EXHIBIT 13

The Reader's Digest Association, Inc. and Subsidiaries

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 2001, 2000 and 1999, unless otherwise indicated,
are to fiscal 2001, fiscal 2000 and fiscal 1999, 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 the Consolidated Financial Statements and related notes.
Certain amounts and percentages do not recalculate due to rounding.


Results of Operations:  Company-Wide

Modifications to Our Reporting Segments

During the fourth quarter of 2001 we modified our reporting segments to reflect
our new internal management organization. We have restated results of operations
for prior periods to conform to our new operating segments.

North America Books and Home Entertainment publishes and markets, primarily
through direct marketing, Books and Home Entertainment products (Select
Editions; series and general books; and music, video and Young Families
products) in the United States and Canada. In addition, North America Books and
Home Entertainment publishes and markets Reader's Digest magazine in Canada and
sells this magazine and other magazines and products through youth fundraising
campaigns of QSP Canada, Inc. North America Books and Home Entertainment also
sells books and gift items by display marketing products on-site at schools and
businesses through Books Are Fun, Ltd.

U.S. Magazines publishes and markets, primarily through direct marketing,
Reader's Digest magazine and several Special Interest magazines in the United
States. In addition, U.S. Magazines sells its magazines and other magazines and
products through youth fundraising campaigns of QSP, Inc.

International Businesses operates outside of the United States and Canada. This
segment publishes and markets, primarily through direct marketing, Books and
Home Entertainment products (described above), Reader's Digest magazine in
numerous editions and languages, and certain Special Interest magazines.

New Business Development comprises the activities of Gifts.com, Inc. (including
Good Catalog Company), financial services alliances, certain Special Interest
magazines in international markets and other developing businesses.

Other Operating Items and Foreign Currency Translation

Management's Discussion and Analysis has been written excluding the effect of
foreign currency translation and other operating items. Other operating items
were $(18) in 2001, $(3) in 2000 and $(38) in 1999 (see Note 3).

Other operating items of $(18) in 2001 comprised: net charges of $(21) 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,

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adjustments to accrual balances of $10 as a result of a favorable state
tax settlement.

Other operating items of $(3) in 2000 comprised: asset impairments of $(3)
primarily related to property, plant and equipment in the United Kingdom;
charges of $(10) for severance costs; and, offsetting these charges, adjustments
to accrual balances of $10 from charges recorded in prior years.

Other operating items of $(38) in 1999 comprised: net charges of $(60) primarily
related to severance costs; asset impairment losses of $(23); other charges of
$(11); and, offsetting these charges, adjustments to accrual balances of $56
from charges recorded in prior years.

Presentation of Revenues and Operating Costs (SAB 101)

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101, as amended, summarizes certain views of the SEC with respect to
applying generally accepted accounting principles to revenue recognition in
financial statements. The principal changes we recorded as a result of SAB 101
relate to gross versus net presentation of revenues as prescribed by the
Emerging Issues Task Force Abstract No. 99-19 "Reporting Revenue Gross as a
Principal versus Net as an Agent" (EITF 99-19). We adopted EITF 99-19
concurrently with SAB 101 in the fourth quarter of 2001 and reclassified our
previously reported information for 2001, 2000 and 1999. The following is a
summary of the effect of the reclassifications:

-   Magazine advertising agency commission costs were reclassified to present
    advertising revenues net of these costs. These costs ($26 in 2001, $28 in
    2000 and $28 in 1999) were originally recorded in promotion, marketing and
    administrative expenses and have been reclassified to revenues.
-   Magazine and music product remittances to publishers were reclassified to
    present revenues net of these costs. These costs ($29 in 2001, $42 in 2000
    and $46 in 1999) were originally recorded in product, distribution and
    editorial expenses and have been reclassified to revenues.

BrandDirect Marketing, Inc. Equity Accounting Restatement

During the second quarter of 2001 we changed our method of accounting for our
investment in BrandDirect Marketing, Inc. from the cost method to the equity
method of accounting. Due to additional funding in the form of an advance and
other changes in circumstances, we obtained the ability to exercise significant
influence as defined in Accounting Principles Board Opinion No. 18 (APB No. 18),
"The Equity Method of Accounting for Investments in Common Stock." As required
by APB No. 18, all prior periods were restated to reflect reported results as if
we had been accounting for this investment on the equity method since initial
ownership in BrandDirect Marketing (see Note 2).



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Summary of Operating Segment Results

                                                    Years ended June 30,
                                              2001         2000          1999
Revenues
  North America Books and Home
    Entertainment                           $   719       $   704       $   584
  U.S. Magazines                                652           580           603
  International Businesses                    1,093         1,146         1,239
  New Business Development                       54            55            33
                                            -------       -------       -------
Total revenues                              $ 2,518       $ 2,485       $ 2,459
                                            =======       =======       =======
Operating profit (loss)
  North America Books and Home
     Entertainment                          $    71       $    90       $    39
  U.S. Magazines                                 77            89           105
  International Businesses                      116           118            28
  New Business Development                      (17)          (40)           (5)
                                            -------       -------       -------
Segment operating profit                        247           257           167
  Other operating items                         (18)           (3)          (38)
                                            -------       -------       -------
Total operating profit                      $   229       $   254       $   129
                                            =======       =======       =======


Revenues and Operating Profit

2001 v. 2000

Revenues increased 1% to $2,518 in 2001, compared with $2,485 in 2000. Excluding
the adverse effect of foreign currency translation, revenues increased 6%. The
increase in revenues was principally attributable to:

-   Increased sales of 58% for QSP products primarily from the integration of
    the products and sales force of World's Finest Chocolate, Inc.
-   Revenue growth in our International Businesses as a result of increased
    membership in certain series products as well as higher sales of general
    books, music and video products. Revenues grew primarily in Eastern Europe
    and other developing markets because of higher response rates to increased
    promotion and more effective promotion techniques.
-   Inclusion of a full-year's revenues from Books Are Fun, which was acquired
    during the second quarter of 2000, as well as incremental revenue growth.
    These events provided 22% higher revenues in 2001 compared with the prior
    year.

Revenue growth was partially offset by:

-   Lower sales primarily for video products and general books in the United
    States due to reduced mailings and lower response rates.
-   A decline in circulation revenues for Reader's Digest magazine primarily
    driven by lower renewals partially offset by new subscribers at lower
    introductory rates.
-   Lower advertising revenues for the Special Interest magazines in the United
    States resulting from industry-wide softness, particularly in the
    automotive, do-it-yourself and health categories.
-   Lower sales from a reduction in catalog activity that was planned to improve
    profitability at Gifts.com, Inc.'s Good Catalog Company division.

Segment operating profit decreased 4% to $247 in 2001, compared with $257 in
2000. However, excluding the adverse effect of foreign currency translation,
profit increased 4% principally from:

-   Profit growth for International Businesses attributed to higher
    sales of virtually all Books and Home Entertainment products sold
    in these markets.
-   Lower employee-related costs for all operating segments as a result of
    reductions in variable compensation plans.
-   Profit improvement for New Business Development as a result of reduced
    marketing and development costs associated with gifts.com, compared with
    higher costs associated with the launch of the Web site in the prior year.

Segment operating profit declined primarily in the United States due to changes
in sweepstakes promotions, softness in the U.S. economy, weakness in the
direct-mail industry, lower responses to certain products and lower magazine
advertising volume. These factors were evident in certain segment and product
line results, specifically in:

-   North America Books and Home Entertainment, where sales were
    lower for video products, general books and illustrated series products as a
    result of lower response rates.
-   U.S. Magazines, where profits were lower for Reader's Digest magazine as a
    result of increased testing of new subscription sources and additional costs
    associated with a major fulfillment outsourcing project; and for the Special
    Interest magazines due to industry-wide softness in several advertising
    categories.

Product, distribution and editorial expenses increased 7% in 2001 to $971,
compared with $907 in 2000. These costs increased principally due to additional
volume for U.S. Magazines from the integration of the products and sales force
of World's Finest Chocolate and for North America Books and Home Entertainment
from the inclusion of a full-year's results for Books Are Fun. In addition,
costs (excluding the effect of foreign currency translation) were higher for
International Businesses as a result of incremental volume growth in many
markets.

Promotion, marketing and administrative expenses decreased 2% in 2001 to $1,300,
compared with $1,320 in 2000. However, excluding the effect of foreign currency
translation, these costs increased 2%. The increase in promotion, marketing and
administrative expenses was due to the volume increases for U.S. Magazines,
North America Books and Home Entertainment, and International Businesses
described above. Offsetting a portion of the increases were lower expenses for
New Business Development primarily from reduced marketing and development costs
associated with Gifts.com, Inc.

2000 v. 1999

Revenues increased 1% in 2000 to $2,485, compared with $2,459 in 1999. Excluding
the adverse effect of foreign currency translation, revenues increased 5%
principally from:

-   The addition of Books Are Fun, which was acquired in the second quarter of
    2000 and provided $197 in additional revenues.
-   Revenue growth in International Businesses for Select Editions, primarily
    attributed to the launch of this product line in many markets.
-   Higher sales in New Business Development for Gifts.com, Inc.
    (including the full-year effect of the 1999 acquisition of Good
    Catalog Company) and for financial services alliances launched in
    2000.



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Offsetting a portion of these increases were revenue declines in:

-   North America Books and Home Entertainment for general books,
    music and video products.
-   International Businesses for music and video products in certain markets
    that resulted primarily from the strategic reduction in the number of
    promotional mailings; and for Reader's Digest magazine from planned
    reductions in the circulation rate base in certain markets.
-   U.S. Magazines from planned reductions in the circulation rate base for
    Reader's Digest magazine and from the sale of American Health magazine in
    the first quarter of 2000.

Segment operating profit increased 54% in 2000 to $257, compared with $167 in
1999. Segment operating profit increased significantly in both our North America
Books and Home Entertainment and International Businesses operating segments and
profit increases were realized in almost all countries. The increase in segment
operating profit in North America Books and Home Entertainment resulted from
strategic reductions in promotional mailings, the acquisition of Books Are Fun
and cost-reduction initiatives. International Businesses profit improvements
were from re-engineering and cost-reduction initiatives including the closing or
sale of unprofitable operations.

Segment operating profit was lower in:

-   U.S. Magazines principally because of increased investment spending to
    develop new circulation channels for Reader's Digest magazine, higher
    overhead costs and lower subscription income from planned reductions in the
    circulation rate base.
-   New Business Development because of marketing and start-up costs for new
    business ventures, primarily Gifts.com, Inc.

Product, distribution and editorial expenses decreased 6% in 2000 to $907,
compared with $963 in 1999. These costs decreased primarily for North America
Books and Home Entertainment and International Businesses from cost-reduction
and re-engineering initiatives that resulted in lower product volumes. In
addition, costs were lower due to the sale of American Health magazine in the
first quarter of 2000. Offsetting a portion of these declines were additional
costs associated with the acquisition of Books Are Fun that resulted in higher
product volumes.

Promotion, marketing and administrative expenses decreased 1% in 2000 to $1,320,
compared with $1,329 in 1999. Promotion costs were lower as a result of
strategic reductions in the number of promotional mailings for North America
Books and Home Entertainment and International Businesses, as well as from the
sale of American Health magazine. Offsetting a significant portion of the
strategic reductions were higher volume associated with the acquisition of
Books Are Fun and higher marketing and development costs related to Gifts.com,
Inc.

Other (Expense) Income, Net

2001 v. 2000

Other (expense) income, net for 2001 was expense of $(41), compared with expense
of $(19) in 2000. Items affecting the comparability of other (expense) income,
net included:

-   Reduced equity in losses (including amortization of goodwill associated with
    our investment) of BrandDirect Marketing of $5. These losses included a
    write-down of $(13), which reduced the carrying value of our investment to
    zero. In 2000, these losses amounted to $(29).
-   A write-down of our investment in Schoolpop, Inc. of $(7) and a
    write-off of our investment in   e-finet.com of $(3) in the fourth
    quarter of 2001.
-   Recognition of an other-than-temporary decline in the market value of our
    investment in WebMD Corporation amounting to $(10) in the fourth quarter of
    2001.
-   Higher interest expense, net in 2001 of $(18) resulting from
    higher debt levels.
-   Offsetting a portion of these additional expense items was income in 2001 of
    $8 from the sale of certain investments and proceeds of $4 from the
    termination of an agreement. In 2000, other (expense) income, net included a
    gain of $7 from the sale of American Health magazine.

2000 v. 1999

In 2000, other (expense) income, net was expense of $(19), compared with income
of $83 in 1999. During 2000 we recognized equity in losses (including
amortization of goodwill associated with our investment) of BrandDirect
Marketing of $(29). The major contributing factor to the difference was a gain
in 1999 from the sale of important works from our fine art collection.

Income Taxes

2001 v. 2000

The effective tax rate for 2001 was 29.7%, compared with a rate of 38.3% for
2000. The decrease was primarily because of a change in the valuation allowance
in the fourth quarter of 2001 on capital losses relating to BrandDirect
Marketing. Excluding this and other items affecting the comparability of
reported results, our effective tax rate was 33.5% in 2001 and 34.5% in 2000.

2000 v. 1999

The effective tax rate for 2000 was 38.3%, compared with a rate of 40.2% for
1999. Excluding items affecting the comparability of reported results, our
effective tax rate was 34.5% in 2000 and 37.5% in 1999. The lower effective rate
for 2000 was a result of tax initiatives in certain international markets and
the deductibility of goodwill associated with the sale of American Health
magazine, partially offset by amortization of nondeductible goodwill from the
purchase of Books Are Fun.

Net Income

2001 v. 2000

As a result of the items discussed above, net income in 2001 was $132 or $1.26
per share on a diluted-earnings basis ($1.27 per share for basic earnings per
share). In 2000, net income was $145 or $1.34 per share on a diluted-earnings
basis ($1.35 per share for basic earnings per share).

2000 v. 1999

As a result of the items discussed above, net income in 2000 was $145 or $1.34
per share on a diluted-earnings basis ($1.35 per share for basic earnings per
share). In 1999, net income was $152 or $1.39 per share on a diluted-earnings
basis ($1.40 per share for basic earnings per share). Net income in 1999
included the cumulative effect adjustment of $40 ($25 after tax, or $0.24 per
share) related to a change in our method of calculating the market-related value
of pension plan assets.




<PAGE>


Results of Operations:  Operating Segments

North America Books and Home Entertainment

2001 v. 2000

Revenues for North America Books and Home Entertainment increased 2% in 2001 to
$719, compared with $704 in 2000. Revenues for Books Are Fun increased 22% in
2001 compared with the prior year, principally because of the inclusion of a
full-year's operations, as well as incremental revenue growth. Revenues
increased in our Canadian operations for Books and Home Entertainment and QSP
products. In addition, revenues grew for Young Families products as a result of
increased promotional activity. Such growth was partially offset by lower sales
primarily in the United States during the second half of 2001 due to:

-   The elimination of mailings for video products during the
    fourth quarter of 2001 as well as a shift in mailings during the second
    quarter of 2001 from video to music products.
-   Lower responses for general books primarily from a product with stronger
    appeal in the prior year, How to Do Just About Anything on a Computer, which
    outperformed sales of this year's titles.
-   Reduced mailings during the third quarter of 2001 for series products
    (Select Editions and reading and illustrated series) as well as lower
    response rates.

Operating profit for North America Books and Home Entertainment decreased 21% in
2001 to $71, compared with $90 in 2000. Profit was lower principally because:

-   Video products and general books experienced lower revenues, as described
    above.
-   Illustrated series had a product with a lower response rate compared with
    the prior year.
-   Books Are Fun had a first-quarter seasonal loss in 2001, but not in 2000,
    because it was acquired in the second quarter of 2000.

Partially offsetting these profit declines were higher profits for Young
Families and music single-sales products from increased promotions.

2000 v. 1999

Revenues for North America Books and Home Entertainment increased 20% in 2000 to
$704, compared with $584 in 1999. Revenues increased for this operating segment
principally from the acquisition of Books Are Fun in the second quarter of 2000
($197 in additional revenues) and from growth in the United States for Young
Families products because of increased promotions. Offsetting these increases
were reductions in music, general books and video product revenues primarily
attributed to the strategic reduction in the number of promotional mailings.
These actions were primarily conducted during the second half of 1999 and the
first half of 2000.

Operating profit for North America Books and Home Entertainment increased
significantly to $90 in 2000, compared with $39 in 1999. Profit increases were
realized as a result of re-engineering and cost-reduction efforts. We achieved
substantial reductions in overhead, production costs and promotion expenses.
These improvements were partially offset by the effect of lower sales volumes.
In addition, this segment benefited from the acquisition of Books Are Fun and
lower information technology costs.



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U.S. Magazines

2001 v. 2000

Revenues for U.S. Magazines increased 12% in 2001 to $652, compared with $580 in
2000. Revenues for QSP products increased 53% in 2001 compared with the prior
year primarily due to higher sales of food and gift items from the integration
of the products and sales force of World's Finest Chocolate. Also, advertising
revenues for Reader's Digest magazine were higher during the period compared
with the prior year. These improvements in revenues were slightly offset by:

-   A decline in circulation revenues for Reader's Digest magazine
    primarily driven by lower renewals partially offset by new subscribers at
    lower introductory rates.
-   Lower advertising revenues for the Special Interest magazines from
    industry-wide softness, particularly in the automotive, do-it-yourself and
    health categories.
-   The absence of revenues following the sale of American Health magazine,
    which ended publication in the second quarter of 2000.

Operating profit for U.S. Magazines decreased 14% in 2001 to $77, compared with
$89 in 2000, with the majority of the operating profit continuing to be provided
by QSP. Operating profit decreased for Reader's Digest magazine due to increased
testing of new subscription sources, higher costs associated with a major
fulfillment outsourcing project and lower profits for the Special Interest
magazines due to industry-wide softness in certain advertising sectors
particular to these magazines. Partially offsetting the decline in operating
profit were additional sales of QSP products and higher advertising sales of
Reader's Digest magazine.

2000 v. 1999

Revenues for U.S. Magazines decreased 4% in 2000 to $580, compared with
$603 in 1999.  The decrease was a result of:

-   Lower subscription revenues for Reader's Digest magazine
    because of planned reductions in the circulation rate base. We reduced the
    rate base to 12.5 million at the beginning of 2000, compared with a base of
    15.0 million for the first half of 1999 and a base of 13.3 million for the
    second half of 1999.
-   Lower revenues of $21 during 2000 as a result of the sale of American Health
    magazine. Our last issue of that magazine was published in October
    of 2000.

Partially offsetting these decreases were higher average selling prices across
all QSP product lines and an increase in sales of QSP gift products. In
addition, revenues increased as a result of the acquisition of American
Woodworker magazine in the second quarter of 1999.

Operating profit for U.S. Magazines decreased 15% in 2000 to $89, compared with
$105 in 1999. The decrease reflects investment spending to develop new
circulation channels for Reader's Digest magazine, higher information technology
costs, lower subscription income from planned reductions in the circulation rate
base and costs related to the acquisition of the sales force of World's Finest
Chocolate. This decrease was partially offset by lower promotion and product
costs for Reader's Digest magazine, primarily from the reduction in the
circulation rate base.



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International Businesses

2001 v. 2000

Revenues for International Businesses decreased 5% in 2001 to $1,093, compared
with $1,146 in 2000. However, excluding the adverse effect of foreign currency
translation, revenues increased 4%. Revenues were higher for virtually all Books
and Home Entertainment products and about half of our markets had double-digit
growth for the year. Revenues increased principally because of:

-   Growth for series products (Select Editions and reading and illustrated
    series) in Germany and Eastern Europe. Sales of these products were higher
    as a result of increased promotional efforts and increased membership.
-   Higher revenues for general books in Russia, Asia, Mexico and the Czech
    Republic; this was due to improved response rates that resulted from more
    effective promotion techniques and more popular products.
-   Increased promotions and higher response rates for music and video products,
    primarily in Mexico, Asia and Switzerland.

Offsetting a portion of the revenue increase (excluding the adverse effect of
foreign currency translation) were:

-   Lower revenues across all product lines from the sale of our
    Italian operations in the fourth quarter of 2000.
-   Reduced mailing activity of music and series products in the
    United Kingdom.
-   Reduced revenues for Reader's Digest magazine sold in our international
    markets. Revenues declined due to weaker advertising sales in many countries
    and strategic reductions in the circulation rate in the United Kingdom.

Operating profit for International Businesses decreased 2% in 2001 to $116,
compared with $118 in 2000. However, excluding the adverse effect of foreign
currency translation, operating profit increased 14%. Profits were higher in
virtually all markets. Profit growth was primarily from increased sales of Books
and Home Entertainment products as described above. Also, in Asia and Mexico
profits were higher as a result of higher subscription sales of Reader's Digest
magazine. In addition, profits increased in many markets from the execution of
global contracts to facilitate magazine fulfillment resulting in lower paper and
printing costs for Reader's Digest magazines.

Profit growth (excluding the adverse effect of foreign currency translation) was
partially offset by incremental spending on initiatives to acquire new customers
in Brazil, the sale of our Italian operations and higher promotion costs in
Australia from the timing of mailings.

2000 v. 1999

Revenues for International Businesses decreased 7% in 2000 to $1,146, compared
with $1,239 in 1999. Excluding the adverse effect of foreign currency
translation, revenues were flat. Revenue growth was experienced in certain
international markets for Select Editions and general books. Specifically,
revenues increased in:

-   Eastern Europe and Brazil from the launch of Select Editions,
    and in France and Mexico from the growth of Select Editions.
-   France, Brazil and Mexico due to a higher-priced product mix
    and increased sales of general books.
-   Mexico and Brazil as a result of higher subscription prices and circulation
    rates for Reader's Digest magazine.



<PAGE>


Offsetting these increases were revenue declines from:

-   Lower sales of music and video products primarily attributed to
    the strategic reduction in the number of promotional mailings. These actions
    were mostly taken during the second half of 1999 and the first half of 2000
    and were focused in the United Kingdom.
-   The elimination of marginally profitable activities in our Benelux and
    Nordic regions, which resulted in lower sales of music products.
-   The closing or sale of unprofitable operations (Chile, Colombia, Peru, and
    South Africa in 1999, and Italy in 2000).
-   Strategic reductions in the circulation rate base of Reader's Digest
    magazine.
-   Sharply reduced operations in Russia during the second quarter of 1999 in
    response to the economic crisis in that country, which resulted in
    significantly fewer subscribers in 2000.

Operating profit for International Businesses increased significantly to $118 in
2000, compared with $28 in 1999. As a result of re-engineering efforts,
operating profit in most countries improved as we achieved substantial
reductions in overhead, production costs and promotion expenses. These
improvements were partially offset by the effect of lower sales volumes in
certain countries. Profit increases were realized in almost all countries,
especially Poland, Germany, France, Australia, Brazil and the United Kingdom.
Specifically:

-   Poland benefited from the launch of Select Editions.
-   Germany, Australia and the United Kingdom realized increased profits
    primarily because of re-engineering efforts and cost-reduction initiatives.
-   France and Brazil realized higher profits from Select Editions and general
    books because of a higher-priced product mix and improved response rates to
    mailings.
-   Russia realized a small profit versus a loss in the prior year. The loss in
    the prior year resulted from the scaling back of operations in response to
    the Russian economic crisis.
-   Profits for Reader's Digest magazine were higher as a result of subscription
    price increases, re-engineering efforts to reduce paper and printing costs,
    lower promotion costs from the strategic reduction in subscription mailings,
    and the closing or sale of unprofitable operations.

New Business Development

2001 v. 2000

Revenues from New Business Development decreased 2% for 2001 to $54, compared
with $55 in 2000. Revenues were lower for Gifts.com, Inc. as a result of the
Good Catalog Company division's reduction in merchandise catalog promotions.
This decrease was partially offset by higher sales generated by our gifts.com
Web site and financial services alliances.

Operating losses from New Business Development decreased in 2001 to $(17),
compared with $(40) in 2000, primarily from planned reductions in marketing and
development costs related to our gifts.com Web site and improved results from
financial services initiatives.

2000 v. 1999

Revenues from New Business Development increased 71% in 2000 to $55, compared
with $33 in 1999, as a result of additional revenues from Gifts.com, Inc.
(including the full-year effect of the acquisition of Good Catalog Company) and
from financial services alliances.

Operating losses from New Business Development amounted to $(40) in 2000,
compared with losses of $(5) in 1999. Losses in 2000 were from marketing and
start-up costs for a number of ventures, primarily Gifts.com, Inc. Profits from
financial services alliances during the period partially offset these losses.


Liquidity and Capital Resources
(forward-looking information)

The consolidated statement of cash flows for the year ended June 30, 2001, is
summarized below:

Cash and cash equivalents at June 30, 2000                                 $ 50

Net change in cash due to:
  Operating activities                                                       16
  Investing activities                                                      (55)
  Financing activities                                                       36
  Effect of exchange rate changes on cash and cash equivalents              (12)
                                                                           ----
Net change in cash and cash equivalents                                     (15)
                                                                           ----
Cash and cash equivalents at June 30, 2001                                 $ 35
                                                                           ====

Cash and cash equivalents decreased 29% to $35 at June 30, 2001, compared with
$50 at June 30, 2000. The main drivers in the reduction in our cash position
were:

-   Higher inventory balances at Books Are Fun due to the timing of inventory
    acquisitions for summer and fall events, and at QSP due to additional
    chocolate inventory.
-   Higher receivable balances primarily from the timing of sales in our
    international operations (i.e., higher sales in May/June of 2001 versus the
    comparable period in 2000).
-   Payments relating to prior year accruals for incentive compensation and
    other operating items.
-   Additional capital expenditures during the year of $43 related to our
    finance and reporting system implementation and outsourcing fulfillment
    vendor conversion.
-   Additional investments totaling $24 during the first half of the year
    related to BrandDirect Marketing.
-   Repurchase of one million shares of our stock for $34 and
    dividend payments of $22.

Offsetting a portion of these declines were additional short-term borrowings,
net of $72 during the period, which increased our total loans and notes payable
balance to $160 as of June 30, 2001.

As described in Note 10, we were a party to a Competitive Advance and Revolving
Credit Facility Agreement, as amended (the 1996 Credit Agreement), which
provided for borrowings of up to $300 through October 31, 2001. At June 30,
2001, we had borrowings of $160 outstanding under the 1996 Credit Agreement, and
we were in compliance with all covenants. On July 27, 2001, we terminated the
1996 Credit Agreement and entered into a Five-Year Revolving Credit and
Competitive Advance Facility Agreement that expires on July 27, 2006. We also
entered into a 364-Day Revolving Credit and Competitive Advance Facility
Agreement that expires on July 26, 2002. These two agreements together allow for
up to $385 in aggregate principal amount of borrowings ($192.5 for each
agreement).

Some of our international subsidiaries have available lines of credit totaling
$34. At June 30, 2001, no amounts were outstanding under these lines of credit.

In January 2000, we announced authorization to repurchase up to 5 million shares
of our outstanding Class A nonvoting common stock. In October 2000, we announced
authorization to repurchase up to an additional 5 million shares of our
outstanding Class A nonvoting common stock. In May 2001, we announced
authorization to repurchase up to a total of $250 in shares of our outstanding
Class A nonvoting common stock, which superseded the 5-million-share repurchase
authorization announced in October 2000. As of June 30, 2001, we had purchased
approximately 5 million shares totaling $168 (1 million shares totaling $34
during 2001 and 4 million shares totaling $133 during 2000).

We believe that our liquidity, capital resources, cash flows, credit lines and
borrowing capacity are sufficient to fund normal capital expenditures, working
capital requirements, the payment of dividends, the execution of our share
repurchase program and the implementation of our strategic initiatives.


Currency Risk Management
(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 purchase foreign currency
option and forward contracts to minimize the effect of fluctuating foreign
currency exchange rates on our earnings and specifically identifiable
anticipated transactions. In addition, we enter into forward contracts to
minimize the effect of fluctuating foreign currency exchange rates on certain
foreign currency denominated assets and liabilities.

At June 30, 2001, our primary foreign currency market exposures included the
euro and the British pound. We estimate that the results of a uniform 10%
weakening and 10% strengthening in the value of the U.S. dollar relative to the
currencies in which our option and forward contracts are denominated, with all
other variables held constant, would have the following effect:

                                 Effect of a 10%          Effect of a 10%
                                    Weakening              Strengthening
                                of the U.S. Dollar       of the U.S. Dollar


Option contracts                      $ (6.6)                  $ 13.8
Forward contracts                     $ (3.8)                  $  3.1

Additional information concerning derivative financial instruments is available
in Note 1 and Note 6 to our consolidated financial statements.

These estimates represent changes to the fair value of our option and forward
contracts on a stand-alone basis. Such changes would be substantially offset by
the related impact on the assets, liabilities and operating profits being
hedged. Also, this calculation assumes that each exchange rate would change in
the same direction relative to the U.S. dollar. Changes in exchange rates not
only affect the U.S. dollar value of the fair value of these derivatives, but
also affect the underlying foreign subsidiaries' income. Our sensitivity
analysis as described above does not consider potential changes in local sales
levels, or currency prices, or the mitigating effects of option or forward
contracts.


Impact of the Euro Conversion
(forward-looking information)

On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
(legacy currencies) and a single currency called the euro. The legacy currencies
are scheduled to remain legal tender as denominations of the euro during the
transition period from January 1, 1999, to December 31, 2001. Beginning January
1, 2002, euro-denominated bills and coins will be introduced and by July 1,
2002, legacy currencies will no longer be legal tender.



<PAGE>


We performed an internal analysis regarding the business and systems issues
related to the euro conversion and developed a strategic plan to ensure that all
necessary modifications would be made on a timely basis. Our operations in
markets that have adopted the euro are able to accept payments and pay suppliers
in euros and are able to indicate the euro equivalent of pricing on invoices.
During the transition period, we are monitoring customer and competitor reaction
to the euro and updating the strategic plan as needed.

To date, the transition to the euro has not significantly affected our marketing
strategy. In addition, we believe that the conversion to the euro will not have
a significant impact on the marketing strategy of our European operations in the
future. We do not anticipate the need to synchronize prices between markets in
the future, primarily because the editorial content of our products varies. In
addition, products are published in local languages and are sold primarily
through direct mail rather than retail channels. These factors result in
products that tend to be unique to each market and do not easily lend themselves
to price comparisons across borders. The estimated costs to convert all affected
systems to the euro are not expected to have a material adverse effect on our
results of operations, financial position or cash flow.


Recent Accounting Standards

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS No.
141), and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142). SFAS No. 141, as it applies to us, requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also specifies criteria that must be met for intangible assets
acquired in a purchase method business combination to be recognized and reported
apart from goodwill; it further notes that any purchase price allocable to an
assembled workforce may not be accounted for separately.

SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. Intangible assets
with definite useful lives are to be amortized over their respective estimated
useful lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."

We are required to adopt the provisions of SFAS No. 141 immediately. SFAS No.
142 will be effective for fiscal years beginning after December 15, 2001, and it
permits early adoption for fiscal years beginning after March 15, 2001. We will
have six months from the date of adoption to complete the first step of the
impairment test and any transitional impairment loss will be treated as a change
in accounting principle (cumulative catch approach). Any impairment loss after
that date will be included as a component of operations.

As of June 30, 2001, we had unamortized goodwill of $365 and unamortized
identifiable intangible assets of $45, both of which will be subject to the
transition provisions of SFAS No. 141 and No. 142. Amortization expense for 2001
related to goodwill was $(21). Because of the extensive effort needed to comply
with these statements, it is not practicable to reasonably estimate their
impact at this time.


Cautionary Statement
(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/or 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 U.S. 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 integrate newly acquired and newly formed
    businesses successfully;
-   the strength of relationships of newly acquired and newly
    formed businesses with their employees, suppliers and customers;
-   the accuracy of the basis of forecasts relating to newly
    acquired and newly formed businesses;
-   our ability to achieve the financial savings related to
    restructuring programs;
-   our ability to contain and reduce costs, especially through
    global efficiencies;
-   the cost and effectiveness of re-engineering of business
    processes and operations;
-   the accuracy of 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 industry, including the Internet;
-   the effects of worldwide paper and postage costs;
-   the effects of possible postal disruptions on deliveries;
-   the effects of foreign currency fluctuations;
-   the accuracy of management's assessment of the future effective
    tax rate and the effects of initiatives to reduce the rate;
-   the effects of the transition to the euro;
-   the effects and pace of our stock repurchase program; and
-   the impact of unforeseen economic and political changes in
    international markets where we compete.

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                             2001       2000         1999
                                                                        RESTATED     RESTATED

<S>                                                      <C>          <C>          <C>
Revenues                                                 $   2,518.2  $   2,484.5  $   2,458.5

Product, distribution and editorial expenses                  (971.2)      (907.1)      (962.6)
Promotion, marketing and administrative expenses            (1,299.6)    (1,320.2)    (1,328.9)
Other operating items                                          (18.4)        (3.4)       (37.9)
                                                         -----------  -----------  -----------
   Operating profit                                            229.0        253.8        129.1

Other (expense) income, net                                    (41.2)       (19.1)       (82.6)
                                                         -----------  -----------  -----------
   Income before provision for income taxes                    187.8        234.7        211.7

Provision for income taxes                                     (55.7)       (90.0)       (85.1)
                                                         -----------  -----------  -----------
  Income before cumulative effect of change in
    accounting principles                                      132.1        144.7        126.6

Cumulative effect of change in accounting principles
  for pension assets, net of tax provision of $(15.2)             --           --         25.3
                                                         -----------  -----------  -----------
Net income                                               $     132.1  $     144.7  $     151.9
                                                         ===========  ===========  ===========
Basic and diluted earnings per share

Basic earnings per share
   Weighted average common shares outstanding                  102.7        106.0        107.3

   Before cumulative effect of change in accounting
     principles                                                $1.27        $1.35        $1.16
   Cumulative effect of change in accounting
     principles                                                   --           --         0.24
                                                         -----------  -----------  -----------
   Basic earnings per share                                    $1.27        $1.35        $1.40
                                                         ===========  ===========  ===========
Diluted earnings per share
   Adjusted weighted average common shares outstanding         103.7        107.0        108.0

   Before cumulative effect of change in accounting
     principles                                                $1.26        $1.34        $1.15
   Cumulative effect of change in accounting
     principles                                                   --           --         0.24
                                                         -----------  -----------  -----------
   Diluted earnings per share                                  $1.26        $1.34        $1.39
                                                         ===========  ===========  ===========

</TABLE>

See accompanying Notes to Consolidated Financial Statements.

<PAGE>


The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Balance Sheets



                                                          At June 30,
In millions                                            2001        2000
                                                                 RESTATED
Assets
Current assets
  Cash and cash equivalents                        $     35.4  $     49.7
  Receivables, net                                      305.1       285.3
  Inventories, net                                      161.6       120.3
  Prepaid and deferred promotion costs                  106.7       115.5
  Prepaid expenses and other current assets             161.8       185.8
                                                   ----------  ----------
Total current assets                                    770.6       756.6

Marketable securities                                    10.8       173.5
Property, plant and equipment, net                      160.2       152.4
Intangible assets, net                                  409.8       438.8
Other noncurrent assets                                 323.7       208.4
                                                   ----------  ----------
Total assets                                       $  1,675.1  $  1,729.7
                                                   ==========  ==========
Liabilities and stockholders' equity
Current liabilities
  Loans and notes payable                          $    160.3  $     89.4
  Accounts payable                                       86.4       104.8
  Accrued expenses                                      251.1       351.2
  Income taxes payable                                   41.2        38.7
  Unearned revenues                                     291.6       289.4
  Other current liabilities                              28.9        30.9
                                                   ----------  ----------
Total current liabilities                               859.5       904.4

Postretirement and postemployment benefits other
  than pensions                                         138.7       142.3
Unearned revenue                                         54.1        63.8
Other noncurrent liabilities                            166.6       144.0
                                                   ----------  ----------
Total liabilities                                     1,218.9     1,254.5
                                                   ----------  ----------
Stockholders' equity
  Capital stock                                          29.6        28.9
  Paid-in capital                                       226.1       223.1
  Retained earnings                                   1,187.7     1,077.5
  Accumulated other comprehensive (loss) income         (84.6)       31.0
  Treasury stock, at cost                              (902.6)     (885.3)
                                                   ----------  ----------
Total stockholders' equity                              456.2       475.2
                                                   ----------  ----------
Total liabilities and stockholders' equity         $  1,675.1  $  1,729.7
                                                   ==========  ==========


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                                                        2001        2000        1999
                                                                             RESTATED
<S>                                                             <C>         <C>         <C>
Cash flows from operating activities
Net income                                                      $  132.1    $  144.7    $  151.9
Cumulative effect of change in accounting principles                  --          --       (25.3)
Equity in losses of BrandDirect Marketing                           24.9        29.1          --
Investment impairments                                              21.3         4.0          --
Asset impairments                                                    6.6         3.7        22.8
Depreciation and amortization                                       56.8        47.5        43.7
Minority interest                                                     --        (2.6)         --
Net (gain) loss on the sales of certain assets, other
  businesses and contract terminations                             (13.3)       (5.7)      (79.6)
Changes in assets and liabilities, net of effects of
  acquisitions and dispositions
  Receivables, net                                                 (27.4)       20.9        49.5
  Inventories, net                                                 (45.5)       35.2        64.1
  Unearned revenues                                                 (0.1)       (3.2)       (2.4)
  Accounts payable and accrued expenses                           (109.4)      (55.8)      (39.0)
  Other, net                                                       (29.3)      (42.9)       36.8
                                                                --------    --------    --------
Net change in cash due to operating activities                      16.7       174.9       222.5
                                                                --------    --------    --------
Cash flows from investing activities
Proceeds from maturities and sales of marketable securities
  and short-term investments and contract terminations              12.4        23.2         2.3
Proceeds from sales of businesses and other long-term
  investments, net                                                   1.3        13.8        14.6
Proceeds from sales of property, plant and equipment                 1.4         2.8       193.0
Investments in and advances to BrandDirect Marketing               (24.0)      (30.0)         --
Purchases of investments and marketable securities                    --       (24.2)      (35.8)
Payments for business acquisitions                                  (2.3)     (436.9)      (32.7)
Capital expenditures                                               (43.5)      (34.3)      (26.3)
Other, net                                                            --        (0.1)       (0.5)
                                                                --------    --------    --------
Net change in cash due to investing activities                     (54.7)     (485.7)      114.6
                                                                --------    --------    --------
Cash flows from financing activities
Short-term borrowings, net                                          72.3        86.5       (14.3)
Proceeds from other borrowings                                       0.8         7.8          --
Proceeds from employee stock purchase plan and exercise of
  stock options                                                     19.8        13.4        11.1
Dividends paid                                                     (21.9)      (22.6)      (41.5)
Common stock repurchased                                           (34.1)     (133.5)         --
Other, net                                                          (0.9)        6.7         8.3
                                                                --------    --------    --------
Net change in cash due to financing activities                      36.0       (41.7)      (36.4)
                                                                --------    --------    --------
Effect of exchange rate fluctuations on cash                       (12.3)      (11.2)      (10.1)
                                                                --------    --------    --------
Net change in cash and cash equivalents                            (14.3)     (363.7)      290.6
                                                                --------    --------    --------
Cash and cash equivalents at beginning of year                      49.7       413.4       122.8
                                                                --------    --------    --------
Cash and cash equivalents at end of year                        $   35.4    $   49.7    $  413.4
                                                                ========    ========    ========
Supplemental information
Cash paid for interest                                          $   14.8    $    3.0    $    3.5
Cash paid for income taxes                                      $   58.7    $   57.9    $   47.7

</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, 1998                      $   28.8    $    1.4  $ (13.6)   $  144.8 $    845.0   $ (49.8)   $ (698.0   $  258.6

Comprehensive income
Net income                                                                                   151.9                            151.9
Other comprehensive income:
  Translation loss                                                                                      (6.8)                  (6.8)
                                                                                                                           --------
Total comprehensive income                                                                                                    145.1
                                                                                                                           ========
Stock issued under various plans                                        8.2         1.4                              9.7       19.3
Common stock dividends                                                                       (40.2)                           (40.2)
Preferred stock dividends                                                                     (1.3)                            (1.3)
                                              --------    --------  -------    -------- ----------   -------    --------   --------
Balance at June 30, 1999                          28.8         1.4     (5.4)      146.2      955.4     (56.6)     (688.3)     381.5
                                              --------    --------  -------    -------- ----------   -------    --------   --------

Comprehensive income
Net income                                                                                   144.7                            144.7
Other comprehensive income:
  Translation loss                                                                                     (16.4)                 (16.4)
  Net unrealized gain on investments,
    net of deferred taxes of $56.0                                                                     104.0                  104.0
                                                                                                                           --------
Total comprehensive income                                                                                                    232.3
                                                                                                                           ========
Stock issued under various plans                                        4.1         1.9                             11.5       17.5

Exchange of common stock                                                           75.0                            (75.0)        --
Common stock repurchased                                                                                          (133.5)    (133.5)
Common stock dividends                                                                       (21.3)                           (21.3)
Preferred stock dividends                                                                     (1.3)                            (1.3)
                                              --------    --------  -------    -------- ----------   -------    --------   --------
Balance at June 30, 2000                          28.8         1.4     (1.3)      223.1    1,077.5      31.0      (885.3)     475.2
                                              --------    --------  -------    -------- ----------   -------    --------   --------
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 $53.4                                                                     (99.1)                 (99.1)
  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 $  1,187.7   $ (84.6)   $ (902.6)  $  456.2
                                              ========    ========  =======    ======== ==========   =======    =======    ========
</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 2001, 2000 and 1999, unless otherwise
indicated, are to fiscal 2001, fiscal 2000 and fiscal 1999, respectively. Our
fiscal year represents the period from July 1 through June 30.

Note 1         Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of The
Reader's Digest Association, Inc. and its subsidiaries. The preparation of these
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of operating
revenues and expenses. These estimates are based on management's knowledge of
current events and actions that we may undertake in the future, yet actual
results may ultimately differ from those estimates.

Certain prior year amounts have been reclassified to conform to our
current year presentation:

-   Magazine advertising agency commission costs for all periods
    have been reclassified to present advertising revenues net of these costs in
    accordance with Staff Accounting Bulletin No. 101 (see Revenues within this
    Note). These costs were originally recorded in promotion, marketing and
    administrative expenses and have been reclassified to revenues. These costs
    amounted to $26.2 in 2001, $27.6 in 2000 and $27.9 in 1999.
-   Magazine and music product remittances to publishers for all periods have
    been reclassified to present revenues net of these costs in accordance with
    Staff Accounting Bulletin No. 101 (see Revenues within this Note). These
    costs were originally recorded in product, distribution and editorial
    expenses and have been reclassified to revenues. These costs amounted to
    $29.4 in 2001, $41.6 in 2000 and $45.8 in 1999.
-   Customer service costs in 1999 of $45.0 have been reclassified to reflect
    these costs as a component of product, distribution and editorial expenses
    rather than promotion, marketing and administrative expenses.

During the second quarter of 2001 we changed our method of accounting for our
investment in BrandDirect Marketing, Inc. from the cost method to the equity
method of accounting. Due to additional funding in the form of an advance and
other changes in circumstances, we obtained the ability to exercise significant
influence as defined in Accounting Principles Board Opinion No. 18 (APB No. 18),
"The Equity Method of Accounting for Investments in Common Stock." As required
by APB No. 18, all prior periods were restated to reflect reported results as if
we had been accounting for this investment on the equity method since initial
ownership in BrandDirect Marketing. The reported and restated results (see Note
2) reflect equity losses in the affiliate based upon the above (including
amortization of goodwill associated with our investment and write-downs).

Recent Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS
No. 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142). SFAS No. 141, as it applies to us, requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. SFAS No. 141 also specifies criteria that must be met for intangible
assets acquired in a purchase method business combination to be recognized and
reported apart from goodwill; it further notes that any purchase price allocable
to an assembled workforce may not be accounted for separately.

SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. Intangible assets
with definite useful lives are to be amortized over their respective estimated
useful lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."

We are required to adopt the provisions of SFAS No. 141 immediately. SFAS No.
142 will be effective for fiscal years beginning after December 15, 2001, and it
permits early adoption for fiscal years beginning after March 15, 2001. We will
have six months from the date of adoption to complete the first step of the
impairment test and any transitional impairment loss will be treated as a change
in accounting principle (cumulative catch approach). Any impairment loss after
that date will be included as a component of operations.

As of June 30, 2001, we had unamortized goodwill of $365.0 and unamortized
identifiable intangible assets of $44.8, both of which will be subject to the
transition provisions of SFAS No. 141 and No. 142. Amortization expense for 2001
related to goodwill was $(20.6). Because of the extensive effort needed to
comply with these statements, it is not practicable to reasonably estimate their
impact at this time.

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 are stated at the lower of cost or market value. Generally,
inventory in the United States, with the exception of inventory held by Books
Are Fun, Ltd., is valued on the last-in, first-out (LIFO) basis. In our non-U.S.
markets, inventory is primarily determined on the first-in, first-out (FIFO)
basis.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, except for property, plant and
equipment that have been impaired. For impaired assets, the carrying amount is
reduced to the estimated fair market value. During 2000, we modified the useful
lives assigned to certain assets to gain global consistency of useful lives, the
effect of which was not significant.

Buildings, equipment, and furniture and fixtures are depreciated using the
straight-line method over useful lives up to 40 years for buildings and useful
lives ranging from three to 10 years for equipment and furniture and fixtures.
Leasehold improvements are amortized using the straight-line method over the
term of the lease or the useful life of the improvement, whichever is shorter.

Intangible Assets

Intangible assets, net is composed of distribution rights, contracts,
subscription lists and other intangible assets, as well as the excess of costs
over the fair value of net assets of acquired businesses. The excess of costs
over the fair value of businesses acquired is amortized, on a straight-line
basis, over varying periods not in excess of 40 years. Other acquired
intangibles are amortized, on a straight-line basis, over their estimated useful
lives, which are not in excess of 10 years. We continually evaluate the
recoverability of our intangible assets to determine whether current events or
circumstances warrant adjustments to the carrying value. Such evaluation may be
based on current and projected operating profit and cash flows from operations
on an undiscounted basis as well as other economic and market variables.

Investments

Equity Method Investments

The equity method is used to account for investments in entities that are not
majority-owned and that we do not control, but have the ability to significantly
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). Equity in earnings or losses of each affiliate is
recorded according to our level of ownership until the affiliate's contributed
capital has been fully depleted. Thereafter, we recognize the full amount of the
losses generated by the affiliate when we are the primary funding source. These
investments are recorded in other noncurrent assets on the balance sheet.

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 sheet.

Marketable Securities

We classify investments in equity securities in one of three categories:
trading, held-to-maturity and available-for-sale. Trading securities are
acquired for the purpose of short-term investing of funds. Held-to-maturity
securities are acquired for the purpose of holding the security until maturity.
Available-for-sale securities are recorded at fair value in marketable
securities on the balance sheet. Unrealized gains and losses, net of tax, are
recorded in other comprehensive income in stockholder's equity on the balance
sheet. 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
statement. As of June 30, 2001 and 2000, we owned securities that were
classified as available-for-sale securities (see Note 2).

Impairment of Long-Lived Assets

We review long-lived assets and certain identifiable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of that 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. We report assets to be disposed of at the lower of the carrying
amount or fair value less costs to sell.

Stock-Based Compensation

Compensation cost is recognized for stock-based compensation using the intrinsic
value method under Accounting Principles Board 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. Our policy is to grant stock
options at fair market value at the date of grant. For disclosure purposes we
applied the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."

Financial Instruments

We record all derivative instruments on our balance sheet 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

Sales of products by Books and Home Entertainment and certain new businesses are
recorded as revenues at the time of shipment net of provisions for returns and
bad debts. Sales of magazine subscriptions, less estimated cancellations, are
deferred and recognized proportionately as revenues when issues are delivered to
subscribers. Sales of magazine advertising, net of discounts and advertising
agency commissions, are recorded as revenues at the time the advertisements are
published. Sales of QSP, Inc. are recorded as revenues at the time orders are
fulfilled, net of bad debts and remittances to magazine and music publishers.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101, as amended, summarizes certain views of the SEC with respect to
applying generally accepted accounting principles to revenue recognition in
financial statements. The principal changes we recorded as a result of SAB 101
relate to gross versus net presentation of revenue as prescribed by the Emerging
Issues Task Force Abstract No. 99-19 "Reporting Revenue Gross as a Principal
versus Net as an Agent" (EITF 99-19). We adopted EITF 99-19 concurrently with
SAB 101 in the fourth quarter of 2001 and reclassified our previously reported
information for 2001, 2000 and 1999.

Promotion Costs

Costs of direct response advertising are matched with the expected revenue
stream. Direct response advertising consists primarily of promotion costs
incurred in connection with the sale of magazine subscriptions, books and other
products. Promotion costs of $(719.1), $(725.7) and $(796.1) were incurred for
the years ended June 30, 2001, 2000 and 1999, respectively.

Promotion, marketing and administrative expenses on the income statement include
commissions paid to agents for new magazine subscribers. 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 asset on the balance sheet were $35.6 as of June 30, 2001, and $29.0 as
of June 30, 2000. Amounts included in other noncurrent assets on the balance
sheet were $33.9 as of June 30, 2001, and $15.9 as of June 30, 2000.

Income Taxes

Income tax expense is based on reported earnings before income taxes. Deferred
income taxes, net of valuation allowances, reflects the impact of temporary
differences between assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes. These deferred
taxes are measured by applying currently enacted tax laws.



<PAGE>


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 2001, 2000 and 1999) by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed in the same manner except that the weighted average number
of common shares outstanding assumes the exercise and conversion of certain
stock options (1.0 million shares for both 2001 and 2000, and 0.7 million shares
for 1999).

Options to purchase approximately 5.5 million shares of Class A nonvoting common
stock were outstanding during 2001, but were not included in the computation of
diluted earnings per share (3.8 million in 2000 and 5.0 million in 1999). The
exercise prices of these options were greater than the average market price of
the Class A nonvoting 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 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.


Note 2         Acquisitions and Investments

Acquisitions

In October 1999, we purchased 100% of the outstanding common stock of Books Are
Fun, Ltd. Books Are Fun sells books and gift items by display marketing those
products on-site at schools and corporate businesses. The total purchase price
of $393.2 was financed through a combination of internal funds and bank
borrowings of $120.0, which were repaid during the second quarter of 2000. The
acquisition was accounted for using the purchase method of accounting and
generated $346.0 in goodwill. The goodwill is being amortized using the
straight-line method over a period of 20 years. The results of Books Are Fun
have been consolidated since October 1, 1999, and are included in our financial
results for 2000 and 2001.

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

                                                  2000          1999

Pro forma information (unaudited):
  Revenues                                     $ 2,515.4     $ 2,654.6
  Income before extraordinary items            $   139.1     $   118.8
  Net income                                   $   139.1     $   144.1

Earnings per share (unaudited):
  Basic                                            $1.30         $1.33
  Diluted                                          $1.29         $1.32

These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of goodwill, 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 on the balance sheet primarily represents the fair market
value (based on quoted market prices) of our investments in LookSmart, Ltd. and
WebMD Corporation. These securities are accounted for and classified as
available-for-sale securities. As of June 30, 2001, the market value of those
shares totaled $7.4 for LookSmart ($166.5 as of June 30, 2000) and $3.0 for
WebMD ($6.4 as of June 30, 2000).

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 sheet and amounted to $4.9 as of June 30, 2001, and $104.0 as of June
30, 2000. In addition, during 2001 we recorded an impairment of $(10.0) related
to our investment in WebMD. This impairment represented a charge to record what
we believe to be an other-than-temporary decline in the market value of our
shares of WebMD. This impairment represents a write-down from the original
acquisition price to the approximate market value as of June 30, 2001.

During 2001 we sold 1,950,000 shares of LookSmart and recorded a pre-tax gain of
$7.2 in other (expense) income, net on the income statement.

Investments, Equity Method

During the second quarter of 2001 we changed our method of accounting for our
investment in BrandDirect Marketing from the cost method to the equity method of
accounting. The following table summarizes the effect of applying the equity
method of accounting.

                                       2000 Income Statement
                              Previously    Equity in
                               Reported     Losses (1)     Restated

Operating profit              $   253.8     $     --      $   253.8
Other income (expense), net        10.0        (29.1)         (19.1)
                              ----------    --------      ---------
Income before provision
  for income taxes                263.8        (29.1)         234.7
Provision for income taxes        (90.0)          --          (90.0)
                              ----------    --------      ---------
  Net income                  $   173.8     $  (29.1)     $   144.7
                              =========     ========      =========

Basic earnings per share      $    1.63     $  (0.28)     $    1.35
                              =========     ========      =========
Diluted earnings per share    $    1.61     $  (0.27)     $    1.34
                              =========     ========      =========

(1) Equity in losses of BrandDirect Marketing including goodwill amortization of
    $(3.8) associated with our investment.


<PAGE>



                                             2000 Balance Sheet
                              Other noncurrent assets      Retained earnings


Previously reported                   $ 221.6                  $ 1,106.6
Equity in losses (1)                    (29.1)                     (29.1)
                                      -------                  ---------
Restated                              $ 192.5                  $ 1,077.5
                                      =======                  =========

(1) Equity in losses of BrandDirect Marketing including goodwill amortization of
    $(3.8) associated with our investment.

During 2001, our investment in BrandDirect Marketing was written off to zero. As
a result, other (expense) income, net includes losses of $(24.9) (including
equity in losses, a write-down and goodwill amortization).

Investments, at Cost

We hold several other investments, at cost, totaling $2.5. These investments are
included in other noncurrent assets on the balance sheet. During 2001, we
recorded impairment charges in other (expense) income, net on the income
statement totaling $(10.4) (Schoolpop, Inc. -- $(7.5) and e-finet.com --
$(2.9)). The value of these investments at June 30, 2000, was $12.9 (Schoolpop
-- $10.0 and e-finet.com -- $2.9).

Licensing Agreement

In May 2000, we entered into a long-term licensing agreement with World's Finest
Chocolate, Inc. The cost of entering into the agreement was assigned to
distribution rights, included in intangible assets on the balance sheet. These
rights are being amortized using the straight-line method over the initial
period of the agreement (10 years). Under the terms of the agreement, QSP has a
long-term commitment to purchase World's Finest Chocolate products and the
exclusive right to sell those products for fundraising purposes. Our purchase
commitment is based on annual minimum tonnage amounts.


Note 3         Other Operating Items

Other operating items represent charges related primarily to the streamlining of
our organizational structure and the strategic repositioning of certain
businesses. We recorded other operating items of $(18.4) in 2001, $(3.4) in 2000
and $(37.9) in 1999. The components of other operating items are described in
further detail below:

-   Severance Costs - For each reporting period, we identified employees who
    would be separated as a result of actions taken to streamline our
    organizational structure through a combination of voluntary and involuntary
    severance programs. As of June 30, 2001, approximately 380 employees were
    identified to be separated from our operations during fiscal 2002 (65% in
    the United States and 35% in our international markets). In the prior year,
    approximately 100 employees were identified. In certain instances,
    circumstances arose that resulted in decisions to retain employees
    previously identified for termination and the associated charges were
    reversed.
-   Contract Terminations - These charges represent anticipated costs to
    terminate contractual obligations in connection with streamlining
    activities.
-   Impairment Losses - As a result of restructuring activities, 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.

During 2001, net other operating items of $(18.4) comprised:

-   Charges of $(31.8) primarily for severance costs associated
    with restructuring North America Books and Home Entertainment, streamlining
    European operations and reduction of overall staff levels.
-   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 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 have announced that we intend to
    cease publication of this magazine in 2002.

During 2000, net other operating items of $(3.4) comprised:

-   Charges of $(9.9) primarily for severance costs associated with
    the outsourcing of customer service in certain countries, centralization of
    certain accounting functions and discontinuance of certain unproductive
    activities.
-   Adjustments of $10.2 to accrual balances from charges originally recorded in
    1999, 1998 and 1996.
-   Asset impairments of $(3.7) related primarily to property, plant and
    equipment in the United Kingdom.

During 1999, net other operating items of $(37.9) comprised:

-   Charges of $(93.5) primarily related to severance costs of
    $(60.0) and asset impairment losses of $(22.8).
-   Adjustments of $55.6 to accrual balances from charges
    originally recorded in 1998, 1997 and 1996. These adjustments were primarily
    for several actions initiated by prior management that were discontinued in
    connection with our long-term strategy.

At June 30, 2001, we had accruals for other operating items of $33.3, primarily
for severance costs. At June 30, 2000, accruals totaled $19.7, primarily for
severance costs. During 2001, we recorded additional accruals of $31.8 that were
partially offset by adjustments to these accrual balances of $9.9. In addition,
we made payments totaling $8.3 primarily related to severance costs.

Note 4         Other (Expense) Income, Net

                                             2001       2000       1999

Interest income                            $   8.4    $  13.5    $  12.5
Interest expense                             (18.3)      (5.6)      (5.7)
Equity in losses of BrandDirect Marketing    (24.9)     (29.1)        --
Investment impairments (1)                   (21.3)      (4.0)        --
Net gain on the sales of certain
  assets, other businesses and
  contract terminations (2)                   13.3        5.7       79.6
Net gain (loss) on foreign exchange            1.4        3.7       (2.5)
Other (expense), net                           0.2       (3.3)      (1.3)
                                           -------    -------    -------
Total other (expense) income, net          $ (41.2)   $ (19.1)   $  82.6
                                           =======    =======    =======

(1) Investment impairments in 2001 included $(10.0) for WebMD, $(7.5), for
    Schoolpop, $(2.9) for e-finet.com and $(0.9) for Sticky Networks, Inc. In
    2000, investment impairments included $(4.0) for Hardware.com.
(2) Net gain on the sales of certain assets, other businesses and contract
    termination in 2001 principally included sales of our shares in LookSmart of
    $7.2 and a contract termination of $4.2. In 2000, this amount included a
    gain on the sale of American Health magazine of $6.5. In 1999, this amount
    primarily consisted of gains from the sale of important works from our fine
    art collection and certain businesses that were partially offset by losses
    from the sales of publishing operations in South Africa and certain
    international real estate holdings.


Note 5         Supplemental Balance Sheet Information

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

Receivables, Net
                                              2001       2000        1999

Gross accounts receivable, trade           $  418.6    $  399.4    $  435.3

   Beginning reserve for returns
    and bad debts                            (146.0)     (153.8)     (173.0)
   Additions to allowances (1)               (502.7)     (465.8)     (509.1)
   Actual returns and bad debts (2)           504.9       473.6       528.3
                                           --------    --------    --------
Ending reserve for returns and bad debts     (143.8)     (146.0)     (153.8)

Net accounts receivable, trade                274.8       253.4       281.5
Other receivables, net                         30.3        31.9        38.4
                                           --------    --------    --------
Total receivables, net                     $  305.1    $  285.3    $  319.9
                                           ========    ========    ========

(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 includes actual experience during the period
    and the effects of foreign currency translation. Amounts are recorded within
    receivables, net on the balance sheet.

Inventories, Net
                                          2001       2000

Raw materials                           $   8.6    $  13.4
Work-in-progress                           19.2       21.1
Finished goods (1)                        133.8       85.8
                                        -------    -------
Total inventories, net (2)              $ 161.6    $ 120.3
                                        =======    =======

(1) Finished goods inventory includes net inventory held by Books Are Fun of
    $66.1 in 2001 and $41.5 in 2000.
(2) If the FIFO method of inventory had been used for all U.S. locations,
    inventories would have been $5.8 higher than the amount reported at June 30,
    2001, and $6.7 higher than June 30, 2000.

Property, Plant and Equipment, Net
                                               2001       2000

Land                                         $   9.6    $  10.6
Buildings and building improvements            161.5      165.8
Furniture, fixtures and equipment              164.2      228.4
Leasehold improvements                          15.1       14.5
                                             -------    -------
                                               350.4      419.3
Accumulated depreciation and amortization     (190.2)    (266.9)
                                             -------    -------
Total property, plant and equipment, net     $ 160.2    $ 152.4
                                             =======    =======


Intangible Assets, Net
                                               2001       2000
Distribution rights, contracts,
 subscription lists and other                $  76.5    $  86.0

Excess of cost over fair value of
  net assets of businesses acquired            416.5      423.2
                                             -------    -------
                                               493.0      509.2
Accumulated amortization                       (83.2)     (70.4)
                                             -------    -------
Total intangible assets, net                 $ 409.8    $ 438.8
                                             =======    =======

Accrued Expenses
                                               2001       2000

Compensation and other employee benefits     $  55.2    $ 111.9
Royalties and copyrights payable                21.2       24.2
Taxes, other than income taxes                   6.0       13.0
Other operating items                           33.3       19.7
Other, principally operating expenses          135.4      182.4
                                             -------    -------
Total accrued expenses                       $ 251.1    $ 351.2
                                             =======    =======


<PAGE>


Note 6         Financial Instruments

The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998, and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133" in
June 2000. We adopted these statements effective July 1, 2000. These statements
standardized the accounting for our derivative instruments, including certain
derivative instruments embedded in other contracts. The cumulative effect of the
change in accounting principles recorded on July 1, 2000, was not material to
our results of operations, financial position or cash flows. These statements
were not required to be applied retroactively to prior periods.

Risk Management and Objectives

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 and the British pound. We purchase foreign currency option and forward
contracts to minimize the effect of fluctuating foreign currencies on our
subsidiaries' earnings and specifically identifiable anticipated transactions.
In addition, we enter into forward contracts to minimize the effect of
fluctuating foreign currency exchange rates on certain foreign currency
denominated assets and liabilities. Generally, we purchase foreign currency
option and forward contracts over periods ranging up to 12 months. 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 the use of derivative instruments.

Strategies and Description of Derivative Instruments

The following is a brief description of our derivative transactions.

-   We enter into option contracts to hedge against the foreign
    currency risk associated with intercompany royalty fees paid to us by our
    foreign subsidiaries. The contract amounts of these options are based on
    forecasted future revenues earned by our subsidiaries. These contracts are
    designated as and qualify for cash flow hedge accounting.
-   Similarly, option contracts are used to economically hedge against foreign
    currency risk associated with operating cash flows of our foreign
    subsidiaries. The contract amounts of these options are based on forecasted
    cash flows from operating profit recognized by our subsidiaries. These
    contracts do not qualify for hedge accounting treatment.
-   We utilize foreign currency forward contracts to economically hedge against
    foreign currency risk associated with anticipated or forecasted
    transactions, as well as foreign currency denominated loans due to and from
    our foreign subsidiaries. These transactions do not qualify for hedge
    accounting treatment.

Quantitative Disclosures of Derivative Instruments

Cash Flow Hedges - 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 included in stockholders' equity on the balance sheet. The gains and
losses are deferred until the underlying transaction is recognized in earnings.



<PAGE>


The ineffective portion of the change in market value of these option contracts,
specifically the time-value component of $(1.7), was recognized as a loss in
other (expense) income, net on the income statement for 2001. The fair value of
the option contracts at June 30, 2001, of $1.8 is included in prepaid expenses
and other current assets on the balance sheet.

We anticipate that the net gains in accumulated other comprehensive (loss)
income relating to foreign currency option contracts existing at June 30, 2001,
will be recognized as gain (loss) on foreign exchange during the 12-month period
ended June 30, 2002. As of June 30, 2001, the approximate length of time over
which we will hedge our exposure to the variability in future cash flows
associated with foreign currency royalty fees is 12 months. There were no cash
flow hedges discontinued during the 12-month period ended June 30, 2001.

Other Derivatives - For 2001, changes in the spot value of the foreign
currencies and contract settlements associated with option and forward contracts
amounted to a gain of $5.9. These changes are reported in gain (loss) on foreign
exchange included in other (expense) income, net on the income statement. This
effect would generally be offset by the translation of the assets, liabilities
and future operating cash flows being hedged. The fair value of the option and
forward contracts as of June 30, 2001, of $6.6 is included in prepaid expenses
and other current assets on the balance sheet.


Note 7         Pension Plans and Other Postretirement Benefits

Change in Accounting for Pension Assets

Effective July 1, 1998, we changed our method for calculating the market-related
value of pension plan assets. This method is used in determining the
return-on-asset component of annual pension expense and the cumulative net
unrecognized gain (loss) subject to amortization. We believe that the new method
is more widely used in practice and is preferred because it results in pension
plan asset values that more closely approximate fair value, while still
mitigating the effect of annual market value fluctuations. In addition, the new
method facilitates the global management of pension plans as it results in a
consistent methodology for all plans.

Under the old method, realized and unrealized gains or losses on pension plan
assets were amortized and recognized over a five-year period. Dividends and
interest earned during the plan year were immediately recognized. Under the new
method, we recognize an expected return on pension plan assets and amortize
differences between actual and expected returns over a five-year period.

This change resulted in a non-cash benefit in 1999 of $40.5 ($25.3 after tax).
The benefit represents the cumulative effect of the change related to years
prior to 1999.

Change in Measurement Date for Pensions

In 1999, we elected to change the measurement date for pension plan assets and
liabilities from June 30 to March 31, as permitted by SFAS No. 87, "Employers'
Accounting for Pensions." This change had no significant effect on 1999 or prior
years' pension expense.



<PAGE>


Pension and Other Benefits

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

                                                    U.S. Plans

                                               2001    2000    1999

Discount rate                                  7.2%    7.7%     7.0%

Compensation increase rate                     5.0%    5.0%     5.0%

Long-term rate of return on plan assets        9.7%    9.5%     9.5%



                                               International Plans
                                               2001   2000     1999

Discount rate                                 5-16%   5-18%    5-12%

Compensation increase rate                    2-14%   2-16%    3-10%

Long-term rate of return on plan assets       5-17%   5-19%    5-13%


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

                                               Pension Benefits
                                          2001       2000       1999

Service cost                            $  15.4    $  16.9    $  20.5
Interest cost                              45.1       44.9       44.6
Expected return on plan assets            (83.4)     (80.9)     (79.8)
Amortization                               (4.6)      (4.6)      (2.9)
Recognized actuarial gain                 (14.2)      (8.9)      (9.7)
Special items                                --       (0.2)       2.4
                                        -------    -------    -------
Net periodic pension (benefit) cost     $ (41.7)   $ (32.8)   $ (24.9)
                                        =======    =======    =======

We provide medical and dental benefits to U.S. retired employees and their
dependents. Substantially all of our U.S. 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 7.2% for 2001,
7.7% for 2000 and 7.0% for 1999 were used in determining the accumulated
postretirement benefits liability.



<PAGE>


Components of postretirement benefit cost are as follows:

                                                  Other Benefits
                                               2001    2000     1999

Service cost                                  $ 0.9   $ 0.9    $ 1.8
Interest cost                                   4.1     4.1      4.6
Amortization                                   (0.6)   (0.6)      --
Recognized actuarial gain                      (4.0)   (3.7)    (2.7)
Special items                                    --      --     (0.4)
                                              -----   -----    -----
Postretirement benefit cost                   $ 0.4   $ 0.7    $ 3.3
                                              =====   =====    =====

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
                                         2001       2000      2001       2000
Change in benefit obligation:
Benefit obligation at                 $  656.1   $  689.8   $   58.2   $   64.7
  beginning of year
Service cost                              15.4       16.9        0.8        0.9
Interest cost                             45.1       44.9        4.1        4.1
Actuarial loss (gain)                     17.2      (32.8)       1.6       (7.0)
Plan amendments                             --       (0.7)        --        0.4
Exchange rate changes                    (12.2)      (7.9)        --         --
Settlements/curtailments                    --       (0.6)        --         --
Benefits paid                            (50.8)     (55.0)      (5.2)      (4.9)
Other items                                1.2        1.5         --         --
                                      --------   --------   --------   --------
Benefit obligation at end of year        672.0      656.1       59.5       58.2
                                      ========   ========   ========   ========

Change in plan assets:
Fair value at beginning of year          985.3      928.2         --         --
Actual return on plan assets             (78.9)     117.0         --         --
Settlements                                 --       (0.4)        --         --
Employer contribution                     11.0       11.8       (0.4)       0.3
IRC section 401(h) transfer               (5.6)      (4.6)       5.6        4.6
Exchange rate changes                    (13.5)      (8.6)        --         --
Benefits paid                            (50.8)     (55.0)      (5.2)      (4.9)
Other items                               (1.1)      (3.1)        --         --
                                      --------   --------   --------   --------
Fair value at end of year                846.4      985.3         --         --
                                      ========   ========   ========   ========

Funded status                            174.3      329.2      (59.5)     (58.2)
Unrecognized actuarial gain              (41.6)    (237.3)     (46.6)     (52.7)
Unrecognized transition (asset)           (2.9)      (7.6)       0.7        0.9

Unrecognized prior service
  obligation benefit                      (4.6)      (4.7)      (4.2)      (4.8)
Employer - fourth quarter contribution     1.3        1.2         --         --
                                      --------   --------   --------   --------
Net amount recognized                 $  126.5   $   80.8   $ (109.6)  $ (114.8)
                                      ========   ========   ========   ========

During 2001 and 2000, in accordance with Internal Revenue Code section 401(h),
we transferred $5.6 and $4.6, respectively, of excess pension assets to fund
postretirement benefits.

Amounts recognized on the balance sheet are as follows:



<PAGE>

<TABLE>

                                           Pension Benefits       Other Benefits

                                           2001       2000        2001        2000

<S>                                     <C>         <C>        <C>          <C>
Other noncurrent assets                 $  212.0    $  166.2   $     --     $    --
Noncurrent liabilities                     (89.1)      (85.6)    (109.6)     (114.8)
Intangible assets, net                       0.1         0.2         --          --
Accumulated other comprehensive income       3.5          --         --          --
                                        --------    --------   ---------    --------
Net amount recognized                   $  126.5    $   80.8   $  (109.6)   $ (114.8)
                                        ========    ========   =========    ========
</TABLE>

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

                                    Plans with Projected        Plans with
                                     Benefit Obligations    Accumulated Benefit
                                      in Excess of Plan    Obligations in Excess
                                           Assets             of Plan Assets
                                         2001     2000        2001      2000

Projected benefit obligation           $ 221.0   $ 84.9       N/A       N/A

Accumulated benefit obligation             N/A      N/A    $ 82.2    $ 80.6

Fair value of plan assets              $ 124.9   $  2.5    $   --    $  1.3

Health Care Inflation and Cost Trend Rates

The health care inflation assumption used to determine the postretirement
benefits liability was 7.0% for 2001 and 7.5% for 2000, decreasing gradually to
5.5% by 2004 and remaining 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 $0.5 and the postretirement benefit obligation by
$6.1. A one-percentage-point decrease in assumed health care cost trend rates
would decrease the total of the service and interest cost components by $0.4 and
the postretirement benefit obligation by $5.2.


Note 8         Employee 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.

We have adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and, as permitted by that statement, have continued
to measure compensation cost as the excess of the quoted market price of our
stock at the grant date over the amount the employee must pay for the stock.
Since we grant stock options at fair market value at the date of grant, no
compensation expense is recognized. Compensation expense is recognized with
respect to stock appreciation rights, phantom stock and phantom stock options.

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.

We believe that 2001, 2000 and 1999 pro forma amounts are not representative of
the effects of stock-based awards on future pro forma net income and earnings
per share because these pro forma amounts exclude the pro forma compensation
expense related to unvested stock options granted before 1996. In addition,
certain options vest over several years, and terms and conditions of awards in
future years may vary.

As required by SFAS No. 123, we have disclosed below the pro forma impact of
using the fair value method to calculate compensation expense of stock options
and stock purchase rights granted.

                                               2001       2000      1999

Net income           As reported             $ 132.1    $ 144.7   $ 151.9
                     Pro forma               $ 122.0    $ 133.8   $ 144.0

Earnings per share   As reported - basic       $1.27      $1.35     $1.40
                     Pro forma - basic         $1.18      $1.25     $1.33
                     As reported - diluted     $1.26      $1.34     $1.39
                     Pro forma - diluted       $1.16      $1.24     $1.32


The weighted average fair values of options granted in 2001, 2000 and 1999 were
$14.90, $11.30 and $5.91, 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:

                                        2001        2000        1999

Risk-free interest rate                  6.0%        6.0%       4.6%
Expected life                         4.2 years   4.1 years  4.2 years
Expected volatility                     38.6%       35.3%      30.1%
Expected dividend yield                  0.9%        0.5%       0.6%

The following table summarizes information about stock options outstanding at
June 30, 2001:
<TABLE>

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

<S>       <C>        <C>          <C>            <C>             <C>        <C>
 $17.19 - $18.97     1,569        7.23           $18.94          719        $18.93
 $21.47 - $29.53     2,224        6.76           $24.07        1,784        $24.23
 $30.00 - $39.75     1,929        8.18           $32.28          498        $32.10
 $40.13 - $48.00     5,293        5.79           $43.02        2,946        $44.13
 $50.94 - $55.13        44        3.91           $52.13           44        $52.13
                    ------        ----           ------        -----        ------
                    11,059        6.60           $33.95        5,991        $34.24
                    ======        ====           ======        =====        ======
</TABLE>



<PAGE>


Changes in outstanding options are as follows:
<TABLE>

                                                                       Weighted
                                                          Options       Average
                                                          (000's)   Exercise Price

<S>                                                        <C>          <C>
Outstanding at June 30, 1998                               8,782        $36.90
  Granted                                                  2,534        $19.54
  Exercised                                                 (256)       $23.14
  Canceled                                                (1,275)       $38.02
                                                          ------        ------
Outstanding at June 30, 1999                               9,785        $32.61
  Granted                                                  2,055        $31.67
  Exercised                                                 (410)       $22.10
  Canceled                                                (1,443)       $39.03
                                                          ------        ------
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
                                                          ======        ======
Options exercisable at June 30, 2001                       5,991        $34.24
                                                          ======        ======
Options available for grant at June 30, 2001               6,322           N/A
                                                          ======        ======
</TABLE>


1989 and 1994 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, 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 Class A nonvoting common stock (Class A) under
the 1994 Plan. Effective in November 1999, no further awards may be granted
under the 1989 Plan. Under the Plans, options have been granted with exercise
prices not less than the fair market value of our Class A stock at the time of
the grant, with an exercise term (as determined by the committee) not to exceed
10 years. The vesting terms of the options (as determined by the committee)
generally become exercisable over four years.

Restricted Stock - The market value of restricted stock awards is recorded as
unamortized restricted stock included in capital stock on the balance sheet and
is amortized over the term of the restriction period. Amortization expense of
restricted stock amounted to $(0.7), $(4.1) and $(7.6) for 2001, 2000 and 1999,
respectively. As of June 30, 2001 we had outstanding 376,600 restricted stock
awards to employees (368,000 outstanding restricted stock awards as of June 30,
2000).

Performance Shares - The committee awards phantom performance shares that give
the recipients the right to receive cash equal to the value of shares of Class A
stock that are earned if specific performance goals are achieved during a
specific performance period. The awards relate to the 1999-2000, 1999-2001,
2000-2002 and 2001-2003 fiscal-year performance periods. We have recorded
$(1.4), $(9.6) and $(5.9) as expense during 2001, 2000 and 1999, respectively,
for these awards. In August 2001, we anticipate distributing $7.8 to the award
recipients relating to the 1999-2001 performance period. During 2000, we
distributed $10.5 to award recipients relating to the 1999-2000 performance
period.



<PAGE>


1989 Employee Stock Purchase Plan (the ESPP)

Under the ESPP, we are authorized to issue up to 1,650,000 Class A shares,
(330,000 Class A 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 Class A shares. The purchase price of
the shares is 85% of the lower of the fair market values of the Class A stock on
the first and last days of the six-month purchase period. In 2001, approximately
38% of eligible employees participated in the ESPP. In the two years prior, the
percentage of employee participation was 30% in 2000 and 44% in 1999.

In addition, several of our international subsidiaries have employee stock
purchase plans (international ESPP plans) under which we are authorized to issue
up to 400,000 Class A shares to our full-time employees. The terms of the
international ESPP plans in most locations are essentially the same as the ESPP.

Under the ESPP and the international ESPP plans, employees purchased 176,592
shares in 2001, 191,928 shares in 2000, and 208,752 shares in 1999.

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 2001, 2000 and 1999 were $9.79, $9.13 and $6.99,
respectively.

These fair values were estimated using the following assumptions:

                                    2001           2000           1999

Risk-free interest rate             6.0%            5.4%           4.9%
Expected life                     0.5 years      0.5 years      0.5 years
Expected volatility                31.8%           40.7%          37.1%
Expected dividend yield             0.9%            0.5%           0.6%

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 specified investment options. At the discretion
of the Board of Directors, we can make matching contributions to the 401(k)
plan. The matching contributions vest 20% per annum over a five-year period. We
contributed $10.8, $5.6 and $3.7 to the 401(k) plan for 2001, 2000 and 1999,
respectively. Effective July 1, 2000, we ceased contributions to the profit
sharing plan component of the 401(k) plan for most of our employees.




<PAGE>


Note 9         Income Taxes

Income before provision for income taxes is as follows:

                                      2001       2000       1999

United States                      $  70.4     $  98.9    $ 183.1
International                        117.4       135.8       28.6
                                   -------     -------    -------
Income before income taxes         $ 187.8     $ 234.7    $ 211.7
                                   =======     =======    =======

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

                                        2001        2000         1999
Current
   Federal                           $  (4.4)     $   2.9      $  39.4
   State and local                       3.9          4.5          3.7
   International                        51.3         50.2         34.5
                                     -------      -------      -------
   Total current                        50.8         57.6         77.6
                                     =======      =======      =======
Deferred
   Federal                               4.7         33.3         21.3
   State and local                       1.1          3.8          1.8
   International                        (0.9)        (4.7)       (15.6)
                                     -------      -------      -------
  Total deferred                         4.9         32.4          7.5
                                     =======      =======      =======
Provision for income taxes           $  55.7      $  90.0      $  85.1
                                     =======      =======      =======

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

                                          2001       2000        1999

U.S. statutory tax rate                   35.0%      35.0%       35.0%
International operations                  (1.8)      (1.9)        1.3
State taxes, net                           1.7        2.3         1.4
Tax benefit from disposition of assets    (3.9)      (3.8)         --
Nondeductible goodwill                     3.2        1.9          --
Changes in valuation allowance            (3.5)       4.3          --
Other operating items                     (0.1)      (0.4)        2.3
Other, net                                (0.9)       0.9         0.2
                                          ----       ----        ----
Effective tax rate                        29.7%      38.3%       40.2%
                                          ====       ====        ====



<PAGE>


Components of deferred tax assets and liabilities are as follows:

                                                         2001       2000

Deferred compensation and other employee benefits      $  21.3     $ 43.6
Accounts receivable and other allowances                  46.7       54.3
Net operating loss carryforwards                           8.8        9.7
State and local taxes                                     18.8       14.9
Other operating items                                     19.8       14.1
Foreign tax credit                                        18.2         --
Other, net                                                24.1       41.0
                                                       -------     ------
   Gross deferred tax assets                             157.7      177.6
Valuation allowance                                       (9.7)     (19.5)
                                                       -------     ------
   Total net assets                                      148.0      158.1
                                                       =======     ======
Deferred compensation and other employee benefits          7.2        7.4
Unrealized gain on investments                             2.6       56.0
Other, net                                                10.6       12.4
                                                       -------     ------
  Total net liabilities                                   20.4       75.8
                                                       =======     ======
Net deferred taxes                                     $ 127.6     $ 82.3
                                                       =======     ======

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

                                                  2001      2000

Prepaid expenses and other current assets       $  79.1    $ 69.5
Other noncurrent assets                            66.4      22.8
Other current liabilities                          (8.0)     (1.9)
Other noncurrent liabilities                       (9.9)     (8.1)
                                                -------    ------
Net deferred taxes                              $ 127.6    $ 82.3
                                                =======    ======

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 $36.6 at June 30, 2001, the majority of
which may be carried forward indefinitely, are available to reduce future tax
obligations of certain foreign subsidiaries in a number of jurisdictions. In
addition, foreign tax credits amounting to $18.2 are available as of June 30,
2001.

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 10     Debt

Competitive Advance and Revolving Credit Facility Agreements

We were a party to a Competitive Advance and Revolving Credit Facility
Agreement, as amended (the 1996 Credit Agreement), which provided for borrowings
of up to $300.0 through October 31, 2001. The 1996 Credit Agreement was amended
as of September 2, 1999. Prior to the amendment, the 1996 Credit Agreement
included a covenant to maintain a minimum level of consolidated tangible net
worth. The amendment provides borrowing flexibility by replacing this covenant
with covenants to maintain minimum levels of consolidated assets and net worth
and a maximum level of leverage.

On July 27, 2001, we terminated the 1996 Credit Agreement and entered into a
Five-Year Revolving Credit and Competitive Advance Facility Agreement that
expires on July 27, 2006. We also entered into a 364-Day Revolving Credit and
Competitive Advance Facility Agreement that expires on July 26, 2002. Together,
these two agreements allow for up to $385.0 in aggregate principal amount
borrowings ($192.5 for each agreement).

Each of the new credit agreements includes the following terms:

-   Interest rates that are based on several pricing options that
    can vary based upon our credit rating.
-   Authorization to use proceeds of borrowings for general corporate purposes,
    including acquisitions, share repurchases and commercial paper backup.
-   Restrictions on our ability to incur debt, create liens and guarantee
    indebtedness.
-   Covenants relating to a minimum level of interest coverage and a maximum
    level of leverage.
-   Borrowings that may be denominated in U.S. dollars or various
    foreign currencies.
-   Facility fees that are payable quarterly in arrears and paid regardless of
    use. Fees range between 0.125% and 0.3% of the total commitment.
-   Administrative fees and a utilization fee, payable quarterly in arrears, of
    0.125% of the loans outstanding when borrowings exceed 33% of the committed
    amount.

At June 30, 2001, we had short-term borrowings of $160.0 outstanding under the
1996 Credit Agreement. This amount is included in loans and notes payable on the
balance sheet. The weighted average interest rate in 2001 for these borrowings
was 6.4%. The carrying amount of the borrowings approximated fair value at June
30, 2001 and 2000. At June 30, 2000, there were short-term borrowings of $87.0
outstanding under the 1996 Credit Agreement at a weighted average interest rate
of 7.3%.

Lines of Credit

International lines of credit totaled $34.3 at June 30, 2001, and $43.1 at June
30, 2000, of which no amounts were outstanding. These lines of credit expire at
various dates throughout 2002.




<PAGE>


Note 11        Capital Stock

Capital stock and treasury stock consist of the following:
<TABLE>

                                                                     2001           2000
<S>                                                              <C>             <C>
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
                                                                 ========        ========
Class A nonvoting common stock,
  par value $0.01 per share;
  authorized 200,000,000 shares;
  issued 119,428,472 shares                                           1.2             1.2
Class B voting common stock,
  par value $0.01 per share;
  authorized 25,000,000 shares;
  issued 21,716,057 shares                                            0.2             0.2
                                                                 --------        --------
Total common stock                                                    1.4             1.4

Unamortized restricted stock                                         (0.6)           (1.3)
                                                                 --------        --------
Total capital stock                                              $   29.6        $   28.9
                                                                 ========        ========
Common stock in treasury, at cost
  Class A shares:  29,211,011 in 2001 and 28,961,039 in 2000     $ (662.7)       $ (645.4)
  Class B shares:  9,283,893 in 2001 and 2000                      (239.9)         (239.9)
                                                                 --------        --------
Total common stock in treasury, at cost                          $ (902.6)       $ (885.3)
                                                                 ========        ========
</TABLE>

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. Share Exchange

In September 1999, we executed a share exchange with the DeWitt Wallace-Reader's
Digest Fund and the Lila Wallace-Reader's Digest Fund (the Funds). Under the
terms of the exchange, the Funds exchanged approximately 9.3 million shares of
Class B voting common stock (Class B) for approximately 8.0 million shares of
Class A stock, at an exchange ratio of 0.865 Class A shares for each Class B
share. As a result, we exchanged Class A treasury shares at a cost of $164.9 and
a market value of $239.9, for Class B shares, resulting in additional paid-in
capital of $75.0.

Share Repurchase Authorization

In January 2000, we announced authorization to repurchase up to 5.0 million
shares of our outstanding Class A nonvoting common stock. In October 2000, we
announced authorization to repurchase up to an additional 5.0 million shares of
our outstanding Class A nonvoting common stock. In May 2001, we announced
authorization to repurchase up to a total of $250.0 in shares of our outstanding
Class A nonvoting common stock, which superseded the 5-million-share repurchase
authorization announced in October 2000. As of June 30, 2001, we had purchased
approximately 5.0 million shares totaling $167.6 (1.0 million shares totaling
$34.1 during 2001 and 4.0 million shares totaling $133.5 during 2000).


Note 12        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 would not significantly affect
our financial position or our results of operations.

In March 2001, we announced a voluntary comprehensive agreement with attorneys
general for 32 states and the District of Columbia regarding standards for
direct mail sweepstakes promotions. We will promote consumer education and adopt
standards for promotions in the United States similar to those agreed to by
other direct marketing and publishing companies. The agreement includes
establishment of a consumer fund of approximately $6.0 to be used at the
discretion of the attorneys general for activities including consumer education
efforts. In addition, we will include with all sweepstakes promotion mailings a
fact sheet that explains in detail how our sweepstakes work and will modify the
language and packaging we use for those mailings. We have paid the total amount
due under the agreement, including approximately $2.0 in attorneys' fees, all of
which was accrued in prior periods.

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 2007.

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.



<PAGE>


Lease Obligations

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

Rental expense and sublease income are as follows:

                                      2001       2000       1999

Rental expense                       $ 17.1     $ 20.6     $ 18.5
Sublease income                        (2.6)      (1.6)      (0.9)
                                     ------     ------     ------
Net rental expense                   $ 14.5     $ 19.0     $ 17.6
                                     ======     ======     ======

Future minimum rental commitments, net of sublease income, for noncancelable
operating leases are as follows:

                         Minimum         Minimum
                          Rental         Sublease
                         Payments         Income            Net

2002                      $ 15.0         $  (4.6)          $ 10.4
2003                      $ 14.1         $  (4.6)          $  9.5
2004                      $ 11.7         $  (4.7)          $  7.0
2005                      $ 11.3         $  (4.8)          $  6.5
2006                      $ 14.1         $  (4.8)          $  9.3
Later years               $ 77.7         $ (29.4)          $ 48.3


Note 13        Segments

During the fourth quarter of 2001 we modified our reporting segments to reflect
our new internal management organization. We have restated results of operations
for prior periods to conform to our new operating segments.

North America Books and Home Entertainment publishes and markets, primarily
through direct marketing, Books and Home Entertainment products (Select
Editions; series and general books; and music, video and Young Families
products) in the United States and Canada. In addition, North America Books and
Home Entertainment publishes and markets Reader's Digest magazine in Canada and
sells this magazine and other magazines and products through youth fundraising
campaigns of QSP Canada, Inc. North America Books and Home Entertainment also
sells books and gift items by display marketing products on-site at schools and
businesses through Books Are Fun.

U.S. Magazines publishes and markets, primarily through direct marketing,
Reader's Digest magazine and several Special Interest magazines in the United
States. In addition, U.S. Magazines sells its magazines and other magazines and
products through youth fundraising campaigns of QSP.

International Businesses operates outside of the United States and Canada. This
segment publishes and markets, primarily through direct marketing, Books and
Home Entertainment products (described above), Reader's Digest magazine in
numerous editions and languages, and certain Special Interest magazines.

New Business Development comprises of the activities of Gifts.com, Inc.
(including Good Catalog Company), financial services alliances, certain Special
Interest magazines in international markets and other developing businesses.

Reportable segments are based on our method of internal reporting and each
operating segment is a strategic business unit that is managed separately. Prior
period revenue and operating profit (loss) information has been restated to
present our four reportable segments. Accounting policies of our segments are
the same as those described in Note 1. In addition, we allocate all corporate
administrative costs to operating segments on the basis of headcount and, where
appropriate, revenue and estimated usage.

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 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.

Operating Segment Financial Information

                                              Years ended June 30,
                                         2001         2000          1999
                                                     RESTATED     RESTATED
Revenues
   North America Books and Home
    Entertainment                    $    719.0    $    703.6    $    584.0
   U.S. Magazines                         651.6         579.9         603.5
   International Businesses             1,093.8       1,145.8       1,238.7
   New Business Development                53.8          55.2          32.3
                                     ----------    ----------    ----------
Total revenues                       $  2,518.2    $  2,484.5    $  2,458.5
                                     ==========    ==========    ==========
Operating profit (loss)
   North America Books and Home
    Entertainment                    $     70.9    $     90.1    $     39.1
   U.S. Magazines                          76.9          89.2         104.6
   International Businesses               116.2         118.3          28.0
   New Business Development               (16.6)        (40.4)         (4.7)
                                     ----------    ----------    ----------
Segment operating profit                  247.4         257.2         167.0
Other operating items                     (18.4)         (3.4)        (37.9)
                                     ----------    ----------    ----------
Total operating profit               $    229.0    $    253.8    $    129.1
                                     ==========    ==========    ==========
Identifiable assets
   North America Books and Home
    Entertainment                    $    556.1    $    534.8    $    261.6
   U.S. Magazines                         190.0         146.4         299.1
   International Businesses               479.1         538.1         558.3
   New Business Development                67.2          22.1          20.9
   Corporate                              382.7         488.3         476.6
                                     ----------    ----------    ----------
Total identifiable assets            $  1,675.1    $  1,729.7    $  1,616.5
                                     ==========    ==========    ==========



<PAGE>



                                                Years ended June 30,
                                              2001      2000      1999
                                                      RESTATED  RESTATED
Depreciation, amortization and asset
 impairments
  North America Books and Home
   Entertainment                             $ 22.7    $ 20.9    $ 13.8
  U.S. Magazines                               17.6      13.2      15.5
  International Businesses                     10.8      15.8      21.0
  New Business Development                      0.1       0.5       0.3
  Corporate                                    12.2       0.8      15.9
                                             ------    ------    ------
Total depreciation, amortization and
 asset impairments                           $ 63.4    $ 51.2    $ 66.5
                                             ======    ======    ======
Capital expenditures
  North America Books and Home
   Entertainment                             $  2.8    $  9.2    $  4.7
  U.S. Magazines                                4.8       9.9       8.6
  International Businesses                      9.4      10.3       9.7
  New Business Development                      0.1       0.6       1.6
  Corporate                                    26.4       4.3       1.7
                                             ------    ------    ------
Total capital expenditures                   $ 43.5    $ 34.3    $ 26.3
                                             ======    ======    ======

Information about geographic areas is as follows:

                                                 Years ended June 30,
                                             2001       2000        1999
                                                      RESTATED    RESTATED

Revenues
   United States                          $ 1,280.9   $ 1,229.1   $ 1,103.8
   International                            1,240.7     1,261.0     1,359.8
   Inter-area                                  (3.4)       (5.6)       (5.1)
                                          ---------   ---------   ---------
Total revenues                            $ 2,518.2   $ 2,484.5   $ 2,458.5
                                          =========   =========   =========
Revenues inter-area
   United States                          $     1.8   $     1.9   $     1.5
   International                                1.6         3.7         3.6
                                          ---------   ---------   ---------
Total revenues inter-area                 $     3.4   $     5.6   $     5.1
                                          =========   =========   =========
Long-lived assets
   United States                          $   688.4   $   665.3   $   282.6
   International                              102.5        80.5       136.7
                                          ---------   ---------   ---------
Total long-lived assets                   $   790.9   $   745.8   $   419.3
                                          =========   =========   =========



<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, 2001 and 2000, 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, 2001.
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 at June 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for an investment in an affiliate from the
cost method to the equity method of accounting. As discussed in Note 7 to the
Consolidated Financial Statements, for the year ended June 30, 1999, the
Company changed its method for calculating the market-related value of pension
plan assets used in the determination of pension expense.

KPMG LLP
New York, New York
August 14, 2001

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 judgements 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.

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.






Thomas O. Ryder
Chairman of the Board and
Chief Executive Officer





<PAGE>


Selected Financial Data


<PAGE>

<TABLE>

 In millions, except per share data                      2001(2)       2000(3)       1999(4)       1998(5)        1997(6)

Income Statement Data                                                 RESTATED       RESTATED      RESTATED      RESTATED
<S>                                                  <C>           <C>            <C>             <C>           <C>
Revenues                                               $ 2,518.2     $ 2,484.5      $ 2,458.5     $ 2,618.5     $ 2,823.8
EBITDA as adjusted(1)                                    $ 304.2     $   304.7      $   210.7     $   146.3     $   274.6
Operating profit                                         $ 229.0     $   253.8      $   129.1     $    30.2     $   192.8
Net income                                                $132.1     $   144.7      $   151.9     $    17.9     $   133.5
Basic and diluted earnings per share                 $1.27/$1.26   $1.35/$1.34    $1.40/$1.39         $0.16         $1.24
Dividends per common share                                $0.200        $0.200         $0.375         $0.90         $1.80
                                                          ------        ------         ------         -----         -----

Balance Sheet Data                                                    RESTATED
Cash and cash equivalents, short-term investments
 and marketable securities                                $ 47.3     $   227.6      $   437.2     $   126.1     $   102.4
Total assets                                           $ 1,675.1     $ 1,729.7      $ 1,616.5     $ 1,501.7     $ 1,615.8
Stockholders' equity                                     $ 456.2     $   475.2      $   381.5     $   258.6     $   346.0
Weighted-average common shares outstanding (basic    102.7/103.7   106.0/107.0    107.3/108.0         106.5         106.7
 and diluted)
Book value per common share                                $4.44         $4.48          $3.28         $2.14         $2.98
                                                         -------     ---------      ---------     ---------     ---------

</TABLE>

  (1)Earnings before interest, taxes, depreciation and
     amortization (EBITDA as adjusted) represents operating profit excluding
     other operating items, depreciation and amortization.
  (2)Results for 2001 include the net effect of second quarter adjustments and
     fourth quarter charges (aggregate pre-tax charges of $18.4).
  (3)Results for 2000 include the net effect of third quarter charges and fourth
     quarter adjustments (aggregate pre-tax charges of $3.4).
  (4)Results for 1999 include the net effect of second and fourth quarter
     charges (aggregate pre-tax charges of $37.9).
  (5)Results for 1998 include the effect of first quarter charges (aggregate
     pre-tax charges of $70.0).
  (6)Results for 1997 include the effect of fourth quarter charges (aggregate
     pre-tax charges of $35.0).

  RESTATED - Results for 2000 were restated to reflect equity in losses in
    BrandDirect Marketing. Results for all prior fiscal years were restated to
    reflect gross versus net presentation of revenues as described in Note 1 to
    our Notes to Consolidated Financial Statements.

Selected Quarterly Financial Data and Dividend and Market Information
 (Unaudited)
<TABLE>

In millions, except per
share data and                     Operating                    Net Income (Loss)                   Stock Price Range
shareholder information              Profit   Dividends             Per Share  Per Share                High - Low
                         Revenues    (Loss)  Per Share(1)   Amount    Basic     Diluted        Class A             Class B

 2001                    RESTATED   RESTATED               RESTATED  RESTATED   RESTATED
<S>                      <C>         <C>        <C>        <C>        <C>        <C>       <C>      <C>         <C>      <C>
    First Quarter        $   551.5   $  44.3    $0.050     $  22.3    $0.21      $0.21     $41.88 - $33.13      $38.00 - $29.63
    Second Quarter (2)       824.3     164.4     0.050       103.8     1.01       0.99     $40.44 - $32.44      $35.88 - $28.75
    Third Quarter            597.9      40.3     0.050        27.9     0.27       0.27     $40.50 - $26.25      $35.25 - $23.25
    Fourth Quarter(2)        544.5     (20.0)    0.050       (21.9)   (0.22)     (0.22)    $29.98 - $25.50      $27.10 - $23.00
                         ---------   -------    ------      ------    -----      -----     ------   ------      ------   ------
                         $ 2,518.2   $ 229.0    $0.200     $ 132.1    $1.27      $1.26     $41.88 - $25.50      $38.00 - $23.00
                         =========   =======    ======     =======    =====      =====     ======   ======      ======   ======


 2000                    RESTATED   RESTATED               RESTATED  RESTATED   RESTATED
    First Quarter        $   511.2   $  38.8    $0.050     $  28.6    $0.26      $0.26     $42.50 - $28.75     $39.13 - $26.25
    Second Quarter           805.2     146.2     0.050        86.3     0.81       0.80     $33.50 - $26.75     $30.13 - $24.50
    Third Quarter(3)         608.3      31.1     0.050        12.8     0.12       0.12     $39.63 - $28.38     $35.75 - $25.25
    Fourth Quarter(3)        559.8      37.7     0.050        17.0     0.16       0.16     $41.13 - $29.69     $37.75 - $26.00
                         ---------   -------    ------      ------    -----      -----     ------   ------      ------   ------
                         $ 2,484.5   $ 253.8    $0.200     $ 144.7    $1.35      $1.34     $42.50 - $26.75     $39.13 - $24.50
                         =========   =======    ======     =======    =====      =====     ======   ======     ======   ======

</TABLE>

Our Class A and Class B stock are listed on the New York Stock Exchange under
the symbols RDA and RDB, respectively. As of June 30, 2001, there were
approximately 1,725 holders of record of our Class A stock and 187 holders of
record of our Class B stock.
(1) Cash  dividends  on common stock are declared and paid share and share alike
on Class A and Class B stock.
(2)  Results  for 2001  include the net effect of
second quarter pre-tax  adjustments of $(8.2) and fourth quarter pre-tax charges
of $26.6.
(3)Results  for 2000 include the net effect of third quarter  pre-tax
charges of $9.3 and fourth quarter pre-tax adjustments of $(5.9).
RESTATED - Results for certain quarters of 2001 and 2000 were restated to
reflect equity in losses in BrandDirect Marketing. Results for all quarters
were restated to reflect gross versus net presentation of revenues as
described in Note 1 to our Notes to Consolidated Financial Statements.

The Reader's Digest Association, Inc. and Subsidiaries