Introduction

The following analysis of our consolidated, combined consolidated and combined results of operations and consolidated financial condition provides information that we believe is relevant to an assessment and understanding of our consolidated, combined consolidated or combined results of operations and consolidated financial condition, including changes in financial condition and results of operations. This discussion should be read in conjunction with the Consolidated, Combined Consolidated and Combined Financial Statements and related notes beginning on page F-1. This discussion contains forward-looking statements about our markets, the demand for our products and services and our future results. 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 this Annual Report. We do not have any intention or obligation to update forward-looking statements included in this Annual Report. Certain amounts and percentages do not recalculate due to rounding. Certain prior year amounts have been reclassified to conform to current year presentation. All references to dollars in this discussion and analysis are in millions, except per share data. Certain prior year amounts have been reclassified to conform to current year presentation.

Subsequent to March 2, 2007, unless indicated otherwise, references in this Management's Discussion and Analysis section to "we," "us," "RDA" and "our" are to The Reader's Digest Association, Inc. and its subsidiaries, including WRC Media and Direct Holdings. Prior to March 2, 2007, these references are to the combined operations of WRC Media Inc. and Direct Holdings. All references to 2008, 2007, and 2006, unless otherwise indicated, are to fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Our fiscal year is the period from July 1 through June 30.

Basis of Presentation

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 $101 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 ($81), RDA Holding Co. junior pay-in-kind preferred stock ($20) 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 $57 (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 $57 paid at the closing of the Direct Holdings Stock Acquisition included a combination of RDA Holding Co. common stock ($50) and cash ($7). 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., 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. Because Reader's Digest was acquired by an investor group led by Ripplewood, and because 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., WRC Media is considered the predecessor company for purposes of preparing the financial statements of the combined company following the Acquisition Transaction. Prior to March 2, 2007, our financial statements reflect only the businesses of WRC Media and Direct Holdings, which affects the comparability of our financial statements. The combination of WRC Media and Direct Holdings for the periods prior to March 2, 2007 was accounted for using the historical cost method prescribed in Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, for a combination of entities under common control. Subsequent to March 2, 2007, our financial statements reflect the businesses of WRC Media, Direct Holdings and Reader's Digest Association, Inc.

The Reader's Digest Association, Inc. reports on a fiscal year that begins on July 1. The years ended June 30, 2008 and 2007 are fiscal 2008 and 2007, respectively. WRC Media and Direct holdings previously reported on a fiscal year that ended on December 31 and on a fiscal year that ended on the last Saturday in June, respectively. Subsequent to March 2, 2007, both WRC Media and Direct Holdings changed their respective fiscal year ends to June 30, which was retroactively applied to the 2006 combined financial statements. Direct Holdings' 2006 fiscal year began on June 26, 2005 and ended on June 24, 2006. The period from June 25, 2006 to June 30, 2006 is not material to the combined financial statements for 2006.

Our Reportable Segments

Our business is organized and reports across three business segments:
Reader's Digest United States (formerly Reader's Digest North America), Reader's Digest International and School & Educational Services. During the second quarter of fiscal 2008, WRC Media and Direct Holdings were integrated into our School & Educational Services and Reader's Digest International business segments, respectively. In addition, commencing with the second quarter of fiscal 2008, our Canadian operating results are included within our International segment, which would have previously been included in our Reader's Digest United States segment. We have recast our reporting segment results for previous periods to conform to the above-stated changes to our new reporting segments.

The following Management's Discussion and Analysis discusses the results of operations on both a generally accepted accounting principles ("GAAP") reported basis and a pro forma basis. The year-over-year changes in the results of operations for our Reader's Digest United States, Reader's Digest International and School and Educational Services segments are discussed within the pro forma sections of this Management's Discussion and Analysis.

Effect of the Acquisition Transaction

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, Business Combinations. Accordingly, the consolidated results of The Reader's Digest Association, Inc. are included in the combined consolidated financial statements from the acquisition date on March 2, 2007 and include the pushdown of purchase consideration from RDA Holding Co. As a result, the accompanying combined financial statements of The Reader's Digest Association, Inc. and subsidiaries consist exclusively of the combined results of WRC Media and Direct Holdings for all periods prior to March 2, 2007. Thus, comparability of the fiscal 2007 and fiscal 2006 year ended periods is limited.

Our significant accounting policies are more fully described under Critical Accounting Policies below, and in Note 1, Organization and Summary of Significant Accounting Policies in our Notes to Consolidated, Combined Consolidated and Combined Financial Statements.

Subsequent to the fiscal 2008 year-end, we entered into agreements to sell 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. Management had concluded that these businesses were no longer consistent with our strategic direction. The TOHE transaction closed on July 25, 2008. Consideration for such sale was a $1.0 subordinated note with interest and principal due in 2012, plus an earn out based upon year-four operating profits generated by the TOHE business. The QSP sale closed on August 22, 2008 for a purchase price of $110.0, subject to certain closing balance sheet adjustments. See Note 18-Subsequent Events in our Notes to Consolidated, Combined Consolidated and Combined Financial Statements for additional information.

Trends

Industry trends

Our business is affected by a number of important trends in the publishing and media industries, including, but not limited to, those set forth under "Item 1A. RISK FACTORS" in this Annual Report, as well as the following:

Popularity of reader-generated content

We are a pioneer of reader-generated content, which, along with celebrity themes, is a growing trend in the publishing industry, particularly online publishing, both internationally and in the United States. Our Reader's Digest magazine has for many years relied on readers' contributions for a portion of its content. In addition, almost all the content from certain of our other publications, such as Taste of Home, and Allrecipes.com, our social networking food website, comes from readers. We believe that, in addition to reducing editorial costs, our ability to utilize a significant amount of reader-generated, community-oriented content creates a bond with our customers, generates strong renewal rates, is a unique differentiator in the print world, and a popular trend in the online world.

Decrease in discretionary income

Most of our products involve discretionary spending on the part of consumers. We believe that consumer spending is influenced by general economic conditions and the availability of discretionary

Expansion into developing markets

We believe that the expansion of our international business will continue to be a significant driver of our growth. The magazine publishing market outside the United States has grown, and we continue to increase the number of countries in which we offer magazines. In the past three years, for example, we launched new businesses in Turkey, Bulgaria, Kazakhstan, Bosnia and Lithuania, while launching new editions of Reader's Digest in China, Romania, Serbia, Slovenia and Croatia. The demand for magazines and other consumer products has grown more quickly in emerging markets than in more mature North American and Western European markets.

We believe the growth of the Internet has become a significant trend in our business. The increased use of the Internet represents an opportunity for publishers to offer valuable content, attract a new audience, and build relationships with current consumers. However, it also has the potential for decreasing demand for printed products. The Internet is a channel for acquiring new customers that may allow us to reduce our traditional reliance on direct mail. However, on a global basis, consumers increasingly demand access to online content at no cost. A growing percentage of advertising expenditures in consumer magazines has migrated toward standalone and companion websites, Internet search engines and other electronic media.

Principal Revenue factors

We pay close attention to a number of performance and revenue measures, which vary according to the business segment and product, including:

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º Magazine metrics. The performance of our magazines and our other magazines is partly a function of:
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º circulation, which we measure against either our rate base (which is the guaranteed average circulation upon which our advertising rates are based) or, historically in the case of our non-rate base magazines, the number of paid subscribers and newsstand buyers;

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º renewal rates for our magazines among existing subscribers;

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º prices of our magazines, which are partly a function of our costs;

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º the number of countries in which we offer products;

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º the number of advertising pages sold per fiscal year and the rate paid per page; and

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º advertising revenue, net of agency fees.

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º Books and home entertainment metrics. The performance of the sales of our books and home entertainment products, including our Select Editions books, reading series books, general books, recorded music collections and series, including our global Direct Holdings products, video, and adult trade and children's publishing products and other similar products is partly a function of:
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º our active customer base;

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º the number of countries in which we offer products;

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º our response rates to direct marketing;

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º the number of new customers;

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º customer payment rates; and

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º series membership (products that are sold on a continuity basis).

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º School & Educational Services metrics. The performance of our School & Educational Services products is partly a function of:
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º for our Books Are Fun business, the products, the number of events, the average sales per event, the size of our sales force, our product margins and inventory turns;

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º for our QSP youth fundraising support business, the number of magazine subscriptions sold; food products and other gift products sold; average prices, same-school sales, the size of the sales force; the number of retained accounts; the number of new accounts and the level of student participation;

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º for our Weekly Reader business, subscription revenue from periodicals and revenue from sales of books including workbooks, teacher resource materials and non-fiction reference books; and

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º for our CompassLearning business, license revenues from software sales and consulting/teacher training services to educators on curriculum development and technology integration in the classroom, utilizing CompassLearning's software products.

Cost factors

Our business is also affected by a number of significant cost factors, some of which affect specific types of products and others that affect our business as a whole.

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º Production costs. Production costs for our products include the cost of the physical production of our books and magazines, the cost of paper and the costs of merchandise purchased from third parties. See "Item 1. BUSINESS-Production and Fulfillment."

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º Postage costs. Historically, we have relied on direct mail for a significant portion of our customer acquisition activities. The rise in postal rates in the various markets we operate have increased our customer acquisition costs as we depend on postal services and private delivery services for the delivery of our products.

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º Paper costs. Paper is the principal raw material used in our business for printed products and promotional materials.

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º Promotion costs. Promotion costs are a significant cost factor in our business. We believe that our sales are directly affected by the levels of our promotional spending, including: (1) the cost of the direct mail solicitations, (2) package and freestanding inserts,
(3) cross-promotional activities, (4) renting and purchasing customer lists, (5) special promotions (including sweepstakes) and (6) DRTV and telemarketing.

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º Fulfillment costs. Our costs also include the costs of fulfillment, warehousing, customer service and payment and order processing, which are generally handled by independent contractors.

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º Editorial costs. Editorial costs include amounts we pay to our own writers and other editorial and photographic staff and third-party sources of editorial and photographic content. We maintain a central editorial repository which permits the editors of our magazines to utilize content prepared for other magazines or regions efficiently.

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º Restructuring costs. In connection with the Acquisition Transaction, we have implemented several restructuring programs to strategically reposition our businesses and streamline operations. These restructuring activities principally involve reductions in headcount, contract terminations, asset dispositions or write-downs and facilities closures. These restructuring charges, as well as reversals in future periods based on changes in estimates, are summarized in the notes to our consolidated, combined consolidated and combined financial statements contained elsewhere in this Annual Report, see Note 4, Other Operating Items, Net in our Notes to the Consolidated, Combined Consolidated and Combined Financial Statements.

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º Interest Expense. We have increased our aggregate borrowing in connection with the Acquisition Transaction. Our increased indebtedness and deferred financing costs will significantly increase our interest expense.

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º Gasoline and transportation related costs. The increase in gasoline and transportation related costs within the past year have negatively impacted the financial results of certain of our businesses. Due to the increase in such operating costs, our Books Are Fun and QSP sales representatives eliminated holding certain smaller and less profitable events and therefore, fewer events took place during the year. In addition, significant increases in energy costs may result in the imposition of fuel surcharges by our suppliers or distributors that could adversely affect our operating margins and financial results.

Other factors

In addition to the revenue and cost factors described above, our financial condition and results of operations are affected by a number of other factors on an ongoing basis, including the following:

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º Seasonality. We typically experience our strongest revenue in our second fiscal quarter (the three month period ending December 31) due to purchases during the holidays. Summer and fall are the most active promotion periods in our United States segment for both our magazine and BHE businesses, in part due to the significant percentage of our sales that result from holiday gifts. In addition, as fundraising frequently is done at the beginning of the school year, the QSP business has been strongest in the second fiscal quarter. We experience less pronounced seasonality for our Books Are Fun business, which is strongest in the second fiscal quarter and weakest in the first fiscal quarter as schools are closed and corporate employees often take vacations during that quarter. Our International segment is also less seasonal, although profits do fluctuate as a function of when we time our customer acquisition mailings (generally in July and January, depressing first fiscal quarter and third fiscal quarter profits as a result), and revenue tends to be strongest in our second fiscal quarter. Weekly Reader's and CompassLearning's sales are significantly affected by the school year. For example, Weekly Reader's sales in its first, and to a lesser extent its second, fiscal quarters are typically the strongest when products are issued in connection with the start of the school year. CompassLearning's net revenue is historically strongest in its fourth quarter. The historical strength of CompassLearning is generally attributed to the end of the school fiscal year (June 30) and the need for the schools to spend budget money prior to year-end.

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º Restructuring Costs. We have benefited from annual cost savings including through the implementation of headcount reductions and the absence of certain other expenses. We also believe there are significant cost and revenue synergies among our product affinities, including infrastructure and distribution channel synergies. Additionally, we have been working with a leading supply chain consulting firm to analyze our company-wide infrastructure in order to

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º Changes in working capital. Our working capital fluctuations reflect the seasonality of our business, reflecting the timing of our peak selling period in the fall and early winter, our second fiscal quarter. During the first fiscal quarter, selling activity is seasonally low and we purchase inventory and promotion material for use in the second fiscal quarter. As a result, working capital increases and free cash flow historically has been negative. During the second fiscal quarter, selling activity typically increases and working capital typically decreases as promotional material is mailed and inventory is sold. As a result, working capital decreases and free cash flow historically has been positive. During the third and fourth fiscal quarters, working capital changes are less dramatic.

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º Foreign exchange rates. Because we conduct a significant portion of our business outside the United States, our revenue and costs are affected by fluctuations in the exchange rates between the U.S. dollar and the local currencies in the foreign markets in which we operate. We cannot predict the effect of foreign currency fluctuations on our revenue and costs from period to period.

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º Debt and Interest rates. Our results could be adversely affected by a reduction in the volume of debt securities issued in domestic and/or global capital markets. Unfavorable financial or economic conditions that either reduce investor demand for debt securities or reduce issuers' willingness or ability to issue such securities could reduce the number and dollar volume of debt issuance for which Standard & Poor's provides ratings services. In addition, increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, and/or the types of credit-sensitive products being offered. A sustained period of market decline or weakness could have a material adverse effect on us. Our results could also be adversely affected because of public statements or actions by market participants, government officials and others who may be advocates of increased regulation, regulatory scrutiny or litigation. In addition, our high degree of leverage could expose us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest, which could increase our interest payment obligations and which could have an adverse effect on us.

Results of Operations

To facilitate a more meaningful comparison between periods, this Management's Discussion and Analysis of Financial Condition and Results of Operations supplements historical analysis with pro forma information with respect to Net Revenues and Operating Loss for the year ended June 30, 2008 which our management believes provides the most meaningful comparability among these periods. The pro forma information represents financial information for the combined consolidated businesses of Direct Holdings, Weekly Reader, and The Reader's Digest Association, Inc. for the twelve months ending 2007, as if the acquisition of Reader's Digest Association, Inc. occurred as of July 1, 2006. The historical information excludes the results of The Reader's Digest Association, Inc. for the period July 1, 2005 to March 1, 2007. Due to the close of the Acquisition Transaction on March 2, 2007, the historical information for fiscal year 2008 includes twelve months of results for The Reader's Digest Association, Inc. as a result there is no need for 2008 pro forma information.

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                                            Year Ended June 30,

                                       Historical
                                 2008      2007     2006     Pro Forma 2007
               Net Revenues     $ 2,786   $ 1,076   $ 394     $        2,691
               Operating loss   $  (337 ) $   (36 ) $ (13 )   $         (147 )


     2008 vs. 2007

The revenues in fiscal 2008 increased $1,710 to $2,786 as compared to $1,076 in 2007. The increase in revenues is principally due to the acquisition of The . . .