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 September 30, 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  November 11, 2008 was 1,000.





-1-















THE
READER’S DIGEST ASSOCIATION, INC.







QUARTERLY
REPORT


FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008




INDEX








Part
      I -
            Financial
      Information
            PageItem
      1.
            Financial
      Statements (unaudited):Consolidated  Statements
      of Operations for the three-month periods ended
              September
      30, 2008 and 2007
            4Consolidated
      Balance Sheets as of September 30, 2008 and June 30, 2008
            5Consolidated
      Statements of Cash Flows for the three-month periods ended
              September
      30, 2008 and 2007
            6Notes
      to Consolidated Financial Statements
            8Item
      2.
            Management's
      Discussion and Analysis of Financial Condition
              and
      Results of Operations
            25Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            29Item
      4T.
            Controls
      and Procedures
            30Part
      II -
            Other
      InformationItem
      1.
            Legal
      Proceedings
            31Item
      1A.
            Risk
      Factors
            31Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            32Item
      3.
            Defaults
      Upon Senior Securities
            32Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            32Item
      5.
            Other
      Information
            32Item
      6.
            Exhibits
            32











-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 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.











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ITEM1.FINANCIAL STATEMENTS





The
Reader's Digest Association, Inc. and Subsidiaries


Consolidated
Statements of Operations for the three-month periods ended September 30, 2008
and September 30, 2007


(In
millions)


(unaudited)








Three-month
      period endedSeptember
      30,2008
            
            
            2007Revenues
            
            $
            550.4
            
            
            $
            545.5Product,
      distribution and editorial expenses
            
            
            (287.4
            )
            
            
            (258.6
            )Promotion,
      marketing and administrative expenses
            
            
            (366.9
            )
            
            
            (365.8
            )Intangible
      asset impairment
            
            
            (2.5
            )
            
            
            ---Other
      operating items, net
            
            
            (4.0
            )
            
            
            (0.6
            )Operating loss
            
            
            (110.4
            )
            
            
            (79.5
            )Interest
      expense
            
            
            (40.8
            )
            
            
            (45.5
            )Other
      income, net
            
            
            1.8
            
            
            
            2.2Loss
      before benefit from income taxes and discontinued
    operations
            
            
            (149.4
            )
            
            
            (122.8
            )Income
      tax benefit
            
            
            15.8
            
            
            
            13.2Loss
      from continuing operations
            
            
            (133.6
            )
            
            
            (109.6
            )Loss
      from discontinued operations, net of$3.8
      and $0.2 tax benefits infiscal
      2009 and 2008, respectively
            
            
            (22.9
            )
            
            
            (13.4
            )Net loss
            
            $
            (156.5
            )
            
            $
            (123.0
            )





See
accompanying Notes to Consolidated Financial Statements.





-4-





TheReader's Digest Association, Inc. and Subsidiaries


Consolidated
Balance Sheets as of September 30, 2008


and June
30, 2008


(In
millions, except per share data)


(unaudited)




September
      30,
                2008
              
              
              June
      30,
                2008AssetsCurrent
      assetsCash and cash
      equivalents
              
              $
              35.5
              
              
              $
              79.4Accounts receivable,
      net
              
              
              283.7
              
              
              
              296.1Inventories
              
              
              156.7
              
              
              
              176.4Prepaid
      and deferred promotion costs
              
              
              48.0
              
              
              
              54.5Prepaid expenses and other current
      assets
              
              
              174.8
              
              
              
              162.8Assets
      held for sale
              
              
              ---
              
              
              
              155.0Total
      current assets
              
              
              698.7
              
              
              
              924.2Property, plant and equipment,
      net
              
              
              98.7
              
              
              
              106.8Goodwill
              
              
              1,537.3
              
              
              
              1,621.2Other intangible assets,
      net
              
              
              888.0
              
              
              
              904.1Prepaid pension
    assets
              
              
              297.5
              
              
              
              290.9Other
      noncurrent assets
              
              
              116.0
              
              
              
              118.9Total
      assets
              
              $
              3,636.2
              
              
              $
              3,966.1Liabilities
      and stockholder’s equityCurrent
      liabilitiesShort-term debt
              
              $
              22.1
              
              
              $
              25.6Accounts payable
              
              
              216.7
              
              
              
              227.7Accrued expenses
              
              
              248.4
              
              
              
              281.7Income taxes
    payable
              
              
              22.5
              
              
              
              27.9Unearned revenues
              
              
              410.7
              
              
              
              378.0Other current
      liabilities
              
              
              10.6
              
              
              
              10.9Liabilities
      held for sale
              
              
              ---
              
              
              
              28.7Total
      current liabilities
              
              
              931.0
              
              
              
              980.5Long-term debt
              
              
              2,057.0
              
              
              
              2,091.9Unearned revenues
              
              
              154.9
              
              
              
              137.6Accrued pension
              
              
              79.6
              
              
              
              84.0Post-retirement and
      post-employment benefits other than pensions
              
              
              23.8
              
              
              
              25.5Other noncurrent
      liabilities
              
              
              373.2
              
              
              
              391.6Total
      liabilities
              
              $
              3,619.5
              
              
              $
              3,711.1Common
      stock (par value $1.00 per share, authorized and issued
                1,000 shares at September 30, 2008 and June 30, 2008)Paid-in capital
              
              
              1,009.3
              
              
              
              1,008.8Accumulated
deficit
              
              
              (1,063.7
              )
              
              
              (907.2
              )Accumulated other comprehensive
      gain
              
              
              71.1
              
              
              
              153.4Total
      stockholder’s equity
              
              
              16.7
              
              
              
              255.0Total
      liabilities and stockholder’s equity
              
              $
              3,636.2
              
              
              $
              3,966.1


See
accompanying Notes to Consolidated Financial Statements.





-5-





TheReader's Digest Association, Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows for the three-month periods
  ended


September
      30, 2008 and September 30, 2007


(In
millions)


(unaudited)








Three-month
      period endedSeptember
      30,2008
            
            
            2007Cash
      flows from operating activitiesNet
      loss from continuing operations
            
            $
            (133.6
            )
            
            $
            (109.6
            )Depreciation
      and amortization
            
            
            18.4
            
            
            
            21.4Impairment
      of intangibles
            
            
            2.5
            
            
            
            ---Amortization
      of debt issuance costs
            
            
            2.1
            
            
            
            2.1Net
      gain on sale of certain assets
            
            
            ---
            
            
            
            (0.4
            )Stock-based
      compensation
            
            
            0.6
            
            
            
            ---Changes
      in assets and liabilities, net of effects of
              DispositionsAccounts
      receivable, net
            
            
            (6.5
            )
            
            
            (18.1
            )Inventories
            
            
            13.3
            
            
            
            (24.7
            )Prepaid
      and deferred promotion costs
            
            
            2.1
            
            
            
            1.5Other
      assets
            
            
            (9.4
            )
            
            
            (4.4
            )Unearned
      revenues
            
            
            64.8
            
            
            
            97.0Income
      and deferred taxes, net
            
            
            (29.5
            )
            
            
            (32.7
            )Accounts
      payable and accrued expenses
            
            
            (23.9
            )
            
            
            (14.3
            )Other
      liabilities
            
            
            (1.6
            )
            
            
            (10.6
            )Net
      change in cash due to continuing operating activities
            
            
            (100.7
            )
            
            
            (92.8
            )Net
      change in cash due to discontinued operating activities
            
            
            (22.9
            )
            
            
            (32.7
            )Net
      change in cash due to operating activities
            
            
            (123.6
            )
            
            
            (125.5
            )Cash flows from investing
      activitiesProceeds from sales of certain
      businesses, net
            
            
            108.1
            
            
            
            10.2Capital
    expenditures
            
            
            (2.3
            )
            
            
            (4.8
            )Net
      change in cash due to continuing investing activities
            
            
            105.8
            
            
            
            5.4




















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The
Reader's Digest Association, Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows for the three-month periods
  ended


September
      30, 2008 and September 30, 2007


(In
millions)


(unaudited)





Three-month
      period endedSeptember
      30,2008
              
              
              2007Cash
      flows from financing activitiesProceeds
      from borrowings, net
              
              
              41.5
              
              
              
              136.4Debt
      payments
              
              
              (65.2
              )
              
              
              ---Short-term
      borrowings, net
              
              
              (2.0
              )
              
              
              ---Other,
      net
              
              
              ---
              
              
              
              0.1Total
      change in cash due to financing activities
              
              
              (25.7
              )
              
              
              136.5Effect
      of exchange rate changes on cash
              
              
              (0.4
              )
              
              
              2.4Net
      change in cash and cash equivalents
              
              
              (43.9
              )
              
              
              18.8Cash
      and cash equivalents at beginning of period
              
              
              79.4
              
              
              
              50.2Cash
      and cash equivalents at end of period
              
              $
              35.5
              
              
              $
              69.0


See
accompanying Notes to Consolidated Financial Statements.





-7-







TheReader's Digest Association, Inc. and
      Subsidiaries


Notes
to Consolidated Financial Statements


(Dollars
in millions, except per share data)


(unaudited)





References
in Notes to Consolidated Financial Statements to “we,” “us” and "our” are to The
Reader’s Digest Association Inc., All references to 2008 and 2007, unless
otherwise indicated, are to fiscal 2009 and fiscal 2008,
respectively.  Our fiscal year is the period from July 1 through June
30.  Dollars are presented in millions, except for share and per share
data.








(1)           Basis
of Presentation and Use of Estimates





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 more than 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 5,
Revenues and Operating (Loss) Profit by Reportable Segment.




During
the first quarter of fiscal 2009, we sold our home party planning business
Taste of Home Entertaining, Inc. (“TOHE”) and our schools and youth fundraising
division consisting of QSP, Inc., Quality Service Programs, Inc., and their
affiliated subsidiaries in the United States and Canada
(“QSP”).  Management had concluded that these businesses were no
longer consistent with our strategic direction.  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, subject
to certain closing balance sheet adjustments.  Such operations have
been included in Discontinued Operations in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.  See Note 14, Discontinued
Operations for more information.




Subsequent
to September 30, 2008, we entered into an agreement to sell certain assets of
Books Are Fun, Ltd. ("BAF"), RDA’s display-marketing division.  The
transaction includes the sale of intellectual property and product
inventory.  Under the terms of the agreement, consideration for such
sale is $17.5 payable over three years, subject to potential adjustment based on
inventory levels at closing.





Basis
of Presentation and Use of Estimates





The
accompanying consolidated financial statements as of September 30, 2008 and 2007
and for the three-month periods 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”).





-8-





We and
our majority owned subsidiaries are owned by RDA Holding Co., an entity
controlled by Ripplewood Holdings L.L.C. (“Ripplewood”).  The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in our Annual Report
for the fiscal year ended June 30, 2008.





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 ($80.6), RDA Holding Co. junior pay-in-kind preferred stock
($20.0) and cash ($0.1).





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 ($50.1) and net cash
($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 ($0.7) and payment of cash ($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 SFAS No. 141, Business Combinations, for a
combination of entities under common control.





-9-





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 No.
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.





All
significant intercompany accounts and transactions have been eliminated in
fiscal 2009 and 2008 consolidations.  These statements, in the opinion
of management, have been prepared in conformity with U.S. generally accepted
accounting principles, applying certain assumptions and estimates, including all
adjustments considered necessary to present such information
fairly.  During the first quarter of fiscal 2009, an inventory
write-down in the amount of ($35) was recorded for Books are Fun due to
strategic decisions made by senior management regarding the business unit and a
severe downturn in economic conditions.  All other adjustments are of
a normal recurring nature.  Although these estimates are based on
management’s knowledge of current events and actions that we may undertake in
the future, actual results may ultimately differ from those
estimates.  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.





We report
on a fiscal year that begins July 1.  The three-month periods ended
September 30, 2008 and 2007 are the first fiscal quarters of 2009 and 2008,
respectively.





Recent
Accounting Standards





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No.
141(R)”).  SFAS No. 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-relating 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 No.
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 No. 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.





In
March 2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS No. 161”). SFAS No. 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 No. 161.




(2)           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





-10-





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
4,988,047 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 491,000, to 5,479,047, net of forfeitures and expirations.





During
the three-month period ended September 30, 2008, the Holding Co. Board granted
approximately 0.5 million stock options, 0.02 million shares of restricted stock
and 0.02 million shares of restricted stock units to certain directors,
employees and consultants of our company. 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.  Stock options were granted with an exercise price of $10.00
that was deemed equal to the estimated market value of RDA Holding Co.’s common
stock at the date of grant.  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 options, the
expected period to consummate a liquidity event and the mid-point between the
vesting date and the end of the contractual term.








Assumptions
            
            Fiscal
      Year 2009Expected
      volatility
            
            
            32.38%-
      41.97
            %Expected
      term (years)
            
            
            4-6Risk-free
      interest rate
            
            
            2.68%
      - 5.05
            %Expected
      dividend yield
            
            
            0
            %





A summary
of stock option activity under the 2007 Plan as of September 30, 2008 is as
follows:





Options
            
            Shares
              (000’s)
            
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual TermOutstanding
      at June 30, 2008
            
            
            2,991
            
            
            $
            10.00
            
            9.2
      yearsGranted
            
            
            509
            
            
            
            10.00Forfeited
      or expired
            
            
            (74
            )
            
            
            10.00Outstanding
      at September 30, 2008
            
            
            3,426
            
            
            $
            10.00
            
            7.7
      yearsVested
      or expected to vest at September 30, 2008
            
            
            3,426
            
            
            $
            10.00
            
            7.7
      yearsExercisable
      at September 30, 2008
            
            
            1,473
            
            
            $
            10.00
            
            9.0
      years







-11-





The
weighted-average fair value of options granted during the three-month period
ended September 30, 2008 was $4.31. No options were exercised during the
three-month period ended September 30, 2008.





A summary
of RSAs and RSUs activity under the 2007 Plan as of September 30, 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
            
            
            21
            
            
            
            10.00
            
            
            
            15
            
            
            
            10.00Vested
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            10.00Forfeited
            
            
            (95
            )
            
            
            10.00
            
            
            
            (7
            )
            
            
            10.00Nonvested
      at September 30, 2008
            
            
            934
            
            
            $
            10.00
            
            
            
            238
            
            
            $
            10.00





Stock
based compensation expense is pushed down to us from RDA Holding
Co.  For the three-month period ended September 30, 2008, stock based
compensation expense of $0.6 and the related income tax benefit of $0.2, were
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
$3.2, which will be recognized over a weighted average period of 2.25 years on a
straight-line basis over the requisite service period for each separately
vesting portion of the stock option award.





As of
September 30, 2008, it was determined that it was not probable that the
liquidity event, as defined, will be satisfied. As of September 30, 2008, total
stock options, RSAs and RSUs outstanding with these liquidity provisions was 1.4
million, 0.9 million and 0.2 million, respectively. As a result, no compensation
expense was recognized during the three-month period ended September, 2008 for
stock options, RSAs and RSUs with liquidity event provisions.  Total
unrecognized compensation expense related to these stock options, RSAs and RSUs
was $6.7, $9.3 and $2.4, respectively.





(3)           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.







-12-






(4)           Goodwill





The
changes in the carrying amount of goodwill for the three-month period ended
September 30, 2008 are as follows:





Balance
      at June 30, 2008
            
            $
            1,621.2Currency
      translation adjustment
            
            
            (78.0
            )Adjustments
      to the fair value of assets acquired and liabilities assumed at March
      2, 2007
            
            
            (5.9
            )Balance
      at September 30, 2008
            
            $
            1,537.3





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 liabilities.





(5)           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
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.





During
fiscal 2009, we sold our home party-planning business TOHE, and our schools and
youth fundraising division consisting of QSP, Inc., Quality Service Programs,
Inc., and their affiliated subsidiaries in the United States and
Canada.  TOHE was part of the Reader’s Digest United States reporting
segment, and QSP was part of the School & Educational Services reporting
segment.  As a result, these entities have been removed from the
September 30, 2008 and September 30, 2007 results and are now presented in
Discontinued Operations.  See Note 14, Discontinued Operations for
more information.








-13-











Three-month
      period ended
              September
      30,2008
            
            
            2007RevenuesReader’s Digest United
      States
            
            $
            172.9
            
            
            $
            192.3Reader’s Digest
      International
            
            
            352.6
            
            
            
            353.0School & Educational
      Services
            
            
            36.0
            
            
            
            51.3Intercompany
      eliminations
            
            
            (3.7
            )
            
            
            (7.6
            )Purchase accounting related
      adjustment (1)
            
            
            (7.4
            )
            
            
            (43.5
            )Total
      revenues
            
            $
            550.4
            
            
            $
            545.5Operating
      (loss) profitReader’s Digest United
      States
            
            $
            (4.4
            )
            
            $
            2.4Reader’s Digest
      International
            
            
            (25.2
            )
            
            
            (7.5
            )School & Educational
      Services(2)
            
            
            (50.7
            )
            
            
            (9.3
            )Corporate Unallocated(3)
            
            
            (18.7
            )
            
            
            (21.0
            )Other
      operating items, net(4)
            
            
            (4.0
            )
            
            
            (0.6
            )Purchase
      accounting related adjustment (1)
            
            
            (7.4
            )
            
            
            (43.5
            )Operating
      loss
            
            $
            (110.4
            )
            
            $
            (79.5
            )Intercompany
      eliminationsReader’s Digest United
      States
            
            $
            (2.6
            )
            
            $
            (6.3
            )Reader’s Digest
      International
            
            
            (1.1
            )
            
            
            (1.2
            )School & Educational
      Services
            
            
            ---
            
            
            
            (0.1
            )Total
      Intercompany eliminations
            
            $
            (3.7
            )
            
            $
            (7.6
            )








(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)
            During
      the first quarter of fiscal 2009, an inventory write-down in the amount of
      ($35) was recorded for Books are Fun due to strategic decisions made by
      senior management regarding the business unit and a severe downturn in
      economic conditions.





(3)
            Corporate
      Unallocated includes intangible asset impairment, expenses for the cost of
      governance and centrally managed expenses, 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.





(4)
            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.








-14-





(6)           Comprehensive
Loss





Accumulated
other comprehensive gain as reported in our balance sheets represents deferred
pension liabilities and other retirement benefits, foreign currency translation
adjustments and the unrealized loss on our derivatives.  The
components of comprehensive loss, net of related tax, for the three-month
periods ended September 30, 2008 and 2007 were as follows:





Three-month
      period endedSeptember
      30,2008
            
            
            2007Net
      loss
            
            $
            (156.5
            )
            
            $
            (123.0
            )Change
      in:Foreign currency translation
      adjustments
            
            
            (74.2
            )
            
            
            (1.7
            )Unrealized loss on derivatives,
      net of deferred tax benefits of $0.6 and
              $6.0, respectively
            
            
            (1.1
            )
            
            
            (9.9
            )Deferred pension liabilities and
      other retirement benefits, net of
              deferred taxes of
      ($4.2)
            
            
            (7.0
            )
            
            
            ---Total
      comprehensive loss
            
            $
            (238.8
            )
            
            $
            (134.6
            )





(7)           Other
Operating Items, Net





Items
included in Other Operating Items, net for the three-month period ended
September 30, 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.





The table below reflects changes for
the three-month period ended September 30, 2008 to our restructuring
accruals.





Severance
            
            
            Contract
      Obligations
            
            
            TotalBalance
      at June 30, 2008
            
            $
            12.5
            
            
            $
            6.8
            
            
            $
            19.3Accruals
            
            
            1.7
            
            
            
            ---
            
            
            
            1.7Spending
            
            
            (4.2
            )
            
            
            (0.2
            )
            
            
            (4.4
            )Other
            
            
            (3.1
            )
            
            
            ---
            
            
            
            (3.1
            )Balance
      at September 30, 2008
            
            $
            6.9
            
            
            $
            6.6
            
            
            $
            13.5







During
the first quarter of Fiscal 2009, we recorded new charges of $1.7 principally
related to severance costs for restructuring actions at Books are
Fun.  Other principally relates to changes in estimates for previously
established restructuring reserves at the date of the acquisition.







-15-







(8)           Inventories





September
      30,
              2008
            
            
            June
      30,
              2008Raw
      materials
            
            $
            15.4
            
            
            $
            11.2Work-in-progress
            
            
            5.7
            
            
            
            4.9Finished
      goods
            
            
            135.6
            
            
            
            160.3Total
      inventories
            
            $
            156.7
            
            
            $
            176.4








At September 30, 2008, the Company
recorded an inventory write-down for Books are Fun totaling $35.4 due to
strategic decisions made by senior management regarding the business unit and a
severe downturn in economic conditions.





(9)           Debt





2007 Credit Agreement and
Senior Subordinated Notes





As
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 $300.0 revolving credit
facility and a seven-year $1,310.0 term loan (collectively, the “2007 Credit
Agreement”) and $600.0 in 9% Senior Subordinated Notes due 2017.





At
September 30, 2008 and 2007, $173.2 and $225.0, respectively was outstanding
under the revolving credit facility; $1,191.9 and $1,204.0, respectively was
outstanding under the term loan in the United States; $105.1 and $107.5,
respectively, was outstanding under the term loan made available to one of our
German subsidiaries; and $600.0 was outstanding under the Senior Subordinated
Notes. Interest expense for the three-month periods ended September 30, 2008 and
2007 was $40.8 and $45.5, respectively, including the amortization of deferred
financing fees of $2.1 for each period.  The weighted average interest
rate on our borrowings for the three-month periods ended September 30, 2008 and
2007 was 6.8% and 7.7%, respectively.





Derivative
Instruments





As
described in Note 8, Financial Instruments, to the consolidated financial
statements included in our Annual Report 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%.







-16-






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-month period ended September 30, 2008, the fair market value of our
interest rate swaps decreased, resulting in a loss of $1.1, net of deferred tax
benefit of $0.6.  This change is reported in accumulated other
comprehensive gain, which is included in stockholder’s equity on the September
30, 2008 balance sheet.





Lines
of Credit and Overdraft Facilities





As of
September 30, 2008 and 2007, international lines of credit and overdraft
facilities totaled $50.1 and $43.6, respectively of which $8.9 and $0.0 were
outstanding.  The interest rate on outstanding borrowings at September
30, 2008 ranged from 4.0% to 6.0%. These lines of credit are subject to renewal
annually. As of September 30, 2008 and 2007, there were $4.6 and $2.8,
respectively stand-by letters of credit serving as security for real estate
leases entered into by WRC Media and as security for a surety bond related to
sweepstakes promotions.  As of September 30, 2008 and 2007, there were
trade letters of credit of $0.0 and $1.8, respectively.





(10)         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.





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-month
      period ended
              September
      30, 2008
            
            
            Three-month
      period ended
              September
      30, 2007Service
      cost
            
            $
            2.7
            
            
            $
            4.1Interest
      cost
            
            
            12.5
            
            
            
            12.4Expected
      return on plan assets
            
            
            (20.7
            )
            
            
            (20.8
            )Amortization
      of prior service credit
            
            
            (0.1
            )
            
            
            ---Recognized
      actuarial gain
            
            
            (0.6
            )
            
            
            (0.1
            )Curtailments
            
            
            ---
            
            
            
            (1.1
            )Net
      periodic pension benefit
            
            $
            (6.2
            )
            
            $
            (5.5
            )





For the three-month period ended
September 30, 2008 and September 30, 2007 approximately $1.8 and $2.1,
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-month period
ended September 30, 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, and paid $2.3 and $3.6 during the three-month
period ended September 30, 2008 and September 30, 2007,
respectively.


-17-








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-month
      period ended
              September
      30, 2008
            
            
            Three-month
      period ended
              September
      30, 2007Service
      cost
            
            $
            ---
            
            
            $
            0.2Interest
      cost
            
            
            0.4
            
            
            
            0.9Amortization
      of prior service credit
            
            
            (0.4
            )
            
            
            ---Recognized
      actuarial gain
            
            
            (0.4
            )
            
            
            ---Net
      periodic postretirement cost
            
            $
            (0.4
            )
            
            $
            1.1





(11)         Income
Taxes





During
the three-month periods ended September 30, 2008 and 2007, we recorded an income
tax benefit of $15.8 and $13.2, respectively.  The increase in the tax
benefit from September 2007 to September 2008 primarily relates to the
utilization of current year losses against taxable income from discontinued
operations.  These benefits were partially offset by the tax effect of
reversing temporary basis differences.  A discrete income tax benefit
of $2.1 was recorded during the quarter ended September 30, 2008 principally
related to a change in an opening deferred tax balance of a foreign subsidiary
and the impairment of an intangible asset that had a deferred tax liability
associated with it.




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 is 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.




In July
2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48
(“Fin 48”), Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement 109.  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 September 30, 2008 is $42.1
including $15.8 of unrecognized tax benefits, that, if recognized, would affect
the effective tax rate and $26.3 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. We recognize interest and, if
applicable, penalties which could be assessed related to unrecognized tax
benefits in income tax expense.




We have
been notified by the Internal Revenue Service that they will examine the federal
tax returns for fiscal years ended June 30, 2006 and March 2,
2007.  We continue to have routine ongoing income tax audits in
various other jurisdictions.





-18-







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 12 months.
These changes may be the result of 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.




(12)           Service Agreement





On
October 17, 2007, we entered into a seven year contract with Williams Lea, a
global corporate information solutions provider.  Under the contract,
Williams Lea delivers outsourced print procurement and marketing solutions to
our operations in the United States, Canada, Europe, Middle East, Asia Pacific
and Latin America.  Williams Lea has assumed the promotional printing
operations of our direct-mail business, providing us with increased leverage and
purchasing power by virtue of Williams Lea's expertise and global scale. The
contract with Williams Lea is expected to reduce our print procurement cash
expenditures by an aggregate of approximately $130.0 over the first three
years.





(13)           Guarantor
and Non-Guarantor Financial Information





The
Reader’s Digest Association, Inc. (“RDA”) is the issuer of the
Notes.  Our domestic subsidiaries that guarantee our senior secured
credit facility (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
substantially all of whose assets 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.





The
following tables present condensed consolidating financial information as of
September 30, 2008 and 2007 and for the periods ended September 30, 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 and
subsidiaries on a consolidated basis.








-19-











Consolidated
condensed balance sheet as of September 30, 2008:





Assets
              
              Issuer
                Parent
      - RDA
              
              
              Guarantor
                Subsidiaries
              
              
              Non-Guarantor
                Subsidiaries
              
              
              Total
                Eliminations
              
              
              ConsolidatedCurrent
      Assets
              
              $
              11.8
              
              
              $
              437.9
              
              
              $
              373.4
              
              
              $
              (124.4
              )
              
              $
              698.7Property,
      plant and
                equipment, net
              
              
              24.4
              
              
              
              40.4
              
              
              
              33.9
              
              
              
              ---
              
              
              
              98.7Goodwill
              
              
              ---
              
              
              
              633.1
              
              
              
              904.2
              
              
              
              ---
              
              
              
              1,537.3Other
      intangible assets,
                net
              
              
              ---
              
              
              
              344.9
              
              
              
              543.1
              
              
              
              ---
              
              
              
              888.0Prepaid
      pension assets
              
              
              265.4
              
              
              
              ---
              
              
              
              32.1
              
              
              
              ---
              
              
              
              297.5Investments
      in
                subsidiaries
              
              
              2,171.6
              
              
              
              6.2
              
              
              
              ---
              
              
              
              (2,177.8
              )
              
              
              ---Intercompany
                noncurrent receivables
              
              
              13.9
              
              
              
              ---
              
              
              
              110.4
              
              
              
              (124.3
              )
              
              
              ---Other
      noncurrent assets
              
              
              (22.3
              )
              
              
              120.7
              
              
              
              17.6
              
              
              
              ---
              
              
              
              116.0Total
      Assets
              
              $
              2,464.8
              
              
              $
              1,583.2
              
              
              $
              2,014.7
              
              
              $
              (2,426.5
              )
              
              $
              3,636.2Issuer
              
              
              Guarantor
              
              
              Non-Guarantor
              
              
              TotalLiabilities and
    stockholder’s
              
              Parent
      - RDA
              
              
              Subsidiaries
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedEquityCurrent
      liabilities
              
              $
              267.0
              
              
              $
              410.4
              
              
              $
              378.0
              
              
              $
              (124.4
              )
              
              $
              931.0Long-term
      debt
              
              
              1,953.0
              
              
              
              ---
              
              
              
              104.0
              
              
              
              ---
              
              
              
              2,057.0Unearned
      revenues
              
              
              ---
              
              
              
              151.5
              
              
              
              3.4
              
              
              
              ---
              
              
              
              154.9Accrued
      pension
              
              
              61.8
              
              
              
              ---
              
              
              
              17.8
              
              
              
              ---
              
              
              
              79.6Postretirement
      and
                Postemployment
      benefits
                other than
      pensions
              
              
              21.5
              
              
              
              ---
              
              
              
              2.3
              
              
              
              ---
              
              
              
              23.8Intercompany
      noncurrent
                Payables
              
              
              110.4
              
              
              
              11.7
              
              
              
              2.2
              
              
              
              (124.3
              )
              
              
              ---Other
      noncurrent liabilities
              
              
              68.4
              
              
              
              141.8
              
              
              
              163.0
              
              
              
              ---
              
              
              
              373.2Total
      Liabilities
              
              $
              2,482.1
              
              
              $
              715.4
              
              
              $
              670.7
              
              
              $
              (248.7
              )
              
              $
              3,619.5Stockholder’s
      Equity
              
              
              (17.3
              )
              
              
              867.8
              
              
              
              1,344.0
              
              
              
              (2,177.8
              )
              
              
              16.7Total
      Liabilities and Stockholder's Equity
              
              $
              2,464.8
              
              
              $
              1,583.2
              
              
              $
              2,014.7
              
              
              $
              (2,426.5
              )
              
              $
              3,636.2














-20-





Consolidated
condensed statement of operations for the three-month period ended
September 30, 2008:




Issuer
            
            
            Guarantor
            
            
            Non-Guarantor
            
            
            TotalParent
      - RDA
            
            
            Subsidiaries
            
            
            Subsidiaries
            
            
            Eliminations
            
            
            ConsolidatedRevenues
            
            $
            22.5
            
            
            $
            212.3
            
            
            $
            319.3
            
            
            $
            (3.7
            )
            
            $
            550.4Product,
      distribution and
              editorial
    expenses
            
            
            (17.4
            )
            
            
            (138.6
            )
            
            
            (135.1
            )
            
            
            3.7
            
            
            
            (287.4
            )Promotion
      marketing and
              administrative
      expenses
            
            
            (34.1
            )
            
            
            (128.0
            )
            
            
            (204.8
            )
            
            
            ---
            
            
            
            (366.9
            )


Intangible
      asset impairments
            
            
            ---
            
            
            
            (2.5
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (2.5
            )Other
      operating items, net
            
            
            1.0
            
            
            
            (1.0
            )
            
            
            (4.0
            )
            
            
            ---
            
            
            
            (4.0
            )Operating
      loss
            
            
            (28.0
            )
            
            
            (57.8
            )
            
            
            (24.6
            )
            
            
            ---
            
            
            
            (110.4
            )Interest
      expense
            
            
            (37.0
            )
            
            
            ---
            
            
            
            (3.8
            )
            
            
            ---
            
            
            
            (40.8
            )Other
      (expense) income, net
            
            
            (32.6
            )
            
            
            46.0
            
            
            
            (11.6
            )
            
            
            ---
            
            
            
            1.8(Expense)
      income from
              investment in
      subsidiaries
            
            
            (62.4
            )
            
            
            0.1
            
            
            
            ---
            
            
            
            62.3
            
            
            
            ---Loss
      before (provision) benefit for income taxes and 
      discontinued  operations
            
            
            (160.0
            )
            
            
            (11.7
            )
            
            
            (40.0
            )
            
            
            62.3
            
            
            
            (149.4
            )Income
      tax (provision) benefit
            
            
            (1.6
            )
            
            
            9.9
            
            
            
            7.5
            
            
            
            ---
            
            
            
            15.8Loss
      from continuing operations
            
            
            (161.6
            )
            
            
            (1.8
            )
            
            
            (32.5
            )
            
            
            62.3
            
            
            
            (133.6
            )Loss
      fromdiscontinued
      operations (net of
              $3.8
      of tax benefit)
            
            
            5.0
            
            
            
            (24.5
            )
            
            
            (3.4
            )
            
            
            ---
            
            
            
            (22.9
            )Net
      (loss) gain
            
            $
            (156.6
            )
            
            $
            (26.3
            )
            
            $
            (35.9
            )
            
            $
            62.3
            
            
            $
            (156.5
            )







Consolidated
condensed statement of cash flows for the three-month period ended
September 30, 2008:





Issuer
            
            
            Guarantor
            
            
            Non-Guarantor
            
            
            TotalParent
      - RDA
            
            
            Subsidiaries
            
            
            Subsidiaries
            
            
            Eliminations
            
            
            ConsolidatedNet
      change in cash due to continuing
              operating
      activities
            
            $
            (70.1
            )
            
            $
            29.4
            
            
            $
            (60.3
            )
            
            $
            0.3
            
            
            $
            (100.7
            )Net
      change in cash due to discontinued
              operating
      activities
            
            
            0.7
            
            
            
            (24.4
            )
            
            
            0.8
            
            
            
            ---
            
            
            
            (22.9
            )Net
      change in cash due to operating
              activities
            
            
            (69.4
            )
            
            
            5.0
            
            
            
            (59.5
            )
            
            
            0.3
            
            
            
            (123.6
            )Net
      change in cash due to investing
              activities
            
            
            93.1
            
            
            
            (2.0
            )
            
            
            14.7
            
            
            
            ---
            
            
            
            105.8Net
      change in cash due to financing
              activities
            
            
            (22.3
            )
            
            
            ---
            
            
            
            (3.4
            )
            
            
            ---
            
            
            
            (25.7
            )Effect
      of exchange rate changes
              on cash and cash
      equivalents
            
            
            (4.8
            )
            
            
            ---
            
            
            
            4.7
            
            
            
            (0.3
            )
            
            
            (0.4
            )Cash
      and cash equivalents at
              beginning of the
      period
            
            
            4.6
            
            
            
            3.9
            
            
            
            70.9
            
            
            
            ---
            
            
            
            79.4Cash
      and cash equivalents at end of the
              period
            
            $
            1.2
            
            
            $
            6.9
            
            
            $
            27.4
            
            
            $
            ---
            
            
            $
            35.5







-21-








Consolidated
condensed statement of operations for the three-month period ended
September 30, 2007:





Issuer
            
            
            Guarantor
            
            
            Non-Guarantor
            
            
            TotalParent
      - RDA
            
            
            Subsidiaries
            
            
            Subsidiaries
            
            
            Eliminations
            
            
            ConsolidatedRevenues
            
            $
            24.0
            
            
            $
            227.0
            
            
            $
            301.5
            
            
            $
            (7.0
            )
            
            $
            545.5Product,
      distribution and
              editorial
    expenses
            
            
            (11.8
            )
            
            
            (123.8
            )
            
            
            (130.0
            )
            
            
            7.0
            
            
            
            (258.6
            )Promotion,
      marketing and
              administrative
      expenses
            
            
            (38.2
            )
            
            
            (135.3
            )
            
            
            (192.3
            )
            
            
            ---
            
            
            
            (365.8
            )Other
      operating items, net
            
            
            8.2
            
            
            
            (10.0
            )
            
            
            1.2
            
            
            
            ---
            
            
            
            (0.6
            )Operating
      loss
            
            
            (17.8
            )
            
            
            (42.1
            )
            
            
            (19.6
            )
            
            
            ---
            
            
            
            (79.5
            )Interest
      expense
            
            
            (42.7
            )
            
            
            ---
            
            
            
            (2.8
            )
            
            
            ---
            
            
            
            (45.5
            )Other
      income(expense), net
            
            
            9.0
            
            
            
            (0.2
            )
            
            
            (6.6
            )
            
            
            ---
            
            
            
            2.2(Expense)
      income from
              investment
      in subsidiaries
            
            
            (72.3
            )
            
            
            0.3
            
            
            
            ---
            
            
            
            72.0
            
            
            
            ---Loss
      before benefit for income
              taxes
      and discontinued
              operations
            
            
            (123.8
            )
            
            
            (42.0
            )
            
            
            (29.0
            )
            
            
            72.0
            
            
            
            (122.8
            )Income
      tax benefit
            
            
            0.8
            
            
            
            1.5
            
            
            
            10.9
            
            
            
            ---
            
            
            
            13.2Loss
      from continuing operations
            
            
            (123.0
            )
            
            
            (40.5
            )
            
            
            (18.1
            )
            
            
            72.0
            
            
            
            (109.6
            )Loss
      from discontinued
              operations
      (net of $0.2 of tax
              benefit)
            
            
            ---
            
            
            
            (11.8
            )
            
            
            (1.6
            )
            
            
            ---
            
            
            
            (13.4
            )Net
      (loss) gain
            
            $
            (123.0
            )
            
            $
            (52.3
            )
            
            $
            (19.7
            )
            
            $
            72.0
            
            
            $
            (123.0
            )







Consolidated
condensed statement of cash flows for the three-month period ended
September 30, 2007:




Issuer
              
              
              Guarantor
              
              
              Non-Guarantor
              
              
              TotalParent
      - RDA
              
              
              Subsidiaries
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      change in cash due to
                continuing operating
      activities
              
              $
              (130.0
              )
              
              $
              22.8
              
              
              $
              14.4
              
              
              $
              ---
              
              
              $
              (92.8
              )Net
      change in cash due to
                discontinued
      operating activities
              
              
              ---
              
              
              
              (26.8
              )
              
              
              (5.9
              )
              
              
              ---
              
              
              
              (32.7
              )Net
      change in cash due to
                operating
      activities
              
              
              (130.0
              )
              
              
              (4.0
              )
              
              
              8.5
              
              
              
              ---
              
              
              
              (125.5
              )Net
      change in cash due to
                Investing
      activities
              
              
              0.1
              
              
              
              7.3
              
              
              
              (2.0
              )
              
              
              ---
              
              
              
              5.4Net
      change in cash due to
                financing
    activities
              
              
              136.9
              
              
              
              ---
              
              
              
              (0.4
              )
              
              
              ---
              
              
              
              136.5Effect
      of exchange rate changes
                on cash and cash
      equivalents
              
              
              (4.2
              )
              
              
              ---
              
              
              
              6.6
              
              
              
              ---
              
              
              
              2.4Cash
      and cash equivalents at
                beginning of the
      period
              
              
              1.6
              
              
              
              5.2
              
              
              
              43.4
              
              
              
              ---
              
              
              
              50.2Cash
      and cash equivalents at end
                of
      the period
              
              $
              4.4
              
              
              $
              8.5
              
              
              $
              56.1
              
              
              $
              ---
              
              
              $
              69.0





-22-





(14)  Discontinued
Operations





During
fiscal 2009, we sold our home party-planning business TOHE, and our schools and
youth fundraising division consisting of QSP, Inc., Quality Service Programs,
Inc., and their affiliated subsidiaries in the United States and
Canada.  Management had concluded that these businesses were no longer
consistent with our strategic direction.  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, subject to certain closing
balance sheet adjustments.





The
businesses each qualify as a discontinued operation component of Reader’s Digest
under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.  Reader’s Digest 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.





The
results from discontinued operations were as follows (in millions):




For
      the periods ended September 30,2008
              
              
              2007Revenues
              
              $
              2.0
              
              
              $
              32.3Loss
      from operations before income taxes, net
              
              
              (20.7
              )
              
              
              (13.6
              )Income
      tax benefit on discontinued operations
              
              
              8.7
              
              
              
              0.2Net
      loss from discontinued operations
              
              $
              (12.0
              )
              
              $
              (13.4
              )


The consummation of the QSP
transaction resulted in a net loss of $(22.1).  The loss reported in
Loss from Discontinued Operations, net was calculated as follows:








Sale
      Price
            
            $
            110.0Less:  Cash
      on hand
            
            
            (1.9
            )Net
      sale proceeds
            
            
            108.1Net
      assets of subsidiaries
            
            
            76.2Associated
      intangible assets
            
            
            45.1Transaction
      costs
            
            
            3.9Loss
      on sale
            
            
            (17.1
            )Income
      tax
            
            
            (5.0
            )Net
      loss
            
            $
            (22.1
            )








At
September 30, 2008, Accumulated Other Comprehensive Gain 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 Gain
upon the disposition of QSP and reflected in Loss from Discontinued Operations,
net.











-23-





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 June 30, 2008 were as follows:








Current
      assets
            
            $
            38.5Goodwill
      and other intangible assets, net
            
            
            116.5Total
      Assets held for sale
            
            $
            155.0Total
      Liabilities held for sale
            
            $
            28. 7








(15)  Fair
Value





We adopted the provisions
of SFAS No. 157, Fair Value Measurements (“SFAS No. 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 No. 157.





Fair
Value Hierarchy




SFAS
No. 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 No. 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
No. 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
classifies 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.





-24-





We have interest rate swaps with a
notional value of $750.0.  We obtained the fair value of these
interest rate swaps using quotes from independent sources which resulted in a
loss of $1.1, net of deferred tax benefit of $0.6 for the quarter ended
September 30, 2008 and a cumulative loss of $15.7, net of deferred tax benefit
of $9.3 as of September 30, 2008 and is reported in Accumulated Other
Comprehensive Gain in Stockholder’s Equity on the September 30, 2008 balance
sheet.  These swaps were considered level 2 under 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
three independent sources to ascertain market values for financial
instruments.





(16)  Subsequent
Event




Subsequent
to September 30, 2008, we entered into an agreement to sell certain assets of
Books Are Fun, Ltd. ("BAF"), RDA’s display-marketing division.  The
transaction includes the sale of intellectual property and product
inventory.  Under the terms of the agreement, consideration for such sale
is $17.5 payable over three years, subject to potential adjustment based on
inventory levels at closing.





ITEM2.  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 for the year ended June 30, 2008 and presumes that
the readers have read or have access to that discussion and analysis in our
Annual Report for the fiscal year ended June 30, 2008.  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 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.








-25-





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-month period ended September 30, 2008 and
2007 are the first fiscal quarters of 2009 and 2008, respectively.




Subsequent
to September 30, 2008, we entered into an agreement to sell certain assets of
Books Are Fun, Ltd. ("BAF"), RDA’s display-marketing division.  The
transaction includes the sale of intellectual property and product
inventory.  Under the terms of the agreement, consideration for such sale
is $17.5 payable over three years, subject to potential adjustment based on
inventory levels at closing.


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 5,
Revenues and Operating (Loss) Profit by Reportable Segment for additional
information.





Three-Month
Period Ended September 30, 2008, Compared With Three-Month Period Ended
September 30, 2007





Revenues





Revenues
during the first quarter of fiscal 2009 increased $4 to $550, as compared to
$546 in the first quarter 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 $7 in the first quarter of 2009 and $44 in the
first quarter of 2008.  Excluding the unearned revenue adjustment and
inter-segment eliminations, there were decreases in revenues within our United
States and School & Educational Services segments.  Revenues in
our International segments remained relatively flat.





Our
United States business segment revenues for the first quarter of 2009 decreased
$19 to $173, as compared to $192 during the first quarter of
2008.  Revenue increases in our Food & Entertaining and Health
& Wellness affinities were more than offset by declines in our RD Community
and Home & Garden affinities.  The Food & Entertaining
affinity gained momentum in the marketplace during the first quarter of 2009
through new launches within our Taste of Home business and Internet sales
generated from our Tasteofhome.com and Allrecipes.comwebsites.  In addition, our Health & Wellness affinity
experienced an increase in direct mail series and single sales during the first
quarter of 2009.  Lower revenues within our RD Community affinity were
largely the result of lower advertising and subscription related revenues due to
a planned rate base reduction in January 2008, while the Home & Garden
affinity had lower subscription, newsstand and book revenue during the first
quarter of 2009.  The overall net decrease in sales revenues from the
United States business segment was in part impacted by the tightening economic
condition in the United States as it continues to have a negative impact on
advertising revenues and consumer spending and in certain of our magazine, book,
music and video product categories.





Our
School & Educational Services business segment revenues for the first
quarter of 2009 decreased $15 to $36, as compared to $51 during the first
quarter of 2008.  Revenues at our Books are Fun business declined due
to lower selling averages per event and a decrease in the number of school
displays and corporate fairs held primarily due to the overall weakened economy
and competition.  Weekly Reader Publishing Group and CompassLearning
also experienced an overall decrease in revenues, principally due to challenging







-26-





educational
market conditions as schools reevaluate 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 which
contributed to the year-over-year revenue decline.





Our
International business segment revenues during the first quarter of 2009
remained unchanged at $353, as compared to the first quarter of 2008 primarily
due to the positive impact of changes in foreign currency exchange
rates.  Excluding the effect of foreign currency exchange rates, our
International business segment experienced a net decrease in revenues of $20
during the first quarter of 2009.  Revenue increases in Russia,
Argentina and Brazil primarily attributable to an increase in paid advertising
sales and higher circulation were offset by declines in Central Europe, Western
Europe, Mexico, Canada and Asia principally due to lower sales of magazines,
books, and music products, as well as a decrease in advertising
revenues.





Operating
Loss





The
operating loss during the first quarter of 2009 increased ($30) to ($110), as
compared to ($80) during the first quarter of 2008.





During
the first quarter of 2009, we experienced an increase in operating losses in our
United States, International, and School & Educational Services business
segments of ($7), ($18), and ($41), respectively.  These declines in
operating results were principally due to the reductions in revenues discussed
above. Our International business segment was also negatively impacted by
increases in paper, delivery and postage costs during the first quarter of
2009.  Results at our Books are Fun business were also significantly
impacted by an inventory write-down adjustment in the amount of ($35) due to
strategic decisions made by senior management for the business unit made by
senior management and a severe downturn in economic conditions.  These
declines were partially offset by the unearned revenue adjustment, as discussed
in the “Revenues” section above, and a decrease in corporate unallocated
expenses of $2.





Interest
Expense





Interest
expense, net decreased ($5) to ($41) during the first quarter of 2009, compared
with ($46) during the first quarter of 2008.  The decrease is
principally due to a decrease in debt outstanding that was incurred in
connection with the Acquisition Transaction and associated with our 2007 Credit
Agreement and the Senior Subordinated Notes and lower interest
rates.  As of September 30, 2008, $173 was outstanding under the
revolving credit facility, $1,192 was outstanding under the term loan in the
United States, $105 was outstanding under the term loan made available to one of
our German subsidiaries, and $600 was outstanding under the Senior Subordinated
Notes.





Income
Taxes





During
the three-month periods ended September 30, 2008 and 2007, we recorded an income
tax benefit of $16 and $13, respectively. The benefit recorded for the
three-month period ended September 30, 2008, primarily relates to foreign losses
incurred during the quarter that are expected to offset profits in subsequent
quarters in the fiscal year. Additionally, the benefit recorded in the current
quarter also 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.











-27-





Discontinued Operations





During fiscal 2009, we sold our home party-planning business TOHE, and our
schools and youth fundraising division consisting of QSP, Inc., Quality Service
Programs, Inc., and their affiliated subsidiaries in the United States and
Canada.  The sale of these businesses resulted in a net loss of ($23),
which includes pension curtailment gain of $11 and a $2 World’s Finest Chocolate
potential liability that we retained related to the sale of QSP.  See
Note 14, Discontinued Operations.





Liquidity
and Capital Resources




Three-month
                  Period
      ended
                  September
      30, 2008Cash
      and cash equivalents at June 30, 2008
                
                $
                79.4Net
      change in cash due to:Continuing operating
      activities
                
                
                (100.7
                )Discontinued operating
      activities
                
                
                (22.9
                )Operating
    activities
                
                
                (123.6
                )Investing
    activities
                
                
                105.8Financing
    activities
                
                
                (25.7
                )Effect of exchange rate changes on
      cash and cash equivalents
                
                
                (0.4
                )Net
      change in cash and cash equivalents
                
                
                (43.9
                )Cash
      and cash equivalents at September 30, 2008
                
                $
                35.5


Cash and cash equivalents decreased to
$35.5 as of September 30, 2008, compared with $79.4 as of June 30,
2008.  The decrease in cash and cash equivalents as of September 30,
2008 was principally driven by our operating losses and debt repayments
partially offset by proceeds from the sale of QSP.  We 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 over the next twelve
months.  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 over the
near term.





The Reader’s Digest Association,
Inc.





2007 Credit Agreement and
Senior Subordinated Notes





As
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.  At
September 30, 2008 and 2007, $173 and $225, respectively was outstanding under
the revolving credit facility, $1,192 and $1,204, respectively was outstanding
under the term loan in the United States, $105 and $108, respectively was
outstanding under the term loan made available to one of our German
subsidiaries, and $600 was outstanding under





-28-





the
Senior Subordinated Notes. Interest expense for the three months ended September
30, 2008 and 2007 was ($41) and ($46), including the amortization of deferred
financing fees of ($2) in both years.  The weighted average interest
rate on our borrowings for the three month periods ended September 30, 2008 and
2007 was 6.8% and 7.7%.





Derivative
Instruments





As
described in Note 8, Financial Instruments, to the consolidated financial
statements included in our Annual Report 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, 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 of 3-year interest rate swaps and $300 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.





As of
September 30, 2008 the fair market value of our interest rate swaps decreased
during the quarter, resulting in a loss of $1.1, which is recorded net of
deferred taxes of $0.6.   This change is reported in accumulated
other comprehensive gain, which is included in stockholders’ equity on the
September 30, 2008 balance sheet.





Recent
Accounting Standards





See Note
1 – Basis of Presentation and Use of Estimates – Recent Accounting Standards to
the 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 the local
currency.  We purchase forward contracts to minimize the effect of
fluctuating currencies on specifically identifiable
transactions.  These transactions were minimal during the three-month
period ended September 30, 2008.  Based on our historical experience,
we expect the foreign exchange transaction gains and losses during 2009 to be
minimal.





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.





-29-








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-month period ended September 30, 2008 by
$2.





We
entered into interest rate swap agreements with a notional value totaling $750,
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 8, Financial 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.





Evaluation
of Effectiveness of Controls





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness 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.











-30-





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. We currently
are in the process of integrating the U.S. business of Direct Holdings into
our financial reporting systems, and expect to make changes to our internal
controls in connection therewith. No change in our internal control over
financial reporting occurred during the quarter ended September 30, 2008 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.








PART
II


OTHER
INFORMATION





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 for the year ended June 30, 2008, except as set forth
below.  The following risk factor contained in our Annual Report has
been amended and restated as follows:





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.





If we were to sustain a decline in our
operating results or available cash, we could experience difficulties in
complying with the covenants contained in the indenture governing our
senior subordinated notes or our senior secured credit facilities. 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.





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.







-31-





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 over the next twelve months.  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 first quarter of fiscal 2009.








ITEM
3.      DEFAULTS UPON SENIOR
SECURITIES





There were no defaults upon senior
securities during the first quarter of fiscal 2009.








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





None.





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).







-32-








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).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.











-33-








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:  November
13,
2008                                                                           By:       
/s/ Harris Williams


Harris
Williams


Acting Chief Financial
Officer








-34-








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).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.








-35-