READERS DIGEST ASSOCIATION INC, S-3/A, 1998-02-06

READERS DIGEST ASSOCIATION INC
S-3/A, 1998-02-06
BOOKS: PUBLISHING OR PUBLISHING & PRINTING

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998.

REGISTRATION NO.: 333-42581

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

THE READER'S DIGEST ASSOCIATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE READER'S DIGEST ROAD 13-1726769
(STATE OR OTHER JURISDICTION PLEASANTVILLE, NY 10570-7000 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) (914) 238-1000 IDENTIFICATION NO.)
(ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA
CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>

------------------------

MR. GEORGE V. GRUNE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE READER'S DIGEST ASSOCIATION, INC.
READER'S DIGEST ROAD
PLEASANTVILLE, NY 10570
(914) 238-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

<TABLE>
<S> <C>
ARTHUR FLEISCHER, JR., ESQ. DONALD B. BRANT, JR., ESQ.
FRIED, FRANK, HARRIS SHRIVER & JACOBSON MILBANK, TWEED, HADLEY & MCCLOY
ONE NEW YORK PLAZA 1 CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10005
(212) 859-8000 (212) 530-5618
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
===========================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Nonvoting Common Stock, par value
$0.01 per share............................. 11,854,496 $23.032 $273,032,752.00 $80,545.00(4)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 1,546,239 shares of Class A Nonvoting Common Stock that may be
purchased pursuant to the over-allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee, based
on the average of the high and low prices of the registrant's Class A
Nonvoting Common Stock as reported on the New York Stock Exchange on January
26, 1998 in accordance with Rule 457(c) under the Securities Act of 1933.
(3) The shares of Class A Nonvoting Common Stock being registered pursuant to
this Registration Statement represent the maximum number of shares that may
be delivered upon the exchange of the Reader's Digest Automatic Common
Exchange Securities registered on a separate registration statement on Form
N-2 (Registration Statement Nos. 333-28245 and 811-08237). The number of
shares of Class A Nonvoting Common Stock that may be delivered pursuant to
the terms of the Reader's Digest Automatic Common Exchange Securities is
subject to adjustment in accordance with Rule 416.

(4) Previously paid by the Registrant.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998

10,308,257 SHARES

THE READER'S DIGEST ASSOCIATION, INC.
CLASS A NONVOTING COMMON STOCK
(PAR VALUE $0.01 PER SHARE)

------------------------

This Prospectus relates to an aggregate of 10,308,257 shares of Class A
Nonvoting Common Stock (the "Nonvoting Common Stock") of The Reader's Digest
Association, Inc., a Delaware corporation (the "Company") beneficially owned by
the Selling Stockholders identified under the heading "Selling Stockholders"
that may be delivered by the Reader's Digest Automatic Common Exchange Security
Trust (the "Trust") to holders of the Trust Automatic Common Exchange Securities
of the Trust (the "Automatic Common Exchange Securities") upon exchange of such
securities on , 2001 (11,854,496 shares assuming that the Underwriters
exercise in full the number of Automatic Common Exchange Securities subject to
the over-allotment option). The Company will receive no portion of the proceeds
from the sale of the Nonvoting Common Stock offered hereby or from the sale of
the Automatic Common Exchange Securities. The Automatic Common Exchange
Securities are being sold by the Trust in an offering described in the attached
prospectus of the Trust (the "Trust Prospectus"). See "Trust Prospectus."

The Nonvoting Common Stock is currently traded on the New York Stock
Exchange under the symbol "RDA." On February 5, 1998, the last reported price
for the Nonvoting Common Stock as reported on the New York Stock Exchange
Composite Tape was $23.75 per share. See "Price Range of Nonvoting Common Stock
and Dividend Information."

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

------------------------
GOLDMAN, SACHS & CO. LAZARD FRERES & CO. LLC
------------------------
The date of this Prospectus is , 1998
<PAGE> 3

------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OFFERED
HEREBY INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."

------------------------

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy and information statements and
other information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's regional
offices at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661-2511, and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding the Company at (http://www.sec.gov). Such materials may also be
inspected and copied at the offices of the New York Stock Exchange (the "NYSE"),
20 Broad Street, New York, New York 10005.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby (the
"Securities"). This Prospectus, which forms a part of the Registration Statement
on Form S-3, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Securities, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
are not necessarily complete, and, in each instance, reference is made to the
copy of the document filed as an exhibit to the applicable Registration
Statement. The Registration Statement (and the exhibits and schedules thereto)
may be inspected and copied at the public reference facilities maintained by the
Commission at its offices and at the Commission's regional offices at the
locations listed above.

------------------------

THE STATEMENTS CONTAINED IN THIS PROSPECTUS, IF NOT HISTORICAL, ARE
FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH
FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. SEE "PROSPECTUS
SUMMARY -- RECENT DEVELOPMENTS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

------------------------

The Trust may be deemed an "underwriter" of the Nonvoting Common Stock
being offered hereunder for purposes of the Securities Act, and may therefore be
subject to the liabilities imposed upon "underwriters" by that Act. For further
information concerning the Trust, see the Trust Prospectus.

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and is subject to,
the detailed information and financial statements appearing elsewhere in this
Prospectus and the documents incorporated by reference herein. Unless otherwise
indicated, all references in this Prospectus to the "Company" or to "Reader's
Digest" are to The Reader's Digest Association, Inc. and its consolidated
subsidiaries. The Class A Nonvoting Common Stock of the Company (the "Nonvoting
Common Stock") and the Class B Voting Common Stock of the Company (the "Voting
Common Stock") are collectively referred to in this Prospectus as the "Common
Stock." The term "fiscal" when used in this Prospectus preceding a specific year
shall mean the twelve-month period ending June 30 in that year.

THE COMPANY

The Company is a preeminent global leader in publishing and direct
marketing, creating and delivering products, including magazines, books,
recorded music collections, home videos and other products, that inform, enrich,
entertain and inspire. The Company has published its flagship
publication, Reader's Digest magazine, the most widely read magazine in the
world, since 1922. Its products are sold principally through direct mail
marketing. The Company's direct mail campaigns are usually accompanied by
sweepstakes and premium merchandise offers which are researched
and designed for specific target audiences. In addition to its core expertise in
disciplined direct marketing, the Company believes that its large and high
quality worldwide customer lists represent a significant competitive advantage.
The Company constantly strives to expand and improve its customer lists and
related databases. The Company believes that its United States list of over 50
million households - over half the total number of households in the country -
is one of the largest direct response lists in the country. In addition, the
Company markets to a significant number of prospective customers on rented
lists.

The Company operates in over 50 countries. The first international edition
of Reader's Digest magazine was published in the United Kingdom in 1938. The
Company is a major publisher of magazines and books in Canada, Mexico, Western
Europe and Australia and has established operations in many countries in Asia,
Central and Eastern Europe, Latin America and Africa. Its international customer
lists comprise approximately 50 million households. The Company believes that
its long presence in many of its international markets and its use of local
editorial and marketing expertise have helped to make the Company's name and
products an accepted and recognized component of local culture throughout the
world. In fiscal 1997, international operations generated approximately 57% of
the Company's total revenues and approximately 45% of its operating profit
(before corporate expenses and other operating items).

The Company reports its results of operations in four business segments:
(1) Reader's Digest Magazine, (2) Books and Home Entertainment Products, (3)
Special Interest Magazines and (4) Other Businesses.

READER'S DIGEST MAGAZINE. Reader's Digest magazine is published in 48
editions and 19 languages. In fiscal 1997, Reader's Digest magazine had a
worldwide monthly circulation that averaged almost 28 million with an estimated
monthly readership of 100 million people. The Company believes that Reader's
Digest magazine is a powerful "front door" that provides a customer base to
which the Company can market more broadly and effectively its many other
offerings, including books and home entertainment products. Reader's Digest
magazine's broad demographic reach also makes it an effective advertising
medium. For example, based upon an independent study of United States magazines
conducted in the fall of 1997 by Mediamark Research Inc., the United
States-English language edition of Reader's Digest reaches: (i) more adults with
household income of over $100,000 than Fortune, Business Week and The Wall
Street Journal combined, (ii) approximately twice as many 18-34 year old readers
as Rolling Stone, (iii) more adults age 25-54 than any other magazine and (iv)
more adults with a college education than any other magazine. In fiscal 1997,
Reader's Digest magazine accounted for approximately 26%

3
<PAGE> 5

of the Company's revenues and approximately 18% of its operating profit (before
corporate expenses and other operating items).

BOOKS AND HOME ENTERTAINMENT PRODUCTS. The Company publishes and markets
Reader's Digest Condensed Books (called "Select Editions" in certain markets),
Today's Best Nonfiction(R), series books, general books, recorded music
collections and series, home video products and series, and children's books and
videos. In fiscal 1997 it sold nearly 60 million books worldwide (including
approximately 18 million children's books) and nearly 10 million sets of
recorded music. Among the general books recently published by the Company is the
internationally popular Foods That Harm, Foods That Heal, published in 10
languages in 25 countries with over two million copies sold. In fiscal 1997, the
Company's books and home entertainment products accounted for approximately 65%
of the Company's revenues and approximately 74% of its operating profit (before
corporate expenses and other operating items).

SPECIAL INTEREST MAGAZINES. The Company publishes several special interest
magazines that it deems consistent with its image, editorial philosophy and
market expertise. Publications include popular magazines such as The Family
Handyman(R), New Choices: Living Even Better After 50(R), American Health for
Women(R), Walking(R) and Moneywise. The Company's special interest magazines
have a combined readership of almost 12 million. The continuing development of
the special interest magazine business represents an opportunity for the Company
to further expand its customer lists and product portfolio.

OTHER BUSINESSES. The Company's wholly owned subsidiaries, QSP, Inc. and
Quality Service Plan, Inc. (collectively, "QSP"), assist schools and youth
groups in the United States and Canada in their fundraising efforts by selling
magazine subscriptions, including subscriptions to Reader's Digest magazine, and
other products. In fiscal 1997, QSP helped over 25,000 schools and youth groups
raise over $135 million and provided the Company with an opportunity to attract
new, younger customers.

RECENT DEVELOPMENTS

The Company's operating results have declined over recent years. See
"Selected Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The decline in
operating results has been principally attributable, on a geographic basis, to
weaker performances in the Company's international markets, particularly in its
major European and Pacific geographic markets, and, on a business segment basis,
to weaker performance in the Books and Home Entertainment Products segment. The
primary causes of this operating decline have been (i) lower customer response
rates to the Company's promotional mailings and (ii) fewer active and promotable
customers. The Company believes that several factors have contributed to these
circumstances, including modification and reduced implementation of the
Company's historical promotion testing and product testing techniques, use of
less-effective promotional materials, de-emphasis on sweepstakes promotions,
variation in quantity and frequency of promotional mailings, uncompetitive
product pricing, weakness in European economies, and increased competitive
pressures. The Company's declining results were also due to higher paper and
postage costs in fiscal 1995 and 1996, increased investment and expansion into
new countries and increased promotional spending to retain subscribers for
Reader's Digest magazine who purchase other Company products.

Since the commencement of fiscal 1996, the Company has recorded pre-tax
charges of $350 million composed primarily of severance costs associated with
headcount reductions, repositioning and discontinuation of certain businesses
and various claims against the Company.

In addition, the Company's liquidity has declined steadily in recent years.
At the beginning of fiscal 1995, the Company's cash and cash equivalents,
short-term investments and marketable securities position was $766.9 million,
compared with $86.6 million at the end of the second quarter of fiscal 1998.
This reduction in liquidity was primarily due to the Company's expenditures
during this period of $409.4 million for repurchases of its Nonvoting Common
Stock and of $607.4 million for dividends on its stock, which was partially
offset by net cash from operations during this period

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<PAGE> 6

of $400.1 million. In response to this liquidity trend, the Company (i) reduced
its quarterly Common Stock dividend by 50% (from $0.45 to $0.225 per share),
effective beginning the first quarter of fiscal 1998 (reducing its annual cash
dividend payment by approximately $100 million), and (ii) has not purchased any
shares of Common Stock under its share repurchase program since February 1997
(the Company has no present intention to make any additional share repurchases).
As of December 31, 1997, the Company had U.S. lines of credit of up to $525.0
million in place with various financial institutions, of which $475.0 million
was available for borrowing. In addition, as of December 31, 1997, the Company
had various international lines of credit of up to $88.7 million in place with
various financial institutions, of which $53.4 million was available for
borrowing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

In response to the decline in its financial performance, on August 11,
1997, the Company asked George V. Grune to return as Chairman and Chief
Executive Officer. Mr. Grune served as Chief Executive Officer of the Company
from 1984 to 1994 and retired as its Chairman in 1995. Since reassuming his
position, Mr. Grune has rebuilt a management team with strong experience in
direct mail marketing at Reader's Digest. See "Management." The Board of
Directors has designated a search committee, composed of three members of the
Board of Directors, to find a new Chief Executive Officer. The Board currently
intends to complete its search by the end of fiscal 1998.

Mr. Grune and the new management team have commenced implementation of the
following strategies to improve the Company's long-term financial performance:

- INVEST IN AND EXPAND CORE BUSINESS. The Company's primary objective is
to stabilize and strengthen its core franchise by focusing on the key
elements of its direct marketing business: promotion, products and list.

- PROMOTION: REFOCUS ON DISCIPLINED DIRECT MARKETING. The Company is
returning to its tradition of implementing extensive direct market
testing in order to restore the effectiveness of its promotions. The
Company believes that this disciplined approach will enhance its
ability to efficiently generate customers.

- PRODUCTS: REFOCUS ON CORE OFFERINGS. The Company is refocusing on
disciplined testing methods to expand and develop its core product
lines to appeal broadly to existing and new customers, including those
representing younger demographic segments.

- LIST: ENHANCE UTILIZATION OF WORLDWIDE CUSTOMER DATABASES. The
Company will continue to develop and improve utilization of its
integrated promotion and fulfillment databases, which enables the
Company to select customers to receive promotional offers based on
such customers' affinities for, and demonstrated purchasing behavior
with, Reader's Digest products and services. The information contained
in the Company's customer lists provides opportunities to create
targeted demographic editions of the Company's magazines. These
editions enhance the magazines' appeal to advertisers, thereby
increasing advertising revenues.

- REVITALIZE GROWTH. The Company intends to seek to restore revenue and
operating profit growth by investing in new products, new markets and new
direct marketing channels. The Company also intends to generate growth by
further capitalizing on synergy opportunities through cross-promotion of
its products among customer segments. For example, the Company intends to
use Reader's Digest magazine as a "front door" to expand into new
geographic markets in Central and Eastern Europe, South America and Asia,
and more effectively market its many other offerings to an expanded
customer list. The Company continues to explore opportunities to
introduce products to new demographic segments, particularly to young
families, and to develop new direct marketing channels such as direct
response television, telemarketing, the Internet and strategic alliances
to further expand its customer base.

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- ENHANCED GLOBAL EFFICIENCY. The Company believes it can improve the
efficiency of its worldwide operations through increased coordination and
sharing of "best practices" among its U.S. and foreign operations in
product and promotion development, information systems and production.
Consistent with industry practice, the Company periodically evaluates the
financial implications of the circulation rate base of Reader's Digest
magazine. In order to increase the efficiency of its promotional
spending, the Company is presently reviewing possible rate base
reductions in selected major markets.

Due to the long lead time nature of the Company's business, the effects of
this strategy are expected to impact results starting in fiscal 1999. However,
there is no assurance that the Company's business strategy will be successful or
that any of the actions which the Company takes will stabilize or improve its
financial performance. There are risks and uncertainties that could cause actual
results to differ materially from management's strategic growth plan or those
expressed or implied in any other forward-looking statements in this Prospectus.
These risks and uncertainties include: the effect of increased market testing of
its promotions and products; the effect of modified and varied promotions; the
ability to identify customer trends; the ability to continue to create a broadly
appealing mix of new products; the ability to attract and retain new and younger
magazine subscribers and product customers in view of the maturing of an
important portion of the U.S. customer base; the effect of selective adjustments
in pricing; the ability to expand and more effectively utilize the Company's
customer database; the ability to expand into new international markets and to
introduce new product lines into new and existing markets; the ability to expand
into new channels of distribution; the ability to negotiate and implement
productive strategic alliances and joint ventures; the ability to contain and
reduce costs, especially through global efficiencies; the cost and effectiveness
of the realignment of business processes and operations; the accuracy of
management's assessment of the current status of the Company's business; the
evolution of the Company's organizational and structural capabilities, including
the effect of the transition to a future chief executive officer; the effect of
privacy and other governmental regulation; the ability of the Company to respond
to competitive pressures within and outside of the direct mail industry; the
effect of worldwide paper and postage costs; the effect of postal disruptions on
deliveries; the effect of foreign currency fluctuations; the effect of the year
2000 issue; as well as general economic conditions.

The Company is a Delaware corporation that was originally incorporated in
New York in 1926 and was reincorporated in Delaware in 1951. Its principal
executive offices are located at Reader's Digest Road, Pleasantville, New York

10570 and its telephone number is (914) 238-1000.

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<PAGE> 8

SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)

The following tables present summary financial data of the Company. This
information should be read in conjunction with, and is qualified in its entirety
by reference to, the Company's financial statements and accompanying notes
contained in the Company's Annual Report on Form 10-K for fiscal 1997 and the
Company's Quarterly Report on Form 10-Q for the period ended December 31, 1997,
which are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference."

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents, short-
term investments
and marketable
securities........... $ 723.4 $ 766.9 $ 532.1 $ 374.2 $ 102.4 $ 86.6
Total assets........... 1,872.4 2,049.4 1,958.7 1,904.1 1,643.8 1,751.4
Long-term notes
payable.............. 8.1 8.7 1.7 1.7 1.7 1.8
Stockholders' equity... 806.3 791.0 640.8 478.9 346.0 284.7
</TABLE>

- ---------------

(1) Results for fiscal 1993 include the cumulative effect of changes in
accounting principles ($51.0, or $0.42 per share).

(2) Results for fiscal 1994 include the effects of promotion accounting changes,
net (pre-tax benefit of $113.9, or $0.60 per share), other operating items
(aggregate pre-tax charge of $76.0, or $0.51 per share) and the cumulative
effect of changes in accounting principles ($25.8, or $0.23 per share).

(3) Results for fiscal 1996 include the effects of third quarter charges
(aggregate pre-tax charges of $245.0, or $1.57 per share) and fourth quarter
savings on the finalization of the Company's lease termination program in
the United Kingdom ($10.0, or $0.09 per share).

(4) Results for fiscal 1997 include the effect of fourth quarter charges
(aggregate pre-tax charges of $35.0, or $0.21 per share).

(5) Results for fiscal 1998 include the effect of first quarter charges
(aggregate pre-tax charges of $70.0 or $0.49 per share).

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REVENUES AND OPERATING PROFIT BY GEOGRAPHIC AREA

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1993 1994(1) 1995 1996(2) 1997(3)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
United States........................... $1,157.3 $1,117.8 $1,196.9 $1,278.9 $1,236.4
Europe.................................. 1,322.5 1,301.0 1,455.8 1,379.7 1,172.2
Pacific and Other Markets............... 398.9 396.8 424.9 445.6 439.8
Interarea............................... (10.1) (9.2) (9.1) (6.1) (9.4)
-------- -------- -------- -------- --------
$2,868.6 $2,806.4 $3,068.5 $3,098.1 $2,839.0
======== ======== ======== ======== ========
Operating profit:
United States........................... $ 115.5 $ 87.1 $ 151.7 $ 16.6 $ 133.8
Europe.................................. 231.7 205.3 225.5 110.0 94.1
Pacific and Other Markets............... 68.6 46.4 70.7 45.6 13.3
Effect of promotion accounting changes,
net.................................. -- 113.9 -- -- --
Corporate Expense....................... (63.1) (59.0) (56.0) (62.9) (48.4)
-------- -------- -------- -------- --------
$ 352.7 $ 393.7 $ 391.9 $ 109.3 $ 192.8
======== ======== ======== ======== ========
</TABLE>

REVENUES AND OPERATING PROFIT BY BUSINESS SEGMENT

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1993 1994(1) 1995 1996(2) 1997(3)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Reader's Digest Magazine................ $ 720.0 $ 689.1 $ 732.9 $ 739.8 $ 729.2
Books and Home Entertainment Products... 1,958.1 1,900.3 2,099.8 2,099.4 1,850.5
Special Interest Magazines.............. 84.1 90.6 95.6 91.9 81.9
Other Businesses........................ 110.4 129.6 143.9 170.6 181.0
Intersegment(4)......................... (4.0) (3.2) (3.7) (3.6) (3.6)
-------- -------- -------- -------- --------
$2,868.6 $2,806.4 $3,068.5 $3,098.1 $2,839.0
======== ======== ======== ======== ========
Operating profit
Reader's Digest Magazine................ $ 97.3 $ 60.8 $ 78.3 $ 11.2 $ 42.7
Books and Home Entertainment Products... 307.2 266.8 339.3 192.0 175.6
Special Interest Magazines.............. (9.2) (6.7) (0.8) (21.1) 0.4
Other Businesses........................ 20.5 17.9 31.1 (9.9) 22.5
Effect of promotion accounting changes,
net.................................. -- 113.9 -- -- --
Corporate Expense....................... (63.1) (59.0) (56.0) (62.9) (48.4)
-------- -------- -------- -------- --------
$ 352.7 $ 393.7 $ 391.9 $ 109.3 $ 192.8
======== ======== ======== ======== ========
</TABLE>

- ---------------
(1) Operating profit for fiscal 1994 has been restated to reflect the allocation
of other operating items of $76.0 to the business segment and geographic
financial information as follows: Reader's Digest Magazine $17.8, Books and
Home Entertainment Products $44.0, Special Interest Magazines $3.5, Other
Businesses $8.7, Corporate Expense $2.0 and United States $48.0 and Europe
$26.0.

(2) Operating profit for fiscal 1996 reflects the allocation of other operating
items of $235.0 to the business segment and geographic financial information
as follows: Reader's Digest Magazine $37.6, Books and Home Entertainment
Products $130.1, Special Interest Magazines $21.4, Other Businesses $42.1,
Corporate Expense $3.8, and United States $151.0, Europe $63.5, and Pacific
and Other Markets $16.7.

(3) Operating profit for fiscal 1997 reflects the allocation of other operating
items of $35.0 to the business segment and geographic financial information
as follows: Reader's Digest Magazine $5.6, Books and Home Entertainment
Products $25.5, Other Businesses $0.5, Corporate Expense $3.4, and United
States $15.3, Europe $7.4, and Pacific and Other Markets $8.9.

(4) Intersegment sales are included in the Company's Other Businesses segment.

8
<PAGE> 10

PRICE RANGE OF NONVOTING COMMON STOCK AND DIVIDEND INFORMATION

Since February 1990, the shares of Nonvoting Common Stock have been traded
on the NYSE. The table below shows, for the periods indicated, the high and low
sales prices for the shares of Nonvoting Common Stock on the NYSE as reported on
the New York Stock Exchange Composite Tape.

<TABLE>
<CAPTION>
DIVIDEND
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
Fiscal Year ended June 30, 1996
First Quarter.................................................. $47 7/8 $43 7/8 $ 0.40
Second Quarter................................................. 52 46 3/4 0.45
Third Quarter.................................................. 51 3/8 45 1/4 0.45
Fourth Quarter................................................. 47 3/4 40 1/2 0.45
Fiscal Year ended June 30, 1997
First Quarter.................................................. $43 3/4 $38 1/4 $ 0.45
Second Quarter................................................. 41 1/4 34 0.45
Third Quarter.................................................. 41 28 3/4 0.45
Fourth Quarter................................................. 30 22 1/8 0.45
Fiscal Year ending June 30, 1998
First Quarter.................................................. $30 9/16 $24 1/2 $ 0.225
Second Quarter................................................. 31 1/2 20 7/8 $ 0.225
Third Quarter (through
February 5, 1998).............................................. 25 3/8 22 3/8 $ 0.225
</TABLE>

On February 5, 1998, the last sale price of the Nonvoting Common Stock as
reported on the New York Stock Exchange Composite Tape was $23.75.

Trading prices of the Nonvoting Common Stock will be influenced by the
Company's results of operations, financial condition, cash requirements, future
prospects and by economic, financial and other factors and market conditions.
There can be no assurance that prices of the Nonvoting Common Stock will, in the
future, be within the ranges set forth above.

The Company reduced its Common Stock quarterly dividend by 50% (from $0.45
to $0.225), effective for the first quarter of fiscal 1998. See "Prospectus
Summary -- Recent Developments." The payment and amount of future dividends (if
any) will be determined by the Board of Directors in light of the Company's
earnings, capital requirements, financial condition and other relevant factors.

9
<PAGE> 11

CAPITALIZATION
(IN MILLIONS)

The following table sets forth the condensed consolidated capitalization of
the Company as of December 31, 1997.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
DEBT:
Current debt............................................................. $ 88.1
Long-term debt........................................................... 1.8
-------
Total debt....................................................... $ 89.9
STOCKHOLDERS' EQUITY:
Capital stock............................................................ $ 29.4
Paid-in capital.......................................................... 141.5
Retained earnings........................................................ 873.6
Foreign currency translation adjustment.................................. (47.1)
Net unrealized losses on certain investments............................. (0.1)
Treasury stock, at cost.................................................. (712.6)
-------
Total stockholders' equity....................................... $ 284.7
-------
Total capitalization............................................. $ 374.6
=======
</TABLE>

10
<PAGE> 12

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)

The following financial information is qualified by reference to and should
be read in conjunction with the consolidated financial statements and
accompanying notes contained in the Company's Annual Report on Form 10-K for
fiscal 1997 and the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1997, which are incorporated by reference herein, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this Prospectus. The selected financial data for each of
the years in the five-year period ended June 30, 1997 are derived from the
Company's consolidated financial statements for each of the years in the
five-year period ended June 30, 1997. The Company's consolidated financial
statements for the years ended June 30, 1997, 1996, 1995, 1994 and 1993 have
been audited by KPMG Peat Marwick, independent certified public accountants. The
financial statements for fiscal years 1997, 1996 and 1995 and the report of KPMG
Peat Marwick LLP thereon have been incorporated by reference herein. The
selected financial data for the six-month periods ended December 31, 1997 and
1996 are derived from unaudited consolidated condensed financial statements
contained in the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1997, which is incorporated by reference herein, which in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary to state fairly the data included therein in
accordance with generally accepted accounting principles for interim financial
information. Interim results are not necessarily indicative of the results to be
expected for the entire fiscal year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------- -------------------
1993(1) 1994(2) 1995 1996(3) 1997(4) 1996 1997(5)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................................... $2,868.6 $2,806.4 $3,068.5 $3,098.1 $2,839.0 $1,518.6 $1,373.9
Product, distribution and editorial expense.... 1,111.2 935.8 1,049.7 1,079.8 1,026.7 519.1 501.3
Promotion, marketing and administrative
expense...................................... 1,404.7 1,514.8 1,626.9 1,674.0 1,584.5 820.3 799.7
Effect of promotion accounting changes, net.... -- (113.9) -- -- -- -- --
Other operating items.......................... -- 76.0 -- 235.0 35.0 -- 70.0
Operating profit............................... 352.7 393.7 391.9 109.3 192.8 179.2 2.9
Other income, net.............................. 67.3 69.5 30.6 28.4 17.4 7.7 6.6
Income before provision for income taxes....... 420.0 463.2 422.5 137.7 210.2 186.9 9.5
Provision for income taxes..................... 161.7 191.1 158.5 57.1 76.7 68.2 11.6
Cumulative effect of changes in accounting
principles................................... (51.0) (25.8) -- -- -- -- --
Net income (loss).............................. 207.3 246.3 264.0 80.6 133.5 118.7 (2.1)
Earnings (loss) per common share............... $ 1.74 $ 2.11 $ 2.35 $ 0.73 $ 1.24 $ 1.10 $ (0.03)
Dividends per common share..................... $ 1.15 $ 1.35 $ 1.55 $ 1.75 $ 1.80 $ 0.90 $ 0.45
Average common shares outstanding.............. 118.7 115.7 112.0 107.9 106.7 107.0 106.3
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, short-term
investments and marketable securities........ $ 723.4 $ 766.9 $ 532.1 $ 374.2 $ 102.4 $ 86.6
Total assets................................... 1,872.4 2,049.4 1,958.7 1,904.1 1,643.8 1,751.4
Long-term notes payable........................ 8.1 8.7 1.7 1.7 1.7 1.8
Stockholders' equity........................... 806.3 791.0 640.8 478.9 346.0 284.7
</TABLE>

11
<PAGE> 13

- ---------------

(1) Results for fiscal 1993 include the cumulative effect of changes in
accounting principles ($51.0, or $0.42 per share).

(4) Results for fiscal 1997 include the effect of fourth quarter charges
(aggregate pre-tax charges of $35.0, or $0.21 per share).

(5) Results for fiscal 1998 include the effect of first quarter charges
(aggregate pre-tax charges of $70.0, or $0.49 per share).

12
<PAGE> 14

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company's fiscal year ends June 30. All references to 1998, 1997, 1996
and 1995 in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" are to fiscal 1998, fiscal 1997, fiscal 1996 and fiscal
1995, respectively. All dollar amounts in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are in millions of
dollars, except per share data. As it pertains to geographic and business
segment information, the discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" has been written excluding the
effects of the 1998 first quarter charges of $70.0, the 1997 fourth quarter
charges of $35.0 and the 1996 third quarter charges of $245.0 (together,
referred to as the operating charges) in order to analyze the results on a
comparable basis. In addition, in 1996 reported results include $10.0 of savings
recognized as a result of the finalization of the Company's lease termination
program in the United Kingdom.

RESULTS OF OPERATIONS

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

In the first quarter of 1998, the Company recorded charges of $70.0 ($51.8
after tax, or $0.49 per share) composed primarily of severance costs of $39.5
associated with workforce reductions in Europe, the United States, and at the
corporate level; and other costs associated with the discontinuation of certain
businesses and the realignment of business processes and operations. Businesses
that were discontinued include a children's book club in the United States, and
the Company's investment in LookSmart, a World Wide Web navigation service. The
realignment of business processes and operations also relates to certain vendor
contracts in the United States and Europe.

Worldwide revenues for the six-month period ended December 31, 1997
decreased to $1,373.9, or by 10%, compared with $1,518.6 in the six-month period
ended December 31, 1996. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues decreased 5%. This decrease was due almost
equally to lower unit sales and lower-priced product offerings and sales of a
lower-priced product mix. Revenues declined primarily in the Company's European
and United States operations. Within Books and Home Entertainment Products, the
decrease in revenues was predominantly due to lower unit sales in certain
product lines as a result of a combination of lower mail quantities and lower
customer response to promotional mailings in major markets. The Company reported
worldwide operating profit of $2.9 in the six-month period ended December 31,
1997, compared with $179.2 in the six-month period ended December 31, 1996.
Excluding the effect of other operating items, operating profit was $72.9 in the
six-month period ended December 31, 1997. These operating results reflect lower
revenues in major markets, significant declines in revenues and operating profit
in Germany, higher proportionate promotional spending, and increased investment
in product development, testing and list development initiatives.

The Company reported a net loss of $2.1, or $0.03 per share, in the
six-month period ended December 31, 1997, compared with net income of $118.7, or
$1.10 per share, in the six-month period ended December 31, 1996. Excluding the
effect of other operating items, earnings per share was $0.46 per share in the
six-month period ended December 31, 1997.

1997 V. 1996

Worldwide revenues for 1997 decreased to $2,839.0, or by 8%, compared with
$3,098.1 for 1996. Excluding the adverse effect of changes in foreign currency
exchange rates, revenues decreased 7%. Revenues declined in all geographic
areas, particularly in the Company's European operations. The decrease in
revenues was principally due to lower unit sales, and, to a lesser extent,
lower-priced product offerings and sales of a lower-priced product mix in Books
and Home Entertainment Products. External factors, including weak European
economies and increased

13
<PAGE> 15

competitive pressures globally, impacted revenues. Tactical implementation of
many simultaneous strategic initiatives, including varying the quantity and
frequency of promotional mailings, moderating product pricing and introducing
greater promotion variety and less aggressive sweepstakes, also contributed to
lower worldwide revenues in 1997.

Worldwide operating profit increased to $192.8 in 1997, compared with
$109.3 in 1996. The 1997 and 1996 results reflect operating charges of $35.0
($22.2 after tax, or $0.21 per share) and $245.0 ($169.8 after tax, or $1.57 per
share), respectively. Excluding the effects of the operating charges, worldwide
operating profit decreased by 36% in 1997, compared with the same period a year
ago. These operating results reflect the impact of lower revenues and higher
inventory write-offs as a result of lower customer response to third and fourth
quarter promotional mailings, partially offset by the benefits of
cost-containment initiatives.

The Company reported net income of $133.5, or $1.24 per share in 1997,
compared with $80.6, or $0.73 per share in 1996. Excluding the effects of the
operating charges, earnings per share decreased 37% to $1.45 in 1997, compared
with $2.30 in 1996, which includes the benefit of $0.09 per share due to the
savings recognized as a result of the finalization of the Company's lease
termination program in the United Kingdom.

1996 V. 1995

Worldwide revenues in 1996 were about even at $3,098.1, compared with the
prior year. Slightly higher prices and sales of a higher-priced product mix were
offset by slight declines in volume. Higher revenues in the United States and
Pacific and Other Markets were offset by lower revenues in Europe.

Worldwide operating profit decreased from $391.9 in 1995 to $109.3, or by
72%, in 1996. Excluding the effect of the third quarter charges, worldwide
operating profit decreased to $354.3, or by 10%, which includes $10.0 of savings
recognized as a result of the finalization of the Company's lease termination
program in the United Kingdom. Operating profit decreased due to higher paper
and postage costs and unfavorable results in the Company's European operations.

Earnings per share declined 69% to $0.73 in 1996, compared with $2.35 in
1995. Excluding the effect of the third quarter charges, earnings per share
decreased to $2.30, or by 2%, in 1996, which includes the benefit of $0.09 per
share due to the savings recognized as a result of the finalization of the
Company's lease termination program in the United Kingdom. Earnings per share
declined less than operating profit due to a lower effective tax rate, excluding
the effect of other operating items, and the reduction in outstanding shares due
to the Company's share repurchase program.

OTHER INCOME, NET

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Other income, net decreased in the six-month period ended December 31, 1997
to $6.6, compared with $7.7 in the prior year. This decrease was primarily
because of higher interest expense, lower interest income and lower gains on
sales of certain investments in 1998, which were partially offset by favorable
effects of foreign exchange transactions and hedging activity.

1997 V. 1996

Other income, net for 1997 decreased to $17.4, compared with $28.4 a year
ago. This decrease was primarily because of lower interest income ($11.4 in
1997, compared with $21.5 in 1996), lower gains on the sales of certain
investments ($7.0 in 1997, compared with $15.8 in 1996), and higher interest
expense ($7.0 in 1997, compared with $2.4 in 1996), which were partially offset
by higher gains on foreign exchange transactions and hedging activity ($8.5 in
1997, compared with a loss of $6.1 in 1996).

14
<PAGE> 16

1996 V. 1995

Other income, net decreased in 1996 to $28.4, compared with $30.6 in 1995.
The primary contributor to this decrease was lower interest income ($21.5 in
1996, compared with $40.1 in 1995), partially offset by higher gains on the
sales of certain investments ($15.8 in 1996, compared with $8.9 in 1995) and
lower expense related to losses on foreign exchange transactions and hedging
activity ($6.1 in 1996, compared with $10.3 in 1995).

INCOME TAXES

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

For the six-month period ended December 31, 1997, the reported tax rate was
122%. Excluding the effect of other operating items, the overall effective tax
rate was 37.5% for the six-month period ended December 31, 1997. For the
six-month period ended December 31, 1996, the effective tax rate was 36.5%. The
higher effective tax rate in 1998 was primarily due to reduced utilization of
foreign tax credits.

1997 V. 1996

The overall effective tax rate for 1997 was 36.5% compared with a reported
rate of 41.5% for 1996. Excluding the effects of other operating items, the
effective tax rate was 36.5% and 35.5% in 1997 and 1996, respectively. The lower
effective rate in 1996 was primarily attributable to favorable settlements
relating to prior years.

1996 V. 1995

The Company reduced its overall effective tax rate, excluding the effect of
other operating items, to 35.5% in 1996 from 37.5% in 1995. This decrease was
primarily attributable to favorable settlements relating to prior years, as well
as effective tax planning.

GEOGRAPHIC AREAS

OPERATING PROFIT BY GEOGRAPHIC AREA

<TABLE>
<CAPTION>
OTHER OPERATING AS
1997 AS REPORTED ITEMS ADJUSTED
- ----------------------------------------------------- ----------- --------------- --------
<S> <C> <C> <C>
United States...................................... $ 133.8 $15.3 $149.1
Europe............................................. 94.1 7.4 101.5
Pacific and Other Markets.......................... 13.3 8.9 22.2
Corporate Expense.................................. (48.4) 3.4 (45.0)
------ ----- ------
$ 192.8 $35.0 $227.8
====== ===== ======
</TABLE>

<TABLE>
<CAPTION>
OTHER OPERATING AS
1996(1) AS REPORTED ITEMS ADJUSTED
- ----------------------------------------------------- ----------- --------------- --------
<S> <C> <C> <C>
United States...................................... $ 16.6 $ 151.0 $167.6
Europe............................................. 110.0 63.5 173.5
Pacific and Other Markets.......................... 45.6 16.7 62.3
Corporate Expense.................................. (62.9) 3.8 (59.1)
------ ----- ------
$ 109.3 $ 235.0 $344.3
====== ===== ======
</TABLE>

- ---------------

(1) Results for 1996 include the effects of third quarter charges ($245.0) and
fourth quarter savings on the finalization of the Company's lease
termination program in the United Kingdom ($10.0).

15
<PAGE> 17

UNITED STATES

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Revenues in the United States decreased from $665.8 in 1997 to $635.7, or
by 5%, in 1998. This decrease was primarily attributable to lower unit sales in
the general books and Condensed Books product lines within Books and Home
Entertainment Products, which were partially offset by increased revenues in
Special Interest Magazines. The decrease in general books was primarily a result
of lower customer response to promotional mailings in 1998. The decline in
Condensed Books was a result of timing of promotional mailings, as well as a
reduction in paid shipments due to fewer customers carried into 1998 who were
participating in the series. The increase in Special Interest Magazines was
primarily a result of the acquisition of Walking magazine in the third quarter
of 1997. Operating profit decreased significantly in 1998, compared with 1997,
due to the revenue decrease, higher promotional spending and spending on
investment initiatives such as new product development, testing and list
development projects.

1997 V. 1996

Revenues in the United States decreased from $1,278.9 in 1996 to $1,236.4,
or by 3%, in 1997. This decrease was primarily attributable to lower unit sales
in Books and Home Entertainment Products. Revenues were also adversely affected
by the exclusion of revenues due to the sale of Travel Holiday magazine in the
third quarter of 1996. Within Books and Home Entertainment Products, the lower
unit sales were principally caused by declines in Condensed Books and music
products. The decrease in Condensed Books and music products sales was caused by
lower customer response to promotional offers. Operating profit decreased 11% to
$149.1 in 1997 compared with $167.6 in 1996 due to lower revenues and lower
customer response to promotional mailings, partially offset by lower paper costs
and the benefit of cost-containment initiatives.

1996 V. 1995

Revenues in the United States increased in 1996 to $1,278.9, or by 7%,
compared with 1995. Books and Home Entertainment Products accounted for 6% of
this increase. Within Books and Home Entertainment Products, the increase was
attributable to higher revenues in general books, due to a higher-priced product
mix, the launch of a new illustrated book series and higher music product
revenues, which was partially attributable to increased membership in music
series. Revenues also increased in Other Businesses due to higher sales at QSP.
Operating profit increased 11% to $167.6 in 1996, compared with 1995, due to
higher revenues and the benefit of cost-containment initiatives, partially
offset by higher paper and postage costs.

EUROPE

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Revenues in Europe decreased from $629.6 in 1997 to $524.5, or by 17%, in
1998. Excluding the adverse effect of changes in foreign currency exchange
rates, revenues decreased 7%. The revenue decrease was primarily due to
lower-priced product offerings and sales of a lower-priced product mix, and, to
a lesser extent, lower unit sales of Books and Home Entertainment Products.
Within this segment revenues declined principally in the series books and
Condensed Books product lines. Product expansion in Eastern European markets,
particularly in general books, music and video product lines, was offset by
continued lower sales in major markets, particularly in Germany, where sales and
operating profit have declined disproportionately to other markets. Lower sales
were as a result of lower paid shipments due to fewer customers carried into
1998 for series books and Condensed Books product lines, lower mail quantities
and lower customer response to promotional mailings. Operating profit decreased
significantly in 1998, compared with 1997, as a result of lower revenues, higher
proportionate promotional spending and higher proportionate product carrying
costs.

16
<PAGE> 18

1997 V. 1996

Revenues in Europe decreased from $1,379.7 in 1996 to $1,172.2, or by 15%,
in 1997. Excluding the adverse effect of changes in foreign currency exchange
rates, revenues decreased 12%. The decrease in revenues was primarily due to
lower unit sales, and, to a lesser extent, lower-priced product offerings and
sales of a lower-priced product mix within Books and Home Entertainment
Products. Revenues declined in all product lines within Books and Home
Entertainment Products, except for video products. Operating profit decreased
from $173.5 in 1996 to $101.5, or by 41%, in 1997. Current year results were
affected by increased competitive pressures, the continuing general weakness in
European economies, and the Company's ongoing actions to restore long-term
growth in this region. These actions include the selective modification of the
number of promotional mailings and mail quantity in a given mailing, variation
of promotional formats, and moderation of product prices. The impact of these
items was partially offset by the benefit of lower product returns and bad
debts, and the implementation of cost-containment initiatives.

1996 V. 1995

Revenues in Europe decreased from $1,455.8 in 1995 to $1,379.7, or by 5%,
in 1996. Excluding the favorable effects of foreign currency exchange rates,
revenues declined 8%. This decline was attributable primarily to lower volume in
Books and Home Entertainment Products, including Condensed Books, general books
and series books. Operating profit decreased from $225.5 in 1995 to $173.5, or
by 23%, in 1996. These results reflect the Company's investment in restaging its
European operations, lower customer response rates to some of the Company's
promotional mailings in a number of markets and general weakness in European
economies. Higher paper costs also contributed to the operating profit decline.

PACIFIC AND OTHER MARKETS

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Revenues in Pacific and Other Markets decreased from $223.2 in 1997 to
$213.7, or by 4%, in 1998. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues increased 1%. Lower Books and Home
Entertainment Products revenues were more than offset by increased Reader's
Digest Magazine circulation revenues. Within Books and Home Entertainment
Products, the decline in revenues was due to lower unit sales of Condensed
Books, and, to a lesser extent, lower-priced product offerings and sales of a
lower-priced product mix in the general books product line. Higher revenues in
Latin America, reflecting product expansion primarily in Brazil, were more than
offset by significant revenue declines in Canada and Australia because of lower
customer response to promotional mailings, and, to a lesser extent due to the
effects of a postal strike in Canada in November 1997. Operating results
declined significantly in 1998, compared with 1997, primarily because of lower
revenues and higher promotional and overhead spending.

1997 V. 1996

Revenues in Pacific and Other Markets decreased from $445.6 in 1996 to
$439.8, or by 1%, in 1997. This decrease was caused by lower Books and Home
Entertainment Products revenues; however, increased Reader's Digest Magazine
circulation revenues in new countries offset almost three-quarters of this
decline. Within Books and Home Entertainment Products, the decline in revenues
was due to lower-priced product offerings and sales of a lower-priced product
mix, as well as lower unit sales in 1997, primarily in Condensed Books and
general books. Higher revenues in

17
<PAGE> 19

Latin America, reflecting product expansion in Brazil and Argentina, were offset
primarily by significant revenue declines in South Africa, because of
substantially lower mail quantities and customer response rates and the
country's economic climate, and in Australia, due to lower customer response to
promotional mailings, including the effect of promotional mailing variations,
and increased competitive pressures. Operating profit decreased 64% in 1997 to
$22.2, primarily because of higher proportionate promotional spending,
continuing investments in new country expansion, and higher inventory write-offs
as a result of lower customer response rates.

1996 V. 1995

Revenues in Pacific and Other Markets increased from $424.9 in 1995 to
$445.6, or by 5%, in 1996. Excluding the unfavorable effects of foreign
exchange, revenues increased 10%. This increase was attributable to Books and
Home Entertainment Products, Reader's Digest Magazine and Other Businesses.
Within Books and Home Entertainment Products, excluding the unfavorable effects
of foreign currency exchange rates, all product lines reported revenue increases
due primarily to higher prices and a higher-priced product mix. For Reader's
Digest Magazine the increase was primarily attributable to increased circulation
revenues. Revenues for Other Businesses increased due to the acquisition of QSP
Canada. Operating profit decreased 12% in 1996 to $62.3. The decrease in
operating profit was primarily attributable to higher paper costs, lower
response rates to promotional mailings and formats in South Africa, and
investments in new countries.

BUSINESS SEGMENTS

OPERATING PROFIT BY BUSINESS SEGMENT

<TABLE>
<CAPTION>
OTHER OPERATING AS
1997 AS REPORTED ITEMS ADJUSTED
- ----------------------------------------------------- ----------- --------------- --------
<S> <C> <C> <C>
Reader's Digest Magazine........................... $ 42.7 $ 5.6 $ 48.3
Books and Home Entertainment Products.............. 175.6 25.5 201.1
Special Interest Magazines......................... 0.4 -- 0.4
Other Businesses................................... 22.5 0.5 23.0
Corporate Expense.................................. (48.4) 3.4 (45.0)
------ ----- ------
$ 192.8 $35.0 $227.8
====== ===== ======
</TABLE>

<TABLE>
<CAPTION>
OTHER OPERATING AS
1996(1) AS REPORTED ITEMS ADJUSTED
- ----------------------------------------------------- ----------- --------------- --------
<S> <C> <C> <C>
Reader's Digest Magazine........................... $ 11.2 $ 37.6 $ 48.8
Books and Home Entertainment Products.............. 192.0 130.1 322.1
Special Interest Magazines......................... (21.1) 21.4 0.3
Other Businesses................................... (9.9) 42.1 32.2
Corporate Expense.................................. (62.9) 3.8 (59.1)
------ ----- ------
$ 109.3 $ 235.0 $344.3
====== ===== ======
</TABLE>

- ---------------
(1) Results for 1996 include the effects of third quarter charges ($245.0) and
fourth quarter savings on the finalization of the Company's lease
termination program in the United Kingdom ($10.0).

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READER'S DIGEST MAGAZINE

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Revenues for Reader's Digest Magazine decreased from $362.5 in 1997 to
$359.2, or by 1%, in 1998. Excluding the adverse effect of changes in foreign
currency exchange rates, revenues increased 4%. The increase in revenues was
attributable to higher circulation revenues, and, to a lesser extent, higher
advertising revenues. Increased circulation levels in Brazil, Eastern Europe and
Thailand were partially offset by circulation declines in several major markets.
In addition, higher circulation revenues in the United States were attributable
to a higher-priced mix of subscriptions. A higher number of advertising pages
sold in the Pacific and Other Markets was partially offset by a lower number of
pages sold in the United States. Rate per advertising page increased due to a
higher negotiated rate in the United States. Operating profit for Reader's
Digest Magazine decreased in the six-month period ended December 31, 1997
compared with the same period a year ago. The decrease reflects higher
promotional spending to acquire and renew subscribers who purchase the Company's
other products and spending on investment initiatives such as list development
projects. Consistent with industry practice, the Company periodically evaluates
the financial implications of the circulation rate base of Reader's Digest
Magazine. In order to increase the efficiency of its promotional spending, the
Company is presently reviewing possible rate base reductions in selected major
markets.

1997 V. 1996

Revenues for Reader's Digest Magazine decreased from $739.8 in 1996 to
$729.2, or by 1%, in 1997. Circulation revenues were about even year-over-year,
and advertising revenues increased slightly from the prior year, excluding the
adverse effect of changes in foreign currency exchange rates. Increased
circulation levels in Latin America, Eastern Europe and Thailand were offset by
lower paid copies in several European countries and the United States. The
increase in advertising revenues was attributable to a higher number of
advertising pages sold in Pacific and Other Markets and the United States,
offset by a lower number of pages in Europe, and, to a lesser extent, a higher
average price per page in the United States offset by a lower average price per
page in Pacific and Other Markets. Operating profit for Reader's Digest Magazine
decreased in 1997 to $48.3 compared with $48.8 in 1996. The decrease reflects
lower revenues, increased promotional spending and investments in new countries,
partially offset by lower paper costs and the benefit of cost-containment
initiatives.

1996 V. 1995

Revenues for Reader's Digest Magazine remained about even at $739.8 in
1996. The slight increase was primarily due to higher advertising revenues. The
increase in advertising revenues was attributable to higher rates, and, to a
lesser extent, higher advertising pages. Advertising pages increased in the
United States and Pacific and Other Markets but declined in Europe. Circulation
revenues remained even. Lower circulation levels were offset by higher
subscription pricing. Increased circulation levels in Pacific and Other Markets
were more than offset by decreased circulation levels in Europe. Subscription
price increases in Europe and Pacific and Other Markets were partially offset by
lower average subscription prices in the United States consistent with the
Company's long-term growth strategy. Operating profit for Reader's Digest
Magazine decreased in 1996 to $48.8 compared with $78.3 in 1995 due primarily to
higher paper and postage costs and increased promotional spending to retain
high-quality subscribers who purchase the Company's other products.

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BOOKS AND HOME ENTERTAINMENT PRODUCTS

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Revenues for Books and Home Entertainment Products decreased from $988.2 in
1997 to $828.5, or by 16%, in 1998. Excluding the adverse effect of changes in
foreign currency exchange rates, revenues decreased 11%, principally
attributable to the Company's United States and European operations. The lower
revenues were predominantly due to lower unit sales in the Condensed Books,
series books and general books product lines. The decline in Condensed Books and
series books revenues was caused by a combination of lower customer response to
promotional mailings in major markets, reduced mail quantities in many markets
and lower paid shipments due to fewer customers carried into 1998. In addition,
the timing of Condensed Books mailings and the number of series mailings in the
United States also contributed to lower revenues. The decrease in general books
sales was primarily a result of lower customer response to promotional mailings
in the United States and certain other major markets, which was partially offset
by growth in Eastern Europe and Latin America. Operating profit for Books and
Home Entertainment Products decreased significantly in 1998, compared with 1997.
These operating results were affected by lower revenues, higher proportionate
promotional spending and increased spending on investment initiatives such as
new product development, testing, and list development projects.

1997 V. 1996

Revenues for Books and Home Entertainment Products decreased from $2,099.4
in 1996 to $1,850.5, or by 12%, in 1997, principally attributable to the
Company's European operations. Excluding the adverse effect of changes in
foreign currency exchange rates, revenues decreased 10%. Most product lines
reported significantly lower revenues, primarily due to lower unit sales, and,
to a lesser extent, lower-priced product offerings and sales of a lower-priced
product mix. External factors, including weak European economies and increased
competitive pressures globally, impacted revenues. Tactical implementation of
many simultaneous strategic initiatives, including varying the quantity and
frequency of promotional mailings, moderating product pricing and introducing
greater promotion variety and less aggressive sweepstakes, contributed to lower
revenues in 1997. Operating profit for Books and Home Entertainment Products
decreased in 1997 to $201.1 compared with $322.1 in 1996. These operating
results were affected by the impact of the Company's strategic actions to
restore long-term growth in Europe, lower than anticipated responses to
promotional mailings in Pacific and Other Markets, higher inventory write-offs
as a result of lower customer response to promotional mailings in the third and
fourth quarter, and lower customer response to Condensed Books promotional
mailings.

1996 V. 1995

Revenues for Books and Home Entertainment Products were even at $2,099.4 in
1996, compared with 1995. Higher prices and sales of a higher-priced product
mix, and, to a lesser extent, the favorable effect of changes in foreign
currency exchange rates, were offset by a decrease in unit sales. Higher unit
sales in the United States and Pacific and Other Markets were more than offset
by lower unit sales in Europe. Globally, revenues for series books, music and
video products reported healthy gains, offset by substantially lower revenues
for general books and Condensed Books. Operating profit for Books and Home
Entertainment Products decreased in 1996 to $322.1 compared with $339.3 in 1995
principally due to lower levels of customer response in Europe offset by strong
performance in the United States. Higher paper and postage costs also reduced
profitability.

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SPECIAL INTEREST MAGAZINES

SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED WITH SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996

Revenues for Special Interest Magazines increased from $37.7 in 1997 to
$46.3, or by 23%, in 1998. This increase was primarily attributable to the
acquisition of Walking magazine in the third quarter of 1997. Excluding Walking,
revenues increased 6%, principally due to a higher number of advertising pages
sold in the six-month period ended December 31, 1997. Operating results improved
in 1998 compared with 1997 primarily as a result of the higher advertising
revenues, which were partially offset by increased promotional spending
associated with Walking.

1997 V. 1996

Revenues for Special Interest Magazines decreased from $91.9 in 1996 to
$81.9, or by 11%, in 1997. This decrease was primarily attributable to the
exclusion of revenues due to the sale of Travel Holiday magazine in the third
quarter of 1996. Excluding prior year revenues from Travel Holiday, revenues
increased 8% in 1997 compared with 1996. The acquisition of Walking magazine in
the third quarter of 1997 accounted for 3% of the increase in revenues. Revenues
also increased due almost equally to higher circulation levels and advertising
pages sold in 1997. Operating performance improved in 1997 compared with 1996,
primarily reflecting the increases in circulation and advertising revenues.

1996 V. 1995

Revenues for Special Interest Magazines decreased in 1996 to $91.9, or by
4%, compared with the prior year. This decrease was primarily attributable to
the exclusion of revenues due to the sale of Travel Holiday magazine in the
third quarter of 1996. Excluding results for Travel Holiday, circulation
revenues increased slightly due primarily to higher subscription pricing while
advertising revenues remained about even compared with the prior year. Operating
performance improved in 1996 compared with 1995 primarily due to lower
advertising sales expenses.

OTHER BUSINESSES

1997 V. 1996

Revenues for Other Businesses, net of intersegment sales, increased in 1997
to $177.4, or by 6%, compared with the prior year, primarily due to growth in
the merchandise catalog business in the United Kingdom, higher sales at QSP in
the United States and the introduction of a merchandise catalog business in the
United States. Operating profit decreased because of costs associated with the
launch of the Company's World Wide Web navigation service, LookSmart, in 1997
and higher proportionate promotional costs associated with the launch of the
catalog business in the United States, which were partially offset by increased
profits at QSP.

1996 V. 1995

Revenues for Other Businesses, net of intersegment sales, increased in 1996
to $167.0, or by 19%, compared with the prior year, primarily due to higher
sales at QSP in the United States and the acquisition of QSP Canada. Operating
profit increased because of magazine subscription growth at QSP, offset by
higher paper costs.

CORPORATE EXPENSE

Corporate Expense in the six-month period ended December 31, 1997 declined
to $16.4, compared with $24.4 a year ago, primarily as a result of savings in
employee benefit costs and the benefit of cost-containment initiatives.
Corporate Expense in 1997 decreased 24% to $45.0 compared with $59.1 in 1996 due
principally to lower recruiting and relocation expenses and the benefit of
cost-containment initiatives. Corporate Expense in 1996 of $59.1 increased 6%
compared with $56.0 in the prior year primarily due to higher recruiting and
relocation expenses offset by the benefit of cost-containment initiatives.

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<PAGE> 23

FORWARD-LOOKING INFORMATION

The first priority for the Company is to stabilize the results of its
existing product lines, which, in turn, would provide the resources to fund
future growth. The Company's strategy to stabilize its business includes the
restoration of disciplined techniques of testing promotions and products and the
return to the use of more effective sweepstakes promotions, as well as continued
investment in new product development and list development initiatives. The
Company's growth strategy includes expanding offerings of new and existing
products through new markets and new marketing channels. Due to the long lead
time nature of the Company's business, the effects of this strategy are expected
to impact results starting in fiscal 1999.

The Company continues to evaluate its long-term strategy and expects to
make significant investments in its existing core product lines. The Company is
formulating a new investment strategy on an annual basis to supersede the $400.0
program previously announced. The Company is also evaluating its alliances for
strategic fit and return on investment and expects to renegotiate or terminate
certain alliances. For a discussion of certain risks and uncertainties involved
in the Company's business strategy and the implementation thereof, see
"Prospectus Summary -- Recent Developments."

The Company continues to believe that 1998 is a year of stabilizing and
rebuilding its core business.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents, short-term investments and marketable securities
decreased from $102.4 at June 30, 1997, to $86.6 at December 31, 1997. The
decrease was primarily due to cash used by operations of $61.7 and dividend
payments of $48.5 which were partially offset by net proceeds from short-term
borrowings of $57.9 and proceeds from the sale of other long-term investments of
$46.6.

In the second quarter of 1998, the Company paid a $0.225 per share dividend
on its Common Stock, representing a 50% decrease compared with $0.45 per share a
year ago. At the current rate, the annualized dividend is $0.90 per share in
1998 compared with $1.80 in 1997.

The Company did not repurchase any shares of Class A Nonvoting Common Stock
in the second quarter of 1998.

In September 1997, the Company entered into an agreement with Morgan
Guaranty Trust Company of New York for an uncommitted line of credit of $50.0
(the "Morgan Line of Credit") to be used for general corporate purposes. The
loans under the Morgan Line of Credit are payable on demand and bear interest at
a floating rate based on the cost of funds of the bank plus a margin. At
December 31, 1997 there were no borrowings outstanding under the Morgan Line of
Credit.

The Company is party to an agreement with The Chase Manhattan Bank for a
line of credit of $75.0 (the "Chase Line of Credit") for a term of one year to
be used for general corporate purposes. The loans under the Chase Line of Credit
are payable on demand and bear interest at a floating rate based on the cost of
funds of the bank plus a margin. At December 31, 1997 there were no borrowings
outstanding under the Chase Line of Credit. In addition, various international
subsidiaries of the Company have available lines of credit totaling $88.7. At
December 31, 1997, loans in the amount of $35.3 were outstanding under
international lines of credit, at a weighted average interest rate of 6.1%.

The Company is also party to a Competitive Advance and Revolving Credit
Facility Agreement dated as of November 12, 1996, with a syndicate of domestic
and foreign banks (the "Credit Agreement"). The Credit Agreement, which has a
term of five years, permits competitive advance and revolving credit borrowings
of up to $400.0 by the Company and its designated subsidiaries. Interest rates
can be based on: the prime rate, the federal funds rate, the London Interbank
Offered

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<PAGE> 24

Rate (LIBOR), and money market rates. The proceeds of the borrowings are to be
used for general corporate purposes, including acquisitions, share repurchases
and commercial paper backup. The Credit Agreement contains certain restrictions
on incurrence of debt, liens and guarantees of indebtedness. The Company must
also comply with certain financial covenants, including a calculation of
consolidated tangible net worth, which calculation was modified in the first
quarter of 1998. At December 31, 1997, borrowings in the amount of $50.0 were
outstanding under the Credit Agreement at a weighted average interest rate of
6.0%.

The Company believes that its liquidity, capital resources, cash flow and
borrowing capacity are sufficient to fund normal capital expenditures, working
capital requirements, the payment of dividends, and present plans to expand
existing product lines in existing markets, to identify and develop new products
and markets, and to enter into strategic alliances.

IMPACT OF THE YEAR 2000 ISSUE

The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year, with the result that
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, potentially causing a system failure or miscalculations that
could disrupt operations.

The Company has completed an assessment of the year 2000 issue with respect
to its computer systems and is currently executing a plan to convert all
affected systems. The Company believes that its plan will be completed in a
timely manner and that the total cost of its plan will not have a material
effect on the results of operations of the Company. The Company is in the
process of formal communications with its significant suppliers to determine the
extent to which it may be affected by those third parties' plans to remediate
their own year 2000 issue in a timely manner.

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BUSINESS OF THE COMPANY

The Company is a Delaware corporation that was originally incorporated in
New York in 1926 and was reincorporated in Delaware in 1951. The mailing address
of its principal executive offices is Pleasantville, New York 10570 and its
telephone number is (914) 238-1000.

Effective September 1997, the Company's businesses were reorganized into
two operating groups, Reader's Digest U.S.A. and Reader's Digest International.
Prior to that time, the Company's businesses had been organized in four
operating groups: Reader's Digest Europe, Reader's Digest U.S.A., Reader's
Digest Pacific and a fourth operating group that operated the Company's school
and youth group fundraising business and focused on developing new products and
entering new marketing channels. For financial information by geographic area,
see "Prospectus Summary -- Summary Financial Information." The following is a
discussion of the operations of the Company based upon the four business
segments through which the Company reports its results of operations: (1)
Reader's Digest Magazine; (2) Books and Home Entertainment Products; (3) Special
Interest Magazines and (4) Other Businesses. For financial information by
business segment, see "Selected Consolidated Financial Information."

READER'S DIGEST MAGAZINE

Reader's Digest magazine is a monthly, general interest magazine consisting
of original articles and previously published articles in condensed form, a
condensed version of a previously published or soon-to-be published full-length
book, monthly humor columns, such as "Laughter, The Best Medicine(R)," "Life In
These United States(R)," "Humor in Uniform(R)," and "All In A Day's Work(R),"
and other regular features, including "Heroes For Today(R)," "It Pays To Enrich
Your Word Power(R)," "News From The World Of Medicine(R)," "Tales Out of
School(R)," "Virtual Hilarity(R)," and "The Verbal Edge(TM)." DeWitt and Lila
Wallace founded Reader's Digest magazine in 1922. As of December 31, 1997,
Reader's Digest has a worldwide circulation of almost 28 million and
approximately 100 million readers each month, generating revenues of $729.2
million in fiscal 1997, as compared with $739.8 million in fiscal 1996 and
$732.9 million in fiscal 1995. Reader's Digest is published in 48 editions and
19 languages, including a Slovak language edition that began publication in July
1997. In addition, a Korean edition, an Indian edition, a braille edition and a
recorded edition are published by third parties pursuant to licenses.

CIRCULATION

Based on the most recent audit report issued by the Audit Bureau of
Circulation, Inc. ("ABC"), a not-for-profit organization that monitors
circulation in the United States and Canada, the Company has determined that the
United States-English language edition of Reader's Digest has the largest paid
circulation of any United States magazine, other than those automatically
distributed to all members of the American Association of Retired Persons.
Approximately 95% of the United States paid circulation of Reader's Digest
consists of subscriptions. The balance consists of single copy sales at
newsstands and in supermarkets and similar establishments.

Reader's Digest is truly a global magazine. Many of its international
editions have the largest paid circulation for monthly magazines both in the
individual countries and in the regions in which they are published. For most
international editions of Reader's Digest, subscriptions comprise about 90% of
circulation. The balance is attributable to newsstand and other retail sales.

The Company maintains its circulation rate base through annual subscription
renewals and new subscriptions. The global circulation rate base for Reader's
Digest of 27.7 million includes a circulation rate base of 15 million for the
United States - English language edition. In the United

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<PAGE> 26

States, the Company sells approximately five million new subscriptions each year
in order to maintain its circulation rate base. New subscriptions are sold
primarily by direct mail, with extensive use of sweepstakes entries. The largest
percentage of subscriptions is sold between July and December of each year.
Subscriptions to Reader's Digest may be canceled at any time and the unused
subscription price is refunded.

Worldwide revenues from circulation accounted for $558.9 million, or 77% of
the total revenues of Reader's Digest magazine, in the fiscal year ended June
30, 1997.

ADVERTISING

In fiscal 1997, Reader's Digest carried 13,484 advertising pages: 1,075
advertising pages in its United States - English language edition and 12,409
advertising pages in its other editions. The United States and the larger
international editions of Reader's Digest offer advertisers different regional
editions, major market editions and demographic editions. These editions,
usually containing the same editorial material, permit advertisers to
concentrate their advertising in specific markets or to target specific
audiences. Reader's Digest sells advertising in both the United States and
international editions principally through an internal advertising sales force.
The Company sells advertisements in multiple editions worldwide, and offers
advertisers discounts for placing advertisements in more than one edition.

Worldwide revenues from advertising accounted for $170.3 million, or 23% of
the total revenues of Reader's Digest magazine, in the fiscal year ended June
30, 1997.

EDITORIAL

Reader's Digest is a reader-driven, family magazine. Editorial content is,
therefore, crucial to the loyal subscriber base that constitutes the cornerstone
of the Company's operations. The editorial mission of Reader's Digest is to
inform, enrich, entertain and inspire. The articles, book section and features
included in Reader's Digest cover a broad range of contemporary issues and
reflect an awareness of traditional values.

A substantial portion of the selections in Reader's Digest are original
articles written by staff writers or free-lance writers. The balance is selected
from existing published sources. All material is condensed by Reader's Digest
editors. The Company employs a professional staff to research and fact-check all
published pieces.

Each international edition has a local editorial staff responsible for the
editorial content of the edition. The mix of locally generated editorial
material, material taken from the United States edition and material taken from
other international editions varies greatly among editions. In general, the
Company's larger international editions, for example, those in Canada, France,
Germany and the United Kingdom, carry more original or locally adapted material
than do smaller editions.

PRODUCTION AND FULFILLMENT

All editions of Reader's Digest are printed by independent third parties.
The United States edition is printed exclusively by one printer in Pennsylvania
under a 10-year contract that commenced in fiscal 1997. The Company believes
that generally there is an adequate supply of alternative printing services
available to the Company at competitive prices, should the need arise. The
Company has developed plans to minimize recovery time in the event of a disaster
at an existing printing facility.

The principal raw materials used in the publication of Reader's Digest are
coated and uncoated paper. The Company has supply contracts with a number of
global suppliers of paper and believes that those supply contracts provide an
adequate supply of paper for its needs and that, in any event, alternative
sources are available at competitive prices. Paper prices are affected by a
variety of factors, including demand, capacity, pulp supply, and by general
economic conditions.

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Subscription copies of the United States edition of Reader's Digest are
delivered through the United States Postal Service as "periodicals" class mail.
Subscription copies of international editions are also delivered through the
postal service in each country. For additional information about postal rates
and service, see "-- Direct Marketing Operations."

Newsstand and other retail distribution is accomplished through a
distribution network. The Company has contracted in each country with a magazine
distributor for the distribution of Reader's Digest.

BOOKS AND HOME ENTERTAINMENT PRODUCTS

The Company publishes and markets, principally by direct mail, Reader's
Digest Condensed Books, series books, general books, recorded music collections
and series and home video products. See "-- Direct Marketing Operations."

CONDENSED BOOKS

Reader's Digest Condensed Books (called "Select Editions" in certain
markets) is a continuing series of condensed versions of primarily current
popular fiction. Condensation reduces the length of an existing text, while
retaining the author's style, integrity and purpose. As of December 31, 1997, 16
editions of Condensed Books, published in 12 languages, are marketed in 24
countries. In fiscal 1997, Condensed Books generated worldwide revenues of
$305.0 million, as compared with $370.4 million in fiscal 1996 and $392.1
million in fiscal 1995.

International editions of Condensed Books generally include some material
from the United States edition or from other international editions, translated
and edited as appropriate, and some condensations of locally published works.
Each local editorial staff determines whether existing Condensed Books
selections are appropriate for their local market.

The Company publishes six volumes of Condensed Books a year in the United
States. Some of the Company's international subsidiaries also publish six
volumes a year, while others publish five.

SERIES BOOKS

The Company markets two types of series books: reading series and
illustrated series. These book series may be open-ended continuing series, or
may consist of a limited number of volumes. Series books are published in nine
languages and marketed in 18 countries. In fiscal 1997, series books generated
worldwide revenues of $209.5 million, as compared with $264.3 million in fiscal
1996 and $236.6 million in fiscal 1995.

Reading series marketed in the United States include Today's Best
Nonfiction, which consists of five volumes per year each generally containing
condensed versions of four contemporary works of nonfiction and The World's Best
Reading, consisting of full-length editions of classic works of literature, of
which six volumes are published each year. Today's Best Nonfiction is published
in 10 countries in three languages and The World's Best Reading is published in
eight countries in three languages.

The Company markets illustrated series, which are generally closed-ended,
in the United States and several other countries.

GENERAL BOOKS

The Company's general books consist primarily of reference books,
cookbooks, "how-to" and "do-it-yourself" books, children's books and books on
subjects such as history, travel, religion, health, nature and the home. General
books are published in 16 languages and are marketed in 37 countries. In fiscal
1997, general books generated worldwide revenues of $675.9 million, as compared
with $753.5 million in fiscal 1996 and $808.7 million in fiscal 1995.

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New general books are generally original Reader's Digest books, but may
also be books acquired from other publishers. During the development period for
an original Reader's Digest book, the Company conducts extensive research and
prepares an appropriate marketing strategy for the book.

Although most sales of a general book will result from the initial bulk
promotional mailing, substantial additional sales occur through subsequent
promotions, catalog sales and the use of sales inserts in mailings for other
Reader's Digest products. The Company also distributes its books for retail sale
in stores, through third-party distributors.

MUSIC

The Company publishes recorded music packages on cassettes and compact
discs, which it sells principally by direct mail. The music packages are
generally collections of previously recorded and newly commissioned material by
a variety of artists, although they may include selections from the Company's
17,000-selection library. The collections span a broad range of musical styles.
In certain markets, the Company also sells music series, which are marketed in
the same manner as Condensed Books and series books. The marketing strategy for
music packages is similar to that for general books. The Company markets music
products in 32 countries, offering different music products in the various
international markets because of diverse tastes. In fiscal 1997, music products
generated worldwide revenues of $404.2 million, as compared with $460.1 million
in fiscal 1996 and $435.9 million in fiscal 1995.

TELEVISION AND VIDEO

The Company's television and home video products are in genres similar to
its general books. Several original programs have won awards of excellence,
including five Emmy awards, and have appeared on the Disney Channel and the
Discovery Channel. The Company continues to expand its video operations in the
United States and in international markets and is presently marketing video
products principally by direct mail in the United States and 30 other countries.
Most of the Company's original programs have been licensed to cable television
networks. The Company also sells its home video products through retail
establishments. In fiscal 1997, home video products generated worldwide revenues
of $243.5 million, as compared with $241.3 million in fiscal 1996 and $218.7
million in fiscal 1995.

PRODUCTION AND FULFILLMENT

The various editions of Condensed Books are printed and bound by
third-party contractors. The Company is a party to an exclusive agreement
through 2002 for printing English language Condensed Books distributed in the
United States and Canada. The Company solicits bids for the printing and binding
of each general book or book series. Production and manufacture of music and
video products is typically accomplished through third parties.

The principal raw material necessary for the publication of Condensed
Books, series books and general books is paper. The Company has a number of
paper supply arrangements relating to paper for Condensed Books. Paper for
series books and general books is purchased for each printing. The Company
believes that existing contractual and other available sources of paper provide
an adequate supply at competitive prices. Third parties arrange for the
acquisition of some of the necessary raw materials for the manufacture of music
and video products.

Fulfillment, warehousing, customer service and payment processing are
conducted principally by independent contractors. Most of the Company's products
are packaged and delivered to the Postal Service directly by the printer or
supplier. For information about postal rates and service, see "-- Direct
Marketing Operations."

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In all of the Company's direct marketing sales, a customer may return any
book or home entertainment product to the Company either prior to payment or
after payment for a refund. The Company believes that its returned goods policy
is essential to its reputation and also elicits a greater number of orders, many
of which are not returned because of the generally high satisfaction rate of
consumers with the Company's products. This policy and a "first book free"
policy for Condensed Books and series books result in a significant amount of
returned goods.

Sales of the Company's books and home entertainment products are seasonal
to some extent. In the direct marketing industry as a whole, the winter months
have traditionally had higher consumer response than other times of the year.
Sales are also higher during the pre-Christmas season than in spring and summer.

DIRECT MARKETING OPERATIONS

The sale of magazine subscriptions, Condensed Books, series books, general
books, music and video products, as well as certain other products, is
accomplished principally through direct mail solicitations to households on the
Company's customer lists, usually accompanied by sweepstakes entries and, in
some cases, premium merchandise offers. For many years the Company has been
acknowledged as a pioneer and innovator in the direct mail industry.

As part of its growth strategy, the Company has begun to pursue increased
distribution of its products through direct response channels other than direct
mail, such as direct response television, telemarketing and the Internet, as
well as expanded direct marketing channels, such as catalogs and clubs.

The Company is adapting the editorial content and the marketing methods of
its magazines and books and home entertainment products to new technologies,
such as computer on-line services. In 1997, the Company launched Reader's Digest
World, a global World Wide Web site (www.readersdigest.com) that links the
Company's 13 local and international Web sites, for shopping and information
about the Company's products.

To promote the sale of its products in the United States, the Company
usually offers a sweepstakes in its promotional mailings. Prizes totaled about
$15 million for the 1997 edition of the sweepstakes. Generally, each of the
Company's international subsidiaries sponsors its own sweepstakes, the mechanics
of which vary from jurisdiction to jurisdiction, depending upon local law.

From time to time, the Company is involved in proceedings concerning its
direct marketing promotions. Also from time to time, more restrictive laws or
regulations governing sweepstakes or direct marketing are considered in some
jurisdictions, principally in Europe. The Company does not believe that such
proceedings and proposed laws and regulations will have a material adverse
effect on the Company's direct marketing business.

The Company is subject to postal rate increases, which affect its product
deliveries, promotional mailings and billings. Postage is one of the Company's
largest expenses in its promotional and billing activities. In the past, the
Company has had sufficient advance notice of most increases in postal rates so
that the higher rates could be factored into the Company's pricing strategies
and operating plans. Because increased prices (or increased delivery charges
paid by customers) may have a negative effect on sales, the Company may
strategically determine from time to time the extent, if any, to which these
cost increases are passed on to its customers.

The Company relies on postal delivery service in the jurisdictions in which
it operates for timely delivery of its products and promotional mailings. In the
United States and most international markets, delivery service is generally
satisfactory. Some international jurisdictions, however, experience periodic
work stoppages in postal delivery service or less than adequate postal
efficiency, although these problems have not had a significant impact on the
Company.

28
<PAGE> 30

In some states in the United States and in some foreign jurisdictions, some
or all of the Company's products are subject to sales tax or value added tax.
Tax, like delivery, is generally stated separately on bills where permitted by
applicable law. Nonetheless, tax increases or imposition of new taxes increases
the total cost to the customer and thus may have a negative effect on sales.
Moreover, in jurisdictions where applicable tax must be included in the purchase
price, the Company may be unable to fully recover from customers the amount of
any tax increase or new tax.

MANAGEMENT INFORMATION SYSTEMS AND CUSTOMER LIST ENHANCEMENT

The size and quality of the Company's computerized customer list of current
and prospective customers in each country in which it operates contribute
significantly to its business and the Company is constantly striving to improve
its lists. The Company believes that its United States list of over 50 million
households -- over half the total number of households in the country -- is one
of the largest direct response lists in the United States. The Company's
international lists include a comparable number of households, in the aggregate.

The Company is making and will continue to make significant investments in
management
information systems in order to improve its operating efficiencies, increase the
level of service provided to its customer base and facilitate globalization of
the Company.

List management activity is limited in some international subsidiaries
because local jurisdictions, particularly in Europe, have data protection laws
or regulations prohibiting or limiting the exchange of such information. Certain
jurisdictions also prohibit the retention of information, other than certain
basic facts, about noncurrent customers. Although data protection laws in effect
from time to time may hinder the Company's list enhancement capacity, the
Company believes that current laws and regulations do not prevent the Company
from engaging in activities necessary to its business.

SPECIAL INTEREST MAGAZINES

The Company publishes several special interest magazines that it deems
consistent with its image, editorial philosophy and market expertise. The Family
Handyman magazine provides instructions and guidance for "do-it-yourself" home
improvement projects. New Choices: Living Even Better After 50 magazine is aimed
at active, mature readers and provides information on entertainment, travel,
health and leisure time activities. American Health for Women magazine provides
helpful information on medicine, nutrition, psychology and fitness as those
issues relate to women. In 1997, the Company acquired Walking magazine, which
provides information on health and fitness for walking enthusiasts. These
magazines are sold by subscription and on the newsstand. Like most magazines,
the Company's special interest magazines are highly dependent on advertising
revenue. Each of these magazines publishes 10 issues per year, except Walking,
which publishes six times per year. The Company also publishes Moneywise
magazine, a magazine devoted to helping families manage their finances, in the
United Kingdom.

The following table sets forth the circulation rate base of each of the
Company's United States special interest magazines at June 30, 1997, as well as
the number of advertising pages carried for the fiscal year ended June 30, 1997.
Circulation rate base data is as reported to ABC.

<TABLE>
<CAPTION>
NUMBER OF
CIRCULATION ADVERTISING
RATE BASE PAGES CARRIED
----------- -------------
<S> <C> <C>
The Family Handyman............................... 1,000,000 580
American Health for Women......................... 900,000 461
New Choices: Living Even Better After 50.......... 600,000 486
Walking........................................... 625,000 327
</TABLE>

Moneywise had a circulation rate base of 107,800 as of the end of fiscal
1997 and carried 515 pages of advertising.

29
<PAGE> 31

Of total revenues of $81.9 million for the Company's special interest
magazines in fiscal 1997, 61% was generated by circulation revenues and 39% by
advertising revenues.

The U.S. magazines are promoted to the Company's U.S. customer list and the
Company's other products are promoted to each magazine's customer list, as
appropriate. This strategy helps to expand the Company's customer base for all
of its products.

QSP

QSP is in the business of assisting schools and youth groups in the United
States and Canada in their fundraising efforts. QSP's staff helps schools and
youth groups prepare fundraising campaigns in which participants sell magazine
subscriptions, music and video products, books, food and gifts. QSP derives its
revenue from a portion of the proceeds of each sale. Several hundred publishers
(including the Company) make magazine subscriptions available to QSP at a
substantial discount. QSP also obtains discounted music products from a large
music publisher. Processing of magazine subscription orders and payments is
performed for QSP by an independent contractor.

COMPETITION AND TRADEMARKS

Although Reader's Digest magazine is a unique and well-established
institution in the magazine publishing industry, it competes with other
magazines for subscribers and with magazines and all other media, including
radio and television, for advertising. The Company believes that the extensive
and longstanding international operations of Reader's Digest provide the Company
with a significant advantage over competitors seeking to establish a global
publication.

The Company owns numerous trademarks that it uses in its business
worldwide. Its two most important trademarks are "Reader's Digest" and the
"Pegasus" logo. The Company believes that the name recognition, reputation and
image that it has developed in each of its markets significantly enhance
customer response to the Company's direct marketing sales promotions.
Accordingly, trademarks are important to the Company's business and the Company
aggressively defends its trademarks.

The Company believes that its name, image and reputation, as well as the
quality of its customer lists, provide a significant competitive advantage over
many other direct marketers. However, the Company's books and home entertainment
products business is in competition with companies selling similar products at
retail as well as by direct marketing. Because tests show that consumers'
responses to direct marketing promotions can be adversely affected by the
overall volume of direct marketing promotions, the Company is also in
competition with all other direct marketers, regardless of whether the products
being offered are similar to the Company's products.

Each of the Company's special interest magazines is in competition with
other magazines of the same genre for readers and advertising. Nearly all of the
Company's products compete with other products and services that utilize leisure
activity time or disposable income.

EMPLOYEES

As of June 30, 1997, the Company employed approximately 5,900 persons
worldwide; approximately 2,200 were employed in the United States and 3,700 were
employed by the Company's international subsidiaries. The Company's relationship
with its employees is generally satisfactory.

30
<PAGE> 32

PROPERTIES

The Company's headquarters and principal operating facilities are situated
on approximately 120 acres in Westchester County, New York, much of which the
Company acquired in 1940. The site includes five principal buildings aggregating
approximately 697,000 square feet that house executive, administrative,
editorial and operational offices, and data processing and other facilities. In
New York City, the Company leases approximately 181,000 square feet of office
space in a total of three buildings, portions of which are used as editorial
offices for its books and home entertainment products business, as advertising
sales offices for Reader's Digest magazine and as offices for the Company's
special interest magazines. The Company leases space totaling approximately
52,000 square feet for an editorial bureau, advertising sales offices and other
purposes in various cities in the United States. A subsidiary of the Company
also leases 36,000 square feet of office space in Westport, Connecticut.

QSP leases approximately 163,000 square feet in Conyers, Georgia, 4,000
square feet in Danbury, Connecticut, and 21,000 square feet in Ridgefield,
Connecticut.

The Company owns approximately 1,613,200 square feet and leases
approximately 531,000 square feet of space outside the United States that is
utilized by the Company's international operating subsidiaries principally as
headquarters, administrative and editorial offices and warehouse space. The
foregoing properties owned by the Company include 207,000 square feet of space
in Swindon, England, in a building owned by the Company on land leased by the
Company through 2076.

The Company believes that its current facilities, together with expansions
and upgrading of facilities presently underway or planned, are adequate to meet
its present and reasonably foreseeable needs. The Company also believes that
adequate space will be available to replace any leased facilities for which the
leases expire in the near future.

LEGAL PROCEEDINGS

The Company and its subsidiaries are defendants in various lawsuits and
claims arising in the regular course of business. It is management's belief that
recoveries, if any, by plaintiffs and claimants would not materially affect the
financial position of the Company or its results of operations.

31
<PAGE> 33

MANAGEMENT

DIRECTORS

The Board of Directors currently consists of eight members who are elected
annually to hold office until the next Annual Meeting or until their successors
are duly elected and qualified. The Board of Directors is responsible for the
management of the Company's business.

Set forth below opposite the name and age of each Director are the
Director's present positions and offices with the Company, the year in which the
Director was first elected a Director of the Company and the Director's
principal occupations during the past five years.

<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH THE COMPANY AND
NAME AND AGE PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS
- ------------------------------- -----------------------------------------------------------
<S> <C>
George V. Grune (68)........... Mr. Grune returned to the Company to serve as Chairman of
the Board and Chief Executive Officer on August 11, 1997,
after having previously served as Chairman of the Board of
the Company until his retirement in August 1995 and as
Chief Executive Officer until August 1994. Mr. Grune first
joined the Company in 1960 and was a member of the Board of
Directors from 1976 to 1995. Mr. Grune has also served as
Chairman of the DeWitt Wallace-Reader's Digest Fund, Inc.
and the Lila Wallace-Reader's Digest Fund, Inc. since July
1987. Mr. Grune is also a director of Avon Products, Inc.,
Bestfoods, The Chase Manhattan Corporation and Federated
Department Stores, Inc.
Melvin R. Laird (75)........... Mr. Laird has been a member of the Board of Directors of
the Company since 1990. He has served as Senior Counsellor
for national and international affairs since 1974 and was
elected to the additional position of Vice President in
1989. Mr. Laird joined the Company in 1974. Mr. Laird also
serves as a director of IDS Mutual Fund Group.
Lynne V. Cheney (56)........... Dr. Cheney joined the Board of Directors in 1993. She is an
author, lecturer and television commentator with CNN and
has been a senior fellow of the American Enterprise
Institute for Public Policy Research since January 1993.
She served as Chairman of the National Endowment for the
Humanities from May 1986 to January 1993. Dr. Cheney is
also a director of FPL Group, Inc. (parent of Florida Power
& Light Company), IDS Mutual Fund Group, Lockheed-Martin
Corporation and Union Pacific Resources Group, Inc.
M. Christine DeVita (47)....... Ms. DeVita has been a member of the Board of Directors of
the Company since 1993. She has been President of the
DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc. since June 1989.
James E. Preston (64).......... Mr. Preston has been a member of the Board of Directors of
the Company since 1994. He became Chairman of the Board of
Avon Products, Inc. (beauty and related products) in
January 1989 and has been Chief Executive Officer since
1988, holding the additional position of President from
1988 until November 1993. Mr. Preston also serves on the
boards of directors of Aramark, Inc. and Woolworth
Corporation.
</TABLE>

32
<PAGE> 34

EXECUTIVE OFFICERS

The following paragraphs set forth the name, age and offices with the
Company of each present executive officer of the Company, the period during
which each executive officer has served as such and each executive officer's
business experience during the past five years:

<TABLE>
<CAPTION>
NAME AND AGE POSITIONS AND OFFICES WITH THE COMPANY
- ------------------------------- -----------------------------------------------------------
<S> <C>
George V. Grune (68)........... Mr. Grune returned to the Company to serve as Chairman of
the Board and Chief Executive Officer on August 11, 1997,
after having previously served as Chairman of the Board of
the Company until his retirement in August 1995 and as
Chief Executive Officer until August 1994. Mr. Grune first
joined the Company in 1960.
Melvin R. Laird (75)........... Mr. Laird has been a member of the Board of Directors of
the Company since 1990. He has served as Senior Counsellor
for national and international affairs since 1974 and was
elected to the additional position of Vice President in
1989. Mr. Laird joined the Company in 1974.
M. John Bohane (62)............ Mr. Bohane has been Senior Vice President of the Company
and President, International Operations since September 8,
1997. He first joined the Company in 1964 and served in a
number of executive capacities, including President, Direct
Marketing Group, until leaving the Company in July 1991.
Prior to rejoining the Company, Mr. Bohane served as
President and Chief Executive Officer of Newfield
Publications from April 1994 to July 1995 and as Vice
President of Corporate Database Marketing of Time-Warner,
Inc., from April 1992 to December 1993.
</TABLE>

33
<PAGE> 35

<TABLE>
<CAPTION>
NAME AND AGE POSITIONS AND OFFICES WITH THE COMPANY
- ------------------------------- -----------------------------------------------------------
<S> <C>
Peter J.C. Davenport (58)...... Mr. Davenport has been Senior Vice President, Global
Marketing of the Company since September 8, 1997. He served
as Senior Vice President, Global Direct Marketing from
January 1994 until his retirement in March 1997 and as Vice
President, Global Direct Marketing from September 1991 to
January 1994. Mr. Davenport first joined the Company in
1958.
Richard A. Garvey (49)......... Mr. Garvey has been Senior Vice President, Corporate
Planning and New Business Development since September 8,
1997 and was a Vice President and Group President, Global
Marketing and New Channels of the Company from the time he
joined the Company in September 1996. He was previously
Vice President, Marketing of LEGO Systems, Inc. (children's
educational and entertainment products).
Marcia M. Lefkowitz (53)....... Ms. Lefkowitz has been a Senior Vice President and
President of Reader's Digest U.S.A. since September 8,
1997. Prior thereto, Ms. Lefkowitz served as the Company's
Senior Consultant for Marketing and Marketing Systems
Projects from November 1995, as Vice President, Marketing,
Reader's Digest U.S.A. from July 1993, Vice President,
Marketing Systems from February 1993 and Vice President,
Global New Business Development prior thereto. Ms.
Lefkowitz joined the Company in 1967.
George S. Scimone (50)......... Mr. Scimone has been Vice President and Chief Financial
Officer of the Company since September 8, 1997. Prior
thereto, he was a Vice President and President, Reader's
Digest U.S.A. from November 1996 and Vice President and
Corporate Controller from September 1995. Prior to joining
the Company, Mr. Scimone was Business Chief Financial
Officer, Electrical Distribution and Control of General
Electric Company.
Christopher P. Willcox (51).... Mr. Willcox has been Senior Vice President and
Editor-in-Chief of Reader's Digest magazine since March
1996. He served as Worldwide Executive Editor from June
1994 to March 1996, Executive Editor, International from
October 1991 to June 1994 and Assistant Managing Editor
from 1990 to 1991. He joined the Company in 1988.
</TABLE>

Pursuant to the By-Laws of the Company, officers serve at the pleasure of
the Board of Directors. Officers of the Company are elected annually to serve
until their respective successors are elected and qualified.

USE OF PROCEEDS

The Company will not receive any proceeds from the sales of the shares of
Nonvoting Common Stock. All of the shares of Nonvoting Common Stock being
offered are beneficially owned by the Selling Stockholders.

34
<PAGE> 36

PRINCIPAL STOCKHOLDERS

The following table shows, based on information reported to the Company by
or on behalf of such persons, the ownership, as of December 31, 1997, of the
Company's voting securities by the only persons known to the Company to be the
beneficial owners of more than five percent of the Voting Common Stock, the only
class of voting securities of the Company outstanding:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
- ------------------------------------------------------ --------------------- ----------------
<S> <C> <C>
DeWitt Wallace-Reader's Digest Fund, Inc.............. 7,750,000 shares 35.69%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
Lila Wallace-Reader's Digest Fund, Inc................ 7,750,000 shares 35.69%
Two Park Avenue (sole voting and
New York, NY 10016(1) investment power)
State Street Bank and Trust Company,.................. 1,716,057 shares 7.90%
as trustee of The Reader's Digest Employees (shared voting and
Profit-Sharing Plan(2) investment power)
</TABLE>

- ---------------
(1) As of December 31, 1997, the DeWitt Wallace-Reader's Digest Fund, Inc. also
owned 6,117,240 shares of Nonvoting Common Stock, which, together with its
holding of Voting Common Stock, represented 13.04% of the total outstanding
common stock of the Company. The Lila Wallace-Reader's Digest Fund, Inc.
also owned 2,439,558 shares of Nonvoting Common Stock, which, together with
its holding of Voting Common Stock, represented 9.58% of the total
outstanding common stock of the Company.

(2) State Street Bank and Trust Company ("State Street") is trustee of the Trust
created by the Trust Agreement amended and restated as of July 1, 1992
between The Reader's Digest Association, Inc. and State Street, as trustee,
relating to The Reader's Digest Employees Profit-Sharing Plan (the
"Profit-Sharing Plan"). According to the Schedule 13G filed by State Street
in such capacity and received by the Company, State Street may be deemed to
have shared voting and shared dispositive power over the shares listed, but
has disclaimed beneficial ownership of all such shares.

Each of the DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace-Reader's Digest Fund, Inc. (collectively, the "Funds") has five members
and a board consisting of five directors. Ms. DeVita and Mr. Silas, who are
Directors of the Company, and Mr. Grune, who is Chairman of the Board and Chief
Executive Officer of the Company, are also members and directors of each of the
Funds.

It has been the Company's objective since fiscal 1990 that the Company's
employee benefit plans, including the Profit-Sharing Plan, would hold up to 20%
of the Voting Common Stock, or approximately 4% of the equity in Common Stock of
the Company, by the end of fiscal 1999. As of December 31, 1997, approximately
7.90% of the outstanding Voting Common Stock is held by the Profit-Sharing Plan,
which is the only employee benefit plan that holds such stock.

In order to avoid the imposition of excise taxes, commencing in the year
2000 the Funds together may not own more than 50% of the voting stock or value
of the Company. Accordingly, the Funds must reduce their aggregate holdings of
Voting Common Stock to 50% by the year 2000. The Funds presently own
approximately 71% of the outstanding Voting Common Stock. The Funds will be
required to dispose of between 3-to-4.5 million shares of Voting Common Stock by
the year 2000 (depending on the amount of Voting Common Stock outstanding,
including the amount held by the Company's employee benefit plans), in order to
avoid the imposition of excise taxes. No determination has been made at this
time as to the manner in which, or the time during which, further reductions in
ownership of Voting Common Stock will be effected. The Funds intend to retain
50% of the Voting Common Stock as long-term investors.

35
<PAGE> 37

SELLING STOCKHOLDERS

Pursuant to the Contracts (as defined in the Trust Prospectus), a specified
number of shares of Nonvoting Common Stock will be required to be delivered to
the Trust by the Selling Stockholders listed below (the "Selling Stockholders")
upon exchange of the Automatic Common Exchange Securities. The following table
sets forth certain information for each Selling Stockholder with respect to (i)
such Selling Stockholder's beneficial ownership of the Nonvoting Common Stock as
of the date of this Prospectus and (ii) the maximum number of shares of such
Selling Stockholder that may be delivered to the Trust pursuant to the
applicable Contract (without taking into account the Underwriters'
over-allotment option). The Selling Stockholder's beneficial ownership of the
Nonvoting Common Stock will not change as a result of the offering of the
Automatic Common Exchange Securities unless, until and to the extent, the
Selling Stockholders deliver shares of Nonvoting Common Stock to the Trust
pursuant to the Contracts.

<TABLE>
<CAPTION>
SHARES OF NONVOTING % OF SHARES OF NON- MAXIMUM NUMBER OF SHARES OF
COMMON STOCK VOTING COMMON STOCK NONVOTING COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED DELIVERABLE TO TRUST PURSUANT
SELLING STOCKHOLDER AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1997 TO CONTRACT
- ----------------------------- ----------------------- ----------------------- -----------------------------
<S> <C> <C> <C>
Lila Acheson and DeWitt
Wallace Fund for Lincoln
Center(1).................. 6,380,759 7.5 2,011,312
DeWitt Wallace Fund for
Macalester College(1)(2)... 5,957,310 7.0 2,978,655
Community Funds, Inc......... 3,144,188 3.7 1,025,769
Lila Acheson and DeWitt
Wallace Fund for Hudson
Highlands(1)(3)............ 5,510,657 6.5 2,646,902
Lila Acheson Wallace Fund for
the New York Zoological
Society(1)(3).............. 2,900,346 3.4 914,233
DeWitt Wallace Fund for
Memorial Sloan-Kettering
Cancer Center(1)(3)........ 2,320,277 2.7 731,386
</TABLE>

- ---------------
(1) Mr. Grune, the Chairman of the Board and Chief Executive Officer of the
Company, is President, a member and director of the Lila Acheson and DeWitt
Wallace Fund for Lincoln Center, the DeWitt Wallace Fund for Macalester
College, the Lila Acheson and DeWitt Wallace Fund for the Hudson Highlands,
the Lila Acheson Wallace Fund for the New York Zoological Society and the
DeWitt Wallace Fund for Memorial Sloan-Kettering Cancer Center.
(2) Mr. Laird, a director, Senior Counsellor for national and international
affairs and Vice President of the Company, is a member and director of the
DeWitt Wallace Fund for Macalester College.
(3) Ms. DeVita, a director of the Company, is a member and director of the Lila
Acheson and DeWitt Wallace Fund for the Hudson Highlands, the Lila Acheson
Wallace Fund for the New York Zoological Society and the DeWitt Wallace Fund
for Memorial Sloan-Kettering Cancer Center.

The Company has agreed to indemnify each of the Selling Stockholders, its
directors, officers and certain controlling persons against certain liabilities,
including liabilities under the Securities Act.

36
<PAGE> 38

DESCRIPTION OF CAPITAL STOCK

The following statements are subject to the detailed provisions of the
Company's Restated Certificate of Incorporation and By-Laws, do not purport to
be complete, and are qualified in their entirety by reference thereto.

The Company is authorized to issue 200,000,000 shares of Nonvoting Common
Stock, par value $0.01 per share, of which 84,733,370 were issued and
outstanding as of December 31, 1997, and 25,000,000 shares of Voting Common
Stock, par value $0.01 per share, of which 21,716,057 shares were issued and
outstanding as of December 31, 1997.

The Company is also authorized to issue 40,000 shares of Preferred Stock
(the "First Preferred Stock"), par value $1.00 per share, 120,000 shares of
Second Preferred Stock (the "Second Preferred Stock"), par value $1.00 per
share, 230,000 shares of Third Subordinated Preferred Stock (the "Third
Preferred Stock"), par value $1.00 per share (the First Preferred Stock, Second
Preferred Stock and Third Preferred Stock collectively, the "Preferred Stock")
and 25,000,000 shares of Preference Stock, par value $0.01 per share, issuable
in series (the "Preference Stock").

As of December 31, 1997, there were outstanding 29,720 shares of First
Preferred Stock, 103,720 shares of Second Preferred Stock and 155,022 shares of
Third Preferred Stock. No shares of Preference Stock have been issued.

The Preference Stock is issuable in series, and the Board of Directors has
authority to designate the powers, preferences and rights pertaining to each
series, subject to certain limitations relating to voting rights (described
below) and convertibility into voting stock of the Company.

The Preferred Stock is primarily held by various charities and charitable
remainder annuity trusts, all of which received their shares, directly or
indirectly, by gift or bequest from DeWitt and Lila Wallace.

VOTING RIGHTS

Holders of Nonvoting Common Stock and Preferred Stock have no voting power
for any purpose whatsoever, except as otherwise provided by law. Holders of
Voting Common Stock have full voting power for all purposes, except as otherwise
required by law and except that the Board of Directors may designate one or more
series of Preference Stock, the holders of which may have the right to elect an
aggregate of no more than two additional directors in the event of dividend
arrearages specified in the designation. The Board of Directors may designate
one or more series of Preference Stock with additional voting rights, if the
designation is approved by the holders of Voting Common Stock.

DIVIDEND AND LIQUIDATION RIGHTS

Holders of First Preferred Stock and Second Preferred Stock are entitled to
receive an annual dividend of $4.00 per share, and holders of Third Preferred
Stock are entitled to receive an annual dividend of $5.00 per share. Holders of
all classes of Preferred Stock are entitled to a liquidation preference of
$100.00 per share (together with an amount equal to all accrued and unpaid
dividends) and are entitled to receive $105.00 per share, together with unpaid,
accrued dividends, upon a redemption of shares of Preferred Stock by the
Company. Subject to these rights of holders of Preferred Stock, and subject to
such rights of holders of Preference Stock that may become outstanding pursuant
to designation by the Board of Directors, holders of Nonvoting Common Stock and
holders of Voting Common Stock participate equally, on a per share basis, in
such dividends as may be declared by the Board of Directors out of funds legally
available for that purpose and in distributions of assets upon liquidation or
otherwise, except that (i) any dividend or other distribution upon the Common
Stock of the Company that is payable in the Common Stock of the Company may be
paid only in Nonvoting Common Stock to holders of Nonvoting Common Stock and
only in Voting Common Stock to holders of Voting Common Stock and (ii) any
dividend or other

37
<PAGE> 39

distribution upon the Common Stock of the Company that is payable in common
stock of any subsidiary of the Company may be paid to holders of Voting Common
Stock only in common stock of the subsidiary having full voting rights and may
be paid to holders of Nonvoting Common Stock only in common stock of the
subsidiary having no voting rights other than those prescribed by law. In the
case of any split or reverse split of Common Stock, the number of shares of
Nonvoting Common Stock and the number of shares of Voting Common Stock must be
increased or decreased, as the case may be, in the same proportion, share and
share alike.

GENERAL

No holder of Voting Common Stock or Nonvoting Common Stock has any
preemptive right to subscribe for any securities of the Company. All outstanding
shares of Voting Common Stock and Nonvoting Common Stock are validly issued,
fully paid and nonassessable.

TRANSFER AGENT AND REGISTRAR

Chase Mellon Shareholder Services, LLC acts as transfer agent and registrar
for the Nonvoting Common Stock and the Voting Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Rule 144 under the Securities Act ("Rule 144"), as currently in effect,
provides that a person (or persons whose sales are aggregated) who is an
affiliate of the Company, or who has beneficially owned for at least one (1)
year shares which were issued and sold in reliance upon exemptions from
registration under the Securities Act ("Restricted Shares"), is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of that class of stock or
the average weekly trading volume in that class of stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about the Company. However, a person who is not
deemed to have been an "affiliate" of the Company at any time during the three
months preceding a sale, and who has beneficially owned Restricted Shares for at
least two years, may sell such shares under Rule 144 without regard to volume
limitations, manner-of-sale provisions, notice requirements or the availability
of current public information about the Company.

The Selling Stockholders, the Lila Acheson Wallace Fund for The
Metropolitan Museum of Art, the DeWitt Wallace Fund for Colonial Williamsburg
and the Funds may be deemed to be affiliates of the Company depending upon a
variety of factors, including whether the Selling Stockholders are under common
control with the Company. In addition, if these stockholders are deemed to be
affiliates of the Company and act in concert in disposing of the Nonvoting
Common Stock of the Company, their sales could be aggregated for purposes of
determining the number of shares permitted to be sold by them under Rule 144. As
of December 31, 1997, the Company had outstanding 84,733,370 shares of Nonvoting
Common Stock. Of these shares, 40,236,158 shares are freely tradable by persons
without restriction or registration under the Securities Act, 26,213,537 shares
are owned by the Selling Stockholders (and will continue to be owned by them
after the offering of the Automatic Common Exchange Securities subject to the
terms and conditions of the Automatic Common Exchange Securities described in
the Trust Prospectus), 6,826,531 shares are owned by the Lila Acheson Wallace
Fund for The Metropolitan Museum of Art, 2,900,346 shares are owned by the
DeWitt Wallace Fund for Colonial Williamsburg and 8,556,798 shares are owned by
the Funds. Any such shares held by affiliates may be sold in accordance with
Rule 144.

Subject to certain exceptions, the Selling Stockholders, the Lila Acheson
Wallace Fund for The Metropolitan Museum of Art and the DeWitt Wallace Fund for
Colonial Williamsburg have agreed with the Underwriters not to sell any shares
of Nonvoting Common Stock, and the Company and the Funds have agreed with the
Underwriters not to sell any shares of Nonvoting Common Stock or

38
<PAGE> 40

Voting Common Stock, in each case for a period of 180 days after the closing of
the offering of the Automatic Common Exchange Securities, without the prior
written consent of the Underwriters.

On December 31, 1997, the Company had outstanding 21,716,057 shares of
Voting Common Stock. Of these shares, 17,216,057 are held by the Funds and the
Profit Sharing Plan and may be sold in accordance with Rule 144.

As of December 31, 1997, employees of the Company held options to purchase
an aggregate of 8,419,059 shares of Nonvoting Common Stock at exercise prices
ranging from $20.00 to $55.125 per share.

No precise predictions can be made as to the effect, if any, that market
sales of shares of Voting Common Stock or Nonvoting Common Stock or the
availability of shares of Voting Common Stock or Nonvoting Common Stock for sale
will have on the market price for the Nonvoting Common Stock. Nevertheless,
sales of substantial amounts of Voting Common Stock or Nonvoting Common Stock
could adversely affect prevailing market prices for the Nonvoting Common Stock.

PLAN OF DISTRIBUTION

The Automatic Common Exchange Securities will be distributed as described
in the Trust Prospectus under the caption "Underwriting." Goldman, Sachs & Co.
has from time to time performed investment banking and financial advisory
services for the Company, and Lazard Freres & Co. LLC has from time to time
acted as financial advisor to the Selling Stockholders and certain related
entities.

TRUST PROSPECTUS

The Automatic Common Exchange Securities are being offered pursuant to the
Trust Prospectus. This Prospectus relates only to the Nonvoting Common Stock
that may be delivered upon exchange of the Automatic Common Exchange Securities.
The Company takes no responsibility for any information included in or omitted
from the Trust Prospectus. The Trust Prospectus does not constitute a part of
this Prospectus nor is it incorporated by reference herein.

VALIDITY OF SECURITIES

The validity of the shares of Nonvoting Common Stock being offered hereby
will be passed upon for the Company by Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations), New York, New York and
certain legal matters will be passed upon for the Underwriters by Milbank,
Tweed, Hadley & McCloy, New York, New York. Laraine S. Rothenberg, a member of
Fried, Frank, Harris, Shriver & Jacobson, is a member and director of each of
the Funds and the Lila Acheson and DeWitt Wallace Fund for Lincoln Center, one
of the Selling Stockholders.

EXPERTS

The financial statements of the Company as of June 30, 1997 and 1996, and
for each of the years in the three-year period ended June 30, 1997, have been
incorporated by reference herein and in this Prospectus in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference, and upon the authority of said firm as experts in
accounting and auditing.

39
<PAGE> 41

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are incorporated by reference and made
a part of this Prospectus: (i) the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997; (ii) all other reports filed pursuant to
Section 13(a) or 15(d) of the Exchange Act since June 30, 1997, specifically
including the Company's Quarterly Reports on Form 10-Q (and any amendments
thereto) for the quarterly periods ended September 30, 1997 and December 31,
1997 and the Company's Current Reports on Form 8-K dated July 11, 1997, August
11, 1997, September 8, 1997, October 6, 1997 and November 24, 1997; (iii) the
Company's Proxy Statement dated October 27, 1997 relating to the 1997 Annual
Meeting of Stockholders held December 12, 1997 with respect to the information
required to be included herein by Items 401 (management), 402 (executive
compensation) and 404 (certain relationships and related transactions) of
Regulation S-K promulgated under the Securities Act and the Exchange Act and
(iv) the description of the Common Stock contained in the Company's registration
statement on Form 8-A filed January 16, 1990.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document or information incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is, or is
deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.

The making of a modifying or superseding statement shall not be deemed an
admission that the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an omission to
state a material fact that is required to be stated or that is necessary to make
a statement not misleading in light of the circumstances in which it was made.

THE COMPANY UNDERTAKES TO PROVIDE, WITHOUT CHARGE, TO EACH PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED,
UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY AND ALL OF THE
DOCUMENTS OR INFORMATION REFERRED TO ABOVE THAT HAS BEEN OR MAY BE INCORPORATED
BY REFERENCE IN THIS PROSPECTUS (EXCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE). REQUESTS SHOULD BE
DIRECTED TO C.H.R. DUPREE, ACTING SECRETARY, THE READER'S DIGEST ASSOCIATION,
INC., READER'S DIGEST ROAD, PLEASANTVILLE, NEW YORK 10570, TELEPHONE: (914)
238-1000.

40
<PAGE> 42

(This page intentionally left blank.)
<PAGE> 43

=======================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Recent Developments.................... 4
Price Range Of Nonvoting Common Stock
And Dividend Information............. 9
Capitalization......................... 10
Selected Consolidated Financial
Information.......................... 11
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations........................... 13
Business Of The Company................ 24
Properties............................. 31
Legal Proceedings...................... 31
Management............................. 32
Use Of Proceeds........................ 34
Principal Stockholders................. 35
Selling Stockholders................... 36
Description Of Capital Stock........... 37
Plan Of Distribution................... 39
Trust Prospectus....................... 39
Validity Of Securities................. 39
Experts................................ 39
Incorporation Of Certain Documents By
Reference............................ 40
</TABLE>

=======================================================
=======================================================

10,308,257 SHARES

THE READER'S DIGEST

ASSOCIATION, INC.

CLASS A NONVOTING COMMON STOCK
(PAR VALUE $0.01 PER SHARE)

------------------

[L O G O]

------------------

GOLDMAN, SACHS & CO.

LAZARD FRERES & CO. LLC

=======================================================
<PAGE> 44

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following are the estimated expenses, other than underwriting discounts
and commissions, to be incurred in connection with the issuance and distribution
of the securities registered under this Registration Statement:

<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 80,500
Fees and expenses of qualification under state securities laws
(including legal fees)......................................... 5,000
Printing and engraving expenses.................................. 99,500
Legal fees and expenses.......................................... 650,000
Accounting fees and expenses..................................... 50,000
Miscellaneous.................................................... 20,000
--------
Total.................................................. $905,000
========
</TABLE>

- ---------------
The Selling Shareholders will bear all of such expenses.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Certificate of Incorporation provides that the Company shall
indemnify each officer or director of the Company to the fullest extent
permitted by law, subject to the limitations set forth in its By-Laws. The
By-Laws provide that the Company shall indemnify to the fullest extent permitted
by law any person made or threatened to be made a party to any action, suit or
proceedings, whether civil, criminal, administrative or investigative, by reason
of the fact that such person or such person's testator or intestate is or was a
director or officer of the Company or serves or served at the request of the
Company or any other enterprise as a director or officer. Expenses incurred by
any such person in defending any such action, suit or proceeding shall be paid
or reimbursed by the Company promptly upon receipt by it of an undertaking of
such person to repay such expenses if it shall ultimately be determined that
such person is not entitled to be indemnified by the Company. The rights of any
person under the By-Laws shall be enforceable against the Company by such
person, who shall be presumed to have relied upon them in serving or continuing
to serve as a director or officer as provided above. Notwithstanding the
foregoing, and except as otherwise provided by law, the Company may not make any
payment for indemnification pursuant to the By-Laws to any person to the extent
of the amount of such payment that would result in the imposition of an excise
tax under Chapter 42 of the Internal Revenue Code of 1986, as amended.

Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceedings. The Delaware General Corporation Law also provides
that Delaware corporations may purchase insurance on behalf of any director,
officer, employee or agent.

II-1
<PAGE> 45

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<C> <S>
4.1.1 Restated Certificate of Incorporation of The Reader's Digest Association, Inc.
filed with the State of Delaware on February 7, 1990, filed as Exhibit 3.1.1 to the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1993, is
incorporated herein by reference.
4.1.2 Certificate of Amendment of the Certificate of Incorporation of The Reader's Digest
Association, Inc. filed with the State of Delaware on February 22, 1991, filed as
Exhibit 3.1.2 to the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1993, is incorporated herein by reference.
4.2 Amended and Restated By-Laws of The Reader's Digest Association, Inc., effective
February 22, 1991, filed as Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1993, is incorporated herein by reference.
4.3 $400,000,000 Competitive Advance and Revolving Credit Facility Agreement dated as
of November 12, 1996 between the registrant, the Borrowing Subsidiaries, The Chase
Manhattan Bank and J.P. Morgan Securities Inc., filed as Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996,
is incorporated herein by reference.
4.4 First Amendment dated as of September 17, 1997 to the $400,000,000 Competitive
Advance and Revolving Credit Facility Agreement dated as of November 12, 1996 among
the registrant, the Borrowing Subsidiaries, The Chase Manhattan Bank and J.P.
Morgan Securities Inc., filed as Exhibit 10.29 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by
reference.
Note: Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation
S-K, the registrant hereby undertakes to furnish to the Commission upon request
copies of the instruments pursuant to which it and its subsidiaries hold long-term
debt of the registrant, none of which instruments governs indebtedness exceeding
10% of the total assets of the registrant and its subsidiaries on a consolidated
basis.
*5.1 Opinion of Fried, Frank, Harris, Shriver and Jacobson as to the validity of the
Class A Nonvoting Common Stock being registered.
23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Fried, Frank, Harris, Shriver and Jacobson (included in Exhibit 5.1).
24.1 Power of Attorney (included in the signature pages of the initial Registration
Statement)
</TABLE>

- ---------------

* Previously filed.

II-2
<PAGE> 46

(b) Financial Statement Schedules.

Schedule II: Valuations and Qualifying Accounts

All other financial statement schedules relating to the Registrant are
omitted because they are not required or because the required information, if
material, is contained in the consolidated financial statements or Notes
thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(3) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(4) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-3
<PAGE> 47

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-3
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Pleasantville, New York on February 6, 1998.

THE READER'S DIGEST ASSOCIATION, INC.

By: /s/ GEORGE V. GRUNE*

------------------------------------
Name: George V. Grune
Title: Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the date first above indicated:

<TABLE>
<CAPTION>
Signature Title
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ GEORGE V. GRUNE* Chairman of the Board and Chief Executive
- --------------------------------------------- Officer and Director (Principal Executive
George V. Grune Officer)

/s/ GEORGE S. SCIMONE* Vice President and Chief Financial Officer
- --------------------------------------------- (Principal Financial Officer)
George S. Scimone
/s/ AYESHA ZAFAR* Vice President and Corporate Controller
- --------------------------------------------- (Controller)
Ayesha Zafar

/s/ LYNNE V. CHENEY* Director
- ---------------------------------------------
Lynne V. Cheney

/s/ M. CHRISTINE DEVITA* Director
- ---------------------------------------------
M. Christine DeVita

/s/ MELVIN R. LAIRD* Director
- ---------------------------------------------
Melvin R. Laird

/s/ JAMES E. PRESTON* Director
- ---------------------------------------------
James E. Preston

/s/ ROBERT G. SCHWARTZ* Director
- ---------------------------------------------
Robert G. Schwartz

/s/ C.J. SILAS* Director
- ---------------------------------------------
C.J. Silas

/s/ WILLIAM J. WHITE* Director
- ---------------------------------------------
William J. White

*By: /s/ CLIFFORD H.R. DUPREE February 6, 1998
- ---------------------------------------------
Clifford H.R. DuPree,
Attorney-in-Fact
</TABLE>

II-4
<PAGE> 48

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<S> <C>
4.1.1 Restated Certificate of Incorporation of The Reader's Digest Association, Inc.
filed with the State of Delaware on February 7, 1990, filed as Exhibit 3.1.1 to the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1993, is
incorporated herein by reference.
4.1.2 Certificate of Amendment of the Certificate of Incorporation of The Reader's Digest
Association, Inc. filed with the State of Delaware on February 22, 1991, filed as
Exhibit 3.1.2 to the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1993, is incorporated herein by reference.
4.2 Amended and Restated By-Laws of The Reader's Digest Association, Inc., effective
February 22, 1991, filed as Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1993, is incorporated herein by reference.
4.3 $400,000,000 Competitive Advance and Revolving Credit Facility Agreement dated as
of November 12, 1996 between the registrant, the Borrowing Subsidiaries, The Chase
Manhattan Bank and J.P. Morgan Securities Inc., filed as Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996,
is incorporated herein by reference.
4.4 First Amendment dated as of September 17, 1997 to the $400,000,000 Competitive
Advance and Revolving Credit Facility Agreement dated as of November 12, 1996 among
the registrant, the Borrowing Subsidiaries, The Chase Manhattan Bank and J.P.
Morgan Securities Inc., filed as Exhibit 10.29 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by
reference.
Note: Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation
S-K, the registrant hereby undertakes to furnish to the Commission upon request
copies of the instruments pursuant to which it and its subsidiaries hold long-term
debt of the registrant, none of which instruments governs indebtedness exceeding
10% of the total assets of the registrant and its subsidiaries on a consolidated
basis.
*5.1 Opinion of Fried, Frank, Harris, Shriver and Jacobson as to the validity of the
Class A Nonvoting Common Stock being registered.
23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Fried, Frank, Harris, Shriver and Jacobson (included in Exhibit 5.1).
24.1 Power of Attorney (included in the signature pages of the initial Registration
Statement)
</TABLE>

- ---------------

* Previously filed.

II-5

<PAGE> 1

EXHIBIT 23.1

[KPMG PEAT MARWICK LLP LETTERHEAD]

The Board of Directors

The Reader's Digest Association, Inc.:

We consent to the use of our report incorporated herein by reference and to
the reference to our form under the heading "Experts" in the prospectus.

KPMG PEAT MARWICK LLP

February 6, 1998