
            (129.6
            )
            **$**
            **(129.6**
            **)**
            $
            (102.0
            )Change
                in:Foreign
                currency translation adjustments
            
            
            **1.4**
            
            
            (3.5
            )
            
            **4.7**
            
            
            11.8Net
                unrealized gains (losses) on certain derivative
                transactions
            
            
            **---**
            
            
            0.1
            
            
            **---**
            
            
            0.2**Total
                comprehensive (loss) income**
            
            **$**
            **2.4**
            
            **$**
            **(133.0**
            **)**
            **$**
            **(124.9**
            **)**
            **$**
            **(90.0**
            **)**








**(6)**  **Other
      Operating Items and Restructuring Charges**





Included
      in other operating items in the accompanying statements of operations for the
      nine-month periods ended March 31, 2006 and 2005 are gains from the sales of
      certain non-strategic assets totaling $3.4 and $12.4, respectively. Gains on
      the
      sales of certain assets in 2006 included $2.5 from the sale of our building
      in
      Mexico in the first quarter and $0.5 from the sale of certain fine art in the
      second quarter. Gains on the sales of certain assets in the second quarter
      of
      2005 included $1.7 from the sale of our building in Australia, $3.0 from the
      sale of *Moneywise* magazine
      in the United Kingdom and *Crafting
      Traditions* magazine
      in the United States, $1.2 from the sales of certain fine art and $1.2 from
      the
      sale of other non-strategic assets. The third quarter of 2005 included a gain
      of
      $5.3 from the sale of our building in Portugal.





The
      components of restructuring charges previously recognized and currently included
      in accrued expenses on the accompanying balance sheets are described in further
      detail below:





·
            **Severance
                Costs**-
                These accruals represent the cost to separate employees from our
                operations as a result of actions taken to streamline the organizational
                structure. This separation is accomplished through a combination
                of
                voluntary and involuntary severance programs. Accordingly, the positions
                to be separated were identified when the charge was recorded.





·
            **Contract
                Terminations**-
                These accruals represent anticipated costs to terminate contractual
                obligations in connection with streamlining
                activities.





The
      table
      below reflects changes for the nine-month period ended March 31, 2006 to
      accruals recorded in previous periods. The majority of the reserves remaining
      relate to on-going severance payments and guaranteed minimum payments for
      multi-year product agreements that have already been discontinued. Most of
      the
      spending to date relates to severance costs. Of the approximately 880 positions
      identified to be separated under the charges recorded in fiscal 2003, 2004
      and
      2005, approximately 97% have been separated from the business as of March 31,
      2006.





**Initial
                year**
              **of
                charge**
            
            **Balance
                at**
              **June
                30, 2005**
            
            **Spending**
            
            **Balance
                at**
              **March
                31, 2006**2002
                & prior
            
            $
            1.7
            
            $
            0.2
            
            $
            1.52003
            
            
            1.8
            
            
            1.1
            
            
            0.72004
            
            
            3.7
            
            
            2.3
            
            
            1.42005
            
            
            2.9
            
            
            1.3
            
            
            1.6**Total**
            
            **$**
            **10.1**
            
            **$**
            **4.9**
            
            **$**
            **5.2**





-12-


**(7)**  **Inventories**





**March
                31,**
              **2006**
            
            **June
                30,**
              **2005**
            
            **March
                31,**
              **2005**Raw
                materials
            
            **$**
            **12.3**
            
            $
            11.5
            
            $
            10.2Work-in-progress
            
            
            **3.2**
            
            
            5.6
            
            
            3.8Finished
                goods
            
            
            **183.0**
            
            
            145.3
            
            
            169.2**Total
                inventories**
            
            **$**
            **198.5**
            
            **$**
            **162.4**
            
            **$**
            **183.2**








**(8)**  **Goodwill
      and Other Intangible Assets, Net**





Changes
      in the carrying amount of goodwill by segment for the nine-month period ended
      March 31, 2006, are as follows:





**Reader’s
                Digest North America**
            
            **Consumer
                Business Services**
            
            **Total****Balance
                as of June 30, 2005**
            
            **$**
            **687.5**
            
            **$**
            **193.4**
            
            **$**
            **880.9**Impact
                of foreign currency translation on goodwill balances outside the
                United
                States
            
            
            ---
            
            
            0.3
            
            
            0.3Goodwill
                charge
            
            
            ---
            
            
            (187.8
            )
            
            (187.8
            )**Balance
                as of March 31, 2006**
            
            **$**
            **687.5**
            
            **$**
            **5.9**
            
            **$**
            **693.4**





At
      least
      annually (in the third quarter), we review the carrying amount of goodwill
      and
      other intangibles with indefinite lives in our reporting units for
      recoverability. Reiman and Books Are Fun are our primary reporting units in
      Reader’s Digest North America and Consumer Business Services, respectively. In
      interim periods, we continually monitor changes in our businesses for indicators
      of impairments. Due to the shortfall in Books Are Fun’s operating performance
      relative to our expectations during our peak selling season, we were required
      to
      review goodwill balances related to this business in the second quarter. The
      decline in performance was attributed to competitive pressure on margin and
      turnover of independent sales representatives. Based on our assessment, Books
      Are Fun recorded a charge of $187.8 in the second quarter of 2006 to write
      off
      its remaining goodwill. The fair value of Books Are Fun was determined by a
      third-party appraiser using a combination of discounted net cash flows and
      an
      assessment of comparable companies in the marketplace. The annual recoverability
      tests for the remaining units were performed during the third quarter and we
      determined that no other goodwill and intangible losses have occurred.





The
      following categories of acquired intangible assets are included in other
      intangible assets, net, on the balance sheets, as of March 31, 2006 and June
      30,
      2005.





**March
                31, 2006**
            
            **June
                30, 2005****Gross**
            
            **Net**
            
            **Gross**
            
            **Net****Intangible
                assets with indefinite lives:**Tradenames
            
            **$**
            **89.7**
            
            **$**
            **89.7**
            
            $
            89.7
            
            $
            89.7**Intangible
                assets with finite lives:**Licensing
                agreements
            
            
            **58.1**
            
            
            **28.1**
            
            
            57.3
            
            
            31.9Customer
                lists
            
            
            **138.3**
            
            
            **8.3**
            
            
            137.8
            
            
            16.2Other
                tradenames and
              noncompete
                agreements
            
            
            **1.9**
            
            
            **---**
            
            
            3.0
            
            
            ---**Total
                intangible assets**
            
            **$**
            **288.0**
            
            **$**
            **126.1**
            
            **$**
            **287.8**
            
            **$**
            **137.8**





-13-


Amortization
      related to intangible assets with finite lives amounted to $4.2 and $12.6 for
      the three- and nine-month periods ended March 31, 2006, respectively. For the
      three- and nine-month periods ended March 31, 2005 amortization amounted to
      $9.9 and $29.7, respectively. Our World’s Finest Chocolate licensing agreement
      (discussed below) is principally amortized over the initial 10-year contract
      term, with a portion being amortized over the remaining 15-year term of our
      amended agreement. Customer lists are being amortized principally between three
      and six years. Estimated annual amortization expense for intangible assets
      with
      finite lives by fiscal year is as follows: 2006 - $16.2; 2007 - $10.9; 2008
      - $6.1; 2009 - $5.8; and 2010 - $5.8.





**Licensing
      Agreement**





In
      May
      2000, QSP, Inc. entered into a long-term licensing agreement with World’s Finest
      Chocolate, Inc. In September 2002, this agreement was amended to extend the
      term
      of the original agreement by 10 years, reduce the annual minimum tonnage
      purchase requirements, favorably adjust pricing and permit QSP to sell World’s
      Finest Chocolate products through marketing channels other than fundraising,
      under specified circumstances. The cost associated with the agreement was
      assigned to licensing agreements and is included in other intangible assets,
      net
      on the balance sheets. Amounts paid in connection with this agreement have
      been
      assigned to various amortization periods through 2020 (the remaining period
      of
      the amended agreement). This asset will be substantially amortized by
      2010.





The
      approximate annual minimum purchase amounts under the amended agreement by
      calendar year are: 2005 - $58.8; 2006 - $60.8; 2007 - $62.6; 2008 - $64.5;
      2009
      - $66.4; and approximately $79.7 per year from 2010 through 2020. These amounts
      are estimates based on defined minimum tonnage requirements, as stipulated
      in
      the amended agreement, and nominal price increases.








**(9)**  **Debt**





As
      described in Note 11 to the Consolidated Financial Statements included in our
      2005 Annual Report to Stockholders, our borrowings include proceeds under our
      $400.0 Five-Year Revolving Credit Agreement (2005 Credit Agreement) and $300.0
      in 61⁄2% senior unsecured notes due in 2011. On April 19, 2005, we entered into an
      amendment to our 2005 Credit Agreement, which increased the aggregate principal
      amount available to $500.0, increased the maximum leverage ratio (as defined
      in
      the amendment) and increased pricing when the leverage ratio is at higher
      levels. The interest rate on the 2005 Credit Agreement at March 31, 2006 is
      at
      LIBOR plus 125 basis points and is subject to change based on our leverage
      ratio. The amended 2005 Credit Agreement contains financial covenants that
      require us to maintain minimum interest coverage and maximum leverage ratios,
      and it is secured by the stock of a substantial portion of our subsidiaries.





As
      of
      March 31, 2006, we had $312.4 of outstanding borrowings under the 2005 Credit
      Agreement and $300.0 outstanding under the senior unsecured notes. Interest
      expense for the three- and nine-month periods ended March 31, 2006 was $12.1
      and
      $34.7, respectively ($11.8 and $35.6 for the three- and nine-month periods
      ended
      March 31, 2005, respectively). Interest income on cash balances was $2.0 and
      $5.3 for the three- and nine-month periods ended March 31, 2006,
      respectively ($1.7 and $4.3 for the three- and nine-month periods ended March
      31, 2005, respectively). The weighted average interest rate on our borrowings
      for the nine-month periods ended March 31, 2006 and 2005 was 5.8% and 5.1%,
      respectively.








**(10)**  **Pension
      Information**





We
      sponsor various pension plans, including those for employees in the United
      States, international employees and supplemental plans for executives. The
      largest plan, covering substantially all employees in the United States, is
      a
      cash balance plan.





-14-


The
      table
      below details the components of our net periodic pension (benefit) cost for
      the
      three- and nine-month periods ended March 31, 2006 and 2005.





**Three-month
                period ended**
            
            **Nine-month
                period ended****March
                31,**
            
            **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Service
                cost
            
            **$**
            **4.1**
            
            $
            4.8
            
            **$**
            **12.3**
            
            $
            14.3Interest
                cost
            
            
            **11.1**
            
            
            11.2
            
            
            **33.3**
            
            
            33.4Expected
                return on plan assets
            
            
            **(17.2**
            **)**
            
            (18.2
            )
            
            **(51.7**
            **)**
            
            (54.2
            )Amortization
                of prior service cost
            
            
            **(0.3**
            **)**
            
            (0.2
            )
            
            **(0.9**
            **)**
            
            (0.8
            )Recognized
                actuarial gain
            
            
            **1.7**
            
            
            0.8
            
            
            **5.3**
            
            
            2.4**Net
                periodic pension (benefit) cost**
            
            **$**
            **(0.6**
            **)**
            **$**
            **(1.6**
            **)**
            **$**
            **(1.7**
            **)**
            **$**
            **(4.9**
            **)**





For
      the
      three- and nine-month periods ended March 31, 2006, approximately $2.6 and
      $6.2,
      respectively, was contributed to our international pension plans. Because the
      Retirement Plan in the United States is over-funded, we did not make any
      contributions during the nine-month period ended March 31, 2006. The U.S.
      supplemental retirement plans are not qualified under the Internal Revenue
      Code
      because they are available only to certain executives. We pay the benefits
      under
      these unfunded plans as the obligations are incurred ($2.7 and $6.1 during
      the
      three- and nine-month periods ended March 31, 2006).





We
      also
      sponsor certain postretirement benefit plans in the U.S. and Canada. The table
      below details the components of our net periodic postretirement cost (benefit)
      for the three- and nine-month periods ended March 31, 2006 and
      2005.





**Three-month
                period ended**
            
            **Nine-month
                period ended****March
                31,**
            
            **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Service
                cost
            
            **$**
            **0.2**
            
            $
            0.2
            
            **$**
            **0.6**
            
            $
            0.8Interest
                cost
            
            
            **1.1**
            
            
            1.3
            
            
            **3.2**
            
            
            3.8Amortization
                of prior service cost
            
            
            **(0.7**
            **)**
            
            (0.4
            )
            
            **(2.1**
            **)**
            
            (1.3
            )**Net
                periodic postretirement cost**
            
            **$**
            **0.6**
            
            **$**
            **1.1**
            
            **$**
            **1.7**
            
            **$**
            **3.3**








**(11)**  **Share
      Repurchase Authorization**





In
      April
      2005, we announced a $100.0 share repurchase authorization. In the nine-month
      period ended March 31, 2006, we repurchased approximately 2.8 million shares
      for
      $43.5. As of March 31, 2006, we have repurchased approximately 3.2 million
      shares for $50.5.








**(12)**  **Income
      Taxes**





Although
      we recognized a loss for the nine-month period ended March 31, 2006, we recorded
      a tax expense because of the non-deductible write-down of goodwill at Books
      Are
      Fun. The $27.9 of tax expense recorded included net discrete tax benefits of
      $4.6, principally from the settlement of a tax audit in a foreign country and
      changes in our estimates of permanent book-to-tax differences, as a result
      of
      filing our tax return for fiscal 2005.








**(13)**  **Acquisitions**





On
      April
      20, 2006, we acquired *Allrecipes.com* for
      approximately $66.0. *Allrecipes.com* is
      an
      online community food and cooking website that leverages an active and growing
      network of home cooks to generate revenue from advertising sponsorships and
      retail licensing. The results of *Allrecipes.com* will be
      included in our Reader’s Digest North America reportable segment in the fourth
      quarter.





-15-





**The
      Reader's Digest Association, Inc. and Subsidiaries**


**Management's
      Discussion and Analysis**


**of
      Financial Condition and Results of Operations**


*(Dollars
      in millions, except per share data)*


*(unaudited)*





*Unless
      indicated otherwise, references in Management's Discussion and Analysis to
“we,”
“us” and “our” are to The Reader’s Digest Association, Inc. and subsidiaries.
      All references to 2006 and 2005, unless otherwise indicated, are to fiscal
      2006
      and fiscal 2005, respectively. Our fiscal year is the period from July 1
      through June 30.*





*The
      following discussion and analysis provides information that we believe is
      relevant to an assessment and understanding of our consolidated results of
      operations and financial condition and has been written excluding the effect
      of
      foreign currency translation, except as specifically noted otherwise. This
      discussion should be read in conjunction with the Consolidated Condensed
      Financial Statements and related notes. Certain amounts and percentages do
      not
      recalculate due to rounding. Operating results for any interim period are not
      necessarily indicative of the results for an entire year due to the seasonality
      of our business.*








**Three-Month
      Period Ended March 31, 2006, Compared With Three-Month Period Ended March 31,
      2005**





**Results
      of Operations: Company-Wide**





**Overview**





The
      third
      quarter of 2006 was characterized by revenue growth for Reader’s Digest North
      America and Reader’s Digest International (on a constant currency basis) due in
      part to new products and geographic expansion. In the third quarter of 2006
      we
      launched two new editions of *Reader’s
      Digest* magazine
      in Central Europe and a new magazine in Germany, and we started selling our
      products in three new markets. We also invested in new magazine titles and
      products, including our Taste of Home Entertaining business. Books Are Fun
      continued to experience the effect of competitive pressures, while QSP was
      slightly better than the prior year.








**Revenues**





Revenues
      for the third quarter of 2006 increased to $547, compared with $545 for the
      third quarter of 2005. Excluding the effect of foreign currency translation,
      revenues increased 2%. Revenues for Reader’s Digest International and Reader’s
      Digest North America increased, while revenues for Consumer Business Services
      declined.





Increased
      mail quantities and improved response rates to promotional mailings in certain
      established markets drove the improvement in revenues for Reader’s Digest
      International. Additionally, revenues from 10 new markets further increased
      revenues. These increases were partially offset by weaker sales in certain
      smaller markets.





Improved
      revenues for Reader’s Digest North America were principally driven by
      circulation growth from new magazine titles, especially those related to our
      food affinity, and increased advertising pages in *Reader’s
      Digest* magazine. Strong performance of certain single sales books and home
      entertainment products in the United States and Canada contributed to the
      improvement. These increases were partially offset by lower sales of certain
      book annual products.





In
      Consumer Business Services, fewer events in certain lines of business adversely
      affected Books Are Fun, while QSP benefited from increased sales volumes of
      World’s Finest Chocolate products.








-16-


**Operating
      (Loss) Profit**





Operating
      profit for the third quarter of 2006 was $10, compared with a loss of $(121)
      for
      the third quarter of 2005. The comparability of results was affected by two
      significant items recorded in 2005: the write-down of Books Are Fun goodwill
      of
      $(129) and the amortization of previously deferred magazine promotion costs
      of
      $(13) (these items are more fully explained in our 2005 Annual Report to
      Stockholders). In addition, profits in Reader’s Digest North America improved.
      Lower profits for Consumer Business Services and Reader’s Digest International,
      as well as lower gains from the sales of non-strategic assets, partially offset
      these increases.





Increased
      profits for Reader’s Digest North America were driven by lower amortization of
      intangible assets that were established when we acquired Reiman (because the
      assets reached the end of their useful lives) and strong performance of certain
      single sales products in the United States and Canada. These improvements were
      partially offset by investments in strategic growth initiatives and a U.S.
      postage rate increase.





Profits
      for Consumer Business Services were adversely affected by lower revenue
      activity, competitive pressures on profit margins, and costs incurred to recruit
      and retain independent sales representatives at Books Are Fun .
      These
      declines were partially offset by lower overhead costs at QSP because of
      cost-reduction measures initiated in previous periods.





In
      addition, lower profits for Reader’s Digest International were principally
      driven by the timing of promotional campaigns, in favor of the fourth quarter
      of
      2006, lower membership for certain series products, and investments in new
      products and new customer acquisition efforts.





Corporate
      Unallocated expenses in the third quarter of 2006 were $10, compared with $9
      in
      the third quarter of 2005. The slight increase in these costs was principally
      attributable to stock option expense (see Recent Accounting Standards, below,
      for additional information) and lower net pension income. These costs were
      partially offset by lower incentive expenses.





*Other
      Operating Items*


Other
      operating items in 2006 were lower because the prior year period included gains
      of $5 from the sale of real estate in an international market.








**Other
      Expense, Net**





Other
      expense, net was $(9) in both the third quarters of 2006 and 2005. This caption
      is principally composed of interest expense and interest income.








**Income
      Taxes**





For
      the
      third quarter of 2006, we recognized a net tax benefit because of changes in
      our
      estimates of permanent book-to-tax differences, as a result of filing our tax
      return for fiscal 2005. The benefit recognized in the third quarter of 2005
      was
      principally driven by the pre-tax loss, partially offset by recognition of
      a tax
      liability as a result of an ongoing IRS tax audit. However, this benefit was
      not
      affected by the write-down of goodwill at Books Are Fun because the charge
      was
      not deductible for tax purposes.








**Net
      (Loss) Income and (Loss) Earnings Per Share**





As
      a
      result of the activities described above, net income for the third quarter
      of
      2006 was $1 or $0.01 for both basic and diluted earnings per share, compared
      with a net loss of $(130), or $(1.33) per share for both basic and diluted
      loss
      per share for the third quarter of 2005. For the third quarter of 2005, the
      effect of potentially dilutive shares was not considered in the calculation
      of
      loss per share because such shares would have been anti-dilutive.








-17-


**Results
      of Operations: Reportable Segments**





The
      following chart details our revenues, profit (loss) and other operating items,
      net.





**Three-month
                period ended****March
                31,****2006**
            
            **2005****Revenues**Reader’s
                Digest North America
            
            **$**
            **220**
            
            $
            211Reader’s
                Digest International
            
            
            **237**
            
            
            239Consumer
                Business Services
            
            
            **97**
            
            
            99Intercompany
                eliminations
            
            
            **(7**
            **)**
            
            (4
            )**Total
                revenues**
            
            **$**
            **547**
            
            **$**
            **545****Operating
                (loss) profit**Reader’s Digest North America
            
            **$**
            **24**
            
            $
            22Reader’s Digest International
            
            
            **5**
            
            
            7Consumer
                Business
                Services
            
            
            **(9**
            **)**
            
            (4
            )Magazine deferred promotion amortization(1)
            
            
            **---**
            
            
            (13
            )Goodwill charge(2)
            
            
            **---**
            
            
            (129
            )Corporate Unallocated(3)
            
            
            **(10**
            **)**
            
            (9
            )Other operating items, net(4)
            
            
            **---**
            
            
            5**Operating
                (loss) profit**
            
            **$**
            **10**
            
            **$**
            **(121**
            **)****Intercompany
                eliminations**Reader’s
                Digest North America
            
            **$**
            **(3**
            **)**
            $
            (2
            )International
                Businesses
            
            
            **(2**
            **)**
            
            (1
            )Consumer Business Services
            
            
            **(2**
            **)**
            
            (1
            )**Total
                intercompany eliminations**
            
            **$**
            **(7**
            **)**
            **$**
            **(4**
            **)**




**(1)**
              In
                  connection with our change to expensing magazine deferred promotion
                  costs
                  when the promotion is mailed to prospective customers, our reportable
                  segment operating results in 2005 include such expenses as incurred.
                  Amortization of previously deferred promotion costs is not included
                  in
                  segment results reviewed by our chief operating decision maker.
                  Magazine
                  deferred promotion amortization relates 89% to Reader's Digest
                  North
                  America and 11% to Reader's Digest
                  International.
 
 **(2)**
              The
                  goodwill charge related to Books Are Fun, part of the Consumer
                  Business
                  Services reportable segment, is a non-cash item and, therefore,
                  is not
                  included in segment results reviewed by our chief operating decision
                  maker. See Note 8, Goodwill and Other Intangible Assets, Net, in
                  our Notes
                  to Consolidated Condensed Financial Statements for further
                  information.
 
 **(3)**
              Corporate
                  Unallocated includes expenses for the cost of governance and centrally
                  managed expenses, as well as the accounting for U.S. pension plans,
                  postretirement healthcare costs, and stock and executive compensation
                  programs that are not allocated to the reportable segments. Governance
                  and
                  centrally managed expenses include costs for departments such as
                  corporate
                  finance, general corporate management, investor relations, legal,
                  public
                  relations and treasury and for related information technology and
                  facility
                  costs incurred by these departments.
 
 **(4)**
              Other
                  operating items include gains on sales of certain non-strategic
                  assets
                  and, therefore, are not included in segment results reviewed by
                  our chief
                  operating decision maker. See Note 6, Other Operating Items and
                  Restructuring Charges, in our Notes to Consolidated Condensed Financial
                  Statements for further information. In previous periods, such amounts
                  were
                  included in other expense, net, and have been reclassified to other
                  operating items to conform to the current period
                  presentation.


-18-


**Reader’s
      Digest North America**





Revenues
      for Reader’s Digest North America for the third quarter of 2006 increased 4% to
      $220, compared with $211 for the third quarter of 2005. Excluding the effect
      of
      foreign currency translation, revenues increased 3%.


Increased
      revenues were principally driven by the addition of revenues from newer
      magazines and improved advertising revenues for *Reader’s
      Digest* magazine.





Magazine
      revenues improved based on growth in circulation for newer titles, including *Every
      Day with Rachael Ray* (launched
      in the second quarter of 2006), *Cooking
      for 2* (launched in the third quarter of 2005) and *Birds
      & Blooms Extra* (launched in the fourth quarter of 2005). In addition, advertising pages for *Reader’s
      Digest* magazine
      were higher. These increases were partially offset by lower circulation revenues
      for certain cooking titles at Reiman, and for *Reader’s
      Digest* magazine, because of a change in the mix of the renewal pool to newer
      subscribers and less reliance on agents.





Lower
      sales of certain established Reiman-inspired book annual products and declining
      membership in Select Editions was offset by the performance of strong single
      sales products in the United States and Canada.





Operating
      profit for the third quarter of 2006 increased 10% to $24, compared with $22
      for
      the third quarter of 2005. Excluding the effect of foreign currency translation,
      profit increased 9%. The increase in profits was principally driven by $6 of
      lower amortization of intangible assets established when we acquired Reiman
      because the assets reached the end of their useful lives. Lower amortization,
      coupled with the revenue changes described above, were partially offset by
      investments in new magazine titles and products, including our Taste of Home
      Entertaining business, and the effects of a 5% U.S. postage rate increase that
      went into effect at the beginning of the quarter.








**Reader’s
      Digest International**





Revenues
      for Reader’s Digest International for the third quarter of 2006 decreased 1% to
      $237, compared with $239 for the third quarter of 2005. Excluding the effect
      of
      foreign currency translation, revenues increased 4%. The increase in revenues
      was principally driven by increased mail quantities and improved response rates
      to promotional mailings for books and home entertainment products in Germany,
      Brazil, France and Australia. Also, revenues from 10 new markets, including
      Ukraine and Romania, increased significantly as we continue to expand these
      businesses.





These
      increases were partially offset by lower revenues for books and home
      entertainment products in Poland, Portugal and Mexico principally due to lower
      mail quantities as a result of a smaller active customer base.





Operating
      profit for the third quarter of 2006 decreased to $5, compared with $7 for
      the
      third quarter of 2005. Excluding the effect of foreign currency translation,
      profit decreased 25%. As expected, the decline in profits was principally driven
      by the timing of promotional mailings, in favor of the fourth quarter of 2006.
      Lower membership for certain series products, higher product returns in certain
      Central European markets, and investments in new products and new customer
      acquisition efforts contributed to the decline.








**Consumer
      Business Services**





Revenues
      for Consumer Business Services for the third quarter of 2006 decreased 2% to
      $97, compared with $99 for the third quarter of 2005.





Lower
      revenues at Books Are Fun were principally driven by fewer events in certain
      lines of business. The decrease in events was due to increased turnover of
      independent sales representatives in this market. These decreases were
      moderately offset by improved results for certain developing lines of
      business.





Higher
      revenues at QSP were principally driven by a 14% increase in volumes for World’s
      Finest Chocolate products due to a strong spring selling season. Lower direct
      mail volumes and renewal rates for magazine accounts in the United States
      partially offset this improvement.





-19-


Operating
      loss for the third quarter of 2006 increased to $(9), compared with $(4) for
      the
      third quarter of 2005. This increase was principally driven by the revenue
      changes described above, competitive pressures on profit margins and costs
      incurred to recruit and retain members of the independent sales force at Books
      Are Fun. These increases were partially offset by the benefits of cost-reduction
      measures initiated in previous periods at QSP.








**Nine-Month
      Period Ended March 31, 2006, Compared With Nine-Month Period Ended March 31,
      2005**





**Results
      of Operations: Company-Wide**





**Overview**





As
      communicated in our 2005 Annual Report to Stockholders, we planned to focus
      on
      growth initiatives during the nine-month period ended March 31, 2006. In 2006
      we
      launched two new magazine titles and three new editions of *Reader’s
      Digest* magazine,
      and we started selling our products in six new markets. We also invested in
      new
      magazine titles and products, including our Taste of Home Entertaining business.
      We are already realizing the benefits of some of these investments in both
      Reader’s Digest North America and Reader’s Digest International. Although we
      made progress on some of our strategic initiatives, Books Are Fun continued
      to
      experience the effect of competitive pressures on margin while profits at QSP
      were moderately better.








**Revenues**





Revenues
      for the nine-month period ended March 31, 2006 were $1,829, compared with $1,833
      for the nine-month period ended March 31, 2005. Excluding the impact of foreign
      currency translation, revenues increased 1%. Increased revenues for Reader’s
      Digest International were partially offset by lower revenues for Consumer
      Business Services. Revenues for Reader’s Digest North America were
      flat.





Improved
      revenues for Reader’s Digest International were principally driven by growth in
      10 new markets. In addition, increased mail quantities and response rates to
      promotional mailings in certain other markets improved.





Lower
      revenues in Consumer Business Services were principally driven by fewer events
      and lower average sales per event at Books Are Fun and, to a lesser extent,
      by
      lower renewal rates for magazine accounts at QSP. These declines were partially
      offset by higher food and gift sales at QSP.





In
      Reader’s Digest North America, circulation growth from new magazine titles and
      increased advertising revenue for *Reader’s
      Digest* magazine
      were offset by lower books and home entertainment revenue.








**Operating
      (Loss) Profit**





Operating
      loss for the nine-month period ended March 31, 2006 was $(73), compared with
      a
      loss of $(61) for the nine-month period ended March 31, 2005. Excluding the
      effect of foreign currency translation, the loss for the nine-month period
      ended
      March 31, 2006 would have been $(72). The comparability of results was affected
      by two significant items: a $(59) higher goodwill charge in 2006 when compared
      with the charge recorded in 2005, and the absence in 2006 of $(65) of expense
      related to the amortization of previously deferred magazine promotion costs
      (this item is more fully explained in our 2005 Annual Report to Stockholders).
      In addition, profits were lower in Consumer Business Services and, to a lesser
      extent, Reader’s Digest International. Profits for Reader’s Digest North America
      improved.





Profits
      for Consumer Business Services were adversely affected by lower revenue
      activity, competitive pressures on profit margins, and costs to recruit
      and retain members of the independent sales force at Books
      Are Fun. Improved profits at QSP, driven by the effects of cost-reduction
      measures, partially offset the decline.





Reader’s
      Digest International profits declined because of lower response rates to
      promotional mailings in certain markets and because of investments in new
      products and new customer acquisition efforts.


-20-


The
      declines noted above were partially offset by increased profits for Reader’s
      Digest North America, principally due to lower amortization of intangible assets
      that were established when we acquired Reiman (because the assets reached the
      end of their useful lives) and the benefits of cost-reduction initiatives.





Corporate
      Unallocated expenses for the nine-month period ended March 31, 2006 were $29,
      compared with $31 for the nine-month period ended March 31, 2005. Lower costs
      were driven by the reversal of $4 from a litigation-related accrual recorded
      in
      previous periods that is no longer necessary, lower facilities costs due to
      the
      sale and partial leaseback of our Westchester, New York headquarters facility
      and lower incentive expenses. These decreases were partially offset by stock
      option expense (see Recent Accounting Standards, below, for additional
      information) and lower net pension income.





*Other
      Operating Items*


Other
      operating items in 2006 and 2005 included gains from the sale of non-strategic
      assets, including certain buildings and magazines. Gains recognized in 2006
      were
      lower than 2005 because we sold fewer assets.





*Goodwill
      Charge*


We
      are
      required to assess the recoverability of goodwill and our indefinite lived
      intangible assets at least annually. We recorded charges of $(188) and $(129)
      in
      2006 and 2005, respectively, to write-down goodwill balances at Books Are Fun
      to
      net realizable value. The fair value of Books Are Fun was determined by a
      third-party appraiser using a combination of discounted future net cash flows
      and an assessment of comparable companies in the marketplace. For further
      information, see Note 8, Goodwill and Other Intangible Assets, Net, in our
      Notes
      to Consolidated Condensed Financial Statements, and Note 6 to the Consolidated
      Financial Statements included in our 2005 Annual Report to
      Stockholders.








**Other
      Expense, Net**





Other
      expense, net was $(29) for the nine-month period ended March 31, 2006, compared
      with $(31) for the nine-month period ended March 31, 2005. Other expense, net
      is
      principally composed of interest expense and interest income.








**Income
      Taxes**





Because
      our losses for the nine-month periods ended March 31, 2006 and 2005 were driven
      by the non-deductible write-down of goodwill at Books Are Fun, we recorded
      income tax expense of $(28) and $(10), respectively. Tax expense for the
      nine-month period ended March 31, 2006 included discrete tax benefits due to the
      settlement of a tax audit in a foreign country and changes in our estimates
      of
      permanent book-to-tax differences, as a result of filing our tax return for
      fiscal 2005. Tax expense for the nine-month period ended March 31, 2005
      included the reversal of tax liabilities resulting from various settlements
      of
      U.S. federal and state tax audits, partially offset by a reduction in the value
      of certain deferred tax assets as a result of a change to the tax law of a
      foreign jurisdiction.








**Net
      (Loss) Income and (Loss) Earnings Per Share**





For
      the
      nine-month period ended March 31, 2006, our net loss was $(130), or $(1.35)
      for
      both basic and diluted loss per share. In the prior year period, our net loss
      was $(102), or $(1.06) for both basic and diluted loss per share. For the
      nine-month periods ended March 31, 2006 and 2005, the effect of potentially
      dilutive shares was not considered in the calculation of diluted loss per share
      because such shares would have been anti-dilutive.








-21-


**Results
      of Operations: Reportable Segments**





The
      following chart details our revenues, (loss) profit and other operating items,
      net.





**Nine-month
                period ended****March
                31,****2006**
            
            **2005****Revenues**Reader’s
                Digest North America
            
            **$**
            **695**
            
            $
            689Reader’s
                Digest International
            
            
            **772**
            
            
            760Consumer
                Business Services
            
            
            **385**
            
            
            405Intercompany
                eliminations
            
            
            **(23**
            **)**
            
            (21
            )**Total
                revenues**
            
            **$**
            **1,829**
            
            **$**
            **1,833****Operating
                (loss) profit**Reader’s
                Digest North America
            
            **$**
            **68**
            
            $
            63Reader’s
                Digest International
            
            
            **45**
            
            
            49Consumer Business Services
            
            
            **28**
            
            
            39Magazine
                deferred promotion amortization(1)
            
            
            **---**
            
            
            (65
            )Goodwill
                charge(2)
            
            
            **(188**
            **)**
            
            (129
            )Corporate
                Unallocated(3)
            
            
            **(29**
            **)**
            
            (31
            )Other
                operating items, net(4)
            
            
            **3**
            
            
            13**Operating
                (loss) profit**
            
            **$**
            **(73**
            **)**
            **$**
            **(61**
            **)****Intercompany
                eliminations**Reader’s
                Digest North America
            
            **$**
            **(9**
            **)**
            $
            (8
            )Reader’s
                Digest International
            
            
            **(5**
            **)**
            
            (3
            )Consumer Business Services
            
            
            **(9**
            **)**
            
            (10
            )**Total
                intercompany eliminations**
            
            **$**
            **(23**
            **)**
            **$**
            **(21**
            **)**




**(1)**
              In
                  connection with our change to expensing magazine deferred promotion
                  costs
                  when the promotion is mailed to prospective customers, our reportable
                  segment operating results in 2005 include such expenses as incurred.
                  Amortization of previously deferred promotion costs is not included
                  in
                  segment results reviewed by our chief operating decision maker.
                  Magazine
                  deferred promotion amortization relates 88% to Reader's Digest
                  North
                  America and 12% to Reader's Digest
                  International.
 
 **(2)**
              The
                  goodwill charge related to Books Are Fun, part of the Consumer
                  Business
                  Services reportable segment, is a non-cash item and, therefore,
                  is not
                  included in segment results reviewed by our chief operating decision
                  maker. See Note 8, Goodwill and Other Intangible Assets, Net, in
                  our Notes
                  to Consolidated Condensed Financial Statements for further
                  information.
 
 **(3)**
              Corporate
                  Unallocated includes expenses for the cost of governance and centrally
                  managed expenses, as well as the accounting for U.S. pension plans,
                  postretirement healthcare costs, and stock and executive compensation
                  programs that are not allocated to the reportable segments. Governance
                  and
                  centrally managed expenses include costs for departments such as
                  corporate
                  finance, general corporate management, investor relations, legal,
                  public
                  relations and treasury and for related information technology and
                  facility
                  costs incurred by these departments.
 
 **(4)**
              Other
                  operating items include gains on sales of certain non-strategic
                  assets
                  and, therefore, are not included in segment results reviewed by
                  our chief
                  operating decision maker. See Note 6, Other Operating Items and
                  Restructuring Charges, in our Notes to Consolidated Condensed Financial
                  Statements for further information. In previous periods, such amounts
                  were
                  included in other expense, net, and have been reclassified to other
                  operating items to conform to the current period
                  presentation.


-22-


**Reader’s
      Digest North America**





Revenues
      for Reader’s Digest North America for the
      nine-month period ended March 31, 2006 increased 1% to $695, compared with $689 for the nine-month period ended March
      31, 2005. Excluding the impact of foreign currency translation, revenues were
      flat. Increased circulation revenues, driven by new magazine titles, were offset
      by lower books and home entertainment revenues.





Circulation
      growth was driven by new magazine titles, including *Every
      Day with Rachael Ray* (launched
      in the second quarter of 2006), *Cooking
      for 2* (launched in the third quarter of 2005) and *Backyard
      Living* (launched in the third quarter of 2004). In addition, advertising revenues
      for *Reader’s
      Digest* magazine
      improved because of an increase in advertising pages. These improvements were
      partially offset by a continued decline in circulation for certain
      Reiman-inspired cooking titles and lower circulation for *Reader’s
      Digest* magazine
      due to a change in the mix of the renewal pool to newer subscribers and less
      reliance on agents.





Lower
      books and home entertainment revenues were driven by lower sales of certain
      established Reiman-inspired book annual products and lower Select Editions
      membership. Also, revenues for Reader’s Digest Young Families declined because
      of planned reductions in promotional activity to improve profitability. These
      declines were partially offset by increased single sales revenues from strong
      products and increased promotional activity.





Operating
      profit for the nine-month period ended March 31, 2006 increased 8% to $68,
      compared with $63 for the third quarter of 2005. Excluding the effect of foreign
      currency translation, profit increased 7%. The increase was principally driven
      by $17 of lower amortization of intangible assets that were established when
      we
      acquired Reiman (because the assets reached the end of their useful lives)
      and
      the benefits of cost-reduction measures initiated in previous periods.
      Investments in new magazine titles and new products, including our Taste of
      Home
      Entertaining business, and new customer acquisition costs for certain existing
      magazine titles partially offset these improvements.








**Reader’s
      Digest International**





Revenues
      for Reader’s Digest International for the nine-month period ended March 31, 2006
      increased 2% to $772, compared with $760 for the nine-month period ended March
      31, 2005. Excluding the impact of foreign currency translation, revenues
      increased 4%. Increased revenues were principally driven by growth from 10
      new
      markets, including Romania and Ukraine, as we continue to expand those
      businesses. Increased mail quantities and response rates to promotional mailings
      for single sales products in Brazil, Russia, Australia and Germany contributed
      to the improvement.





These
      increases were partially offset by lower revenues in the Nordic region, Portugal
      and Poland driven by lower response rates to promotional mailings and lower
      membership in certain series products. In addition, revenues in the United
      Kingdom were lower because of stronger product offerings in 2005 and the absence
      of revenues from *Moneywise* magazine
      (which was sold in the second quarter of 2005).





Operating
      profit for the nine-month period ended March 31, 2006 decreased 9% to $45,
      compared with $49 for the nine-month period ended March 31, 2005. Excluding
      the
      effect of foreign currency translation, profit decreased 4%. The decline in
      profits was principally driven by lower response rates to promotional mailings
      in certain markets and by investments in new products and new customer
      acquisition efforts.








**Consumer
      Business Services**





Revenues
      for Consumer Business Services for the nine-month period ended March 31, 2006
      decreased 5% to $385, compared with $405 for the nine-month period ended March
      31, 2005.




Revenues
      at Books Are Fun decreased principally because of fewer events in certain lines
      of business, attributed to the turnover of independent sales representatives.
      Also, lower average sales per event due to increased competition for events
      contributed to the decline. These decreases were moderately offset by improved
      results for certain developing lines of business.





-23-


Revenues
      at QSP declined slightly due to lower renewal rates for magazines. The impact
      of
      this decrease was mitigated by a significant improvement in the rate of same
      school sales when compared with the prior period. In addition, this decline
      was
      partially offset by higher food and gift sales. Food sales principally increased
      due to a 5% increase in World’s Finest Chocolate sales volumes because of a
      strong spring selling season, despite the after-effects of Hurricanes Katrina
      and Rita and a labor action in a Canadian territory. Gift revenue increased
      as a
      result of improvements made to promotions and the sale of higher-priced
      products.





Operating
      profit for the nine-month period ended March 31, 2006 decreased 29% to $28,
      compared with $39 for the nine-month period ended March 31, 2005. The decrease
      in profits was driven by the revenue changes above, the effects of competitive
      pressures, and costs associated with recruiting and retaining members of the
      independent sales force at Books Are Fun. These declines were partially offset
      by improved profits at QSP due to lower promotion costs and the benefits of
      cost-reduction measures initiated in previous periods.








**Liquidity
      and Capital Resources**





**Nine-month**
              **period
                ended****March
                31, 2006****Cash
                and cash equivalents at June 30, 2005**
            
            **$**
            **38***Net
                change in cash due to:*Operating
                activities
            
            
            **57**Investing
                activities
            
            
            **(11**
            **)**Financing
                activities
            
            
            **(24**
            **)**Effect
                of exchange rate changes on cash and cash equivalents
            
            
            ---**Net
                change in cash and cash equivalents**
            
            
            **22****Cash
                and cash equivalents at March 31, 2006**
            
            **$**
            **60**





Cash
      and
      cash equivalents increased to $60 as of March 31, 2006, compared with $38 as
      of
      June 30, 2005. The increase in cash was principally driven by cash from
      operations and proceeds from borrowings of $54. In 2006, cash was used to fund
      working capital requirements, our stock repurchase program and dividend
      payments.





On
      April
      20, 2006, we acquired *Allrecipes.com* ,
      an
      online community food and cooking website, for $66.
      The acquisition will be financed using existing borrowing capacity.





***Debt***





As
      described in Note 11 to the Consolidated Financial Statements included in our
      2005 Annual Report to Stockholders, our borrowings include proceeds under our
      $400 Five-Year Revolving Credit Agreement (2005 Credit Agreement) and $300
      in
      61⁄2% senior unsecured notes due in 2011. On April 19, 2005, we entered into an
      amendment to our 2005 Credit Agreement that increased the aggregate principal
      amount available to $500, increased the maximum leverage ratio (as defined
      in
      the amendment) and increased pricing when the leverage ratio is at higher
      levels. The interest rate on the 2005 Credit Agreement at March 31, 2006 is
      at
      LIBOR plus 125 basis points and is subject to change based on our leverage
      ratio. The amended 2005 Credit Agreement contains financial covenants that
      require us to maintain minimum interest coverage and maximum leverage ratios,
      and it is secured by the stock of a substantial portion of our subsidiaries.




As
      of
      March 31, 2006, we had $312 of outstanding borrowings under the 2005 Credit
      Agreement and $300 outstanding under the senior unsecured notes. Interest
      expense for the three- and nine-month periods ended March 31, 2006 was $12
      and
      $35, respectively ($12 and $36 for the three- and nine-month periods ended
      March 31, 2005, respectively). Interest income on cash balances was $2 and
      $5 for the three- and nine-month periods ended March 31, 2006, respectively
      ($2 and $4 for the three- and nine-month periods ended March 31, 2005,
      respectively). The weighted average interest rate on our borrowings for the
      nine-month periods ended March 31, 2006 and 2005 was 5.8% and 5.1%,
      respectively.








-24-


***Share
      Repurchase Authorization***





In
      April
      2005, we announced a $100 share repurchase authorization. In the nine-month
      period ended March 31, 2006, we repurchased approximately 2.8 million shares
      for
      $44. As of March 31, 2006, we have repurchased approximately 3.2 million shares
      for $51.





We
      believe that our liquidity, capital resources, cash flows and borrowing capacity
      are sufficient to fund normal capital expenditures, working capital
      requirements, the payment of dividends and debt service.








**Recent
      Accounting Standards**





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based
      Payment” (SFAS No. 123R). This statement supersedes SFAS No. 123, “Accounting
      for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based
      Compensation-Transition and Disclosure-an amendment of FASB Statement No.
      123, *”* and
      Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued
      to Employees.” The statement is effective for interim or annual periods
      beginning after June 15, 2005.





Prior
      to
      July 1, 2005, we accounted for our stock compensation plans under SFAS No.
      123.
      As permitted under this standard, compensation cost was recognized using the
      intrinsic value method described in APB No. 25. Effective July 1, 2005, we
      adopted the fair-value recognition provisions of SFAS No. 123R and Securities
      and Exchange Commission Staff Accounting Bulletin No. 107 using the modified
      prospective transition method; therefore, prior periods have not been restated.
      Compensation cost recognized in the three- and nine-month periods ended March
      31, 2006 includes compensation cost for all share-based payments granted prior
      to, but not yet vested as of, July 1, 2005, based on the grant date fair value
      estimated in accordance with the original provisions of SFAS No. 123, and
      compensation cost for all share-based payments granted subsequent to July 1,
      2005, based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123R. See Note 3, Stock-Based Compensation, in our Notes
      to Consolidated Condensed Financial Statements for further information on our
      compensation plans.




No
      stock-based compensation cost related to stock options was recognized in the
      statements of operations for the years ended June 30, 2005 and 2004, as all
      options granted in these periods had an exercise price equal to the market
      price
      at the date of grant. As a result of adopting SFAS No. 123R, our income before
      taxes and net income for the three-month period ended March 31, 2006 are $2
      and
      $1 lower, respectively, than if we had continued to account for stock-based
      compensation under APB No. 25. For the nine-month period ended March 31,
      2006, our loss before taxes and net loss are $5 and $3 higher, respectively.
      This resulted in a decrease in our reported basic and diluted income per share
      of $0.01 for the three-month period ended March 31, 2006 and an increase in
      our
      reported basic loss per share of $0.03 for the nine-month period ended March
      31,
      2006. As of March 31, 2006, there was $8 of total unrecognized compensation
      cost
      related to nonvested stock options to be recognized over a weighted-average
      period of 1.5 years.





The
      fair
      values of the options granted during the nine-month periods ended March 31,
      2006
      and 2005 were estimated on the dates of their grants under SFAS No. 123R using
      the Black-Scholes option-pricing model. The risk-free interest rate for the
      periods within the expected life of the option is based on the U.S. Treasury
      yield curve in effect at the time of grant. In fiscal 2005, the expected life
      was based on historical exercises and terminations. Due to the insignificant
      number of stock option exercises during the past three fiscal years, in 2006
      we
      have estimated the expected life of options granted to be the midpoint between
      the average vesting term and the contractual term. The expected volatility
      for
      the periods with the expected life of the option is determined using historical
      volatilities based on historical stock prices. The expected dividend yield
      is
      based on our annual dividend in relation to our historical average stock price.
      The increase in the dividend yield is attributed to the increased quarterly
      dividend beginning February 1, 2005.





We
      also
      maintain restricted and deferred stock plans. Restricted and deferred stock
      expense amounted to $2 and $3, before taxes of $1 for both three-month periods
      ended March 31, 2006 and 2005. Restricted and deferred stock expense amounted
      to
      $6 and $8, before taxes of $2 and $3 for the nine-month periods ended March
      31,
      2006 and 2005, respectively. As of March 31, 2006, there was $7 of total
      unrecognized compensation cost related to nonvested restricted and deferred
      compensation arrangements to be recognized over a weighted-average period of
      1.6
      years.


-25-








**Forward-Looking
      Information**





**Fiscal
      2006 and 2007 Results**





We
      expect
      improved fourth quarter revenues and profits driven by Reader’s Digest North
      America, Reader’s Digest International and QSP. We expect earnings per share for
      the fourth quarter between $0.25 and $0.30 per share, excluding restructuring
      charges and other items that cannot be forecasted at this time, which is higher
      than the fourth quarter of 2005.





Lower-than-expected
      results at Books Are Fun reduced our second-half expectations for profits and
      earnings per share. As a result, we are lowering our full-year loss per share
      guidance for 2006 to a range of $(1.11) to $(1.06), from our previous range
      of
      $(1.04) to $(0.94).





We
      expect
      fourth quarter 2006 momentum to continue into fiscal 2007, including stronger
      revenues and operating profits. This performance will be driven by incremental
      revenue from strategic growth initiatives, including: recent new country
      launches, *Every
      Day with Rachael Ray* ,
      launched in the second quarter of 2006, Taste of Home Entertaining, a home
      party
      plan business that will launch on May 1, 2006, and *Allrecipes.com* ,
      a
      website for home cooks that we acquired in April 2006.








*****





This
      report contains “forward-looking statements” within the meaning of the U.S.
      federal securities laws. Forward-looking statements include any statements
      that
      address future results or occurrences. These forward-looking statements
      inherently involve risks and uncertainties that could cause actual future
      results and occurrences to differ materially from the forward-looking
      statements.





Some
      of
      these risks and uncertainties include factors relating to:





·
            the
                effects of potentially more restrictive privacy and other governmental
                regulation relating to our marketing
                methods;


·
            the
                effects of modified and varied
                promotions;


·
            our
                ability to identify customer
                trends;


·
            our
                ability to continue to create and acquire a broadly appealing mix
                of new
                products;


·
            our
                ability to attract and retain new and younger magazine subscribers
                and
                product customers in view of the maturing of an important portion
                of our
                customer base;


·
            our
                ability to attract and retain subscribers and customers in an economically
                efficient manner;


·
            the
                effects of selective adjustments in
                pricing;


·
            our
                ability to expand and more effectively utilize our customer
                database;


·
            our
                ability to expand into new international markets and to introduce
                new
                product lines into new and existing
                markets;


·
            our
                ability to expand into new channels of
                distribution;


·
            our
                ability to negotiate and implement productive acquisitions, strategic
                alliances and joint ventures;


·
            our
                ability to successfully integrate newly acquired and newly formed
                businesses;


·
            the
                strength of relationships of newly acquired and newly formed businesses
                with their employees, suppliers and customers;


·
            the
                accuracy of the basis of forecasts relating to newly acquired and
                newly
                formed businesses;


·
            our
                ability to achieve financial savings related to restructuring
                programs;


·
            our
                ability to contain and reduce costs, especially through global
                efficiencies;


·
            the
                cost and effectiveness of our reengineering of business processes
                and
                operations;


·
            the
                accuracy of our management’s assessment of the current status of our
                business;


·
            the
                evolution of our organizational and structural
                capabilities;


·
            our
                ability to respond to competitive pressures within and outside the
                direct
                marketing and direct sales industries, including the
                Internet;


·
            our
                ability to recruit, train and retain effective sales personnel;


-26-





·
            the
                effects of worldwide paper and postage
                costs;


·
            the
                effects of possible postal disruptions on deliveries of promotions,
                products and payments;


·
            the
                effects of foreign currency
                fluctuations;


·
            the
                accuracy of our management’s assessment of the future effective tax rate
                and the effects of initiatives to reduce the
                rate;


·
            the
                adequacy of our financial
                resources;


·
            the
                effects of the terms of, and increased leverage resulting from additional
                borrowings under, our credit
                facilities;


·
            the
                effects of interest rate
                fluctuations;


·
            the
                effects of downgrades of our credit
                ratings;


·
            the
                effects of economic and political changes in the markets where we
                compete;


·
            the
                effects of weather in limiting access to consumers;
                and


·
            the
                economic effects of terrorist activity and related events, especially
                those limiting access to consumers and otherwise affecting the direct
                marketing and direct sales
                industries.





We
      do not
      undertake to update any forward-looking statements.


-27-





**Item
      4.**  **CONTROLS
      AND PROCEDURES**





Our
      management evaluated, with the participation of our principal executive officer
      and principal financial officer, the effectiveness of our disclosure controls
      and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934) as of the end of the period covered by this report. Based
      on that evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that our disclosure controls and procedures were effective as of
      the
      end of the period covered by this report.





There
      has
      been no change in our internal control over financial reporting during the
      fiscal quarter covered by this report that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.








-28-


**PART
      II. OTHER INFORMATION**





**Item
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




**Period**
              
              **(a)
                  Total Number of Shares (or Units) Purchased****(1)**
              
              **(b)
                  Average Price Paid per Share (or Unit)**
              
              **(c)
                  Total Number of Shares (or Units) Purchased as Part of Publicly
                  Announced
                  Plans or Programs****(2)**
              
              **(d)
                  Maximum Number (or Approximate Dollar Value) of Shares (or Units)
                  that May
                  Yet Be Purchased Under the Plans or Programs****(2)****January
                  1 - 31, 2006**
              
              
              ---
              
              
              ---
              
              
              ---
              
              $
              57,161,638**February
                  1 - 28, 2006**
              
              
              373,800
              
              
              15.45
              
              
              373,800
              
              $
              51,386,259**March
                  1 - 31, 2006**
              
              
              127,476
              
              
              15.08
              
              
              125,000
              
              $
              49,633,425**Total**
              
              
              501,276
              
              
              15.36
              
              
              498,800




(1)
            The
                shares purchased in March 2006 include 2,476 shares of the Company's
                Common Stock surrendered to the Company by employees in order to
                fulfill
                tax withholding obligations of employees upon vesting of restricted
                stock. (2)
            On
                April 28, 2005, our Board of Directors authorized our repurchase
                of up to
                $100.0 million of our Common Stock over the succeeding two
                years.


**Item
      6.**  **EXHIBITS**





**(a)**  **Exhibits**




10.57
              Merger
                  Agreement dated March 31, 2006 by and among The Reader’s Digest
                  Association, Inc., RD Merger Sub, Inc. and Allrecipes.com, Inc.
                  filed as
                  Exhibit 2.1 to our Current Report on Form 8-K dated March 31, 2006,
                  in
                  incorporated herein by reference.
 
 10.58
              Form
                  of Support Agreement dated March 31, 2006 by and among The Reader’s Digest
                  Association, Inc., RD Merger Sub, Inc. and the signatories thereto,
                  filed
                  as Exhibit 10.1 to our Current Report on Form 8-K dated March 31,
                  2006, in
                  incorporated herein by reference.
 
 10.59
              First
                  Amendment, dated as of April 19, 2006, to the $400,000,000 Five-Year
                  Revolving Credit Agreement, dated as of April 14, 2005, among The
                  Reader’s
                  Digest Association, Inc., the Borrowing Subsidiaries party thereto,
                  the
                  Lenders party thereto, JPMorgan Chase Bank, as administrative agent
                  and
                  collateral agent, and the co-documentation agents party thereto,
                  filed as
                  Exhibit 10.58 to our Current Report on Form 8-K dated April 19,
                  2006, is
                  incorporated herein by reference.
 
 31.1
              Certification
                  of Chief Executive Officer of The Reader’s Digest Association, Inc.
                  pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange
                  Act of
                  1934.
 
 31.2
              Certification
                  of Chief Financial Officer of The Reader’s Digest Association, Inc.
                  pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange
                  Act of
                  1934.
 
 32
              Certificationsof
                  Chief Executive Officer and Chief Financial Officer of The Reader’s Digest
                  Association, Inc. pursuant to rule 13a-14(b)/15d-14(b) of the Securities
                  Exchange Act of 1934.




-29-


























SIGNATURES








Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




















The
                Reader's Digest Association, Inc.*(Registrant)*Date:
                May 2, 2006
            By:
            /s/
                Thomas D. BarryThomas
                D. BarryVice
                President and Corporate Controller
              (Chief
                accounting officer and authorized
                signatory)