Exhibit 13


Management's Discussion and Analysis
Dollars in millions, except per share data


Unless otherwise indicated, references in Management's Discussion
and Analysis to "we," "our" and "us" are to The Reader's Digest
Association, Inc. and its subsidiaries.  All references to 2003,
2002 and 2001, unless otherwise indicated, are to fiscal 2003,
fiscal 2002 and fiscal 2001, respectively.  Our fiscal year
represents 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. This
discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes.  Certain amounts and
percentages do not recalculate due to rounding.


Results of Operations:  Company-Wide

Modifications to Our Operating Segments

During the fourth quarter of 2003 we modified our operating
segments to reflect our new internal management organization.
Each of our three segments (Reader's Digest North America,
Consumer Business Services and International Businesses) reports
its results to our chief operating decision maker, who uses such
information to assess segment performance.  We have restated
operating segment results of operations for prior periods to
conform to our new operating segments.  Additionally, we
separately report Corporate Unallocated expenses, which include
the cost of governance and other corporate-related expenses, as
well as income and expenses associated with our U.S. pension
plans and retiree healthcare benefits, and executive compensation
programs.  The new organization structure is designed to combine
related businesses and facilitate efforts in leveraging best
practices to significantly reduce overhead and operating costs.
In addition, our new internal management and reporting structure
provides greater transparency to our operating results.

Reader's Digest North America

This segment comprises our operations in the United States and
Canada that:
  -     Publish and market (primarily through direct marketing)
        Reader's Digest magazine and several special interest
        magazines;
  -     Publish and market (primarily through direct marketing) the
        magazines and books of, and operate the complementary
        businesses of, Reiman Media Group, Inc., which we acquired
        on May 20, 2002; and
  -     Publish and market (primarily through direct marketing)
        Books and Home Entertainment products, which include
        Select Editions, series and general books, and music and
        video products related to some or all of the following
        affinities: reading, home and health, and entertainment.

All of these businesses have a common focus on the direct
marketing aspect of new customer acquisition at a minimal cost.
The performance of Reader's Digest magazine and our special
interest magazines is driven primarily by circulation revenues
and, to a lesser extent, by advertising sales.  The publications
of Reiman Media Group have minimal advertising revenues, and
accordingly, circulation is the primary driver of performance in
this business.  The results of our Books and Home Entertainment
business are driven by its universe of active promotable
customers, the response rates to its promotional mailings,
customer payment rates and membership in our continuity series
business.


<PAGE>


Consumer Business Services

This segment comprises our operations that:
  -     Sell books and gift items by display marketing products
        on-site through independent sales representatives at schools
        and businesses through Books Are Fun, Ltd. in the United
        States and Canada;
  -     Sell our magazines and other publishers' magazines and other
        products through youth fundraising campaigns of QSP, Inc. in
        the United States and Quality Service Programs Inc. in
        Canada (QSP Canada);
  -     Publish and market (primarily through retail channels as
        well as through Books Are Fun, Ltd. and QSP, Inc.) Books and
        Home Entertainment products of Young Families and Children's
        Publishing;
  -     Promote our financial services marketing alliances in the
        United States and Canada; and
  -     Sold gifts and other merchandise through Gifts.com, Inc.
        (including Good Catalog Company), which ceased operations in
        2002.

The primary focus of the Consumer Business Services segment is to
grow revenues by selling products through non-direct marketing
channels.  The larger businesses in this segment are focused on
expanding their sales forces, thereby increasing coverage of
markets each serves.  The performance of these businesses is
driven by product selection, the number of accounts or events
held, and the average sales per account or event.

International Businesses

This segment comprises our operations outside of the United
States and Canada that:
  -     Publish and market (primarily through direct marketing)
        Books and Home Entertainment products (described above),
        Reader's Digest magazine in numerous editions and languages,
        and several special interest magazines; and
  -     Establish and develop the operations of our financial
        services marketing alliances and other new business
        development initiatives, including the introduction of
        display marketing.

The performance of these businesses is driven by similar factors
to those in the Reader's Digest North America segment except that
results are more susceptible to changes in local market
conditions due to the number of countries in which we operate.
The results for Reader's Digest magazine in international markets
are driven principally by circulation and secondarily by
advertising revenues.  The results of our Books and Home
Entertainment products in these markets is driven by its universe
of active promotable customers, the response rates to its
promotional mailings, customer payment rates and membership in
our continuity series business.

Intercompany Eliminations and Corporate Unallocated Expenses

We present our segment revenues and operating profits on an
arm's-length basis, consistent with how we manage our operations
and how our chief operating decision maker reviews our results.
Revenues and expenses attributable to intercompany transactions
are included in the results of our operating segments.  Such
amounts are eliminated (under the Intercompany Eliminations
caption below) to reconcile our operating segment amounts to
consolidated amounts, as reported in our income statements.  In
addition to intercompany revenues and expenses, we separately
report Corporate Unallocated expenses, which cover expenses that
are not directly attributable to business unit performance.
Corporate Unallocated expenses include the cost of governance and
other corporate-related expenses, as well as income and expenses
associated with our U.S. pension plans and retiree healthcare benefits,
and executive compensation programs.


<PAGE>






Summary of Operating Segment Results

                                            Years ended June 30,
                                      2003         2002         2001

Revenues
  Reader's Digest North America     $   854      $   649      $   777
  Consumer Business Services            641          668          645
  International Businesses            1,008        1,078        1,118
  Intercompany eliminations             (28)         (26)         (22)
                                    -------      -------      -------
Total revenues                      $ 2,475      $ 2,369      $ 2,518
                                    =======      =======      =======

Operating profit (loss)
  Reader's Digest North America     $    61      $    (2)     $    40
  Consumer Business Services             91           88           71
  International Businesses               49          106          139
  Corporate Unallocated                 (22)          (7)          (3)
  Other operating items, net(1)         (40)         (27)         (18)
                                    -------      -------      -------
Operating profit                    $   139      $   158      $   229
                                    =======      =======      =======

Intercompany eliminations
  Reader's Digest North America     $    (1)     $    (4)     $    (2)
  Consumer Business Services            (24)         (16)         (11)
  International Businesses               (3)          (6)          (9)
                                    -------      -------      -------
Total intercompany eliminations     $   (28)     $   (26)     $   (22)
                                    =======      =======      =======

(1) Other operating items, net in 2003 related to: 13% to
    Reader's Digest North America, 6% to Consumer Business
    Services, 64% to International Businesses and 17% to corporate
    departments that benefit the entire organization.  In 2002,
    these items related to: 22% to Reader's Digest North America,
    27% to Consumer Business Services, 16% to International
    Businesses and 35% to corporate departments that benefit the
    entire organization.  Excluding adjustments of $10 related to a
    favorable tax settlement, other operating items, net in 2001
    related to:  56% to Reader's Digest North America, 39% to International
    Businesses and 5% to corporate departments that benefit the entire
    organization.


Revenues and Operating Profit

2003 v. 2002

Revenues
Revenues increased 4% to $2,475 in 2003, compared with $2,369 in
2002.  Excluding the effect of foreign currency translation,
revenues increased 1%.  The revenue increase was primarily
attributable to an increase in revenues in Reader's Digest North
America, driven by the addition of a full year of revenues from
Reiman, which was acquired on May 20, 2002.  Offsetting this
growth were lower revenues in International Businesses and, to a
lesser extent, Consumer Business Services.

In Reader's Digest North America, the increase in revenues from
the addition of a full year of revenues from Reiman was
partially offset by lower revenues for U.S. Books and Home
Entertainment, due to the elimination of marginally profitable
and unprofitable product lines, and by lower revenues for
Reader's Digest Magazine, due to lower circulation and
advertising revenues. In addition, revenues in 2002 were higher
due to the inclusion of revenues from Walking and New Choices
magazines, which were discontinued during 2002.

The decline in revenues in International Businesses was
primarily across Books and Home Entertainment products, with
significant declines in general books, music and video
products, and certain series products.  The primary markets
with declining revenues were the United Kingdom, Germany,
France, Mexico and Australia.  These declines were partially
offset by improved performance in the developing markets of
Russia and Hungary.

The decline in revenues in Consumer Business Services was
attributable to the absence of revenues from Gifts.com, Inc.,
which ceased operations in 2002, and to lower revenues from our
financial services marketing alliances as a result of the
receipt of a one-time payment in connection with the
termination of an alliance in 2002.  In addition, lower
revenues from Young Families due to the elimination of
marginally profitable and unprofitable products contributed to
the decline.  These declines were partially offset by increased
revenues at Books Are Fun and Children's Publishing.

Operating Profit
Operating profit declined 12% to $139 in 2003, compared with
$158 in 2002.  Excluding the effect of foreign currency
translation, operating profit declined 16%.  The higher
restructuring charge in 2003 contributed most of the decline.
Other operating items, net in 2003 were $(40) compared with $(27) in
2002.  In addition, Corporate Unallocated expenses were
significantly higher ($22 in 2003 compared with $7 in 2002),
primarily due to lower net pension income and increased
employee-related costs.  Partially offsetting a portion of
these cost increases were higher profit from certain operating
segments, which are described in further detail below.

Operating Segments
The increase in operating profit from our operating segments
was driven by Reader's Digest North America, which benefited
from the addition of a full year of profit from Reiman and an
80% reduction in losses in our U.S. Books and Home
Entertainment business.  This increase was partially offset by
a 54% reduction in profit for our International Businesses
(excluding the effect of foreign currency translation, profit
in International Businesses declined 60%).  The significant
decline in International Businesses was primarily attributable
to profit declines in established international markets,
including France, Germany, the United Kingdom and Mexico due to
the decline in revenues, and was partially offset by lower
product and promotion costs.

Product, distribution and editorial expenses increased 6% to
$1,002 in 2003, compared with $948 in 2002. Excluding the
effect of foreign currency translation, these expenses
increased 2%. The increase was driven by the incremental costs,
including postage, related to the addition of a full year of costs
attributable to Reiman. This increase was partially offset by reduced
activity in U.S. Books and Home Entertainment, Reader's Digest magazine
and special interest magazines. Costs for other businesses in
Reader's Digest North America decreased due to a combination of
factors, including the decline in sales volume and our decision
to reduce the rate base for Reader's Digest magazine (both of
which resulted in fewer products printed), rebates from
suppliers and cost-cutting measures. The decline in costs in
International Businesses was attributable to lower
manufacturing and delivery costs stemming from a decline in
sales volume.

Promotion, marketing and administrative expenses increased 5%
to $1,294 in 2003, compared with $1,237 in 2002.  Excluding the
effect of foreign currency translation, these expenses
increased 1%.  The increase in these expenses was driven by the
addition of a full year of costs for Reiman and the
amortization of intangible assets acquired with Reiman.  This
increase was partially offset by a decrease in costs in other
businesses in Reader's Digest North America and in
International Businesses.  These decreases were principally
driven by a significant reduction in promotion costs due to our
decision to reduce mailing activity in U.S. Books and Home
Entertainment and several international markets and to our
decision to lower the rate base for Reader's Digest magazine.

Corporate Unallocated
Corporate Unallocated expenses were $(22) in 2003, compared
with $(7) in 2002.  The increase in expenses was attributable
to significantly lower net pension income from our U.S. pension
plans ($25 in 2003 compared with $37 in 2002), a higher mix of
restricted stock in equity compensation and higher retiree
healthcare costs.  Expenses for governance and other
corporate-related expenses were marginally reduced by
cost-reduction initiatives.  The decline in net pension income
was partially a result of our decision to lower the assumed
rate of return on our pension assets in accordance with our
outlook on long-term asset return trends.

Other Operating Items, Net
Other operating items, net increased significantly to $(40) in
2003, compared with $(27) in 2002.  The increase was primarily
due to higher severance costs in 2003 relative to 2002, as we
implemented cost-reduction programs.

Other operating items, net of $(40) in 2003 comprised:  Charges
of $(38) for severance and related items, $(3) related to
write-downs of assets and $(5) of other costs.  These charges
were taken to lower our cost base in commensuration with our
current revenues and to streamline our business processes.
These costs were partially offset by a gain of $3 related to
the reversal of severance accruals recorded in previous years
and a gain of $3 related to net adjustments to
litigation-related accrual balances that had been established
in previous years, following settlement of a six-year old
lawsuit in the first quarter of 2003.  Reversals of accruals
recorded in previous years represent circumstances where
conditions changed after the date the accrual was established.

Severance charges recorded in the third and fourth quarters of
2003 of $(38) represent charges taken to terminate
approximately 580 positions (35% in North America and 65% in
International Businesses), of which approximately 50% were
separated during the third and fourth quarters of 2003.  The
remaining employees, of which a majority are located outside
the United States, will be separated during the next several
fiscal quarters.

Asset impairments of $(3) principally comprised write-offs
related to software and to unprofitable and discontinued
products.  Other costs of $(5) principally comprised expenses
incurred to prepare and review the restructuring plans utilized
to streamline our operations in certain domestic and
international markets.

Other operating items, net of $(27) in 2002 comprised:  Charges
of $(36), including $(15) for severance costs, $(8) for
contract terminations, and $(13) for asset impairments and
other items, adjustments of $7 related to accruals from charges
originally recorded in 2001 and prior periods, and a reversal
of $2 pertaining to a legal matter that was originally recorded
in prior years in other operating items, net.

2002 v. 2001

Revenues
Revenues decreased 6% to $2,369 in 2002, compared with $2,518
in 2001.  Excluding the effect of foreign currency translation,
revenues decreased 5%.  The decline in revenues was
attributable to lower revenues in Reader's Digest North America
and International Businesses, partially offset by increased
revenues in Consumer Business Services.  Primary factors
contributing to the decline were lower revenues for:
  - General books, music and video products, and Select Editions
    in our U.S. Books and Home Entertainment business.  Lower
    revenues resulted principally from our significant
    reduction of mail quantities as a result of promotion
    changes required by our March 2001 attorneys general
    sweepstakes agreement and continued softness in the U.S.
    economy.  Moreover, due to the aftermath of the September
    11th terrorist attack and subsequent anthrax scare, response
    rates were lower than expected.
  - Reader's Digest magazine subscriptions, which were adversely
    affected by the aftermath of the September 11th terrorist
    attack and the subsequent anthrax scare, as well as by an
    increased number of new subscribers at lower introductory
    rates.
  - International Businesses, due to weakness in some markets,
    including Germany and the United Kingdom, for music
    products and Select Editions.  The decline in revenues was
    principally driven by reductions in mail quantities to
    eliminate marginally unprofitable mailings and by lower
    response rates to mailings.  Revenues also declined in
    Australia, Mexico and Argentina.  In Australia, the decline
    was driven by planned reductions in mail quantities that
    resulted in lower unit sales.  In Mexico, revenues were
    down principally due to lower sales of music products in
    direct mail and kiosks.  Revenues in Argentina were down
    principally due to weak economic conditions.

These declines in revenues were partially offset by:
  - A 13% increase in revenues at Books Are Fun from growth in
    the number of events held and in the average sales per
    event.
  - Inclusion of revenues amounting to $31 related to Reiman
    from the date of acquisition, May 20, 2002.
  - Revenue growth in Eastern European countries (excluding
    Poland) of 26% as a result of higher promotion efforts.
  - An increase in revenues attributable to receipt of a
    one-time payment in connection with the termination of a
    financial services marketing alliance.

Operating Profit
Operating profit decreased 31% to $158 in 2002, compared with
$229 in 2001.  Excluding the effect of foreign currency
translation, operating profit decreased 32%.  The decline in
profit was attributable to declines in Reader's Digest North
America and International Businesses, restructuring and other
charges of ($27) in 2002, compared with $(18) in 2001, and higher
Corporate Unallocated expenses.  These declines were partially
offset by improved performance in Consumer Business Services.

Operating Segments
Primary factors contributing to the decline included:
  - Lower operating profit in U.S. Books and Home Entertainment
    due to lower revenues principally in Select Editions and
    general books and to expenses associated with investments
    in new marketing channels, including third-party mailing
    lists.  This decline was partially offset by increased
    operating profit driven by lower promotion costs and the
    timing of promotion costs at Reader's Digest magazine and
    by reduced losses from Walking magazine, which was sold in
    2002.
  - Lower operating profit in some markets, including the
    United Kingdom, Australia, Poland and Mexico.  The decrease
    was attributable to lower revenues, the initial costs of
    investments in new marketing channels and, in some markets,
    weak economic conditions.

These declines were partially offset by:
  - The absence in 2002 of goodwill amortization,
    primarily related to Books Are Fun, as a result of our
    adoption of the Financial Accounting Standards Board (FASB)
    Statement of Financial Accounting Standards (SFAS) No. 142,
    "Goodwill and Other Intangible Assets."  If we had not
    adopted SFAS No. 142, goodwill amortization in 2002 would
    have been $(25), net of tax.
  - Increased operating profit from Books Are Fun due to
    revenue growth.
  - Increased profits from financial services marketing
    alliances.

Product, distribution and editorial expenses decreased 2% to
$948 in 2002, compared with $971 in 2001.  This decline was
principally a result of lower unit volumes for most product
lines in U.S. Books and Home Entertainment, especially music
and video products.  In addition, the elimination of Walking
and New Choices magazines contributed to the decrease in
product costs.  These declines were partially offset by
increased costs from higher sales volume at Books Are Fun and
from sales at Reiman after it was acquired.

Promotion, marketing and administrative expenses decreased 5%
to $1,237 in 2002, compared with $1,300 in 2001.  For Reader's
Digest North America the decline in expenses was principally
attributable to the strategic reductions in mail quantities to
eliminate marginally unprofitable mailings and the elimination
of Walking and New Choices magazines.  In Consumer Business
Services, lower operating costs at Gifts.com, Inc. and the
cessation of the amortization of goodwill as required after the
adoption of SFAS No. 142 contributed to the decline.  The
decline in expenses for International Businesses was
principally due to the favorable cost impact of lower volumes
in some markets and to actions taken in 2001 that streamlined
and consolidated administrative functions worldwide.

Corporate Unallocated
Corporate Unallocated expenses were $(7) in 2002, compared with
$(3) in 2001.  The increase in corporate expenses was driven by
lower net pension income from our over-funded U.S. pension plan
($37 in 2002 compared with $42 in 2001) and higher compensation
costs, including restricted stock.  Corporate governance and
other corporate-related expenses were consistent between
periods.  The decline in net pension income was due to our
decision to lower the assumed rate of return on our pension
assets to approximate market conditions.

Other Operating Items, Net
Other operating items, net increased to $(27) in 2002, compared
with $(18) in 2001.  The aggregate charge comprised charges of
$(36), including $(15) for severance costs, $(8) for contract
terminations, and $(13) for asset impairments and other items,
adjustments of $7 related to accrual balances from charges
originally recorded in 2001 and prior periods, and a reversal of
$2 pertaining to a pending legal matter that was originally
recorded in prior years in other operating items, net.

The charges detailed above related to the following actions:
  -     $(13) related to our U.S. Books and Home Entertainment
        business;
  -     $(6) related to our closure of Gifts.com, Inc.; and
  -     $(17) related to streamlining various U.S. and international
        businesses and to reducing global staffing levels.

In connection with these initiatives, we eliminated 289
positions, of which approximately 16% were located outside the
United States.  A majority of the employee separations were
related to U.S. Books and Home Entertainment and administrative
functions that support this business, including information
technology and Gifts.com, Inc. personnel.

Other operating items, net of $(18) in 2001 comprised:  Net
charges of $(31) primarily related to severance costs associated
with cost-reduction and re-engineering activities; impairment
losses of $(7) relating primarily to our investment in Walking
magazine; and, offsetting these charges, adjustments of $10
related to accruals originally recorded in years prior to 2001
and adjustments to accruals of $10 as a result of a favorable
state tax settlement.  Reversals of accruals recorded in previous
years represent circumstances where conditions changed after the
date the accrual was established.


Other (Expense) Income, Net

2003 v. 2002

Other (expense) income, net for 2003 was $(39), compared with
$(17) in 2002.  The primary changes were:
  - Additional interest expense, net of $(28), primarily
    attributable to the inclusion of a full year of interest
    expense associated with additional borrowings in the fourth
    quarter of 2002 to consummate the Reiman acquisition and share
    recapitalization transactions.
  - Minimal losses from foreign currency transactions in 2003,
    compared with a loss of $(4) in 2002.  This was partially due
    to the discontinuance of a portion of our hedging program (see
    Note 7, Financial Instruments, in our Notes to Consolidated
    Financial Statements).
  - A gain of $2 from the sale of a building in Australia in
    2003.
  - Lower sales of shares of LookSmart, Ltd. of $5 in 2003,
    compared with $7 in 2002.

2002 v. 2001

Other (expense) income, net for 2002 was $(17), compared with
$(41) in 2001.  Excluding equity in losses (including goodwill
amortization) associated with our investment in BrandDirect
Marketing, Inc., other (expense) income, net was $(16) in 2001.
The primary factors affecting comparability (other than
BrandDirect Marketing, Inc.) are:
  - An investment write-off of $(3) in 2002, compared with
    investment write-offs of $(21) in 2001.
  - A loss on foreign exchange of $(4) in 2002, compared with a
    gain on foreign exchange of $1 in 2001.
  - Lower interest income of $5 in 2002, compared with $8 in
    2001, due to lower interest rates.
  - Lower gains on the sales of certain assets and contract terminations
    of $7 in 2002, compared with $13 in 2001, primarily attributable to
    a contract termination payment recognized in 2001 of $4.
  - Expenses associated with our recapitalization transactions
    of $(3) (see Note 12, Capital Stock, in our Notes to
    Consolidated Financial Statements).


Income Taxes

2003 v. 2002

The effective tax rate for 2003 was 38.9%, compared with a rate
of 35.1% for 2002.  The higher tax rate was due to the lower tax
benefit realized on our international restructuring charges and
non-deductible costs associated with our recapitalization
transactions.  Excluding these items, the comparable effective
tax rate for 2003 was 35.3%, compared with 35.1% in 2002.

2002 v. 2001

The effective tax rate for 2002 was 35.1%, compared with a rate
of 29.7% for 2001.  The increase was primarily attributable to a
change in the valuation allowance in the fourth quarter of 2001
on capital losses relating to BrandDirect Marketing.  Excluding
this, our effective tax rate was 33.5% in 2001.  The higher
effective rate in 2002 was attributable to the write-down of
certain investments in 2001, which did not occur to the same
extent in 2002, as described above, partially offset by the
absence in 2002 of nondeductible goodwill amortization primarily
related to Books Are Fun as a result of our adoption of SFAS No.
142.


Net Income

2003 v. 2002

As a result of the items discussed above, net income in 2003
was $61 or $0.60 per share on a diluted-earnings basis ($0.61
per share for basic earnings per share).  In 2002, net income
was $91 or $0.89 per share on a diluted-earnings basis ($0.90
per share for basic earnings per share).

2002 v. 2001

As a result of the items discussed above, net income in 2002
was $91 or $0.89 per share on a diluted-earnings basis ($0.90
per share for basic earnings per share).  In 2001, net income
was $132 or $1.26 per share on a diluted-earnings basis ($1.27
per share for basic earnings per share).


Results of Operations:  Operating Segments

Reader's Digest North America

2003 v. 2002

Revenues for Reader's Digest North America increased 32% to $854
in 2003, compared with $649 in 2002.  This increase was driven by
the addition of a full year of revenues for Reiman in 2003 (in
2002 we recognized revenues for Reiman from the date of
acquisition, May 20, 2002, until June 30, 2002).  Contributing to
the improvement were the introduction of new products, including
RD Specials and increased advertising and circulation revenues
from Selecciones, Reader's Digest Large Print and The Family
Handyman.

These improvements in revenues were partially offset by a 36%
decrease in revenues in U.S. Books and Home Entertainment, a 5%
decline in revenues for Reader's Digest magazine, and the absence
of revenues from Walking and New Choices magazines.  The decline
in revenues for U.S. Books and Home Entertainment was driven by
lower revenues for music and video products due to the
elimination of unprofitable products, which was announced in the
fourth quarter of 2002, including exiting certain unprofitable
video products, the catalog business and certain continuity
series.  Revenues for Select Editions declined due to lower
series membership and planned reductions in mailings to third
party customer lists.

Lower Reader's Digest magazine revenues were driven by lower
circulation revenues, attributable to the reduction in the rate
base, and lower renewal pools, partially offset by new
subscribers at lower introductory rates.  In addition,
advertising revenues were lower due to our decision to lower the
circulation rate base.

Operating profit for this segment improved to $61 in 2003,
compared with a loss of $(2) in 2002.  The profit improvement was
principally attributable to the revenue changes described above,
specifically the addition of a full year of profit from Reiman,
the elimination of unprofitable products and lower promotion
costs in U.S. Books and Home Entertainment, and the impact of
cost-cutting measures.

2002 v. 2001

Revenues for Reader's Digest North America decreased 17% to $649
in 2002, compared with $777 in 2001.  The decline in revenues was
principally due to the factors described below, partially offset
by the addition of $31 in revenues from the acquisition of Reiman
in the fourth quarter of 2002.  The declines were principally
attributable to:
  - Lower sales for most products in U.S. Books and Home
    Entertainment, especially music and video products and general
    books.  We reduced our mail quantities by approximately 32% in
    2002 in anticipation of lower response rates as a result of
    promotion changes required by the attorneys general
    sweepstakes agreement and of softness in the U.S. economy.
    Moreover, due to the aftermath of the September 11th terrorist
    attack and subsequent anthrax scare, response rates were lower
    than expected.
  - A decline in revenues for Reader's Digest magazine.  Lower
    circulation revenues resulted principally from the aftermath
    of the September 11th terrorist attack and subsequent anthrax
    scare as well as an increased number of new subscribers at
    lower introductory rates.  Advertising revenues declined due
    to continued softness in the U.S. advertising market.
  - Lower revenues from the sale of Walking magazine in the
    first quarter of 2002 and the closure of New Choices magazine.

Operating profit for this segment declined to a loss of $(2) in
2002, compared with profit of $40 in 2001.  The decline in
profit was primarily attributable to the revenue changes
described above and expenses associated with investments in new
marketing channels, including telemarketing and third party
mailing lists.  These declines were partially offset by
significant cost reductions in our U.S. Books and Home
Entertainment business, lower promotion and fulfillment costs for
Reader's Digest magazine, the sale of an unprofitable
magazine--Walking, and profit of $1 contributed by Reiman.

Consumer Business Services

2003 v. 2002

Revenues for Consumer Business Services decreased 4% to $641 in
2003, compared with $668 in 2002.  The decline was driven by the
absence of revenues from Gifts.com, Inc., which ceased operations
in 2002, and lower revenues from financial services marketing
alliances due to a one-time payment received in connection with
the termination of a financial services marketing alliance in
2002.  In addition, the elimination of unprofitable product lines
for Young Families, and lower sales volume due to increased
competition for QSP Canada, contributed to the decline.

These declines were partially offset by a 4% increase in revenues
at Books Are Fun and increased revenues for Children's
Publishing.  The improvement in revenues at Books Are Fun was
attributable to an increase in the number of business and
corporate fairs held and an increase in the average sales per
fair for business and corporate fairs.  In addition, the
introduction of new product lines at Books Are Fun contributed to
the increased revenues.  Revenues in Children's Publishing
increased due to better selling products and increased sales to
mass marketers.

Revenues for QSP, Inc. increased 2% in 2003, compared
with 2002.  Increased revenues due to a higher pricing mix were
partially offset by lower volumes for most products, including
gift and magazine products, due principally to softness in the
economy.

Operating profit increased 2% to $91 in 2003, compared with $88
in 2002.  The increase was principally due to profit improvement
attributable to the elimination of unprofitable businesses and
product lines, including Gifts.com, Inc.  Profit at QSP, Inc.
were lower as a result of expenses associated with investments in
the sales force, the recording of a penalty associated with the
minimum purchase commitment related to our World's Finest
Chocolate, Inc. licensing agreement and the effect of the
dockworkers' strike on the west coast of the United States.
Profit at QSP Canada declined due to lower sales volumes and
increased fulfillment and other costs.  These decreases in
profit were partially offset by the impact of a higher pricing
mix at QSP, Inc. and the impact of cost-reduction initiatives.

2002 v. 2001

Revenues for Consumer Business Services increased 4% to $668 in
2002, compared with $645 in 2001.  The improvement was driven by
a 13% increase in revenues for Books Are Fun, due to strong
growth in school and corporate events, sales per event, and the
successful introduction of art and jewelry events.  In addition,
revenues from our financial services marketing alliances doubled
when compared with 2001.  This was due to a contract termination
payment of $5 from a former insurance marketing alliance partner
and the introduction of a new investment products marketing
alliance in the United States.

These increases were partially offset by revenue declines in QSP,
Inc., Young Families and Trade Publishing.  Revenues at QSP, Inc.
declined 3% in part due to the displacement or cancellation of
events after the September 11th terrorist attack in the second
quarter of 2002, QSP's peak seasonal marketing period.  Revenues
in Young Families declined due to lower payment rates for orders,
and revenues in Children's Publishing declined due to less
popular product offerings in 2002.

Operating profit increased 25% to $88 in 2002, compared with $71
in 2001.  The improvement in profit was driven by profit growth
at Books Are Fun, due in part to the absence of goodwill
amortization in accordance with SFAS No. 142, and by lower
operating costs for the Gifts.com, Inc. website and the revenue
changes described above.  Partially offsetting these increases
were lower profit for Children's Publishing due to the revenue
changes described above.

International Businesses

2003 v. 2002

Revenues for International Businesses decreased 6% to $1,008 in
2003, compared with $1,078 in 2002.  Excluding the effect of
foreign currency translation, revenues decreased 14%.  The
decline was principally driven by lower revenues for Books and
Home Entertainment products in the United Kingdom, Germany,
France, Mexico and Australia principally due to:
  - lower response rates to mailings and lower payment
    performance partially attributable to weak economies;
  - planned reductions in mail quantities to eliminate
    marginally profitable mailings and to reduce the unfavorable
    effect of the intensity of our mailings on our response rates;
  - lower membership in Select Editions and illustrated series
    products due to a smaller universe of active promotable
    customers and lower response rates to mailings; and
  - issues associated with outsourcing to new fulfillment
    vendors in Australia and France.

These decreases were partially offset by improved revenues in two
of our developing markets.  Revenues in Russia increased due to
the introduction of new products and increased series
membership.  In Hungary, revenues improved due to increased
response rates to mailings and increased mail quantities.

Operating profit in this segment declined 54% to $49 in 2003,
compared with $106 in 2002.  Excluding the effect of foreign
currency translation, profit declined 60%.  The profit decline
was attributable to the changes in revenues described above,
partially offset by lower product and promotion costs.

2002 v. 2001

Revenues for International Businesses decreased 4% to $1,078 in
2002, compared with $1,118 in 2001.  Excluding the effect of
foreign currency translation, revenues decreased 2%.  Declines
were principally attributable to weaker performance in certain
markets, including Australia, Germany, Argentina, the United
Kingdom and Poland.  During the third quarter of 2002, we
experienced slightly lower response rates in countries that
converted to the euro (promotional efforts may differ
significantly depending on the market).  We evaluate promotional
investments on a market-by-market basis taking into consideration
various factors, including the local economic environment.
Specific details of revenue declines include:
  - A decline in revenues across a majority of the products in
    Australia due to a 25% reduction in mail quantities as part of
    a plan to lower mailing intensity and due to lower response
    rates compared with 2001.  In addition, during late 2001 and
    early 2002 we restructured the management team to focus on
    revitalizing the business.
  - A revenue decline in Germany as a result of reduced mail
    quantities for music products and lower response rates to
    mailings for Select Editions products.  Mail quantities were
    reduced to eliminate marginally unprofitable mailings. These
    declines were partially offset by the results of mailings for
    new products promoted in the second half of 2002.
  - A 45% decline in revenues in Argentina attributable to
    strategic reductions in mail quantities in response to the
    poor economic conditions in the country.
  - A revenue decline in the United Kingdom primarily due to
    lower response rates for general books mailings and the timing
    of Select Editions promotions.  These reductions were
    partially offset by higher revenues for some products from the
    use of new marketing channels.  In addition, response rates
    were lower for Reader's Digest magazine promotional mailings;
    however, this decline was partially offset by increased
    subscription renewals.
  - A decline in revenues in Poland for most products due to
    lower mail quantities and response rates compared with 2001.
    The decline was partially offset by the introduction of new
    products and the use of new marketing channels.

The revenue declines above were partially offset by strong
performances in Russia and most developing markets, including
Hungary, Asia, the Czech Republic and Slovakia.  Principal
offsetting factors were:
  - Higher revenues of 27% across all products in Russia
    principally due to increased mail quantities, increased
    response rates to mailings and new music product introductions
    in 2002.
  - Higher revenues of 26% in the Eastern European countries
    (excluding Poland) principally due to increased mail
    quantities and mailings for general books and new music
    product introductions in 2002.
  - Increased revenues in Asia principally due to increased mail
    quantities and response rates to mailings for general books,
    partially offset by lower mail quantities for music products
    and Reader's Digest magazine.

Operating profit for this segment decreased 24% to $106 in 2002,
compared with $139 in 2001.  Excluding the effect of foreign
currency translation, operating profit decreased 26%.  The
decrease was primarily attributable to the revenue changes
described above as well as increased promotion costs in the
United Kingdom.  In addition, the expenses associated with
investments in new marketing channels, including telemarketing,
and new product introductions in the United Kingdom, Australia
and Mexico, contributed to the decline.  These declines were
partially offset by the effects of cost-reduction initiatives in
most European markets.


Critical Accounting Policies
(includes forward-looking information)

Our significant accounting policies are more fully described in
Note 1, Organization and Summary of Significant Accounting
Policies, in our Notes to Consolidated Financial Statements.  The
accounting policies described below are those that we believe are
critical to an understanding of our financial statements and
require management to make significant judgments.  These
judgments entail estimates and assumptions that are essential to
determining the recorded amounts and their impact on our
operating results.  Due to the uncertainty inherent in these
estimates and assumptions, actual results may differ.  The
determination of the accounting policies that are critical and
the assumptions and estimates that we have made have been
reviewed and discussed with the Audit Committee of our Board of
Directors.

Estimates of Returns and Bad Debt
Our ability to accurately estimate returns and bad debt is
critical in determining the amount of revenue to recognize and
promotion and agent costs to defer.  We present our revenues net
of an allowance for returns and bad debt.

We estimate returns for all products as well as cancellations of
magazine subscriptions based on historical data, method of
promotion and results of market testing for the products.
Reserve levels are adjusted as actual return data is received.
Generally, on a consolidated basis, our estimates of returns have
not differed significantly from actual results.

Estimates of bad debts are prepared using historical data based
on the type of product and promotion and the source of customer.
We review our bad debt reserves periodically to ensure they are
appropriately stated.  If actual results differ from our
estimates, the reserve is adjusted as actual bad debt data is
received.  Generally, on a consolidated basis, our estimates of
bad debts have not differed significantly from actual results.

Inventory Valuation
We periodically assess our inventory for obsolescence and to
ensure it is recorded at the lower of cost or market value.  In
estimating the necessary inventory reserve, we forecast demand
for products on hand and assess market conditions, including
potential usage in future promotions.  Adjustments to inventory
reserves are recorded in product, distribution and editorial
expenses on our income statements.

Deferred Promotion Costs and Related Amortization
Promotion costs are deferred only if certain criteria are met,
including whether the future profit expected to be generated by
a promotional campaign are greater than the costs deferred.
Estimates of revenues and profits to be generated and of returns
are made using historical data based on the type of product,
method of promotion and customer targeted.  As actual results for
a specific promotional campaign are received, the campaign is
re-assessed.  To the extent the costs of the campaign exceed
profit generated, the difference is expensed immediately.
Amortization related to deferred promotion expenses is included
in promotion, marketing and administrative costs on our income
statements.

Pension Assumptions
The calculation of pension income (expense) is based on various
actuarial assumptions.  The expected return on assets, a
significant factor in determining pension expense, requires
significant judgment.  We review this assumption annually,
together with actuarial consultants, to determine a reasonable
rate.

During our periodic review of assumptions used in determining the
net pension expense to be recorded in 2003 (our measurement date
is March 31st of the previous fiscal year), we examined the
assumed long-term rate of return on pension assets and the
discount rate.  These are the most significant factors in
determining our net pension income and our benefit obligation.

The assumed long-term rate of return on pension assets represents
the rate of return we expect our pension assets to return over an
extended time horizon.  Accordingly, significant changes in this
rate due to short-term fluctuations in market conditions are not
appropriate.  In 2002, our assumed long-term rate of return on
pension assets was 9.75%.  Due to lower anticipated rates of
return for portfolios with asset allocations similar to those of
our pension plans, we reduced our long-term rate of return on
pension assets to 9.25% for 2003.  For the same reason, we have
reduced the long-term rate of return on pension assets to 8.75%
for fiscal 2004.

In 2002, our discount rate was 7.25%.  In the United States, the
discount rate should approximate high quality long-term corporate
bond rates.  Due to declining interest rates, our discount rate
for 2003 was reduced to 6.25%.

Income and expenses associated with our pension plans are
included in promotion, marketing and administrative expenses on
our income statements.

Restructuring Charges
We establish reserves for severance costs, contract terminations
and asset impairments as a result of costs incurred to streamline
our organization and reposition certain businesses.

In 2003 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities."  This statement
superseded Emerging Issues Task Force Issue (EITF) No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs To Exit an Activity (Including Certain Costs
Associated with a Restructuring)," and required that a liability
for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, as opposed to when
management is committed to an exit plan.  Such liabilities are
recorded based on their fair value, as defined.  The provisions
of this statement apply to all costs accrued related to
restructuring activities, including one-time severance benefits.  However,
because our severance benefits are not considered one-time, we recognize
these benefits under the provisions of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" and SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits" (the impact of pension curtailments
and settlements that are directly attributable to our restructuring actions
were recorded in accordance with SFAS No. 88).  As such, amounts for
severance are recognized when a termination plan is developed and approved
and when payment is probable and estimable.  Restructuring
charges for all other types of costs, such as contract
terminations, are recorded in accordance with SFAS No. 146.
Asset impairments are calculated in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."

For charges prior to December 31, 2002, estimates of costs incurred to
complete those actions, such as future lease payments, sublease income, the
fair value of assets, and contract termination settlements, were based on
assumptions at the time management was committed to a plan.  To the
extent actual costs differed from those estimates, reserve levels were
adjusted.  In addition, plans for certain severance actions were revised
due to changes in business conditions that we did not foresee at the time
such plans were approved.

The impact of restructuring charges is recorded in other
operating items, net on our income statements.

Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, goodwill and intangibles with
indefinite lives must be assessed annually for impairment.  These
assessments, which require a great deal of judgment, involve
management's estimates of future cash flows, market trends and
other factors.  If goodwill is determined to be impaired, a loss
is recorded in accordance with the statement.

In accordance with SFAS No. 144, intangible assets with finite
lives must be assessed for impairment whenever changes in
circumstances indicate that the assets may be impaired.  Similar
to goodwill, the assessment for impairment requires estimates of
future cash flows related to the intangible asset.  To the extent
the carrying value of the asset exceeds its future cash flows, an
impairment loss is recorded based on the fair value of the
asset.  Asset impairments are recorded in other operating items,
net on our income statements.


Liquidity and Capital Resources
(includes forward-looking information)

The consolidated statement of cash flows for the year ended
June 30, 2003, is summarized below:



Cash and cash equivalents at June 30, 2002                      $ 108

Net change in cash due to:
  Operating activities                                            153
  Investing activities                                            (16)
  Financing activities                                           (197)
  Effect of exchange rate changes on cash and cash equivalents      3
                                                                -----
Net change in cash and cash equivalents                           (57)
                                                                -----
Cash and cash equivalents at June 30, 2003                      $  51
                                                                =====

Cash and cash equivalents decreased 52% to $51 as of June 30,
2003, compared with $108 as of June 30, 2002.  Cash flow from
operations increased to $153 in 2003, compared with $133 in
2002.  The increase in cash flow from operations was principally
attributable to a full year of cash flows from Reiman.  Other
factors contributing to the positive cash flow from operations
include cash generated by Books Are Fun and QSP, Inc.

Significant uses of cash in 2003 related to:
  - Repurchasing $100 of shares in connection with the
    recapitalization transactions.
  - Repayment of $85 of our borrowings.
  - Cash payments for dividends of $21.

Borrowings
During 2002, in connection with the Reiman acquisition, which was
completed in the fourth quarter of 2002, and with the
recapitalization transactions, we amended and restated our
Five-Year Revolving Credit and Competitive Advance Facility
Agreement and entered into a Term Loan Agreement with a syndicate
of banks and other financial institutions (see Note 11, Debt, in
our Notes to Consolidated Financial Statements for additional
information).  (The Five-Year Revolving Credit and Competitive
Advance Facility Agreement and the Term Loan Agreement are
collectively referred to as the 2002 Credit Agreements.)
Borrowings under the Five-Year Revolving Credit and Competitive
Advance Facility Agreement may be used for general corporate
purposes, including acquisitions, share repurchases and
commercial paper backup.  Borrowings under the 2002 Credit
Agreements are secured by substantially all of our assets and are
subject to various covenants, including limitations on additional
debt for money borrowed and related guarantees, acquisitions,
share repurchases, liens, and minimum interest coverage and
maximum leverage ratios.

In the fourth quarter of 2003, we and the syndicate of lenders
amended the 2002 Credit Agreements.  The amendments included modifications to
ease the leverage covenant (which specifies the maximum ratio of debt to
EBITDA) and to exclude the impact of certain cash restructuring
charges from the calculation of EBITDA in 2003 and 2004.  The
amendment also increased the interest rate we pay on outstanding
borrowings by up to 50 basis points based upon our credit rating
as of June 30, 2003.

The Term Loan Agreement requires quarterly principal repayments,
with the final payment due in 2008.  Aggregate mandatory
principal payments are $31 in fiscal 2004, $55 in fiscal 2005,
$78 in fiscal 2006, $75 in fiscal 2007, and $626 in fiscal 2008.
The Term Loan Agreement also requires us to use our excess cash
flow to prepay the principal amount of borrowings.  The weighted
average interest rate on our borrowings was 4.0%, 3.8% and 6.4%
in 2003, 2002 and 2001, respectively.

The interest rate under the Term Loan Agreement is required to be
reset from time to time for periods of up to six months.  The
interest rate is either LIBOR plus a spread based on our credit
rating at the time the rate is established, or the Alternate Base
Rate, as defined in the Term Loan Agreement.  Assuming the LIBOR
option, if our credit rating at June 30, 2003 were to decrease
one increment, the interest rate under both the Term Loan
Agreement and the Five-Year Revolving Credit and Competitive
Advance Facility would increase 25 basis points.  If our credit
rating at June 30, 2003 were to improve one increment, the
interest rate on the smaller tranche of the Term Loan and on the
Five-Year Revolving Credit and Competitive Advance Facility would
decrease 50 basis points.

Under the 2002 Credit Agreements, we are required to hedge at
least one-third of borrowings outstanding under the Term Loan
Agreement.  In July 2002, we entered into agreements to cap at 6%
the interest rate on $400 of the LIBOR component of our
borrowings under the Term Loan Agreement for a period of three
years.

Recapitalization Agreement
On October 15, 2002, we entered into a revised agreement with the
DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc. (the Funds) providing for a
series of actions that resulted in all shares of our Class B
Voting Common Stock (Class B Stock) and Class A Nonvoting Common
Stock (Class A Stock) being recapitalized into a single class of
Common Stock with one vote per share.  The October 15, 2002
recapitalization agreement replaced the recapitalization
agreement that we entered into with the Funds on April 12, 2002.
The transactions contemplated by the October recapitalization
agreement were completed on December 13, 2002.  As a result:
  - We repurchased approximately 4.6 million shares of Class B
    Stock from the Funds for $100 in cash in the aggregate;
  - Each share of Class A Stock was recapitalized into one share
    of Common Stock having one vote per share;
  - Each remaining share of Class B Stock was recapitalized into
    1.22 shares of Common Stock;
  - We amended our charter to, among other things, reflect the
    reclassification of the stock, divide our board of directors
    into three classes and eliminate action by written consent of
    our stockholders; and
  - We reclassified as long-term debt the $100 borrowed under
    the Term Loan Agreement on May 20, 2002 to repurchase stock.
    On June 30, 2002, the $100 was classified as short-term debt
    pending completion of the recapitalization transactions.

Four legal actions were commenced against us, our directors and
the Funds challenging the original recapitalization transaction
announced in April 2002.  Three of the four actions were
purported class actions; the fourth action was brought by
individual stockholders.  The parties in two of the three class
actions, which were brought on behalf of holders of Class B
Stock, entered into a memorandum of understanding setting forth
agreements in principle, subject to court approval, with respect
to the settlement of those actions.  The third class action,
which was brought on behalf of holders of Class A Stock, was
dismissed with prejudice by the Court of Chancery of the State of
Delaware pursuant to a comprehensive settlement agreement that
was approved by the Court of Chancery on February 12, 2003.  The
fourth action was voluntarily dismissed.

Other Liquidity Matters
In May 2001, we announced authorization to repurchase up to a
total of $250 in shares of our outstanding Common Stock, which
superseded a 5 million share repurchase authorization announced
in October 2000.  As of June 2002, we had purchased approximately
3.6 million shares for approximately $64 under the May 2001
authorization.  Under the 2002 Credit Agreements, we are
prohibited from repurchasing our Common Stock until our credit
ratings are investment grade.

In the second quarter of 2002, we filed a shelf registration
statement with the Securities and Exchange Commission allowing us
to issue up to $500 of public debt securities.  As of June 30,
2003, no securities had been issued under the registration
statement.

At June 30, 2003, some of our international subsidiaries had
available lines of credit and overdraft facilities totaling $37.
There were no borrowings outstanding under these facilities at
June 30, 2003.

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


Contractual Obligations and Commitments
(includes forward-looking information)

For information regarding debt and other obligations, including
lease commitments and contingencies, see Note 6, Goodwill and
Other Intangible Assets, Net; Note 11, Debt; and Note 13,
Commitments and Contingencies, in our Notes to Consolidated
Financial Statements.

In the normal course of business, we enter into long-term
arrangements with suppliers for raw materials and merchandise and
with other parties whose recordings or works we use in our
products.  These arrangements may contain minimum purchase
requirements.  We enter into these agreements to facilitate an
adequate supply of materials and to enable us to develop better
products for sale to our customers.  The table below details our
significant contractual obligations and the timing of payments
due for those contracts with minimum purchase requirements.

<TABLE>

                                   Less than    One to      Three to    More than
Contractual Obligations            one year   three years  five years   five years

<S>                                  <C>        <C>          <C>          <C>
Debt obligations:
  Term Loan Agreement(1)             $  31      $ 133        $ 701        $  --
  Other lines of credit                  1         --           --           --
 Lease commitments:
  Operating leases                      17         26           22           57
Purchase commitments:
  World's Finest Chocolate(2)           55        120          131          828
  Royalty contracts                      4          1           --           --
Service and outsource contracts(3)      44         15           14           10
                                     -----      -----        -----        -----
Total                                $ 152      $ 295        $ 868        $ 895
                                     =====      =====        =====        =====
</TABLE>


(1) In the fourth quarter of 2002 we borrowed $950 to complete
    the Reiman acquisition, finance the recapitalization
    transactions and pay down existing debt balances.  The
    commitments detailed above represent the mandatory scheduled
    principal repayments detailed in the Term Loan Agreement,
    adjusted for the effect of principal repayments made in 2003 in excess
    of those required.  See Note 11, Debt, in our Notes to
    Consolidated Financial Statements for additional information.
(2) In May 2000 QSP, Inc. entered into a licensing agreement
    with World's Finest Chocolate, Inc. to obtain the exclusive
    right to distribute World's Finest Chocolate products for
    fundraising purposes.  This agreement was amended in 2003.  The
    commitments detailed above represent our minimum purchase
    requirement of chocolate products from fiscal 2004 until the
    agreement terminates, in fiscal 2020.  See Note 6, Goodwill and
    Other Intangible Assets, Net, in our Notes to Consolidated
    Financial Statements for additional information.
(3) This caption includes a number of service contracts, such
    as: product fulfillment agreements, information technology
    license and maintenance agreements, and agreements with postal
    authorities.  These contracts terminate at varying dates
    ranging from fiscal 2004 through fiscal 2010.  The most
    significant of these commitments expire in fiscal 2004.


Currency Risk Management
(includes forward-looking information)

In the normal course of business, we are exposed to the effects
of foreign exchange rate fluctuations on the U.S. dollar value of
our foreign subsidiaries' results of operations and financial
condition.  We hedge significant known transactional exposures,
but generally do not hedge the impact of foreign currency
translation on our earnings.

Additional information concerning derivative financial
instruments is available in Note 7, Financial Instruments, in our
Notes to Consolidated Financial Statements.

Fiscal 2004 Outlook
(includes forward-looking information)

Our plan is to achieve sustainable revenue and profit growth by
fiscal 2005.  This plan includes more than $20 of incremental
investments during fiscal 2004, as well as significant cost
reductions intended to result in at least $70 in annual savings
by fiscal 2005.  We plan to achieve lower costs mainly through overhead
reductions, including the scheduled elimination of approximately 580
positions, or 12 percent of the workforce, expected to be
completed during the next several fiscal quarters.  A majority of
the eliminations have been communicated.  The costs of these
actions were included in the third- and fourth-quarter 2003
restructuring charges.

For each of the three operating segments, we anticipate
stabilizing our customer base and improving margins in more
mature businesses by reducing direct mail activity in the near term, as well
as investing in new products, expanding new customer acquisition
channels, and increasing inter-divisional selling opportunities
with the goal of driving revenue growth in all businesses.

In the course of meeting our goal of sustainable revenue and
profit growth by fiscal 2005, we assume flat to slightly lower
operating performance in fiscal 2004, excluding restructuring and
special items (these items totaled $40 in 2003), followed by
improved performance and double-digit year-over-year profit
growth in fiscal 2005.  For full-year fiscal 2004, we
expect that:
  - Revenues should be flat, as growth at Reiman, Books Are Fun
    and QSP, Inc. should be offset by planned lower revenues as
    well as unfavorable business trends in International
    Businesses.
  - Operating profit should be between $165 and $180.  Each
    operating segment is expected to grow operating profit in the
    low-to-mid teens.  These results should be offset by a $30
    increase in Corporate Unallocated expenses relating to lower
    net pension income from the company's over-funded U.S. pension
    plan and to higher retiree healthcare and other
    employee-related costs.
  - Operating profit should include $20 in expenses associated
    with incremental investments intended to drive revenue growth
    in the second half of fiscal 2004 and beyond.
  - Earnings per share should be negatively affected by
    approximately ($0.05) per share compared with 2003 due to the
    absence of certain gains in other (expense) income, net,
    associated with assets sold in 2003.
  - Quarter-to-quarter comparisons should be down in the first
    half of fiscal 2004, attributable to lower international
    profit, as re-engineering and cost-reduction efforts are
    implemented to offset negative revenue trends and planned
    activity reductions.  The first half should also be negatively
    affected by a reduction in U.S. net pension income and the
    timing of investment spending.  Results should improve in the
    second half, mainly because of the beneficial impact of the
    cost reductions announced in 2003.
  - We should pay down approximately $150 of debt in fiscal
    2004, even though mandatory principal payments under the Term
    Loan Agreement are $31 for that year.

Assuming the above, we expect diluted earnings per share to be in
the range of $0.75 to $0.85 in fiscal 2004 and higher in fiscal
2005.

In January 2004, we will reduce the circulation rate base for the
U.S. edition of Reader's Digest magazine from 11 million copies
to 10 million copies.  We believe that this reduction will enable
the magazine to reduce new subscriber acquisition costs and
improve profitability.


Recent Accounting Standards
(includes forward-looking information)

In January 2003, the FASB issued FASB Interpretation (FIN)
No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51."  FIN
No. 46 introduces a new consolidation model with respect to
variable interest entities.  The new model requires that the
determination of control should be based on the potential
variability in gains and losses of the variable interest
entity being evaluated.  The entity with the majority of the
variability in gains and losses is deemed to control the
variable interest entity and is required to consolidate it.
This interpretation is effective on July 1, 2003 (for us,
effective fiscal 2004 and thereafter).

On May 15, 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity."  SFAS No. 150 establishes
standards for classifying certain financial instruments that
represent obligations, yet also have characteristics similar
to equity instruments.  Specifically, SFAS No. 150 addresses
the accounting for instruments such as mandatorily redeemable
securities, certain option contracts and obligations to be
settled in shares.  SFAS No. 150 is effective for interim
periods beginning after June 15, 2003 (for us, effective
fiscal 2004 and thereafter).

Adoption of FIN No. 46 and SFAS No. 150 will not have a
material impact on our operating results.


Cautionary Statement
(includes 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 (including the Reiman business);
  - the strength of relationships of newly acquired and newly
    formed businesses (including the Reiman business) with their
    employees, suppliers and customers;
  - the accuracy of the basis of forecasts relating to newly
    acquired and newly formed businesses (including the Reiman
    business);
  - 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 re-engineering 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;
  - 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 ratings downgrades resulting from our
    increased leverage;
  - the effects of economic and political changes in the markets
    where we compete;
  - the effects of weather in limiting access to consumers; and
  - the economic effects of terrorist activity and subsequent
    related events, especially those limiting access to consumers
    and otherwise affecting the direct marketing and direct sales
    industries.

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



<PAGE>

<TABLE>

The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Income


                                                                     Years ended June 30,
In millions, except per share data                           2003          2002            2001

<S>                                                     <C>            <C>            <C>
Revenues                                                $   2,474.9    $   2,368.6    $   2,518.2

Product, distribution and editorial expenses               (1,002.2)        (947.7)        (971.2)
Promotion, marketing and administrative expenses           (1,293.8)      (1,236.5)      (1,299.6)
Other operating items, net                                    (39.8)         (26.7)         (18.4)
                                                        -----------    -----------    -----------
  Operating profit                                            139.1          157.7          229.0

Other (expense) income, net                                   (38.7)         (17.1)         (41.2)
                                                        -----------    -----------    -----------
  Income before provision for income taxes                    100.4          140.6          187.8

Provision for income taxes                                    (39.1)         (49.4)         (55.7)
                                                        -----------    -----------    -----------
Net income                                              $      61.3    $      91.2    $     132.1
                                                        ===========    ===========    ===========

Basic and diluted earnings per share

Basic earnings per share
  Weighted average common shares outstanding                   98.1          100.2          102.7

  Basic earnings per share                              $      0.61    $      0.90   $       1.27
                                                        ===========    ===========    ===========

Diluted earnings per share
  Adjusted weighted average common shares outstanding          99.2          100.6          103.7

  Diluted earnings per share                            $      0.60    $      0.89   $       1.26
                                                        ===========    ===========    ===========

</TABLE>

See accompanying Notes to Consolidated Financial Statements.

<PAGE>

<TABLE>

The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Balance Sheets



                                                                        At June 30,
In millions                                                          2003        2002

<S>                                                              <C>         <C>
Assets
Current assets
  Cash and cash equivalents                                      $     51.3  $    107.6
  Accounts receivable, net                                            256.5       295.2
  Inventories                                                         155.7       156.0
  Prepaid and deferred promotion costs                                132.7       140.9
  Prepaid expenses and other current assets                           191.8       153.2
                                                                 ----------  ----------
Total current assets                                                  788.0       852.9

Property, plant and equipment, net                                    162.5       168.1
Goodwill                                                            1,009.4     1,004.0
Other intangible assets, net                                          212.3       240.6
Other noncurrent assets                                               427.3       426.3
                                                                 ----------  ----------
Total assets                                                     $  2,599.5  $  2,691.9
                                                                 ==========  ==========
Liabilities and stockholders' equity
Current liabilities
  Loans and notes payable                                        $     31.3  $    132.7
  Accounts payable                                                     97.5       102.8
  Accrued expenses                                                    281.4       283.2
  Income taxes payable                                                 36.5        28.4
  Unearned revenues                                                   414.8       416.1
  Other current liabilities                                            19.7         6.8
                                                                 ----------  ----------
Total current liabilities                                             881.2       970.0

Postretirement and postemployment benefits other than pensions        121.9       128.1
Unearned revenues                                                     127.6       134.8
Long-term debt                                                        834.7       818.0
Other noncurrent liabilities                                          233.8       169.1
                                                                 ----------  ----------
Total liabilities                                                $  2,199.2     2,220.0
                                                                 ==========  ==========
Commitments and Contingencies (Notes 6, 11 and 13)

Stockholders' equity (Note 12)
  Capital stock                                                        17.6        25.5
  Paid-in capital                                                     215.0       224.6
  Retained earnings                                                 1,301.6     1,261.2
  Accumulated other comprehensive (loss) income                      (109.2)      (89.7)
  Treasury stock, at cost                                          (1,024.7)     (949.7)
                                                                 ----------  ----------
Total stockholders' equity                                            400.3       471.9
                                                                 ----------  ----------
Total liabilities and stockholders' equity                       $  2,599.5  $  2,691.9
                                                                 ==========  ==========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.


<PAGE>

<TABLE>

The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

                                                                                Years ended June 30,
In millions                                                                   2003     2002      2001

<S>                                                                        <C>       <C>       <C>
Cash flows from operating activities
Net income                                                                 $   61.3  $   91.2  $  132.1
Equity in losses of BrandDirect Marketing                                        --        --      24.9
Investment impairments                                                           --       2.5      21.3
Asset impairments                                                               3.2      11.7       6.6
Depreciation and amortization                                                  64.7      35.9      56.8
Net (gain) loss on the sales of certain assets,
  other businesses and contract terminations                                   (8.6)     (6.9)    (13.3)
Changes in current assets and liabilities, net
  of effects of acquisitions and dispositions
  Accounts receivable, net                                                     55.0       2.5     (40.0)
  Inventories                                                                   6.4      21.8     (45.5)
  Unearned revenues                                                           (12.1)     (5.2)     21.7
  Accounts payable and accrued expenses                                       (20.1)     24.7    (109.4)
  Other, net                                                                    7.8      35.7      40.9

Changes in noncurrent assets and liabilities, net of effects of
  acquisitions and dispositions                                                (4.3)    (81.4)    (79.4)
                                                                           --------  --------  --------
Net change in cash due to operating activities                                153.3     132.5      16.7
                                                                           --------  --------  --------
Cash flows from investing activities
Proceeds from maturities and sales of marketable securities,
  short-term investments and contract terminations                              5.2      11.6      12.4
Proceeds from sales of businesses and other long-term
  investments, net                                                               --       2.2       1.3
Proceeds from sales of property, plant and equipment                            5.5       2.4       1.4
Investments in and advances to BrandDirect Marketing                             --        --     (24.0)
Purchases of investments, marketable securities and
  licensing agreements                                                        (10.5)     (1.3)       --
Payments for business acquisitions, net of cash acquired                         --    (763.2)     (2.3)
Capital expenditures                                                          (15.7)    (24.6)    (43.5)
                                                                           --------  --------  --------
Net change in cash due to investing activities                                (15.5)   (772.9)    (54.7)
                                                                           --------  --------  --------
Cash flows from financing activities
Proceeds (repayments) of revolving credit and other facilities, net            (0.6)   (160.4)     73.1
(Repayments) proceeds from Term Loan                                          (84.7)    950.0        --
Proceeds from employee stock purchase plan and exercise of stock options        4.3       8.6      19.8
Dividends paid                                                                (21.0)    (21.3)    (21.9)
Common Stock repurchased                                                     (101.7)    (64.1)    (34.1)
Other, net                                                                      6.9       2.7      (0.9)
                                                                           --------  --------  --------
Net change in cash due to financing activities                               (196.8)    715.5      36.0
                                                                           --------  --------  --------
Effect of exchange rate fluctuations on cash and cash equivalents               2.7      (2.9)    (12.3)
                                                                           --------  --------  --------
Net change in cash and cash equivalents                                       (56.3)     72.2     (14.3)
                                                                           --------  --------  --------
Cash and cash equivalents at beginning of year                                107.6      35.4      49.7
                                                                           --------  --------  --------
Cash and cash equivalents at end of year                                   $   51.3  $  107.6  $   35.4
                                                                           ========  ========  ========
Supplemental information
Cash paid for interest                                                     $   39.6  $    9.3  $   14.8
Cash paid for income taxes                                                 $   36.2  $   40.8  $   58.7

</TABLE>


See accompanying Notes to Consolidated Financial Statements.

<PAGE>

<TABLE>
The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

                                                Capital Stock                                  Accumulated
                                                            Unamortized                           Other      Treasury
                                       Preferred  Common    Restricted   Paid-in   Retained   Comprehensive  Stock, at
In millions                              Stock     Stock       Stock     Capital   Earnings   (Loss) Income    Cost         Total


<S>                                     <C>        <C>        <C>        <C>       <C>         <C>          <C>          <C>
Balance at June 30, 2000                $ 28.8     $   1.4    $  (1.3)   $  223.1  $1,081.1    $     31.0   $  (885.3)   $    478.8

Comprehensive income
   Net income                                                                         132.1                                   132.1
   Other comprehensive income:
     Translation loss                                                                               (15.6)                    (15.6)
     Net unrealized loss on
       investments, net of deferred
       taxes of $50.9                                                                               (94.4)                    (94.4)
     Reclassification adjustments for
       gains that are included in net
       income, net of deferred taxes
       of $2.5                                                                                       (4.7)                     (4.7)
     Net unrealized gain on
       derivatives, net of deferred
       taxes of $0.5                                                                                  0.8                       0.8
     Minimum pension liability, net
     of  deferred taxes of $0.9                                                                      (1.7)                     (1.7)
                                                                                                                         ----------
Total comprehensive income                                                                                                     16.5
                                                                                                                         ==========

Stock issued under various plans                                  0.7         3.0                                16.8          20.5

Common Stock repurchased                                                                                        (34.1)        (34.1)
Common Stock dividends                                                                (20.6)                                  (20.6)
Preferred stock dividends                                                              (1.3)                                   (1.3)
                                        ------     -------    -------    --------  --------    ----------   ---------    ----------
Balance at June 30, 2001                  28.8         1.4       (0.6)      226.1   1,191.3         (84.6)     (902.6)        459.8
                                        ------     -------    -------    --------  --------    ----------   ---------    ----------

Comprehensive income
   Net income                                                                          91.2                                    91.2
   Other comprehensive income:
     Translation gain                                                                                13.0                      13.0
     Net unrealized gain on
       investments, net of deferred
       taxes of $1.9                                                                                  3.6                       3.6
     Reclassification adjustments for
       gains that are included in net
       income, net of deferred taxes
       of $2.5                                                                                       (4.7)                     (4.7)
     Net realized loss on
       net of deferred taxes of $0.5                                                                 (0.8)                     (0.8)
     Minimum pension liability, net of
       deferred taxes of $6.8                                                                       (16.2)                    (16.2)
                                                                                                                         ----------
Total comprehensive income                                                                                                     86.1
                                                                                                                         ==========

Stock issued under various plans                                 (4.1)       (1.5)                               17.0          11.4

Common Stock repurchased                                                                                        (64.1)        (64.1)
Common Stock dividends                                                                (20.0)                                  (20.0)
Preferred stock dividends                                                              (1.3)                                   (1.3)
                                        ------     -------    -------    --------  --------    ----------   ---------    ----------
Balance at June 30, 2002                $ 28.8    $    1.4  $    (4.7)   $  224.6  $1,261.2   $     (89.7)  $  (949.7)  $     471.9
                                        ------     -------    -------    --------  --------    ----------   ---------    ----------

</TABLE>



<PAGE>

<TABLE>

The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity, continued



                                                Capital Stock                                  Accumulated
                                                            Unamortized                           Other      Treasury
                                       Preferred  Common    Restricted   Paid-in   Retained   Comprehensive  Stock, at
In millions                              Stock     Stock       Stock     Capital   Earnings   (Loss) Income    Cost         Total

<S>                                     <C>        <C>        <C>        <C>       <C>         <C>          <C>          <C>
Comprehensive income
   Net income                                                                         $61.3                                   $61.3
   Other comprehensive income:
     Translation gain                                                                                19.0                      19.0
     Reclassification adjustments for
       gains that are included in net
       income, net of deferred taxes
       of $1.8                                                                                       (3.3)                     (3.3)
     Net realized loss on derivatives,
       net of deferred taxes of $0.8                                                                 (1.4)                     (1.4)
     Minimum pension liability, net of
       deferred taxes of $14.7                                                                      (33.8)                    (33.8)
                                                                                                                         ----------
Total comprehensive income                                                                                                $    41.8
                                                                                                                         ==========
Stock issued under various plans                                 (8.0)       (9.5)                               26.7           9.2

Reclassification of par value due to
   the recapitalization transactions                   0.1                   (0.1)                                               --
Common Stock repurchased                                                                                       (101.7)       (101.7)
Common Stock dividends                                                                (19.6)                                  (19.6)
Preferred stock dividends                                                              (1.3)                                   (1.3)
                                        ------     -------    -------    --------  --------    ----------   ---------    ----------
Balance at June 30, 2003                $ 28.8     $   1.5    $ (12.7)    $ 215.0  $1,301.6    $   (109.2)  $(1,024.7)   $    400.3
                                        ======     =======    =======    ========  ========    ==========   =========    ==========

</TABLE>

See accompanying Notes to Consolidated Financial Statements.





<PAGE>


The Reader's Digest Association, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
Dollars in millions, except per share data

Unless otherwise indicated, references in Notes to Consolidated
Financial Statements to "we," "our" and "us" are to The Reader's
Digest Association, Inc. and its subsidiaries.  All references to
2003, 2002 and 2001, unless otherwise indicated, are to fiscal
2003, fiscal 2002 and fiscal 2001, respectively.  Our fiscal year
represents the period from July 1 through June 30.

Note 1     Organization and Summary of Significant Accounting Policies

Nature of Our Business

We are a diversified media company that produces books, magazines
and other products worldwide.  We sell these and other products
through direct marketing and direct sales channels.  Our best
known trademark is our flagship magazine, Reader's Digest.  We
conduct business through three operating segments: Reader's
Digest North America, Consumer Business Services and
International Businesses.  For further commentary regarding these
segments, see Management's Discussion and Analysis and Note 14,
Segments.

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements include the
accounts of The Reader's Digest Association, Inc. and its
majority-owned subsidiaries.  These financial statements are
prepared in conformity with accounting principles generally
accepted in the United States, which require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of operating revenues and expenses during the
reporting period.  These estimates are based on management's
knowledge of current events and actions that we may undertake in
the future; however, actual results may ultimately differ from
those estimates.  The primary estimates underlying our
consolidated financial statements include allowances for returns
and doubtful accounts, valuation of inventories, valuation of
direct response advertising and subscriber acquisition costs,
valuation of deferred tax assets, and pension, postemployment and
postretirement benefits.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable.  However, we believe our concentrations of credit risk
with respect to trade receivables are limited due to our large
number of customers, their low dollar balances and their dispersion
across many different geographic and economic environments.

Cash and Cash Equivalents

We consider all highly liquid investments with original
maturities of three months or less at the date of purchase to be
cash equivalents. The carrying amount approximates fair value
based upon the short-term maturity of these investments.

Inventories

Inventories consist primarily of finished goods and raw materials
(including paper) and are stated at the lower of cost or market
value.  Cost is determined under the first-in, first-out (FIFO)
method for all inventories.


<PAGE>







Property, Plant and Equipment, Net

Assets that comprise property, plant and equipment, net are
stated at cost less accumulated depreciation.  Depreciation
expense is generally calculated on a straight-line basis over the
estimated useful lives of the assets: 10-40 years for buildings
and three to ten years for equipment, furniture and fixtures.
Leasehold improvements are amortized using the straight-line
basis over the term of the lease or the useful life of the
improvement, whichever is shorter.

Goodwill and Other Intangible Assets, Net

Goodwill is composed of the excess of costs over the fair value
of net assets of acquired businesses.  Other intangible assets,
net is composed of licensing agreements, customer lists,
tradenames and other items.

In accordance with the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets," on July 1, 2001, we ceased amortization
of goodwill and intangible assets with indefinite lives.
Acquired intangibles with finite lives are amortized, on a
straight-line basis, over their estimated useful lives.  Most of
our intangibles currently have useful lives ranging from two to
ten years.  Prior to the adoption of SFAS No. 142, goodwill was
amortized, on a straight-line basis, over varying periods not in
excess of 40 years.

SFAS No. 142 requires that the carrying amount of goodwill and
intangibles with indefinite lives be evaluated, at least
annually, for recoverability.  This assessment involves comparing
the fair value of the reporting unit or asset, as applicable, to
its carrying value.  Recognition of the impairment, if any, is
determined in accordance with the statement.  In accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we review our intangible assets with finite
lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of that asset may not be
recoverable.  We measure recoverability by comparing the asset's
carrying amount to the undiscounted future net cash flows
expected to be generated by the asset.  If we determine that the
asset is impaired, the impairment recognized is the amount by
which the carrying amount of the asset exceeds the fair value of
the asset.  See Note 6, Goodwill and Other Intangible Assets,
Net, for additional information on our adoption of SFAS No. 142.

Investments

Equity Method Investments

The equity method is used to account for investments in entities
that are not majority-owned by us and that we do not control but
over which we have the ability to exercise significant
influence.  Generally, under the equity method, original
investments in these affiliates are recorded at cost and are
subsequently adjusted by our share of equity in earnings or
losses after the date of acquisition (including amortization of
goodwill prior to July 1, 2001).  Equity in earnings or losses of
each affiliate is recorded according to our level of ownership
until our investment has been fully depleted.  If our investment
has been fully depleted, we recognize the full amount of the
losses generated by the affiliate only when we are the primary
funding source.  These investments are recorded in other
noncurrent assets on the balance sheets.

Cost Method Investments

The cost method is used to account for investments in entities
that are not majority-owned and that we do not control or have
the ability to significantly influence.  Investments of this type
are recorded at cost, less valuation allowances, and are included
in other noncurrent assets on the balance sheets.

Marketable Securities

All of our marketable securities are classified as
available-for-sale.  Accordingly, these securities are recorded
at fair value in other noncurrent assets on the balance sheets.
Unrealized gains and losses on available-for-sale securities, net
of tax, are recorded in other comprehensive income in
stockholders' equity on the balance sheets.  Realized gains and
losses, and declines in carrying value deemed to be other than
temporary, are recorded in other (expense) income, net on the
income statements.

Impairment of Long-Lived Assets

We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such an asset may not be recoverable.  We measure the
recoverability of an asset that is to be held and used by
comparing its carrying amount to the undiscounted future net cash
flows expected to be generated by the asset.  If we determine
that the asset is impaired, the impairment recognized is the
amount by which the carrying amount of the asset exceeds the fair
value of the asset.

Debt Issuance Costs

Debt issuance costs consist of fees and expenses incurred in
connection with our borrowings.  These fees are being amortized
over the terms of the related debt agreements, currently ranging
from three to five years.  Capitalized debt issuance costs are
included in other noncurrent assets on the balance sheets.

Stock-Based Compensation

We account for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation."  As permitted by this
standard, compensation cost is recognized for stock-based
compensation using the intrinsic value method under APB Opinion
No. 25, "Accounting for Stock Issued to Employees."  Under this
method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date over the amount an
employee must pay to acquire the stock.  Since our practice is to
grant stock options at fair market value at the date of grant, no
compensation cost is recognized.  Compensation cost is recognized
with respect to restricted stock and similar instruments.

As required under SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment
of FASB Statement No. 123," we have included the table below
which presents our net income and basic and diluted earnings per
share as reported on our income statements for the respective
periods and adjusts these amounts to include the pro forma impact
of using the fair value based method to calculate stock
compensation expense as prescribed under SFAS No. 123.  The fair
value of our options on the date of grant was calculated using
the Black-Scholes option-pricing model.  The pro forma stock
compensation would result in an additional $(13.1), $(14.2) and
$(14.0) of expense, net of tax, for the years ended June 30,
2003, 2002 and 2001, respectively.


<PAGE>



                                               2003    2002     2001

Net income          As reported               $61.3   $91.2    $132.1
                    Pro forma                 $48.2   $77.0    $118.1

Earnings per share  As reported - basic       $0.61   $0.90     $1.27
                    Pro forma - basic         $0.48   $0.76     $1.14
                    As reported - diluted     $0.60   $0.89     $1.26
                    Pro forma - diluted       $0.47   $0.75     $1.13


For the years ended June 30, 2003, 2002 and 2001, $(4.0), $(1.8)
and $(0.5), net of tax, respectively, of expenses related to
restricted stock and other stock compensation are included in our
net income and earnings per share, as reported.  Additional
information is presented in Note 9, Employee Equity Compensation
Plans.

Financial Instruments

Due to the short maturities of our cash, temporary investments,
receivables and payables, the carrying value of these financial
instruments approximates their fair values.

We record all derivative instruments on our balance sheets at
fair value.  Derivatives that are not classified as hedges are
adjusted to fair value through earnings.  Changes in fair value
of the derivatives that we have designated and that qualify as
effective hedges are recorded in either other comprehensive
income or earnings, as appropriate.  The ineffective portion of
our derivatives that are classified as hedges is immediately
recognized in earnings.

Revenues

Magazines

Sales of our magazine subscriptions, less estimated
cancellations, are deferred and recognized as revenues
proportionately over the subscription period.  Revenues from
sales of magazines through the newsstand are recognized at the
issue date, net of an allowance for returns.  Advertising
revenues are recorded as revenues at the time the advertisements
are published, net of discounts and advertising agency
commissions.

Sponsor Fundraising Programs

Our sponsor fundraising program business, which operates principally through
QSP, Inc., receives its revenues net of amounts due to its sponsors.
Accordingly, we present revenues net of sponsors' earnings.
Sales of subscriptions to magazines published by other companies
and sales of music products are recorded as revenues at the time orders
are submitted to the publisher, net of bad debts and remittances
to magazine and music publishers.

Books, Display Marketing and Other Products

Revenues are recorded when title passes, net of provisions for
estimated returns and bad debts.  For our display marketing
products, title passes either at the point of sale or at the time
of shipment.  In certain circumstances, our promotion entitles
the customer to a preview period.  Revenue generated by these
promotions is recognized after the preview period lapses.

When we recognize revenues for most of our products, we also
record an estimate of bad debts and returns.  These estimates are
based on historical data and the method of promotion.  Reserve
levels are adjusted as actual data is received.  In the direct
marketing business, returns and bad debts are tied to customer responses
to our promotional efforts.  Accordingly, we deduct both estimates of
bad debts and of returns from gross revenue.

Financial Services Marketing Alliances

Revenues from our financial services marketing alliances are based on
amounts negotiated through contracts with our alliance partners.  Such
amounts are recognized as revenue as it is earned.  In circumstances
where amounts are received in advance, we defer revenue recognition
until such amounts are earned.

Promotion Costs

Costs of direct response advertising are accounted for under the
American Institute of Certified Public Accountants Statement of
Position (SOP) 93-7, "Reporting on Advertising Costs."  Under SOP
93-7, costs associated with direct response advertising that can
be directly linked to eliciting sales and result in probable
future benefits are capitalized on a cost-pool-by-cost-pool
basis.  Magazine related direct response advertising costs are
amortized over the expected future revenue stream, generally one to
three years.  Books and home entertainment advertising costs are
amortized over a period that is generally less than one year.  We
assess the carrying amount of our capitalized direct response
advertising costs for recoverability on a periodic basis.

Direct response advertising consists primarily of promotion costs
incurred in connection with the sale of magazine subscriptions,
books and other products.  Promotion expense, which consists of
both amortization of capitalized promotion costs and costs
expensed as incurred, included in our income statements totaled
$(670.6), $(666.3) and $(719.1) for 2003, 2002 and 2001,
respectively.  Prepaid and deferred promotion costs included on
the balance sheets were $132.7 and $140.9 as of June 30, 2003 and
2002, respectively.  Amounts included in other noncurrent assets
on the balance sheets were $21.2 and $21.8 as of June 30, 2003
and 2002, respectively.

Commissions earned by agents for new magazine subscribers are
included in promotion, marketing and administrative expenses on
the income statements.  These costs are deferred and amortized
over the related subscription term, typically one to three
years.  Amounts deferred and included in prepaid expenses and
other current assets on the balance sheets were $33.2 and $42.3
as of June 30, 2003 and 2002, respectively.  Amounts included in
other noncurrent assets on the balance sheets were $26.5 and
$34.5 as of June 30, 2003 and 2002, respectively.

Income Taxes

Income taxes are accounted for under the provisions of SFAS No.
109, "Accounting for Income Taxes."  In accordance with SFAS No.
109, deferred income taxes, net of valuation allowances, reflect
the future tax consequences of differences between the financial
statement and tax bases of assets and liabilities.  These
deferred taxes are calculated by applying currently enacted tax
laws.

Basic and Diluted Earnings Per Share

Basic earnings per share is computed by dividing net income less
preferred stock dividend requirements ($1.3 for each of 2003,
2002 and 2001) by the weighted average number of shares of Common
Stock outstanding during the year. Diluted earnings per share is
computed in the same manner except that the weighted average
number of shares of Common Stock outstanding assumes the exercise
and conversion of certain stock options and vesting of certain
restricted stock (1.2 million shares for 2003, 0.4 million shares
for 2002 and 1.0 million shares for 2001).

Options to purchase approximately 12.1 million shares of Common
Stock were outstanding during 2003, but were not included in the
computation of diluted earnings per share (10.3 million shares in 2002
and 5.5 million shares in 2001).  The exercise prices of these options
were greater than the average market price of the Common Stock
during the period.

Foreign Currency Translation

The functional currency for most foreign operations is the local
currency.  Revenues and expenses denominated in foreign
currencies are translated at average monthly exchange rates
prevailing during the year.  The assets and liabilities of
international subsidiaries are translated into U.S. dollars at
the rates of exchange in effect at the balance sheet date. The
resulting translation adjustment is reflected as a separate
component of stockholders' equity in accumulated other
comprehensive (loss) income.

The U.S. dollar is used as the functional currency for
subsidiaries operating in highly inflationary economies, for
which both translation adjustments and gains and losses on
foreign currency transactions are included in other (expense)
income, net.

Reclassifications

Certain reclassifications have been made to amounts in prior
periods to conform to the current period presentation.

Recent Accounting Standards

In January 2003, the FASB issued FASB Interpretation (FIN)
No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51."  FIN
No. 46 introduces a new consolidation model with respect to
variable interest entities.  The new model requires that the
determination of control should be based on the potential
variability in gains and losses of the variable interest
entity being evaluated.  The entity with the majority of the
variability in gains and losses is deemed to control the
variable interest entity and is required to consolidate it.
This interpretation is effective on July 1, 2003 (for us,
effective fiscal 2004 and thereafter).

On May 15, 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity."  SFAS No. 150 establishes
standards for classifying certain financial instruments that
represent obligations, yet also have characteristics similar
to equity instruments.  Specifically, SFAS No. 150 addresses
the accounting for instruments such as mandatorily redeemable
securities, certain option contracts and obligations to be
settled in shares.  SFAS No. 150 is effective for interim
periods beginning after June 15, 2003 (for us, effective
fiscal 2004 and thereafter).

Adoption of FIN No. 46 and SFAS No. 150 will not have a
material impact on our operating results.


Note 2          Acquisitions and Investments

Acquisitions

On May 20, 2002, we purchased substantially all of the assets and
assumed certain liabilities of Reiman Holding Company, LLC and
subsidiaries (Reiman).  Reiman publishes cooking, gardening,
country lifestyle and nostalgia magazines and books and operates
other complementary businesses in the United States and Canada.
The total purchase price of $760.0, plus capitalized acquisition
costs of $8.2, was financed entirely through bank and
institutional borrowings.  The acquisition was accounted for
using the purchase method of accounting and resulted in $651.7 of
goodwill on the date of acquisition, which is deductible for tax
purposes.  Reiman's results have been consolidated since May 20,
2002.  We acquired Reiman to:
  - generate significant purchasing and product-related
    synergies with our existing businesses,
  - reduce our reliance on sweepstakes promotions,
  - expand our direct marketing database, and
  - allow for geographic expansion of certain Reiman products.

As with most acquisitions of magazine publishers, we also
acquired a significant subscription liability.

The following table represents the fair values of assets acquired
and liabilities assumed at the date of acquisition:

    Current assets                      $ 101.1
    Property, plant and equipment          10.7
    Identified intangible assets          206.8
    Goodwill                              651.7
    Other noncurrent assets                21.6
                                        -------
      Total assets acquired               991.9
    Current liabilities                  (154.2)
    Long-term liabilities                 (69.5)
                                        -------
      Net assets acquired               $ 768.2
                                        =======

Identified intangible assets comprised tradenames and customer
lists.  The tradenames, with a fair value of $89.7, were
determined to have an indefinite life.  The subscriber lists,
with a fair value of $117.1, are amortized over their estimated
useful lives, ranging from three to six years.  The weighted
average useful life of the customer lists is approximately 3.5
years.  For changes in goodwill and acquired intangibles
subsequent to the date of acquisition, see Note 6, Goodwill and
Other Intangible Assets, Net.

The following table presents pro forma information as though the
acquisition took place at the beginning of the periods presented.

                                       2002      2001

Pro forma information (unaudited):
  Revenues                           $2,648.2  $2,824.4
  Net income                         $   92.3  $  110.9

Earnings per share (unaudited):
  Basic                              $   0.91  $   1.07
  Diluted                            $   0.90  $   1.06

These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such
as additional amortization expense for identified intangibles,
increased interest expense from the incurrence of debt and lower
interest income from reduced cash on hand.  The results are not
intended to be indicative of the results of operations that
actually would have resulted had the acquisition occurred at the
beginning of each period, or of future results of operations of
our consolidated entity.

Available-for-Sale Marketable Securities

Marketable securities included in other noncurrent assets on the
balance sheets primarily represent the fair market value (based
on quoted market prices) of our investments in LookSmart, Ltd.
These securities are accounted for and classified as
available-for-sale securities.  As of June 30, 2003 and 2002, the
market value of our investment in LookSmart shares totaled $0.6
and $5.7, respectively.

The net unrealized gain on these investments, net of deferred
taxes, is included in accumulated other comprehensive (loss)
income in stockholders' equity on the balance sheets and amounted
to $0.4 and $3.7 as of June 30, 2003 and 2002, respectively.  In
addition, during 2001 we recorded an impairment of $(10.0)
related to our investment in WebMD Corp, which was sold in 2002.
This impairment represented a charge to record what we believed
to be an other-than-temporary decline in the market value of our
shares of WebMD.

During 2003 and 2002 we sold approximately 2.7 million shares and
4.2 million shares, respectively, of LookSmart and recorded
pre-tax gains of $5.1 and $7.3, respectively, in other (expense)
income, net on the income statements.

Investments, Equity Method

Long-term equity investments included in other noncurrent assets
on the balance sheets represent our investment in BrandDirect
Marketing, Inc.  Due to additional funding in the form of an
advance and other circumstances, we had the ability to exercise
significant influence as defined in APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock."  In
accordance with APB Opinion No. 18, equity in losses of this
investment (including goodwill amortization prior to July 1,
2001) was included in other (expense) income, net on the income
statements.  As of June 30, 2001, we had written down our
investment in BrandDirect Marketing to zero.

Investments, at Cost

Investments carried at cost are included in other noncurrent
assets on the balance sheets.  As of June 30, 2003, we had no
investments carried at cost on our balance sheets.  During June
2002, we recorded an impairment charge on our investment in
Schoolpop, Inc. of $(2.5) and sold a portion of our investment in
e-finet.com, which had been written down to zero in 2001.


Note 3          Other Operating Items, Net

Charges included in other operating items, net primarily
represent the streamlining of our organizational structure and
the strategic repositioning of certain businesses.

Charges recorded prior to December 31, 2002 were recorded in accordance
with Emerging Issues Task Force Issue (EITF) No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
To Exit an Activity (Including Certain Costs Associated with a
Restructuring)." EITF No. 94-3 required that amounts related to restructuring
actions be recorded only when management was committed to an exit plan.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," superseding EITF
No. 94-3. Under SFAS No. 146, costs associated with
restructuring actions, including one-time severance benefits, are
only recorded once a liability has been incurred. SFAS No. 146
does not consider severance benefits determined pursuant to an
existing formula as one-time benefits. As our severance programs
do not qualify as one-time benefits, we recognize severance amounts
pursuant to SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" and SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" (the impact of
pension curtailments and settlements that are directly attributable to
our restructuring actions were recorded in accordance with SFAS No. 88).
As such, severance amounts were recorded when a termination plan was developed
and approved and when payment was probable and estimable. Other
amounts related to restructuring actions, including contract
terminations, are recorded based upon fair value in accordance
with SFAS No. 146. Asset impairments were calculated in
accordance with the provisions of SFAS No. 144.

We recorded charges for other operating items, net of $(39.8) in
2003, $(26.7) in 2002 and $(18.4) in 2001.  The components of
other operating items, net are described in further detail below:

  -   Severance Costs - These charges represent the cost to
      separate employees from our operations as a result of costs
      incurred to streamline the organization.
  -   Contract Terminations - These charges represent costs
      incurred to terminate contractual obligations in connection
      with streamlining activities.
  -   Impairment Losses - We incurred charges related to the
      carrying value of intangible assets, certain leasehold
      improvements, computer hardware and software and, to a lesser
      extent, property, plant and equipment no longer used in our
      operations.

For charges recorded prior to December 2002, in certain instances
circumstances arose that resulted in decisions to retain
employees previously identified for termination, and in certain
other instances the costs associated with actions identified were
settled for less than originally anticipated.  In these
instances, the associated charges were reversed.

During 2003, other operating items, net of $(39.8) comprised:
  -     Charges of $(45.3), including $(37.6) for severance costs,
        $(3.2) related to asset impairments and $(4.5) related to
        other items.  These charges were taken to lower our cost
        base in commensuration with our current revenues and in an
        effort to streamline our operations.

        The $(37.6) of severance costs relates to the termination of
        approximately 580 positions, of which 35% are located in
        North America and 65% are located outside North America.
        Of the total positions, approximately 50% have been
        separated as of June 30, 2003.  The remaining positions
        will be terminated during the next several fiscal
        quarters.

        Asset impairment charges of $(3.2) are primarily
        attributable to write-offs of software and other
        capitalized costs related to unprofitable businesses and
        discontinued products.  Other costs of $(4.5) principally
        comprised costs incurred to review and compile the
        restructuring plan utilized to streamline our operations
        in certain domestic and international markets.

  -     Income of $2.8 representing net adjustments to
        litigation-related accrual balances, established in
        previous years, following settlement of a lawsuit in the
        first quarter of 2003.
  -     Income of $2.7 related to reversals of primarily severance
        charges recorded in previous years.  Reversals of accruals
        recorded in previous years represent circumstances where
        conditions changed after the date the accrual was
        established.

During 2002, other operating items, net of $(26.7) comprised the
following actions:  $(5.6) related to the closure of Gifts.com,
Inc.; $(12.8) related to the scaling back of our U.S. Books and
Home Entertainment business; and $(17.2) related to streamlining
various U.S. and international businesses and reducing global
staffing levels.  These charges were partially offset by
adjustments to reserves of $8.9.  These charges and adjustments
comprised:
  -     Charges of $(35.6), including $(14.7) for severance costs,
        $(8.0) for contract terminations, and $(12.9) for asset
        impairments and other items.

        The $(14.7) of severance costs related to the separation of
        289 employees.  Approximately 16% of the employees
        identified were located outside the United States.  A
        majority of the employee separations included in the
        severance charge were related to U.S. Books and Home
        Entertainment and administrative functions that support
        this business, including information technology personnel
        and Gifts.com, Inc.  As of June 30, 2003, substantially
        all of these positions had been eliminated.  Severance
        charges associated with those positions that were not
        eliminated were reversed in 2003.

  -     Adjustments of $6.9 related to accrual balances from charges
        originally recorded in 2001 and prior periods.  Reversals
        of accruals recorded in previous years represent
        circumstances where conditions changed after the date the
        accrual was established.
  -     A reversal of $2.0 pertaining to a pending legal matter that
        was originally recorded in prior years in other operating
        items, net.

During 2001, other operating items, net of $(18.4) comprised:
  -     Charges of $(31.8) primarily for severance costs associated
        with restructuring U.S. Books and Home Entertainment,
        streamlining European operations and reducing overall
        staff levels.  All of the 380 employees included in the
        2001 charge were separated from our operations as of June
        30, 2003.
  -     Adjustments of $9.9 to accrual balances from charges
        originally recorded in years prior to 2001 as a result of
        unexpected delays in the outsourcing of certain activities.
  -     An additional adjustment as a result of a favorable tax
        settlement of $14.5 of which $10.1 was originally recorded
        in other operating items, net and $4.4 was originally
        recorded in administrative expenses.
  -     Asset impairments of $(6.6) related primarily to goodwill
        associated with our investment in Walking magazine.  We
        sold this magazine in the first quarter of 2002.

At June 30, 2003, we had restructuring reserves for other
operating items, net of $34.7, primarily for severance costs and
contract terminations that will take place during the next
several fiscal quarters.  This reserve is included in accrued
expenses on the balance sheets.  At June 30, 2002, restructuring
reserves totaled $31.3, primarily for severance costs and
contract terminations.  During 2003, we recorded additional
restructuring and other reserves of $45.3, which were partially
offset by adjustments to these reserve balances of $2.7.  In
addition, $39.2 was charged to this reserve primarily for
severance costs and contract termination payments.

The table below outlines the activity related to the
restructuring actions recorded in 2003 and previous years.

 Initial year    Balance at     (Adjustments)/                 Balance at
  of charge    June 30, 2002       Accruals     Spending     June 30, 2003

2002 & prior       $ 31.3           $(2.2)       $(23.0)        $   6.1
2003                   --            44.8         (16.2)           28.6
                   ------           -----        ------         -------
  Total            $ 31.3           $42.6        $(39.2)        $  34.7
                   ======           =====        ======         =======


Note 4          Other (Expense) Income, Net

                                                   2003    2002     2001

Interest income                                   $  5.1  $  4.7   $  8.4
Interest expense                                   (46.5)  (18.6)   (18.3)
Equity in losses of BrandDirect Marketing             --      --    (24.9)
Investment impairments(1)                             --    (2.5)   (21.3)
Net gain on the sales of certain assets
  and contract terminations(2)                       8.6     6.9     13.3
Net (loss) gain on foreign exchange                 (0.1)   (4.2)     1.4
Other (expense) income, net(3)                      (5.8)   (3.4)     0.2
                                                  ------  ------   ------
Total other (expense) income, net                 $(38.7) $(17.1)  $(41.2)
                                                  ======  ======   ======

(1) Investment impairments in 2002 represented $(2.5) for
    Schoolpop.  In 2001, impairments included $(10.0) for WebMD,
    $(7.5), for Schoolpop, $(2.9) for e-finet.com and $(0.9) for
    Sticky Networks, Inc.
(2) Net gain on the sales of certain assets, other businesses
    and contract terminations principally included sales of our
    shares in LookSmart of $5.1 and $7.3 in 2003 and 2002,
    respectively.  In addition, in 2003, this item included a gain
    of $2.2 on the sale of a building in Australia and a gain of
    $1.6 from settlement of a class action lawsuit related to fine
    art sales in previous years.  In 2001, this item included the
    receipt of a contract termination payment of $4.2.
(3) In 2003 and 2002, other (expense) income, net principally
    comprised expenses associated with our recapitalization
    transactions.  See Note 12, Capital Stock, for additional
    information.  In addition, in 2003, this item included
    write-offs of currency translation adjustments related to
    certain discontinued international operations.


<PAGE>



Note 5          Supplemental Balance Sheet Information

The components of certain balance sheet accounts as of June 30
are as follows:

Accounts Receivable, Net
                                                   2003     2002

Gross accounts receivable, trade                 $ 422.7  $ 472.2

  Beginning reserve for returns                    (55.2)   (66.2)
  Additions to allowances(1)                      (349.3)  (361.1)
  Actual returns(2)                                360.5    372.1
                                                 -------  -------
Ending reserve for returns                         (44.0)  ( 55.2)

  Beginning reserve for  bad debts                (121.8)   (93.3)
  Additions to allowances(1)                      (118.2)  (139.6)
  Actual bad debts(2)                              117.8    111.1
                                                 -------  -------
Ending reserve for bad debts                      (122.2)  (121.8)
                                                 -------  -------
Ending reserve for returns and bad debts          (166.2)  (177.0)
                                                 -------  -------
Accounts receivable, net                         $ 256.5  $ 295.2
                                                 =======  =======

(1) Additions to allowances represent estimated reserves
    established at the time of revenue recognition for returns and
    bad debts in accordance with SFAS No. 48, "Revenue Recognition
    When Right of Return Exists."  Amounts are recorded as an
    offset to revenues.
(2) Actual returns and bad debts include actual experience
    during the period and the effects of foreign currency
    translation.

Inventories
                                                        2003      2002

Raw materials                                         $   9.3   $  14.7
Work-in-progress                                          6.2       8.7
Finished goods                                          140.2     132.6
                                                      -------   -------
Total inventories                                     $ 155.7   $ 156.0
                                                      =======   =======

Property, Plant and Equipment, Net
                                                         2003     2002

Land                                                  $  12.8   $  11.4
Buildings and building improvements                     188.9     180.8
Furniture, fixtures and equipment                       175.3     169.6
Leasehold improvements                                   14.5      13.6
                                                      -------   -------
                                                        391.5     375.4
Accumulated depreciation and amortization              (229.0)   (207.3)
                                                      -------   -------
Total property, plant and equipment, net              $ 162.5   $ 168.1
                                                      =======   =======


<PAGE>


Accrued Expenses
                                               2003     2002

Compensation and other employee benefits     $  73.1  $  69.4
Royalties and copyrights payable                15.0     19.9
Taxes, other than income taxes                   9.0      5.8
Other operating items, net                      34.7     31.3
Other, principally operating expenses          149.6    156.8
                                             -------  -------
Total accrued expenses                       $ 281.4  $ 283.2
                                             =======  =======

Note 6          Goodwill and Other Intangible Assets, Net

On July 1, 2001, we adopted SFAS No. 142, which requires that
amortization of goodwill cease and that the carrying amount of
goodwill be evaluated, at least annually, for recoverability.
Accordingly, we have not recorded any goodwill amortization in
2003 and 2002.  We conducted our annual impairment assessment for
goodwill and indefinite-lived intangible assets as of the end of
our third quarter and concluded there was no impairment at that
time.

The changes in the carrying amount of goodwill by segment for the
fiscal year ended June 30, 2003, are as follows:
<TABLE>

                                    Reader's Digest       Consumer
                                     North America    Business Services      Total


<S>                                     <C>                <C>             <C>
Balance as of June 30, 2002             $ 682.2            $ 321.8         $ 1,004.0
Additional costs capitalized related
  to Reiman acquisition                     4.2                 --               4.2
Final settlement of the purchase
  price related to tax matters
  associated with Books Are Fun              --                0.5               0.5
Impact of foreign currency
  translation on goodwill balances
  outside the United States                  --                0.7               0.7
                                        -------            -------         ---------
Balance as of June 30, 2003             $ 686.4            $ 323.0         $ 1,009.4
                                        =======            =======         =========

</TABLE>

In connection with finalizing the purchase accounting for Reiman, we
determined that certain costs initially allocated to deferred promotion
were not capitalizable and should have been allocated to goodwill.
Accordingly, we adjusted goodwill by approximately $4.0
in the fourth quarter of 2003 to reflect this item.

The following categories of acquired intangible assets are
included in other intangible assets, net as of June 30, 2003 and
2002:

                                                  2003              2002
                                            Gross      Net    Gross        Net

Intangible assets with indefinite lives:
  Tradenames                               $  89.7  $  89.7  $  89.7    $  89.7
Intangible assets with finite lives:
  Licensing agreements                        54.8     41.0     43.5       34.6
  Customer lists                             137.8     81.6    137.8      116.3
  Other tradenames and
    noncompete agreements                      3.0       --      3.0         --
                                           -------  -------  -------    -------
Total intangible assets                    $ 285.3  $ 212.3  $ 274.0    $ 240.6
                                           =======  =======  =======    =======

Amortization related to intangible assets with finite lives
amounted to $39.6, $11.1 and $5.2 for 2003, 2002 and 2001,
respectively.  Licensing agreements are principally amortized
over 10 years from the initial contract date, while customer
lists are being amortized principally between three and six
years.  Estimated fiscal year amortization expense for intangible
assets with finite lives is as follows:  fiscal 2004 - $39.2;
fiscal 2005 - $36.3; fiscal 2006 - $15.4, fiscal 2007 - $10.0 and
fiscal 2008 - $5.3.



<PAGE>


The following table reconciles the prior period's reported net
income to its respective unaudited pro forma amounts adjusted to
exclude goodwill amortization, which is no longer recorded under
SFAS No. 142, for the fiscal year ended June 30, 2001.

                                                                 Year Ended
                                                                  June 30,
                                                                    2001

Net income                                                        $ 132.1
Add-back amortization related to the excess of cost
  over net assets of acquired businesses, net of tax                 19.7
Add-back goodwill  amortization related to an equity
  method investee, net of tax                                         5.4
                                                                  -------
Adjusted net income                                               $ 157.2
                                                                  =======

Basic earnings per share                                          $  1.27
Add-back amortization related to the excess of cost
  over net assets of acquired businesses, net of tax, per
  share                                                              0.19
Add-back goodwill  amortization related to an equity
  method investee,  net of tax, per share                            0.05
                                                                  -------
Adjusted   basic  earnings  per share                             $  1.51
                                                                  =======

Diluted earnings per share                                        $  1.26
Add-back amortization related to the excess of cost
  over net assets of acquired businesses, net of tax, per
  share                                                              0.19
Add-back goodwill amortization related to an equity
  method investee, net of tax, per share                             0.05
                                                                  -------
Adjusted  diluted  earnings per share                             $  1.50
                                                                  =======


Licensing Agreement

In May 2000, QSP, Inc. entered into a long-term licensing
agreement with World's Finest Chocolate, Inc.  The cost
associated with the agreement was assigned to licensing
agreements and is included in other intangible assets, net on the
balance sheets.  In September 2002, this agreement was amended to
extend the term of the original agreement by ten years, reduce
the annual minimum tonnage purchase requirements, favorably
adjust pricing and permit QSP to sell World's Finest Chocolate
products through marketing channels other than fundraising, under
specified circumstances.  In connection with these amended terms,
QSP agreed to pay World's Finest Chocolate $10.5 in 2003.  The
amount paid in May 2000 to consummate the initial agreement is
being amortized over the original 10-year license term.  Amounts
paid to amend the agreement have been assigned various
amortization periods ranging from 8 to 18 years (the remaining
period of the amended agreement).

The approximate annual minimum purchase amounts under the amended
agreement are: fiscal 2004 - $55.0; fiscal 2005 - $59.0; fiscal
2006 - $61.0; fiscal 2007 - $62.0; and from fiscal 2008 to fiscal
2020, approximately $69.0 per year.  The amounts are estimates
based on minimum tonnage requirements and nominal price increases
as stipulated in the amended agreement.



<PAGE>



Note 7          Financial Instruments

Risk Management and Objectives

Under the 2002 Credit Agreements (referred to in Note 11, Debt),
we are required to enter into interest rate protection agreements
to fix or limit the interest cost with respect to at least
one-third of the outstanding borrowings under the Term Loan
Agreement.  Accordingly, in July 2002, we entered into agreements
to cap at 6% the LIBOR interest rate component of $400.0 of our
borrowings for a period of three years.  Our interest rate cap
agreements qualify as cash flow hedges, the effect of which is
described below.

In the normal course of business we are exposed to market risk
from the effect of foreign exchange rate fluctuations on the U.S.
dollar value of our foreign subsidiaries' results of operations
and financial condition.  A significant portion of our risk is
associated with foreign exchange rate fluctuations of the euro.
During the fourth quarter of 2002, we ceased our practice of
purchasing foreign currency option and forward contracts to
minimize the effect of fluctuating foreign currencies on our
foreign subsidiaries' earnings and certain foreign currency
denominated assets and liabilities.  However, we hedge
significant known transactional exposures.  Accordingly, gains
and losses on derivative instruments are comprised of different
instruments in 2002 and 2001 when compared with 2003.

As a matter of policy, we do not speculate in financial markets
and, therefore, we do not hold financial instruments for trading
purposes. We continually monitor foreign currency risk and our
use of derivative instruments.

As of June 30, 2003 and 2002, we did not hold any forward or
option contracts.

Quantitative Disclosures of Derivative Instruments

Cash Flow Hedges - For 2003, the fair value of our interest rate
cap decreased, resulting in a loss of $(1.4), net of deferred
taxes of $0.8.  For 2001, changes in the spot value of the
foreign currencies associated with option contracts designated
and qualifying as cash flow hedges of forecasted royalty payments
amounted to a gain of $0.8, net of deferred taxes of $0.5.  These
changes are reported in accumulated other comprehensive (loss)
income, which is included in stockholders' equity on the balance
sheets.  The gains and losses are deferred until the underlying
transaction is recognized in earnings.

The ineffective portion of the change in market value of our
foreign currency option contracts, specifically the time-value
component of $(0.4) and $(1.7), was recognized as a loss in other
(expense) income, net on the income statements for 2002 and 2001,
respectively.  As of June 30, 2003, the fair value of our
interest rate cap was $0.1.  There were no cash flow hedges
discontinued during the 12-month periods ended June 30, 2003,
2002 or 2001.

Other Derivatives - For 2002 and 2001, changes in the spot value
of the foreign currencies and contract settlements associated
with option and forward contracts amounted to a loss of $(4.6)
and a gain of $5.9, respectively.  These changes are reported in
gain (loss) on foreign exchange, which is included in other
(expense) income, net on the income statements.  This effect
would generally be offset by the translation of the assets,
liabilities and future operating cash flows being hedged.


Note 8          Pension Plans and Other Postretirement Benefits

Pension and Other Benefits

Assumptions used to determine pension costs and projected benefit
obligations are as follows:

                                               U.S. Plans

                                           2003    2002    2001

Discount rate                              6.25%   7.25%   7.25%

Compensation increase rate                 4.50%   5.00%   5.00%

Long-term rate of return on plan assets    9.25%   9.75%   9.75%




<PAGE>


                                            International Plans
                                           2003    2002     2001

Discount rate                              5-9%    6-10%    5-16%

Compensation increase rate                 2-6%     3-8%    2-14%

Long-term rate of return on plan assets    5-9%    6-11%    5-17%


Components of net periodic pension (benefit) cost are as follows:

                                                 Pension Benefits
                                            2003      2002       2001

Service cost                               $ 16.2    $ 16.4     $ 15.4
Interest cost                                47.0      44.2       45.1
Expected return on plan assets              (80.5)    (84.7)     (83.4)
Amortization                                 (0.8)     (1.0)      (4.6)
Recognized actuarial gain                    (1.9)     (8.4)     (14.2)
Curtailments, settlements and other items     1.6      (1.3)        --
                                           ------    ------     ------
Net periodic pension (benefit) cost        $(18.4)   $(34.8)    $(41.7)
                                           ======    ======     ======

We provide medical and dental benefits to U.S. retired employees
and their dependents.  Substantially all of our U.S. employees,
excluding Books Are Fun and Reiman employees, become eligible for
these benefits when they meet minimum age and service
requirements.  We have the right to modify or terminate these
unfunded benefits.  Discount rates of 6.25% for 2003 and 7.25%
for both 2002 and 2001 were used in determining the accumulated
postretirement benefits liability.



<PAGE>


Components of postretirement benefit cost are as follows:

                                                   Other Benefits
                                               2003     2002     2001

Service cost                                  $ 0.9    $ 0.9    $ 0.9
Interest cost                                   5.0      4.1      4.1
Amortization                                   (0.5)    (0.5)    (0.6)
Recognized actuarial gain                      (2.2)    (3.4)    (4.0)
Curtailments, settlements and other items        --     (0.8)      --
                                              -----    -----    -----
Postretirement benefit cost                   $ 3.2    $ 0.3    $ 0.4
                                              =====    =====    =====

A reconciliation of beginning and ending balances of benefit
obligations and fair value of plan assets, and the funded status
of the plans are as follows:

                                            Pension Benefits     Other Benefits
                                             2003      2002      2003     2002
Change in benefit obligation:
Benefit obligation at  beginning of year   $ 709.1   $ 672.0   $  72.1  $  59.5
Service cost                                  16.2      16.4       0.9      0.9
Interest cost                                 47.0      44.2       5.0      4.1
Actuarial loss                                36.9      19.8      32.1     13.0
Plan amendments                               (0.3)      0.3      (1.2)      --
Exchange rate changes                         20.3      13.8       0.2       --
Settlements/curtailments/termination
 benefits                                     (7.7)     (1.5)       --     (0.4)
Benefits paid                                (56.3)    (57.3)     (6.0)    (5.0)
Other items                                    1.7       1.4        --       --
                                           -------   -------   -------  -------
Benefit obligation at end of year            766.9     709.1     103.1     72.1
                                           -------   -------   -------  -------


Change in plan assets:
Fair value at  beginning of year             836.9     846.4        --       --
Actual return on plan assets                (111.7)     31.6        --       --
Employer contribution                         14.1      12.0       0.1     (0.7)
IRC section 401(h) transfer                   (5.9)     (5.7)      5.9      5.7
Exchange rate changes                         16.9      12.4        --       --
Benefits paid                                (56.3)    (57.3)     (6.0)    (5.0)
Other items                                   (8.8)     (2.5)       --       --
                                           -------   -------   -------  -------
Fair value at end of year                    685.2     836.9        --       --
                                           -------   -------   -------  -------

Funded status                                (81.7)    127.8    (103.1)   (72.1)
Unrecognized actuarial loss (gain)           285.3      46.1       4.4    (30.0)
Unrecognized  transition (asset)
 obligation                                   (1.9)     (2.2)      0.6      0.6
Unrecognized prior service
 obligation benefit                           (4.1)     (4.3)     (3.7)    (3.1)
Employer - fourth quarter
 contribution                                  2.1       1.2        --       --
                                           -------   -------   -------  -------
Net amount recognized                      $ 199.7   $ 168.6   $(101.8) $(104.6)
                                           =======   =======   =======  =======

During 2003 and 2002, in accordance with Internal Revenue Code
section 401(h), we transferred $5.9 and $5.7, respectively, of
excess pension assets to fund postretirement benefits.


<PAGE>

Amounts recognized on the balance sheets are as follows:

                                           Pension Benefits     Other Benefits
                                            2003      2002      2003      2002

Other noncurrent assets                   $ 278.4   $ 255.6   $    --   $    --
Noncurrent liabilities                     (153.1)   (112.4)   (101.8)   (104.6)
Accumulated other comprehensive income       74.4      25.4        --        --
                                          -------   -------   -------   -------
Net amount recognized                     $ 199.7   $ 168.6   $(101.8)  $(104.6)
                                          =======   =======   =======   =======

Balances of plans with projected and accumulated benefit
obligations in excess of the fair value of plan assets are as
follows:



<PAGE>


                                   Plans with                Plans with
                                 Projected Benefit       Accumulated Benefit
                               Obligations in Excess    Obligations in Excess
                                   of Plan Assets           of Plan Assets
                                   2003    2002             2003     2002

Projected benefit obligation     $ 280.8   $ 265.4            N/A      N/A

Accumulated benefit obligation       N/A       N/A        $ 254.4  $ 228.5

Fair value of plan assets        $ 109.0   $ 142.7        $ 102.0  $ 126.0


Health Care Inflation and Cost Trend Rates

The health care inflation assumption used to determine the
postretirement benefits liability was 13.0% for 2003 and 6.5% for
2002.  The assumption decreases gradually to 5.0% by fiscal 2014
and remains at that level thereafter.

Assumed health care cost trend rates have a significant effect on
the amounts reported for postretirement benefits.  A
one-percentage-point increase in assumed health care cost trend
rates would increase the total of the service and interest cost
components by $0.6 and the postretirement benefit obligation by
$10.1.  A one-percentage-point decrease in assumed health care
cost trend rates would decrease the total of the service and
interest cost components by $(0.5) and the postretirement benefit
obligation by $(8.7).


Note 9          Employee Equity Compensation Plans

We maintain several employee compensation plans relating to stock
or stock-based awards, including stock options, restricted stock,
stock appreciation rights, phantom stock and phantom stock
options.

As discussed in Note 1, Organization and Summary of Significant
Accounting Policies, we have adopted the disclosure provisions of
SFAS No. 123 and SFAS No. 148 and, as permitted by those
statements, have continued to measure compensation cost using the
intrinsic value method under APB No. 25.

SFAS No. 123 requires disclosure of pro forma net income and
earnings per share as if the fair-value-based method had been
applied in measuring compensation cost for stock-based awards
granted after 1995.  Such disclosure is included in Note 1,
Organization and Summary of Significant Accounting Policies.

The weighted average fair values of options granted in 2003, 2002
and 2001 were $4.85, $7.30 and $14.90, respectively.

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

                                  2003         2002          2001

Risk-free interest rate           2.9%         4.3%          6.0%
Expected life                  4.1 years    4.1 years     4.2 years
Expected volatility              39.3%        39.5%         38.6%
Expected dividend yield           1.7%         1.2%          0.9%

The following table summarizes information about stock options
outstanding at June 30, 2003:

                              Options Outstanding         Options Exercisable
                                     Weighted
                                     Average    Weighted             Weighted
     Range of                       Remaining   Average              Average
     Exercise            Options   Contractual  Exercise   Options   Exercise
      Prices             (000's)   Life (yrs.)   Price     (000's)    Price

  $10.94 - $18.97         3,149        7.67      $17.05     1,190     $18.95
  $20.59 - $28.84         4,039        6.50      $22.94     2,424     $23.81
  $30.00 - $39.75         1,558        6.19      $32.23     1,205     $32.18
  $41.29 - $47.31         3,391        4.68      $42.41     2,477     $42.54
  $50.94 - $50.94            30        2.39      $50.94        30     $50.94
                         ------        ----      ------     -----     ------
                         12,167        6.25      $28.10     7,326     $30.84
                         ======        ====      ======     =====     ======

Changes in outstanding options are as follows:

                                                          Weighted
                                                          Average
                                               Options    Exercise
                                               (000's)      Price

Outstanding at June 30, 2000                    9,987    $   31.99
  Granted                                       2,526    $   40.72
  Exercised                                      (549)   $   22.77
  Canceled                                       (905)   $   38.86
                                               ------    ---------
Outstanding at June 30, 2001                   11,059    $   33.95
   Granted                                      2,577    $   21.52
  Exercised                                      (230)   $   19.87
  Canceled                                     (1,676)   $   36.68
                                               ------    ---------
Outstanding at June 30, 2002                   11,730        30.97
  Granted                                       2,018        15.82
  Exercised                                        --           --
  Canceled                                     (1,581)       34.01
                                               ------    ---------
Outstanding at June 30, 2003                   12,167        28.10
                                               ------    ---------
Options exercisable at June 30, 2003            7,326        30.84
                                               ------    ---------
Options available for grant at June 30, 2003    7,052
                                               ======




<PAGE>


1994 and 2002 Key Employee Long Term Incentive Plans (the Plans)

The Plans provide that the Compensation and Nominating Committee
of the Board of Directors (the committee) may grant stock
options, stock appreciation rights, restricted stock, deferred
stock, performance units, performance shares and other
stock-based awards to eligible employees. The committee may grant
awards up to a maximum of 17,300,000 underlying shares of Common
Stock under the 1994 Plan and 4,500,000 underlying shares under
the 2002 Plan.

Under the Plans, stock options have been granted with exercise
prices not less than the fair market value of our Common Stock at
the time of the grant, with an exercise term (as determined by
the committee) not to exceed 10 years.  The committee determines
the vesting period for our stock options.  Generally, such stock
options become exercisable over four years.

Restricted Stock - Restricted stock are shares of Common Stock
that are subject to restrictions on transfer that lapse upon the
fulfillment of specified conditions.  The market value of
restricted stock awards on the date of grant is recorded as a
reduction of capital stock on the balance sheets and is amortized
ratably over the term of the restriction period, typically
ranging from three to four years.  Amortization expense of
restricted stock amounted to $(5.5), $(2.4) and $(0.7) for 2003,
2002 and 2001, respectively.  During 2003, we granted 958,080
shares of restricted stock to employees (297,622 shares of
restricted stock were granted during 2002).

Deferred Stock - Outside the United States, we offer deferred
stock, which are rights to receive shares of Common Stock upon the
fulfillment of specified conditions, to certain employees.
Deferred stock is similar to restricted stock in all respects,
except that deferred stock is issued to the employee at the
completion of the vesting period.  We recognized expense of
$(0.7) and $(0.3) in 2003 and 2002, respectively, related to
these awards.  During 2003 and 2002, we granted 164,163 shares of
deferred stock and 60,712 shares of deferred stock, respectively.

Performance Shares - The committee awards phantom shares that
give the recipients the right to receive cash equal to the value
of shares of Common Stock that are earned if specific performance
goals are achieved during a specific performance period.
Compensation cost related to performance shares is based on
management's best estimate as to whether or not the performance
criteria will be satisfied and the market price of our shares on
the date of the financial statements.  This amount is recognized
ratably over the performance period.  Adjustments based on
changes in our estimate of whether the performance
criteria will be satisfied and changes in the market value of our
shares are recorded in the period in which the change occurs.
The awards relating to the two outstanding three-year performance
periods (2001-2003 and 2002-2004) were canceled and replaced
with an award relating to a two-year performance period
(2003-2004) and a transitional award relating to operating
performance for fiscal 2003.  We have recorded $(1.8) as expense
during 2003 ($(1.4) as expense during both 2002 and 2001) for
these awards.  We expect to distribute in fiscal 2004 $2.8
related to the transitional awards.  In 2003, we distributed $1.1
relating to the 2000-2002 performance period ($7.8 was
distributed in 2002 relating to the 1999-2001 performance
period).

Employee Stock Purchase Plans

Under the U.S. Employee Stock Purchase Plan (ESPP), we are
authorized to issue up to 2,650,000 shares of Common Stock
(330,000 shares per annum), principally to our full-time
employees in the United States, nearly all of whom are eligible
to participate. Under the terms of the ESPP, employees can choose
every six months to have up to 10% of their annual base earnings
withheld to purchase Common Stock. The purchase price of the
shares is 85% of the lower of the fair market values of the
Common Stock on the first and last days of the six-month purchase
period.  In 2003, 2002 and 2001 approximately 28%, 32% and 38% of
eligible employees participated in the ESPP, respectively.

Several of our international subsidiaries have employee stock
purchase plans (international ESPP) under which we are authorized
to issue up to 500,000 shares of Common Stock to our full-time
employees. The terms of the international ESPP in most locations
are essentially the same as the ESPP.

Under the ESPP and the international ESPP, employees purchased
256,870 shares in 2003, 216,121 shares in 2002, and 176,592
shares in 2001.

The calculation of the fair value of these shares using the
Black-Scholes option-pricing model assumes that options were
issued to employees on the first day of the purchase period.  The
weighted average fair values of these assumed options granted in
2003, 2002 and 2001 were $4.31, $6.50 and $9.79, respectively.

These fair values were estimated using the following assumptions:

                                     2003         2002         2001

Risk-free interest rate               1.5%        2.8%         6.0%
Expected life                      0.5 years   0.5 years    0.5 years
Expected volatility                  35.6%       35.5%        31.8%
Expected dividend yield               1.7%        1.2%         0.9%

Other Compensation Plans

Employee Ownership Plan and 401(k) Partnership (the 401(k) plan)
- The 401(k) plan consists of both a profit sharing plan and a
savings plan under section 401(k) of the Internal Revenue Code.
The savings plan component allows employees to make pre-tax
contributions to their accounts, which may be invested in
specified investment alternatives.  We may match employee
contributions to the extent determined by our Board of
Directors.  The matching contributions vest 20% per annum over a
five-year period.  Our contributions to the 401(k) plan,
including matching contributions, were $5.0, $5.0 and $10.8 for
2003, 2002 and 2001, respectively.

Share Incentive Plan - One of our international subsidiaries has
a Share Incentive Plan.  Under this program, all regular
full-time employees of the respective business unit are eligible
to receive Common Stock for services rendered.  Our contributions
to this plan were $0.2 in 2003.


Note 10         Income Taxes

Income before provision for income taxes is as follows:

                                2003       2002       2001

United States                $   89.1   $   47.9   $   70.4
International                    11.3       92.7      117.4
                             --------   --------   --------
Income before income taxes   $  100.4   $  140.6   $  187.8
                             ========   ========   ========




<PAGE>


Components of the provision (benefit) for income taxes are as follows:

                                 2003      2002      2001
Current
  Federal                      $ (3.3)   $(16.9)   $ (4.4)
  State and local                 0.4      (2.4)      3.9
  International                  18.4      35.1      51.3
                               ------    ------    ------
  Total current                  15.5      15.8      50.8
                               ------    ------    ------
Deferred
  Federal                        28.7      25.5       4.7
  State and local                 1.9       9.6       1.1
  International                  (7.0)     (1.5)     (0.9)
                               ------    ------    ------
  Total deferred                 23.6      33.6       4.9
                               ------    ------    ------
Provision for income taxes     $ 39.1    $ 49.4    $ 55.7
                               ======    ======    ======

A reconciliation between the statutory U.S. federal income tax
rate and the effective income tax rate is as follows:

                                            2003       2002       2001

U.S. statutory tax rate                     35.0%      35.0%      35.0%
International operations                     4.1       (2.5)      (1.8)
State taxes, net                             1.3        3.3        1.7
Tax benefit from disposition of assets        --         --       (3.9)
Nondeductible goodwill                        --         --        3.2
Changes in valuation allowance              (2.1)        --       (3.5)
Other operating items, net                   2.5        0.3       (0.1)
Other, net                                  (1.9)      (1.0)      (0.9)
                                            ----       ----       ----
Effective tax rate                          38.9%      35.1%      29.7%
                                            ====       ====       ====

Included in the rate reconciliation as part of international operations
is an increase in the valuation allowance of approximately $2.2
relating to net operating losses overseas.


<PAGE>

<TABLE>

Components of deferred tax assets and liabilities are as follows:

                                                               2003         2002

<S>                                                          <C>         <C>
Deferred compensation and other employee benefits            $   19.5    $   13.2
Accounts receivable and other allowances                         41.6        56.2
Net operating loss carryforwards                                 15.2        12.2
Other operating items, net                                       12.2        17.4
Tax credit carryforwards                                         27.3        43.8
Other, net                                                        3.6        26.9
                                                             --------    --------
  Gross deferred tax assets                                     119.4       169.7
Valuation allowance                                              (6.9)      (11.0)
                                                             --------    --------
  Total net assets                                              112.5       158.7
                                                             --------    --------
Deferred compensation and other employee benefits                 8.3         6.7
Unrealized gain on investments                                     --         2.0
Deferred promotion                                               20.6        41.2
Other, net                                                       17.0        11.6
                                                             --------    --------
  Total net liabilities                                          45.9        61.5
                                                             --------    --------
Net deferred taxes                                           $   66.6    $   97.2
                                                             ========    ========

</TABLE>

<TABLE>

Balance sheet classifications of deferred tax assets and
liabilities are as follows:

                                                               2003         2002

<S>                                                          <C>         <C>
Prepaid expenses and other current assets                    $   44.4    $   29.5
Other noncurrent assets                                          64.4        79.3
Other current liabilities                                       (14.8)       (3.1)
Other noncurrent liabilities                                    (27.4)       (8.5)
                                                             --------    --------
Net deferred taxes                                           $   66.6    $   97.2
                                                             ========    ========

</TABLE>


We have concluded that it is more likely than not that the
results of future operations will generate sufficient taxable
income to realize the net deferred tax assets.

Net operating loss carryforwards of $55.0 at June 30, 2003, are
available to reduce future tax obligations of certain foreign
subsidiaries in a number of jurisdictions with various expiration
dates, some of which are indefinite.  In addition, foreign tax
credit carryforwards amounting to $19.4 and alternative minimum
tax credit carryforwards of $7.9 are available as of June 30,
2003.  Foreign tax credit carryforwards have various expiration
dates through 2007; alternative minimum tax credit carryforwards
have an indefinite life.

Net operating loss carryforwards and their valuation allowance of
approximately $14.0 that are associated with discontinued
operations in several countries have been written off.

Approximately $17.3 of deferred tax benefit is included as a
component of stockholders' equity.

Deferred federal income taxes have not been provided on
undistributed earnings of foreign subsidiaries because we do not
anticipate those undistributed earnings will be remitted in the
foreseeable future.  Determination of the deferred tax liability
related to our investments in foreign subsidiaries is not
practicable.



<PAGE>



Note 11    Debt

Credit Agreements

Prior to July 27, 2001, we were a party to a Competitive Advance
and Revolving Credit Facility Agreement, as amended (the 1996
Credit Agreement), which provided for bank borrowings of up to
$300.0.  On July 27, 2001, we entered into a Five-Year Revolving
Credit and Competitive Advance Facility Agreement and a 364-Day
Revolving Credit and Competitive Advance Facility Agreement (the
2001 Credit Agreements), each of which allowed for up to $192.5
in aggregate principal amount of bank borrowings.

Interest under the 2001 Credit Agreements was based on several
pricing options that varied based upon our credit rating.
Borrowings from these facilities were allowed to be used for
general corporate purposes, including acquisitions, share
repurchases and commercial paper backup.  Non-financial covenants
included restrictions on our ability to incur additional debt for
money borrowed, create liens and guarantee indebtedness.  The
financial covenants included minimum interest coverage and
maximum leverage ratios.

On May 20, 2002, we entered into a $950.0 Term Loan Agreement
with a syndicate of banks and other financial institutions, and
we amended and restated the Five-Year Revolving Credit and
Competitive Advance Facility Agreement to conform it to the Term
Loan Agreement (the Term Loan and the Five-Year Facility are
collectively referred to as the 2002 Credit Agreements); we also
terminated the 364-Day Revolving Credit and Competitive Advance
Facility Agreement.  Proceeds from the Term Loan Agreement were
used to finance the Reiman acquisition purchase price and pay
related financing and transaction costs, to finance our
recapitalization transactions (See Note 12, Capital Stock) and to
refinance obligations under the 2001 Credit Agreements.
Borrowings under the Five-Year Revolving Credit and Competitive
Advance Facility Agreement may be used for general corporate
purposes, including acquisitions, share repurchases and
commercial paper backup.

Borrowings under the 2002 Credit Agreements bear interest at
either LIBOR plus a spread based upon our credit rating at the
time the rate is established, or the Alternate Base Rate, as
defined in the Term Loan Agreement.  The interest rate is
required to be reset from time to time for periods of up to six
months.  Borrowings under the 2002 Credit Agreements are secured
by substantially all of our assets and are subject to various
covenants.  Non-financial covenants include limitations on:
additional debt for money borrowed and related guarantees;
acquisitions; mergers and asset transfers; share repurchases;
liens; and dividend payments.  Financial covenants include
minimum interest and fixed charge coverage, maximum leverage
ratios and limitations on annual capital expenditures.

In the fourth quarter of 2003, we amended the 2002 Credit
Agreements.  The terms of the amendment included modifications to
ease the leverage covenant (which specifies the maximum ratio of
debt to EBITDA) and to exclude the impact of certain cash
restructuring charges from the calculation of EBITDA in 2003 and
2004.  The amendment also increased the interest rate we pay on
outstanding borrowings by up to 50 basis points based upon our
credit rating at June 30, 2003.




<PAGE>


The Term Loan Agreement requires quarterly principal repayments
with the final payment due in fiscal 2008.  Total payments
required during that period are as follows:

             2004         30.6
             2005         54.5
             2006         78.5
             2007         75.3
             2008        626.4
                       -------
             Total     $ 865.3
                       =======

In the second quarter of 2002, we filed a shelf registration
statement with the Securities and Exchange Commission allowing us
to issue up to $500.0 of public debt securities.  As of June 30,
2003, no securities had been issued under the registration
statement.

At June 30, 2003, we had borrowings of $866.0 outstanding, of
which $31.3 is classified as short-term debt and included in
loans and notes payable on our balance sheets.  The average
interest rate on borrowings was 4.0% for 2003.  In 2002, we had
total borrowings of $950.7 outstanding and the weighted average
interest rate for these borrowings was 3.8%.  The carrying amount
of the borrowings approximated fair value at June 30, 2003 and
2002.

Lines of Credit

International lines of credit and overdraft facilities totaled
$36.9 at June 30, 2003, and $32.0 at June 30, 2002, of which no
amounts were outstanding at these respective dates.  These lines
of credit are renewed annually.



<PAGE>



Note 12         Capital Stock

Capital stock and treasury stock consist of the following as of June 30:

                                               2003      2002
First preferred stock,
  par value $1.00 per share;
  authorized 40,000 shares;
  issued and outstanding 29,720 shares     $     3.0    $   3.0
Second preferred stock,
  par value $1.00 per share;
  authorized 120,000 shares;
  issued and outstanding 103,720 shares         10.3       10.3
Third subordinated preferred stock,
  par value $1.00 per share;
  authorized 230,000 shares;
  issued and outstanding 155,022 shares         15.5       15.5
Preference stock,
  par value $0.01 per share;
  authorized 25,000,000 shares;
  issued and outstanding none                     --         --
                                           ---------    -------
Total preferred stock                           28.8       28.8
                                           ---------    -------
Common Stock,
  par value $0.01 per share;
  authorized 200,000,000 shares;
  issued 145,922,062 shares in 2003              1.5         --
Class A Nonvoting Common Stock,
  par value $0.01 per share;
  authorized 200,000,000 shares;
  issued 119,428,472 shares in 2002               --        1.2
Class B Voting Common Stock,
  par value $0.01 per share;
  authorized 25,000,000 shares;
  issued 21,716,057 shares in 2002                --        0.2
                                           ---------    -------
Total Common Stock                               1.5        1.4

Unamortized restricted stock                   (12.7)      (4.7)
                                           ---------    -------
Total capital stock                        $    17.6    $  25.5
                                           =========    =======
Common Stock in treasury, at cost
  Common Stock: 47,743,830 in 2003         $(1,024.7)   $    --
  Class A shares: 32,337,230 in 2002              --     (709.8)
  Class B shares: 9,283,893 in 2002               --     (239.9)
                                           ---------    -------
Total Common Stock in treasury, at cost    $(1,024.7)   $(949.7)
                                           =========    =======


All shares of preferred stock have a preference in liquidation of
$100.00 per share. The difference between the aggregate par value
and liquidation preference has been appropriated from retained
earnings and is shown as part of the value of preferred stock.
At our option and at any time, all preferred stock is redeemable
at $105.00 per share plus accrued dividends.  The terms of the
first preferred stock and the second preferred stock provide for
annual cumulative dividends of $4.00 per share.  The terms of the
third subordinated preferred stock provide for annual cumulative
dividends of $5.00 per share.

Recapitalization Agreement

On October 15, 2002, we entered into a revised agreement with the
DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc. (the Funds) providing for a
series of actions that resulted in all shares of our Class B
Voting Common Stock (Class B Stock) and Class A Nonvoting Common
Stock (Class A Stock) being recapitalized into a single class of
Common Stock with one vote per share.  The October 15, 2002
recapitalization agreement replaced the recapitalization
agreement that we entered into with the Funds on April 12, 2002.
The transactions contemplated by the October recapitalization
agreement were completed on December 13, 2002.  As a result:
-     We repurchased approximately 4.6 million shares of Class B
      Stock from the Funds for $100.0 in cash in the aggregate;
-     Each share of Class A Stock was recapitalized into one share
      of Common Stock having one vote per share;
-     Each remaining share of Class B Stock was recapitalized into
      1.22 shares of Common Stock;
-     We amended our charter to, among other things, reflect the
      reclassification of the stock, divide our board of
      directors into three classes and eliminate action by
      written consent of our stockholders; and
-     We reclassified as long-term debt the $100.0 borrowed under
      the Term Loan Agreement on May 20, 2002 to repurchase
      stock.  On June 30, 2002, the $100.0 was classified as
      short-term debt pending completion of the recapitalization
      transactions.

Four legal actions were commenced against us, our directors and
the Funds challenging the original recapitalization transaction
announced in April 2002.  Three of the four actions were
purported class actions; the fourth action was brought by
individual stockholders.  The parties in two of the three class
actions, which were brought on behalf of holders of Class B
Stock, entered into a memorandum of understanding setting forth
agreements in principle, subject to court approval, with respect
to the settlement of those actions.  The third class action,
which was brought on behalf of holders of Class A Stock, was
dismissed with prejudice by the Court of Chancery of the State of
Delaware pursuant to a comprehensive settlement agreement that
was approved by the Court of Chancery on February 12, 2003.  The
fourth action was voluntarily dismissed.

Share Repurchase Authorization

As of June 30, 2003, under various share repurchase
authorizations (announced during 2000, 2001 and 2002), we have
repurchased 8.6 million shares of our Class A Nonvoting Common
Stock for approximately $231.7 (no shares during 2003, 3.6
million shares totaling $64.1 during 2002 and 1.0 million shares
totaling $34.1 during 2001).  As of June 30, 2003, we had $186.0
remaining under a $250.0 share repurchase authorization announced
in May 2001.  Under the 2002 Credit Agreements, we are prohibited
from repurchasing our Common Stock until our credit ratings are
investment grade (see Note 11, Debt).

In addition, we repurchased 4.6 million shares for approximately
$100.0, plus capitalizable acquisition costs of $1.7, on December
13, 2002, in connection with the recapitalization transactions.


Note 13         Commitments and Contingencies

General Litigation

We are a defendant in lawsuits and claims arising in the regular
course of business.  Based on the opinions of management and
counsel on such matters, recoveries, if any, by plaintiffs and
claimants (net of reserves established) would not significantly
affect our financial position or our results of operations.

Supply and Service Agreements

We maintain several long-term agreements with vendors primarily
for the purchase of paper, printing and fulfillment services.
These agreements expire at various times through fiscal 2008.

In the normal course of business, we enter into long-term
arrangements with suppliers for raw materials and merchandise and
with other parties whose recordings or works we use in our
products.  These arrangements may contain minimum purchase
requirements.  We enter into these agreements to facilitate an
adequate supply of materials and to enable us to develop better
products for sale to our customers.

Sale and Leaseback

During 1999, we sold and leased back a portion of our operating
facility in the United Kingdom.  The gain is being amortized on a
straight-line basis over the term of the lease as a reduction in
lease expense.

Lease Obligations

We occupy certain facilities under lease arrangements and lease
certain equipment.

Rental expense and sublease income are as follows:

                         2003    2002   2001

Rental expense          $ 19.5  $ 18.9   $17.1
Sublease income           (5.0)   (4.9)   (2.6)
                        ------  ------   -----
Net rental expense      $ 14.5  $ 14.0   $14.5
                        ======  ======   =====

Future minimum rental commitments, net of sublease income, for
noncancelable operating leases for the next five fiscal years and
thereafter are as follows:

               Minimum    Minimum
                Rental    Sublease
               Payments    Income      Net

2004           $  16.9    $  (5.2)   $ 11.7
2005           $  13.9    $  (5.1)   $  8.8
2006           $  12.0    $  (5.0)   $  7.0
2007           $  11.3    $  (4.8)   $  6.5
2008           $  10.9    $  (4.8)   $  6.1
Later years    $  57.2    $ (21.5)   $ 35.7


Note 14         Segments

During the fourth quarter of 2003 we modified our operating
segments to reflect our new internal management organization.
The three operating segments are Reader's Digest North America,
Consumer Business Services and International Businesses.  We have
restated operating segment results of operations for prior
periods to conform to our new operating segments.  Additionally,
we separately report Corporate Unallocated expenses, which
include the cost of governance, such as our internal audit,
legal, tax and treasury departments, corporate financial
management and other corporate functions that benefit the entire
organization.  In addition, this item also captures the income
and expenses associated with our U.S. pension plans and retiree healthcare
benefits, and executive compensation programs.  The new
organization structure is designed to combine related businesses
and to facilitate efforts in leveraging best practices to
significantly reduce overhead and operating costs.  In addition,
our new internal management and reporting structure provides
greater transparency to our operating results.

Operating segments are based on our method of internal reporting
and each operating segment is a strategic business unit that is
managed separately and whose results are regularly reviewed by
the chief operating decision maker.  Consequently, revenues are
presented on a third-party arm's-length basis.  Revenues and
expenses attributable to intercompany transactions are eliminated
(under the intercompany eliminations caption below) to reconcile
our operating segment amounts to consolidated amounts, as
reported in our income statements.  Accounting policies of our
segments are the same as those described in Note 1, Organization
and Summary of Significant Accounting Policies.

Reader's Digest North America

This segment comprises our operations in the United States and
Canada that:
  -     Publish and market (primarily through direct marketing)
        Reader's Digest magazine and several special interest
        magazines;
  -     Publish and market (primarily through direct marketing) the
        magazines and books of, and operate the complementary
        businesses of, Reiman Media Group, Inc., which we acquired
        on May 20, 2002; and
  -     Publish and market (primarily through direct marketing)
        Books and Home Entertainment products, which include
        Select Editions, series and general books, and music and
        video products related to some or all of the following
        affinities: reading, home and health, and entertainment.

All of these businesses have a common focus on the direct
marketing aspect of new customer acquisition at a minimal cost.
The performance of Reader's Digest magazine and our special
interest magazines is driven primarily by circulation revenues
and, to a lesser extent, by advertising sales.  The publications
of Reiman Media Group have minimal advertising revenues, and
accordingly, circulation is the primary driver of performance in
this business.  The results of our Books and Home Entertainment
business are driven by its universe of active promotable
customers, the response rates to its promotional mailings,
customer payment rates and membership in our continuity series
business.

Consumer Business Services

This segment comprises our operations that:
  -     Sell books and gift items by display marketing products
        on-site through independent sales representatives at
        schools and businesses through Books Are Fun, Ltd. in the
        United States and Canada;
  -     Sell our magazines and other publishers' magazines and other
        products through youth fundraising campaigns of QSP, Inc.
        in the United States and Quality Service Programs Inc. in
        Canada;
  -     Publish and market (primarily through retail channels as
        well as through Books Are Fun, Ltd. and QSP, Inc.) Books
        and Home Entertainment products of Young Families and
        Children's Publishing;
  -     Promote our financial services marketing alliances in the
        United States and Canada; and
  -     Sold gifts and other merchandise through Gifts.com, Inc.
        (including Good Catalog Company), which ceased operations
        in 2002.

The primary focus of the Consumer Business Services segment is to
grow revenues by selling products through non-direct marketing
channels.  The larger businesses in this segment are focused on
expanding their sales forces, thereby increasing coverage of
markets each serves.  The performance of these businesses is
driven by product selection, the number of accounts or events
held, and the average sales per account or event.

International Businesses

This segment comprises our operations outside of the United
States and Canada that:
  -     Publish and market (primarily through direct marketing)
        Books and Home Entertainment products (described above),
        Reader's Digest magazine in numerous editions and languages,
        and several special interest magazines; and
  -     Establish and develop the operations of our financial
        services marketing alliances and other new business
        development initiatives, including the introduction of
        display marketing.

The performance of these businesses is driven by similar factors
to those in the Reader's Digest North America segment except that
results are more susceptible to changes in local market
conditions due to the number of countries in which we operate.
The results for Reader's Digest magazine in international markets
are driven principally by circulation and secondarily by
advertising revenues.  The results of our Books and Home
Entertainment products in these markets is driven by the universe
of active promotable customers, the response rates to its
promotional mailings, customer payment rates and membership in
our continuity series business.

We evaluate performance and allocate resources based on operating
income from continuing operations excluding other operating
items.  Identifiable assets by segment are those assets that are
used in the operations of that business.  Corporate assets
consist primarily of cash and cash equivalents, certain prepaid
expenses, marketable securities, certain pension assets, certain
fixed assets and certain other current assets.  Sales are attributed
to countries based on selling location.  Long-lived assets are
principally composed of: property, plant and equipment, net;
intangible assets, net; and prepaid pension benefits.


<PAGE>


Operating Segment Financial Information

                                            Years ended June 30,
                                       2003         2002         2001
Revenues
  Reader's Digest North America     $   854.4   $   649.0    $   777.3
  Consumer Business Services            640.8       668.1        644.9
  International Businesses            1,007.8     1,077.5      1,117.6
  Intercompany eliminations             (28.1)      (26.0)       (21.6)
                                    ---------   ---------    ---------
Total revenues                      $ 2,474.9   $ 2,368.6    $ 2,518.2
                                    =========   =========    =========
Operating profit (loss)
  Reader's Digest North America     $    60.6   $    (2.2)   $    40.2
  Consumer Business Services             90.6        88.4         70.9
  International Businesses               49.1       106.3        139.1
  Corporate Unallocated                 (21.4)       (8.1)        (2.8)
  Other operating items, net (1)        (39.8)      (26.7)       (18.4)
                                    ---------   ---------    ---------
Total operating profit              $   139.1   $   157.7    $   229.0
                                    =========   =========    =========
Intercompany eliminations
  Reader's Digest North America     $    (1.2)  $    (4.4)   $    (2.2)
  Consumer Business Services            (23.5)      (15.3)       (10.3)
  International Businesses               (3.4)       (6.3)        (9.1)
                                    ---------   ---------    ---------
Total intercompany eliminations     $   (28.1)  $   (26.0)   $   (21.6)
                                    =========   =========    =========
Identifiable assets
  Reader's Digest North America     $ 1,185.2   $ 1,401.8    $   342.1
  Consumer Business Services            535.9       521.8        534.6
  International Businesses              472.7       469.9        405.8
  Corporate                             405.7       298.4        382.7
                                    ---------   ---------    ---------
Total identifiable assets           $ 2,599.5   $ 2,691.9    $ 1,665.2
                                    =========   =========    =========

(1) Other operating items, net in 2003 related to:  13% to Reader's Digest
    North America, 6% to Consumer Business Services, 64% to International
    Businesses and 17% to corporate departments that benefit the entire
    organization.  In 2002, these items related to:  22% to Reader's Digest
    North America, 27% to Consumer Business Services, 16% to International
    Businesess and 35% to corporate departments that benefit the entire
    organization.  Excluding adjustments of $10 related to a favorable tax
    settlement, other operating items, net in 2001 related to:  56% to
    Reader's Digest North America, 39% to International Businesses and
    5% to corporate departments that benefit the entire organization.

<PAGE>


<TABLE>

                                                            Years ended June 30,
                                                      2003        2002         2001
<S>                                                <C>         <C>          <C>
Depreciation, amortization and asset impairments
  Reader's Digest North America                    $    40.9   $    10.2    $    14.6
  Consumer Business Services                            11.6        12.0         29.2
  International Businesses                               9.5        10.1         11.2
  Corporate                                              5.9        15.3          8.4
                                                   ---------   ---------    ---------
Total depreciation, amortization and asset
  impairments                                      $    67.9   $    47.6    $    63.4
                                                   =========   =========    =========

Capital expenditures
  Reader's Digest North America                    $     2.5   $     3.1    $     4.9
  Consumer Business Services                             1.2         2.7          4.1
  International Businesses                               5.1         6.1          8.1
  Corporate                                              6.9        12.7         26.4
                                                   ---------   ---------    ---------
Total capital expenditures                         $    15.7   $    24.6    $    43.5
                                                   =========   =========    =========

</TABLE>


The following table presents our consolidated net revenues by product:
<TABLE>

                                                           Years ended June 30,
                                                      2003        2002         2001

<S>                                                <C>         <C>          <C>
Revenues
  Books                                            $ 1,081.7   $ 1,063.6    $ 1,111.5
  Magazines - subscription and other                   750.1       610.1        635.2
  Magazines - advertising                              151.0       151.4        161.2
  Music and videos                                     254.9       320.7        401.9
  Food and gift                                        155.5       165.3        171.3
  Fees from financial services marketing alliances      13.2        20.8         11.3
  Other                                                 68.5        36.7         25.8
                                                   ---------   ---------    ---------
Total revenues                                     $ 2,474.9   $ 2,368.6    $ 2,518.2
                                                   =========   =========    =========

</TABLE>


Information about geographic areas is as follows:
<TABLE>

                                                           Years ended June 30,
                                                       2003        2002        2001

<S>                                                <C>         <C>          <C>
Revenues
  United States                                    $ 1,351.8   $ 1,176.7    $ 1,280.9
  International                                      1,124.6     1,196.3      1,240.7
  Inter-area                                            (1.5)       (4.4)        (3.4)
                                                   ---------   ---------    ---------
Total revenues                                     $ 2,474.9   $ 2,368.6    $ 2,518.2
                                                   =========   =========    =========

Revenues inter-area
  United States                                    $    (0.1)  $    (2.8)   $    (1.8)
  International                                         (1.4)       (1.6)        (1.6)
                                                   ---------   ---------    ---------
Total revenues inter-area                          $    (1.5)  $    (4.4)   $    (3.4)
                                                   =========   =========    =========

Long-lived assets
  United States                                    $ 1,633.3   $ 1,646.6    $   688.4
  International                                        113.5       107.2        102.5
                                                   ---------   ---------    ---------
Total long-lived assets                            $ 1,746.8   $ 1,753.8    $   790.9
                                                   =========   =========    =========

</TABLE>








<PAGE>





Independent Auditors' Report



The Stockholders and Board of Directors
The Reader's Digest Association, Inc.

We have audited the accompanying consolidated balance sheets of
The Reader's Digest Association, Inc. and subsidiaries as of June
30, 2003 and 2002, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 2003.  These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of The Reader's Digest Association, Inc. and
subsidiaries as of June 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three-year period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of
America.



KPMG LLP
New York, New York
July 25, 2003

Report of Management






We are responsible for the preparation and integrity of the
consolidated financial statements appearing in our Annual
Report.  The consolidated financial statements were prepared in
accordance with generally accepted accounting principles; certain
estimates and judgments were applied as required.  Financial
information in this Annual Report is consistent with that in the
financial statements.

We are responsible for maintaining a system of internal
accounting controls and procedures to provide reasonable
assurance, at an appropriate cost/benefit relationship, that
assets are safeguarded and that transactions are authorized,
recorded and reported properly.  The system of internal
safeguards is characterized by a control-oriented environment
that includes written policies and procedures, careful selection
and training of personnel, and audits by a professional staff of
internal auditors.

In accordance with the requirements of the recently signed
Sarbanes-Oxley Act of 2002, we have filed our written
certifications with the Securities and Exchange Commission.  The
certifications have been filed as exhibits to our Form 10-K for
the fiscal year ended June 30, 2003.

KPMG LLP, independent auditors, have audited and reported on our
consolidated financial statements.  Their report is presented
herein.

The Audit Committee of the Board, composed of non-management
directors, meets periodically with KPMG LLP, the company's
internal auditors and management representatives to review
internal accounting control, auditing and financial reporting
matters.  Both KPMG LLP and the internal auditors have
unrestricted access to the Audit Committee and may meet with the
committee with or without management present.






/s/THOMAS O. RYDER
Thomas O. Ryder
Chairman of the Board and
Chief Executive Officer


/s/MICHAEL S. GELTZEILER
Michael S. Geltzeiler
Senior Vice President and
Chief Financial Officer





<PAGE>

<TABLE>

Selected Financial Data
In millions, except per share data                                 2003          2002           2001          2000          1999

<S>                                                           <C>           <C>           <C>            <C>           <C>
Income Statement Data
Revenues                                                        $ 2,474.9     $ 2,368.6     $ 2,518.2      $ 2,484.5     $ 2,458.5
Operating profit                                                $   139.1     $   157.7     $   229.0      $   253.8     $   129.1
Net income                                                      $    61.3     $    91.2     $   132.1      $   144.7     $   151.9
Basic and diluted earnings per share                          $0.61/$0.60   $0.90/$0.89   $1.27/$1.26    $1.35/$1.34   $1.40/$1.39
Dividends per common share                                      $    0.20         $0.20         $0.20          $0.20         $0.38

Balance Sheet Data
Cash and cash equivalents, short-term investments and
   marketable securities                                        $    52.1     $   114.7     $    47.3      $   227.6     $   437.2
Total assets                                                    $ 2,599.5     $ 2,691.9     $ 1,665.2      $ 1,707.2     $ 1,622.3
Long-term debt                                                  $   834.7     $   818.0     $     9.8      $     7.9     $     2.2
Stockholders' equity                                            $   400.3     $   471.9     $   459.8      $   478.8     $   385.1
Weighted-average common shares outstanding (basic and diluted)  98.1/99.2   100.2/100.6   102.7/103.7    106.0/107.0   107.3/108.0
Book value per common share                                         $4.08         $4.71         $4.47          $4.51         $3.59

</TABLE>


<PAGE>

<TABLE>
Selected Quarterly Financial Data and Dividend and Market Information (Unaudited)
                                                                                                          Stock Price Range
                                                                Net Income (Loss)                              High-Low

 In millions, except
 per share data and               Operating  Dividends            Per       Per
 shareholder                        Profit     Per               Share     Share       Common
 information            Revenues    (Loss)   Share(1)  Amount    Basic    Diluted     Stock(2)         Class A(2)      Class B(2)


<S>                     <C>        <C>        <C>      <C>       <C>       <C>     <C>              <C>              <C>
 2003
    First Quarter       $   517.1  $   2.0    $ 0.05   $ (5.2)   $(0.05)   $(0.05)       N/A        $18.14 - $14.70  $22.40 - $18.10
    Second Quarter          830.6    146.6      0.05     84.2      0.85      0.84  $16.23 - $14.72  $17.17 - $13.89  $20.69 - $16.60
    Third Quarter           563.5     (3.5)     0.05     (4.6)    (0.05)    (0.05) $16.00 - $ 9.50        N/A              N/A
    Fourth Quarter          563.7     (6.0)     0.05    (13.1)    (0.14)    (0.14) $13.81 - $10.15        N/A              N/A
                        ---------  -------    ------   ------    ------    ------  ---------------  ---------------  ---------------
                        $ 2,474.9  $ 139.1    $ 0.20   $ 61.3    $ 0.61    $ 0.60  $16.23 - $ 9.50  $18.14 - $13.89  $22.40 - $16.60
                        =========  =======    ======   ======    ======    ======  ===============  ===============  ===============

 2002
    First Quarter       $   497.5  $   2.8    $ 0.05   $ (1.1)   $(0.01)   $(0.01)       N/A        $28.64 - $16.68  $26.40 - $16.40
    Second Quarter          784.0    126.6    $ 0.05     78.8      0.78      0.78        N/A        $23.56 - $15.65  $22.65 - $15.70
    Third Quarter           541.8     21.7    $ 0.05     16.4      0.16      0.16        N/A        $23.20 - $19.99  $23.80 - $19.80
    Fourth Quarter          545.3      6.6    $ 0.05     (2.9)    (0.03)    (0.03)       N/A        $24.15 - $18.73  $29.40 - $22.90
                        ---------  -------    ------   ------    ------    ------  ---------------  ---------------  ---------------
                        $ 2,368.6  $ 157.7    $ 0.20   $ 91.2    $ 0.90    $ 0.89        N/A        $28.64 - $15.65  $29.40 - $15.70
                        =========  =======    ======   ======    ======    ======  ===============  ===============  ===============

    As of June 30, 2003, our Common Stock was listed on the New York Stock Exchange under the symbol RDA.  At
    that time there were approximately 1,876 holders of record of our Common Stock.
    (1)  Cash dividends on our shares in the first quarter of 2003 and in 2002 were declared and paid share and share alike on
         Class A Stock and Class B Stock.
    (2)  Effective December 13, 2002, we completed a recapitalization under which we recapitalized all of our
         Class A Stock and Class B Stock into Common Stock.  See Note 12, Capital Stock, for additional
         information.

</TABLE>


The Reader's Digest Association, Inc. and Subsidiaries