UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-Q









x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of
              the
      Securities Exchange Act of 1934




For
      the quarter ended December 31, 2008
            
            Commission
      file number 001-10434









THE
READER’S DIGEST ASSOCIATION, INC.


(Exact
name of registrant as specified in its charter)









Delaware
            
            13-1726769(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)Reader’s
      Digest Road, Pleasantville, New York
            
            10570(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code: (914) 238-1000






Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes   ̈  No  x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
accelerated filer   ̈    Accelerated
filer   ̈    Non-accelerated
filer  x    Smaller
reporting company   ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    Yes   ̈    No  x




The
number of shares of Common Stock of the registrant outstanding as of February
13, 2009 was 1,000.
















1







THE
READER’S DIGEST ASSOCIATION, INC.







QUARTERLY
REPORT


FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008




INDEX








Part
      I -
            Financial
      Information
            PageItem
      1.
            Financial
      Statements (unaudited):Consolidated  Statements of
      Operations for the three and six-months ended
              December 31, 2008 and
      2007
            4Consolidated Balance Sheets as
      of December 31, 2008 and June 30, 2008
            5Consolidated Statements of Cash
      Flows for the six-months ended
              December 31, 2008 and
      2007
            6Notes to Consolidated Financial
      Statements
            7Item
      2.
            Management's
      Discussion and Analysis of Financial Condition
              and
      Results of Operations
            30Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            38Item
      4T.
            Controls
      and Procedures
            39Part
      II -
            Other
      InformationItem
      1.
            Legal
      Proceedings
            41Item
      1A.
            Risk
      Factors
            41Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            44Item
      3.
            Defaults
      Upon Senior Securities
            44Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            45Item
      5.
            Other
      Information
            45Item
      6.
            Exhibits
            45








2


PART I


FINANCIAL
INFORMATION





All
references in this report to “Reader’s Digest,” “RDA,” the “Company,” “we,” “us”
and “our” mean, unless the context indicates otherwise, The Reader’s Digest
Association, Inc., and its subsidiaries on a consolidated basis.





DISCLOSURE
      REGARDING FORWARD LOOKING
STATEMENTS





Portions
of the information in this Quarterly Report, including, but not limited to,
those set forth under “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and certain oral statements
made from time to time by representatives of the Company may be considered
“forward-looking statements.” Forward-looking statements can be identified by
the use of forward-looking terminology, including words such as “prospects,”
“outlook,” “believes,” “estimates,” “intends,” “may,” “will,” “should,”
“anticipates,” “expects” or “plans,” or the negative or other variation of these
or similar words, or by discussion of trends and conditions, strategy or risks
and uncertainties. These forward-looking statements include all matters that are
not historical facts. They relate to, without limitation, our intentions,
beliefs or current expectations concerning, among other things, our results of
operations, financial condition, liquidity, prospects, growth, strategies,
plans, objectives and the industry in which we operate.





Forward-looking
statements are inherently subject to risks, trends and uncertainties, many of
which are beyond our ability to control or predict with accuracy, and some of
which we might not even anticipate, because they relate to events and depend on
circumstances that may or may not occur in the future. We caution you that
forward-looking statements are not guarantees of future performance and that our
actual results of operations, financial condition and liquidity, and the
development of the industry in which we operate, may differ materially from
those made in or suggested by the forward-looking statements contained in this
quarterly report. Although we believe that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions at the time
made, we can give no assurance that our expectations will be achieved. In
addition, even if our results of operations, financial condition and liquidity,
and the development of the industry in which we operate are consistent with the
forward-looking statements contained in this quarterly report, those results or
developments may not be indicative of results or developments in subsequent
periods. Future events and actual results, financial and otherwise, may differ
materially from the results discussed in the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking
statements.





Important
factors that may cause actual results to differ materially from forward-looking
statements include, but are not limited to, the risks and uncertainties set
forth in this report in “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and “Business,” “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Annual Report on Form 10-K for the year ended June 30,
2008.





Any
forward-looking statements that we make in this quarterly report speak only as
of the dates of such statements. We assume no obligation to update or supplement
any forward-looking statements that may become untrue because of subsequent
events, whether because of new information, future events or otherwise.
Comparisons of results for current and any prior periods are not intended to
express any future trends or indications of future performance, unless expressed
as such, and should only be viewed as historical data.








3


ITEM 1.
FINANCIAL STATEMENTS





The
Reader's Digest Association, Inc. and Subsidiaries


Consolidated
Statements of Operations


(in
millions)


(unaudited)








Three-months
      ended
                  
                  
                  Six-months
      endedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenues
                  
                  $
                  642.0
                  
                  
                  $
                  703.5
                  
                  
                  $
                  1,178.2
                  
                  
                  $
                  1,226.8Product, distribution and
      editorial expenses
                  
                  
                  271.3
                  
                  
                  
                  293.5
                  
                  
                  
                  514.1
                  
                  
                  
                  539.9Promotion, marketing and
      administrative
                    expenses
                  
                  
                  314.3
                  
                  
                  
                  364.4
                  
                  
                  
                  667.0
                  
                  
                  
                  711.7Other operating items,
      net
                  
                  
                  19.3
                  
                  
                  
                  7.8
                  
                  
                  
                  21.8
                  
                  
                  
                  8.6Operating
      profit (loss)
                  
                  
                  37.1
                  
                  
                  
                  37.8
                  
                  
                  
                  (24.7
                  )
                  
                  
                  (33.4
                  )Interest
      expense
                  
                  
                  40.0
                  
                  
                  
                  46.8
                  
                  
                  
                  80.7
                  
                  
                  
                  92.3Other
      expense (income), net
                  
                  
                  3.6
                  
                  
                  
                  (2.7
                  )
                  
                  
                  2.1
                  
                  
                  
                  (4.9
                  )Loss before expense
      (benefit) from income taxes and discontinued operations
                  
                  
                  (6.5
                  )
                  
                  
                  (6.3
                  )
                  
                  
                  (107.5
                  )
                  
                  
                  (120.8
                  )Income
      tax expense (benefit)
                  
                  
                  14.9
                  
                  
                  
                  4.7
                  
                  
                  
                  13.8
                  
                  
                  
                  (8.5
                  )Loss
      from continuing operations
                  
                  
                  (21.4
                  )
                  
                  
                  (11.0
                  )
                  
                  
                  (121.3
                  )
                  
                  
                  (112.3
                  )(Loss)
      Income from discontinued operations, net of  tax expense
      (benefit) of $1.6  and $(16.8) for the three and six-months
      ended December 31, 2008, respectively, and $(0.4) and $(0.6) for the three
      and six-months ended December 31, 2007, respectively
                  
                  
                  (12.7
                  )
                  
                  
                  28.3
                  
                  
                  
                  (69.3
                  )
                  
                  
                  6.6Net
      (loss) income
                  
                  $
                  (34.1
                  )
                  
                  $
                  17.3
                  
                  
                  $
                  (190.6
                  )
                  
                  $
                  (105.7
                  )








See
accompanying Notes to the Consolidated Financial Statements.


4


The
Reader's Digest Association, Inc. and Subsidiaries


Consolidated
Balance Sheets


(in
millions, except share and per share data)


(unaudited)





December
      31,
                  2008
                
                
                June
      30,
                  2008AssetsCurrent
      assetsCash and cash
      equivalents
                
                $
                70.2
                
                
                $
                79.4Accounts receivable,
      net
                
                
                292.7
                
                
                
                291.5Inventories
                
                
                108.9
                
                
                
                112.0Prepaid and deferred promotion
      costs
                
                
                37.2
                
                
                
                54.5Prepaid expenses and other current
      assets
                
                
                198.2
                
                
                
                157.1Assets held for
    sale
                
                
                12.6
                
                
                
                241.4Total current
    assets
                
                
                719.8
                
                
                
                935.9Property,
      plant and equipment, net
                
                
                86.8
                
                
                
                99.1Goodwill
                
                
                1,458.5
                
                
                
                1,621.2Other
      intangible assets, net
                
                
                874.1
                
                
                
                901.5Prepaid
      pension assets
                
                
                301.3
                
                
                
                290.9Other
      noncurrent assets
                
                
                124.7
                
                
                
                117.5Total assets
                
                $
                3,565.2
                
                
                $
                3,966.1Liabilities
      and stockholder’s (deficit) equityCurrent
      liabilitiesCurrent portion of long-term and
      short-term debt
                
                $
                34.8
                
                
                $
                25.6Accounts payable
                
                
                211.5
                
                
                
                229.4Accrued expenses
                
                
                245.5
                
                
                
                270.0Income taxes
    payable
                
                
                20.1
                
                
                
                26.9Unearned revenues
                
                
                410.2
                
                
                
                377.9Other current
      liabilities
                
                
                21.2
                
                
                
                10.9Liabilities held for
      sale
                
                
                10.6
                
                
                
                42.5Total current
      liabilities
                
                
                953.9
                
                
                
                983.2Long-term
      debt
                
                
                2,086.4
                
                
                
                2,091.9Unearned
      revenues
                
                
                153.9
                
                
                
                137.6Accrued
      pension
                
                
                75.7
                
                
                
                84.0Post-retirement
      and post-employment benefits other than pensions
                
                
                22.3
                
                
                
                25.5Other
      noncurrent liabilities
                
                
                397.0
                
                
                
                388.9Total liabilities
                
                $
                3,689.2
                
                
                $
                3,711.1Common
      stock (par value $1.00 per share, authorized and issued
                  1,000 shares at December 31, 2008
      and June 30, 2008)Paid-in
      capital
                
                
                1,009.9
                
                
                
                1,008.8Accumulated
      deficit
                
                
                (1,097.8
                )
                
                
                (907.2
                )Accumulated
      other comprehensive (loss) gain
                
                
                (36.1
                )
                
                
                153.4Total stockholder’s
      (deficit) equity
                
                
                (124.0
                )
                
                
                255.0Total liabilities and
      stockholder’s (deficit) equity
                
                $
                3,565.2
                
                
                $
                3,966.1





See
accompanying Notes to the Consolidated Financial Statements.


5








The
Reader's Digest Association, Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows


(in
millions)


(unaudited)





Six-months
      endedDecember
      31,2008
                
                
                2007Cash
      flows from operating activitiesNet
      loss from continuing operations
                
                $
                (121.3
                )
                
                $
                (112.3
                )Adjustments
      to reconcile net loss to changes in net cash due to continuing operating
      activities:Depreciation
      and amortization
                
                
                38.2
                
                
                
                40.0Amortization
      of debt issuance costs
                
                
                4.2
                
                
                
                4.2Net
      gain on sale of certain assets
                
                
                0.7
                
                
                
                (0.2
                )Stock-based
      compensation
                
                
                1.1
                
                
                
                5.3Changes
      in assets and liabilities, net of effects of
                  DispositionsAccounts
      receivable, net
                
                
                (38.6
                )
                
                
                (56.2
                )Inventories
                
                
                (9.7
                )
                
                
                4.9Prepaid
      and deferred promotion costs
                
                
                9.7
                
                
                
                16.1Other
      assets
                
                
                (38.4
                )
                
                
                (9.6
                )Unearned
      revenues
                
                
                77.7
                
                
                
                148.4Income
      and deferred taxes, net
                
                
                (11.2
                )
                
                
                (19.0
                )Accounts
      payable and accrued expenses
                
                
                (8.3
                )
                
                
                (38.9
                )Other
      liabilities
                
                
                (11.3
                )
                
                
                18.5Net
      change in cash due to continuing operating activities
                
                
                (107.2
                )
                
                
                1.2Net
      change in cash due to discontinued operating activities
                
                
                (25.8
                )
                
                
                (1.1
                )Net
      change in cash due to operating activities
                
                
                (133.0
                )
                
                
                0.1Cash
      flows from investing activitiesProceeds from sales of certain
      businesses, net
                
                
                108.1
                
                
                
                10.2Purchases of
      intangibles
                
                
                -
                
                
                
                (0.7
                )Capital
    expenditures
                
                
                (4.2
                )
                
                
                (13.4
                )Net
      change in cash due to continuing investing activities
                
                
                103.9
                
                
                
                (3.9
                )Cash
      flows from financing activitiesProceeds from long term
      borrowings
                
                
                400.1
                
                
                
                205.9Long-term debt
      payments
                
                
                (393.3
                )
                
                
                (133.2
                )Short-term borrowings,
      net
                
                
                11.3
                
                
                
                8.0Repurchase of preferred
      stock
                
                
                -
                
                
                
                (11.6
                )Other, net
                
                
                -
                
                
                
                (0.1
                )Total
      change in cash due to continuing financing activities
                
                
                18.1
                
                
                
                69.0Effect
      of exchange rate changes on cash
                
                
                1.8
                
                
                
                4.7Net
      change in cash and cash equivalents
                
                
                (9.2
                )
                
                
                69.9Cash
      and cash equivalents at beginning of period
                
                
                79.4
                
                
                
                50.2Cash
      and cash equivalents at end of period
                
                $
                70.2
                
                
                $
                120.1





See
accompanying Notes to the Consolidated Financial Statements.


6


The
Reader's Digest Association, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


(in
millions, except share and per share data)


(unaudited)





References
in Notes to Consolidated Financial Statements to “we,” “us,” “our,” “RDA” and
“Company” are to The Reader’s Digest Association, Inc. and its subsidiaries on a
consolidated basis.  All references to 2008 and 2007, unless otherwise
indicated, are to fiscal year 2009 and fiscal year 2008,
respectively.  Our fiscal year is the period from July 1 through June
30.





(1)           Basis
of Presentation





Description
of Our Business





We are a
global multi-brand media and marketing company that educates, entertains and
connects audiences around the world.  We are dedicated to providing
our customers with the inspiration, ideas and tools that simplify and enrich
their lives.  With offices in 45 countries and serving customers in 79
countries, we market books, magazines, educational products, recorded music
collections and home video products to a customer database of approximately 130
million names worldwide.  We sell our products worldwide through
direct marketing and direct sales channels.  Our best known trademark
is our flagship brand, Reader’s
Digest.  Our business is organized and reports across three
primary business segments: Reader’s Digest United States, Reader’s Digest
International, and School & Educational Services. For further commentary
regarding these segments, see Management’s Discussion and Analysis and Note 15,
Segments, in our Annual Report on Form 10-K.




During
the first half of fiscal 2009, we sold our home party planning business
Taste of Home Entertaining, Inc. (“TOHE”); our schools and youth fundraising
business consisting of QSP, Inc., Quality Service Programs, Inc., and their
affiliated subsidiaries in the United States and Canada (“QSP”); and the
principal operating assets of Books Are Fun, Ltd. (“BAF”), our display-marketing
business, in connection with our exit of this business. As a result, TOHE,
QSP and BAF are classified as discontinued operations for all periods presented
in the consolidated financial statements.   See Note 3,
Discontinued Operations, for more information.





Basis
of Presentation





The
accompanying consolidated financial statements as of December 31, 2008 and 2007
and for the three and six-months then ended includes the accounts of The
Reader’s Digest Association, Inc. and its majority-owned subsidiaries including
the predecessor entities WRC Media Inc. (“WRC Media”) and Direct Holdings U.S.
Corp. (“Direct Holdings”).  We and our majority owned subsidiaries are
owned by RDA Holding Co., an entity controlled by Ripplewood Holdings L.L.C.
(“Ripplewood”).





On
January 23, 2007, RDA Holding Co. (a Ripplewood controlled entity), WRC
Acquisition Co. (a subsidiary of RDA Holding Co.) and WRC Media entered into a
merger agreement that provided for WRC Acquisition Co. to merge with and into
WRC Media, with WRC Media being the surviving corporation (the “WRC Media
Merger”).  An investment fund affiliated with Ripplewood acquired its
original interest in WRC Media in 1999 and had at the time of the WRC Media
Merger approximately a 46% economic interest and a majority voting interest in
WRC Media.  The merger consideration of $100.7 paid to WRC Media’s
existing stockholders to acquire all the common stock of WRC Media at the
closing of the WRC Merger on March 2, 2007 included a combination of RDA Holding
Co. common stock of $80.6, RDA Holding Co. junior pay-in-kind preferred stock of
$20.0 and cash of $0.1.


7





On
January 23, 2007, RDA Holding Co. entered into a stock acquisition agreement to
acquire all the common stock of Direct Holdings in exchange for shares of common
stock of RDA Holding Co. and net cash totaling $56.7 (the “Direct Holdings Stock
Acquisition”).  An investment fund affiliated with Ripplewood acquired
its original interest in Direct Holdings in December 2003 and had at the
time of the Direct Holdings Stock Acquisition approximately an 84% voting and
economic interest in Direct Holdings.  The net consideration of $56.7
paid at the closing of the Direct Holdings Stock Acquisition on March 2, 2007
included a combination of RDA Holding Co. common stock of $50.1 and net cash of
$6.6.Under the
terms of the stock acquisition agreement, a purchase price adjustment was
required to be made in January 2008, which resulted in the issuance of
additional RDA Holding Co. common stock of $0.7 and payment of cash of $0.1 to
the shareholders of Direct Holdings.





On March
2, 2007, RDA Holding Co. acquired The Reader’s Digest Association, Inc. pursuant
to a Merger Agreement dated November 16, 2006 among The Reader’s Digest
Association, Inc., RDA Holding Co. and Doctor Acquisition Co. (a wholly owned
subsidiary of RDA Holding Co.) (the “RDA Merger Agreement”).  Pursuant
to the RDA Merger Agreement, Doctor Acquisition Co. was merged with and into The
Reader’s Digest Association, Inc., with The Reader’s Digest Association, Inc.
being the surviving corporation (the “Acquisition Transaction”).  In
the Acquisition Transaction, each outstanding share of common stock of The
Reader’s Digest Association, Inc. (except those held in treasury) was converted
into the right to receive $17.00 in cash and each outstanding share of Doctor
Acquisition Co. was converted into one share of common stock of The Reader’s
Digest Association, Inc., as the surviving corporation.  Prior to the
Acquisition Transaction, The Reader’s Digest Association, Inc. was a publicly
traded company listed on the New York Stock Exchange.  Upon the
closing of the Acquisition Transaction, RDA Holding Co. became the owner of all
the issued and outstanding common stock of The Reader’s Digest Association,
Inc., as the surviving corporation of the Acquisition Transaction. Concurrently,
with the closing of The Reader’s Digest Association, Inc. acquisition on March
2, 2007, RDA Holding Co. contributed all of the outstanding shares of WRC Media
and Direct Holdings to The Reader’s Digest Association, Inc.





Prior to
the acquisition of The Reader’s Digest Association, Inc., investment funds
affiliated with Ripplewood controlled a majority of the voting rights in both
WRC Media and Direct Holdings.  WRC Media is treated as the
predecessor company since Ripplewood acquired its controlling ownership position
in WRC Media in 1999, prior to its ownership position in Direct Holdings and The
Reader’s Digest Association, Inc. The combination of WRC Media and Direct
Holdings for the periods prior to March 2, 2007 was accounted for using the
accounting method prescribed in the Statement of Financial Accounting Standard
(“SFAS”) No. 141, Business Combinations, (“SFAS
141”) for a combination of entities under common control.





The
acquisition of The Reader’s Digest Association, Inc. by RDA Holding Co. was
accounted for using the purchase method of accounting prescribed in SFAS
141.Accordingly, the
consolidated results of The Reader’s Digest Association, Inc. are included in
the consolidated financial statements from the acquisition date on March 2, 2007
and include the pushdown of purchase consideration from RDA Holding
Co.





The
consolidated financial statements include all companies that RDA directly
controls.  All significant intercompany accounts and transactions have
been eliminated for all periods presented in the consolidated financial
statements.





We report
on a fiscal year that begins July 1.  The three and six-months ended
December 31, 2008 and 2007 are the first and second fiscal quarters of 2009 and
2008, respectively.


8





Use
of Estimates and Interim Reporting





The
unaudited interim consolidated financial statements included in this Form 10-Q
should be read in conjunction with the audited consolidated financial statements
and accompanying notes that are included in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2008. These statements, in the opinion of
management, have been prepared following the requirements of the Securities and
Exchange Commission and generally accepted accounting principles in the United
States of America (“GAAP”) for interim reporting, applying certain assumptions
and estimates, including all adjustments considered necessary to present such
information fairly.  Operating results for any interim period are not
necessarily indicative of the results for an entire year due to the seasonality
of our business among other things.  In preparing the consolidated
financial statements in conformity with GAAP, we must make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial statements and
during the reporting period.  Actual results could differ from those
estimates.





Reclassifications





Certain
amounts in the Company’s prior period consolidated financial statements have
been reclassified to conform to the presentation as of and for the three and
six-months ended December 31, 2008.  Such amounts include the
Company’s reclassification of assets and liabilities held for sale and
discontinued operations.





Recent
Accounting Standards





In
December 2007, the Financial Accounting Standards Board (“FASB”) SFAS No.
141(R), Business
Combinations.  SFAS 141(R) clarifies the accounting for
business combinations and provides additional guidance on disclosure
requirements.  SFAS 141(R) will require the recognition of 100% of the
fair values of assets acquired, liabilities assumed and non-controlling
interests in acquisitions of less than 100% controlling interest when the
acquisition constitutes a change in control in the acquired entity, all
acquisition-related transaction costs will be expensed as incurred and will
require the expensing of acquisition-related restructuring costs as incurred
unless the criteria in SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities are met, as of the acquisition
date.  SFAS 141(R) is effective for business combination
transactions for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  We are currently evaluating the provisions of SFAS 141(R) and
plan on adopting this new standard, as required, beginning July 1,
2009.  The impact of this standard will be dependent on the level of
our acquisitions in the future and the level of adjustments to our tax estimates
related to prior acquisitions.





In
March 2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures
concerning (1) the manner in which an entity uses derivatives (and the
reasons it uses them), (2) the manner in which derivatives and related
hedged items are accounted for under SFAS No. 133 and interpretations
thereof, and (3) the effects that derivatives and related hedged items have
on an entity’s financial position, financial performance, and cash flows. The
standard is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008.  We are
currently evaluating the potential impact of adopting SFAS 161.





In
December 2008, the FASB Issued FASB Staff Position (“FSP”) SFAS No. 132(R)-1
(FSP 132(R)) Employers’
Disclosures about Postretirement Benefit Plan Assets.  FSP
132(R) provides enhanced guidance on employer’s disclosures about plan assets of
a defined benefit pension or other post retirement plan.  The standard
is effective for financial statements issued for fiscal years ending after
December 15, 2009.  We do not expect the impact of this FSP to
have a material impact on our financial statements.


9





(2) Acquisition of The Reader’s
Digest Association, Inc.





On March
2, 2007, RDA Holding Co. acquired 100% of the outstanding common stock of The
Reader’s Digest Association, Inc. for $1,517.1; net of cash acquired of $119.6,
plus capitalized transaction costs of $36.0. In connection with the Acquisition
Transaction, certain holders of preferred stock executed their preferred stock
appraisal rights.





In
October 2007, we reached an agreement to redeem 26,725, 83,783 and 87,083 shares
of preferred stock, second preferred stock and third subordinated preferred
stock, respectively, for an aggregate of approximately $11.6.





In
January 2008, we reached an agreement to redeem 2,995, 19,937 and 67,939 shares
of first preferred stock, second preferred stock and third subordinated
preferred stock, respectively, for $5.7 million.  Each share of
preferred stock repurchased was automatically canceled; therefore, at June 30,
2008 and December 31, 2008, there were no shares of preferred stock issued or
outstanding.





(3) Discontinued
Operations




During
fiscal 2009, we sold our home party-planning business TOHE; our schools and
youth fundraising business QSP, Inc.; and sold the principal operating
assets of BAF, RDA’s display-marketing business, in connection with the exit of
the business.




The TOHE
transaction closed on July 23, 2008.  Consideration for such sale was a
$1.0 subordinated note payable in four years, plus interest and an earnout based
upon the year-four operating profits generated by the TOHE business. The QSP
transaction closed on August 22, 2008, for a purchase price of $110.0. The BAF
transaction closed on December 19, 2008 and included the sale of intellectual
property and product inventory for consideration of $16.8, subject to the
finalization of certain audit-related adjustments.  The $16.8 is
payable over three years, plus 7% interest, with principal repayments of $9.3,
$5.0, and $2.5, paid in calendar years 2009, 2010 and 2011,
respectively.





The
businesses each qualify as a discontinued operation component of RDA under SFAS
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.  RDA has reported
the results of operations and consolidated financial position of these
businesses in discontinued operations within the Consolidated Statement of
Operations, Consolidated Balance Sheets and Consolidated Statement of Cash Flows
for all periods presented.





10


The net
(loss) income from discontinued operations, net of taxes, were as
follows:




Three-months
      ended
                  
                  
                  Six-months
      endedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenues:
                  
                  $
                  44.6
                  
                  
                  $
                  184.9
                  
                  
                  $
                  60.8
                  
                  
                  $
                  239.4(Loss)
      income from operations before incometaxes,
      net
                  
                  
                  (6.1
                  )
                  
                  
                  27.9
                  
                  
                  
                  (75.2
                  )
                  
                  
                  6.0Income
      tax expense (benefit) on discontinuedoperations
                  
                  
                  1.6
                  
                  
                  
                  (0.4
                  )
                  
                  
                  (1.7
                  )
                  
                  
                  (0.6
                  )(Loss)
      Income from discontinued operations,net
      of tax
                  
                  
                  (7.7
                  )
                  
                  
                  28.3
                  
                  
                  
                  (73.5
                  )
                  
                  
                  6.6Loss
      on dispositions, net of taxes
                  
                  
                  (5.0
                  )
                  
                  
                  -
                  
                  
                  
                  (7.0
                  )
                  
                  
                  -Curtailment
      of pension and postretirementbenefits
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11.2
                  
                  
                  
                  -Net
      (Loss) income from discontinuedoperations,
      net of taxes
                  
                  $
                  (12.7
                  )
                  
                  $
                  28.3
                  
                  
                  $
                  (69.3
                  )
                  
                  $
                  6.6


The
consummation of these transactions resulted in a net loss of $5.0 and $7.0 for
the three and six-months ended December 31, 2008.  These losses are
reported in the Loss from discontinued operations, net of taxes and were
calculated as follows:


Three-months
      ended
                    December
      31, 2008
                  
                  
                  Six-months
      ended
                    December
      31, 2008Sale
      price
                  
                  $
                  16.8
                  
                  
                  $
                  126.8Less:  Cash
      on hand
                  
                  
                  -
                  
                  
                  
                  (1.9
                  )Net
      sale proceeds
                  
                  
                  16.8
                  
                  
                  
                  124.9Net
      assets sold
                  
                  
                  21.4
                  
                  
                  
                  97.6Associated
      intangible assets
                  
                  
                  -
                  
                  
                  
                  45.1Transaction
      costs
                  
                  
                  0.4
                  
                  
                  
                  4.3Loss
      on dispositions
                  
                  
                  (5.0
                  )
                  
                  
                  (22.1
                  )Income
      tax benefit
                  
                  
                  -
                  
                  
                  
                  (15.1
                  )Net
      loss
                  
                  $
                  (5.0
                  )
                  
                  $
                  (7.0
                  )


At December
31, 2008, Accumulated other comprehensive loss in the amount of $11.2 was
attributable to the curtailment of pension and postretirement benefits for
QSP.  The gain was removed from Accumulated other comprehensive loss
upon the disposition of QSP and reflected in Loss from discontinued operations,
net of taxes.


11


The
carrying amounts of the major classes of assets and liabilities included in the
Assets held for sale and Liabilities held for sale in the Consolidated Balance
Sheets at December 31, 2008 and June 30, 2008 were as follows:





December
      31,
                
                
                June
      30,2008
                
                
                2008Accounts
      receivable, net
                
                $
                6.1
                
                
                $
                12.7Inventory,
      net
                
                
                -
                
                
                
                78.6Other
      assets
                
                
                6.5
                
                
                
                31.0Goodwill
      and other intangible assets, net
                
                
                -
                
                
                
                119.1Total assets held for
      sale
                
                $
                12.6
                
                
                $
                241.4Total
      liabilities held for sale
                
                $
                10.6
                
                
                $
                42.5





(4)  Recent
Accounting Standards Adopted





We
adopted the provisions of SFAS No. 157, Fair Value Measurements
(“SFAS 157”) on July 1, 2008. We recorded no change to our opening balance of
retained earnings as of July 1, 2008 as we do not hold any financial
instruments requiring retrospective application per the provisions of SFAS
157.





Fair
Value Hierarchy




SFAS 157
specifies a hierarchy of valuation techniques based upon whether the inputs to
those valuation techniques reflect assumptions other market participants would
use based upon market data obtained from independent sources (observable inputs)
or reflect our own assumptions of market participant valuation (unobservable
inputs). In accordance with SFAS 157, these two types of inputs have created the
following fair value hierarchy:




Level
      1
            Quoted
      prices in active markets that are unadjusted and accessible at
      the
              measurement
      date for identical, unrestricted assets or liabilities;Level
      2
            Quoted
      prices for identical assets and liabilities in markets that are not
      active,
              quoted
      prices for similar assets and liabilities in active markets or
      financial
              instruments
      for which significant inputs are observable, either directly
      or
              indirectly;Level
      3
            Prices
      or valuations that require inputs that are both significant to the fair
      value
              measurement
      and unobservable.




SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort.





Measurement
of Fair Value




When
available, we use unadjusted quoted market prices to measure fair value and
classify such items within Level 1. If quoted market prices are not available,
fair value is based upon internally developed models that use, where possible,
current market-based or independently-sourced market parameters such as interest
rates and currency rates and classifies such items within Level 2. If quoted
market prices are not available, the valuation model used generally depends on
the specific asset or liability being valued. The determination of fair value
considers various factors including interest rate yield curves and time value
underlying the financial instruments and classifies such items
within


Level
3.


12





We have
interest rate swaps, fully described in Note 9, Derivatives Instruments, which
are fair valued as required by SFAS 157 and fall into level 2 of the fair value
hierarchy. We evaluate whether the creditworthiness of each swap counterparty is
such that default on its obligations under the swap is not
probable.  We also assess whether the LIBOR-based interest payments
are probable of being paid under the loans at the inception and, on an ongoing
basis (no less than once each quarter), during the life of each hedging
relationship. In addition, we use six independent sources to ascertain market
values for financial instruments.





(5)           Inventories





Inventory balances consisted of the
following:





December
      31,
                  2008
                
                
                June
      30,
                  2008Raw
      materials
                
                $
                16.6
                
                
                $
                11.2Work-in-progress
                
                
                4.5
                
                
                
                4.9Finished
      goods
                
                
                87.8
                
                
                
                95.9Total
      inventories
                
                $
                108.9
                
                
                $
                112.0





(6)           Goodwill





The
changes in the carrying amount of goodwill for the six-months ended December 31,
2008 are as follows:





Reader’s
      Digest United States
                
                
                Reader’s
      Digest International
                
                
                School
      & Educational Services
                
                
                TotalBalance
      as of June 30, 2008
                
                $
                597.7
                
                
                $
                987.5
                
                
                $
                36.0
                
                
                $
                1,621.2Adjustments
      to the fair values ofassets
      acquired and liabilitiesassumed
      at March 2, 2007
                
                
                (4.9
                )
                
                
                (4.7
                )
                
                
                (0.4
                )
                
                
                (10.0
                )Currency
      translation adjustment
                
                
                -
                
                
                
                (152.7
                )
                
                
                -
                
                
                
                (152.7
                )Balance
      as of December 31, 2008
                
                $
                592.8
                
                
                $
                830.1
                
                
                $
                35.6
                
                
                $
                1,458.5





The
adjustments to the fair values of assets acquired and liabilities assumed in
connection with the Acquisition Transaction on March 2, 2007, made subsequently
to June 30, 2008, primarily consist of changes in estimates related to
restructuring and other tax related liabilities.





(7)           Other
Operating Items, Net





Items
included in Other Operating Items, net for the six-months ended December 31,
2008 and 2007, principally consist of: 1) restructuring charges, representing
the streamlining of our organizational structure and 2) contractual charges
related to the strategic repositioning of our businesses.


13


The table
below reflects changes for the six-months ended December 31, 2008 to our
restructuring accruals.


Severance
                
                
                Contractual
      Obligations
                
                
                TotalBalance
      at June 30, 2008
                
                $
                12.5
                
                
                $
                6.8
                
                
                $
                19.3FY09
      InitiativesAccruals
                
                
                16.6
                
                
                
                0.9
                
                
                
                17.5Spending
                
                
                (0.3
                )
                
                
                -
                
                
                
                (0.3
                )FY08
      and Prior InitiativesAccruals
                
                
                -
                
                
                
                -
                
                
                
                -Spending
                
                
                (6.3
                )
                
                
                (0.3
                )
                
                
                (6.6
                )Other
                
                
                (3.1
                )
                
                
                -
                
                
                
                (3.1
                )Balance
      at December 31, 2008
                
                $
                19.4
                
                
                $
                7.4
                
                
                $
                26.8





During
the six-months ended December 31, 2008, we recorded new charges of $17.5
principally related to severance costs attributable to the planned outsourcing
of our IT function.  Other largely relates to changes in estimates for
previously established restructuring reserves at the date of the
acquisition.





(8)           Debt





2007
Credit Agreement and Senior Subordinated Notes





As fully
described in Note 12, Debt, to the consolidated financial statements included in
our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, our
borrowings include proceeds under our six-year senior secured $300.0 revolving
credit facility, a seven-year $1,310.0 term loan (collectively, the “2007 Credit
Agreement”) and $600.0 in 9% Senior Subordinated Notes due 2017.





At
December 31, 2008 and June 30, 2008, $206.0 and $192.5, respectively, was
outstanding under the revolving credit facility; $1,188.8 and $1,194.9,
respectively, was outstanding under the term loan in the United States; $104.0
and $117.8, respectively, was outstanding under the term loan made available to
one of our German subsidiaries; $600.0 was outstanding under the Senior
Subordinated Notes.  Additionally, other obligations of $0.9 were
outstanding at December 31, 2008.





Interest
expense for the three-months ended December 31, 2008 and 2007 was $40.0 and
$46.8, respectively, including amortization of deferred financing fees $2.1 for
each period.  Interest expense for the six-months ended December 31,
2008 and 2007 was $80.7 and $92.3, respectively, including the amortization of
deferred financing fees of $4.2 for each period.  The weighted average
interest rate on our borrowings for both the three and six-months ended December
31, 2008 and 2007 was 6.8% and 7.7%, respectively.





Lines
of Credit and Overdraft Facilities





As of
December 31, 2008 and June 30, 2008, international lines of credit and overdraft
facilities totaled $45.1 and $55.1, respectively, of which $21.5 and $12.3 were
outstanding.  The weighted average interest rates on outstanding
borrowings at December 31, 2008 and June 30, 2008 were 3.3% and 5.5%,
respectively. These lines of credit are subject to renewal annually. As of both
December 31, 2008 and June 30, 2008, there were $2.6 of stand-by letters of
credit serving as security for real estate leases entered into by WRC Media and
$2.0 held as security for a surety bond related to sweepstakes
promotions.   There were no trade letters of credit as of December 31,
2008 and as of June 30, 2008, there were trade letters of credit of
$0.8.


14





(9)           Derivative
Instruments





As
described in Note 8, Financial Instruments, to the consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2008, on April 19, 2007, we entered into interest rate swap agreements
with a notional value totaling $750.0, involving the exchange of floating for
fixed-rate interest payments, to reduce interest rate volatility and to comply
with the interest rate hedging provisions of our 2007 Credit
Agreement.  The transactions included $450.0 of 3-year interest rate
swaps and $300.0 of 5-year interest rate swaps.  In each case, we will
receive floating-rate interest payments that offset the LIBOR component of the
interest due on some of our floating-rate debt and make fixed-rate interest
payments over the life of the respective interest rate swaps.  The
fixed interest rate under the 3-year swaps is 4.89% and the fixed interest rate
under the 5-year swaps is 4.94%.





Additionally,
we evaluate whether the creditworthiness of each swap counterparty is such that
default on its obligations under the swap is not probable.  We also
assess whether the LIBOR-based interest payments are probable of being paid
under the loans at the inception and, on an ongoing basis (no less than once
each quarter), during the life of each hedging relationship.





During
the three-months ended December 31, 2008 and 2007, the fair market value of our
interest rate swaps decreased, resulting in an unrealized loss of $19.2 and
$11.0, respectively, net of deferred tax benefits of $11.4 and $6.5,
respectively. For the six-months ended December 31, 2008 and 2007, the fair
market value of our interest rate swaps decreased, resulting in an unrealized
loss of $20.2 and $20.9, respectively, net of deferred tax benefits of $12.1 and
$12.5, respectively.  These changes are reported in Accumulated other
comprehensive (loss) gain, which is included in Stockholder’s (deficit) equity
on the December 31, 2008 and June 30, 2008 balance sheets.





(10)           
Income
Taxes





During
the six-months ended December 31, 2008 and 2007, we recorded an income tax
expense (benefit) of $13.8 and $(8.5), respectively. The increase in the tax
provision from December 2007 to December 2008 primarily relates to the tax
liability on our foreign earnings and the establishment of deferred tax
liabilities for which no current benefit is allowed due to the establishment of
valuation allowance on our net operating loss carryforwards.  A
discrete income tax benefit of $(1.0) was recorded in the six-months ended
December 31, 2008 principally related to a change in an opening deferred tax
balance of a foreign subsidiary.




The
deferred tax assets related to the net operating losses, alternative minimum tax
credits and foreign tax credits of our domestic companies and certain net
operating losses of our foreign companies have been fully offset with valuation
allowances as we have determined it more likely than not that the benefit of
these assets will not be realized.  On an ongoing basis, we reassess
the need for such valuation allowances based on recent operating results, its
assessment of the likelihood of future taxable income and developments in the
relevant tax jurisdictions.


15




In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of SFAS 109 (“FIN 48”).  Among other
things, FIN 48 provides guidance to address uncertainty in tax positions and
clarifies the accounting for income taxes by prescribing a minimum recognition
threshold which income tax positions must achieve before being recognized in the
financial statements.  We adopted FIN 48 on October 1, 2007, and were
not required to record a change to retained earnings due to the adoption. The
amount of unrecognized tax benefits, including interest, from uncertain tax
positions at December 31, 2008 is $33.1 including $18.4 of unrecognized tax
benefits, that, if recognized, would impact the effective tax rate and $14.7 of
tax positions arising from business combinations that, if recognized, would be
recorded as an adjustment to goodwill and would not impact the effective tax
rate.  During the quarter ended December 31, 2008, we favorably
resolved various domestic and foreign income tax audits resulting in the
reduction of uncertain tax positions amounting to $11.6, $2.9 of which adjusts
goodwill and the balance of $8.7 was offset by fully reserved deferred tax
assets.  Furthermore, for the six-months ended December 31, 2008, we
recorded $9.1 of additional uncertain tax positions, which were offset by fully
reserved deferred tax assets.  We recognize interest and, if
applicable, penalties which could be assessed related to unrecognized tax
benefits in income tax expense.




As of
October 2008, the Company has settled the federal IRS audits for the tax years
ended June 30, 2004 and June 30, 2005.  The settlement of these audits
did not have a material affect on the Company’s financial statements for the
six-months ending December 31, 2008.  The Company continues to have
routine ongoing income tax audits in various taxing jurisdictions.




We
consider many factors when evaluating and estimating our tax positions and tax
benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes.   It is reasonably possible that the
amount of the unrecognized benefit with respect to certain of our unrecognized
tax positions will significantly increase or decrease within the next twelve
months. These changes may be the result of the settlement of ongoing audits or
final decisions in transfer pricing matters. At this time, an estimate of the
range of the reasonably possible outcomes cannot be made.


16





(11)           Accumulated
other comprehensive (loss) gain





Accumulated
other comprehensive (loss) gain as reported in our balance sheets represents,
foreign currency translation adjustments, the unrealized loss on our derivatives
and deferred pension liabilities and other retirement benefits.  The
components of other comprehensive (loss) gain, net of related tax, for the three
and six-months ended December 31, 2008 and 2007 were as follows:





Three-months
      ended
                
                
                Six-months
      endedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      (loss) income
                
                $
                (34.1
                )
                
                $
                17.3
                
                
                $
                (190.6
                )
                
                $
                (105.7
                )Change
      in:Foreign
      currency translation adjustments
                
                
                (88.0
                )
                
                
                0.5
                
                
                
                (162.3
                )
                
                
                (1.2
                )Unrealized
      loss on derivatives, net of  deferred tax benefits of $11.4 and
      $6.5, respectively, for the  three-months ended
      December  31, 2008 and 2007 and $12.1 and $12.5, respectively,
      for the six-months ended December 31, 2008 and 2007
                
                
                (19.2
                )
                
                
                (11.0
                )
                
                
                (20.2
                )
                
                
                (20.9
                )Deferred
      pension liabilities and other retirement benefits, net of deferred tax
      benefit of $(4.2)
                
                
                -
                
                
                
                -
                
                
                
                (7.0
                )
                
                
                -Accumulated other
      comprehensive (loss) gain
                
                $
                (141.3
                )
                
                $
                6.8
                
                
                $
                (380.1
                )
                
                $
                (127.8
                )





(12)             Equity-Based
Compensation





In July
2007, upon the recommendation of the Compensation Committee of our Board of
Directors, the Board of Directors of RDA Holding Co. (the “Holding Co. Board”)
approved the RDA Holding Co. 2007 Omnibus Incentive Compensation Plan (the “2007
Plan”).  All of our prior existing employee incentive compensation
plans were terminated upon the completion of the Acquisition
Transaction.  Under the 2007 Plan, the Holding Co. Board may grant to
eligible directors, employees and consultants stock options, stock appreciation
rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and
other equity-based or equity related awards in RDA Holding Co. that the Holding
Co. Board determines, in consultation with the Compensation Committee of our
Board of Directors, are consistent with the purpose of the 2007 Plan and our
best interests.  The Holding Co. Board may grant up to a maximum of
5.0 million shares under the 2007 Plan, net of forfeitures and
expirations.  During the first quarter of fiscal 2009, the Board of
Directors amended the 2007 Plan to increase the number of shares available for
grant by 0.4 million, to 5.4 million, net of forfeitures and
expirations.





During
the six-months ended December 31, 2008 the Holding Co. Board granted
approximately 0.5 million stock options. There were no stock options granted
during the three-months ended December 31, 2008. During the three and six-months
ended December 31, 2008, 0.02 and 0.04 million shares of restricted stock and
0.01 and 0.03 million shares of restricted stock units, respectively, were
granted to certain directors, employees and consultants of our
company.  During the three and six-months ended December 31, 2007 the
Holding Co. Board granted approximately 2.3 and 3.3 million stock options, 0.2
and 1.3 million shares of RSAs and 0.2 and 0.4 million shares of RSUs to certain
directors, employees and consultants of our company,
respectively.


17


In
general, granted stock options vest over four years, have 10-year contractual
terms and are exercisable upon the occurrence of certain liquidity events, as
defined in the 2007 Plan.  The weighted average exercise price of all
stock options granted is $10.00.  The exercise price of all options
was deemed equal to the estimated market value of RDA Holding Co.’s common stock
at the date of grant.  The weighted average grant date fair value of
RSAs and RSUs granted during the three-months ended December 31, 2008 and
December 31, 2007 are $9.95 and $10.00, respectively.  The weighted
average grant date fair value of RSAs and RSUs for the six-months ended December
31, 2008 and December 31, 2007 is $9.98 and $10.00, respectively.  In
general, 50% of granted RSAs and RSUs become vested upon the occurrence of a
liquidity event, as defined, and the other 50% upon the first anniversary of the
occurrence of a liquidity event.





The fair
value of each stock option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table.  As there is no public market for RDA Holding Co.’s
stock, the expected volatility was based on the average volatility of historical
closing stock prices of comparable guideline companies over the expected term of
the option. The risk-free interest rate for the periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. The expected term of options granted is based upon management’s
estimate for the period of time for which options are expected to be
outstanding. We have no historical stock option exercise experience and have
estimated the expected term of options using the vesting period of the options,
the expected period to consummate a liquidity event and the mid-point between
the vesting date and the end of the contractual term.







Three-months
      ended
                    
                    
                    Six-months
      endedDecember
      31,
                    
                    
                    December
      31,Assumptions
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Expected
      volatility
                    
                    
                    N/A
                    
                    
                    
                    32.38%
      - 41.97
                    %
                    
                    
                    40.66
                    %
                    
                    
                    32.38%
      - 41.97
                    %Expected term
      (years)
                    
                    
                    N/A
                    
                    
                    
                    4-6
                    
                    
                    
                    6
                    
                    
                    
                    4-6Risk-free interest
      rate
                    
                    
                    N/A
                    
                    
                    
                    4.13%
      - 5.05
                    %
                    
                    
                    2.68
                    %
                    
                    
                    4.13%
      - 5.05
                    %Expected dividendyield
                    
                    
                    N/A
                    
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %


A summary
of stock option activity under the 2007 Plan for the six-months ended December
31, 2008 is as follows:




Shares
                    (000’s)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  Weighted
                    Average
                    Remaining
      Contractual TermOptionsOutstanding
      at June 30, 2008
                  
                  
                  2,991
                  
                  
                  $
                  10.00
                  
                  9.2
      yearsGranted
                  
                  
                  509
                  
                  
                  
                  10.00Forfeited
      or expired
                  
                  
                  (185
                  )
                  
                  
                  10.00Outstanding
      at December 31, 2008
                  
                  
                  3,315
                  
                  
                  
                  10.00
                  
                  8.8
      yearsVested
      or expected to vest at December 31, 2008
                  
                  
                  3,315
                  
                  
                  
                  10.00
                  
                  8.8
      yearsExercisable
      at December 31, 2008
                  
                  
                  1,470
                  
                  
                  $
                  10.00
                  
                  8.7
      years
 18





The
weighted-average fair value of options granted during the six-months ended
December 31, 2008 was $4.31. There were no options granted during the
three-months ended December 31, 2008.  The weighted average fair value
of options granted during both the three and six-months ended December 31, 2007
was $4.58.  No options were exercised during the six-months ended
December 31, 2008.





A summary
of RSAs and RSUs activity under the 2007 Plan for the six-months ended December
31, 2008 is as follows:




RSAs
              
              
              RSUsShares
      (000’s)
              
              
              Weighted
      Average Grant-Date
                Fair
      Value
              
              
              Shares
      (000’s)
              
              
              Weighted
      Average Grant-Date
                Fair
      ValueNonvested
      at June 30, 2008
              
              
              1,008
              
              
              $
              10.00
              
              
              
              230
              
              
              $
              10.00Granted
              
              
              37
              
              
              
              9.98
              
              
              
              31
              
              
              
              9.98Vested
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (211
              )
              
              
              10.00
              
              
              
              (13
              )
              
              
              10.00Nonvested
      at December 31, 2008
              
              
              834
              
              
              $
              10.00
              
              
              
              248
              
              
              $
              10.00





Stock
based compensation expense is pushed down to us from RDA Holding
Co.  For the three-months ended December 31, 2008, stock based
compensation expense of $0.5 and the related income tax benefit of $0.2, was
recognized for stock options and RSUs that are not subject to the liquidity
event provisions of the 2007 Plan. For the six-months ended December 31, 2008,
stock based compensation expense of $1.1 and the related income tax benefit of
$0.4, was recognized for stock options and RSUs that are not subject to the
liquidity event provisions of the 2007 Plan.  Total unrecognized
compensation expense related to stock awards without a liquidity event
provision, as defined, was $2.7, which will be recognized over a weighted
average period of 2.16 years on a straight-line basis over the requisite service
period for each separately vesting portion of the stock option
award.





As of
December 31, 2008, it was determined that it was not probable that the liquidity
event, as defined, will be satisfied. As of December 31, 2008, total stock
options, RSAs and RSUs outstanding with these liquidity provisions was 1.3
million, 0.8 million and 0.2 million, respectively. As a result, no compensation
expense was recognized during the three or six-months ended December 31, 2008 or
December 31, 2007 for stock options, RSAs and RSUs with liquidity event
provisions.  Total unrecognized compensation expense related to these
stock options, RSAs and RSUs for the period ending December 31, 2008 are $6.2,
$8.3 and $2.5, respectively.  Total unrecognized compensation expense
related to these stock options, RSAs and RSUs for the period ended December 31,
2007 were $6.4, $12.0 and $2.2, respectively.





(13)           Pension
Information





We
sponsor various pension and postretirement benefit plans, including those for
employees in the United States, international employees and supplemental plans
for executives.


19







In fiscal
year 2008, our other postretirement benefit plan was changed to cap the company
subsidy for plan participants retiring after 1985. The subsidy will be
eliminated after 10 years for pre-Medicare coverage, and after 5 years for
post-Medicare coverage. The company may continue to offer benefits after this
period, but all costs would be paid by the retirees.  In addition,
effective July 1, 2008, the U.S. qualified and excess pension plans were
harmonized for all participants who benefit under the plans.





The table
below details the components of our net periodic pension benefit:





Three-months
      ended
                
                
                Six-months
      endedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Service
      cost
                
                $
                2.4
                
                
                $
                4.2
                
                
                $
                5.1
                
                
                $
                8.2Interest
      cost
                
                
                11.7
                
                
                
                12.5
                
                
                
                24.2
                
                
                
                25.0Expected
      return on plan assets
                
                
                (19.8
                )
                
                
                (21.0
                )
                
                
                (40.5
                )
                
                
                (41.8
                )Amortization
      of prior service credit
                
                
                -
                
                
                
                -
                
                
                
                (0.1
                )
                
                
                -Recognized
      actuarial gain
                
                
                (0.5
                )
                
                
                (0.1
                )
                
                
                (1.1
                )
                
                
                (0.2
                )Curtailments
                
                
                -
                
                
                
                (0.1
                )
                
                
                -
                
                
                
                (1.1
                )Net periodic pension
      benefit
                
                $
                (6.2
                )
                
                $
                (4.5
                )
                
                $
                (12.4
                )
                
                $
                (9.9
                )





For the
three-months ended December 31, 2008 and December 31, 2007 approximately $1.7
and $2.0, respectively, was contributed to our international pension
plans.   For the six-months ended December 31, 2008 and December
31, 2007 approximately $3.5 and $4.1, respectively, was contributed to our
international pension plans.  Because our retirement plan in the
United States is over-funded, we did not make any contributions during the three
or six-months ended December 31, 2008.  The U.S. supplemental
retirement plans are not qualified under the Internal Revenue Code because they
are available only to certain executives.  We pay the benefits under
these unfunded plans as the obligations are incurred.  For the
three-months ended December 31, 2008 and 2007 we paid $1.9 and $1.7,
respectively.  We paid $4.2 and $5.1 during the six-months ended
December 31, 2008 and December 31, 2007, respectively.





We also
sponsor certain postretirement benefit plans in the U.S. and
Canada.  The table below details the components of our net periodic
postretirement cost:





Three-months
      ended
                  
                  
                  Six-months
      endedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Service
      cost
                  
                  $
                  0.1
                  
                  
                  $
                  0.1
                  
                  
                  $
                  0.1
                  
                  
                  $
                  0.3Interest
      cost
                  
                  
                  0.5
                  
                  
                  
                  1.0
                  
                  
                  
                  0.9
                  
                  
                  
                  1.9Amortization
      of prior service credit
                  
                  
                  (0.6
                  )
                  
                  
                  -
                  
                  
                  
                  (1.0
                  )
                  
                  
                  -Recognized
      actuarial gain
                  
                  
                  (0.4
                  )
                  
                  
                  -
                  
                  
                  
                  (0.8
                  )
                  
                  
                  -Net periodic postretirement(benefit)
      cost
                  
                  $
                  (0.4
                  )
                  
                  $
                  1.1
                  
                  
                  $
                  (0.8
                  )
                  
                  $
                  2.2





20





(14)           Revenues
and Operating (Loss) Profit by Reportable Segment





The
accounting policies of our segments are the same as those described in Note 15,
Segments, in the consolidated financial statements included in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2008.  See
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS – Our Reportable Segments” in this Quarterly Report for additional
information on our segment reporting.





Reportable
segments are based on our method of internal reporting.  We present
our segments’ revenues as if the intercompany transactions were with third
parties.  Revenues and expenses attributable to intercompany
transactions are eliminated to reconcile our reportable segment amounts to
consolidated amounts, as reported in our consolidated statements of
operations.





As
described in Note 3, Discontinued Operations, we sold TOHE, QSP and
BAF.  TOHE was part of the Reader’s Digest United States reporting
segment. QSP and BAF were part of the School & Educational Services
reporting segment.  As a result, these entities have been removed from
the December 31, 2008 and December 31, 2007 results and are now presented as
Discontinued Operations.





Three-months
      ended
                
                
                Six-months
      endedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007RevenuesReader’s Digest United
      States
                
                $
                222.5
                
                
                $
                236.1
                
                
                $
                395.4
                
                
                $
                428.4Reader’s Digest
      International
                
                
                404.0
                
                
                
                478.9
                
                
                
                756.6
                
                
                
                831.9School & Educational
      Services
                
                
                24.6
                
                
                
                33.7
                
                
                
                46.4
                
                
                
                62.6Intercompany
      eliminations
                
                
                (2.3
                )
                
                
                (5.1
                )
                
                
                (6.0
                )
                
                
                (12.4
                )Purchase accounting related
      adjustment (1)
                
                
                (6.8
                )
                
                
                (40.1
                )
                
                
                (14.2
                )
                
                
                (83.7
                )Total revenues
                
                $
                642.0
                
                
                $
                703.5
                
                
                $
                1,178.2
                
                
                $
                1,226.8Operating
      profit (loss)Reader’s Digest United
      States
                
                $
                29.5
                
                
                $
                35.2
                
                
                $
                25.1
                
                
                $
                37.6Reader’s Digest
      International
                
                
                38.2
                
                
                
                69.3
                
                
                
                13.0
                
                
                
                61.8School & Educational
      Services
                
                
                (0.9
                )
                
                
                5.3
                
                
                
                (7.3
                )
                
                
                4.1Corporate unallocated(2)
                
                
                (3.6
                )
                
                
                (24.1
                )
                
                
                (19.5
                )
                
                
                (44.6
                )Other
      operating items, net(3)
                
                
                (19.3
                )
                
                
                (7.8
                )
                
                
                (21.8
                )
                
                
                (8.6
                )Purchase
      accounting related adjustment (1)
                
                
                (6.8
                )
                
                
                (40.1
                )
                
                
                (14.2
                )
                
                
                (83.7
                )Operating profit
      (loss)
                
                $
                37.1
                
                
                $
                37.8
                
                
                $
                (24.7
                )
                
                $
                (33.4
                )Intercompany
      eliminationsReader’s Digest United
      States
                
                $
                (1.1
                )
                
                $
                (3.7
                )
                
                $
                (3.7
                )
                
                $
                (9.6
                )Reader’s Digest
      International
                
                
                (1.2
                )
                
                
                (1.4
                )
                
                
                (2.3
                )
                
                
                (2.7
                )School & Educational
      Services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (0.1
                )Total
                
                $
                (2.3
                )
                
                $
                (5.1
                )
                
                $
                (6.0
                )
                
                $
                (12.4
                )





(1)
            Purchase
      accounting related fair value adjustments to reduce unearned
      revenues.  This charge was not included in the segment results
      reviewed by the chief operating decision
maker.




(2)
              Corporate
      unallocated includes expenses for the cost of governance and
      centrally managed expenses, including adjustments related to our global
      management incentive plans, as well as the accounting for U.S. pension
      plans, postretirement healthcare costs, and other costs that are not
      allocated to the reportable segments, such as the amortization of
      intangible assets.  Governance and centrally managed expenses
      include costs for departments such as corporate finance, general corporate
      management, legal, public relations and treasury and for related
      information technology and facility costs incurred by these
      departments.
 
 (3)
              Other
      operating items, net, include restructuring, contractual charges and a
      gain on sales of certain non-strategic assets and, therefore, are not
      included in segment results reviewed by our chief operating decision
      maker.


21




(15)            Guarantor
and Non-Guarantor Financial Information





The
Reader’s Digest Association, Inc. is the issuer of the Senior Subordinated
Notes (“Notes”).  Our domestic subsidiaries that guarantee
our 2007 Credit Agreement (collectively, the “Guarantor Subsidiaries”)
jointly and severally irrevocably and unconditionally guarantee, on an unsecured
senior subordinated basis, our obligations under the Notes.  The
Guarantor Subsidiaries do not include foreign subsidiaries, domestic
subsidiaries whose assets substantially consist of voting stock of one or more
foreign subsidiaries, or non-wholly-owned subsidiaries (subject to certain
limited exceptions such as in the event that such non-wholly-owned subsidiary
guarantees debt issued in a capital markets transaction).  Our
subsidiaries that are not Guarantor Subsidiaries (collectively, the
“Non-Guarantor Subsidiaries”) are not guarantors of the Notes or the 2007 Credit
Agreement.





The
following tables present condensed consolidating financial information as of
December 31, 2008, June 30, 2008 and for the three and six-months ended December
31, 2008 and 2007 for the parent guarantor, (RDA on a standalone basis),
Guarantor Subsidiaries on a combined basis, Non-Guarantor Subsidiaries on a
combined basis and RDA on a consolidated basis.





22


Consolidated
condensed balance sheet as of December 31, 2008:





Issuer
                                  Parent
      - RDA
                                
                                
                                Guarantor
      Subsidiaries
                                
                                
                                Non-Guarantor
      Subsidiaries
                                
                                
                                Total
                                  Eliminations
                                
                                
                                ConsolidatedAssetsCurrent
      assets
                                
                                $
                                48.4
                                
                                
                                $
                                479.2
                                
                                
                                $
                                390.8
                                
                                
                                $
                                (198.6
                                )
                                
                                $
                                719.8Property,
      plant and equipment, net
                                
                                
                                27.7
                                
                                
                                
                                30.6
                                
                                
                                
                                28.5
                                
                                
                                
                                -
                                
                                
                                
                                86.8Goodwill
                                
                                
                                -
                                
                                
                                
                                628.5
                                
                                
                                
                                830.0
                                
                                
                                
                                -
                                
                                
                                
                                1,458.5Other
      intangible assets, net
                                
                                
                                -
                                
                                
                                
                                361.8
                                
                                
                                
                                512.3
                                
                                
                                
                                -
                                
                                
                                
                                874.1Prepaid
      pension assets
                                
                                
                                273.3
                                
                                
                                
                                -
                                
                                
                                
                                28.0
                                
                                
                                
                                -
                                
                                
                                
                                301.3Investments
      in  subsidiaries
                                
                                
                                2,115.5
                                
                                
                                
                                6.2
                                
                                
                                
                                -
                                
                                
                                
                                (2,121.7
                                )
                                
                                
                                -Intercompany
      noncurrent receivables
                                
                                
                                13.7
                                
                                
                                
                                0.4
                                
                                
                                
                                99.5
                                
                                
                                
                                (113.6
                                )
                                
                                
                                -Other
      noncurrent assets
                                
                                
                                (16.6
                                )
                                
                                
                                124.6
                                
                                
                                
                                16.7
                                
                                
                                
                                -
                                
                                
                                
                                124.7Total
      assets
                                
                                $
                                2,462.0
                                
                                
                                $
                                1,631.3
                                
                                
                                $
                                1,905.8
                                
                                
                                $
                                (2,433.9
                                )
                                
                                $
                                3,565.2Issuer
                                  Parent
      - RDA
                                
                                
                                Guarantor
      Subsidiaries
                                
                                
                                Non-Guarantor
      Subsidiaries
                                
                                
                                Total
                                  Eliminations
                                
                                
                                ConsolidatedLiabilities and stockholder’s(deficit) equityCurrent
      liabilities
                                
                                $
                                331.4
                                
                                
                                $
                                431.2
                                
                                
                                $
                                389.9
                                
                                
                                $
                                (198.6
                                )
                                
                                $
                                953.9Long-term
      debt
                                
                                
                                1,983.5
                                
                                
                                
                                -
                                
                                
                                
                                102.9
                                
                                
                                
                                -
                                
                                
                                
                                2,086.4Unearned
      revenues
                                
                                
                                -
                                
                                
                                
                                150.7
                                
                                
                                
                                3.2
                                
                                
                                
                                -
                                
                                
                                
                                153.9Accrued
      pension
                                
                                
                                61.0
                                
                                
                                
                                -
                                
                                
                                
                                14.7
                                
                                
                                
                                -
                                
                                
                                
                                75.7Postretirement
      and postemployment benefits other than pensions
                                
                                
                                20.2
                                
                                
                                
                                -
                                
                                
                                
                                2.1
                                
                                
                                
                                -
                                
                                
                                
                                22.3Intercompany
      noncurrent payables
                                
                                
                                99.5
                                
                                
                                
                                11.7
                                
                                
                                
                                2.4
                                
                                
                                
                                (113.6
                                )
                                
                                
                                -Other
      noncurrent liabilities
                                
                                
                                101.2
                                
                                
                                
                                131.7
                                
                                
                                
                                164.1
                                
                                
                                
                                -
                                
                                
                                
                                397.0Total
      liabilities
                                
                                $
                                2,596.8
                                
                                
                                $
                                725.3
                                
                                
                                $
                                679.3
                                
                                
                                $
                                (312.2
                                )
                                
                                $
                                3,689.2Stockholder’s
      (deficit) equity
                                
                                
                                (134.8
                                )
                                
                                
                                906.0
                                
                                
                                
                                1,226.5
                                
                                
                                
                                (2,121.7
                                )
                                
                                
                                (124.0
                                )Total
      liabilities and stockholder's (deficit) equity
                                
                                $
                                2,462.0
                                
                                
                                $
                                1,631.3
                                
                                
                                $
                                1,905.8
                                
                                
                                $
                                (2,433.9
                                )
                                
                                $
                                3,565.2














23





Consolidated
condensed balance sheet as of June 30, 2008:








Issuer
                        Parent
      - RDA
                      
                      
                      Guarantor
      Subsidiaries
                      
                      
                      Non-Guarantor
      Subsidiaries
                      
                      
                      Total
                        Eliminations
                      
                      
                      ConsolidatedAssetsCurrent
      assets
                      
                      $
                      5.0
                      
                      
                      $
                      539.1
                      
                      
                      $
                      465.1
                      
                      
                      $
                      (73.3
                      )
                      
                      $
                      935.9Property,
      plant and equipment, net
                      
                      
                      23.5
                      
                      
                      
                      37.0
                      
                      
                      
                      38.6
                      
                      
                      
                      -
                      
                      
                      
                      99.1Goodwill
                      
                      
                      -
                      
                      
                      
                      633.7
                      
                      
                      
                      987.5
                      
                      
                      
                      -
                      
                      
                      
                      1,621.2Other
      intangible assets, net
                      
                      
                      -
                      
                      
                      
                      373.9
                      
                      
                      
                      527.6
                      
                      
                      
                      -
                      
                      
                      
                      901.5Prepaid
      pension assets
                      
                      
                      257.5
                      
                      
                      
                      -
                      
                      
                      
                      33.4
                      
                      
                      
                      -
                      
                      
                      
                      290.9Investments
      in  subsidiaries
                      
                      
                      2,392.0
                      
                      
                      
                      5.9
                      
                      
                      
                      -
                      
                      
                      
                      (2,397.9
                      )
                      
                      
                      -Intercompany
      noncurrent receivables
                      
                      
                      14.1
                      
                      
                      
                      -
                      
                      
                      
                      125.3
                      
                      
                      
                      (139.4
                      )
                      
                      
                      -Other
      noncurrent assets
                      
                      
                      38.0
                      
                      
                      
                      55.5
                      
                      
                      
                      20.1
                      
                      
                      
                      3.9
                      
                      
                      
                      117.5Total
      assets
                      
                      $
                      2,730.1
                      
                      
                      $
                      1,645.1
                      
                      
                      $
                      2,197.6
                      
                      
                      $
                      (2,606.7
                      )
                      
                      $
                      3,966.1Issuer
                        Parent
      - RDA
                      
                      
                      Guarantor
      Subsidiaries
                      
                      
                      Non-Guarantor
      Subsidiaries
                      
                      
                      Total
                        Eliminations
                      
                      
                      ConsolidatedLiabilities and stockholder’sequityCurrent
      liabilities
                      
                      $
                      238.1
                      
                      
                      $
                      387.5
                      
                      
                      $
                      423.5
                      
                      
                      $
                      (65.9
                      )
                      
                      $
                      983.2Long-term
      debt
                      
                      
                      1,974.1
                      
                      
                      
                      -
                      
                      
                      
                      117.8
                      
                      
                      
                      -
                      
                      
                      
                      2,091.9Unearned
      revenues
                      
                      
                      -
                      
                      
                      
                      134.6
                      
                      
                      
                      3.0
                      
                      
                      
                      -
                      
                      
                      
                      137.6Accrued
      pension
                      
                      
                      62.9
                      
                      
                      
                      -
                      
                      
                      
                      21.1
                      
                      
                      
                      -
                      
                      
                      
                      84.0Postretirement
      and postemployment benefits other than pensions
                      
                      
                      23.1
                      
                      
                      
                      -
                      
                      
                      
                      2.4
                      
                      
                      
                      -
                      
                      
                      
                      25.5Intercompany
      noncurrent payables
                      
                      
                      125.3
                      
                      
                      
                      11.7
                      
                      
                      
                      2.4
                      
                      
                      
                      (139.4
                      )
                      
                      
                      -Other
      noncurrent liabilities
                      
                      
                      79.6
                      
                      
                      
                      145.8
                      
                      
                      
                      166.8
                      
                      
                      
                      (3.3
                      )
                      
                      
                      388.9Total
      liabilities
                      
                      $
                      2,503.1
                      
                      
                      $
                      679.6
                      
                      
                      $
                      737.0
                      
                      
                      $
                      (208.6
                      )
                      
                      $
                      3,711.1Stockholder’s
      equity
                      
                      
                      227.0
                      
                      
                      
                      965.5
                      
                      
                      
                      1,460.6
                      
                      
                      
                      (2,398.1
                      )
                      
                      
                      255.0Total
      liabilities and stockholder's equity
                      
                      $
                      2,730.1
                      
                      
                      $
                      1,645.1
                      
                      
                      $
                      2,197.6
                      
                      
                      $
                      (2,606.7
                      )
                      
                      $
                      3,966.1





24





Consolidated
condensed statement of operations for the three-months ended December 31,
2008:


Issuer
                  Parent
      - RDA
                
                
                Guarantor
      Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Total
      Eliminations
                
                
                ConsolidatedRevenues
                
                $
                20.0
                
                
                $
                264.9
                
                
                $
                359.3
                
                
                $
                (2.2
                )
                
                $
                642.0Product,
      distribution and editorial expenses
                
                
                16.7
                
                
                
                108.6
                
                
                
                148.2
                
                
                
                (2.2
                )
                
                
                271.3Promotion
      marketing and administrative expenses
                
                
                17.3
                
                
                
                118.0
                
                
                
                179.0
                
                
                
                -
                
                
                
                314.3Other
      operating items, net
                
                
                5.6
                
                
                
                0.7
                
                
                
                13.0
                
                
                
                -
                
                
                
                19.3Operating
      (loss) profit
                
                
                (19.6
                )
                
                
                37.6
                
                
                
                19.1
                
                
                
                -
                
                
                
                37.1Interest
      expense
                
                
                36.8
                
                
                
                0.2
                
                
                
                3.0
                
                
                
                -
                
                
                
                40.0Other
      (income) expense, net
                
                
                (33.1
                )
                
                
                33.9
                
                
                
                2.8
                
                
                
                -
                
                
                
                3.6Expense
      (income) from investment in subsidiaries
                
                
                27.1
                
                
                
                (0.1
                )
                
                
                -
                
                
                
                (27.0
                )
                
                
                -(Loss) income
      before expense (benefit) for income taxes and discontinued
      operations
                
                
                (50.4
                )
                
                
                3.6
                
                
                
                13.3
                
                
                
                27.0
                
                
                
                (6.5
                )Income
      tax expense
                
                
                1.0
                
                
                
                0.7
                
                
                
                13.2
                
                
                
                -
                
                
                
                14.9(Loss) income
      from continuing operations
                
                
                (51.4
                )
                
                
                2.9
                
                
                
                0.1
                
                
                
                27.0
                
                
                
                (21.4
                )Income
      (loss) from discontinued operations (net of $1.6 of tax
      expense)
                
                
                17.3
                
                
                
                (30.9
                )
                
                
                0.9
                
                
                
                -
                
                
                
                (12.7
                )Net
      (loss) income
                
                $
                (34.1
                )
                
                $
                (28.0
                )
                
                $
                1.0
                
                
                $
                27.0
                
                
                $
                (34.1
                )





25


Consolidated
      condensed statement of operations for the six-months ended December 31,
      2008:





Issuer
                  Parent
      - RDA
                
                
                Guarantor
      Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Total
      Eliminations
                
                
                ConsolidatedRevenues
                
                $
                42.5
                
                
                $
                463.0
                
                
                $
                678.6
                
                
                $
                (5.9
                )
                
                $
                1,178.2Product,
      distribution and editorial expenses
                
                
                34.1
                
                
                
                202.6
                
                
                
                283.3
                
                
                
                (5.9
                )
                
                
                514.1Promotion
      marketing and administrative expenses
                
                
                51.4
                
                
                
                231.8
                
                
                
                383.8
                
                
                
                -
                
                
                
                667.0Other
      operating items, net
                
                
                3.1
                
                
                
                1.7
                
                
                
                17.0
                
                
                
                -
                
                
                
                21.8Operating
      (loss) profit
                
                
                (46.1
                )
                
                
                26.9
                
                
                
                (5.5
                )
                
                
                -
                
                
                
                (24.7
                )Interest
      expense
                
                
                73.8
                
                
                
                0.1
                
                
                
                6.8
                
                
                
                -
                
                
                
                80.7Other
      (income) expense, net
                
                
                (0.4
                )
                
                
                (12.0
                )
                
                
                14.5
                
                
                
                -
                
                
                
                2.1Expense
      (income) from investment in subsidiaries
                
                
                90.8
                
                
                
                (0.2
                )
                
                
                -
                
                
                
                (90.6
                )
                
                
                -(Loss) income
      before expense for income taxes and discontinued
operations
                
                
                (210.3
                )
                
                
                39.0
                
                
                
                (26.8
                )
                
                
                90.6
                
                
                
                (107.5
                )Income
      tax expense
                
                
                2.6
                
                
                
                5.5
                
                
                
                5.7
                
                
                
                -
                
                
                
                13.8(Loss) income
      from continuing operations
                
                
                (212.9
                )
                
                
                33.5
                
                
                
                (32.5
                )
                
                
                90.6
                
                
                
                (121.3
                )Income
      (loss) from discontinued operations (net of $(16.8) of tax
      benefit)
                
                
                22.3
                
                
                
                (89.0
                )
                
                
                (2.6
                )
                
                
                -
                
                
                
                (69.3
                )Net
      (loss) income
                
                $
                (190.6
                )
                
                $
                (55.5
                )
                
                $
                (35.1
                )
                
                $
                90.6
                
                
                $
                (190.6
                )





Consolidated
      condensed statement of cash flows for the six-months ended December 31,
      2008:





Issuer
                  Parent
      - RDA
                
                
                Guarantor
      Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Total
      Eliminations
                
                
                ConsolidatedNet
      change in cash due to continuing operating activities
                
                $
                (114.8
                )
                
                $
                31.6
                
                
                $
                (24.0
                )
                
                $
                -
                
                
                $
                (107.2
                )Net
      change in cash due to discontinued operating activities
                
                
                (1.0
                )
                
                
                (25.6
                )
                
                
                0.8
                
                
                
                -
                
                
                
                (25.8
                )Net
      change in cash due to operating activities
                
                
                (115.8
                )
                
                
                6.0
                
                
                
                (23.2
                )
                
                
                -
                
                
                
                (133.0
                )Net
      change in cash due to investing activities
                
                
                94.2
                
                
                
                (3.7
                )
                
                
                13.4
                
                
                
                -
                
                
                
                103.9Net
      change in cash due to financing activities
                
                
                7.4
                
                
                
                -
                
                
                
                10.7
                
                
                
                -
                
                
                
                18.1Effect
      of exchange rate changes on cash and cash equivalents
                
                
                16.3
                
                
                
                -
                
                
                
                (14.5
                )
                
                
                -
                
                
                
                1.8Cash
      and cash equivalents at beginning of the period
                
                
                4.6
                
                
                
                3.9
                
                
                
                70.9
                
                
                
                -
                
                
                
                79.4Cash
      and cash equivalents at end of the period
                
                $
                6.7
                
                
                $
                6.2
                
                
                $
                57.3
                
                
                $
                -
                
                
                $
                70.2





26





Consolidated
      condensed statement of operations for the three-months ended December 31,
      2007:





Issuer
                  
                  
                  Guarantor
                  
                  
                  Non-Guarantor
                  
                  
                  TotalParent
      – RDA
                  
                  
                  Subsidiaries
                  
                  
                  Subsidiaries
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedRevenues
                  
                  $
                  23.5
                  
                  
                  $
                  265.8
                  
                  
                  $
                  419.2
                  
                  
                  $
                  (5.0
                  )
                  
                  $
                  703.5Product, distribution andeditorial
      expenses
                  
                  
                  16.2
                  
                  
                  
                  114.8
                  
                  
                  
                  167.5
                  
                  
                  
                  (5.0
                  )
                  
                  
                  293.5Promotion, marketing andadministrative
      expenses
                  
                  
                  39.7
                  
                  
                  
                  125.7
                  
                  
                  
                  199.0
                  
                  
                  
                  -
                  
                  
                  
                  364.4Other operating items,
      net
                  
                  
                  3.4
                  
                  
                  
                  2.0
                  
                  
                  
                  2.4
                  
                  
                  
                  -
                  
                  
                  
                  7.8Operating (loss)
      profit
                  
                  
                  (35.8
                  )
                  
                  
                  23.3
                  
                  
                  
                  50.3
                  
                  
                  
                  -
                  
                  
                  
                  37.8Interest
    expense
                  
                  
                  43.0
                  
                  
                  
                  -
                  
                  
                  
                  3.8
                  
                  
                  
                  -
                  
                  
                  
                  46.8Other (income)expense,
      net
                  
                  
                  (17.4
                  )
                  
                  
                  0.2
                  
                  
                  
                  14.5
                  
                  
                  
                  -
                  
                  
                  
                  (2.7
                  )(Income) expense frominvestment
      in subsidiaries
                  
                  
                  (77.9
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  -
                  
                  
                  
                  78.0
                  
                  
                  
                  -Income (loss) before (benefit)expense
      from income taxes
                    and discontinuedoperations
                  
                  
                  16.5
                  
                  
                  
                  23.2
                  
                  
                  
                  32.0
                  
                  
                  
                  (78.0
                  )
                  
                  
                  (6.3
                  )Income tax (benefit)
      expense
                  
                  
                  (0.8
                  )
                  
                  
                  (2.4
                  )
                  
                  
                  7.9
                  
                  
                  
                  -
                  
                  
                  
                  4.7Income (loss) from continuingoperations
                  
                  
                  17.3
                  
                  
                  
                  25.6
                  
                  
                  
                  24.1
                  
                  
                  
                  (78.0
                  )
                  
                  
                  (11.0
                  )Income from discontinuedoperations
      (net of $(0.4) oftax
      benefit)
                  
                  
                  -
                  
                  
                  
                  24.3
                  
                  
                  
                  4.0
                  
                  
                  
                  -
                  
                  
                  
                  28.3Net
      income (loss)
                  
                  $
                  17.3
                  
                  
                  $
                  49.9
                  
                  
                  $
                  28.1
                  
                  
                  $
                  (78.0
                  )
                  
                  $
                  17.3





27





Consolidated
      condensed statement of operations for the six-months ended December 31,
      2007:





Issuer
                  
                  
                  Guarantor
                  
                  
                  Non-Guarantor
                  
                  
                  TotalParent
      - RDA
                  
                  
                  Subsidiaries
                  
                  
                  Subsidiaries
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedRevenues
                  
                  $
                  47.5
                  
                  
                  $
                  470.6
                  
                  
                  $
                  720.7
                  
                  
                  $
                  (12.0
                  )
                  
                  $
                  1,226.8Product, distribution andeditorial
      expenses
                  
                  
                  28.0
                  
                  
                  
                  226.4
                  
                  
                  
                  297.5
                  
                  
                  
                  (12.0
                  )
                  
                  
                  539.9Promotion, marketing andadministrative
      expenses
                  
                  
                  77.9
                  
                  
                  
                  242.5
                  
                  
                  
                  391.3
                  
                  
                  
                  -
                  
                  
                  
                  711.7Other operating items,
      net
                  
                  
                  (4.8
                  )
                  
                  
                  12.2
                  
                  
                  
                  1.2
                  
                  
                  
                  -
                  
                  
                  
                  8.6Operating (loss)
      profit
                  
                  
                  (53.6
                  )
                  
                  
                  (10.5
                  )
                  
                  
                  30.7
                  
                  
                  
                  -
                  
                  
                  
                  (33.4
                  )Interest
    expense
                  
                  
                  85.7
                  
                  
                  
                  -
                  
                  
                  
                  6.6
                  
                  
                  
                  -
                  
                  
                  
                  92.3Other (income) expense,
      net
                  
                  
                  (26.4
                  )
                  
                  
                  0.4
                  
                  
                  
                  21.1
                  
                  
                  
                  -
                  
                  
                  
                  (4.9
                  )(Income) expense frominvestment
      in subsidiaries
                  
                  
                  (5.6
                  )
                  
                  
                  (0.4
                  )
                  
                  
                  -
                  
                  
                  
                  6.0
                  
                  
                  
                  -(Loss) income before benefitfrom
      income taxes and
                    discontinued
      operations
                  
                  
                  (107.3
                  )
                  
                  
                  (10.5
                  )
                  
                  
                  3.0
                  
                  
                  
                  (6.0
                  )
                  
                  
                  (120.8
                  )Income tax
      (benefit)
                  
                  
                  (1.6
                  )
                  
                  
                  (3.9
                  )
                  
                  
                  (3.0
                  )
                  
                  
                  -
                  
                  
                  
                  (8.5
                  )(Loss) income fromcontinuing
      operations
                  
                  
                  (105.7
                  )
                  
                  
                  (6.6
                  )
                  
                  
                  6.0
                  
                  
                  
                  (6.0
                  )
                  
                  
                  (112.3
                  )Income from discontinuedoperations
      (net of $(0.6) of
                    tax benefit)
                  
                  
                  -
                  
                  
                  
                  4.2
                  
                  
                  
                  2.4
                  
                  
                  
                  -
                  
                  
                  
                  6.6Net
      (loss) income
                  
                  $
                  (105.7
                  )
                  
                  $
                  (2.4
                  )
                  
                  $
                  8.4
                  
                  
                  $
                  (6.0
                  )
                  
                  $
                  (105.7
                  )





Consolidated
      condensed statement of cash flows for the six-months ended December 31,
      2007:





Issuer
                
                
                Guarantor
                
                
                Non-Guarantor
                
                
                TotalParent
      - RDA
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      change in cash due tocontinuing
      operating activities
                
                $
                (37.1
                )
                
                $
                (4.0
                )
                
                $
                42.3
                
                
                $
                -
                
                
                $
                1.2Net
      change in cash due todiscontinued
      operating activities
                
                
                -
                
                
                
                (2.1
                )
                
                
                1.0
                
                
                
                -
                
                
                
                (1.1
                )Net
      change in cash due tooperating
      activities
                
                
                (37.1
                )
                
                
                (6.1
                )
                
                
                43.3
                
                
                
                -
                
                
                
                0.1Net
      change in cash due toinvesting
      activities
                
                
                (2.6
                )
                
                
                3.0
                
                
                
                (4.3
                )
                
                
                -
                
                
                
                (3.9
                )Net
      change in cash due tofinancing
      activities
                
                
                61.5
                
                
                
                -
                
                
                
                7.5
                
                
                
                -
                
                
                
                69.0Effect
      of exchange rate changeson
      cash and cash equivalents
                
                
                (0.3
                )
                
                
                -
                
                
                
                5.0
                
                
                
                -
                
                
                
                4.7Cash
      and cash equivalents atbeginning
      of the period
                
                
                1.6
                
                
                
                5.2
                
                
                
                43.4
                
                
                
                -
                
                
                
                50.2Cash
      and cash equivalents at endof
      the period
                
                $
                23.1
                
                
                $
                2.1
                
                
                $
                94.9
                
                
                $
                -
                
                
                $
                120.1





28





(16)  
Subsequent Event





On
January 28, 2009, The Reader’s Digest Association, Inc. (the “Company”)
announced that it will adopt a global “Recession Plan” to strengthen its
financial performance in the current economy, including a planned reduction of
approximately eight percent of its current global workforce.  The
Company anticipates that it will record charges related to the Recession Plan
for severance and other costs in the third quarter of fiscal
2009.  The severance and associated costs are determined based on the
Company’s existing severance plans.





29





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





Introduction





The
following discussion and analysis supplements the Management's Discussion and
Analysis in our Annual Report on Form 10-K for the year ended June 30, 2008 and
presumes that the readers have read or have access to that discussion and
analysis.  The following discussion and analysis includes historical
and certain forward-looking information that should be read together with the
accompanying consolidated financial statements, related footnotes, and the
discussion below of certain risks and uncertainties that could cause future
operating results to differ materially from historical results or from the
expected results indicated by forward-looking statements.  Actual
results may differ materially from those suggested by our forward-looking
statements for various reasons, including those discussed in the “Risk Factors”
and “Disclosure Regarding Forward Looking Statements” sections of our Annual
Report on Form 10-K for the fiscal year ended June 30, 2008. We do not have any
intention or obligation to update forward-looking statements. Certain amounts
and percentages do not recalculate due to rounding.  All references to
dollars in this discussion and analysis are in millions.





References in this Management's
Discussion and Analysis section to “we,” “us” and “our” are to The Reader’s
Digest Association, Inc. and its subsidiaries.  All references to 2008
and 2007, unless otherwise indicated, are to fiscal 2009 and fiscal 2008,
respectively.





Basis
of Presentation





We report on a fiscal year that begins
July 1 and is for the period from July 1 through
June 30.  The three and six-months ended December 31, 2008 and
2007 are the first and second fiscal quarters of 2009 and 2008,
respectively.




During
the first half of fiscal 2009, we sold our home party planning business
Taste of Home Entertaining, Inc. (“TOHE”); our schools and youth fundraising
business consisting of QSP, Inc., Quality Service Programs, Inc., and their
affiliated subsidiaries in the United States and Canada (“QSP”); and the
principal operating assets of Books Are Fun, Ltd. (“BAF”), our display-marketing
business, in connection with our exit of this business. As a result, TOHE,
QSP and BAF are classified as discontinued operations for all periods presented
in the consolidated financial statements.   Loss from
discontinued operations, net of taxes, was $12.7 and $69.3 for the three and
six-months ended December 31, 2008, respectively.  Income from
discontinued operations, net of taxes, was $28.3 and $6.6 for the three and
six-months ended December 31, 2007, respectively. See Note 3, Discontinued
Operations, for more information.





Our
Reportable Segments





Our
business is organized and reports across three business segments: Reader’s
Digest United States, Reader’s Digest International and School & Educational
Services.  See Note 14, Revenues and Operating (Loss) Profit by
Reportable Segment, within this report, for additional information.





30


Three-Months
Ended December 31, 2008, Compared With Three-Months Ended December 31,
2007





Revenues
during the second quarter of fiscal 2009 decreased $61.5 to $642.0, as compared
to $703.5 during the comparable period in fiscal 2008.  In connection
with the purchase method of accounting prescribed in SFAS No. 141, the fair
value of our unearned revenue was reduced to establish a new accounting basis as
of March 2, 2007 which reduced revenues by $6.8 and $40.1 during the second
quarter of fiscal 2009 and 2008, respectively.  Excluding the unearned
revenue adjustment, revenues continued to decline across all of our segments by
$94.8, which includes $56.7 of a negative impact from changes in foreign
currency exchange rates, as we continued to feel the impact of the tightening of
the global economy in the United States and internationally where we were
more significantly negatively impacted.  This decrease in our segments
was offset slightly by a $2.8 reduction of inter-segment sales, and the related
elimination, during the second quarter of fiscal 2009.





Our
United States business segment revenues during the second quarter of fiscal 2009
decreased $13.6 to $222.5, as compared to $236.1 during the comparable
period in 2008.  Lower revenues were mostly driven by our RD Community
Affinity and were largely the result of a planned rate base
reduction, decreased advertising revenues, lower book sales and the absence
of Young Families revenue due to our decision to exit the product line during
fiscal 2008.  Our Food & Entertaining Affinity contributed further
to the revenue decrease largely due to the timing of certain of our book sales
as several new book launches were strategically moved into the second half of
fiscal 2009 and declines in our Taste of Home annual membership
mailing.  These declines were partially offset by higher advertising
revenues at Allrecipes.com, increased revenue at Every Day with Rachael Ray
from a higher rate basealong with increased
sales of our Home and Health Affinity products.





Our
International business segment revenues during the second quarter of fiscal 2009
decreased $74.9 to $404.0, as compared to $478.9 during the comparable period in
fiscal 2008.  Excluding the negative effect of foreign currency
translation, our International business segment experienced a net decrease in
revenues of $18.2 during the second quarter of 2009.  This decrease
was mainly the result of lower single sales pulls, a smaller active customer
base and lower mail quantities primarily in the United Kingdom and France. In
addition, and to a lesser extent, lower revenues from single sales, kiosk sales
and advertising in Canada and Mexico contributed to the decline.  The
decrease in revenue was offset, in part, by price increases in
Russia.





Our
School & Educational Services business segment revenues during the second
quarter of fiscal 2009 decreased $9.1 to $24.6, as compared to $33.7 during
the comparable period in fiscal 2008.  The decrease in revenue was
principally due to Weekly Reader Publishing Group and CompassLearning
experiencing challenging educational market conditions as schools reevaluated
their funding in the current economic environment.  In addition, in
fiscal 2008 certain unprofitable lines of business were curtailed or sold at
Weekly Reader Publishing Group contributing to the quarter-over-quarter revenue
decline.





Operating
Profit (Loss)





The
operating profit during the second quarter of fiscal 2009 decreased $0.7 to
$37.1, as compared to $37.8 during the comparable period in fiscal
2008.  The reduction of unearned revenue, as described in the
“Revenues” section above, reduced operating profits during the second quarters
of fiscal 2009 and 2008 by $6.8 and $40.1, respectively.  Excluding
this adjustment, the operating results during the second quarter of fiscal 2009
decreased by $34.0 to $43.9 from $77.9 during the comparable period in fiscal
2008.  Our operating profits were also negatively impacted by
workforce reduction actions across all of our segments.


31





Our
United States business segment operating profit during the second quarter of
fiscal 2009 decreased $5.7 to $29.5, as compared to $35.2 during second quarter
of fiscal 2008. This decrease was attributable to softness of advertising and
lower book sales volumes through our retail channels in the RD Community
Affinity, costs attributable to the third quarter launch of Purpose Driven Connection in our Home and
Health Affinity and a planned shift in the timing of shipments on several books
to the second half of 2009 in our Food & Entertaining Affinity.





The
operating profit within our International business segment during the
second quarter of fiscal 2009 decreased $31.1 to $38.2, as compared to
$69.3 during the second quarter of fiscal 2008.  Excluding the
negative effect of foreign currency exchange rates, our International business
segment experienced a net decrease of $25.3.  The decrease was largely
the result of the declines in revenues discussed above combined with increased
postal costs in some of our European markets, most notably in Russia, and higher
production costs in Asia.





Our
School & Educational Services business segment operating profit during the
second quarter of fiscal 2009 decreased $6.2 to an operating loss of $0.9, as
compared to an operating profit of $5.3 during the comparable period in fiscal
2008.  This decrease was principally attributable to a decrease in
operating profit from CompassLearning due to revenue declines resulting from
current market conditions in the education market.





These
declines in operating profit were offset, in part, by a reduction of Corporate
unallocated costs largely driven by lower estimated costs accrued, primarily
during the second quarter of fiscal 2009, for our management incentive plans,
which are measured against our expected operating results; changes to the
Company’s Retirement Plans during fiscal 2008 resulting in a decrease in pension
and postretirement costs; and lower stock compensation expense during the second
quarter of fiscal 2009.





The
operating loss was fueled further by an increase in restructuring and severance
costs reported in other operating items. During the second quarter of fiscal
2009, we formulated and announced a plan to outsource our internal IT function
and, as a result, recognized severance costs related to that plan estimated at
$15.8.





Interest
Expense





Interest
Expense decreased $6.8 to $40.0 during the second quarter of fiscal 2009, as
compared with $46.8 during the comparable period in fiscal 2008.  This
decline is principally due to lower interest rates during the second quarter of
fiscal 2009.





Income
Taxes





During
the second quarter of fiscal 2009 and fiscal 2008, we recorded an income tax
expense of $14.9 and $4.7, respectively.  The expenses recorded during
these periods primarily relates to the tax liability on our foreign earnings and
the establishment of deferred tax liabilities for which no current benefit is
allowed due to the existence of valuation allowances on our net operating loss
carryforwards.  The increase of $10.2 in the tax expense in fiscal
2009 primarily relates to the increase in foreign tax expense due to greater
foreign taxable income during fiscal 2009.





32


Six-Months
Ended December 31, 2008, Compared With Six-Months Ended December 31,
2007





Revenues
during the first half of fiscal 2009 decreased $48.6 to $1,178.2, as compared to
$1,226.8 during the first half of fiscal 2008.  In connection with the
purchase method of accounting prescribed in SFAS No. 141, the fair value of our
unearned revenue was reduced to establish a new accounting basis as of March 2,
2007 which decreased revenues by $14.2 and $83.7 during the first half of fiscal
2009 and fiscal 2008, respectively.  Excluding the unearned revenue
adjustment, revenues declined across all of our segments by $118.1, which
includes $37.2 of a negative impact from changes in foreign currency exchange
rates, and was largely the result of a global tightening of economic
conditions that continues to have a negative impact on advertising revenues
and consumer spending and across many of our magazine, book, music and video
product categories.  This decrease in our segments was offset slightly by a
$6.4 reduction of inter-segment sales, and the related elimination, during the
first half of fiscal 2009.





Our
United States business segment revenues during the first half of fiscal 2009
decreased $33.0 to $395.4, as compared to $428.4 during the first half of fiscal
2008.  The decrease in revenue was principally driven by lower
advertising, subscription related revenues, and the absence of Young
Families revenue due to our decision to exit the product line in Fiscal 2008 in
our RD Community Affinity.  Our Food & Entertaining Affinity added
slightly to the decline while our Home and Health Affinity remained flat for the
period.  Continued growth in the Food & Entertaining Affinity
resulting from an increased rate base and higher subscription revenue from Everyday with Rachael Ray and an increase in
advertising revenue from Allrecipes.com was offset by
a lower volume of book sales.





Our
International business segment revenues during the first half of fiscal 2009
decreased $75.3 to $756.6, as compared to $831.9 during the comparable period in
fiscal 2008.  Excluding the negative effect of foreign currency
translation, our International business segment experienced a net decrease in
revenues of $38.1 during the first half of fiscal 2009 when compared to the
comparable period in fiscal 2008.  Revenues declined throughout our
international segment with the most significant declines in the United Kingdom,
France, Benelux and our Time Life business which operates across
Europe.  These declines were largely due to lower mail quantities,
weaker responses on our mailings during the period resulting from declines in
consumer spending combined with execution issues in certain promotional
mailings.





Our
School & Educational Services business segment revenues during the first
half of fiscal 2009 decreased $16.2 to $46.4, as compared to $62.6 during the
comparable period in fiscal 2008.  The decrease in revenue was
principally due to Weekly Reader Publishing Group and CompassLearning
experiencing challenging educational market conditions as schools reevaluate
their funding in the current economic environment along with the curtailment or
sale of certain unprofitable lines of business at Weekly Reader Publishing Group
during fiscal 2008.





Operating
Profit (Loss)





The
operating loss during the first half of fiscal 2009 decreased $8.7 to $24.7, as
compared to $33.4 during the comparable period in fiscal 2008. The reduction of
unearned revenue, as described in the “Revenues” section above, reduced
operating profits during the first half of fiscal 2009 and fiscal 2008 by $14.2
and $83.7, respectively.  Excluding this adjustment, operating results
decreased by $60.8 to an operating loss of $10.5 during the first half of fiscal
2009 from an operating profit of $50.3 during the comparable period in fiscal
2008.  Our operating profits were also negatively impacted by
workforce reduction actions across all of our segments.


33


Our
United States business segment operating profit during the first half of fiscal
2009 decreased by $12.5 to $25.1 as compared to $37.6 for the comparable period
in fiscal 2008.  This decline was mainly driven by our RD Community
Affinity and is directly a result of the rate base reductions in January 2008
and lower advertising revenues.  Our Health and Wellness Affinity
contributed further to the deterioration of our operating margins due to upfront
investment costs incurred to launch Purpose Driven Connectionin the third
quarter of fiscal 2009.





The
operating profit within our International business segment during the first half
of fiscal 2009 decreased by $48.8 to $13.0 as compared to $61.8 during the
comparable period in fiscal 2008.  Excluding the negative effect of
foreign currency exchange rates, our International business segment experienced
a net decrease in operating profit of $41.6 during the first half of fiscal 2009
when compared to the comparable period in fiscal 2008.  The largest
portion of the decline is attributable to our European business and is caused by
soft mailing results, lower mail quantities due to a smaller active customer
base when compared to the prior year, postal rate increases, most notably in
Russia, and execution issues encountered during the current
period.  Canada, Mexico and the Asia Pacific region added further to
the decrease as a result of lower advertising, book sales and music sales
coupled with increases in promotion and product costs in connection with new
magazine investments in Canada and higher promotional expenditures in efforts to
increase circulation and readership in the Asia Pacific region.





Our
School & Educational Services business segment operating profit during the
first half of fiscal 2009 decreased $11.4 to an operating loss of $7.3, as
compared to an operating profit of $4.1 during the comparable period in fiscal
2008.  This decrease was principally attributable to a decrease in
operating profit from CompassLearning due to revenue declines combined with
additional charges from restructuring related activities.





These
declines in operating profit were offset, in part, by a reduction of Corporate
Unallocated costs largely driven by a lower estimated cost accrued, primarily
during the first half of fiscal 2009, for our management incentive plans, which
are measured against our expected operating results; changes to the Company’s
Retirement Plans during fiscal 2008, resulting in a decrease in pension and
postretirement costs; and lower stock compensation expense during the first half
of fiscal 2009.





The
operating loss was fueled further by an increase in restructuring and severance
costs reported in other operating items. During the second quarter of fiscal
2009, we formulated and announced a plan to outsource our internal IT function
and, as a result, recognized severance costs related to that plan estimated at
$15.8.





Interest
Expense





Interest
Expense decreased $11.6 to $80.7 during the first half of fiscal 2009, compared
with $92.3 during the comparable period in fiscal 2008.  This decline
is principally due to lower interest rates during the first half of fiscal
2009.





Income
Taxes





During
the first half of fiscal 2009, we recorded an income tax expense of $13.8 as
compared to an income tax benefit of $8.5 during the first half of fiscal
2008.  The expense recorded during the first half of fiscal 2009,
primarily relates to the tax liability on our foreign earnings and the
establishment of deferred tax liabilities for which no current benefit is
allowed due to the establishment of valuation allowance on our net operating
loss carryforwards.  The benefit during the first half of fiscal 2008,
primarily relates to the utilization of current year domestic operating losses
against taxable income from discontinued operations, partially offset by the tax
effect of reversing temporary basis differences and foreign income tax
expense.


34





Liquidity
and Capital Resources





Overview





These
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America applicable to a going
concern, which assumes that we will be able to meet our obligations and continue
our operations over a reasonable length of time.  Realization values
may be substantially different from carrying values as shown and these financial
statements do not give effect to adjustments that would be necessary to the
carrying values and classification of assets and liabilities should we be unable
to continue as a going concern.





Cash flows generated from
operating activities are our primary source of liquidity.  Our
revolving credit facility and local lines of credit internationally provide
additional liquidity.  Cash and cash equivalents decreased $9.2 or
11.6% to $70.2 at December 31, 2008 from $79.4 at June 30, 2008.  We
require cash principally for day-to-day operations, to service our debt, and to
make principal payments on our debt.  In addition, we will require
cash in the next nine months to reinvest the net cash proceeds from the sale of
QSP into assets useful for our business in accordance with the terms of our debt
facilities.  In recent periods, we have financed our operations with
cash from operations, proceeds from the sale of non-core businesses and
additional borrowings on our credit lines.





Given the
current global recessionary environment, we may not generate sufficient earnings
or have sufficient liquidity to operate as a going concern.  The
extreme volatility in the financial, foreign exchange and credit markets
globally has compounded the situation, further impacting customer orders as well
as normal seasonality trends.  These factors are impacting our ability
to accurately forecast our performance results and cash position.  As
highlighted elsewhere in this Management's Discussion and Analysis, we have a
number of initiatives underway and planned with a view of mitigating the effects
of the current economic environment however; there can be no assurances that our
initiatives will be adequate.





Cash
Flows from Operating Activities





Cash
flows used by operating activities during the first half of fiscal 2009 were
$133.0 compared to cash flows provided by operating activities of $0.1 for the
comparable period in fiscal 2008. This included $25.8 and $1.1 of cash used by
discontinued operating activities during the first half of fiscal 2009 and
fiscal 2008, respectively. Cash used by continuing operating activities during
the first half of fiscal 2009 was $107.2 and cash provided by continuing
operating activities during the first half of fiscal 2008 was
$1.2.  This increase in cash used of $108.4 was largely driven by a
decline in the amount of cash provided by a one time sign on bonus from one of
our vendors in the prior period,other working capital
movements and an increase in our net loss primarily as a result of decreased
subscription and advertising revenues and restructuring costs.





Cash
Flows from Investing Activities





Cash
flows from investing activities were primarily the result of proceeds from the
sale of QSP of $108.1, net of cash and normal capital expenditures of
$4.2.





We
routinely evaluate our business as part of our normal business strategy and
continually consider business acquisitions and divestitures.


35





Cash
Flows from Financing Activities





Net cash
provided from financing activities for the first half of fiscal 2009 and 2008
was $18.1 and $69.0, respectively, and included principal payments on our long
term debt of $6.6 during both the first half of fiscal 2009 and fiscal 2008, net
increases in long term borrowings $6.8 and $72.7 and short term borrowings of
$11.3 and $8.0, during the first half of fiscal 2009 and fiscal 2008,
respectively.





Debt





As fully
described in Note 12, Debt, to the consolidated financial statements included in
our Annual Report for the fiscal year ended June 30, 2008, our borrowings
include proceeds under our six-year senior secured $300 revolving credit
facility and a seven-year $1,310 term loan (collectively, the “2007 Credit
Agreement”) and $600 in 9% Senior Subordinated Notes due 2017.  In
addition, we have international lines of credit and overdraft facilities
available to our subsidiaries. A summary of activity for these debt instruments
are as follows:





·
            Senior Secured $300 Revolving
      Credit Facility:During the first half of fiscal 2009 and fiscal
      2008, we had additional borrowings of $400.1 and $205.9, respectively, and
      made payments of $386.7 and $126.6,
  respectively.


·
            $1,310 Term Loan:We
      are required to repay the term loan in quarterly installments in aggregate
      annual amounts equal to 1.0% of the initial aggregate principal amount
      with the full amount due on March 2, 2013.  We repaid $6.6 of
      principal during both the first half of fiscal 2009 and fiscal
      2008.


·
            $600 9% Senior Subordinated
      Notes:The notes mature on February 15, 2017 however are redeemable
      at our option throughout the term.  Please refer to Note 12 in
      our Annual Report on Form 10-K for the year ended June 30, 2008 for the
      detailed terms of the redemption.  No amounts were redeemed
      during the first half of fiscal 2009 and fiscal
  2008.


·
            International Lines of Credit
      and Overdraft Facilities:As of December 31, 2008 and
      June 30, 2008, international lines of credit and overdraft facilities
      totaled $45.1 and $55.1, respectively of which $21.5 and $12.3 were
      outstanding.  During the first half of fiscal 2009 and fiscal
      2008, we increased our amounts borrowed by $11.3 and $8.0,
      respectively.





We are
required to prepay outstanding amounts of the 2007 Credit Agreement upon the
occurrence of certain defined events, including net cash proceeds of any
incurrence of new debt (as defined), certain asset sales or dispositions (as
defined) and 50% of our annual excess cash flow (as defined) and is due in full
on March 2, 2013.  We intend to reinvest the net cash proceeds from
the sale of QSP into assets useful for our business in accordance with the terms
of our debt facilities.  In the event such proceeds are not reinvested
by August 2009, per the terms of the debt facilities, the proceeds must be used
to permanently retire outstanding amounts of the Term Loan.  If it is
necessary to arrange replacement financing for the repayment of the Term Loan,
that replacement financing would be at prevailing interest rates and may or may
not be available, based on present financial market conditions.


36





The 2007
Credit Agreement contains a number of covenants that, among other things,
restrict, subject to certain exceptions, our ability to: (i) incur
additional indebtedness or issue shares by subsidiaries, (ii) create liens
on assets, (iii) engage in mergers or consolidations, (iv) sell
assets, (v) pay dividends and distributions, (vi) make investments,
loans or advances, (vii) repay subordinated indebtedness (including the
Senior Subordinated Notes described below), (viii) make certain
acquisitions, (ix) engage in certain transactions with affiliates,
(x) enter into certain burdensome agreements, (xi) amend material
agreements governing our subordinated indebtedness (including the Senior
Subordinated Notes), (xii) change our lines of business and
(xiii) make capital expenditures.  In addition, the 2007 Credit
Agreement includes a financial covenant requiring us to comply with a maximum
leverage ratio, as defined.  The 2007 Credit Agreement also contains
certain defined customary affirmative covenants and events of
default.  At December 31, 2008 we are in compliance with all of our
financial covenants.





On
December 4, 2008, Moody’s Investor Services (“Moody’s”) downgraded our corporate
family rating and probability of default rating to B3 from B2, the rating on our
senior secured credit facility to B2 from B1 and the rating on our senior
subordinated notes to Caa2 from Caa1, all with a negative rating
outlook.  On December 9, 2008, Standard & Poor’s Ratings Services
(“S&P”) lowered its issue-level rating onthe Company’s
senior secured debt to B- from B.  The issue-level rating on the
Company’s subordinated debt remains unchanged as CCC, and the Company’s
corporate credit rating remains unchanged at B-.  S&P stated that
the rating outlook is stable.





Sufficiency
of Capital Resources





The
current global economic conditions have had a negative impact on the cash flows
of our businesses, and could continue to have a negative impact on our liquidity
and capital resources over the near term.  There can be no assurances
that our businesses will generate sufficient cash flows from operations to fund
our day-to-day operations and, more importantly, our debt service
obligations.  In addition, there can be no assurances that future
borrowings under our 2007 Credit Agreement will be available in an amount
sufficient to satisfy debt obligations or to fund other liquidity
needs.  Our financial and operating performance is subject to
prevailing economic and industry conditions and to financial, business and other
factors, some of which are beyond our control.





If our
cash flows and capital resources are insufficient to fund debt service
obligations, we will likely not perform as previously anticipated or described
in our Annual Report on Form 10-K for the year ended June 30,
2008.  It also may be necessary to take steps to reduce our costs,
seek additional capital or restructure or refinance our
indebtedness.  These actions could have a material adverse effect on
our business, financial condition and results of operations.  In
addition, we cannot assure the ability to take any of these actions, that these
actions would be successful and permit us to meet scheduled debt service
obligations or that these actions would be permitted under the terms of our
existing or future debt agreements, including the indenture governing our Senior
Subordinated Notes and our 2007 Credit Agreement.  For example, we may
need to refinance all or a portion of our indebtedness on or before maturity.
There can be no assurance that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all.  In the
absence of improved operating results and access to capital resources, we could
face substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other
obligations.  These actions could have a material adverse effect on
our business, financial condition and results of operations.


37





Our
ability to access capital markets is subject to market conditions and certain
limitations including our credit ratings and covenant restrictions in our
financing documents.  Current market conditions have further
restricted our ability to access capital.  As stated above, on
December 4, 2008, Moody’s downgraded our corporate family rating and probability
of default rating to B3 from B2, the rating on our senior secured credit
facility to B2 from B1 and the rating on our senior subordinated notes to Caa2
from Caa1, all with a negative rating outlook.  On December 9, 2008,
S&P lowered its issue-level rating on our senior secured debt to B- from B,
maintained the issue-level rating on our subordinated debt as CCC, and
maintained our corporate credit rating at B-, with a stable rating
outlook.  A further downgrade by either S&P or Moody’s could
further restrict our ability to access capital.  Further, a downgrade
may affect the terms under which some suppliers would be willing to continue to
do business with us.





In light
of the current uncertain environment, in order to bolster our liquidity and
competitiveness, we have a number of initiatives planned and
underway.  On January 28, 2009, we announced the adoption of a global
“Recession Plan” to strengthen our financial performance in the current economy,
including a planned reduction of approximately 8 percent of our current global
workforce and other additional cost reduction measures across the organization
including unpaid time off in both Fiscal 2009 and 2010 where permitted by laws
and agreements, and the suspension of company matching contributions to the U.S.
401(k) retirement plan.  The adequacy and ultimate success of our cost
reduction initiatives is uncertain and cannot be assured. We will continue to be
proactive with respect to these matters and, if deemed advisable, will consider
such other measures as circumstances warrant.





If we
cannot maintain compliance with the financial covenants in our financing
agreements or make scheduled payments or prepayments on our debt, we will be in
default under those agreements and, as a result, among other things, our debt
holders could declare all outstanding principal and interest to be due and
payable and we could be forced into bankruptcy or liquidation or be required to
substantially restructure or alter business operations or debt obligations. See
Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2008 and Part II, Item 1A, “Risk Factors” in this Form 10-Q,
for further discussion of the risks associated with our ability to service all
of our existing indebtedness and ability to maintain compliance with financial
covenants in our credit facilities.








Recent
Accounting Standards





See Note
1, Basis of Presentation in our Notes to Consolidated Financial Statements
contained in this Quarterly Report for information regarding recent accounting
standards affecting us.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK


(includes forward-looking
information)





The
functional currency for our foreign operations is the local
currency.  In the normal course of business, significantly all of the
transactions of our foreign operations occur in local currencies.  We
purchase forward contracts to minimize the effect of fluctuating currencies on
specifically identifiable transactions.  These transactions were
minimal during the first two quarters of 2009.  Based on our
historical experience, we expect the foreign exchange gains and losses during
2009 to be minimal.


38





Interest
expense related to our 2007 Credit Agreement is sensitive to changes in the
general level of U.S. interest rates.  Additionally, the 2007 Credit
Agreement includes within the above mentioned facilities a US$100.0 term loan
tranche outstanding that was made in euros to one of our German subsidiaries.
Borrowings under the term loans bear interest at a rate equal to an applicable
margin plus, at our option, either (a) a base rate (“Base Rate”) determined by
reference to the higher of (1) the prime rate and (2) the federal funds rate
plus 0.50% or (b) a Eurocurrency rate (“Eurocurrency Rate”) determined by
reference to the rate for Eurocurrency deposits for a period of one, two, three
or six-months or, subject to availability to the lenders, nine or twelve months,
as selected by us.  For Base Rate loans and Eurocurrency Rate loans,
the applicable margin is 1.00% and 2.00%, respectively.





Based on
our average debt outstanding under this agreement over the past three months, a
1% change in the interest rate charged on these borrowings would have affected
interest expense during the three and six-months ended December 31, 2008 by $1.8
and $3.7, respectively.





We
entered into interest rate swap agreements with a notional value totaling
$750.0, involving the exchange of floating- for fixed rate interest payments, to
reduce interest rate volatility and to comply with the interest rate provisions
of our 2007 Credit Agreement.




Additional
information is available in Note 9, Derivative Instruments, in our Notes to
Consolidated Financial Statements.





ITEM
4T.  CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information is timely recorded, processed, summarized and reported, and that
such information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.





Inherent
Limitations on Effectiveness of Controls





Our
disclosure controls and procedures and our internal controls over financial
reporting may not prevent or detect all errors and all fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons or by collusion of two or more people. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.





39





Evaluation
of Effectiveness of Controls





Our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report.  Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this
report.





Changes
in Internal Control Over Financial Reporting





In the
ordinary course of business, we routinely enhance our information systems by
either upgrading our current systems or implementing new systems. No change in
our internal control over financial reporting occurred during the fiscal quarter
ended December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.














40


PART
II


ITEM
1.  LEGAL PROCEEDINGS





We are
defendants in various lawsuits and claims arising in the regular course of
business.  Based on the opinions of management and counsel for these
matters, we believe that recoveries, if any, by plaintiffs and claimants would
not materially affect our financial position or results of
operations.





ITEM
1A.  RISK FACTORS





There
have been no material changes to our Risk Factors as previously disclosed in our
Annual Report on Form 10-K for the year ended June 30, 2008, except as set forth
below.  The following are additional risks affecting the
company:





The
sustained and expanding financial crisis and economic downturn could continue to
have a negative impact on our liquidity, results of operations and financial
condition, as well as our ability to accurately forecast our results, and it may
cause a number of the risks that we currently face to increase in likelihood,
magnitude and duration.





We are
experiencing pressure on our business and deterioration of our cash and
liquidity as customers across all our businesses respond to increasingly
deteriorating macroeconomic and industry conditions and uncertainty by delaying
and reducing their expenditures.  The extreme volatility in the
financial, foreign exchange, equity and credit markets globally has compounded
the situation.  The current global economic conditions have had a
negative impact on the cash flows of our businesses, and could continue to have
a negative impact on our liquidity and capital resources over the near
term.  With this sustained and expanding economic downturn, we expect
that we will continue to experience significant pressure on a number of
fronts.  The impact of these events on us going forward will depend on
a number of factors, including the duration and severity of these events,
whether the U.S. and global economies enter into a prolonged recession, and
whether the recovery period is brief or prolonged.  Our financial and
operating performance is subject to prevailing economic and industry conditions
and to financial, business and other factors, some of which are beyond our
control.





There can
be no assurances that our businesses will generate sufficient cash flows from
operations to fund our day-to-day operations and, more importantly, our debt
service obligations.  In addition, there can be no assurances that
future borrowings under our senior secured credit facilities will be available
in an amount sufficient to satisfy our debt obligations or to fund other
liquidity needs.





If our
cash flows and capital resources are insufficient to fund debt service
obligations, we will likely not perform as previously anticipated.  It
also may be necessary to take steps to reduce our costs, to seek additional
capital or to restructure or refinance our indebtedness.  These
actions could have a material adverse effect on our business, financial
condition and results of operations.  In addition, we cannot assure
the ability to take any of these actions, that these actions would be successful
and permit us to have adequate liquidity, to meet scheduled debt service
obligations or that these actions would be permitted under the terms of our
existing or future debt agreements, including the indenture governing our senior
subordinated notes and our senior secured credit facilities.  In the
absence of improved operating results and access to capital resources, we could
face substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other
obligations.  These actions could have a material adverse effect on
our business, financial condition and results of operations.


41





Additionally,
as a result of current economic conditions, we may face new risks as yet
unidentified, and a number of risks that we ordinarily face may increase in
likelihood, magnitude and duration.  These risks include but are not
limited to deferrals or reductions of customer orders, potential deterioration
of our customers’ ability to pay, losses or impairment charges, reduced revenue,
further deterioration in our cash balances, and liquidity due to foreign
exchange impacts, and an inability to access our capital markets.  The
financial crisis and economic downturn are also adversely impacting our ability
to accurately forecast our performance, results or cash position.





Concerns
about the economy and financial viability may cause a decrease in the ability or
willingness of our vendors to supply products and services to us on favorable
terms, which may have a negative impact on our business.




We have
developed, and rely on, relationships with vendors who provide us with products
and/or services.  Many factors outside our control may harm these
relationships and the ability or willingness of these vendors to sell these
products or to provide these services on acceptable terms.  A vendor
may seek to modify the terms of the relationship that it has with us, due to
general economic concerns or due to concerns relating to the vendor or to us, at
any time.





Our
results of operations and cash flows have been negatively impacted in the
current fiscal year by the tightening of the global economy.  Should
these negative trends continue, certain vendors may raise concerns about
entering into new agreements with us without some assurance that we will operate
profitably.  Furthermore, certain vendors may refuse to continue to do
business with us unless we guarantee, including the posting of collateral; make
advance payments for products or services; or change our payment
terms.  This concern is exacerbated in the current economic
environment.  Disruptions in goods supplied or services provided from
and by our vendors or changes in the terms of our relationships, including
those that could arise because of concern about our profitability, viability, or
our compliance with the covenants contained in our credit facilities, could have
a material adverse effect on our business, financial condition, results of
operations and cash flows.





Financial
difficulties that some of our vendors may face, including as a result of one or
more vendor bankruptcies due to poor economic conditions, may cause them to fail
to provide us with such products and/or services or may increase the cost of the
products and services that they provide us.  We may be unable to
procure replacement products and/or services from other vendors in a timely and
efficient manner and on acceptable terms, or at all.





In
addition, the arrangements that we have with corporate partners, such as
national wholesalers, may be subject to changes in market conditions, vendor
marketing strategies, and changes in the profitability or sell-through of the
related merchandise.  Any material change in these relationships, such
as increased pricing, could have a material adverse effect on our business,
financial condition, results of operations, liquidity and cash
flow.




42




If
our goodwill or amortizable intangible assets become impaired we may be required
to record a significant non-cash charge which could have a material adverse
effect on our reported net earnings or loss.





As
required by GAAP, we review our goodwill and amortizable intangible assets for
impairment in the fourth quarter of each fiscal year or when events or changes
in circumstances indicate the carrying value may not be
recoverable.  Factors that may be considered a change in circumstances
indicating that the carrying value of our goodwill or amortizable intangible
assets may not be recoverable include a decline in future cash flows and slower
growth rates in our industry, including those resulting from a reduction in
consumer spending and demand for advertising stemming from the deterioration of
the global economy.  We may be required to record a significant
non-cash charge to our results during any period in which impairment of our
goodwill or amortizable intangible assets is determined.  Any such
charge could have a material adverse effect on our reported net earnings or
loss.





In
addition, the following Risk Factors contained in our Annual Report have been
amended and restated as follows:





Our
School & Educational Services segment has not performed well in recent
years, and there is no assurance that our turnaround strategy will be
successful.





The
revenues and operating profit generated by our School & Educational Services
segment for the last few years have been declining.  This decline has
been principally driven by Books Are Fun and QSP.  The declining
results were associated with the competitive pressures in the marketplace, the
costs and issues associated with recruiting and retaining sales force members,
merchandising efforts, as well as the general economic climate.  A
continued decline in this segment may adversely affect our results of operations
and financial condition.  On August 22, 2008, we sold QSP, Quality
Service Programs, Inc., and their affiliated subsidiaries in the United States
and Canada to subsidiaries of Time Inc. for a purchase price of
$110.0.  On December 19, 2008, we sold the principle operating assets
of Books Are Fun to Imagine Nation Books, Ltd. for a purchase price of $16.8,
subject to the finalization of certain audit-related adjustments.





The
remaining businesses in this segment are affected significantly by changes
in purchasing patterns or trends in, as well as the underlying strength of, the
educational, trade, entertainment and software markets.  Many of our
customers in these sectors purchase our products with monies received from
sources of governmental funding, including federal, state and local
governments.  Thus, our business may be adversely affected by
budgetary restraints and other reductions in educational funding at the federal
or state level, as well as new legislative or regulatory actions.  Our
business also could be adversely affected by changes in the procurement process
related to the expenditure of government funds, to which we may be unable to
adapt successfully.





A
decline in our operating results or available cash could cause us to experience
difficulties in complying with covenants contained in our financing
agreements, which could result in our bankruptcy or liquidation.





Given the
disruptions in the credit and financial markets in recent months, and the
continuing impact of adverse economic, financial and industry conditions on the
demand for consumer products and advertising, uncertainty exists as to whether
we will be able to generate results from operations or consummate transactions
sufficient to enable us to remain in compliance with the financial covenants
contained in the indenture governing our senior subordinated notes or our senior
secured credit facilities for subsequent periods.  In addition, under
our senior secured credit facilities, we are required to achieve specified
financial and operating results and to satisfy and maintain specified
financial ratios and other financial condition tests. Our ability to meet those
financial ratios and tests can be affected by events beyond our control,
and we cannot assure you that we will meet those ratios and
tests.


43





A breach
of any of these or other covenants in our senior subordinated notes or senior
secured credit facilities could result in a default under either of these
agreements and by reason of cross-acceleration or cross-default provisions, our
senior secured credit facilities, our senior subordinated notes and any
other indebtedness may then become immediately due and payable. Upon such a
default, our creditors could declare all amounts outstanding to be immediately
due and payable and the lenders under our senior secured credit facilities
could terminate all commitments to extend further credit, which could have
a material adverse effect on our results of operations and financial
condition.





If we
were unable to repay amounts due under our senior secured credit facilities, the
lenders under our senior secured credit facilities could proceed against
the collateral granted to them to secure that indebtedness and institute
foreclosure proceedings against our assets. We have pledged a significant
portion of our assets as collateral under the senior secured credit
agreement. If the lenders under the senior secured credit agreement accelerate
the repayment of borrowings, we cannot assure you that we will have
sufficient assets to repay the senior secured credit facilities, as well as our
unsecured indebtedness. We could be forced into bankruptcy or
liquidation.





If our
operating performance declines, we may in the future need to obtain waivers from
the required lenders under our senior secured credit agreement to avoid an
event of default. We may be unable to obtain any such waiver which could
result in our default under our senior secured credit agreement, and the
lenders could exercise their rights, as described above, and we could be
forced into bankruptcy or liquidation.





In
addition, as allowed under our 2007 Credit Agreement, we currently intend to
reinvest the net cash proceeds from the sale of QSP in assets useful for our
business in accordance with terms of our debt facilities by August
2009.  In the event such proceeds are not reinvested, per the terms of
the debt facilities, the proceeds must be used to permanently retire our term
loan debt.  If it is necessary to arrange replacement financing for
the repaid term loan debt, that replacement financing would be at prevailing
interest rates and may or may not be available, based on present financial
market conditions.  Should we be unable to arrange adequate
replacement financing or our cash flows are insufficient to cover the financial
deficit, we may not have sufficient
liquidity and capital resources necessary to meet our future
financial obligations.  The potential impact of present weak global
economic conditions on the cash flows of our businesses also could have a
negative impact on our liquidity and capital resources.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





There
have been no unregistered sales of equity securities during the fiscal quarter
ended December 31, 2008.





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





There
were no defaults upon senior securities during the fiscal quarter ended December
31, 2008.





44


ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





The
Company’s sole stockholder, RDA Holding Co., approved by written consent dated
November 5, 2008, (1) the election of the following persons to serve as members
of the Board of Directors of the Company, each to serve in such capacity until
such individual’s duly appointed successor is elected and qualified, or until
such individual’s earlier death, resignation, or removal: Mary G. Berner,
Timothy C. Collins, Harvey Golub, Andrew S.B. Knight, Andrew R. Lack, Steven T.
Shapiro, and Harris Williams; (2) the election of Eric W. Schrier to serve as a
member of the Board of Directors of the Company, to hold such office until March
1, 2009, or until his earlier death, resignation, or removal; and (3) the
appointment of Ernst & Young LLP, the Company’s independent auditor for the
fiscal year ended June 30, 2008, to continue as the Company’s independent
auditor for the fiscal year ending June 30, 2009.





ITEM
5.  OTHER INFORMATION





None.





ITEM
6.  EXHIBITS




2.1
              Agreement
      and Plan of Merger dated November 16, 2006 among The Reader’s Digest
      Association, Inc., RDA Holding Co. and Doctor Acquisition Co. (filed as
      Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 1-10434)
      dated November 16, 2006, and incorporated by reference
      herein).3.1
              Certificate
      of Incorporation of The Reader’s Digest Association, Inc., effective March
      2, 2007 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K
      (File No. 1-10434) dated March 8, 2007, and incorporated by reference
      herein).3.2
              Amended
      and Restated By-Laws of The Reader’s Digest Association, Inc., effective
      May 22, 2007 (filed as Exhibit 3.2 to the Company’s Registration Statement
      on Form S-4 (Registration No. 333-149140), and incorporated by reference
      herein).4.1
              Indenture
      dated as of March 2, 2007 among The Reader’s Digest Association, Inc., the
      Guarantors named therein and The Bank of New York, as Trustee, relating to
      The Reader’s Digest Association, Inc.’s 9% Senior Subordinated Notes due
      2017 (filed as Exhibit 4.1 to the Company’s Registration Statement on Form
      S-4 (Registration No. 333-149140),, and incorporated by reference
      herein).10.1*
              Letter
      Agreement dated February 10, 2009 between Mary G. Berner and The Reader's
      Digest Association, Inc.31.1*
              Certification
      of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the
      Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
      of 2002.31.2*
              Certification
      of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the
      Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
      of 2002.32.1*
              Certifications
      of Chief Executive Officer and Chief Financial Officer required by Rule
      13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and
      Section 906 of the Sarbanes-Oxley Act of
2002.


______________________________________


*  Filed
      herewith.


45


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.







THE READER’S DIGEST ASSOCIATION,
INC.











Dated:  February
13,
2009                                                                    By: /s/  Thomas A.
Williams


Thomas A.
Williams


Senior Vice President
and


Chief
Financial Officer


(Principal
Financial Officer)


46




EXHIBIT
INDEX
 
 2.1
              Agreement
      and Plan of Merger dated November 16, 2006 among The Reader’s Digest
      Association, Inc., RDA Holding Co. and Doctor Acquisition Co. (filed as
      Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 1-10434)
      dated November 16, 2006, and incorporated by reference
      herein).3.1
              Certificate
      of Incorporation of The Reader’s Digest Association, Inc., effective March
      2, 2007 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K
      (File No. 1-10434) dated March 8, 2007, and incorporated by reference
      herein).3.2
              Amended
      and Restated By-Laws of The Reader’s Digest Association, Inc., effective
      May 22, 2007 (filed as Exhibit 3.2 to the Company’s Registration Statement
      on Form S-4 (Registration No. 333-149140), and incorporated by reference
      herein).4.1
              Indenture
      dated as of March 2, 2007 among The Reader’s Digest Association, Inc., the
      Guarantors named therein and The Bank of New York, as Trustee, relating to
      The Reader’s Digest Association, Inc.’s 9% Senior Subordinated Notes due
      2017 (filed as Exhibit 4.1 to the Company’s Registration Statement on Form
      S-4 (Registration No. 333-149140),, and incorporated by reference
      herein).10.1*
              Letter
      Agreement dated February 10, 2009 between Mary G. Berner and The Reader's
      Digest Association, Inc.31.1*
              Certification
      of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the
      Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
      of 2002.31.2*
              Certification
      of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the
      Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
      of 2002.32.1*
              Certifications
      of Chief Executive Officer and Chief Financial Officer required by Rule
      13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and
      Section 906 of the Sarbanes-Oxley Act of 2002.
 _____________________________
 *Filed
herewith
  47