**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**





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


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended December 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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated filer [X]  Accelerated
      filer [ ]  Non-accelerated
      filer [ ]





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
      January 19, 2007, 95,027,482 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**








**December
      31, 2006**


**Page
                    No.****Part
                    I - Financial Information:****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 six-month periods ended December 31, 2006
                    and
                    2005
                3Consolidated
                    Condensed Balance Sheets
                  as
                    of December 31, 2006 and June 30, 2006
                4Consolidated
                    Condensed Statements of Cash
                    Flows
                  for
                    the six-month periods ended December 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**
                14**Item
                    4.****Controls
                    and Procedures**
                27**Part
                    II - Other Information:****Item
                    1.****Legal
                    Proceedings**
                28**Item
                    1A.****Risk
                    Factors**
                28**Item
                    2.****Unregistered
                    Sales of Equity Securities and Use of Proceeds**
                28**Item
                    6.****Exhibits**
                29


-2-


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


**ConsolidatedCondensed
      Statements of
      Operations**


*(In
      millions, except per share data)*


*(unaudited)*




**Three-month
                  period ended**
              
              **Six-month
                  period ended****December
                  31,**
              
              **December
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenues**
              
              **$**
              **802.4**
              
              **$**
              **765.2**
              
              **$**
              **1,319.5**
              
              **$**
              **1,281.6**Product,
                  distribution and editorial
                expenses
              
              
              **(320.7**
              **)**
              
              **(301.3**
              **)**
              
              **(546.1**
              **)**
              
              **(522.4**
              **)**Promotion,
                  marketing and administrative
                expenses
              
              
              **(362.1**
              **)**
              
              **(353.1**
              **)**
              
              **(683.3**
              **)**
              
              **(657.8**
              **)**Other
                  operating items, net
              
              
              **(6.1**
              **)**
              
              **0.8**
              
              
              **(6.1**
              **)**
              
              **3.4**Goodwill
                  charge
              
              
              **---**
              
              
              **(187.8**
              **)**
              
              **---**
              
              
              **(187.8**
              **)****Operating
                  profit (loss)**
              
              
              **113.5**
              
              
              **(76.2**
              **)**
              
              **84.0**
              
              
              **(83.0**
              **)**Other
                  income and (expense), net
              
              
              **(17.7**
              **)**
              
              **(10.4**
              **)**
              
              **(31.4**
              **)**
              
              **(19.6**
              **)****Income
                  (loss) before provision for**
                **income
                  taxes**
              
              
              **95.8**
              
              
              **(86.6**
              **)**
              
              **52.6**
              
              
              **(102.6**
              **)**Provision
                  for income taxes
              
              
              **(34.1**
              **)**
              
              **(35.8**
              **)**
              
              **(17.5**
              **)**
              
              **(28.0**
              **)****Net
                  income (loss)**
              
              **$**
              **61.7**
              
              **$**
              **(122.4**
              **)**
              **$**
              **35.1**
              
              **$**
              **(130.6**
              **)****Basic
                  earnings (loss) per share:**Weighted
                  average common shares
                outstanding
              
              
              **94.3**
              
              
              **96.6**
              
              
              **94.2**
              
              
              **97.0****Basic
                  earnings (loss) per share**
              
              **$**
              **0.65**
              
              **$**
              **(1.27**
              **)**
              **$**
              **0.37**
              
              **$**
              **(1.35**
              **)****Diluted
                  earnings (loss) per share:**Adjusted
                  weighted average common
                shares
                  outstanding
              
              
              **95.2**
              
              
              **96.6**
              
              
              **95.1**
              
              
              **97.0****Diluted
                  earnings (loss) per share**
              
              **$**
              **0.65**
              
              **$**
              **(1.27**
              **)**
              **$**
              **0.36**
              
              **$**
              **(1.35**
              **)****Dividends
                  per common share**
              
              **$**
              **0.10**
              
              **$**
              **0.10**
              
              **$**
              **0.20**
              
              **$**
              **0.20**




*See
      accompanying Notes to Consolidated Condensed Financial
      Statements.*





-3-


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


**ConsolidatedCondensed
      Balance Sheets**


*(In
      millions, except share and per share data)*




**December
                  31,**
              
              **June
                  30,****2006**
              
              **2006***(unaudited)***Assets**Cash
                  and cash equivalents
              
              **$**
              **61.7**
              
              $
              34.7Accounts
                  receivable, net
              
              
              **382.4**
              
              
              261.9Inventories
              
              
              **201.4**
              
              
              172.3Prepaid
                  and deferred promotion costs
              
              
              **45.8**
              
              
              62.3Prepaid
                  expenses and other current assets
              
              
              **165.7**
              
              
              173.1**Total
                  current assets**
              
              
              **857.0**
              
              
              **704.3**Property,
                  plant and equipment, net
              
              
              **121.7**
              
              
              119.3Goodwill
              
              
              **727.8**
              
              
              744.1Other
                  intangible assets, net
              
              
              **130.7**
              
              
              134.4Prepaid
                  pension assets
              
              
              **331.7**
              
              
              324.6Other
                  noncurrent assets
              
              
              **99.6**
              
              
              95.4**Total
                  assets**
              
              **$**
              **2,268.5**
              
              **$**
              **2,122.1****Liabilities
                  and stockholders' equity**Accounts
                  payable
              
              **$**
              **186.4**
              
              $
              128.2Accrued
                  expenses
              
              
              **286.2**
              
              
              257.3Income
                  taxes payable
              
              
              **42.3**
              
              
              40.6Unearned
                  revenues
              
              
              **441.4**
              
              
              394.1Other
                  current liabilities
              
              
              **14.2**
              
              
              9.8**Total
                  current liabilities**
              
              
              **970.5**
              
              
              **830.0**Long-term
                  debt
              
              
              **670.0**
              
              
              695.0Unearned
                  revenues
              
              
              **138.5**
              
              
              131.2Accrued
                  pension
              
              
              **111.2**
              
              
              108.7Postretirement
                  and postemployment benefits other than pensions
              
              
              **91.5**
              
              
              94.2Other
                  noncurrent liabilities
              
              
              **90.7**
              
              
              87.9**Total
                  liabilities**
              
              
              **2,072.4**
              
              
              **1,947.0**Preferred
                  stock
              
              
              **28.8**
              
              
              28.8Common
                  stock (par value $0.01 per share; authorized
                200,000,000
                  shares; 145,922,062 issued at December 31, 2006
                and
                  June 30, 2006; 95,048,554 and 95,047,776 outstanding at
                December
                  31, 2006 and June 30, 2006, respectively)
              
              
              **1.5**
              
              
              1.5Paid-in
                  capital
              
              
              **208.6**
              
              
              208.1Retained
                  earnings
              
              
              **1,079.8**
              
              
              1,064.3Accumulated
                  other comprehensive loss
              
              
              **(63.9**
              **)**
              
              (67.4
              )Treasury
                  stock, at cost (50,873,508 and 50,874,286 shares at
                December
                  31, 2006 and June 30, 2006, respectively)
              
              
              **(1,058.7**
              **)**
              
              (1,060.2
              )**Total
                  stockholders' equity**
              
              
              **196.1**
              
              
              **175.1****Total
                  liabilities and stockholders' equity**
              
              **$**
              **2,268.5**
              
              **$**
              **2,122.1**


*See
        accompanying Notes to Consolidated Condensed Financial
        Statements*


-4-


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


**ConsolidatedCondensed
      Statements of Cash
      Flows**


*(In
      millions)*


*(unaudited)*




**Six-month
                  period ended****December
                  31,****2006**
              
              **2005****Cash
                  flows from operating activities**Net
                  income (loss)
              
              **$**
              **35.1**
              
              $
              (130.6
              )Depreciation
                  and amortization
              
              
              **17.2**
              
              
              18.7Goodwill
                  charge
              
              
              **---**
              
              
              187.8Amortization
                  of debt issue costs
              
              
              **0.8**
              
              
              0.7Stock-based
                  compensation
              
              
              **4.2**
              
              
              7.1Net
                  loss (gain) on sales of magazines and other long-term
                  assets
              
              
              **6.1**
              
              
              (3.4
              )Changes
                  in assets and liabilities, net of effects of acquisitions and
                dispositions:Accounts
                  receivable, net
              
              
              **(114.2**
              **)**
              
              (107.4
              )Inventories
              
              
              **(26.8**
              **)**
              
              (38.5
              )Prepaid
                  and deferred promotion costs
              
              
              **17.6**
              
              
              10.2Other
                  assets
              
              
              **(6.7**
              **)**
              
              (26.6
              )Unearned
                  revenues
              
              
              **56.4**
              
              
              49.7Income
                  and deferred taxes, net
              
              
              **(2.5**
              **)**
              
              16.8Accounts
                  payable and accrued expenses
              
              
              **81.1**
              
              
              45.6Other
                  liabilities
              
              
              **2.3**
              
              
              0.7**Net
                  change in cash due to operating activities**
              
              
              **70.6**
              
              
              **30.8****Cash
                  flows from investing activities**Proceeds
                  from the sales of magazines and sales of other long-term
                investments
              
              
              **6.9**
              
              
              0.2Proceeds
                  from sales of property, plant and equipment
              
              
              **9.0**
              
              
              3.7Payments
                  for business acquisitions
              
              
              **(0.4**
              **)**
              
              ---Purchase
                  of intangible assets
              
              
              **(3.3**
              **)**
              
              (0.5
              )Capital
                  expenditures
              
              
              **(10.9**
              **)**
              
              (10.8
              )**Net
                  change in cash due to investing activities**
              
              
              **1.3**
              
              
              **(7.4**
              **)****Cash
                  flows from financing activities**(Repayments)
                  proceeds from borrowings, net
              
              
              **(25.0**
              **)**
              
              66.2Dividends
                  paid
              
              
              **(19.6**
              **)**
              
              (20.1
              )Cash
                  paid for financing fees
              
              
              **(0.7**
              **)**
              
              ---Treasury
                  stock repurchases
              
              
              **---**
              
              
              (35.6
              )Proceeds
                  from employee stock purchase plan and exercise
                of
                  stock options
              
              
              **1.3**
              
              
              1.5Other,
                  net
              
              
              **(3.6**
              **)**
              
              (3.8
              )**Net
                  change in cash due to financing activities**
              
              
              **(47.6**
              **)**
              
              **8.2**Effect
                  of exchange rate changes on cash
              
              
              **2.7**
              
              
              (0.5
              )**Net
                  change in cash and cash equivalents**
              
              
              **27.0**
              
              
              **31.1**Cash
                  and cash equivalents at beginning of period
              
              
              **34.7**
              
              
              37.7**Cash
                  and cash equivalents at end of period**
              
              **$**
              **61.7**
              
              **$**
              **68.8**
  *See
        accompanying Notes to Consolidated Condensed Financial
        Statements.*





-5-


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


**Notesto
      Consolidated Condensed Financial
      Statements**


*(Dollars
      in millions, except share and 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 2007 and 2006, unless otherwise indicated,
      are to fiscal 2007 and fiscal 2006, 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 three- and six-month
      periods ended December 31, 2005 is a goodwill charge related to Books Are Fun.
      See Note 8 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 2006 Annual Report
      to Stockholders.





We
      report
      on a fiscal year that begins July 1. The three-month periods ended December
      31,
      2006 and 2005 are the second fiscal quarters of 2007 and 2006, 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.








**Recent
      Accounting Standards**





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      48, “Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS 109”
(FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a
      minimum recognition threshold a tax position is required to meet before being
      recognized in the financial statements. It also provides guidance on
      derecognition and measurement of tax positions. Disclosure requirements under
      this guidance will include a rollforward of the beginning and ending
      unrecognized tax benefits, as well as specific detail related to tax
      uncertainties for which it is reasonably possible the amount of unrecognized
      tax
      benefit will significantly increase or decrease within a year. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. We are evaluating
      the impact of this standard on our consolidated financial
      statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157).
      This Statement defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements. This Statement
      applies under other accounting pronouncements that require or permit fair value
      measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. We are evaluating the impact of this standard on
      our
      consolidated financial statements.





Also
      in
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements
      No. 87, 88, 106, and 132R)” (SFAS No. 158). The objectives of this
      Statement are for an employer to: (1) recognize the overfunded or underfunded
      status of a single-employer defined benefit postretirement plan as an asset
      or
      liability in its statement of financial position and to recognize changes in
      that funded status in comprehensive income in the year in which the changes
      occur; and (2) measure the plan status as of the date of its year-end statement
      of financial position. SFAS No. 158 is effective for the requirement to
      recognize the funded status of a benefit plan and the disclosure requirements
      as
      of the end of the fiscal year ending after December 15, 2006. The requirement
      to
      measure plan assets and benefit obligations as of the date of the employer’s
      fiscal year-end statement of financial position will be effective for fiscal
      years ending after December 15, 2008. We are evaluating the impact of this
      standard on our consolidated financial statements.








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





Basic
      earnings (loss) per share is computed by dividing net income (loss) less
      preferred stock dividend requirements by the weighted average number of common
      shares outstanding during the period. The preferred stock dividends totaled
      $0.3
      for each of the three-month periods ended December 31, 2006 and 2005, and $0.7
      for each of the six-month periods ended December 31, 2006 and 2005.





Diluted
      earnings (loss) 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- and six-month periods ended December 31, 2006, the incremental
      weighted average shares attributed to the assumed exercise, conversion and
      vesting of stock options and restricted stock were 0.9 million and 0.8 million,
      respectively. Options to purchase 9.3 million and 10.6 million shares were
      not
      included in the calculation of diluted earnings per share for the three- and
      six-month periods ended December 31, 2006, respectively, since the effect of
      including these options would have been anti-dilutive.





For
      the
      three- and six-month periods ended December 31, 2005, 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 and restricted stock
      would have been anti-dilutive. Accordingly, our diluted loss per share for
      the
      three- and six-month periods ended December 31, 2005 is calculated using the
      basic weighted average number of common shares outstanding.








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





As
      of
      July 1, 2006, we maintain certain stock-based compensation plans that are
      described in Note 9 to the Consolidated Financial Statements included in our
      2006 Annual Report to Stockholders.





*Stock
      Options*





We
      grant
      substantially all of our stock options annually during the first quarter of
      our
      fiscal year. Stock options are approved by the Compensation and Nominating
      Committee of the Board of Directors (the Committee) on or prior to the granting
      of stock options. On the date of grant, the exercise prices of our stock options
      are not less than the fair market value of our Common Stock, and have 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 change of control, retirement, death or disability,
      as defined. During each of the three-month periods ended December 31, 2006
      and
      2005, we granted an insignificant number of options. During each of the
      three-month periods ended September 30, 2006 and 2005, we granted 1.2 million
      options.





Stock
      option-based 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. For the three-month periods ended December
      31,
      2006 and 2005, stock option based compensation was ($1.1) and ($1.7),
      respectively. For the six-month periods ended December 31, 2006 and 2005, stock
      option-based compensation was ($2.4) and ($3.3), respectively. There were no
      capitalized stock option-based compensation costs at December 31, 2006 and
      2005.
      As of December 31, 2006, there was $8.0 of total unrecognized compensation
      cost
      related to nonvested stock options to be recognized over a weighted-average
      period of 1.4 years.





The
      fair
      values of the options granted were estimated on the dates of their grants using
      the Black-Scholes option-pricing model on the basis of the following
      weighted-average assumptions:


-6-


**Six-month
                    period ended December 31,****2006**
                
                2005Risk-free
                    interest rate
                
                
                **4.9**
                **%**
                
                4.2
                %Expected
                    life
                
                
                **6.25
                    years**
                
                
                6.25
                    yearsExpected
                    volatility
                
                
                **29.1**
                **%**
                
                31.8
                %Expected
                    dividend yield
                
                
                **2.7**
                **%**
                
                2.6
                %Weighted-average
                    fair value ofoptions
                    granted
                
                **$**
                **3.42**
                
                $
                4.39
 
 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.
          Due to
          the insignificant number of stock option exercises during recent fiscal
          years,
          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.
 
 *Restricted
          Stock and Deferred Stock*
 
 Restricted
          Stock -
          Restricted stock are shares of our Common Stock that are subject to restrictions
          on transfer and risk of forfeiture until the fulfillment of specified
          conditions. Restricted stock awards usually allow for accelerated vesting
          upon
          the occurrence of certain defined events, including a change of control.
          Restricted stock is expensed ratably over the term of the restriction period,
          ranging from two to four years.
 
 We
          did
          not grant any shares of restricted stock during the three-month periods
          ended
          December 31, 2006 and 2005. Restricted stock expense for the three-month
          periods
          ended December 31, 2006 and 2005, amounted to ($0.4) and ($1.5), respectively,
          before tax benefits of $0.2 and $0.6, respectively. There was no vesting
          of
          restricted stock during the three-month periods ended December 31, 2006
          and
          2005.
 
 During
          the six-month periods ended December 31, 2006 and 2005, we granted 0.1
          million
          shares of restricted stock in each period. Restricted stock expense for
          the
          six-month periods ended December 31, 2006 and 2005, amounted to ($1.2)
          and
          ($3.1), respectively, before tax benefits of $0.4 and $1.2, respectively.
          Restricted stock vested during the six-month periods ended December 31,
          2006 and
          2005, were 0.7 million shares in each period.
 
 At
          December 31, 2006, the
          balance of unvested restricted stock is 0.7 million shares with related
          unearned
          compensation cost of $2.8 that is to be recognized over a weighted-average
          period of 1.4 years.
 
 Deferred
          Stock  -
          Deferred stock are rights to receive shares of our Common Stock upon the
          fulfillment of specified conditions. We primarily 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
          did
          not grant any shares of deferred stock during the three-month periods ended
          December 31, 2006 and 2005. During the three-month periods ended December
          31,
          2006 and 2005, we recognized expense of ($0.3) and ($0.4), respectively,
          before
          tax benefits of $0.1 and $0.2, respectively, related to these awards. There
          was
          no vesting of deferred stock during the three-month periods ended December
          31,
          2006 and 2005.
 
 During
          the six-month periods ended December 31, 2006 and 2005, we granted 0.1
          million
          shares of deferred stock in each period. During the six-month periods ended
          December 31, 2006 and 2005, we recognized expense of ($0.6) and ($0.7),
          respectively, before tax benefits of $0.2 and $0.3, respectively, related
          to
          these awards. Deferred stock vested during the six-month periods ended
          December
          31, 2006 and 2005, were 0.1 million shares in each period.
 
 At
          December 31, 2006, the balance of unvested deferred stock is 0.3 million
          shares
          with related unearned compensation cost of $0.9 that is to be recognized
          over a
          weighted-average period of 1.6 years.
   -7-
  
 (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 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 2006 Annual Report
          to
          Stockholders.
 
 
 **Three-month
                    period ended**
                
                **Six-month
                    period ended****December
                    31,**
                
                **December
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005****Revenues**Reader’s
                    Digest North America
                
                **$**
                **274.7**
                
                $
                247.0
                
                **$**
                **504.0**
                
                $
                474.7Reader’s
                    Digest International
                
                
                **329.8**
                
                
                300.8
                
                
                **570.8**
                
                
                535.8Consumer
                    Business Services
                
                
                **211.2**
                
                
                228.7
                
                
                **264.5**
                
                
                288.5Intercompany
                    eliminations
                
                
                **(13.3**
                **)**
                
                (11.3
                )
                
                **(19.8**
                **)**
                
                (17.4
                )**Total
                    revenues**
                
                **$**
                **802.4**
                
                **$**
                **765.2**
                
                **$**
                **1,319.5**
                
                **$**
                **1,281.6****Operating
                    profit (loss)**Reader’s
                    Digest North America
                
                **$**
                **36.7**
                
                $
                28.1
                
                **$**
                **45.3**
                
                $
                44.1Reader’s
                    Digest International
                
                
                **47.0**
                
                
                38.7
                
                
                **38.0**
                
                
                40.1Consumer
                    Business Services
                
                
                **49.2**
                
                
                54.3
                
                
                **30.2**
                
                
                36.3Corporate
                    Unallocated(1)
                
                
                **(13.3**
                **)**
                
                (10.3
                )
                
                **(23.4**
                **)**
                
                (19.1
                )Other
                    operating items, net(2)
                
                
                **(6.1**
                **)**
                
                0.8
                
                
                **(6.1**
                **)**
                
                3.4Goodwill
                    charge(3)
                
                
                **---**
                
                
                (187.8
                )
                
                **---**
                
                
                (187.8
                )**Operating
                    profit (loss)**
                
                **$**
                **113.5**
                
                **$**
                **(76.2**
                **)**
                **$**
                **84.0**
                
                **$**
                **(83.0**
                **)****Intercompany
                    eliminations**Reader’s
                    Digest North America
                
                **$**
                **(4.7**
                **)**
                $
                (2.2
                )
                **$**
                **(8.6**
                **)**
                $
                (6.4
                )Reader’s
                    Digest International
                
                
                **(1.6**
                **)**
                
                (1.7
                )
                
                **(3.9**
                **)**
                
                (3.2
                )Consumer
                    Business Services
                
                
                **(7.0**
                **)**
                
                (7.4
                )
                
                **(7.3**
                **)**
                
                (7.8
                )**Total
                    intercompany eliminations**
                
                **$**
                **(13.3**
                **)**
                **$**
                **(11.3**
                **)**
                **$**
                **(19.8**
                **)**
                **$**
                **(17.4**
                **)**
 
 (1)
              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. 
 (2)
              Other
                  operating items, net, includes losses or gains on sales of certain
                  non-strategic assets and, therefore, is not included in segment
                  results
                  reviewed by our chief operating decision maker. See Note 6, Other
                  Operating Items, Net, for additional information. 
 (3)
              The
                  goodwill charge related to Books Are Fun, part of the Consumer
                  Business
                  Services reportable segment, is not included in segment results
                  reviewed
                  by our chief operating decision maker. See Note 8, Goodwill and
                  Other
                  Intangible Assets, Net, for additional
                  information. 
  -8-
   **(5)**  **Comprehensive
          Income (Loss)**
 
 Accumulated
          other comprehensive income (loss) as reported in our balance sheets primarily
          represents foreign currency translation adjustments. The components of
          comprehensive income (loss), net of related tax, were as follows:
  **Three-month
                      period ended**
                  
                  **Six-month
                      period ended****December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Net
                      income (loss)
                  
                  **$**
                  **61.7**
                  
                  $
                  (122.4
                  )
                  **$**
                  **35.1**
                  
                  $
                  (130.6
                  )Change
                      in:Foreign
                      currency translation adjustments
                  
                  
                  **2.9**
                  
                  
                  ---
                  
                  
                  **3.5**
                  
                  
                  3.3**Total
                      comprehensive income (loss)**
                  
                  **$**
                  **64.6**
                  
                  **$**
                  **(122.4**
                  **)**
                  **$**
                  **38.6**
                  
                  **$**
                  **(127.3**
                  **)**
 
 **(6)**  **Other
          Operating Items, Net**
 
 As
          described in our 2006 Annual Report to Stockholders, amounts included in
          Other
          Operating Items, Net consist of: 1) gains or losses from the sales of certain
          non-strategic assets and 2) restructuring charges, representing the streamlining
          of our organizational structure and the strategic repositioning of our
          businesses, including associated asset impairments.
 
 During
          the three- and six-month periods ended December 31, 2006, we recognized
          a loss
          of ($6.2) for the sale of *American
          Woodworker* magazine
          in December 2006. Gains on the sales of certain assets in 2006 include
          $2.5 from
          the sale of our building in Mexico in the first quarter of 2006 and $0.5
          from
          the sale of certain fine art in the second quarter of 2006.
 
 The
          table
          below reflects changes for the six-month period ended December 31, 2006
          to
          restructuring accruals recorded in previous periods. The majority of the
          accruals 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. Severance related
          to
          the termination of positions in fiscal year 2005 and prior is completed.
          Of the
          approximately 160 positions identified in 2006, approximately 70% have
          been
          separated from the business and the remainder will be completed by the
          end of
          2007.
 
 **Initial
                    year**
                  **of
                    charge**
                
                **Balance
                    at**
                  **June
                    30, 2006**
                
                **Spending**
                
                **Balance
                    at**
                  **December
                    31, 2006**2005
                    & prior
                
                $
                3.2
                
                $
                (1.2
                )
                **$**
                **2.0**2006
                
                
                6.5
                
                
                (3.2
                )
                
                **3.3****Total**
                
                **$**
                **9.7**
                
                **$**
                **(4.4**
                **)**
                **$**
                **5.3**
 
 
 **(7)**  **Inventories**
 
 **December
                    31,**
                  **2006**
                
                **June
                    30,**
                  **2006**
                
                **December
                    31,**
                  **2005**Raw
                    materials
                
                **$**
                **14.2**
                
                $
                12.4
                
                $
                13.7Work-in-progress
                
                
                **4.1**
                
                
                7.2
                
                
                3.3Finished
                    goods
                
                
                **183.1**
                
                
                152.7
                
                
                183.5**Total
                    inventories**
                
                **$**
                **201.4**
                
                **$**
                **172.3**
                
                **$**
                **200.5**
  -9-
  **(8)**  **Goodwill
        and Other Intangible Assets, Net**





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





**Reader’s
                Digest North America**
            
            **Consumer**
              **Business**
              **Services**
            
            **Total****Balance
                as of June 30, 2006**
            
            **$**
            **738.0**
            
            **$**
            **6.1**
            
            **$**
            **744.1**Sale
                of*American
                Woodworker*magazine
            
            
            (16.2
            )
            
            ---
            
            
            (16.2
            )Impact
                of foreign currency translation on goodwill balances outside the
                United
                States
            
            
            ---
            
            
            (0.1
            )
            
            (0.1
            )**Balance
                as of December 31, 2006**
            
            **$**
            **721.8**
            
            **$**
            **6.0**
            
            **$**
            **727.8**








The
      following categories of acquired intangible assets are included in other
      intangible assets, net, on the balance sheets:





**December
                31, 2006**
            
            **June
                30, 2006****Gross**
            
            **Net**
            
            **Gross**
            
            **Net****Intangible
                assets with indefinite lives:**Tradenames
            
            **$**
            **96.2**
            
            **$**
            **96.2**
            
            $
            93.3
            
            $
            93.3**Intangible
                assets with finite lives:**Licensing
                agreements
            
            
            **59.4**
            
            
            **24.9**
            
            
            60.0
            
            
            28.2Customer
                lists
            
            
            **135.9**
            
            
            **3.4**
            
            
            138.3
            
            
            6.1Other
                tradenames andnoncompete
                agreements
            
            
            **9.3**
            
            
            **6.2**
            
            
            9.2
            
            
            6.8**Total
                intangible assets**
            
            **$**
            **300.8**
            
            **$**
            **130.7**
            
            **$**
            **300.8**
            
            **$**
            **134.4**





Amortization
      related to intangible assets with finite lives amounted to ($3.4) and ($4.2)
      for
      the three-month periods ended December 31, 2006 and 2005, respectively.
      Amortization related to intangible assets with finite lives amounted to ($6.7)
      and ($8.4) for the six-month periods ended December 31, 2006 and 2005,
      respectively.





During
      the three months ended December 31, 2006, we acquired the *Fundraising.com* tradename and other intangible assets for approximately $3.3. Additional cash
      consideration of up to approximately $6.0 will be due if Fundraising.com
      achieves certain specified financial performance thresholds over a five-year
      period commencing October 6, 2006. This additional cash consideration is
      calculated based upon a formula applied to sales, as defined.





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 impairment. In the second quarter of 2006, due to a shortfall in Books Are
      Fun’s operating performance relative to our expectations during our peak selling
      season, we recorded a charge of ($187.8) to write off its remaining goodwill.
      The decline in performance was attributed to competitive pressure on margin
      and
      turnover of independent sales representatives. 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. There are no current indicators of goodwill or intangible asset
      impairments in the remaining reporting units.




-10-


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





As
      described in Note 11 to the Consolidated Financial Statements included in our
      2006 Annual Report to Stockholders, our borrowings include proceeds under our
      $500.0 Five-Year Revolving Credit Agreement (2005 Credit Agreement) and $300.0
      in 61⁄2% senior unsecured notes due in 2011. On September 28, 2006, we entered
      into an amendment to our 2005 Credit Agreement that increased the allowable
      maximum leverage ratio (as defined in the amendment) and increased interest
      rates when the leverage ratio is at higher levels through
      March 31, 2007. Subsequent to March 31, 2007, the allowable
      maximum leverage ratio will be defined in accordance with the 2005 Credit
      Agreement. The amendment also places certain defined restrictions on our ability
      to repurchase shares of our Common Stock through
      June 30, 2007.





The
      interest rate on the 2005 Credit Agreement at December 31, 2006 is at
      LIBOR plus 225 basis points and is subject to change based on our leverage
      ratio. The 2005 Credit Agreement, as amended, 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
      December 31, 2006, we had $370.0 of outstanding borrowings under the 2005 Credit
      Agreement and $300.0 outstanding under the senior unsecured notes. Interest
      expense for the three- and six-month periods ended December 31, 2006
      was $(16.8) and $(31.8), respectively, and ($11.8) and ($22.6) for the three-
      and six-month periods ended December 31, 2005, respectively. Interest income
      on
      cash balances for the three- and six-month periods ended
      December 31, 2006 was $1.8 and $3.4, respectively, and $1.6 and $3.3
      for the three- and six-month periods ended December 31, 2005, respectively.
      The
      weighted average interest rate on our borrowings for the six-month periods
      ended
      December 31, 2006 and 2005 was 6.8% and 5.7%,
      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
      table
      below details the components of our net periodic pension (benefit)
      cost.





**Three-month
                period ended**
            
            **Six-month
                period ended****December
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Service
                cost
            
            **$**
            **4.3**
            
            $
            4.1
            
            **$**
            **8.6**
            
            $
            8.2Interest
                cost
            
            
            **11.7**
            
            
            11.1
            
            
            **23.3**
            
            
            22.2Expected
                return on plan assets
            
            
            **(18.0**
            **)**
            
            (17.2
            )
            
            **(35.9**
            **)**
            
            (34.5
            )Amortization
                of prior service cost
            
            
            **(0.3**
            **)**
            
            (0.3
            )
            
            **(0.5**
            **)**
            
            (0.6
            )Recognized
                actuarial loss
            
            
            **2.4**
            
            
            1.7
            
            
            **4.7**
            
            
            3.5Settlements,
                etc.
            
            
            **(0.1**
            **)**
            
            ---
            
            
            **(0.2**
            **)**
            
            ---**Net
                periodic pension (benefit) cost**
            
            **$**
            **---**
            
            **$**
            **(0.6**
            **)**
            **$**
            **---**
            
            **$**
            **(1.2**
            **)**





For
      the
      three-month periods ended December 31, 2006 and 2005, approximately $1.6 and
      $1.5 was contributed to our international pension plans, respectively. For
      the
      six-month periods ended December 31, 2006 and 2005, approximately $4.1 and
      $3.6
      was contributed to our international pension plans, respectively. Because the
      Retirement Plan in the United States is over-funded, we did not make any
      contributions during the six-month periods ended December 31, 2006 and 2005.
      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 ($1.3 and $1.4 during
      the three-month periods ended December 31, 2006 and 2005, respectively, and
      $3.1
      and $3.4 during the six-month periods ended December 31, 2006 and 2005,
      respectively).





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).











**Three-month
                period ended**
            
            **Six-month
                period ended****December
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Service
                cost
            
            **$**
            **0.2**
            
            $
            0.2
            
            **$**
            **0.4**
            
            $
            0.4Interest
                cost
            
            
            **1.0**
            
            
            1.0
            
            
            **1.9**
            
            
            2.1Amortization
                of prior service cost
            
            
            **(0.8**
            **)**
            
            (0.7
            )
            
            **(1.6**
            **)**
            
            (1.4
            )Recognized
                actuarial gain
            
            
            **(0.3**
            **)**
            
            ---
            
            
            **(0.6**
            **)**
            
            ---**Net
                periodic postretirement cost**
            
            **$**
            **0.1**
            
            **$**
            **0.5**
            
            **$**
            **0.1**
            
            **$**
            **1.1**





-11-








**(11)**  **Income
      Taxes**





During
      the six-month periods ended December 31, 2006 and 2005, we recorded income
      tax
      expense of $17.5 and $28.0, respectively. For the six-month period ended
      December 31, 2006, we recorded discrete tax benefits of $2.7 principally related
      to the refund of interest associated with the closing of tax audits and
      adjustments to valuation allowances. For the six-month period ended December
      31,
      2005, we recorded discrete tax benefits of $2.9 principally related to the
      settlement of a tax audit in a foreign country.








**(12)**  **Merger
      Agreement**





On
      November 16, 2006, we entered into a merger agreement with Doctor
      Acquisition Holding Co., a Delaware corporation (“Parent”), and Doctor
      Acquisition Co., a Delaware corporation and wholly owned subsidiary of Parent
      (“Sub”), pursuant to which each issued and outstanding share of our common stock
      (other than Common Stock that is owned by us, Parent or Sub) will be converted
      into the right to receive cash in the amount of $17.00 per share, without
      interest, and, at closing, Sub would be merged with and into us(the “Merger
      Agreement”). Each issued and outstanding share of our first preferred stock,
      second preferred stock and third subordinated preferred stock that does not
      exercise appraisal rights will remain issued and outstanding as shares of first
      preferred stock, second preferred stock and third subordinated preferred stock,
      respectively, of the surviving corporation. Parent and Sub are entities that
      were formed by Ripplewood Holdings L.L.C. Our board of directors approved the
      transactions contemplated by the Merger Agreement, and resolved to recommend
      to
      our stockholders that they adopt the Merger Agreement. A special meeting of
      the
      holders of our common shares is scheduled for February 2, 2007 to consider
      and
      vote on the proposal to adopt the Merger Agreement. The merger is expected
      to
      close by the end of February 2007, and is subject to a financing condition
      and the adoption of the Merger Agreement by the holders of a majority of the
      outstanding shares of our Common Stock, as well as other customary closing
      conditions.





Two
      lawsuits arising out of the proposed merger have been filed in the Supreme
      Court
      of New York, County of Westchester, against us and all of the members of our
      Board of Directors. The lawsuits, filed on November 20, 2006 and December 12,
      2006, respectively, purport to be brought on behalf of all of our public
      stockholders and seek to enjoin the proposed merger. The complaints allege
      that
      our board of directors violated its fiduciary duties to our stockholders by
      entering into the Merger Agreement that, according to the complaints, does
      not
      reflect the “intrinsic value” of our Common Stock. We and Ripplewood Holdings
      L.L.C., which has been named as a defendant in one of the cases, have agreed
      with counsel for the plaintiffs to consolidate these two lawsuits. The lawsuits
      are in their preliminary stage, and, as of the date of this filing, plaintiffs
      have not filed any motion or requested any relief in the Court. We believe
      that
      the lawsuits are without merit and intend to defend these cases
      vigorously.




-12-


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


**Management'sDiscussion
      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 2007 and 2006, unless otherwise indicated, are to fiscal
      2007
      and fiscal 2006, 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.*








**Merger
      Agreement**





On
        November 16, 2006, we entered into a merger agreement with Doctor
        Acquisition Holding Co., a Delaware corporation (“Parent”), and Doctor
        Acquisition Co., a Delaware corporation and wholly owned subsidiary of Parent
        (“Sub”), pursuant to which each issued and outstanding share of our common stock
        (other than Common Stock that is owned by us, Parent or Sub) will be converted
        into the right to receive cash in the amount of $17.00 per share, without
        interest, and, at closing, Sub would be merged with and into us(the “Merger
        Agreement”). Each issued and outstanding share of our first preferred stock,
        second preferred stock and third subordinated preferred stock that does not
        exercise appraisal rights will remain issued and outstanding as shares of
        first
        preferred stock, second preferred stock and third subordinated preferred
        stock,
        respectively, of the surviving corporation. Parent and Sub are entities that
        were formed by Ripplewood Holdings L.L.C. Our board of directors approved
        the
        transactions contemplated by the Merger Agreement, and resolved to recommend
        to
        our stockholders that they adopt the Merger Agreement. A special meeting
        of the
        holders of our common shares is scheduled for February 2, 2007 to consider
        and
        vote on the proposal to adopt the Merger Agreement. The merger is expected
        to
        close by the end of February 2007, and is subject to a financing condition
        and the adoption of the Merger Agreement by the holders of a majority of
        the
        outstanding shares of our Common Stock, as well as other customary closing
        conditions.





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





**Results
      of Operations: Company-Wide**





**Overview**





The
      second quarter of the fiscal year is the peak selling season for most of our
      businesses. During the second quarter of 2007, Reader’s Digest North America and
      Reader’s Digest International benefited from our new business initiatives. In
      addition, our previous investments to grow our customer base for our magazine
      and books and home entertainment product lines also impacted Reader’s Digest
      International. At Consumer Business Services, we continued to increase the
      size
      of our independent sales representative force, implement our plan to lower
      the
      cost base, expand the effectiveness of our sales force and strengthen cash
      flow.








**Revenues** ****





Revenues
      for the second quarter of 2007 increased 5% to $802, compared with $765 for
      the
      second quarter of 2006. The effect of foreign currency fluctuations increased
      revenues in the second quarter by $25.





Higher
      revenues were driven by Reader’s Digest North America and, partially, by
      Reader’s Digest International, while revenues at Consumer Business Services
      declined.





Revenues
      at Reader’s Digest North America grew double digits due to the performance of
      new businesses and new products in which we have invested, including: the 2006
      launches of *Every
      Day with Rachael Ray* and
      Taste
      of Home Entertaining; the acquisition of Allrecipes.com; and our 2007 launches
      of new cookbooks, including the *Taste
      of Home Cookbook* .
      Revenue
      also increased due to strong performance of our books and home entertainment
      products. These positive performances were primarily offset by lower advertising
      for *Reader’s
      Digest* magazine *.*





Revenues
      at Reader’s Digest International increased due to favorable response rates to
      our books and home entertainment products, primarily in Germany, as well as
      the
      favorable results of continued investments in new markets. These increases
      were
      offset by lower promotional mailing response rates in certain countries.





Lower
      revenues at Consumer Business Services were driven by fewer sales events and
      lower average sales per event in the corporate markets at Books Are Fun and
      lower magazine volumes at QSP.


-13-





**Other
      Operating Items, Net**





Other
      operating items, net decreased to $(6) in the second quarter of 2007, compared
      with $1 in the second quarter of 2006. During the second quarter of 2007, we
      recognized a loss of $(6) from the sale of *American
      Woodworker* magazine. **








**Operating** **Profit** **(Loss)**





Operating
      profit for the second quarter of 2007 was $114, compared with a loss of $(76)
      for the second quarter of 2006. The effect of foreign currency fluctuations
      increased operating profit in the second quarter by $4. Higher profits at
      Reader’s Digest North America and Reader’s Digest International were partially
      offset by lower profits at Consumer Business Services and higher Corporate
      Unallocated expenses. Additionally, the write-down of remaining goodwill at
      Books Are Fun of $(188) was included in the second quarter of 2006 operating
      loss.





The
      increases in revenue and timing of promotional mailings compared with the prior
      period were the primary contributors to both Reader’s Digest North America and
      Reader’s Digest International profit increases. Profits at Consumer Business
      Services were adversely affected by QSP due to lower magazine subscription
      volumes, partially offset by planned costs savings at Books Are
      Fun.




Corporate
      Unallocated expenses in the second quarter of 2007 were $(13), compared with
      $(10) in the second quarter of 2006. The increase in these costs was driven
      by
      additional stock-based compensation expense attributed to a 29% increase in
      our
      stock price during the second quarter of 2007. In addition, the increase was
      driven by a lower 2006 expense as a result of a reversal of a litigation-related
      accrual that was no longer necessary.








**Other** **Income and (Expense), Net**





Other
      income and (expense), net increased to $(18) in the second quarter of 2007,
      compared with $(10) in the second quarter of 2006. This is principally
      attributable to an increase of $(5) in interest expense because of higher debt
      balances and higher interest rates in the second quarter of 2007 compared with
      the second quarter of 2006. We also incurred $(3) of transaction related
      expenses related to our merger agreement with affiliates of Ripplewood Holdings
      L.L.C.








**Income
      Taxes**





During
      the three-month periods ended December 31, 2006 and 2005, we recorded income
      tax
      expense of $(34) and $(36), respectively. For the second quarter of 2007, we
      recorded discrete tax benefits of $2 related to adjustments to valuation
      allowances.








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





For
      the
      second quarter of 2007, net income was $62, or $0.65 per share for both basic
      and diluted earnings per share. In the prior year period, net loss was $(122)
      or
      $(1.27) for both basic and diluted loss per share. For the second quarter of
      2006, the effect of potentially dilutive shares was not considered in the
      calculation of loss per share because such shares would have been anti-dilutive.








**Results
      of Operations: Reportable Segments**




**Three-month
                  periods ended****December
                  31,****2006**
              
              **2005****Revenues**Reader’s
                  Digest North America
              
              **$**
              **275**
              
              $
              247Reader’s
                  Digest International
              
              
              **330**
              
              
              301Consumer
                  Business Services
              
              
              **211**
              
              
              228Intercompany
                  eliminations
              
              
              **(14**
              **)**
              
              (11
              )**Total
                  revenues**
              
              **$**
              **802**
              
              **$**
              **765****Operating
                  profit (loss)**Reader’s
                  Digest North America
              
              **$**
              **37**
              
              $
              28Reader’s
                  Digest International
              
              
              **47**
              
              
              39Consumer
                  Business Services
              
              
              **49**
              
              
              54Corporate
                  Unallocated(1)
              
              
              **(13**
              **)**
              
              (10
              )Other
                  operating items, net(2)
              
              
              **(6**
              **)**
              
              1Goodwill
                  charge(3)
              
              
              **---**
              
              
              (188
              )**Operating
                  profit (loss)**
              
              **$**
              **114**
              
              **$**
              **(76**
              **)****Intercompany
                  eliminations**Reader’s
                  Digest North America
              
              **$**
              **(5**
              **)**
              $
              (2
              )Reader’s
                  Digest International
              
              
              **(2**
              **)**
              
              (2
              )Consumer
                  Business Services
              
              
              **(7**
              **)**
              
              (7
              )**Total
                  intercompany eliminations**
              
              **$**
              **(14**
              **)**
              **$**
              **(11**
              **)**
 
 **(1)**
            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. 
 **(2)**
            Other
                operating items, net, includes losses or gains on sales of certain
                non-strategic assets and, therefore, is not included in segment results
                reviewed by our chief operating decision maker. See Note 6 in our
                Notes to
                Consolidated Condensed Financial Statements for additional information. 
 **(3)**
            The
                goodwill charge related to Books Are Fun, part of the Consumer Business
                Services reportable segment, is not included in segment results reviewed
                by our chief operating decision maker. See Note 8 in our Notes to
                Consolidated Condensed Financial Statements for additional
                information.




**Reader’s
      Digest North America**





Revenues
      for Reader’s Digest North America for the second quarter of 2007 increased 11%
      to $275, compared with $247 for the second quarter of 2006. The effect of
      foreign currency fluctuations increased revenues in the second quarter by $1.
      Increases in revenue were driven by the favorable performance of new businesses
      and products in which we have invested, including: *Every
      Day with Rachael Ray,* Taste
      of
      Home Entertaining and new book products, such as the 2007 launch of the *Taste
      of Home Cookbook* .
      Our
      acquisition of Allrecipes.com in 2006 and strong response rates for U.S Books
      and Home Entertainment products also contributed to the increase.





These
      increases were primarily offset by fewer advertising pages for *Reader’s
      Digest* magazine,
      weaker performance of certain mature book annual programs and the absence of
      revenue for *American
      Woodworker,* which
      was
      sold in December 2006.





Operating
      profit for this segment for the second quarter of 2007 increased 31% to $37,
      compared with $28 for the second quarter of 2006. In addition to our strong
      revenue performance, operating profit increased due to lower promotion and
      editorial costs for *Reader’s
      Digest* magazine
      when compared with the prior period and lower amortization of Reiman intangible
      assets. **


-14-







**Reader’s
      Digest** **International** ****





Revenues
      for Reader’s Digest International for the second quarter of 2007 increased 10%
      to $330, compared with $301 for the second quarter of 2006. The effect of
      foreign currency fluctuations increased revenues in the second quarter by $23.
      The increase in revenues was driven by higher response rates to our catalog
      mailings and strong product performance in Germany. Revenues also improved
      in
      our new markets, including Ukraine, Bulgaria, Romania and Kazakhstan. Favorable
      response rates to our music series products in Australia also contributed to
      the
      increase.





These
      increases were partially offset by lower revenues in our books and home
      entertainment products in Poland, Iberia and Hungary as a result of lower
      response rates to outside list customers, partially attributed to the postal
      disruptions in Poland and Portugal and weakened economic environment in Hungary.





Operating
      profit for this segment for the second quarter of 2007 increased 22% to $47,
      compared with $39 for the second quarter of 2006. The effect of foreign currency
      fluctuations increased operating profit by $3. The revenue changes described
      above as well as the movement of promotional campaigns in France to the first
      quarter of 2007 contributed to the increase.








**Consumer
      Business Services**





Revenues
      for Consumer Business Services for the second quarter of 2007 decreased 8%
      to
      $211, compared with $228 for the second quarter of 2006.





Lower
      revenues at Books Are Fun were driven by fewer sales events in the corporate
      market and lower average sales per event in both the corporate and school
      markets. Both lines of business displayed adverse comparability to the
      prior period as a result of sales force turnover experienced in the third
      quarter of fiscal 2006. To a lesser extent, revenue declined from the
      absence of certain lines of business that we exited in the fourth quarter of
      2006. QSP revenues were slightly down due to lower magazine subscription and
      gift sales, partially offset by higher food sales.





Operating
      profit for this segment for the second quarter of 2007 decreased (9)% to $49
      compared with $54 for the second quarter of 2006. This decline was a result
      of
      the above mentioned lower revenues offset by planned cost reductions at Books
      Are Fun and a one-time price reduction at QSP from a supplier as a result
      of production delays during the first quarter of 2007.








**Six-Month
      Period Ended December 31, 2006, Compared With Six-Month Period Ended December
      31, 2005**





**Results
      of Operations: Company-Wide**





**Overview**





Because
      of the significance of revenue and operating profit generated in the second
      quarter, the peak selling season for most of our businesses, the primary drivers
      of performance for the six-month period are similar to those for the second
      quarter. During the first half of 2007 we started to recognize the benefits
      of
      our new business initiatives at Reader’s Digest North America and continued to
      invest to grow our customer base for our magazine and books and home
      entertainment product lines at Reader’s Digest International. At Consumer
      Business Services, we continued to increase the size of our independent sales
      representative force, implement our plan to lower the cost base, expand the
      effectiveness of our sales force and strengthen cash flow.








-15-





**Revenues**





Revenues
      for the six-month period ended December 31, 2006 increased to $1,319, compared
      with $1,282 for the six-month period ended December 31, 2005. The effect of
      foreign currency increased revenues by $36. Higher revenues for Reader’s Digest
      North America and, to a lesser extent, Reader’s Digest International were offset
      by lower revenues at Consumer Business Services.





The
      increase in revenues at Reader’s Digest North America was driven by the
      performance of new businesses and products in which we have invested, including: *Every
      Day with Rachael Ray,* Taste of
      Home Entertaining, and new book products, such as the 2007 launches of new
      cookbooks, including the *Taste
      of Home Cookbook* .
      Our
      acquisition of Allrecipes.com in 2006 and strong performance of our Children’s
      Publishing products also increased revenues. These increases were partially
      offset by fewer advertising pages for *Reader’s
      Digest* magazine
      and lower sales of certain book products.





Revenues
      for Reader’s Digest International improved as we realized the favorable results
      of the investments made in the first quarter of 2007 to increase our books
      and
      home entertainment products and our investments in new markets. Lower response
      rates to our promotional mailings in certain countries offset these
      revenues.





Lower
      revenues for Consumer Business Services were principally driven by fewer sales
      events and lower average sales per event at Books Are Fun and by lower magazine
      and gift volumes at QSP.








**Other
      Operating Items, Net**





Other
      operating items decreased to $(6) in the first half of 2007, compared with
      $3 in
      the first half of 2006. In the second quarter of 2007, we recognized a loss
      of
      $(6) from the sale of *American
      Woodworker* magazine *.* In
      the
      first quarter of 2006, we recognized a gain of $3 on the sale of our building
      in
      Mexico.








**Operating
      Profit (Loss)**





Operating
      profit for the six-month period ended December 31, 2006 was $84, compared with
      a
      loss of $(83) for the six-month period ended December 31, 2005. The effect
      of
      foreign currency increased operating profit by $3. Operating profits at Reader’s
      Digest North America remained flat, while operating profits at Consumer Business
      Services and Reader’s Digest International decreased and Corporate Unallocated
      expenses increased. Additionally, the write-down of remaining goodwill at Books
      Are Fun of $(188) was included in the second quarter of 2006 operating
      loss.





The
      decrease in operating profit at Reader’s Digest International was driven by
      additional investments in new customer acquisitions and the timing and mix
      of
      our promotional campaigns when compared to the prior period.





In
      Consumer Business Services, fewer events and lower average sales per event
      contributed to the profit decline at Books Are Fun, while lower magazine volumes
      drove the decline in profit at QSP.




Corporate
      Unallocated expenses for the six-month period ended December 31, 2006 were
      $(23), compared with $(18) for the six-month period ended December 31, 2005.
      The
      increase in these costs was driven by additional stock-based compensation
      expense attributed to a 20% increase in our stock price during the six-month
      period ended December 31, 2006. In addition, the increase was driven by a lower
      2006 expense as a result of a reversal of a litigation-related accrual that
      was
      no longer necessary.














-16-


**Other
      Income and (Expense), Net**





Other
      income and (expense), net increased to $(31) for the six-month period ended
      December 31, 2006, compared with $(20) for the six-month period ended December
      31, 2005. This is principally attributed to an increase of $(9) in interest
      expense because of higher debt balances and higher interest rates in 2007
      compared with 2006. We also incurred $(3) of expenses related to our merger
      agreement with affiliates of Ripplewood Holdings L.L.C.








**Income
      Taxes**





During
      the six-month periods ended December 31, 2006 and 2005, we recorded income
      tax
      expense of $(18) and $(28), respectively. For the six-month period ended
      December 31, 2006, we recorded discrete tax benefits of $3 principally related
      to the refund of interest associated with the closing of tax audits and
      adjustments to valuation allowances. For the six-month period ended December
      31,
      2005, we recorded discrete tax benefits of $3 principally related to the
      settlement of a tax audit in a foreign country.








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





For
      the
      six-month period ended December 31, 2006, our net income was $35, or $0.36
      for
      diluted earnings per share ($0.37 for basic earnings per share). For the
      six-month period ended December 31, 2005, our net loss was $(131), or $(1.35)
      for both basic and diluted loss per share. For the six-month period ended
      December 31, 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.








-17-


**Results
      of Operations: Reportable Segments**


**Six-month
                  periods ended****December
                  31,****2006**
              
              **2005****Revenues**Reader’s
                  Digest North America
              
              **$**
              **504**
              
              $
              475Reader’s
                  Digest International
              
              
              **571**
              
              
              536Consumer
                  Business Services
              
              
              **265**
              
              
              288Intercompany
                  eliminations
              
              
              **(21**
              **)**
              
              (17
              )**Total
                  revenues**
              
              **$**
              **1,319**
              
              **$**
              **1,282****Operating
                  profit (loss)**Reader’s
                  Digest North America
              
              **$**
              **45**
              
              $
              44Reader’s
                  Digest International
              
              
              **38**
              
              
              40Consumer
                  Business Services
              
              
              **30**
              
              
              36Corporate
                  Unallocated(1)
              
              
              **(23**
              **)**
              
              (18
              )Other
                  operating items, net(2)
              
              
              **(6**
              **)**
              
              3Goodwill
                  charge(3)
              
              
              **--**
              
              
              (188
              )**Operating
                  profit (loss)**
              
              **$**
              **84**
              
              **$**
              **(83**
              **)****Intercompany
                  eliminations**Reader’s
                  Digest North America
              
              **$**
              **(9**
              **)**
              $
              (6
              )Reader’s
                  Digest International
              
              
              **(4**
              **)**
              
              (3
              )Consumer
                  Business Services
              
              
              **(8**
              **)**
              
              (8
              )**Total
                  intercompany eliminations**
              
              **$**
              **(21**
              **)**
              **$**
              **(17**
              **)**
 
 **(1)**
            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. 
 **(2)**
            Other
                operating items, net, includes losses or gains on sales of certain
                non-strategic assets and, therefore, is not included in segment results
                reviewed by our chief operating decision maker. See Note 6 in our
                Notes to
                Consolidated Condensed Financial Statements for additional information. 
 **(3)**
            The
                goodwill charge related to Books Are Fun, part of the Consumer Business
                Services reportable segment, is not included in segment results reviewed
                by our chief operating decision maker. See Note 8 in our Notes to
                Consolidated Condensed Financial Statements for additional
                information.


-18-


**Reader’s
      Digest North America**





Revenues
      for Reader’s Digest North America for the six-month period ended December 31,
      2006 increased 6% to $504, compared with $475 for the six-month period ended
      December 31, 2005. The effect of foreign currency fluctuations increased
      revenues during this period by $4. Increases in revenue were driven by the
      favorable performance of new businesses and products in which we have invested,
      including: *Every
      Day with Rachael Ray,* Taste of
      Home Entertaining, and new book products, such as the 2007 launch of the *Taste
      of Home Cookbook* .
      Our
      acquisition of Allrecipes.com in 2006 and the strong performance of our
      Children’s Publishing products also contributed to the increase.





These
      increases were partially offset by fewer advertising pages for *Reader’s
      Digest* magazine,
      weaker performance of our more established book annual programs, lower
      membership in Select Editions and the elimination of marginally profitable
      promotional activity.





Operating
      profit for this segment for the six-month period ended December 31, 2006
      increased 3% to $45, compared with $44 for the six-month period ended December
      31, 2005. The effect of foreign currency fluctuations increased operating profit
      by $1. The increase in revenues from our new businesses and products increased
      operating profit slightly as we continued to invest in these new products and
      launches. In addition, the decrease in advertising revenue for *Reader’s
      Digest* magazine
      was offset by lower amortization of Reiman intangible assets.





**Reader’s
      Digest** **International**





Revenues
      for Reader’s Digest International for the six-month period ended December 31,
      2006 increased 7% to $571, compared with $536 for the six-month period ended
      December 31, 2005. The effect of foreign currency fluctuations increased
      revenues by $32 during this period. The high response rate to our catalog
      mailings in Germany, as well as strong product performance in this country,
      drove the increase. Also contributing to the increase were revenue improvements
      in the books and home entertainment products of Russia, Australia and our new
      markets, such as Ukraine and Bulgaria, as we continue to invest in those
      businesses.





These
      increases were offset by lower revenues in our books and home entertainment
      products due to the timing of our promotional campaigns, lower response rates
      and mail quantities, and lower series memberships in France, the United Kingdom,
      Poland and Portugal.





Operating
      profit for this segment for the six-month period ended December 31, 2006
      decreased 5% to $38, compared with $40 for the six-month period ended December
      31, 2005. The effect of foreign currency fluctuations increased operating profit
      by $3. The decrease in operating profit was principally driven by additional
      investments in new customer acquisitions and the timing and mix of our
      promotional campaigns when compared with the prior period. The most significant
      decreases were in the United Kingdom, Hungary and France, offset by increases
      in
      Australia and Germany.





**Consumer
      Business Services**





Revenues
      for Consumer Business Services for the six-month period ended December 31,
      2006
      decreased 8% to $265, compared with $288 for the six-month period ended December
      31, 2005.





Revenues
      at Books Are Fun decreased principally due to fewer corporate sales events
      in
      2007 because of the turnover of independent sales representatives to a
      competitor in the third quarter of 2006. Lower average sales per event for
      the
      corporate and school markets also contributed to the decline. To a lesser
      extent, the absence of certain lines of business that we exited in the fourth
      quarter of 2006 contributed to the decline.





Revenues
      at QSP declined principally due to lower volumes for magazines and gift
      products. Magazine revenues declined as a result of lower magazine subscriptions
      and softness in accounts for magazines and gifts, partially offset by a
      higher-priced mix of products sold compared with the prior year and higher
      food
      sales.





Operating
      profit for this segment for the six-month period ended December 31, 2006
      decreased 17% to $30, compared with $36 for the six-month period ended December
      31, 2005. The decrease in profits was attributed to the revenue declines
      described above, which were partially offset by planned cost savings at Books
      Are Fun, higher margins for food products at QSP, and a one-time price reduction
      at QSP from a supplier as a result of production delays during
      the first quarter of 2007.


-19-


**Liquidity
      and Capital Resources**





**Six-month**
              **period
                ended****December
                31, 2006****Cash
                and cash equivalents at June 30, 2006**
            
            **$**
            **35***Net
                change in cash due to:*Operating
                activities
            
            
            71Investing
                activities
            
            
            1Financing
                activities
            
            
            (48
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            3**Net
                change in cash and cash equivalents**
            
            
            **27****Cash
                and cash equivalents at December 31, 2006**
            
            **$**
            **62**





Cash
      and
      cash equivalents increased to $62 as of December 31, 2006, compared with $35
      as
      of June 30, 2006. The increase in cash was driven by an increase in our cash
      from operating activities of $71 in the first half of 2007. During the
      second quarter of 2007, cash received from investing activities included $9
      from
      the sale-leaseback of our Pleasantville headquarters and $7 from the sale of *American
      Woodworker* ;
      offset
      by $(3) of payments for the acquisition of the *Fundraising.com* tradename
      and other intangible assets. During the quarter, cash was used principally
      to
      repay debt and fund dividend payments.





*Debt*


As
      described in Note 11 to the Consolidated Financial Statements included in our
      2006 Annual Report to Stockholders, our borrowings include proceeds under our
      $500 Five-Year Revolving Credit Agreement (2005 Credit Agreement) and $300
      in
      61⁄2% senior unsecured notes due in 2011. On September 28, 2006, we entered into
      an amendment to our 2005 Credit Agreement that increased the allowable maximum
      leverage ratio (as defined in the amendment) and increased interest rates when
      the leverage ratio is at higher levels through March 31, 2007.
      Subsequent to March 31, 2007, the allowable maximum leverage ratio
      will be defined in accordance with the 2005 Credit Agreement. The amendment
      also
      places certain defined restrictions on our ability to repurchase shares of
      our
      Common Stock through June 30, 2007.





The
      interest rate on the 2005 Credit Agreement at December 31, 2006 is at
      LIBOR plus 225 basis points and is subject to change based on our leverage
      ratio. The 2005 Credit Agreement, as amended, 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
      December 31, 2006, we had $370 of outstanding borrowings under the 2005 Credit
      Agreement and $300 outstanding under the senior unsecured notes. Interest
      expense for the three- and six-month periods ended December 31, 2006
      was $(17) and $(32), respectively, and ($12) and ($23) for the three- and
      six-month periods ended December 31, 2005, respectively. Interest income on
      cash
      balances for the three- and six-month periods ended December 31, 2006
      and 2005, was $2 and $3, respectively. The weighted average interest rate on
      our
      borrowings for the six-month periods ended December 31, 2006 and 2005
      was 6.8% and 5.7%, respectively.








**Recent
      Accounting Standards**





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      48, “Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS 109”
(FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a
      minimum recognition threshold a tax position is required to meet before being
      recognized in the financial statements. It also provides guidance on
      derecognition and measurement of tax positions. Disclosure requirements under
      this guidance will include a rollforward of the beginning and ending
      unrecognized tax benefits, as well as specific detail related to tax
      uncertainties for which it is reasonably possible the amount of unrecognized
      tax
      benefit will significantly increase or decrease within a year. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. We are evaluating
      the impact of this standard on our consolidated financial
      statements.





-20-


In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157).
      This Statement defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements. This Statement
      applies under other accounting pronouncements that require or permit fair value
      measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. We are evaluating the impact of this standard on
      our
      consolidated financial statements.





Also
      in
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements
      No. 87, 88, 106, and 132R)” (SFAS No. 158). The objectives of this
      Statement are for an employer to: (1) recognize the overfunded or underfunded
      status of a single-employer defined benefit postretirement plan as an asset
      or
      liability in its statement of financial position and to recognize changes in
      that funded status in comprehensive income in the year in which the changes
      occur; and (2) measure the plan status as of the date of its year-end statement
      of financial position. SFAS No. 158 is effective for the requirement to
      recognize the funded status of a benefit plan and the disclosure requirements
      as
      of the end of the fiscal year ending after December 15, 2006. The requirement
      to
      measure plan assets and benefit obligations as of the date of the employer’s
      fiscal year-end statement of financial position will be effective for fiscal
      years ending after December 15, 2008. We are evaluating the impact of this
      standard on our consolidated financial statements.





-21-


**Forward-Looking
        Information**
 
 This
        report contains or incorporates by reference “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; ·
            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 our access to
                consumers; ·
            the
                economic effects of terrorist activity and related events, especially
                those limiting our access to consumers and otherwise affecting the
                direct
                marketing and direct sales industries; ·
            the
                completion of the merger under the Merger Agreement (described in
                Note 12
                of the Notes to Consolidated Condensed Financial Statements), including
                a
                termination of the Merger Agreement under circumstances that could
                require
                us to pay a $25 million termination fee and/or $5 million of expenses
                to
                Doctor Acquisition Holding Co.; ·
            the
                incurrence of the costs, fees, expenses and charges related to the
                merger; ·
            the
                effect of the announcement of the merger on our business relationships,
                operating results and business generally, including our ability to
                retain
                key employees;  -22-
  
 ·
            the
                risk that the merger may not be completed in a timely manner or at
                all,
                which may adversely affect our business and the price of our common
                shares; ·
            the
                potential adverse effect on our business, properties and operations
                of our
                compliance with certain covenants we agreed to in the merger
                agreement; ·
            the
                risk that we may be subject to litigation in connection with the
                merger;
                and ·
            risks
                related to diverting management’s attention from our ongoing business
                operations in connection with completion of the merger and related
                transactions. 
 
 We
        do not
        undertake to update any forward-looking statements.
 
 
 *****
 
 
  -23-
  **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.





-24-


**PART
      II. OTHER INFORMATION**





**Item
        1.**  **Legal
        Proceedings**
 
 Two
        lawsuits arising out of the proposed merger have been filed in the Supreme
        Court
        of New York, County of Westchester, against us and all of the members of
        our
        Board of Directors. The lawsuits, filed on November 20, 2006 and December
        12,
        2006, respectively, purport to be brought on behalf of all of our public
        stockholders and seek to enjoin the proposed merger. The complaints allege
        that
        our board of directors violated its fiduciary duties to our stockholders
        by
        entering into the Merger Agreement that, according to the complaints, does
        not
        reflect the “intrinsic value” of our Common Stock. We and Ripplewood Holdings
        L.L.C., which has been named as a defendant in one of the cases, have agreed
        with counsel for the plaintiffs to consolidate these two lawsuits. The lawsuits
        are in their preliminary stage, and, as of the date of this filing, plaintiffs
        have not filed any motion or requested any relief in the Court. We believe
        that
        the lawsuits are without merit and intend to defend these cases
        vigorously.
 
 
 **Item
        1A.**  **Risk
        Factors**
 
 The
        following risk factor updates the Risk Factors appearing under Item 1A of
        our
        Annual Report on Form 10-K for the year ended June 30, 2006.
  ***Our
        proposed merger with affiliates of an investor group led by Ripplewood Holdings
        L.L.C. may not be consummated.***
  In
        the
        event that the merger agreement with affiliates of an investor group led
        by
        Ripplewood Holdings L.L.C. is not adopted by our common stockholders or if
        the
        merger is not completed for any other reason, our common stockholders will
        not
        receive any payment for their shares in connection with the merger. Instead,
        we
        will remain an independent public company and our common stock will continue
        to
        be listed on the New York Stock Exchange. If the merger agreement is terminated,
        the agreement specifies that under certain circumstances, we will be obligated
        to pay a termination fee to an entity indirectly controlled by Ripplewood
        Holdings L.L.C. of $25 million plus up to $5 million in expenses. In
        addition, we are subject to the following risks relating to the proposed
        merger:
  ·
            the
                incurrence of the costs, fees, expenses and charges related to the
                merger;  ·
            the
                effect of the announcement of the merger on our business relationships,
                operating results and business generally, including our ability to
                retain
                key employees;  ·
            the
                risk that the merger may not be completed in a timely manner or at
                all,
                which may adversely affect our business and the price of our common
                shares;  ·
            the
                potential adverse effect on our business, properties and operations
                of our
                compliance with certain covenants we agreed to in the merger
                agreement;  ·
            the
                risk that we may be subject to litigation in connection with the
                merger;
                and  ·
            risks
                related to diverting management’s attention from our ongoing business
                operations in connection with completion of the
                merger.


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





On
      April
      28, 2005, we announced our intention to repurchase up to $100.0 million of
      our
      Common Stock over the succeeding two years. As
      of
      December 31, 2006, we have repurchased approximately 4.7 million shares for
      $70.2 million.








-25-





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








2.1
            Agreement
                and Plan of Merger, dated as of November 16, 2006, among Doctor
                Acquisition Holding Co., Doctor Acquisition Co. and The Reader’s Digest
                Association, Inc., filed as Exhibit 2.1 to our Current Report on
                Form 8-K
                dated November 15, 2006, is incorporated herein by
                reference.





2.2
            Damages
                Contribution Agreement, dated as of November 16, 2006, between Ripplewood
                Partners II, L.P. and The Reader’s Digest Association, Inc., filed as
                Exhibit 2.2 to our Current Report on Form 8-K dated November 15,
                2006, is
                incorporated herein by reference.





10.54
            First
                Amendment to The Reader’s Digest Association, Inc. 2001 Income
                Continuation Plan for Senior Management, filed as Exhibit 10.1 to
                our
                Current Report on Form 8-K dated November 15, 2006, is incorporated
                herein
                by reference.





10.55
            Third
                Amendment to Employment Agreement dated April 28, 1988 (as amended
                November 21, 2003 and as further amended October 31, 2005) between
                The
                Reader’s Digest Association, Inc. and Thomas O. Ryder, filed as Exhibit
                10.2 to our Current Report on Form 8-K dated November 15, 2006, is
                incorporated herein by reference.





10.56
            Agreement
                dated December 20, 2006 between The Reader’s Digest Association, Inc. and
                Gary S. Rich.





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
            Section
                1350 certifications of 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.











-26-








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:
                January 25, 2007
            By:
            /s/
                Thomas D. BarryThomas
                D. BarryVice
                President of Finance and Corporate Controller
              (Chief
                accounting officer and authorized
                signatory)