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 2005,
2004 and 2003, unless otherwise indicated, are to fiscal 2005,
fiscal 2004 and fiscal 2003, 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 and
has been written excluding the effect of foreign currency
translation, except as specifically noted otherwise. This
discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes.  Certain amounts and
percentages do not recalculate due to rounding.


Results of Operations:  Company-Wide


Our Reportable Segments

Our businesses are structured into the same three reportable
segments (Reader's Digest North America, Reader's Digest
International and Consumer Business Services) that our chief
operating decision maker uses to assess business performance.  In
addition to the reportable segments, we separately report
Corporate Unallocated expenses, which cover expenses that are not
directly attributable to business unit performance.  In the first
half of 2005, we made minor modifications to the composition of
two of our reportable segments to reflect a change in the manner
in which senior management and our chief operating decision maker
internally manage certain smaller business units.  Reader's
Digest Young Families and Trade Publishing which were included in
Consumer Business Services, are now included in Reader's Digest
North America.  We have restated reportable segment results of
operations for all periods presented and revised the 2004 v. 2003
discussion below to conform to our new reportable segments.  Here
is a brief description of the activities included within our
reportable segments.

Reader's Digest North America

This segment comprises our operations in the United States and
Canada that publish and market Reader's Digest magazine, Reiman
magazines and several special interest magazines; our operations
in the United States and Canada that publish and market Books and
Home Entertainment products, including Select Editions, Reader's
Digest Young Families, music and video products, and series and
general books related to the following affinities: reading, home
and health, and entertainment.  Growth initiatives in this
segment include developing and launching new products and
leveraging our existing products and brands.

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



<PAGE>






Reader's Digest International

This segment comprises our operations outside of the United
States and Canada, with our most significant markets in the
United Kingdom, Germany, Central Europe and France.  The
businesses in this segment publish and market Reader's Digest
magazine (in numerous editions and languages) and books and home
entertainment products (described above).  Growth initiatives in
this segment include: entering new geographic markets, developing
and launching new products, acquiring customers through new
channels and expanding U.S. business models into markets outside
of North America.

The performance of these businesses is driven by factors similar
to those in the Reader's Digest North America segment, except
that overall results are less sensitive to changes in individual
geographic market conditions due to the number of markets in
which we operate.  The results for Reader's Digest magazine in
international markets are driven principally by circulation and
secondarily by advertising revenues.  The results of our books
and home entertainment products in these markets are driven by
its universe of promotable customers, new customer acquisition
programs, response rates to its promotional mailings, customer
payment rates and membership in our continuity series business.

Consumer Business Services

This segment comprises Books Are Fun, our domestic display
marketing business, and QSP, our youth fundraising businesses in
the United States and Canada.  Our focus in these businesses is
to increase market penetration and expand efficiency with
existing accounts by leveraging our sales force.

These businesses principally sell products through non-direct
marketing channels, primarily through their sales forces.  The
performance of these businesses is driven by product selection,
the number of accounts or events held, and the average sales per
account or event.

Intercompany Eliminations and Corporate Unallocated Expenses

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



<PAGE>


Summary of Reportable Segment Results

                                                       Years ended June 30,
                                                2005      2004        2003
                                                        Restated(1) Restated(1)
Revenues
  Reader's Digest North America               $   917    $   919    $   932
  Reader's Digest International                 1,012        970      1,008
  Consumer Business Services                      485        525        563
  Intercompany eliminations                       (24)       (26)       (28)
                                              -------    -------    -------
Total revenues                                $ 2,390    $ 2,388    $ 2,475
                                              =======    =======    =======

Operating (loss) profit
  Reader's Digest North America               $    91    $    76    $    61
  Reader's Digest International                    76         57         49
  Consumer Business Services                       29         59         90
  Previously deferred magazine promotion
   expense(2)                                     (77)       (27)        --
  Goodwill charge(3)                             (129)        --         --
  Corporate Unallocated                           (38)       (44)       (21)
  Other operating items,  net(4)                   --        (15)       (40)
                                              -------    -------    -------
Operating (loss) profit                       $   (48)   $   106    $   139
                                              =======    =======    =======

Intercompany eliminations
  Reader's Digest North America               $    (9)   $   (11)   $    (8)
  Reader's Digest International                    (4)        (4)        (3)
  Consumer Business Services                      (11)       (11)       (17)
                                              -------    -------    -------
Total intercompany eliminations               $   (24)   $   (26)   $   (28)
                                              =======    =======    =======


(1) In the first half of 2005, we made minor modifications to
    the composition of two of our reportable segments to
    reflect a change in the manner in which senior
    management and our chief operating decision maker
    internally manage certain smaller business units.
    Reader's Digest Young Families and Trade Publishing,
    which were included in Consumer Business Services, are
    now included in Reader's Digest North America.

(2) In connection with our change to expensing magazine deferred
    promotion costs when the promotion is mailed to
    prospective customers, our reportable segment
    operating (loss) profit in 2005 includes such expenses
    as incurred.  Amortization of previously deferred
    promotion costs in 2005 and our deferred promotion
    charge recorded in the fourth quarter of 2004 are not
    included in segment results reviewed by our chief
    operating decision maker.  For the year ended June 30,
    2005, amortization of previously capitalized magazine
    promotion costs related to: 81% to Reader's Digest
    North America and 19% to Reader's Digest
    International.  For the year ended June 30, 2004, our
    magazine deferred promotion charge related to: 45% to
    Reader's Digest North America and 55% to Reader's
    Digest International.

(3) The goodwill charge related to Books Are Fun, part of the
    Consumer Business Services reportable segment, is not
    included in segment results reviewed by our chief
    operating decision maker.  See Note 6, Goodwill and
    Other Intangible Assets, Net, in our Notes to
    Consolidated Financial Statements for additional
    information.


<PAGE>



(4) Other operating items, net in 2004, principally comprising
    severance and contract terminations, were attributable
    to: 12% to Reader's Digest North America, 22% to
    Consumer Business Services, 61% to Reader's Digest
    International and 5% to corporate departments that
    benefit the entire organization.  In 2003, these
    items, principally severance, were attributable to:
    13% to Reader's Digest North America, 6% to Consumer
    Business Services, 64% to Reader's Digest
    International and 17% to corporate departments that
    benefit the entire organization.


Overview

The year ended June 30, 2005 marked the end of our two-year
plan to achieve sustainable revenue and profit growth.  As part
of this plan we have right-sized many of our businesses,
including adjusting the rate base for Reader's Digest magazine
in certain markets and investing in new products and markets.
Some of our initiatives are already making contributions to
their respective reportable segments.  Although the effects of
our goodwill charge and amortization of previously deferred
magazine promotion costs resulted in an operating loss in 2005,
we believe our actions have put us on track to achieve
sustainable revenue and profit growth in Reader's Digest North
America and Reader's Digest International.

While the underlying trends in these two reportable segments
are encouraging, our Consumer Business Services segment had a
difficult year.  Competitive pressures and the corresponding
effect on our sales force and accounts have adversely affected
revenues and profits in this segment and continue to pose
challenges.  Accordingly, we recorded a charge to write-down
the value of our goodwill at Books Are Fun in the third quarter
of 2005.  We have initiated strategies to address these
challenges, and we anticipate improved financial performance in
fiscal 2006.

In addition to our reportable segments, we also took measures
to enhance liquidity and shareholder value.  During the year we
refinanced debt maturing in 2008 and simultaneously reduced the
interest rate charged on our borrowings, doubled our quarterly
dividend, monetized a number of non-strategic assets and
announced a $100 share repurchase program.


Revenues and Operating (Loss) Profit

2005 v. 2004

Revenues

Revenues were relatively flat in 2005 when compared with 2004.
Excluding the effect of foreign currency translation, revenues
decreased 3%.  While revenues were lower for all three of our
reportable segments, the declining trend that Reader's Digest
North America and Reader's Digest International have reported
in recent years appears to have stabilized.

Lower revenues for Consumer Business Services were driven by
both Books Are Fun and QSP.  Books Are Fun continues to be
adversely affected by lower average sales per event and fewer
events.  QSP revenues were lower principally because of
magazine and gift volume declines driven by lower participation
in fundraising programs.  Both Books Are Fun and QSP continued
to experience competitive pressure for accounts, which
adversely affected profit margins.

Revenues for Reader's Digest International decreased slightly
in 2005, compared with double-digit declines in 2004 and 2003,
due to lower membership in series products and a decline in the
number of promotable customers.  Planned reductions in
circulation for Reader's Digest magazine in certain markets to
improve profitability, and the elimination of Moneywise
magazine in the United Kingdom contributed to the decline.  The
largest declines were in Germany, Brazil, Mexico and the United
Kingdom.  Partially offsetting these declines were strength in
single sales products and increased mail quantities in
Australia as well as positive results from new markets and new
products.

The slight revenue decline in Reader's Digest North America was
principally driven by the planned elimination of marginally
profitable and unprofitable activity in Reader's Digest Young
Families and lower membership in series products.  In addition,
lower circulation revenues for Reader's Digest magazine, due in
part to the January 2004 reduction in the rate base,
contributed to the decline.  Partially offsetting these
declines were improved revenues in Canada and our special
interest magazines, and new revenues from products launched
within the last two years.  Reiman revenues in 2005 were flat
compared with 2004.


Operating (Loss) Profit

Operating profit decreased significantly to a loss of $(48) in
2005, compared with a profit of $106 in 2004.  The operating
loss was principally driven by the goodwill charge of $(129)
related to Books Are Fun and $(77) related to amortization of
previously deferred magazine promotion costs (described in
further detail below).  Foreign currency translation reduced
our operating loss by $9.  Lower profits for Consumer Business
Services and investments in new products and geographic markets
contributed to the decline.  Despite lower revenues, profits at
Reader's Digest North America and Reader's Digest International
improved because of lower costs.  Combined with lower Corporate
Unallocated expenses, these factors partially offset profit
declines elsewhere.

Product, distribution and editorial expenses decreased to $971 in
2005, compared with $973 in 2004.  Excluding the effect of
foreign currency translation, these costs declined 3%.  Lower
overall sales volumes, and lower manufacturing and delivery costs
for Reader's Digest magazine due to reductions in the rate bases
in various markets, including the January 2004 rate base
reduction in the United States, principally drove the decline.
These decreases were partially offset by costs incurred to enter
new markets.

Promotion, marketing and administrative expenses increased 3% to
$1,337 for 2005, compared with $1,294 in 2004.  Excluding the
effect of foreign currency translation, these costs were only
slightly higher.  In 2005, these expenses included amortization
of previously deferred magazine promotion costs of $(77), while
in 2004 these expenses included a charge of $(27) related to
magazine deferred promotion costs (described below).  In addition
to this increase in magazine promotion costs, promotion,
marketing and administrative expenses increased slightly because
of costs incurred to enter new markets.  These increases were
partially offset by lower costs due to a reduced rate base for
Reader's Digest magazine, lower mail quantities for books and
home entertainment products in various markets and for certain
Reiman products, and the effects of cost-reduction measures
initiated in previous periods, including staff reductions.

Reportable Segments
Profits for Consumer Business Services declined principally
because of lower sales activity and increased incentives at both
QSP and Books Are Fun.

Improved profits for Reader's Digest North America were driven by
effective management of overhead costs, and by lower promotion
and production costs because of lower overall promotion activity
and the January 2004 reduction in the rate base for Reader's
Digest magazine.  Partially offsetting this improvement were
costs incurred to launch two new Reiman-inspired magazines,
Cooking for 2 and Birds & Blooms Extra.

Profits for Reader's Digest International improved because of
increased response rates to promotional mailings for single sales
products, more efficient mailings and the results of
cost-reduction measures initiated in previous periods.  These
improvements were partially offset by costs incurred to develop
new products and enter new geographic markets, a critical
component of the growth initiatives for this reportable segment.

Corporate Unallocated
Corporate Unallocated expenses reflect the cost of governance and
centrally managed expenses, as well as the accounting for U.S.
pension plans, postretirement healthcare costs, and executive
compensation programs that are not allocated to the reportable
segments.  These expenses were $(38) in 2005, compared with $(44)
in 2004.  Lower expenses were driven by an $8 increase in net
pension income (from our over-funded U.S. pension plan) and a $2
decrease in postretirement healthcare costs (due to changes in
our healthcare plans and recognition of a government Medicare
subsidy announced in January 2004).  Lower costs of $2 due to the
favorable settlement of prior property taxes and due to the sale
and partial leaseback of our Westchester New York headquarters
facility.  These items were partially offset by a $(4) increase
in employee compensation expenses.

Other Operating Items, Net
Other operating items, net was zero in 2005, compared with $(15)
in 2004.  Although we incurred other operating items, net, of
$(4) in 2005, this charge was offset by reversals of $4 related
to severance and other charges recorded in previous periods that
were no longer necessary.  We review our restructuring charges
periodically to determine the appropriateness of existing
reserves in light of current circumstances.  Accordingly, these
charges were reversed because of the occurrence of events that
affected our original plans.  Severance charges of $(4) related
to the termination of approximately 60 employees, a majority of
which were located in the United States.  As of June 30, 2005,
approximately 25% of these employees had been terminated.  The
remaining employees are expected to be terminated over the next
several fiscal quarters.

Previously Deferred Magazine Promotion Expense
After reassessing our accounting for magazine promotion costs in
the fourth quarter of 2004, we began expensing magazine promotion
costs when the promotion is mailed to prospective customers
instead of deferring and amortizing such costs.  In the fourth
quarter of 2004 we recorded a $(27) charge related to this
change.  Similarly, in 2005 we expensed $(77) related to
promotion costs capitalized as of June 30, 2004.  Such amount is
included as a component of promotion, marketing and
administrative expenses on the statements of operations.  As of
June 30, 2005, there are no deferred magazine promotion costs for
promotions that were capitalized as of June 30, 2004.

Goodwill Charge
The third quarter of the fiscal year is our designated annual
period to assess the recoverability of goodwill and our
indefinite lived intangible assets.  Based on our assessment,
Books Are Fun recorded a goodwill charge of $(129) in the third
quarter of 2005 because the performance of our product
portfolio and competitive pressures on margin resulted in
revenue and operating profits falling short of our
expectations.  The fair value of Books Are Fun was determined
independently using a combination of discounted future net cash
flows and an assessment of comparable companies in the
marketplace.




<PAGE>


2004 v. 2003

Revenues

Revenues decreased 3% to $2,388 in 2004, compared with $2,475 in
2003.  Excluding the effect of foreign currency translation,
revenues decreased 8%.  Revenues in all three of our reportable
segments declined.  The most significant decline was in Reader's
Digest International.

We anticipated the decline in Reader's Digest International
because of weak economic conditions in most of the geographic
markets where we operate.  Our strategy to stabilize these
businesses by scaling back promotional mailings and exiting
marginally profitable businesses in certain markets worsened the
decline.  Although response rates, principally related to books
and home entertainment products, continued to decline, the rate
of decline decreased.  The most significant revenue declines were
in the United Kingdom, Germany and France.

Revenues for Consumer Business Services declined due to lower
sales at QSP and Books Are Fun because of turnover in the sales
force earlier in the year.  Increased competition at QSP, and
weaker product selection at Books Are Fun in the second quarter
of 2004, our peak selling season, also contributed to the
decline.

Revenues for Reader's Digest North America declined because of
continued lower circulation and advertising revenues for Reader's
Digest magazine driven by our decision to reduce the rate base in
January 2003 and 2004.  Lower sales at Reiman were attributed to
lower series book product sales and lower renewal rates for
certain magazines.  These declines were partially offset by
improved performance for our Trade Publishing business, revenues
from new Reiman-inspired magazines and increased sales of RD
Specials (a newsstand product that was introduced in the second
quarter of 2003) due to an increase in the number of issues
published.


Operating (Loss) Profit

Operating profit declined 24% to $106 in 2004, compared with $139
in 2003.  Excluding the effect of foreign currency translation,
profits declined 29%.  The effect of the magazine deferred
promotion charge recorded in the fourth quarter of 2004
(described below), weaker performance in Consumer Business
Services and higher Corporate Unallocated expenses drove the
overall decline in profitability.  Improved profits at two of our
reportable segments, Reader's Digest North America and Reader's
Digest International, and lower restructuring and other charges,
partially offset the decline.

Product, distribution and editorial expenses decreased 3% to $973
in 2004, compared with $1,002 in 2003.  Excluding the effect of
foreign currency translation, these costs declined 7%.  Lower
product and fulfillment costs, because of the rate base reduction
for U.S. Reader's Digest magazine and lower sales activity, were
the principal drivers of the decline.  The results of efforts to
renegotiate supply contracts and to leverage existing
relationships across all of our businesses contributed to the
decrease in costs.

Promotion, marketing and administrative expenses were flat at
$1,294 for 2004 and 2003. In 2004, these expenses included the
magazine deferred promotion charge (recorded in the fourth
quarter), described in further detail below.  Excluding the
effect of foreign currency translation, these expenses decreased
4%.  The decline in promotion costs parallels our efforts to
reduce risk, stabilize Reader's Digest International and
standardize marketing programs in Reader's Digest North America.
Certain cost-reduction initiatives, including reductions in staff
and other actions, contributed to the decline.  These declines
were partially offset by investments in new customer acquisition
at Reiman and costs incurred to develop and launch new products
in Reader's Digest North America and Reader's Digest
International.

Reportable Segments
Lower profits for Consumer Business Services were driven by a
combination of lower revenues and increased investments in the
sales force for QSP and Books Are Fun.

The increase in profits for Reader's Digest North America was
driven by lower product, promotion and fulfillment costs for
Reader's Digest magazine, principally attributable to the rate
base reductions, increased profits for special interest magazines
and the benefits of cost-reduction initiatives.  Costs incurred
to launch two new Reiman-inspired magazines, Backyard Living and
Our Canada, and investments in new customer acquisition at Reiman
partially offset this improvement.

Profits for Reader's Digest International improved principally
due to significant cost reduction, improved mailing efficiency
and better execution.

Corporate Unallocated
Corporate Unallocated expenses reflect the cost of governance and
centrally managed expenses, as well as the accounting for U.S.
pension plans, postretirement healthcare costs, and executive
compensation programs that are not allocated to the reportable
segments.  These expenses were $(44) in 2004, compared with $(21)
in 2003.  The increase was driven by a:
  -   $(19) decrease in net pension income (from our over-funded
      U.S. pension plan), partly because of our decision to lower
      the assumed rate of return on our pension assets in
      accordance with our outlook on long-term asset return trends
      (see Critical Accounting Policies for additional information)
  -   $(4) increase in compensation expense due to a greater mix
      of restricted stock versus stock options
  -   $(3) increase associated with postretirement healthcare costs

Other Operating Items, Net
Other operating items, net, decreased to $(15) in 2004, compared
with $(40) in 2003.  Charges recorded in the second, third and
fourth quarters of 2004 comprised $(14) for severance and $(3)
for contract terminations, asset impairments and pension
curtailments, partially offset by reversals of $2, principally
related to severance.

Charges of $(14) for severance related to streamlining operations
in certain international markets, domestic businesses and
corporate departments.  These charges relate to the termination
of approximately 240 employees, of which approximately 86% were
terminated as of June 30, 2005.

Charges of $(3) for contract terminations, asset impairments and
pension curtailments principally represent costs associated with
closing our Norway location and a lease termination at Books Are
Fun.

These charges were partially offset by reversals of $2,
principally severance, recorded in the third quarter of 2004
related to charges recorded in previous periods that were no
longer necessary.  We review our restructuring charges
periodically to determine the appropriateness of existing
reserves in light of current circumstances.  Accordingly, these
charges were reversed because of the occurrence of events that
affected our original plans.

In 2003, we recorded net charges of $(40) comprising: $(35), net,
related to severance, $(3) related to write-downs of assets and
$(5) related to other costs.  We also recorded a gain of $3
related to net adjustments to litigation-related accrual balances
that were established in previous years.  The severance and other
charges principally related to lowering our cost base and
streamlining our business processes.



<PAGE>


Previously Deferred Magazine Promotion Expense
During the fourth quarter of 2004, we reassessed our accounting
for magazine promotion costs in response to changes in our
business, as well as the strategies and initiatives being
undertaken by our magazine business.  As a result of these
changes, pursuant to American Institute of Certified Public
Accountants Statement of Position (SOP) 93-7, "Reporting on
Advertising Costs," effective 2005, we will no longer defer and
amortize magazine promotion costs, but will expense such costs
when the promotion is mailed to prospective customers.  As of
June 30, 2004, we recorded a pre-tax charge of $(27), to reflect
the impact of this change in circumstances on our existing
asset.  Such amount is included as a component of promotion,
marketing and administrative expenses on the statements of
operations.


Other (Expense) Income, Net

2005 v. 2004

Other (expense) income, net for 2005 was $(32), compared with
$(40) in 2004.  The most significant component of other (expense)
income, net was interest expense of $(54) and $(55) in 2005 and
2004, respectively.  Interest expense in both periods included
$(7), principally related to the write-off of deferred financing
fees because of refinancing activities (see Liquidity and Capital
Resources section for additional information).

The primary factors affecting comparability in other (expense)
income, net were:
  -  a gain of $7 from the sale of buildings in Portugal and
     Australia in 2005, compared with a gain of $6 from the sale of
     a building in Hong Kong in 2004
  -  gains of $3 from the sale of Moneywise magazine in the
     United Kingdom and Crafting Traditions magazine in the United
     States, both of which occurred in the second quarter of 2005
  -  gains of $5 from the sale of other non-strategic assets in
     2005, principally fine art
  -  the write-off of $(2) in the third quarter of 2004 of
     foreign currency translation losses associated with the
     closure of our business in Norway
  -  a gain of $3 from proceeds received in exchange for our
     interest in Schoolpop, Inc. in the first quarter of 2004,
     which merged into an unrelated third party


2004 v. 2003

Other (expense) income, net for 2004 was $(40), compared with
$(39) in 2003.  The primary changes were:
  -  additional interest expense, net of $(8) in 2004,
     principally due to the write-off of deferred financing fees
     and other items of $(7) as a result of refinancing a portion
     of our existing debt and terminating some of our interest rate
     caps that were no longer required (see Note 7, Financial
     Instruments, and Note 11, Debt, in our Notes to Consolidated
     Financial Statements)
  -  lower gains on sales of shares of LookSmart, Ltd. of $(4)
     because we completely liquidated our remaining investment in
     LookSmart in the first quarter of 2004
  -  a gain of $6 on the sale of our building in Hong Kong in
     2004, compared with a gain of $2 from the sale of a building
     in Australia in 2003
  -  a gain of $3 from proceeds received in exchange for our
     interest in Schoolpop, Inc., which merged into an unrelated
     third party in the first quarter of 2004 (we had written this
     investment down to zero in the fourth quarter of 2002)
  -  expenses of $(3) incurred in 2003 in connection with our
     recapitalization transactions


Income Taxes

2005 v. 2004

Although we had a loss in 2005, we recorded a tax expense of
$(12) principally driven by the non-deductible write-down of
goodwill at Books Are Fun.  Excluding this write-down, the
effective tax rate for 2005 was 23.2%, compared with a rate of
25.1% for 2004.  The effective tax rates in 2005 and 2004 were
both favorably affected by a reduction in tax reserves due to the
resolution of certain federal, state and foreign audits.


2004 v. 2003

The effective tax rate for 2004 was 25.1%, compared with a rate
of 38.9% for 2003.  Excluding non-deductible costs associated
with the recapitalization transactions in 2003 (see Note 12,
Capital Stock, in our Notes to Consolidated Financial Statements
for further information), the comparable effective tax rate for
2003 was 35.3%.  The lower tax rate was due to the favorable
resolution of tax audit matters in certain domestic and
international markets and the tax-free sale of our building in
Hong Kong.  Lower statutory tax rates in some of our markets and
smaller restructuring charges in international markets with more
favorable tax rates contributed to the lower effective tax rate.


Net (Loss) Income

2005 v. 2004

As a result of the items discussed above, net loss in 2005 was
$(91) or $(0.95) per share for both basic and diluted loss per
share.  For 2005, the effect of potentially dilutive shares was
not considered in the calculation of loss per share because
such shares would have been anti-dilutive.  In 2004, net income
was $49 or $0.49 per share on a diluted-earnings basis ($0.50
per share for basic earnings per share).


2004 v. 2003

As a result of the items discussed above, net income in 2004 was
$49 or $0.49 per share on a diluted-earnings basis ($0.50 per
share for basic earnings per share).  In 2003, net income was $61
or $0.60 per share on a diluted-earnings basis ($0.61 per share
for basic earnings per share).


Results of Operations:  Reportable Segments

Reader's Digest North America

2005 v. 2004

Revenues for Reader's Digest North America were relatively flat
in 2005 when compared with 2004.  Excluding the effect of foreign
currency translation, revenues declined 1%.  Lower revenues for
U.S. Books and Home Entertainment and Reader's Digest magazine
were partially offset by increased revenues in Canada and for our
special interest magazines.

Lower revenues for U.S. Books and Home Entertainment were driven
by the planned elimination of marginally profitable and
unprofitable activity in Reader's Digest Young Families and a
continued decline in Select Editions membership.  Strong
performance of certain single sales products, due in part to
increased mail quantities, and increased Trade Publishing
revenues partially offset these declines.

Circulation revenues for Reader's Digest magazine were lower
principally due to the January 2004 reduction in the rate base
and a continued decline in renewal pools.  However, the
circulation decline shows signs of stabilizing following the
reduction in the rate base and a decreased reliance on
subscriptions generated by agents.  Also, newsstand volume
declined 9% because of industry-wide softness in this market,
while fewer prescription drug and automotive pages drove a slight
decline in advertising revenues.

Lower revenues at Reiman were attributable to lower renewal rates
for certain cooking titles and the absence of revenues from
Crafting Traditions magazine (sold in the second quarter of
2005).  In addition, sales of annual book products declined
slightly because weaker performance of established titles was
partially offset by the performance of newer titles.  These
declines were offset by increased revenues from Backyard Living
(a magazine launched in the third quarter of 2004) and increased
catalog and ancillary sales.

Partially offsetting the declines described above were increased
revenues in Canada, the addition of revenues from new products
and stronger performance from certain special interest magazines.

Increased revenues in Canada were driven by Our Canada, a new
magazine launched in the third quarter of 2004, and strong
performance of single sales products, due to increased mail
quantities and response rates to promotional mailings.
Advertising revenues from our special interest magazines
increased, particularly The Family Handyman and Selecciones.

As part of our program to invest in the business, in 2005 we
launched two new Reiman-inspired magazines: Cooking for 2 and
Birds & Blooms Extra.  Both of these titles made positive
contributions to revenues during the year.

Operating profit increased 19% to $91 in 2005, compared with $76
in 2004.  Excluding the effect of foreign currency translation,
profit improved 18%.  The increase in profit was principally
driven by effective management of overhead costs and lower
promotion costs.  Lower production costs for Reader's Digest
magazine, due to the January 2004 reduction in the rate base,
contributed to the improvement.  These increases were partially
offset by investments in new products.


2004 v. 2003

Revenues for Reader's Digest North America decreased 1% to $919
in 2004, compared with $932 in 2003.  Excluding the effect of
foreign currency translation, revenues declined 3%.  The largest
declines in revenue related to Reader's Digest magazine and
Reiman.

The decline in revenues for Reader's Digest magazine was
attributable to lower circulation and advertising revenues due to
the January 2003 and 2004 reductions in the rate base.
Circulation revenues continued to be adversely affected by a
decline in renewal pools, partially offset by the introduction of
new subscribers at lower introductory rates.  In addition, in the
first half of 2004, newsstand sales declined, consistent with
softness in this market.  Although this trend showed signs of
stabilizing in the second half of 2004, newsstand volume for the
year declined 11%.  Advertising revenues declined due to a lower
rate per page, because of the January 2003 and 2004 reductions in
the rate base for Reader's Digest magazine.  This decline was
partially offset by an increase in the number of advertising
pages sold.

The decline in revenues for Reiman was principally driven by
lower sales for certain series book products and lower sales of
single sales books because of stronger product offerings in
2003.  In addition, circulation revenues for certain magazines
declined due to lower renewal rates.  These declines were
partially offset by strong sales of new annual book products and
new products for sale in retail outlets.

In addition to the activity noted above, revenues for U.S. Books
and Home Entertainment also declined modestly.  This was largely
attributable to lower sales of Select Editions, because of lower
membership in the series, and the discontinuance of certain
unprofitable series products.  At the same time, increased
promotional activity for single sales products and higher prices
and payment rates for Select Editions, partially offset the
decline.

Revenues in Canada declined slightly because of lower response
rates to mailings for video products and the discontinuance of
certain series products.  These declines were partially offset by
improved response rates for general book products.

Along with these declines in revenues for Reader's Digest North
America, performance for our Trade Publishing business improved
due to increased sales of stronger products, and revenues
increased because of the introduction of new products, including
RD Specials (introduced in the second quarter of 2003) and
Backyard Living (launched in the third quarter of 2004) in the
United States, and Our Canada (launched in the third quarter of
2004) in Canada.  Furthermore, advertising and circulation
revenues for Selecciones increased due to an increase in the rate
base.

Operating profit for this segment improved 24% to $76 in 2004,
compared with $61 in 2003.  Excluding the effect of foreign
currency translation, profit increased 21%.  The most significant
improvements, in U.S. Books and Home Entertainment and Reader's
Digest magazine, were driven by lower product, fulfillment and
promotion costs because of the rate base reductions described
above and the standardization of certain marketing activities.  A
lesser reliance on subscriptions generated by agents (also due to
the rate base reductions described above), increased profits for
special interest magazines and the benefits of cost-reduction
initiatives contributed to the improvement.

These improvements were partially offset by investments in new
customer acquisition for Taste of Home magazine and costs
incurred to develop and launch Backyard Living and Our Canada.


Reader's Digest International

2005 v. 2004

Revenues for Reader's Digest International increased 4% to $1,012
in 2005, compared with $970 in 2004.  Excluding the effect of
foreign currency translation, revenues declined 2%.  Although
revenues declined, the declining trend experienced in recent
years appears to have become stable.  Our active customer base
has stabilized, after substantial declines in recent years.
Other key indicators also showed progress, including improved
response rates, strong performance of single sales products and
stabilizing magazine circulation and series membership.
Collectively, these trends indicate that actions taken to restore
the business are positively affecting this segment.

The decrease in revenues was driven by Germany, Brazil, Mexico
and the United Kingdom as a result of lower sales of books and
home entertainment products due to declining continuity series
membership, lower response rates to promotional mailings and a
decline in the number of promotable customers.  In addition,
revenues for Reader's Digest magazine were lower because of
planned reductions in circulation to better manage customer
acquisition costs, improve profitability and achieve a
sustainable circulation level.

Also, revenues were $(9) lower because we sold Moneywise magazine
in the United Kingdom (in the second quarter of 2005) and because
we licensed publication of Reader's Digest magazine to a third
party in Norway.

Increased revenues from single sales books and home entertainment
products in Australia, Asia, and from new markets, including
Romania and the Ukraine, partially offset revenue declines
elsewhere.  The increase in revenues in Australia was driven by
increased mail quantities due to an increased active customer
base and improved response rates to promotional mailings, while
revenues in Asia improved because of the introduction of new
products.

Operating profit for this segment increased 34% to $76 in 2005,
compared with $57 in 2004.  Excluding the effect of foreign
currency translation, profits increased 20%.  Improved profits
were driven by the United Kingdom, Germany, Australia and the
addition of new markets.  The increase in profits was
attributable to increased response rates to promotional mailings
for single sales products, more efficient mailings, lower
customer acquisition costs, the benefits of continuing
cost-reduction measures and lower product and distribution costs.


2004 v. 2003

Revenues for Reader's Digest International declined 4% to $970 in
2004, compared with $1,008 in 2003.  Excluding the effect of
foreign currency translation, revenues declined 13%.  Revenues
declined in substantially all of our markets. The decline in
revenues in this segment was driven by lower response rates to
promotional mailings and lower series membership in many
markets.  In addition, weaker economic conditions in our markets
contributed to the decline.

To mitigate these factors and the residual effect of lower
response rates in 2003, we reduced mail quantities and the
frequency of our mailings.  While these reductions lessened the
risk of unprofitable mailings and mailing intensity, they also
reduced the number of promotable customers, further lowering
revenues.  Although response rates continued to decline,
principally related to books and home entertainment products, the
rate of decline was lower.

The most significant revenue declines were in the United Kingdom,
Germany and France, and to a lesser extent, in Central Europe,
Asia, Switzerland, Brazil and Australia.  Revenues also declined
in Spain and Norway as we discontinued certain significant lines
of business in those markets to enhance profitability.

Revenue increases in Russia partially offset declines elsewhere.
Revenues in Russia have improved principally due to increased
promotional mailings for single sales products, partially offset
by lower response rates to promotional mailings.

Operating profit for this segment increased 16% to $57 in 2004,
compared with $49 in 2003. Excluding the effect of foreign
currency translation, profit increased 6%.  The most significant
profit improvements were in Australia, Mexico, France and
Poland.  In 2003, issues associated with our transition to new
outsource vendors adversely affected profits in Australia and
France.  The resolution of these issues and active management of
costs drove the profit improvement.  The impact of cost-reduction
initiatives, principally overhead reductions across most markets,
and the discontinuance of marginal lines of business in certain
markets, contributed to the improvement.  These improvements were
partially offset by lower profits in Germany, Switzerland and the
United Kingdom due to the revenue factors described above.


Consumer Business Services

2005 v. 2004

Revenues for Consumer Business Services decreased 8% to $485 in
2005, compared with $525 in 2004.  The revenue decline was
attributable to both QSP and Books Are Fun.

Revenues at Books Are Fun decreased 8% due to lower average sales
per school event and fewer business display and corporate events
held.  Average sales per school event were lower because of
weaker performance of our product portfolio and a shift in the
mix of products sold to lower-priced products.  Although we
experienced significant sales force turnover in the school market
early in the year, in the second half of the year we recovered
lost events through intensive recruiting efforts.  The decline in
business events was driven by turnover in the independent sales
force, due to increased competition, while turnover in accounts
resulted in fewer corporate events.  In contrast to the school
market, our recruiting efforts were not successful in recovering
lost events.  Also, because new representatives generally require
a certain amount of time to build their territories, these
representatives did not significantly affect revenues.  During
the year, the number of sales representatives in our primary
lines of business, the school and corporate markets, decreased
1%.

Double-digit declines in magazine and gift sales volumes due to
lower participation in fundraising programs drove the 8% decline
in revenues at QSP.  These declines were partially offset by
increased sales of music and food products.  Sales of World's
Finest Chocolate products increased 9% due to efforts to convert
more of our food business to these products.

In an effort to stabilize and grow both of these businesses, we
have identified a number of initiatives to increase market
penetration and efficiency with our existing accounts.  We are
also reviewing our product and promotion strategies for certain
product lines, and continuing intensive recruiting efforts at
Books Are Fun.

Operating profit for this segment for 2005 decreased 50% to $29,
compared with $59 in 2004.  The revenue changes described above
along with increased incentives at Books Are Fun drove most of
the decline in profits.  Investments at QSP, including additional
incentives, enhanced promotional materials and costs to integrate
new products, contributed to the decline.

These declines were partially offset by the effect of
cost-reduction measures at QSP that were initiated during the
second half of 2005.


2004 v. 2003

Revenues for Consumer Business Services declined 7% to $525 in
2004, compared with $563 in 2003.  Revenues declined for both QSP
and Books Are Fun.

Revenues for QSP declined 9% due to lower same-account sales and
fewer accounts launched.  This resulted in lower sales volumes of
magazines and gift and food products.  These declines were
attributable to turnover in the sales force in certain
territories, increased competition for fundraising dollars and a
soft economy.  Increased incentives contributed to the decline.
Despite these declines, gross sales of World's Finest Chocolate
products increased 2%, while the tonnage credited toward our
minimum purchase commitment increased 15%.  Slightly higher
pricing for gift products partially offset these declines.

Revenues for Books Are Fun declined 6% primarily due to lower
average sales per event and, to a lesser extent, fewer events
held.  We attribute the weaker average sales per event to
shortages of strong selling products in the second quarter of
2004, which was an unforeseen side effect of aggressively
managing our inventory, and to weaker product selection.  The
decline in the number of events held was primarily due to
turnover in the sales force earlier in the year.

At Books Are Fun, we changed our purchasing management and
reviewed our product allocation strategy and testing processes to
rectify the product issues noted above.

Because of our efforts to grow the sales force, we had more sales
representatives as of June 30, 2004 than we had as of June 30,
2003 to serve new and existing markets for both QSP and Books Are
Fun.  However, because of the time required to develop
territories, the additional sales representatives did not make a
significant impact in 2004.

Operating profit for this segment decreased 34% to $59 in 2004,
compared with $90 in 2003.  The main drivers of this decline in
profits were the revenue changes described above and investments
in the sales force for both QSP and Books Are Fun.  Increased
commission rates and higher freight and warehousing costs at
Books Are Fun contributed to the decline.  During the year, QSP
recorded a penalty of $1 associated with the minimum purchase
commitment related to our World's Finest Chocolate, Inc.
licensing agreement.  As noted above, because our purchases under
the agreement were higher, the penalty recorded in 2004 was less
than half of the penalty recorded in 2003.


Critical Accounting Policies
(includes forward-looking information)

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

Revenue Recognition
Our primary revenue recognition policies for our key products are
described below.

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

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

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

The most significant element in our revenue recognition policy is
the estimate of returns and bad debts, as noted below.

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

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

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

Revenues for our books and home entertainment and magazine
businesses are principally driven by direct mail and, therefore,
are the most sensitive to changes in payment rates and returns.
Our Consumer Business Services businesses are much less
susceptible to changes in payment rates and returns because the
businesses in this segment collect most of their cash at the
point of sale.

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

Throughout the year approximately half of our net inventory
relates to Books Are Fun.  Because of the nature of the display
marketing business model, inventory reserves as a percentage of
total inventory at Books Are Fun have been lower than in our
other businesses.  Because of recent performance, we continually
monitor Books Are Fun's reserve levels.

Inventory for our remaining businesses principally relates to
magazine paper and other products.  During the last few years,
reserve levels have declined for our other businesses because of
continued efforts to better manage inventories.

Deferred Promotion Costs and Related Amortization
During the fourth quarter of 2004, we reassessed our accounting
for magazine promotion costs in response to changes in our
business as well as the strategies and initiatives being
undertaken by our magazine business.  As a result of these
changes and pursuant to SOP 93-7, effective July 1, 2004, we
began expensing magazine deferred promotion costs when the
promotion is mailed to prospective customers instead of deferring
and amortizing such costs.  In 2005 we expensed $(77) of magazine
promotion costs that were capitalized as of June 30, 2004, and in
the fourth quarter of 2004, we recorded a pre-tax charge of
$(27).  Such amounts are included as a component of promotion,
marketing and administrative expenses on the statements of
operations.

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

Pension Assumptions
The calculation of pension income (expense) is based on various
actuarial assumptions.  We review these assumptions annually,
together with actuarial consultants, to determine reasonable
rates.

During our periodic review of assumptions used in determining the
net pension income (expense) to be recorded in 2005 (our
measurement date is March 31 of the previous fiscal year), we
examined the assumed long-term rate of return on pension assets
and the discount rate.  Currently, the long term rate of return
on pension assets is the most significant factor in determining
our net pension income (expense). The assumed long-term rate of
return on pension assets represents the rate of return we expect
our pension assets to earn over an extended time horizon.
Accordingly, significant changes in this rate due to short-term
fluctuations in market conditions are not appropriate.

In 2004, our assumed long-term rate of return on pension assets,
used to determine net pension income for our over-funded U.S.
pension plan, was 8.75%.  Due to lower anticipated rates of
return for portfolios with asset allocations similar to those of
our pension plan, we reduced our long-term rate of return on
pension assets to 8.50% for 2005.  Based on our projections and
expectations of future performance, we have not changed our
long-term rate of return on pension assets for fiscal 2006.  A 25
basis point decrease in the long-term rate of return on pension
assets used for 2005 would have decreased net pension income by
$2.  Because our U.S. Retirement Plan is over-funded, this would
not have affected our funding strategy.

In 2005, our assumed weighted average long-term rate of return on
our international pension assets increased to 6.92% from 6.77% in
2004.  Based on our projections and expectations of future
performance, we have not changed our long-term rate of return on
international pension assets for fiscal 2006.  A 25 basis point
decrease in the weighted average long-term rate of return on
pension assets used for 2005 would have increased net pension
expense by approximately $1.

The discount rate is currently not as significant an assumption
in calculating the net pension income or benefit obligation for
our U.S. plan because our plan is mature, and includes a
significant number of retirees who are currently receiving
benefits.  Accordingly, the period over which the obligation is
discounted is much smaller than it would be for other employers'
plans.  In both 2005 and 2004, the discount rate used to
determine the pension obligation for our U.S. plans as of
year-end was 5.75%.  A 25 basis point decrease in the discount
rate would have a negligible impact on our 2005 net pension
income.  For the international plans, the discount rate used to
determine the pension obligation was 5.36% and 5.50% as of June
30, 2005 and 2004, respectively.  A 25 basis point decrease in
the discount rate would have increased our 2005 pension expense
by approximately $1. The discount rates are generally set by
reference to indices of high-quality long-term corporate bonds of
the appropriate duration.

Income and expenses associated with our pension plans are
included in promotion, marketing and administrative expenses on
the statements of operations.  Impacts on respective countries
vary depending on the nature of each individual plan.

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

In 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities."  This statement superseded Emerging Issues Task Force
Issue (EITF) No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs To Exit an Activity
(Including Certain Costs Associated with a Restructuring)," and
required that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred,
as opposed to when management is committed to an exit plan.  Such
liabilities are recorded based on their fair value, as defined.
The provisions of this statement apply to all costs accrued
related to restructuring activities, including one-time severance
benefits.  However, because our severance benefits are not
considered one-time, we recognize these benefits under the
provisions of SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," and SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits" (the impact of pension curtailments
and settlements that are directly attributable to our
restructuring actions were recorded in accordance with SFAS No.
88).  As such, amounts for severance are recognized when a
termination plan is developed and approved and when payment is
probable and estimable.  Restructuring charges for all other
types of costs, such as contract terminations, are recorded in
accordance with SFAS No. 146.  Asset impairments are calculated
in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets."

For charges prior to December 31, 2003, estimates of costs
incurred to complete those actions, such as future lease
payments, sublease income, the fair value of assets and contract
termination settlements, were based on assumptions at the time
management was committed to a plan.  To the extent actual costs
differed from those estimates, reserve levels were adjusted.  In
addition, plans for certain severance actions were revised due to
changes in business conditions that we did not foresee at the
time such plans were approved.

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

Goodwill and Other Intangible Assets
Goodwill and intangibles with indefinite lives must be assessed
annually for impairment.  These assessments, which require a
great deal of judgment, involve management's estimates of future
cash flows, market trends and other factors.  If goodwill is
determined to be impaired, a loss is recorded in accordance with
the statement.

Management's estimates of future cash flows take into
consideration market trends and our internal projections of
performance relative to other constraints, including the
efficiency and effectiveness of sales channels and potential
changes in market penetration.  External factors, such as
competition and the health of regional economies, must also be
considered.  Although these factors are critical to assessing
impairment, estimates of fair value are also sensitive to small
changes in profit margins and discount rates.

Intangible assets with finite lives must be assessed for
impairment whenever changes in circumstances indicate that the
assets may be impaired.  Similar to goodwill, the assessment for
impairment requires estimates of future cash flows related to the
intangible asset.  To the extent the carrying value of the asset
exceeds its future cash flows, an impairment loss is recorded
based on the fair value of the asset.  Asset impairments are
recorded in other operating items, net on the statements of
operations.  See Note 6, Goodwill and Intangibles, Net, in our
Notes to Consolidated Financial Statements for further
information.

Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax
assets and liabilities be recognized, using enacted tax rates,
for the effect of temporary differences between the book and tax
bases of recorded assets and liabilities.  Deferred tax assets,
including net operating losses, are reduced by a valuation
allowance if it is "more likely than not" that some portion or
all of the deferred tax assets will not be realized.

We are subject to tax in a number of locations, including many
state and foreign jurisdictions.  As might be expected,
significant judgment is required when calculating our world-wide
provision for income taxes.  Because of this uncertainty, we
establish consolidated tax liabilities based on an estimate of
whether it is likely that additional taxes and interest will be
due.  In some cases, many years may elapse before an audit is
completed with respect to items for which a reserve has been
established.  As settlements are reached, we adjust the
corresponding reserves, if required, in the period in which the
final determination is made.  The Internal Revenue Service is
currently auditing our fiscal 2001 through 2004 federal income
tax returns.  Adjustments to our reserves will be recorded upon
completion of the current audit, as appropriate.


Liquidity and Capital Resources
(includes forward-looking information)

The consolidated statement of cash flows for the year ended
June 30, 2005 is summarized below:


Cash and cash equivalents at June 30, 2004                        $  50

Net change in cash due to:
  Operating activities                                              140
  Investing activities                                               46
  Financing activities                                             (200)
  Effect of exchange rate changes on cash and cash equivalents        2
                                                                  -----
Net change in cash and cash equivalents                             (12)
                                                                  -----
Cash and cash equivalents at June 30, 2005                        $  38
                                                                  =====

Cash and cash equivalents decreased 25% to $38 as of June 30,
2005, compared with $50 as of June 30, 2004.  Cash flow from
operations decreased to $140 in 2005, compared with $174 in 2004
driven by changes in working capital.

Significant (uses) and sources of cash in 2005 related to:
   -  net repayments of $(162) of our borrowings
   -  cash payments for dividends of $(31)
   -  contributions of $(18) to our defined benefit plans
   -  sales of non-strategic assets, including our headquarters
      facility in Westchester, New York (discussed below), and the
      sales of our buildings in Australia and Portugal, generated
      $69 in cash

Borrowings
Our primary debt obligations as of June 30, 2005 are our $400
Five-Year Revolving Credit Agreement (2005 Credit Agreement) and
$300 in senior unsecured notes.  As discussed below, the 2002
Credit Agreements were terminated and replaced in April 2005 with
the 2005 Credit Agreement.  As of June 30, 2005, we had $259 of
outstanding borrowings under the 2005 Credit Agreement.

The 2002 Credit Agreements (Five-Year Revolving Credit and
Competitive Advance Facility Agreement and Term Loan Agreement)
were entered into in connection with the Reiman acquisition and
the recapitalization transactions (see Note 12, Capital Stock, in
our Notes to Consolidated Financial Statements for further
information).  Borrowings under the Five-Year Revolving Credit
and Competitive Advance Facility Agreement were used for general
corporate purposes, including acquisitions, share repurchases and
commercial paper backup.  Borrowings under the 2002 Credit
Agreements were subject to interest rates at either LIBOR plus a
spread based upon our credit rating at the time the rate was
established, or the Alternate Base Rate, as defined in the Term
Loan Agreement.  The interest rate was required to be reset from
time to time for periods of up to six months.  Borrowings under
the 2002 Credit Agreements were secured by substantially all of
our assets and were subject to various financial covenants.

On April 14, 2005, we entered into the 2005 Credit Agreement to
retire all outstanding borrowings under the 2002 Credit
Agreements and for general corporate purposes.  Financing fees of
$(2) related to the 2005 Credit Agreement were deferred and are
amortized on a straight-line basis over the term of the
agreement.  In connection with the termination of the 2002 Credit
Agreements, we wrote-off $(7) in the fourth quarter of 2005
related to capitalized financing fees and the discontinuance of
related interest rate protection agreements.  Borrowings under
the 2005 Credit Agreement are based on LIBOR plus a spread based
on our leverage ratio (as defined in the 2005 Credit Agreement).
As of June 30, 2005, the spread was 125 basis points.  The 2005
Credit Agreement contains financial covenants that require us to
maintain a minimum interest coverage and maximum leverage ratios,
and is secured by the stock of a substantial portion of our
subsidiaries.

During the third quarter of 2004, we completed a private
placement, with registration rights, of $300 of 6 1/2% senior
unsecured notes due in 2011 (Senior Notes), in order to refinance
a portion of amounts outstanding under the Term Loan Agreement.
In the fourth quarter of 2004, these notes were exchanged for
notes that were registered under the Securities Act of 1933.

The weighted average interest rate charged on our borrowings was
5.3%, 4.4% and 4.0% in 2005, 2004 and 2003, respectively.

Other Liquidity Matters
International lines of credit and overdraft facilities totaled
$28 at June 30, 2005 and $29 at June 30, 2004.  There were no
outstanding borrowings under these facilities at the end of 2005
and 2004.

On January 21, 2005, we announced that the Board of Directors
approved an increase in the quarterly dividend on our Common
Stock from $0.05 to $0.10 per share.  The initial dividend at the
increased rate was payable on February 15, 2005, to stockholders
of record at the close of business on February 1, 2005.  Using
our fourth quarter dividend on an annualized basis, our dividend
yield as of June 30, 2005 was approximately 2.4%.

On April 28, 2005, our Board of Directors authorized our
repurchase of up to $100 of our Common Stock over the succeeding
two years and rescinded its May 2001 authorization to repurchase
up to $250 of our Common Stock.  Under the April 2005
authorization, we repurchased 410,000 shares for $7 in the fourth
quarter of 2005, of which $2 settled in early July 2005.  We had
not repurchased any shares under the May 2001 authorization since
fiscal 2002.

On December 22, 2004, we completed the sale and partial leaseback
of our corporate headquarters facility in Westchester, New York.
Under the agreement, we received $49 in cash and will receive an
additional $10 on the second anniversary of closing.  The gain of
$25, based on total consideration, was deferred and will be
amortized over the initial 20-year lease term as a reduction in
rent expense.  During the lease term, we will make annual minimum
lease payments of approximately $3, subject to increases every
five years based on changes in the Consumer Price Index.  In
addition, we have leased additional space for three years in this
facility at an annual cost of $1.

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


Contractual Obligations and Commitments
(includes forward-looking information)

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

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

<TABLE>

                                         Less than      One to         Three        More than
   Contractual Obligations                one year    three years    five years     five years
<S>                                        <C>         <C>           <C>             <C>
Debt obligations:
  Senior Notes(1)                              --          --            --             300
  2005 Revolving Credit facility(2)            --          --           259              --
Lease commitments:
  Operating leases                             24          40            31              95
Purchase commitments:
  World's Finest Chocolate(3)                  60         125           133             842
  Royalty contracts                             5           1            --              --
Pension and postretirement
  obligations(4)                               60         120           127             325
Service and outsource contracts(5)             20          12            10              --
                                           ------      ------        ------          ------
Total                                      $  169      $  298        $  560          $1,562
                                           ======      ======        ======          ======

</TABLE>


(1) In the third quarter of 2004, we issued 6 1/2% Senior Notes in
    a private placement.  We used the proceeds from this offering
    to refinance amounts outstanding under the Term Loan Agreement.
(2) On April 14, 2005, we entered into the 2005 Credit Agreement
    to retire all outstanding borrowings under the 2002 Credit
    Agreements and for general corporate purposes.
(3) In May 2000, QSP, Inc. entered into a licensing agreement
    with World's Finest Chocolate, Inc. to obtain the exclusive
    right to distribute World's Finest Chocolate products for
    fundraising purposes.  This agreement was amended in 2003.  The
    commitments detailed above represent our minimum purchase
    requirement of chocolate products from fiscal 2006 until the
    agreement terminates in fiscal 2020.  See Note 6, Goodwill and
    Other Intangible Assets, Net, in our Notes to Consolidated
    Financial Statements for additional information.
(4) This item includes payments that are expected to be made for
    pension and postretirement benefits.  Amounts in the "More than
    five years" category only include projected payments from
    fiscal 2011 through fiscal 2015.  See Note 8, Pension Plans and
    Other Postretirement Benefits, in our Notes to Consolidated
    Financial Statements for additional information.
(5) This item includes a number of service contracts, such as
    product fulfillment agreements and information technology
    license and maintenance agreements.  These contracts terminate
    at varying dates ranging from fiscal 2006 through fiscal 2010.

Currency Risk Management
(includes forward-looking information)

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

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


Fiscal 2006 Outlook
(includes forward-looking information)

The fourth quarter of 2005 marked the close of a two-year plan
that was announced at the end of 2003.  The goal of the plan was
to achieve sustainable revenue and profit growth by the end of
2005 by stabilizing our core business (Reader's Digest North
America and Reader's Digest International), improving operating
margins, and investing in new business initiatives to drive
long-term revenue and profit growth.  The first year of the plan
focused on eliminating unprofitable or marginally profitable
parts of the business, improving efficiency to drive higher
operating margins, reducing fixed costs, beginning to invest in a
series of new growth initiatives and lowering debt.

In 2005, we built on the success of the first year of the plan by
stabilizing the significant decline in revenues at Reader's
Digest North America and Reader's Digest International, which
helped drive double-digit profit growth at Reader's Digest North
America and surpass our goal of mid-single-digit profit growth at
Reader's Digest International.

In fiscal 2006, we expect to shift our focus from stabilization
to growth.  Revenues are expected to grow in the
low-to-mid-single digits, excluding the effects of foreign
currency translation and, despite significant spending on major
new businesses, profits are expected to grow in the mid-teens.

More specifically, we are targeting:

  -  real revenue growth, excluding the effects of foreign
     currency translation, across all business segments;
  -  significant investment in new initiatives, including new
     magazine launches, continued geographic expansion, and a new,
     scaleable home party business, Taste of Home Entertaining.  In
     aggregate, these investments are expected to cost $20.  The
     investment spending is primarily loaded in the first half,
     which will skew profit growth more towards the second half of
     fiscal 2006;
  -  mid-to-high single-digit profit growth in Reader's Digest
     International;
  -  mid-teens profit growth at Reader's Digest North America
     (including a $21 increase in profits because of lower
     amortization expense) reflecting substantial investment in
     major business opportunities, such as Every Day with Rachael
     Ray magazine and the new home party business;
  -  increased revenues and profits at Consumer Business
     Services, led by improvements at both Books Are Fun and QSP;
  -  higher Corporate Unallocated expense reflecting $(6) of
     lower pension income and $(8) related to expensing of stock
     options;
  -  other income and expense, net to be in line with 2005
     results with lower interest expense in fiscal 2006 (due in
     part to the write-off of debt financing fees in 2005)
     offsetting one-time gains in 2005;
  -  the expected tax rate to return to the mid-30% range;
  -  earnings per share in the range of $0.90 to $1.00, excluding
     restructuring charges and other items that cannot be
     forecasted at this time.


Recent Accounting Standards
(includes forward-looking information)

In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R).  This statement supersedes
SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123", and Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."  The most
significant change is the requirement to recognize in the
statements of operations the value of employee stock options and
other stock-based compensation (including employee stock purchase
plans) as calculated using the fair-value-based method, as
opposed to the intrinsic value method currently used.  The
statement is effective for interim or annual periods beginning
after June 15, 2005.  Effective July 1, 2005, we will adopt the
fair-value recognition provisions of SFAS No. 123R using the
modified-prospective-transition method and will not restate prior
periods.  Compensation cost under this transition method will
include compensation cost for all share-based payments granted
prior to, but not vested as of, July 1, 2005, and compensation
cost for all share-based payments granted subsequent to July 1,
2005, as measured under the provisions of SFAS No. 123R.  The
expected impact of adoption of SFAS 123R in fiscal 2006 is
approximately $(8).

In December 2004, the FASB issued FASB Staff Position (FSP)
109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation
Act of 2004."  This statement was effective upon issuance.  The
American Jobs Creation Act (the Act) allows a one-time dividends
received deduction on the repatriation of certain foreign
earnings, provided certain criteria in the Act are satisfied.
Based on our analysis, we currently do not expect to derive any
benefit from this provision of the Act.  Accordingly, no tax
expense has been recognized in the statements of operations for
the year ended June 30, 2005.

In November 2004, the FASB issued SFAS 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4."   This statement clarifies
the guidance in Accounting Research Bulletin No. 43, Chapter 4,
"Inventory Pricing," to account for abnormal amounts of idle
facility expense, freight, handling costs and spoilage as a
period cost.  This standard is effective for inventory costs
incurred after June 14, 2005 and does not have an impact on our
operating results or financial position.






<PAGE>


The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Operations

<TABLE>

                                                                     Years ended June 30,
In millions, except per share data                          2005            2004            2003

<S>                                                     <C>             <C>             <C>
Revenues                                                $   2,389.7     $   2,388.5     $   2,474.9

Product, distribution and editorial expenses                 (970.9)         (972.9)       (1,002.2)
Promotion, marketing and administrative expenses           (1,337.4)       (1,294.5)       (1,293.8)
Goodwill charge                                              (129.0)             --              --
Other operating items, net                                       --           (15.0)          (39.8)
                                                        -----------     -----------     -----------
  Operating (loss) profit                                     (47.6)          106.1           139.1

Other (expense) income, net                                   (31.8)          (40.0)          (38.7)
                                                        -----------     -----------     -----------

  (Loss) income before provision for income taxes             (79.4)           66.1           100.4

Income tax provision                                          (11.5)          (16.6)          (39.1)
                                                        -----------     -----------     -----------

Net (loss) income                                       $     (90.9)    $      49.5     $      61.3
                                                        ===========     ===========     ===========

Basic and diluted (loss) earnings per share

Basic (loss) earnings per share
  Weighted average common shares outstanding                   97.4            97.1            98.1
                                                        -----------     -----------     -----------

  Basic (loss) earnings per share                       $     (0.95)    $      0.50     $      0.61
                                                         ===========     ===========     ===========

Diluted (loss) earnings per share
  Adjusted weighted average common shares outstanding          97.4            99.2            99.2
                                                        -----------     -----------     -----------

  Diluted (loss) earnings per share                     $     (0.95)    $      0.49     $      0.60
                                                         ===========     ===========     ===========

</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                                              2005          2004

Assets
Current assets
  Cash and cash equivalents                          $     37.7    $     50.3
  Accounts receivable, net                                233.9         229.0
  Inventories                                             162.4         152.0
  Prepaid and deferred promotion costs                     53.8         106.9
  Prepaid expenses and other current assets               144.9         152.1
                                                     ----------    ----------

Total current assets                                      632.7         690.3

Property, plant and equipment, net                        119.3         155.8
Goodwill                                                  880.9       1,009.5
Other intangible assets, net                              137.8         173.9
Prepaid pension assets                                    307.9         291.9
Other noncurrent assets                                   102.0         113.5
                                                     ----------    ----------

Total assets                                         $  2,180.6    $  2,434.9
                                                     ==========    ==========

Liabilities and stockholders' equity
Current liabilities
  Loans and notes payable                            $       --    $     83.9
  Accounts payable                                        109.8         110.6
  Accrued expenses                                        267.4         268.7
  Income taxes payable                                     34.5          15.5
  Unearned revenues                                       395.5         403.4
  Other current liabilities                                12.4          10.2
                                                     ----------    ----------

Total current liabilities                                 819.6         892.3

Long-term debt                                            559.2         637.7
Unearned revenues                                         133.0         129.3
Accrued pension                                           121.5         125.9
Postretirement and postemployment                          96.7          99.1
benefits other than pensions
Other noncurrent liabilities                               84.4          74.9
                                                     ----------    ----------

Total liabilities                                    $  1,814.4    $  1,959.2
                                                     ----------    ----------
Commitments and contingencies (Notes 6, 11 and 13)

Stockholders' equity (Note 12)
  Capital stock                                            21.2          17.8
  Paid-in capital                                         206.8         210.1
  Retained earnings                                     1,221.6       1,343.0
  Accumulated other comprehensive loss                    (84.1)        (89.4)
  Treasury stock, at cost                                (999.3)     (1,005.8)
                                                     ----------    ----------

Total stockholders' equity                                366.2         475.7
                                                     ----------    ----------

Total liabilities and stockholders' equity           $  2,180.6    $  2,434.9
                                                     ==========    ==========


See accompanying Notes to Consolidated Financial Statements.


<PAGE>


The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

<TABLE>

                                                                                            Years ended June 30,
In millions                                                                           2005          2004         2003

<S>                                                                                <C>           <C>           <C>
Cash flows from operating activities
Net (loss) income                                                                  $  (90.9)     $   49.5      $   61.3
Depreciation and amortization                                                          56.9          63.2          64.7
Magazine deferred promotion charge                                                       --          27.2            --
Asset impairments                                                                        --           1.1           3.2
Goodwill charge                                                                       129.0            --            --
Amortization of debt issue costs                                                       10.3          12.1           4.3
Stock-based compensation                                                               11.2          10.2           6.2
Net gain on marketable securities and sales of certain assets                         (14.3)        (10.0)         (8.6)
Changes in current assets and liabilities, net of effects of acquisitions and
  dispositions
  Accounts receivable, net                                                              3.6          34.1          55.0
  Inventories                                                                          (7.7)          6.4           6.4
  Unearned revenues                                                                   (14.4)        (14.3)        (12.1)
  Accounts payable and accrued expenses                                                (7.1)         (6.8)        (20.1)
  Other, net (including the amortization of previously deferred promotion costs)       85.3          10.2           4.2
Changes in noncurrent assets and
liabilities, net of effects of acquisitions
  and dispositions                                                                    (22.9)         (8.5)         (2.4)
                                                                                   --------      --------      --------

Net change in cash due to operating activities                                        139.0         174.4         162.1
                                                                                   --------      --------      --------

Cash flows from investing activities
Proceeds from maturities and sales of marketable securities and short-term
  investments                                                                            --           0.8           5.2
Proceeds from other long-term investments, net and sales of businesses                  6.7           3.0            --
Proceeds from sales of property, plant and equipment                                   62.8           7.1           5.5
Purchases of licensing agreements                                                        --          (1.3)        (10.5)
Capital expenditures                                                                  (23.5)        (16.1)        (15.7)
                                                                                   --------      --------      --------

Net change in cash due to investing activities                                         46.0          (6.5)        (15.5)
                                                                                   --------      --------      --------

Cash flows from financing activities
Proceeds (repayments) of revolving credit and other short-term facilities, net        214.6          43.9          (0.6)
Proceeds from Senior Notes offering                                                      --         300.0            --
Repayments of Term Loan                                                              (377.0)       (488.4)        (84.7)
Cash paid for financing fees                                                           (2.2)         (7.6)         (2.7)
Proceeds from employee stock purchase plan and exercise of stock options                3.3           2.5           4.3
Dividends paid                                                                        (30.5)        (20.7)        (21.0)
Common stock repurchased                                                               (5.0)           --        (101.7)
Other, net                                                                             (3.0)          0.5           0.8
                                                                                   --------      --------      --------

Net change in cash due to financing activities                                       (199.8)       (169.8)       (205.6)
                                                                                   --------      --------      --------
Effect of exchange rate fluctuations on cash and cash equivalents                       2.2           0.9           2.7
                                                                                   --------      --------      --------
Net change in cash and cash equivalents                                               (12.6)         (1.0)        (56.3)
                                                                                   --------      --------      --------
Cash and cash equivalents at beginning of year                                         50.3          51.3         107.6
                                                                                   --------      --------      --------
Cash and cash equivalents at end of year                                           $   37.7      $   50.3      $   51.3
                                                                                   ========      ========      ========

Supplemental information
Cash paid for interest                                                             $   36.8      $   34.2      $   39.6
Cash paid for income taxes                                                         $   21.2      $   28.7      $   36.2

</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   Restriced     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, 2002                $ 28.8    $  1.4    $  (4.7)    $  224.6    $1,261.2    $ (89.7)   $  (949.7)   $   471.9
Prior period adjustment, net of
  deferred taxes of $7.8 (See Note1)                                                    12.6                                 12.6
                                        ------    ------    -------     --------    --------    -------    ---------    ---------
Balance as of June 30, 2002,
    as adjusted                         $ 28.8    $  1.4    $  (4.7)    $  224.6    $1,273.8    $ (89.7)   $  (949.7)   $   484.5
Comprehensive income
  Net income                                                                            61.3                                 61.3
  Other comprehensive income:
   Translation gain                                                                                19.0                      19.0
   Reclassification adjustments for
    investment gains that are
    included in net income, net of
    deferred taxes of $1.8                                                                         (3.3)                     (3.3)
   Net realized loss on derivatives,
    net of deferred taxes of $0.8                                                                  (1.4)                     (1.4)
   Minimum pension liability, net of
    deferred taxes of $14.7                                                                       (33.8)                    (33.8)
                                                                                                                        ---------
Total comprehensive income                                                                                                   41.8
                                                                                                                        =========

Stock issued under various plans                               (8.0)        (9.5)                               26.7          9.2
Reclassification of par value due to the
  recapitalization transactions                      0.1                    (0.1)                                              --
Common Stock repurchased                                                                                      (101.7)      (101.7)
Common Stock dividends                                                                 (19.6)                               (19.6)
Preferred Stock dividends                                                               (1.3)                                (1.3)

                                        ------    ------    -------     --------    --------    -------    ---------    ---------
Balance at June 30, 2003, as adjusted   $ 28.8    $  1.5    $ (12.7)    $  215.0    $1,314.2    $(109.2)  $ (1,024.7)   $   412.9
                                        ------    ------    -------     --------    --------    -------    ---------    ---------
Comprehensive income
  Net income                                                                            49.5                                 49.5
  Other comprehensive income:
   Translation gain                                                                                 5.8                       5.8
   Net unrealized gain on
    investments, net of deferred
     taxes of $(0.1)                                                                                0.2                       0.2
   Reclassification adjustments for
    investment gains that are
    included in net income, net of
    deferred taxes of $0.3                                                                         (0.5)                     (0.5)
   Net realized loss on derivatives,
    net of nominal deferred taxes                                                                  (0.1)                     (0.1)
   Reclassification adjustments for
    derivative losses that are
    included in net income, net of
    deferred taxes of $(0.5)                                                                        0.9                       0.9
   Minimum pension liability, net of
    deferred taxes of $(7.7)                                                                       13.5                      13.5
                                                                                                                        ---------
Total comprehensive income                                                                                                   69.3
                                                                                                                        =========
Stock issued under various plans                                0.2         (4.9)                               18.9         14.2
Common Stock dividends                                                                 (19.4)                               (19.4)
Preferred Stock dividends                                                               (1.3)                                (1.3)
                                        ------    ------    -------     --------    --------    -------    ---------    ---------
Balance at June 30, 2004, as adjusted   $ 28.8    $  1.5    $ (12.5)    $  210.1    $1,343.0    $ (89.4)  $ (1,005.8)   $   475.7
                                        ======    ======    =======     ========    ========    =======   ==========    =========

</TABLE>


<PAGE>

<TABLE>

The Reader's Digest Association, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity, continued

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


<S>                                     <C>       <C>       <C>         <C>         <C>         <C>       <C>           <C>
Comprehensive loss
  Net loss                                                                             (90.9)                               (90.9)
  Other comprehensive income:
   Translation gain                                                                                 8.1                       8.1
   Reclassification adjustments for
    derivative losses that are
    included in net income, net of
    nominal deferred taxes                                                                          0.5                       0.5
   Minimum pension liability, net of
    deferred taxes of $1.9                                                                         (3.3)                     (3.3)
                                                                                                                        ---------
Total comprehensive loss                                                                                                    (85.6)
                                                                                                                        =========

Stock issued under various plans                                3.4         (3.3)                               13.5         13.6
Common Stock repurchased                                                                                        (7.0)        (7.0)
Common Stock dividends                                                                 (29.2)                               (29.2)
Preferred Stock dividends                                                               (1.3)                                (1.3)
                                        ------    ------    -------     --------    --------    -------    ---------    ---------
Balance at June 30, 2005                $ 28.8    $  1.5    $  (9.1)    $  206.8    $1,221.6    $ (84.1)  $   (999.3)   $   366.2
                                        ======    ======    =======     ========    ========    =======   ==========    =========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.





<PAGE>





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
2005, 2004 and 2003, unless otherwise indicated, are to fiscal
2005, fiscal 2004 and fiscal 2003, respectively.  Our fiscal year
represents the period from July 1 through June 30.

Note 1     Organization and Summary of Significant Accounting Policies

Description of Our Business

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

Basis of Presentation and Use of Estimates

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

Concentrations of Credit Risk

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

Cash and Cash Equivalents

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

Inventories

Inventories consist primarily of finished goods and raw materials
(including paper) and are stated at the lower of cost or market
value.  For all inventories, cost is determined using the
weighted average cost method, which approximates the first-in,
first-out (FIFO) method.

Shipping and handling costs to the customer are expensed as
incurred and are included in product, distribution and editorial
expenses on the statements of operations.

Long-Lived Assets

Property, Plant and Equipment, Net

Assets that comprise property, plant and equipment, net are
stated at cost less accumulated depreciation and amortization.
Depreciation expense is generally calculated on a straight-line
basis over the estimated useful lives of the assets: 10-40 years
for buildings and 3-10 years for equipment, furniture and
fixtures.  Leasehold improvements are amortized on a
straight-line basis over the initial term of the lease or the
useful life of the improvement, whichever is shorter.

Goodwill and Other Intangible Assets, Net

Goodwill is composed of the excess of costs over the fair value
of net assets of acquired businesses.  Other intangible assets,
net comprises licensing agreements, customer lists, tradenames
and other items.  Acquired intangibles with finite lives are
amortized, on a straight-line basis, over their estimated useful
lives.  See Note 6, Goodwill and Other Intangible Assets, Net,
for additional information.

Impairment of Long-Lived Assets

We review for recoverability, at least annually, the carrying
amount of goodwill and intangibles with indefinite lives.  This
assessment involves comparing the fair value of the reporting
unit or asset, as applicable, to its carrying value.  Recognition
of the impairment, if any, is determined in accordance with the
Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets."   See Note 6, Goodwill and Other
Intangible Assets, Net, for additional information.

Intangible assets with finite lives and assets that are held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of that asset may
not be recoverable in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."  We assess
recoverability by comparing the asset's carrying amount to the
undiscounted future net cash flows expected to be generated by
the asset.  If we determine that the asset is impaired, the
impairment recognized is the amount by which the carrying amount
of the asset exceeds the fair value of the asset.

Investments

Marketable securities are classified as available-for-sale.
Unrealized gains and losses on available-for-sale securities, net
of tax, are recorded in other comprehensive (loss) income in
stockholders' equity on the balance sheets.  Realized gains and
losses, and declines in carrying value deemed to be other than
temporary, are recorded in other (expense) income, net on the
statements of operations.  As of June 30, 2005 and 2004, we did
not hold any marketable securities.

Debt Issuance Costs

Debt issuance costs consist of fees and expenses incurred in
connection with our borrowings.  These fees are amortized over
the terms of the related debt agreements, which range from five
to seven years.  Capitalized debt issuance costs are included in
other noncurrent assets on the balance sheets.  To the extent we
retire a significant portion of our borrowings, a proportionate
amount of debt issue costs related to those borrowings is written
off.



<PAGE>


Stock-Based Compensation

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

The table below presents our net (loss) income and basic and
diluted (loss) earnings per share as reported on the statements
of operations for the respective periods and adjusts these
amounts to include the pro forma impact of using the fair value
based method to calculate stock compensation expense as
prescribed under SFAS No. 123.  The fair value of our options and
shares to be issued in connection with employee stock purchase
plans on the date of grant was calculated using the Black-Scholes
option-pricing model.  Adopting the fair value based method would
result in additional compensation expense of $(6.2), $(10.7), and
$(13.1), net of tax, for the years ended June 30, 2005, 2004 and
2003, respectively.

                                               2005     2004     2003

Net (loss) income    As reported             $(90.9)   $49.5    $61.3
                     Pro forma               $(97.1)   $38.8    $48.2

(Loss)earnings per   As reported - basic     $(0.95)   $0.50    $0.61
  share              Pro forma - basic       $(1.01)   $0.39    $0.48
                     As reported - diluted   $(0.95)   $0.49    $0.60
                     Pro forma - diluted     $(1.01)   $0.38    $0.47

For the years ended June 30, 2005, 2004 and 2003, $(6.9), $(6.6)
and $(4.0), net of tax, respectively, of expenses related to
restricted stock and other stock-based compensation are included
in our net (loss) income and (loss) earnings per share, as
reported.  Additional information is presented in Note 9,
Employee Equity Compensation Plans.

Financial Instruments

Due to the short-term maturities of our cash, cash equivalents,
receivables and payables, the carrying value of these financial
instruments approximates their fair values.  Due to variable
interest rates and current market prices, the fair value of our
$400.0 Revolving Credit Agreement and senior notes, respectively,
approximate their carrying values.  See Note 11, Debt, for
additional information on our debt instruments.

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

Pensions and Postretirement Benefits Other Than Pensions

We account for our pension and postretirement benefits in
accordance with SFAS No. 87, "Employers' Accounting for
Pensions," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."  Pursuant to these
statements, obligations are determined using actuarial models
that incorporate estimates for employee turnover and mortality,
increases in employee compensation and healthcare costs, and an
employee's age at retirement.  These estimates are reviewed
annually with actuarial consultants to determine the
reasonableness of our assumptions. While these models help
determine the obligation, SFAS No. 87 and 106 attempt to match
recognition of the obligation with the period over which our
employees earn benefits.  Because employees earn benefits over
many years of service, the accounting rules require the
recognition of certain events (including plan amendments and
certain gains and losses) over multiple years rather than the
year the event occurs.  This principle also applies to
recognition of the expected return on plan assets.  Although the
rate represents our expectation of the long-term performance of
our asset portfolio; performance will likely vary in the
short-term.  We amortize the difference between the actual and
expected return on assets over a five-year period.  Income and
expenses associated with our pension plans are included in
promotion, marketing and administrative expenses on the
statements of operations.

In addition, pursuant to SFAS No. 87, we recognize a minimum
pension liability in certain instances where the plan's
accumulated benefit obligations as of our measurement date, March
31, exceeds the fair value of plan assets.  This amount is
adjusted based on whether we have a net pension asset or
liability.  The minimum pension liability, as adjusted, is
included in the accrued pension caption on our balance sheets.
The offset is first applied to any unrecognized prior service
cost and the remainder is included in accumulated other
comprehensive loss in stockholders' equity on our balance
sheets.

Revenues

Magazines

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

Sponsor Fundraising Programs

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

Books, Display Marketing and Other Products

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

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



<PAGE>



Promotion Costs

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

During the fourth quarter of 2004, we reassessed our accounting
for magazine promotion costs in response to changes in our
business, as well as the strategies and initiatives being
undertaken by our magazine business.  As a result of these
changes and pursuant to SOP 93-7, effective July 1, 2004, we
began expensing magazine deferred promotion costs when the
promotion is mailed to prospective customers instead of deferring
and amortizing such costs.  As of June 30, 2004, we recorded a
pre-tax charge of $(27.2) to reflect the impact of this change in
circumstances on our existing asset.  The remaining balance of
$(77.1) was amortized in 2005, over the initial subscription
period, generally one year.  These amounts are included as a
component of promotion, marketing and administration expenses on
the statements of operations.

Direct response advertising consists primarily of promotion costs
incurred in connection with the sale of magazine subscriptions,
books and other products.  Promotion expense, which consists of
both amortization of capitalized promotion costs and costs
expensed as incurred, included on the statements of operations
totaled $(724.7) in 2005, including $(77.1) related to previously
deferred magazine promotion costs; $(678.5) in 2004, including
$(27.2) related to our magazine deferred promotion charge; and
$(670.6) in 2003.  Prepaid and deferred promotion costs included
on the balance sheets were $53.8 and $106.9 as of June 30, 2005
and 2004, respectively.

Commissions earned by agents for new magazine subscribers are
included in promotion, marketing and administrative expenses on
the statements of operations.  These costs are deferred and
amortized over the related subscription term, typically one to
three years.  Amounts deferred and included in prepaid expenses
and other current assets on the balance sheets were $22.7 and
$26.0 as of June 30, 2005 and 2004, respectively.  Amounts
included in other noncurrent assets on the balance sheets were
$25.8 and $24.3 as of June 30, 2005 and 2004, respectively.

Income Taxes

Income taxes are accounted for under the provisions of SFAS No.
109, "Accounting for Income Taxes."  In accordance with SFAS No.
109, deferred income taxes, net of valuation allowances, reflect
the future tax consequences of differences between the financial
statement and tax bases of assets and liabilities.  These
deferred taxes are calculated by applying currently enacted tax
rates.  Valuation allowances are recorded when it is "more likely
than not" that a deferred tax asset will not be realized.



<PAGE>


Basic and Diluted (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net
(loss) income less preferred stock dividend requirements ($1.3
for each of 2005, 2004 and 2003) by the weighted average number
of shares of Common Stock outstanding during the year.  Diluted
earnings per share is computed in the same manner except that the
weighted average number of shares of Common Stock outstanding
assumes the exercise and conversion of certain stock options and
vesting of certain restricted stock.  For the year ended June 30,
2005, all outstanding stock options and unvested restricted stock
were excluded from the diluted-loss per share calculations since
the effect of including them would have been anti-dilutive.

For 2004 and 2003, the assumed exercise and conversion of stock
options and vesting of restricted stock were 2.2 and 1.2 millions
shares, respectively.  In addition, stock options to purchase
approximately 10.8 and 12.1 million shares of Common Stock that
were outstanding during 2004 and 2003, respectively, were not
included in the computation of diluted earnings per share since
the effect of including these options would have been
anti-dilutive.

Foreign Currency Translation

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

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

Reclassifications and Prior Period Adjustment

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

During the fourth quarter of 2005, we recorded an adjustment of
$12.6, net of deferred taxes of $7.8, to retained earnings as of
the earliest period presented.  The adjustment reduced an over
accrual for certain long-term employee-related liabilities which
should have been adjusted in a period prior to fiscal 2001.  The
adjustment has been considered immaterial for all periods and has
no impact on the statements of operations or the statements of
cash flows for the periods presented.

Recent Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R).  This statement supersedes
SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123", and APB Opinion No. 25.  The most significant
change is the requirement to recognize in the statements of
operations the value of employee stock options and other
stock-based compensation (including employee stock purchase
plans) as calculated using the fair-value-based method, as
opposed to the intrinsic value method currently used.  The
statement is effective for interim or annual periods beginning
after June 15, 2005.  Effective July 1, 2005, we will adopt the
fair-value recognition provisions of SFAS No. 123R using the
modified-prospective-transition method and will not restate prior
periods.  Compensation cost under this transition method will
include compensation cost for all share-based payments granted
prior to, but not vested as of, July 1, 2005, and compensation
cost for all share-based payments granted subsequent to July 1,
2005, as measured under the provisions of SFAS No. 123R.  The
expected impact of adoption of SFAS 123R in fiscal 2006 is
approximately $(8.0).

In December 2004, the FASB issued FASB Staff Position (FSP)
109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation
Act of 2004."  This statement was effective upon issuance.  The
American Jobs Creation Act (the Act) allows a one-time dividends
received deduction on the repatriation of certain foreign
earnings, provided certain criteria in the Act are satisfied.
Based on our analysis, we currently do not expect to derive any
benefit from this provision of the Act.  Accordingly, no tax
expense has been recognized in the statements of operations for
the year ended June 30, 2005.

In November 2004, the FASB issued SFAS No. 151," Inventory Costs,
an Amendment of ARB No. 43, Chapter 4."  This statement clarifies
the guidance in Accounting Research Bulletin No. 43, Chapter 4,
"Inventory Pricing," to account for abnormal amounts of idle
facility expense, freight, handling costs and spoilage as a
period cost.  This standard is effective for inventory costs
incurred after June 14, 2005 and does not have an impact on our
operating results or financial position.


Note 2          Investments

Available-for-Sale Marketable Securities

Our investment in LookSmart, Ltd. was accounted for and
classified as available-for-sale securities.  We sold all of our
remaining shares in LookSmart in the first quarter of 2004.

During 2004 and 2003, we sold approximately 0.2 million shares
and 2.7 million shares, respectively, of LookSmart and recorded
pre-tax gains of $0.8 and $5.1, respectively, in other (expense)
income, net on the statements of operations.

The net unrealized gain on these investments, net of deferred
taxes, was included in accumulated other comprehensive (loss)
income in stockholders' equity on the balance sheets and amounted
to $0.4 as of June 30, 2003.


Note 3          Other Operating Items, Net

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

Charges recorded prior to December 31, 2003 were recorded in
accordance with Emerging Issues Task Force Issue (EITF) No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs To Exit an Activity (Including Certain Costs
Associated with a Restructuring)."  EITF No. 94-3 required that
amounts related to restructuring actions be recorded only when
management was committed to an exit plan.  Charges subsequent to
December 31, 2002 are recorded in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities," which superseded EITF No. 94-3.  Under SFAS No. 146,
costs associated with restructuring actions, including one-time
severance benefits, are only recorded once a liability has been
incurred.  SFAS No. 146 does not consider severance benefits
determined pursuant to an existing formula as one-time benefits.
As our severance programs do not qualify as one-time benefits, we
recognize severance amounts pursuant to SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" and SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" (the impact
of pension curtailments and settlements that are directly
attributable to our restructuring actions are recorded in
accordance with SFAS No. 88).  As such, severance amounts were
recorded when a termination plan was developed and approved and
when payment was probable and estimable.  Other amounts related
to restructuring actions, including contract terminations, are
recorded in accordance with SFAS No. 146.  Asset impairments were
calculated in accordance with the provisions of SFAS No. 144.

We recorded charges for other operating items, net, on the
statements of operations, of $(15.0) in 2004 and $(39.8) in
2003.   In certain instances, circumstances arose that resulted
in decisions to retain employees previously identified for
termination, and in certain other instances the costs associated
with actions identified were settled for less than originally
anticipated.  In these instances, the associated charges were
reversed.

The components of other operating items, net are described in
further detail below:

-   Severance Costs - These charges represent the cost to
    separate employees from our operations as a result of costs
    incurred to streamline the organization.  This separation is
    accomplished through a combination of voluntary and
    involuntary severance programs.  The positions to be separated
    were identified when the charge was recorded.
-   Contract Terminations - These charges represent costs
    incurred to terminate contractual obligations in connection
    with streamlining activities.
-   Impairment Losses - As a result of streamlining activities,
    we have previously incurred charges related to the carrying
    value of certain long-lived assets.

At June 30, 2005, we had restructuring reserves for other
operating items, net of $10.1, primarily for severance costs and
contract terminations that will take place during the next
several fiscal quarters.  These reserves are included in accrued
expenses on the balance sheet.  During 2005, we recorded
additional reserves of $(3.6), which were offset by adjustments
to previously established reserve balances of $3.6.  In addition,
we incurred spending of $11.6, primarily related to severance.

At June 30, 2004, restructuring reserves totaled $21.7, primarily
for severance costs and contract terminations.   During 2004, we
recorded additional restructuring and other reserves of $(17.1),
which were partially offset by adjustments to reserve balances of
$0.7.  In addition, we incurred $29.4 of spending, primarily for
severance and costs incurred to restructure business processes in
certain departments.

At June 30, 2003, we had $34.7 of restructuring reserves for
other operating items, net, primarily for severance costs and
contract terminations.  During 2003, we recorded additional
restructuring and other reserves of $(45.3), which were partially
offset by adjustments to these reserve balances of $2.7.  In
addition, we spent $39.2, primarily for severance costs and
contract termination payments.



<PAGE>


The tables below outline the activity related to the restructuring actions
recorded in 2005 and previous years.


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

2002 & prior         $ 31.3           $(1.3)         $(23.0)        $   7.0
2003                     --            43.9           (16.2)           27.7
                     ------           -----          ------         -------
  Total              $ 31.3           $42.6          $(39.2)        $  34.7
                     ======           =====          ======         =======

 Initial year     Balance at     (Adjustments)/                    Balance at
  of charge      June 30, 2003       Accruals       Spending      June 30, 2004

2002 & prior         $  7.0           $(0.5)         $ (3.3)        $   3.2
2003                   27.7            (0.1)          (20.9)            6.7
2004                     --            17.0            (5.2)           11.8
                     ------           -----          ------         -------
  Total              $ 34.7           $16.4          $(29.4)        $  21.7
                     ======           =====          ======         =======

 Initial year     Balance at     (Adjustments)/                    Balance at
  of charge      June 30, 2004       Accruals       Spending      June 30, 2005

2002 & prior        $  3.2            $  --          $ (1.5)        $   1.7
2003                   6.7             (3.3)           (1.6)            1.8
2004                  11.8             (0.3)           (7.8)            3.7
2005                    --              3.6            (0.7)            2.9
                     ------           -----          ------         -------
  Total             $ 21.7            $  --          $(11.6)        $ $10.1
                     ======           =====          ======         =======


During 2005, other operating items, net comprised:

  -   Charges of $(3.6), primarily related to severance costs.
      These charges were taken to lower our cost base in
      commensuration with our current revenues and in an effort to
      streamline our operations.  These severance costs related to
      the termination of approximately 60 positions, of which 48%
      were located in Reader's Digest North America, 22% were
      located in Reader's Digest International, 20% were located
      in Consumer Business Service and 10% related to Corporate.
      Of the total positions, approximately 25% have been
      separated as of June 30, 2005.  The remaining positions will
      be terminated during the next several fiscal quarters.

  -   Income of $3.6 related to reversals, primarily severance, of
      charges recorded in previous years.  We review our
      restructuring charges periodically to determine the
      appropriateness of existing reserves in light of current
      circumstances.  Accordingly, these charges, principally
      consisting of severance, were reversed because of the
      occurrence of events that affected our original plans.

During 2004, other operating items, net of $(15.0) comprised:

  -   Charges of $(13.7) for severance and $(4.3) for contract
      terminations, asset impairments and costs associated with
      closing our Norway location.

  -   The severance charges related to streamlining operations in
      certain international markets and corporate departments.  As
      a result of these actions, approximately 240 employees were
      identified to be separated from our operations, of which 50%
      were located in Reader's Digest North America, 39% were
      located in Reader's Digest International and 11% related to
      Corporate. As of June 30, 2005, approximately 86% of these
      positions had been separated from the business.  The
      remaining positions are expected to be terminated over the
      next several fiscal quarters.

  -   Income of $1.3 related to pension curtailments as a result
      of employee terminations.

  -   These charges were partially offset by $1.7 of reversals of
      charges recorded in previous periods that are no longer
      necessary.  We review our restructuring charges periodically
      to determine the appropriateness of existing reserves in
      light of current circumstances.  Accordingly, these charges,
      principally consisting of severance, were reversed because
      of the occurrence of events that affected our original plans.

During 2003, other operating items, net of $(39.8) comprised:

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

  -   The $(37.6) of severance costs related to the termination of
      approximately 580 positions, of which 35% were located in
      North America and 65% were located outside North America.
      Substantially all of these positions have been separated as
      of June 30, 2005.

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

  -   Income of $2.8 representing net adjustments to
      litigation-related accrual balances, established in previous
      years, following settlement of a lawsuit in the first
      quarter of 2003.

  -   Income of $2.7 related to reversals, primarily severance, of
      charges recorded in previous years.  Reversals of accruals
      recorded in previous years represent circumstances where
      conditions changed after the date the accrual was
      established.

Note 4   Other (Expense) Income, Net

                                               2005     2004     2003

Interest income                              $   7.4  $   5.2  $   5.1
Interest expense(1)                            (53.6)   (55.0)   (46.5)
Net gain on the sales of certain assets(2)      14.2     10.0      8.6
Net (loss) gain on foreign exchange               --     (0.1)    (0.1)
Recapitalization costs(3)                         --       --     (3.4)
Other (expense) income, net                      0.2     (0.1)    (2.4)
                                             -------  -------  -------
Total other (expense) income, net            $ (31.8) $ (40.0) $ (38.7)
                                             =======  =======  =======


(1) In connection with the termination of the 2002 Credit
    Agreements, interest expense in 2005 included $(7.3) related to
    the expensing of the associated capitalized financing fees and
    the discontinuance of the related interest rate protection
    agreements.   Interest expense in 2004 included $(7.3) related
    to the expensing of deferred financing fees because we
    refinanced a portion of our existing indebtedness, terminated
    some of our interest rate caps and repriced a portion of our
    borrowings.  See Note 11, Debt, for additional information.
(2) Net gain on the sales of certain assets in 2005 included a
    gain of $3.2 from the sales of certain fine art, a gain of $7.0
    from the sale of buildings in Portugal and Australia, gains of
    $3.0 from the sale of Moneywise magazine in the United Kingdom
    and Crafting Traditions magazine in the United States and gains
    of $1.3 from the sale of other non-strategic assets.  Net gain
    on the sales of certain assets in 2004 included a gain of $6.1
    from the sale of a building in Hong Kong and proceeds of $2.7
    received in exchange for our interest in Schoolpop, Inc. which
    merged into an unrelated third party.  This item also included
    sales of our shares in LookSmart, Ltd. of $0.8 and $5.1 in 2004
    and 2003, respectively.  In 2003, this item included a gain of
    $2.2 on the sale of a building in Australia and a gain of $1.6
    from settlement of a class action lawsuit related to fine art
    sales in previous years.
(3) See Note 12, Capital Stock, for additional information.


Note 5   Supplemental Balance Sheet Information

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

Accounts Receivable, Net
                                               2005             2004

Gross accounts receivable, trade            $  401.3         $  383.4

  Beginning reserve for returns                (56.3)           (59.3)
  Additions to allowances(1)                  (346.7)          (332.7)
  Actual returns(2)                            333.7            335.7
                                            --------         --------
Ending reserve for returns                     (69.3)           (56.3)

  Beginning reserve for bad debts              (98.1)          (106.9)
  Additions to allowances(1)                   (97.0)          (102.9)
  Actual bad debts(2)                           97.0            111.7
                                            --------         --------
Ending reserve for bad debts                   (98.1)           (98.1)
                                            --------         --------
Ending reserve for returns and bad debts      (167.4)          (154.4)
                                            --------         --------
Accounts receivable, net                    $  233.9         $  229.0
                                            ========         ========

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



<PAGE>


Inventories

                                               2005              2004

  Raw materials                             $     8.2         $    10.0
  Work in process                                 5.6               5.0
  Finished goods                                192.1             179.7
                                            ---------         ---------
Gross inventory                             $   205.9         $   194.7

  Beginning inventory reserve                   (42.7)            (42.1)
  Additions to reserve                           (7.5)             (9.6)
  Inventory write-offs                            6.7               9.0
                                            ---------         ---------
Ending inventory reserve                        (43.5)            (42.7)
                                            ---------         ---------

Inventories, net                            $   162.4         $   152.0
                                            =========         =========

Property, Plant and Equipment, Net
                                               2005              2004

Land                                        $    10.1         $    12.4
Buildings and building improvements              85.2             190.9
Furniture, fixtures and equipment               165.1             165.5
Leasehold improvements                           19.6              13.5
                                            ---------         ---------
                                                280.0             382.3
Accumulated depreciation and amortization      (160.7)           (226.5)
                                            ---------         ---------

Total property, plant and equipment, net    $   119.3         $   155.8
                                            =========         =========


Other Noncurrent Assets
                                               2005              2004

Deferred tax assets                         $    39.4         $    30.9
Other, principally operating assets              62.6              82.6
                                            ---------         ---------
Total other noncurrent assets               $   102.0         $   113.5
                                            =========         =========

Accrued Expenses
                                               2005              2004

Compensation and other employee benefits    $    80.5         $    68.4
Royalties and copyrights payable                 16.6              16.9
Taxes, other than income taxes                    7.3               6.7
Accrued interest                                  9.0               8.2
Other operating items, net                       10.1              21.7
Other, principally operating expenses           143.9             146.8
                                            ---------         ---------
Total accrued expenses                      $   267.4         $   268.7
                                            =========         =========



<PAGE>


Other Noncurrent Liabilities
                                                    2005       2004

Deferred tax liabilities                          $   8.0    $  16.6
Deferred gain related to Pleasantville facility
  sale and leaseback (see Note 13)                   22.8         --
Other, principally operating liabilities             53.6       58.3
                                                  -------    -------
Total other noncurrent liabilities                $  84.4    $  74.9
                                                  =======    =======



Note 6   Goodwill and Other Intangible Assets, Net

The changes in the carrying amount of goodwill by reportable
segment for the fiscal year ended June 30, 2005 are as follows:
<TABLE>

                                 Reader's Digest       Consumer
                                   North America    Business Services      Total



<S>                                  <C>                <C>             <C>
Balance as of June 30, 2004          $  686.5           $  323.0        $  1,009.5

Reclassification as a result of
  change in reportable segments           1.0              (1.0)                --
Impact of foreign currency
  translation on goodwill balances         --               0.4                0.4
  outside the United States
Goodwill charge                            --            (129.0)            (129.0)
                                     --------          --------         ----------
Balance as of June 30, 2005          $  687.5          $  193.4         $    880.9
                                     ========          ========         ==========
</TABLE>


At least annually, we review the carrying amount of goodwill and
other intangibles with indefinite lives in our reporting units
for recoverability.  Reiman and Books Are Fun are our primary
reporting units in Reader's Digest North America and Consumer
Business Services, respectively.  We tested the recoverability of
these assets in the third quarter of 2005 (our designated annual
period).  Based on our assessment, Books Are Fun recorded a
goodwill charge of $(129.0) in the third quarter of 2005 because
the performance of its product portfolio and competitive
pressures on margin resulted in revenue and operating profits
falling short of our expectations.  The fair value of Books Are
Fun was determined independently using a combination of
discounted future net cash flows and an assessment of comparable
companies in the marketplace.  We determined that no other
goodwill and intangible losses have occurred.

The following categories of acquired intangible assets are
included in other intangible assets, net as of June 30, 2005 and
2004:

<TABLE>

                                                    2005                 2004
                                             Gross       Net      Gross       Net

<S>                                        <C>        <C>       <C>        <C>
Intangible assets with indefinite lives:
  Tradenames                               $   89.7   $   89.7  $   89.7   $   89.7
Intangible assets with finite lives:
  Licensing agreements                         57.3       31.9      56.0       36.5
  Customer lists                              137.8       16.2     137.8       47.7
  Other tradenames and
    noncompete agreements                       3.0         --       3.0         --
                                           --------   --------   --------   --------
Total intangible assets                    $  287.8   $  137.8   $  286.5   $  173.9
                                           ========   ========   ========   ========
</TABLE>


Amortization related to intangible assets with finite lives
amounted to $(36.9), $(39.6) and $(39.6) for the years ended June
30, 2005, 2004 and 2003, respectively.  Our most significant
licensing agreement (detailed below) is principally amortized
over the initial 10-year contract term, with a portion being
amortized over the remaining 15-year term of our amended
agreement.  Customer lists are being amortized principally
between three and six years from the date of acquisition.  Our
most significant customer list intangible was purchased as part
of the Reiman acquisition.  It will be fully amortized over the
next three years.

Estimated fiscal year amortization expense for intangible assets
with finite lives is as follows: fiscal 2006 - $16.0; fiscal 2007
- $10.6; fiscal 2008 - $5.9; fiscal 2009 - $5.7 and fiscal 2010
$5.7.

Licensing Agreement

In May 2000, QSP, Inc. entered into a long-term licensing
agreement with World's Finest Chocolate, Inc.  The cost
associated with the agreement was assigned to licensing
agreements and is included in other intangible assets, net on the
balance sheets.  In September 2002, this agreement was amended to
extend the term of the original agreement by 10 years, reduce the
annual minimum tonnage purchase requirements, favorably adjust
pricing and permit QSP to sell World's Finest Chocolate products
through marketing channels other than fundraising, under
specified circumstances.  In connection with these amended terms,
QSP paid World's Finest Chocolate $10.5 in 2003.  The amount paid
in May 2000 to consummate the initial agreement is being
amortized over the original 10-year license term.  Amounts paid
to amend the agreement have been assigned to various amortization
periods ranging from 5 to 15 years (the remaining period of the
amended agreement).

The approximate annual minimum purchase amounts under the amended
agreement by calendar year are: 2005 - $58.8; 2006 - $60.8; 2007
- $62.6; 2008 - $64.5; 2009 - $66.4; and approximately $79.7 per
year from 2010 - 2020.  These amounts are estimates based on
defined minimum tonnage requirements, as stipulated in the
amended agreement, and nominal price increases.  In 2005, we met
the minimum purchase requirement under this agreement.  However,
in 2004 and 2003, we did not meet the minimum purchase
requirements and, accordingly, we incurred penalties of $0.8 and
$2.0, respectively.


Note 7     Financial Instruments

Risk Management and Objectives

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

In the normal course of business we are exposed to market risk
from the effect of foreign exchange rate fluctuations on the U.S.
dollar value of our foreign subsidiaries' results of operations
and financial condition.  A significant portion of our risk is
associated with foreign exchange rate fluctuations of the euro.
We purchase forward contracts to minimize the effect of
fluctuating currencies on significant, specifically identifiable
transactions.

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

Quantitative Disclosures of Derivative Instruments

Cash Flow Hedges -  As described in Note 11, Debt, in the third
quarter of 2004 we refinanced a portion of our borrowings
outstanding under the Term Loan.  As a result, the total amount
of outstanding borrowings under the Term Loan, and the total
notional amount of related interest rate caps required,
declined.  Accordingly, we terminated interest rate caps with a
notional value of $250.0 and recognized the remaining unrealized
loss on those instruments, $(1.3), in interest expense.  In
addition, in the fourth quarter of 2005, we terminated our 2002
Credit Agreements.  As a result, we terminated our remaining
interest rate caps with a notional value of $150.0 and recognized
the remaining unrealized loss on those instruments, $(0.4) in
interest expense.   There were no cash flow hedges discontinued
during the 12-month period ended June 30, 2003.

As of June 30, 2004 and 2003, the fair values of our interest
rate caps were largely unchanged. For 2004, the fair value of our
interest rate caps decreased, resulting in a loss of $(0.1), net
of deferred taxes of zero.  For 2003, the fair value of our
interest rate caps decreased, resulting in an unrealized loss of
$(1.4), net of deferred taxes of $0.8.  These changes are
reported in accumulated other comprehensive (loss) income, which
is included in stockholders' equity on the balance sheets.  The
unrealized gains and losses were deferred and recognized in
earnings when the related interest expense was recognized.



Note 8          Pension Plans and Other Postretirement Benefits

Defined Benefit Pension Plans

We offer defined benefit plans for all of our eligible employees
in the United States and in several international markets.  Our
measurement date for these plans is March 31. Contributions to
these plans meet the minimum funding requirements in each
respective market.  Benefit payments are principally based on a
combination of years of service and compensation.

U.S. Plans

In the U.S. we maintain funded and unfunded defined benefit
plans.  The Reader's Digest Association, Inc. Retirement Plan
(Retirement Plan) is our largest plan.  It comprises almost 84%
of our total U.S. benefit obligation and all of our U.S. plan
assets.

Because the Retirement Plan is over-funded, we have not made any
contributions in 2005, 2004 or 2003, nor do we expect to make any
contributions in fiscal 2006.

Our unfunded plans were established for certain officers.  Since
these plans are only available to certain executives, they are
not qualified under the IRC.  We fund the benefit payments under
these plans as they arise.

The overriding principle followed in managing our Retirement Plan
assets is to obtain a reasonable rate of return in terms of both
income and appreciation, consistent with the "Prudent Man" Rule
of the Employee Retirement Income Security Act of 1974 (ERISA),
while providing liquidity to satisfy short-term obligations.



<PAGE>


The table below details our current and target asset allocation
as of our measurement date.

                 Actual Allocation as of March 31,     Target Allocation
  Asset Class             2005      2004                     Range

Equities                   68%       69%                   52% - 72%
Fixed income               26%       26%                   23% - 35%
Other                       6%        5%                    0% - 19%
                          ---       ---
  Total                   100%      100%
                          ===       ===


Equities include companies with both large and small market
capitalizations, as well as listed companies in international
markets.  Our allocation tends to be heavily weighted in favor of
large capitalized companies.  More than half of the Retirement
Plan's funds are invested in equity markets because these
investments tend to provide better returns and offer some
protection from inflation.  Fixed income securities are included
in the portfolio to protect the Retirement Plan's assets from
inflation and to preserve capital.  Other assets, including
private equity and real estate investments, are utilized to a
small extent to take advantage of investments that provide higher
returns.  The Retirement Plan allows investment managers to
invest in derivative instruments, provided that certain criteria
specified in the plan's investment policy are satisfied.

The expected rate of return on plan assets is a significant
driver in calculating our net pension (benefit) cost.  In order
to calculate our 2005 (benefit) cost, we used an expected return
on plan assets of 8.50%.  This rate was based on an analysis of
historical returns generated by asset classes in which our funds
are invested and on projected returns for portfolios with assets
similar to ours.  This decreased from 8.75% in 2004 due to lower
anticipated rates of return for portfolios with asset allocations
similar to those of our pension plans.

Estimated benefit payments during the next 10 years are expected
to be, by fiscal year: 2006 - $41.7; 2007 - $42.0; 2008 - $41.9;
2009 - $42.8; 2010 - $45.1 and from 2011 to 2015 - a total of
$223.6.

International Plans

We offer defined benefit pension plans in several markets outside
the United States.  In fiscal 2006 we expect to contribute $7.1
to these plans.

The table below reflects the actual allocation of assets held for
our international plans and the allocation required pursuant to
our most recent investment policy for these plans.  These
percentages have been calculated on a weighted average basis
because the assets comprised several plans.

                 Actual Allocation as of March 31,     Target Allocation
  Asset Class             2005      2004                     Range

Equities                   64%       68%                      61%
Fixed income               36%       32%                      39%
                          ---       ---
  Total                   100%      100%
                          ===       ===

Similar to the U.S. plans, the expected rate of return on plan
assets is also a significant driver in calculating the net
pension (benefit) cost for our international plans.  In order to
calculate our 2005 and 2004 expense, we used a weighted average
expected return on plan assets of 6.92% and 6.77%, respectively.
These rates were based on a methodology similar to that used to
determine the rate of return for our Retirement Plan.

Estimated benefit payments during the next 10 years are expected
to be, by fiscal year: 2006 - $11.3; 2007 - $11.6; 2008 - $11.3;
2009 - $11.8; 2010 - $12.9 and from 2011 to 2015 - a total of
$68.4.

Assumptions

The table below outlines the weighted average assumptions used to
determine our projected benefit obligation as of year-end and
pension (benefit) cost for the fiscal year for:

U.S. plans:

Benefit obligation                               2005       2004       2003

Discount rate                                   5.75%      5.75%      6.25%

Compensation increase rate                      4.00%      4.50%      4.50%

Pension (benefit) cost

Discount rate                                   5.75%      6.25%      7.25%

Compensation increase rate                      4.50%      4.50%      5.00%

Long-term rate of return on plan assets         8.50%      8.75%      9.25%






<PAGE>

International plans:
                                                 2005       2004       2003
Benefit obligation

Discount rate                                   5.36%      5.50%      5.58%

Compensation increase rate                      3.66%      3.70%      3.63%



Pension (benefit) cost

Discount rate                                   5.50%      5.58%      6.17%

Compensation increase rate                      3.70%      3.63%      3.72%

Long-term rate of return on plan assets         6.92%      6.77%      7.43%



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

                                                        U.S. Plans
                                               2005        2004         2003
Service cost                               $    11.2    $    11.3    $     8.8
Interest cost                                   29.7         31.4         33.4
Expected return on plan assets                 (55.0)       (50.1)       (63.8)
Amortization                                    (0.7)        (0.7)        (0.8)
Recognized actuarial gain                        1.0          2.1         (2.7)
                                           ---------    ---------    ---------
Net periodic pension (benefit) cost        $   (13.8)   $    (6.0)   $   (25.1)
                                           =========    =========    =========



                                                     International Plans
                                                2005       2004         2003
Service cost                               $     7.5    $     7.4    $     7.4
Interest cost                                   14.8         13.4         13.6
Expected return on plan assets                 (17.3)      (14.0)       (16.6)
Amortization                                    (0.4)        (0.5)         0.1
Recognized actuarial gain                        2.2          3.1          0.7
Settlements                                      0.6         (1.5)         1.9
Curtailments and other items                    (0.1)         0.4         (0.4)
                                           ---------    ---------    ---------
Net periodic pension (benefit) cost        $     7.3    $     8.3    $     6.7
                                           =========    =========    =========


<PAGE>


A reconciliation of the beginning and ending balances of benefit
obligations and fair value of plan assets and the funded status
of the defined benefit pension plans is as follows:
<TABLE>

                                               U.S. Plans     International Plans
                                             2005      2004     2005      2004
<S>                                       <C>       <C>       <C>       <C>
Change in benefit obligation:
Benefit obligation at beginning of year   $  542.0  $  525.7  $  267.4  $  241.2
Service cost                                  11.2      11.3       7.5       7.4
Interest cost                                 29.7      31.4      14.8      13.4
Participant contributions                       --        --       2.0       2.1
Actuarial loss                                 1.1      20.5       8.3       7.4
Plan amendments                                 --        --        --      (6.3)
Exchange rate changes                           --        --      (0.6)     19.7
Settlements                                     --        --      (6.8)     (2.5)
Curtailments                                    --        --        --      (2.5)
Benefits paid                                (43.4)    (46.9)    (12.9)    (12.5)
                                          --------  --------  --------  --------
Benefit obligation at end of year            540.6     542.0     279.7     267.4
                                          --------  --------  --------  --------
Change in plan assets:
Fair value at beginning of year              626.4     511.9     221.5     173.3
Actual return on plan assets                  44.8     156.1      20.8      38.1
Employer contribution                          7.5       8.1      10.6      10.3
Participant contribution                        --        --       2.0       2.1
Exchange rate changes                           --        --       2.1      12.7
Settlements                                     --        --      (6.8)     (2.5)
Benefits paid                                (43.4)    (46.9)    (12.9)    (12.5)
Other items                                     --      (2.8)       --        --
                                          --------  --------  --------  --------
Fair value at end of year                    635.3     626.4     237.3     221.5
                                          --------  --------  --------  --------

Funded status                                 94.7      84.4     (42.4)    (45.9)
Unrecognized actuarial loss                  111.0     102.7      83.5      82.6
Unrecognized transition (asset)
  obligation                                    --        --      (1.3)     (1.6)
Unrecognized prior service cost               (4.6)     (5.2)     (3.3)     (3.6)
Employer - fourth quarter
 contribution                                  1.9        --       1.7       2.2
                                          --------  --------  --------  --------
Net amount recognized                     $  203.0  $  181.9  $   38.2  $   33.7
                                          ========  ========  ========  ========

</TABLE>


The accumulated benefit obligation (the actuarial present value
of benefits earned, excluding future compensation increase
assumptions) for our U.S. plans was $531.6 and $530.2 as of June
30, 2005 and 2004, respectively.  The accumulated benefit
obligation for our international plans was $247.6 and $236.6 as
of June 30, 2005 and 2004, respectively.

Other Postretirement Benefits

We provide medical and dental benefits to certain retired
employees and their dependents.  The plans that provide these
benefits cover all of our eligible employees in the United States
who were hired before July 1, 2005, and to a lesser extent,
employees in Canada.

The table below outlines the weighted average assumptions used to
determine our postretirement benefit obligation as of year-end
and our postretirement cost for the fiscal year:

<TABLE>

Postretirement benefit obligation                               2005       2004       2003

<S>                                                             <C>        <C>        <C>
Discount rate                                                   5.75%      5.75%      6.25%

Healthcare cost trend rate assumed for next year               10.00%     11.50%     13.00%

Rate to which the cost trend rate is assumed to decline         5.00%      5.00%      5.00%

Number of years to ultimate trend rate                            8          9         10


Postretirement cost

Discount rate                                                   5.75%      6.19 %     7.25%

Healthcare cost trend rate assumed for next year                11.5%      13.00%     6.00%

Rate to which the cost trend rate is assumed to decline         5.00%       5.00%     5.50%

Number of years to ultimate trend rate                            9          10         1

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

                                                                2005       2004       2003

Service cost                                                  $   1.1    $   1.3    $   0.9
Interest cost                                                     5.1        6.0        5.0
Amortization                                                     (1.8)      (1.0)      (0.5)
Recognized actuarial gain                                          --         --       (2.2)
                                                              -------    -------    -------
Net periodic postretirement (benefit) cost                    $   4.4    $   6.3    $   3.2
                                                              =======    =======    =======

</TABLE>



<PAGE>


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

                                            2005     2004
Change in benefit obligation:
Benefit obligation at beginning of year   $  92.1  $  103.1
Service cost                                  1.1       1.3
Interest cost                                 5.1       6.0
Actuarial (gain) loss                        (4.5)     (4.9)
Plan amendments                                --      (7.1)
Exchange rate changes                         0.2        --
Benefits paid                                (5.3)     (6.3)
                                          -------  --------
Benefit obligation at end of year            88.7      92.1
                                          -------  --------
Change in plan assets:
Fair value at beginning of year                --        --
Employer contribution                         5.3       6.3
Benefits paid                                (5.3)     (6.3)
                                          -------  --------
Fair value at end of year                      --        --
                                          -------  --------

Funded status                               (88.7)    (92.1)
Unrecognized actuarial gain                  (5.9)     (0.4)
Unrecognized transition obligation           0.5       0.6
Unrecognized prior service cost              (8.0)     (9.8)
Employer contributions in the fourth
  quarter                                     1.2        --
                                          -------  --------
Net amount recognized                     $(100.9) $ (101.7)
                                          =======  ========

On May 19, 2004, the FASB issued FSP 106-2 "Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" which supersedes
FSP 106-1 "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003," which was issued on January 12, 2004.  This guidance
relates to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Medicare Reform Act) signed into
law on December 8, 2003.  The Medicare Reform Act introduced a
prescription drug benefit under Medicare Part D (Part D) and a
federal subsidy for sponsors of retiree healthcare benefit plans
that provide a benefit that is at least "actuarially equivalent"
to Part D.  Based on the level of benefits provided under our
retiree healthcare plan, the majority of retiree participants are
eligible to receive benefits that are at least "actuarially
equivalent" to those provided by Part D.  Therefore, as of our
March 31, 2004 measurement date, we reflected an $11.2 benefit as
an unrecognized actuarial gain.  This gain will be amortized as a
component of net periodic postretirement cost over ten years.

Assumed healthcare cost trend rates have a significant effect on
the amounts reported for postretirement benefits.  A
one-percentage-point increase in assumed healthcare cost trend
rates would increase the total of the service and interest cost
components by $0.6 and the postretirement benefit obligation by
$8.5 for the year ended June 30, 2005.  A one-percentage-point
decrease in assumed healthcare cost trend rates would decrease
the total of the service and interest cost components by $(0.5)
and the postretirement benefit obligation by $(7.3) for the year
ended June 30, 2005.

Estimated benefit payments during the next 10 years are expected
to be, by fiscal year:  2006 - $7.2; 2007 - $7.4; 2008 - $7.4;
2009 - $7.9; 2010 - $8.3 and from 2011 to 2015 - a total of
$37.9.  Estimated receipts pursuant to the Medicare Reform Act
during the next 10 years are expected to be, by fiscal year: 2006
- $0.4; 2007 - $0.8; 2008 - $0.8; 2009 - $0.9; 2010 - $0.9; and
from 2011 to 2015 - a total of $5.1.


Balance Sheet Classification

Amounts recognized on the balance sheets related to our material
pension and postretirement plans are as follows:



<PAGE>


                                           Pension Benefits     Other Benefits
                                            2005      2004      2005      2004

Assets                                   $  308.0  $  291.5  $     --  $     --
Liabilities                                (127.0)   (131.2)   (100.9)   (101.7)
Accumulated other comprehensive income       60.2      55.3        --        --
                                         --------  --------  --------  --------
Net amount recognized                    $  241.2  $  215.6  $ (100.9) $ (101.7)
                                         ========  ========  ========  ========

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



<PAGE>


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

                                  2005       2004          2005      2004

Projected benefit obligation     $ 325.1   $ 318.0           N/A       N/A

Accumulated benefit obligation       N/A       N/A       $ 299.9   $ 269.6

Fair value of plan assets        $ 172.1   $ 163.5       $ 172.1   $ 139.2


Note 9    Employee Equity Compensation Plans

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

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

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

The weighted average fair values of options granted in 2005, 2004
and 2003 were $4.43, $3.72, and $4.85, 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:

                                2005        2004         2003

Risk-free interest rate         3.4%         3.3%         2.9%
Expected life                4.1 years    4.1 years    4.1 years
Expected volatility            32.9%        35.7%        39.3%
Expected dividend yield         1.2%         1.4%         1.7%


The following table summarizes information about stock options
outstanding at June 30, 2005:

<TABLE>

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

<C>                   <C>             <C>       <C>              <C>       <C>
$12.16 - $18.97        5,795           7.2       $   15.71        2,097     $   16.80
$20.59 - $28.84        3,580           4.2       $   23.05        3,054     $   23.30
$30.00 - $39.75        1,216           3.8       $   32.12        1,216     $   32.12
$41.19 - $47.31        2,136           3.4       $   41.69        2,136     $   41.69
$50.94 - $50.94           30           0.4       $   50.94           30     $   50.94
                      ------           ---       ---------        -----     ---------
                      12,757           5.4       $   23.76        8,533     $   27.66
                      ======           ===       =========        =====     =========
</TABLE>


Changes in outstanding options are as follows:

                                                           Weighted
                                                            Average
                                                 Options   Exercise
                                                 (000's)     Price

Outstanding at June 30, 2002                     11,730     $30.97
  Granted                                         2,018     $15.82
  Exercised                                          --         --
  Canceled                                       (1,581)    $34.01
                                                 ------     ------
Outstanding at June 30, 2003                     12,167     $28.10
  Granted                                         1,731     $13.42
  Exercised                                          --         --
  Canceled                                       (1,416)    $31.21
                                                 ------     ------
Outstanding at June 30, 2004                     12,482     $25.66
  Granted                                         1,855     $15.74
  Exercised                                         (66)    $14.59
  Canceled                                       (1,514)    $30.20
                                                 ------     ------
Outstanding at June 30, 2005                     12,757     $23.76
                                                 ------     ------
Options exercisable at June 30, 2005              8,533     $27.66
                                                 ------     ------
Options available for grant at June 30, 2005      1,894
                                                  =====


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

The Plans provide that the Compensation and Nominating Committee
of the Board of Directors (the committee) may grant stock
options, stock appreciation rights, restricted stock, deferred
stock, performance units, performance shares and other
stock-based awards to eligible employees. The committee was
allowed to grant awards requiring the issuance of up to a maximum
of 17,300,000 shares of Common Stock under the 1994 Plan (which
expired in February 2004) and may grant up to a maximum of
4,500,000 underlying shares under the 2002 Plan.

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

Restricted Stock - Restricted stock are shares of Common Stock
that are subject to restrictions on transfer and risk of
forfeiture until the fulfillment of specified conditions.  The
market value of restricted stock awards on the date of grant is
recorded as a reduction of capital stock on the balance sheets
and is amortized ratably over the term of the restriction period,
ranging from two to four years. Restricted stock expense amounted
to $(9.3),  $(8.7) and $(5.5) for 2005, 2004 and 2003,
respectively.  We granted 511,000 shares, 764,300 shares and
958,080 shares of restricted stock to employees during 2005, 2004
and 2003, respectively.

Deferred Stock - Deferred stock are rights to receive shares of
Common Stock upon the fulfillment of specified conditions.  We
offer deferred stock outside the United States.  Deferred stock
is similar to restricted stock in all respects, except that
deferred stock is issued to the employee at the completion of the
vesting period.  We recognized expense of $(1.7), $(1.5) and
$(0.7) in 2005, 2004 and 2003, respectively, related to these
awards.  During 2005, 2004 and 2003 we granted 118,900 shares,
119,400 shares and 164,163 shares of deferred stock,
respectively.

Performance Shares - Performance shares give the recipients the
right to receive cash equal to the value of shares of Common
Stock that are earned if specific performance goals are achieved
during a specific performance period.  Compensation cost related
to performance shares is based on management's best estimate as
to whether or not the performance criteria will be satisfied and
the market price of our shares on the date of the financial
statements.  This amount is recognized ratably over the
performance period.  Adjustments based on changes in our estimate
of whether the performance criteria will be satisfied and changes
in the market value of our shares are recorded in the period in
which the change occurs.  In 2005, a new two-year performance
cycle did not commence.  In 2004, we awarded performance shares
for the 2004-2005 performance period.  In 2003, performance share
awards relating to two three-year performance periods (2001-2003
and 2002-2004) were canceled and replaced with an award relating
to a two-year performance period (2003-2004) and a transitional
award relating to operating performance for 2003.  We have
recorded $(1.9), $(0.6) and $(1.8) as expense during 2005, 2004
and 2003, respectively, for these awards.  In fiscal 2006,
approximately $5.0 will be distributed relating to the 2004-2005
performance periods.  No amounts were earned related to the
2003-2004 performance period.    In 2004, we distributed $2.8
relating to the transitional award ($1.1 was distributed in 2003
relating to the 2000-2002 performance period).

Restricted Stock Units - A restricted stock unit is an "other
stock-based award" that is the right to receive cash equal to the
value of a share of Common Stock upon the fulfillment of
specified conditions.  Compensation cost related to restricted
stock units is based on the market price of our shares on the
date of the financial statements.  This amount is recognized
ratably over the lives of the units (two to five years).
Adjustments based on changes in the market value of our shares
are recorded in the period in which the change occurs. We granted
32,100 restricted stock units in 2005 and did not grant any
restricted stock units in 2004 or 2003. We have recorded $(0.1)
as expense during 2005 for these awards.

Employee Stock Purchase Plans

Under the U.S. Employee Stock Purchase Plan (ESPP), we are
authorized to issue up to 2,650,000 shares of Common Stock
(330,000 shares per annum), principally to our full-time
employees in the United States, nearly all of whom are eligible
to participate.  Under the terms of the ESPP, employees can
choose every six months to have up to 10% of their annual base
earnings withheld to purchase Common Stock.  The purchase price
of the shares is 85% of the lower of the fair market values of
the Common Stock on the first and last days of the six-month
purchase period.  In 2005, 2004 and 2003 approximately 27%, 25%
and 28% of eligible employees participated in the ESPP,
respectively.  Effective July 1, 2005, the ESPP was revised to
change the purchase price of the shares to 95% of the market
price of the stock on the last day of the purchase period.

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

Under the ESPP and the international ESPP, employees purchased
196,706 shares in 2005, 215,011 shares in 2004 and 256,870 shares
in 2003.

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
2005, 2004 and 2003 were $3.25, $3.45 and $4.31, respectively.

These fair values were estimated using the following assumptions:

                                2005         2004         2003

Risk-free interest rate         2.1%         1.0%         1.5%
Expected life                0.5 years    0.5 years    0.5 years
Expected volatility            24.4%        35.3%        35.6%
Expected dividend yield         1.0%         1.4%         1.7%

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 IRC.  The savings plan
component allows employees to make pre-tax contributions to their
accounts, which may be invested in specified investment
alternatives.  We may match employee contributions to the extent
determined by our Board of Directors.  The matching contributions
vest 20% per annum over a five-year period.  Our contributions to
the 401(k) plan, including matching contributions, were $3.5,
$3.9 and $5.0 for 2005, 2004 and 2003, respectively.


Note 10         Income Taxes

(Loss) income before provision for income taxes is as follows:

                                         2005      2004       2003

United States                         $ (176.1)   $ 33.0    $  89.1
International                             96.7      33.1       11.3
                                      --------    ------    -------
(Loss) income before provision for
  income taxes                        $  (79.4)   $ 66.1    $ 100.4
                                      ========    ======    =======




<PAGE>


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

                               2005       2004       2003
Current
  U.S. federal               $   3.2    $  (9.5)   $   1.6
  U.S. state and local           1.3        2.2        0.4
  International                 27.2       19.1       13.5
                             -------    -------    -------
  Total current                 31.7       11.8       15.5
                             -------    -------    -------
Deferred
  U.S. federal                 (15.9)      19.9       28.7
  U.S. state and local          (2.7)       1.4        1.9
  International                 (1.6)     (16.5)      (7.0)
                             -------    -------    -------
  Total deferred               (20.2)       4.8       23.6
                             -------    -------    -------

Provision for income taxes   $  11.5    $  16.6    $  39.1
                             =======    =======    =======


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

                                             2005     2004     2003

U.S. statutory tax rate                      35.0%    35.0%    35.0%
International operations                      5.0    (11.6)     1.9
State taxes, net                              3.8      3.6      1.3
Non taxable loss (gain) from disposition
  of assets                                   1.8     (3.2)      --
Changes in valuation allowance               (6.1)     7.9      0.1
Changes in tax reserves                       6.2     (8.0)      --
Goodwill charge                             (56.9)      --       --
Other operating items, net                     --      0.2      2.5
Other, net                                   (3.3)     1.2     (1.9)
                                            -----     ----     ----
Effective tax rate                          (14.5)%   25.1%    38.9%
                                            =====     ====     ====



<PAGE>


Components of deferred tax assets and liabilities are as follows:

                                                       2005         2004

Deferred compensation and other employee benefits   $     --     $    3.5
Accounts receivable and other allowances                52.8         48.2
Net operating loss carryforwards                        26.4         22.2
Other operating items, net                               4.7          7.5
Tax credit carryforwards                                44.7         30.7
Deferred gain on sale of buildings                      14.6          5.9
Other accrued items                                     14.0         17.8
Other, net                                                --          2.6
                                                    --------     --------
  Gross deferred tax assets                            157.2        138.4
Valuation allowance                                    (17.1)       (12.2)
                                                    --------     --------
  Total net assets                                     140.1        126.2
                                                    --------     --------
Deferred compensation and other employee benefits      (18.7)       (16.3)
Deferred promotion                                     (10.3)       (12.3)
Depreciation and amortization                          (15.4)       (22.3)
Deferred agent commissions                             (19.0)       (19.1)
Other, net                                              (2.6)        (8.5)
                                                    --------     --------
  Total net liabilities                                (66.0)       (78.5)
                                                    --------     --------

Net deferred taxes                                  $   74.1     $   47.7
                                                    ========     ========


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

                                                 2005     2004

Prepaid expenses and other current assets       $ 47.2   $ 38.7
Other noncurrent assets                           39.4     30.9
Other current liabilities                         (4.5)    (5.3)
Other noncurrent liabilities                      (8.0)   (16.6)
                                                ------   ------
Net deferred taxes                              $ 74.1   $ 47.7
                                                ======   ======

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 $142.4 at June 30, 2005, are
available to reduce future tax obligations of certain foreign and
U.S. companies in a number of jurisdictions with various
expiration dates, some of which are indefinite.  In addition,
foreign tax credits carryforwards amounting to $34.8 and
alternative minimum tax credit carryforwards of $7.0 are
available as of June 30, 2005.  Foreign tax credit carryforwards
have various expiration dates beginning in fiscal 2011;
alternative minimum tax credit carryforwards have an indefinite
life.

Approximately $1.9 of deferred tax benefit and $8.0 of deferred
tax expense are included as a component of stockholders' equity
for 2005 and 2004, respectively.

A provision has not been made for U.S. taxes that would be
payable if undistributed earnings of the foreign subsidiaries of
approximately $135.6 as of June 30, 2005, were distributed to us
in the form of dividends because we intend to permanently
reinvest such foreign earnings.  A determination of the amount of
the unrecognized deferred tax liability related to undistributed
earnings is not practical.


Note 11    Debt

Our primary debt obligations as of June 30, 2005 are our
borrowings under our $400.0 Five-Year Revolving Credit Agreement
(2005 Credit Agreement) and $300.0 in senior unsecured notes.  As
discussed below, the 2002 Credit Agreements were terminated and
replaced in April 2005 with the 2005 Credit Agreement.

2002 Credit Agreements

On May 20, 2002, we entered into a $950.0 Term Loan Agreement
with a syndicate of banks and other financial institutions and we
amended and restated the 2001 Five-Year Revolving Credit
Agreement, which allowed for up to $192.5 in aggregate principal
amount of bank borrowings to conform it to the Term Loan
Agreement (the Term Loan Agreement and the Five-Year Revolving
Facility Agreement are collectively referred to as the 2002
Credit Agreements).  Proceeds from the Term Loan Agreement were
used to finance the Reiman acquisition purchase price and pay
related financing and transaction costs, to finance our 2002
recapitalization transactions and to refinance the 2001 Five-Year
Revolving Credit Agreement.  (See Note 12, Capital Stock, for
further information on the recapitalization agreement.)
Borrowings under the Five-Year Revolving Facility Agreement were
used for general corporate purposes, including acquisitions,
share repurchases and commercial paper backup.

Borrowings under the 2002 Credit Agreements were subject to
interest rates at either LIBOR plus a spread based upon our
credit rating at the time the rate was established, or the
Alternate Base Rate, as defined in the Term Loan Agreement.  The
interest rate was required to be reset from time to time for
periods of up to six months.  Borrowings under the 2002 Credit
Agreements were secured by substantially all of our assets and
were subject to various financial covenants.

2005 Credit Agreement

On April 14, 2005, we entered into the 2005 Credit Agreement to
retire all outstanding borrowings under the 2002 Credit
Agreements and for general corporate purposes.  Financing fees of
$(1.6) related to the 2005 Credit Agreement were deferred and are
amortized on a straight-line basis over the life of the 2005
Credit Agreement.  In connection with the termination of the 2002
Credit Agreements, we recorded in the fourth quarter of 2005 a
write-off of $(7.3) related to the associated capitalized
financing fees and the discontinuance of the related interest
rate protection agreements.  The interest rate on the 2005 Credit
Agreement is currently at LIBOR plus 125 basis points and is
subject to change based on our leverage ratio (as defined in the
2005 Credit Agreement).  The 2005 Credit Agreement contains
financial covenants that require us to maintain minimum interest
coverage and maximum leverage ratios, and it is secured by the
stock of a substantial portion of our subsidiaries.

Senior Notes

During the third quarter of 2004, we completed a private
placement, with registration rights, of $300.0 of 6 1/2% senior
unsecured notes due in 2011 (Senior Notes) in order to refinance
amounts outstanding under the 2002 Term Loan Agreement.  In the
fourth quarter of 2004, these notes were exchanged for notes that
were registered under the Securities Act of 1933.  The proceeds
from this offering were used to repay $294.0 of principal
outstanding under the 2002 Term Loan Agreement, with the
remainder used to pay a portion of the financing costs.



<PAGE>


Debt Maturities and Interest Expense

Total debt maturities during the next five years are as follows:

             2006       $    --
             2007            --
             2008            --
             2009            --
             2010         259.2
                        -------
             Total      $ 259.2
                        =======


At June 30, 2005, we had borrowings of $559.2 outstanding, all of
which was classified as long-term debt on the balance sheets.  At
June 30, 2004, we had borrowings of $721.6 outstanding, of which
$83.9 was classified as short-term debt and included in loans and
notes payable on the balance sheets.

In 2005, 2004 and 2003, we recorded interest expense, net of
$(46.2), $(49.8) and $(41.4), respectively.  Interest expense in
2005 included the expense and write-off of financing fees of
$(6.9) as a result of the termination of the 2002 Credit
Agreements as well as the associated discontinuance of the
related interest rate protection agreements of $(0.4).  Interest
expense in 2004 included the expense and write-off of financing
fees of $(6.0) as a result of the refinancing and certain other
transactions described above and the write-off of $(1.3) related
to the termination of some of our interest rate caps that were no
longer required (see Note 7, Financial Instruments).  The
weighted average interest rate on our borrowings charged by our
lenders was 5.3%, 4.4% and 4.0% during 2005, 2004 and 2003,
respectively.

Lines of Credit

International lines of credit and overdraft facilities totaled
$27.7 at June 30, 2005 and $28.5 at June 30, 2004, of which no
amounts were outstanding at June 30, 2005.  These lines of credit
are subject to renewal annually.



<PAGE>



Note 12    Capital Stock

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

                                                            2005       2004
First preferred stock,
  par value $1.00 per share;
  authorized 40,000 shares;
  issued and outstanding 29,720 shares                    $   3.0    $     3.0
Second preferred stock,
  par value $1.00 per share;
  authorized 120,000 shares;
  issued and outstanding 103,720 shares                      10.3         10.3
Third subordinated preferred stock,
  par value $1.00 per share;
  authorized 230,000 shares;
  issued and outstanding 155,022 shares                      15.5         15.5
Preference stock,
  par value $0.01 per share;
  authorized 25,000,000 shares;
  issued and outstanding none                                  --           --
                                                          -------    ---------
Total preferred stock                                        28.8         28.8
                                                          -------    ---------

Common Stock,
  par value $0.01 per share;
  authorized 200,000,000 shares;
  145,922,062 issued in 2005 and 2004; 99,256,958 and
  99,058,392 outstanding in 2005 and 2004, respectively       1.5          1.5

Unamortized restricted stock                                 (9.1)       (12.5)
                                                          -------    ---------
Total capital stock                                       $  21.2    $    17.8
                                                          -------    ---------

Common Stock in treasury, at cost
  Common Stock:  46,665,104 and 46,863,670 shares
   in 2005 and 2004, respectively                         $(999.3)   $(1,005.8)
                                                          =======    =========

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.  Preferred stockholders do not have
any voting rights.

Recapitalization Agreement

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

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

Share Repurchase Authorization

On April 28, 2005, our Board of Directors authorized our
repurchase of up to $100.0 of our Common Stock over the
succeeding two years and rescinded its May 2001 authorization to
repurchase up to $250.0 of our Common Stock.  Under the April
2005 authorization, we repurchased 410,000 shares for $7.0 in the
fourth quarter of 2005, of which $2.0 settled in early July
2005.  We had not repurchased any shares under the May 2001
authorization since fiscal 2002.


Note 13  Commitments and Contingencies

General Litigation

From time to time, we are involved in a variety of claims,
lawsuits, investigations and proceedings that arise in the
ordinary course of business. We cannot predict the ultimate
outcome of these matters with certainty.  Management believes
that the ultimate outcome of these matters will not have a
material adverse effect on our financial position or results of
operations, although our results and cash flow could be
significantly unfavorably affected in the reporting periods in
which these matters are resolved.

Supply and Service Agreements

We maintain several long-term agreements with vendors primarily
for the purchase of paper, printing and fulfillment services.
These agreements expire at various times through fiscal 2010.

In the normal course of business, we enter into long-term
arrangements with suppliers for raw materials and merchandise,
including our agreement with World's Finest Chocolate (see Note
6, Goodwill and Other Intangible Assets, Net, for additional
information), and with other parties whose recordings or works we
use in our products.  These arrangements may contain minimum
purchase requirements.  We enter into these agreements to
facilitate an adequate supply of materials and to enable us to
develop better products for sale to our customers.

Sale and Leaseback

On December 22, 2004, we completed the sale and partial leaseback
of our corporate headquarters facility in Westchester, New York.
Under the agreement, we received $48.5 in cash and will receive
an additional $10.0 on the second anniversary of closing.  The
gain of $24.7, based on total consideration, was deferred and
will be amortized over the initial 20-year lease term as a
reduction in rent expense.  During the lease term, we will make
annual minimum lease payments of approximately $3.1, subject to
increases every five years based on changes in the Consumer Price
Index.  In addition, we have leased additional space for three
years in this facility at an annual cost of $0.7.

Lease Obligations

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

Rental expense and sublease income are as follows:

                         2005    2004   2003
Rental expense          $ 23.6   $18.3  $ 19.5
Sublease income           (5.5)   (6.2)   (5.0)
                         -----   -----  ------
Net rental expense       $18.1   $12.1  $ 14.5
                         =====   =====  ======

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

               Minimum       Minimum
                Rental       Sublease
               Payments       Income       Net

2006             $23.8       $  (5.6)     $18.2
2007             $21.2       $  (5.7)     $15.5
2008             $19.2       $  (5.4)     $13.8
2009             $16.8       $  (4.9)     $11.9
2010             $14.2       $  (2.9)     $11.3
Later years      $94.5       $ (15.3)     $79.2


Note 14   Segments

Our businesses are structured into the same three reportable
segments (Reader's Digest North America, Reader's Digest
International and Consumer Business Services) that our chief
operating decision maker uses to assess business performance.  In
addition to the reportable segments, we separately report
Corporate Unallocated expenses, which cover expenses that are not
directly attributable to business unit performance.  In the first
half of 2005, we made minor modifications to the composition of
two of our reportable segments to reflect a change in the manner
in which senior management and our chief operating decision maker
internally manage certain smaller business units.  Reader's
Digest Young Families and Trade Publishing, which were included
in Consumer Business Services, are now included in Reader's
Digest North America.  We have restated reportable segment
results of operations to conform to our new reportable segments.
Here is a brief description of the activities included within our
reportable segments.

Reader's Digest North America

This segment comprises our operations in the United States and
Canada that publish and market Reader's Digest magazine, Reiman
magazines and several special interest magazines; our operations
in the United States and Canada that publish and market Books and
Home Entertainment products, including Select Editions, Reader's
Digest Young Families, music and video products, and series and
general books related to the following affinities: reading, home
and health, and entertainment.

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

Reader's Digest International

This segment comprises our operations outside of the United
States and Canada, with our most significant markets in the
United Kingdom, Germany, Central Europe and France.  The
businesses in this segment publish and market Reader's Digest
magazine (in numerous editions and languages) and books and home
entertainment products (described above).

The performance of these businesses is driven by factors similar
to those in the Reader's Digest North America segment, except
that overall results are less sensitive to changes in individual
geographic market conditions due to the number of markets in
which we operate.  The results for Reader's Digest magazine in
international markets are driven principally by circulation and
secondarily by advertising revenues.  The results of our books
and home entertainment products in these markets are driven by
its universe of promotable customers, new customer acquisition
programs, response rates to its promotional mailings, customer
payment rates and membership in our continuity series business.

Consumer Business Services

This segment comprises Books Are Fun, our domestic display
marketing business, and QSP, our youth fundraising businesses in
the United States and Canada.

These businesses principally sell products through non-direct
marketing channels, primarily through their sales forces.  The
performance of these businesses is driven by product selection,
the number of accounts or events held, and the average sales per
account or event.

Intercompany Eliminations and Corporate Unallocated Expenses

We present our segment revenues and operating (losses) profits on
an arm's-length basis, consistent with how we manage our
operations and how our chief operating decision maker reviews our
results.  Revenues and expenses attributable to intercompany
transactions are included in the results of our reportable
segments.  Such amounts are eliminated (under the intercompany
eliminations caption below) to reconcile our reportable segment
amounts to consolidated amounts, as reported in the statements of
operations.  Accounting policies of our segments are the same as
those described in Note 1, Organization and Summary of
Significant Accounting Policies.  In addition to intercompany
revenues and expenses, we separately report Corporate Unallocated
expenses, which cover expenses that are not directly attributable
to business unit performance.  Corporate Unallocated expenses
include the cost of governance and other corporate-related
expenses, as well as income and expenses associated with our U.S.
pension plans and retiree healthcare benefits, and executive
compensation programs that are not allocated to the reportable
segments.

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

Reportable Segment Financial Information

                                                   Years ended June 30,
                                             2005        2004         2003
                                                     Restated (1)  Restated(1)
Revenues
  Reader's Digest North America          $    917.3   $    919.5   $    931.8
  Reader's Digest International             1,012.1        969.5      1,007.8
  Consumer Business Services                  485.1        525.1        563.4
  Intercompany eliminations                   (24.8)       (25.6)       (28.1)
                                         ----------   ----------   ----------
Total revenues                           $  2,389.7   $  2,388.5   $  2,474.9
                                         ==========   ==========   ==========

Operating (loss) profit
  Reader's Digest North America          $     90.8   $     76.0   $     61.1
  Reader's Digest International                76.1         57.0         49.1
  Consumer Business Services                   29.4         59.0         90.1
  Previously deferred magazine promotion
    expense(2)                                (77.1)       (27.2)          --
  Goodwill charge(3)                         (129.0)          --           --
  Corporate Unallocated                       (37.8)       (43.7)       (21.4)
  Other operating items, net(4)                  --        (15.0)       (39.8)
                                         ----------   ----------   ----------
Total operating (loss) profit            $    (47.6)  $    106.1   $    139.1
                                         ==========   ==========   ==========

Intercompany eliminations
  Reader's Digest North America          $     (9.2)  $    (11.3)  $     (7.7)
  Reader's Digest International                (4.0)        (3.3)        (3.4)
  Consumer Business Services                  (11.6)       (11.0)       (17.0)
                                         ----------   ----------   ----------
Total intercompany eliminations          $    (24.8)  $    (25.6)  $    (28.1)
                                         ==========   ==========   ==========

Assets
  Reader's Digest North America          $  1,084.8   $  1,178.8   $  1,214.5
  Reader's Digest International               387.8        421.8        472.7
  Consumer Business Services                  326.5        456.2        506.6
  Corporate                                   381.5        378.1        397.9
                                         ----------   ----------   ----------
Total assets                             $  2,180.6   $  2,434.9   $  2,591.7
                                         ==========   ==========   ==========

(1) In the first half of 2005, we made minor
    modifications to the composition of two of our
    reportable segments to reflect a change in the manner
    in which senior management and our chief operating
    decision maker internally manage certain smaller
    business units.  Reader's Digest Young Families and
    Trade Publishing, which were included in Consumer
    Business Services, are now included in Reader's Digest
    North America.

(2) In connection with our change to expensing magazine deferred
    promotion costs when the promotion is mailed to
    prospective customers, our reportable segment
    operating (loss) profit in 2005 includes such expenses
    as incurred.  Amortization of previously deferred
    promotion costs in 2005 and our deferred promotion
    charge recorded in the fourth quarter of 2004 are not
    included in segment results reviewed by our chief
    operating decision maker.  For the year ended June 30,
    2005, amortization of previously capitalized magazine
    promotion costs related to: 81% to Reader's Digest
    North America and 19% to Reader's Digest
    International.  For the year ended June 30, 2004, our
    magazine deferred promotion charge related to: 45% to
    Reader's Digest North America and 55% to Reader's
    Digest International.

(3) The goodwill charge, which related to Books Are
    Fun, part of the Consumer Business Services reportable
    segment, is not included in segment results reviewed
    by our chief operating decision maker.  See Note 6,
    Goodwill and Other Intangible Assets, Net, for
    additional information.

(4) Other operating items, net in 2004, principally comprising
    severance and contract terminations, were attributable
    to: 12% to Reader's Digest North America, 22% to
    Consumer Business Services, 61% to Reader's Digest
    International and 5% to corporate departments that
    benefit the entire organization.  In 2003, these
    items, principally severance, were attributable to:
    13% to Reader's Digest North America, 6% to Consumer
    Business Services, 64% to Reader's Digest
    International and 17% to corporate departments that
   benefit the entire organization.



                                                         Years ended June 30,
                                                      2005      2004      2003

Depreciation, amortization and asset impairments
  Reader's Digest North America                    $   36.5   $  39.9   $  40.9
  Reader's Digest International                         7.3       8.1       9.5
  Consumer Business Services                            9.7      11.5      11.6
  Goodwill charge                                     129.0        --        --
  Corporate                                             3.4       4.8       5.9
                                                   --------   -------   -------
Total depreciation, amortization and asset
  impairments                                      $  185.9   $  64.3   $  67.9
                                                   ========   =======   =======

Capital expenditures
  Reader's Digest North America                    $    1.4   $   1.9   $   2.5
  Reader's Digest International                        12.9       3.7       5.1
  Consumer Business Services                            1.4       2.2       1.2
  Corporate                                             7.8       8.3       6.9
                                                   --------   -------   -------
Total capital expenditures                         $   23.5   $  16.1   $  15.7
                                                   ========   =======   =======



<PAGE>


The following table presents our consolidated net revenues by product:

<TABLE>

                                                              Years ended June 30,
                                                         2005        2004        2003

<S>                                                  <C>         <C>         <C>
 Revenues
  Books                                              $    971.6  $    968.5  $     982.9
  Magazines - subscription and other                      689.8       702.7        750.1
  Magazines - advertising                                 153.2       150.0        151.0
  Music and videos                                        262.7       240.3        257.4
  Food and gift                                           215.0       228.7        244.9
  Other                                                    97.4        98.3         88.6
                                                     ----------  ----------  -----------
Total revenues                                       $  2,389.7  $  2,388.5  $   2,474.9
                                                     ==========  ==========  ===========
</TABLE>


Information about geographic areas is as follows:

<TABLE>

                                                              Years ended June 30,
                                                         2005        2004         2003

<S>                                                  <C>         <C>         <C>
Revenues
  United States                                      $  1,232.6  $  1,291.3  $   1,351.8
  International                                         1,162.6     1,102.1      1,124.6
  Inter-area                                               (5.5)       (4.9)        (1.5)
                                                     ----------  ----------  -----------
Total revenues                                       $  2,389.7  $  2,388.5  $   2,474.9
                                                     ==========  ==========  ===========

Revenues inter-area
  United States                                      $     (3.1) $     (2.6) $      (0.1)
  International                                            (2.4)       (2.3)        (1.4)
                                                     ----------  ----------  -----------
Total revenues inter-area                            $     (5.5) $     (4.9) $      (1.5)
                                                     ==========  ==========  ===========

Long-lived assets, net
  United States                                      $  1,444.6  $  1,638.1  $   1,633.3
  International                                            63.8        75.3        113.5
                                                     ----------  ----------  -----------
Total long-lived assets, net                         $  1,508.4  $  1,713.4  $   1,746.8
                                                     ==========  ==========  ===========

</TABLE>








<PAGE>





Report of Independent Registered Public Accounting Firm

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

We have audited management's assessment, included in the
accompanying Management's Report on Internal Control Over
Financial Reporting, that The Reader's Digest Association, Inc.
and subsidiaries maintained effective internal control over
financial reporting as of June 30, 2005, based on criteria
established in Internal Control--Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).  The Reader's Digest Association, Inc.'s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

We  conducted  our audit in  accordance  with the  standards of the
Public Company  Accounting  Oversight Board (United States).  Those
standards  require  that we plan and  perform  the  audit to obtain
reasonable  assurance  about  whether  effective  internal  control
over financial  reporting was maintained in all material  respects.
Our audit included  obtaining an  understanding of internal control
over  financial  reporting,   evaluating  management's  assessment,
testing and  evaluating the design and operating  effectiveness  of
internal  control,  and  performing  such  other  procedures  as we
considered  necessary  in the  circumstances.  We believe  that our
audit provides a reasonable basis for our opinion.

A  company's  internal  control  over  financial   reporting  is  a
process  designed to provide  reasonable  assurance  regarding  the
reliability   of  financial   reporting  and  the   preparation  of
financial  statements  for  external  purposes in  accordance  with
generally  accepted  accounting  principles.  A company's  internal
control  over  financial  reporting  includes  those  policies  and
procedures  that (1) pertain to the  maintenance  of records  that,
in   reasonable   detail,   accurately   and  fairly   reflect  the
transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as
necessary  to  permit   preparation  of  financial   statements  in
accordance  with  generally  accepted  accounting  principles,  and
that receipts and  expenditures  of the company are being made only
in accordance  with  authorizations  of management and directors of
the  company;   and  (3)  provide  reasonable  assurance  regarding
prevention or timely  detection of unauthorized  acquisition,  use,
or disposition  of the company's  assets that could have a material
effect on the financial statements.

Because  of  its  inherent   limitations,   internal  control  over
financial  reporting  may  not  prevent  or  detect  misstatements.
Also,  projections  of any  evaluation of  effectiveness  to future
periods  are  subject  to  the  risk  that   controls   may  become
inadequate  because of changes  in  conditions,  or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion,  management's  assessment  that The Reader's Digest
Association,  Inc. and subsidiaries  maintained  effective internal
control over  financial  reporting  as of June 30, 2005,  is fairly
stated,  in all material  respects,  based on criteria  established
in Internal  Control--Integrated  Framework  issued by the Committee
of  Sponsoring  Organizations  of the Treadway  Commission  (COSO).
Also, in our opinion,  The Reader's  Digest  Association,  Inc. and
subsidiaries  maintained,  in  all  material  respects,   effective
internal  control  over  financial  reporting  as of June 30, 2005,
based  on  criteria  established  in  Internal   Control--Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of
the Treadway Commission (COSO)..

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of The Reader's Digest Association,
Inc. and subsidiaries as of June 30, 2005 and 2004, and the
related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year
period ended June 30, 2005, and our report dated August 30, 2005,
expressed an unqualified opinion on those consolidated financial
statements.


/s/KPMG LLP
KPMG LLP
New York, New York
August 30, 2005



Report of Independent Registered Public Accounting Firm

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, 2005 and 2004, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 2005.  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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.


In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of The Reader's Digest Association, Inc. and
subsidiaries as of June 30, 2005 and 2004, and the results of
their operations and their cash flows for each of the years in
the three-year period ended June 30, 2005, in conformity with
U.S. generally accepted accounting principles.


We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of The Reader's Digest Association, Inc.'s internal
control over financial reporting as of June 30, 2005, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated August 30, 2005
expressed an unqualified opinion on management's assessment of,
and the effective operation of, internal control over financial
reporting.

/s/KPMG LLP
KPMG LLP
New York, New York
August 30, 2005

REPORT OF MANAGEMENT

MANAGEMENT RESPONSIBILITY FOR FINANCIAL INFORMATION
Management of the company is responsible for the preparation and
integrity of the financial statements appearing in this Annual
Report.  The financial statements were prepared in accordance
with accounting principles generally accepted in the United
States of America; certain estimates and judgments were applied
as required.  Financial information in this Annual Report is
consistent with that in the financial statements.

Management is 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 registered public accounting firm, have
audited and reported on our financial statements.  Their report
is also included in this Annual Report.

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.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Rule 13a-15 (f) under the Securities Exchange Act
of 1934.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.  No
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been
detected.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.

Under the supervision and with the participation of the company's
management, including the company's principal executive and
principal financial officers, the company conducted an evaluation
of the effectiveness of the company's internal control over
financial reporting, based on the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.  Based on this evaluation, management
concluded that the company's internal control over financial
reporting was effective as of June 30, 2005.

Management's assessment of the effectiveness of the company's
internal control over financial reporting has been audited by
KPMG LLP, an independent registered public accounting firm, as
stated in their report which is included in this Annual Report.





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


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




<PAGE>



Changes in Registrant's Certifying Accountant

After The Reader's Digest Association, Inc. (RDA) completed its
fiscal year ended June 30, 2005, the Audit Committee of RDA's
Board of Directors determined that the Committee would issue a
request for proposals regarding the engagement of an independent
registered public accounting firm to audit RDA's financial
statements for the fiscal year ending June 30, 2006.  The request
for proposals was issued on August 3, 2005 to several large,
international public accounting firms, including KPMG LLP.  On
August 23, 2005, KPMG informed RDA that KPMG would not submit a
proposal and would not stand for re-appointment to the RDA
engagement upon the completion of RDA's audit for the fiscal year
ended June 30, 2005.

KPMG's reports on RDA's consolidated financial statements for the
fiscal years ended June 30, 2005 and 2004 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting
principles.  KPMG's report on RDA management's assessment of the
effectiveness of RDA's internal control over financial reporting
as of June 30, 2005 and KPMG's report on the effectiveness of RDA's
internal control over financial reporting as of June 30, 2005 did not
contain an adverse opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.

During the fiscal years ended June 30, 2005 and 2004 and during
the subsequent interim period through the completion of RDA's audit for
the fiscal year ended June 30, 2005, there were no disagreements between
RDA and KPMG on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement,
if not resolved to the satisfaction of KPMG, would have caused KPMG to make
reference to the subject matter of the disagreement in KPMG's
reports.  During the fiscal years ended June 30, 2005 and 2004
and during the subsequent interim period through the completion of RDA's
audit for the fiscal year ended June 30, 2005, there were no "reportable
events" (as defined in Item 304(a)(1)(v) of Regulation S-K under the Securities
Exchange Act of 1934).


<PAGE>



<TABLE>



Selected Financial Data
In millions, except per share data                  2005             2004           2003            2002          2001

<S>                                            <C>                <C>           <C>            <C>           <C>
Statement of Operation Data
Revenues                                          $2,389.7         $2,388.5       $2,474.9       $2,368.6      $2,518.2
Operating (loss) profit                           $  (47.6)        $  106.1       $  139.1       $  157.7      $  229.0
Net (loss) income                                 $  (90.9)        $   49.5       $   61.3       $   91.2      $  132.1
Basic and diluted (loss) earnings per share    $(0.95)/$(0.95)    $0.50/$0.49   $0.61/$0.60    $0.90/$0.89   $1.27/$1.26
Dividends per common share                        $   0.30         $   0.20       $   0.20       $   0.20      $   0.20

Balance Sheet Data
Cash and cash equivalents, short-term
 investments and marketable securities            $   37.7         $   50.4       $   52.1       $  114.7      $   47.3
Total assets*                                     $2,180.6         $2,434.9       $2,591.7       $2,684.1      $1,657.0
Long-term debt                                    $  559.2         $  637.7       $  834.7       $  818.0      $    9.8
Stockholders' equity*                             $  366.2         $  475.7       $  412.9       $  484.5      $  472.0
Weighted-average common shares outstanding
 (basic and diluted)                              97.4/97.4        97.1/99.2      98.1/99.2    100.2/100.6    102.7/103.7
Book value per common share*                         $3.76            $4.90          $4.21          $4.83         $4.59

</TABLE>

  *See Note 1 for information on the prior period adjustment.

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


                                                                                                Stock Price Range
                                                                   Net (Loss) Income                High-Low

 In millions, except per              Operating
 share data and                         (Loss)   Dividends             Per Share    Per Share
 shareholder information    Revenue     Profit   Per Share   Amount      Basic       Diluted       Common Stock


 <S>                        <C>         <C>         <C>      <C>         <C>         <C>          <C>
 2005
   First Quarter           $   490.0   $ (35.9)    $0.05    $ (30.3)    $ (0.31)    $ (0.31)     $16.07 - $12.50
   Second Quarter              798.0      88.2     $0.05       57.8        0.59        0.58      $15.90 - $13.15
   Third Quarter               544.9    (126.1)    $0.10     (129.6)      (1.33)      (1.33)     $17.83 - $13.75
   Fourth Quarter              556.8      26.2     $0.10       11.2        0.11        0.11      $18.00 - $16.34
                           ---------   -------     -----    -------     -------     -------      ---------------
                           $ 2,389.7   $ (47.6)    $0.30    $ (90.9)    $ (0.95)*   $ (0.95)     $18.00 - $12.50
                           =========   =======     =====    =======     =======     =======      ===============

 2004
   First Quarter           $   494.7   $ (13.5)    $0.05    $ (13.5)    $ (0.14)    $ (0.14)     $14.32 - $11.94
   Second Quarter              796.4     113.9     $0.05       66.5        0.68        0.67      $15.01 - $13.69
   Third Quarter               561.0      19.1     $0.05        2.2        0.02        0.02      $14.83 - $13.35
   Fourth  Quarter             536.4     (13.4)    $0.05       (5.7)      (0.06)      (0.06)     $16.30 - $13.91
                           ---------   -------     -----    -------     -------     -------      ---------------
                           $ 2,388.5   $ 106.1     $0.20    $  49.5     $  0.50     $  0.49      $16.30 - $11.94
                           =========   =======     =====    =======     =======     =======      ===============


  As of June 30, 2005, our Common Stock was listed on the New York Stock Exchange under the symbol RDA.  At that time there
  were approximately 1,601 holders of record of our Common Stock.
 * The sum of the four quarters' earnings per share does not equal the full-year earnings per share because each quarterly
  earnings per share is calculated using the weighted average number of shares of Common Stock for the quarter while the
  full-year earnings per share is calculated using the weighted average number of shares of Common Stock outstanding during the
  year.
</TABLE>


The Reader's Digest Association, Inc. and Subsidiaries