UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**


(Mark
      One)


x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


For
      the quarterly period ended December 2, 2006




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For the transition period from __________ to __________





Commission
      file no. 1-11107





**FRANKLIN
      COVEY CO.**


(Exact
      name of registrant as specified in its charter)




Utah
              (State
                of incorporation)
            
            87-0401551
              (I.R.S.
                employer identification number)2200
                West Parkway Boulevard
              Salt
                Lake City, Utah
              (Address
                of principal executive offices)
            
            84119-2099
              (Zip
                Code)Registrant’s
                telephone number,
              Including
                area code
            
            (801)
                817-1776





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  x    
No  o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filer
            o
            
            Accelerated
                filer
            x
            
            Non-accelerated
                filer
            o





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




Indicate
      the number of shares outstanding of each of the issuer’s classes of Common Stock
      as of the latest practicable date:





19,718,196
      shares of Common Stock as of January 2, 2007










PART
      I.
      FINANCIAL INFORMATION


ITEM
      1.
      FINANCIAL STATEMENTS




FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(in
      thousands, except per share amounts)





December
                2,
              2006
            
            August
                31,
              2006(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            22,879
            
            $
            30,587Accounts
                receivable, less allowance for doubtfulaccounts
                of $1,025 and $979
            
            
            28,422
            
            
            24,254Inventories
            
            
            23,001
            
            
            21,790Deferred
                income taxes
            
            
            4,137
            
            
            4,130Other
                current assets
            
            
            7,272
            
            
            6,359Total
                current assets
            
            
            85,711
            
            
            87,120Property
                and equipment, net
            
            
            34,137
            
            
            33,318Intangible
                assets, net
            
            
            78,629
            
            
            79,532Deferred
                income taxes
            
            
            3,423
            
            
            4,340Other
                assets
            
            
            12,577
            
            
            12,249$
            214,477
            
            $
            216,559LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt and financing obligation
            
            $
            591
            
            $
            585Accounts
                payable
            
            
            12,464
            
            
            13,769Income
                taxes payable
            
            
            1,996
            
            
            1,924Accrued
                liabilities
            
            
            30,686
            
            
            32,170Total
                current liabilities
            
            
            45,737
            
            
            48,448Long-term
                debt and financing obligation, less current portion
            
            
            33,382
            
            
            33,559Other
                liabilities
            
            
            1,257
            
            
            1,203Total
                liabilities
            
            
            80,376
            
            
            83,210Shareholders’
                equity:Preferred
                stock - Series A, no par value; 4,000 shares authorized,1,494
                shares issued and outstanding; liquidation preferencetotaling
                $38,278
            
            
            37,345
            
            
            37,345Common
                stock - $0.05 par value; 40,000 shares authorized,27,056
                shares issued and outstanding
            
            
            1,353
            
            
            1,353Additional
                paid-in capital
            
            
            185,782
            
            
            185,691Common
                stock warrants
            
            
            7,611
            
            
            7,611Retained
                earnings
            
            
            14,557
            
            
            14,075Accumulated
                other comprehensive income
            
            
            749
            
            
            653Treasury
                stock at cost, 7,065 and 7,083 shares
            
            
            (113,296
            )
            
            (113,379
            )Total
                shareholders’ equity
            
            
            134,101
            
            
            133,349$
            214,477
            
            $
            216,559




See
      notes
      to condensed consolidated financial statements.







FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED INCOME STATEMENTS


(in
      thousands, except per share amounts)





Quarter
                EndedDecember
                2,
              2006
            
            November26,
              2005(unaudited)Net
                sales:Products
            
            $
            42,109
            
            $
            43,403Training
                and consulting services
            
            
            33,421
            
            
            28,94875,530
            
            
            72,351Cost
                of sales:Products
            
            
            18,473
            
            
            18,664Training
                and consulting services
            
            
            10,659
            
            
            9,28129,132
            
            
            27,945Gross
                profit
            
            
            46,398
            
            
            44,406Selling,
                general, and administrative
            
            
            40,849
            
            
            37,767Depreciation
            
            
            1,037
            
            
            1,408Amortization
            
            
            902
            
            
            1,095Income
                from operations
            
            
            3,610
            
            
            4,136Interest
                income
            
            
            201
            
            
            330Interest
                expense
            
            
            (661
            )
            
            (643
            )Income
                before provision for income taxes
            
            
            3,150
            
            
            3,823Provision
                for income taxes
            
            
            (1,734
            )
            
            (590
            )Net
                income
            
            
            1,416
            
            
            3,233Preferred
                stock dividends
            
            
            (934
            )
            
            (1,379
            )Net
                income available to common shareholders
            
            $
            482
            
            $
            1,854Net
                income available to common shareholdersper
                share:Basic
            
            $
            .02
            
            $
            .09Diluted
            
            $
            .02
            
            $
            .09Weighted
                average number of common shares:Basic
            
            
            19,910
            
            
            20,331Diluted
            
            
            20,192
            
            
            20,642




See
      notes
      to condensed consolidated financial statements.







FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
      thousands)


Quarter
                EndedDecember
                2,
              2006
            
            November
                26,
              2005(unaudited)Cash
                flows from operating activities:Net
                income
            
            $
            1,416
            
            $
            3,233Adjustments
                to reconcile net income to net cash used for operatingactivities:Depreciation
                and amortization
            
            
            2,340
            
            
            3,037Deferred
                income taxes
            
            
            914
            
            
            -Share-based
                compensation cost
            
            
            119
            
            
            77Changes
                in assets and liabilities:Increase
                in accounts receivable, net
            
            
            (4,070
            )
            
            (5,424
            )Increase
                in inventories
            
            
            (1,169
            )
            
            (3,865
            )Decrease
                (increase) in other assets
            
            
            (613
            )
            
            1,423Decrease
                in accounts payable and accrued liabilities
            
            
            (2,861
            )
            
            (4,597
            )Increase
                (decrease) in other long-term liabilities
            
            
            59
            
            
            (89
            )Increase
                in income taxes payable
            
            
            73
            
            
            39Net
                cash used for operating activities
            
            
            (3,792
            )
            
            (6,166
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (2,289
            )
            
            (599
            )Curriculum
                development costs
            
            
            (587
            )
            
            (702
            )Net
                cash used for investing activities
            
            
            (2,876
            )
            
            (1,301
            )Cash
                flows from financing activities:Principal
                payments on long-term debt and financing obligation
            
            
            (147
            )
            
            (681
            )Change
                in restricted cash
            
            
            -
            
            
            699Proceeds
                from sales of common stock from treasury
            
            
            70
            
            
            126Proceeds
                from management stock loan payments
            
            
            -
            
            
            134Redemption
                of preferred stock
            
            
            -
            
            
            (10,000
            )Purchase
                of treasury shares
            
            
            (16
            )
            
            -Payment
                of preferred stock dividends
            
            
            (934
            )
            
            (1,629
            )Net
                cash used for financing activities
            
            
            (1,027
            )
            
            (11,351
            )Effect
                of foreign exchange rates on cash and cash equivalents
            
            
            (13
            )
            
            (44
            )Net
                decrease in cash and cash equivalents
            
            
            (7,708
            )
            
            (18,862
            )Cash
                and cash equivalents at beginning of the period
            
            
            30,587
            
            
            51,690Cash
                and cash equivalents at end of the period
            
            $
            22,879
            
            $
            32,828Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            668
            
            $
            673Cash
                paid for income taxes
            
            $
            818
            
            $
            599Non-cash
                investing and financing activities:Accrued
                preferred stock dividends
            
            $
            934
            
            $
            1,184Capital
                lease financing of property and equipment purchases
            
            
            -
            
            
            109




See
      notes
      to condensed consolidated financial statements.







FRANKLIN
        COVEY CO.
 
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
  **NOTE
        1 - BASIS OF PRESENTATION**
 
 Franklin
        Covey Co. (hereafter referred to as us, we, our, or the Company) provides
        integrated consulting, training, and performance enhancement solutions to
        organizations and individuals in strategy execution, productivity, leadership,
        sales force effectiveness, effective communications, and other areas. Each
        integrated solution may include components of training and consulting,
        assessment, and other application tools that are generally available in
        electronic or paper-based formats. Our products and services are available
        through professional consulting services, public seminars, retail stores,
        catalogs, and the internet at www.franklincovey.com .
        Historically, the Company’s best-known offerings include the FranklinCovey
        PlannerTM and a suite of individual-effectiveness and leadership-development
        training products based on the best-selling book, *The
        7
        Habits of Highly Effective People* .
        We also
        offer a range of training and assessment products to help organizations achieve
        superior results by focusing and executing on top priorities, building the
        capability of knowledge workers, and aligning business processes. These
        offerings include the popular workshop *FOCUS:
        Achieving Your Highest Priorities* TM, *The
        4
        Disciplines of Execution* TM, *The
        4
        Roles of Leadership* TM, *Building
        Business Acumen: What the CEO Wants You to Know* TM,
        the
        Advantage Series communication workshops, and the *Execution
        Quotient* ( *xQ* TM)
        organizational assessment tool.
 
 The
        accompanying unaudited condensed consolidated financial statements reflect,
        in
        the opinion of management, all adjustments (which include only normal recurring
        adjustments) necessary to present fairly the financial position and results
        of
        operations of the Company as of the dates and for the periods indicated.
        Certain
        information and footnote disclosures normally included in financial statements
        prepared in accordance with accounting principles generally accepted in the
        United States of America have been condensed or omitted pursuant to Securities
        and Exchange Commission (SEC) rules and regulations. The information included
        in
        this quarterly report on Form 10-Q should be read in conjunction with the
        consolidated financial statements and related notes included in our Annual
        Report on Form 10-K for the fiscal year ended August 31, 2006.
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and the disclosure of contingent assets and liabilities at the
        dates
        of the financial statements, and the reported amounts of revenues and expenses
        during the reporting periods. Actual results could differ from those
        estimates.
 
 The
        Company utilizes a modified 52/53-week fiscal year that ends on August 31
        of
        each year. Corresponding quarterly periods generally consist of 13-week periods
        that will end on December 2, 2006, March 3, 2007, and June 2, 2007 during
        fiscal
        2007. Under the modified 52/53-week fiscal year, the quarter ended December
        2,
        2006 had 5 additional business days compared to the quarter ended November
        26,
        2005.
 
 The
        results of operations for the quarter ended December 2, 2006 are not necessarily
        indicative of results expected for the entire fiscal year ending August 31,
        2007.
 
 **NOTE
        2 - INVENTORIES**
 
 Inventories
        are stated at the lower of cost or market, cost being determined using the
        first-in, first-out method, and were comprised of the following (in
        thousands):
 
 December
                  2,
                2006
              
              August
                  31,
                2006Finished
                  goods
              
              $
              19,332
              
              $
              18,464Work
                  in process
              
              
              664
              
              
              706Raw
                  materials
              
              
              3,005
              
              
              2,620$
              23,001
              
              $
              21,790
 
 
 **NOTE
        3 - SHARE-BASED COMPENSATION**
 
 The
        Company has a performance based long-term incentive plan (the LTIP) that
        provides for annual grants of share-based performance awards to certain
        managerial personnel and executive management as directed by the Compensation
        Committee of the Board of Directors. The LTIP performance awards cliff vest
        at
        the completion of a three-year performance period that begins on September
        1 in
        the fiscal year of the grant. The number of common shares that are finally
        awarded to LTIP participants is variable and is based entirely upon the
        achievement of a combination of performance objectives related to sales growth
        and cumulative operating income during the three-year performance period.
        During
        the quarter ended December 2, 2006, the Compensation Committee granted
        performance awards for 429,312 shares (the Target Award) of common stock
        under
        terms of the LTIP. The number of common shares finally awarded will range
        from
        zero shares, if a minimum level of performance is not achieved, to 200 percent
        of the Target Award, if specifically defined performance criteria is achieved
        during the three-year performance period. The fiscal 2007 LTIP award was
        valued
        at $5.78 per share, which was the closing price of our common stock on the
        grant
        date, and we will record compensation expense over the vesting period using
        a
        five percent estimated forfeiture rate. The corresponding estimated compensation
        cost of the fiscal 2007 LTIP award is currently $2.5 million, which is expected
        to be expensed over the remaining service period of the award, which ends
        on
        August 31, 2009.
 
 Due
        to
        the variable number of common shares that may be issued under the LTIP, we
        reevaluate our LTIP grants on a quarterly basis and adjust the number of
        shares
        expected to be awarded based upon financial results of the Company as compared
        to the performance goals set for the award. Adjustments to the number of
        shares
        awarded, and to the corresponding compensation expense, are made on a cumulative
        basis at the date of adjustment based upon the estimated probable number
        of
        common shares to be awarded. Based upon actual financial performance through
        December 2, 2006 and estimated performance through the remaining service
        period
        of the fiscal 2006 LTIP grant (fiscal 2007 and 2008), the number of performance
        awards granted during fiscal 2006 was reduced to 213,946 shares, which resulted
        in a cumulative adjustment (reduction) to our operating expenses of $0.2
        million in the quarter ended December 2, 2006. At December 2, 2006, there
        was
        $1.0 million of total unrecognized compensation cost related to our fiscal
        2006
        LTIP grant, which is expected to be recognized over the remaining service
        period
        of the award.
 
 
 **NOTE
        4 - INCOME TAXES**
 
 In
        order
        to determine our quarterly provision for income taxes, we use an estimated
        annual effective tax rate, which is based on expected annual income and
        statutory tax rates in the various jurisdictions in which we operate. Certain
        significant or unusual items are separately recognized in the quarter during
        which they occur and can be a source of variability in the effective tax
        rates
        from quarter to quarter.
 
 During
        the fourth quarter of fiscal 2006, we determined that it was appropriate
        to
        reverse substantially all of the valuation allowances on our deferred income
        tax
        assets. Prior to the reversal of these valuation allowances, our income tax
        provisions were affected by reductions in our deferred income tax valuation
        allowance as we utilized net operating loss carryforwards. Accordingly, our
        income tax provision increased from $0.6 million the first quarter of fiscal
        2006 to $1.7 million for the quarter ended December 2, 2006. Our effective
        tax
        rate for the quarter ended December 2, 2006 of approximately 55 percent was
        higher than statutory combined rates primarily due to the accrual of taxable
        interest income on the management stock loan program and withholding taxes
        on
        royalty income from foreign licensees.
 
 
 **NOTE
        5 - COMPREHENSIVE INCOME**
 
 Comprehensive
        income is based on net income and includes charges and credits to equity
        accounts that are not the result of transactions with shareholders.
        Comprehensive income for the Company was calculated as follows (in
        thousands):
 
 Quarter
                  EndedDecember
                  2,
                2006
              
              November
                  26,
                2005Net
                  income
              
              $
              1,416
              
              $
              3,233Other
                  comprehensive income (loss) items net of tax:Foreign
                  currency translation adjustments
              
              
              96
              
              
              (365
              )Comprehensive
                  income
              
              $
              1,512
              
              $
              2,868
 
 
 **NOTE
        6 - EARNINGS PER SHARE**
 
 Basic
        earnings per common share (EPS) is calculated by dividing net income available
        to common shareholders by the weighted-average number of common shares
        outstanding for the period. Diluted EPS is calculated by dividing net income
        available to common shareholders by the weighted-average number of common
        shares
        outstanding plus the assumed exercise of all dilutive securities using the
        treasury stock method or the “as converted” method, as appropriate. Due to
        modifications to our management stock loan program made during the fourth
        quarter of fiscal 2006, we determined that the shares of management stock
        loan
        participants which were placed in the escrow account are participating
        securities as defined by EITF Issue 03-6, *Participating
        Securities and the Two-Class Method under FASB Statement No.
        128* ,
        because
        they continue to have equivalent common stock dividend rights. Accordingly,
        these management stock loan shares are included in our Basic EPS calculation
        during periods of net income and excluded from the Basic EPS calculation
        in
        periods of net loss.
 
 The
        following table presents the computation of our EPS for the periods indicated
        (in thousands, except per share amounts):
 
 Quarter
                  EndedDecember
                  2,
                2006
              
              November
                  26,
                2005**Numerator
                  for basic and diluted earnings per share:**Net
                  income
              
              $
              1,416
              
              $
              3,233Preferred
                  stock dividends
              
              
              (934
              )
              
              (1,379
              )Net
                  income available to common shareholders
              
              $
              482
              
              $
              1,854**Denominator
                  for basic and diluted earnings per share:**Basic
                  weighted average shares outstanding(1)
              
              
              19,910
              
              
              20,331Effect
                  of dilutive securities:Stock
                  options
              
              
              35
              
              
              46Unvested
                  stock awards
              
              
              247
              
              
              265Performance
                  awards(2)
              
              
              -
              
              
              -Common
                  stock warrants(2)
              
              
              -
              
              
              -Diluted
                  weighted average shares outstanding
              
              
              20,192
              
              
              20,642**Basic
                  and diluted EPS:**Basic
                  EPS
              
              $
              .02
              
              $
              .09Diluted
                  EPS
              
              $
              .02
              
              $
              .09
 (1)
                Since
                  the Company recognized net income for the quarter ended December
                  2, 2006,
                  basic weighted average shares for that period includes 3.5 million
                  shares
                  of common stock held by management stock loan participants that
                  were
                  placed in escrow.(2)
                For
                  the quarter ended December 2, 2006, conversion of LTIP performance
                  awards
                  and common stock warrants is not assumed because such conversion
                  would be
                  anti-dilutive (see table below).
  
 The
        following table sets forth the securities not included in the calculation
        of
        diluted EPS because to do so would be anti-dilutive (in thousands):
 
 Quarter
                  EndedDecember
                  2,
                2006
              
              November
                  26,
                2005Performance
                  awards
              
              
              643
              
              
              -Common
                  stock warrants
              
              
              6,239
              
              
              6,2396,882
              
              
              6,239
 
 At
        December 2, 2006 and November 26, 2005, we had approximately 2.0 million
        stock
        options outstanding which were not included in the computation of diluted
        EPS
        because the options’ exercise prices were greater than the average market price
        of the Company’s common shares for the respective periods. Although these shares
        were not included in our calculation of diluted EPS, these stock options
        may
        have a dilutive effect on the Company’s EPS calculation in future periods if the
        price of our common stock increases.
 
 
 **NOTE
        7 - SEGMENT INFORMATION**
 
 The
        Company has two segments: the Consumer Solutions Business Unit (CSBU) and
        the
        Organizational Solutions Business Unit (OSBU). The following is a description
        of
        our segments, their primary operating components, and their significant business
        activities:
 
 ***Consumer
        Solutions Business Unit -*** This
        business unit is primarily focused on sales to individual customers and small
        business organizations and includes the results of our domestic retail stores,
        consumer direct operations (primarily catalog, eCommerce, and public seminars
        programs), wholesale operations, international product channels in certain
        countries, and other related distribution channels, including government
        product
        sales and domestic printing and publishing sales. The CSBU results of operations
        also include the financial results of our paper planner manufacturing
        operations. Although CSBU sales primarily consist of products such as planners,
        binders, software, totes, and handheld electronic planning devices, virtually
        any component of our leadership, productivity, and strategy execution solutions
        may be purchased through our CSBU channels.
 
 ***Organizational
        Solutions Business Unit -*** The
        OSBU
        is primarily responsible for the development, marketing, sale, and delivery
        of
        strategic execution, productivity, leadership, sales force performance, and
        communication training and consulting solutions directly to organizational
        clients, including other companies, the government, and educational
        institutions. The OSBU includes the financial results of our domestic sales
        force and certain international operations. The domestic sales force is
        responsible for the sale and delivery of our training and consulting services
        in
        the United States. Our international sales group includes the financial results
        of our directly owned foreign offices and royalty revenues from
        licensees.
 
 The
        Company’s chief operating decision maker is the CEO, and each of the segments
        has a president who reports directly to the CEO. The primary measurement
        tool
        used in business unit performance analysis is earnings before interest, taxes,
        depreciation, and amortization (EBITDA), which may not be calculated as
        similarly titled amounts calculated by other companies. For segment reporting
        purposes, the Company’s consolidated EBITDA can be calculated as its income from
        operations excluding depreciation and amortization charges.
 
 In
        the
        normal course of business, the Company may make structural and cost allocation
        revisions to its segment information to reflect new reporting responsibilities
        within the organization. During the first quarter of fiscal 2007, we transferred
        the international product channels in certain countries from OSBU to CSBU
        and
        made other less significant organizational changes. All prior period segment
        information has been revised to conform to the most recent classifications
        and
        organizational changes. The Company accounts for its segment information
        on the
        same basis as the accompanying condensed consolidated financial
        statements.
 
 SEGMENT
        INFORMATION
 (in
                  thousands)*Quarter
                  Ended*
                *December
                  2, 2006*
              
              Sales
                  to External Customers
              
              Gross
                  Profit
              
              EBITDA
              
              Depreciation
              
              Amortization**Consumer
                  Solutions Business Unit:**Retail
              
              $
              14,127
              
              $
              8,399
              
              $
              1,198
              
              $
              191
              
              $
              -Consumer
                  direct
              
              
              19,936
              
              
              12,279
              
              
              9,992
              
              
              24
              
              
              -Wholesale
              
              
              4,577
              
              
              2,778
              
              
              2,663
              
              
              -
              
              
              -CSBU
                  International
              
              
              2,386
              
              
              1,485
              
              
              486
              
              
              -
              
              
              -Other
                  CSBU
              
              
              1,296
              
              
              (256
              )
              
              (9,461
              )
              
              259
              
              
              -Total
                  CSBU
              
              
              42,322
              
              
              24,685
              
              
              4,878
              
              
              474
              
              
              -**Organizational
                  Solutions Business Unit:**Domestic
              
              
              17,721
              
              
              11,421
              
              
              359
              
              
              110
              
              
              902International
              
              
              15,487
              
              
              10,292
              
              
              3,187
              
              
              205
              
              
              -Total
                  OSBU
              
              
              33,208
              
              
              21,713
              
              
              3,546
              
              
              315
              
              
              902Total
                  operating segments
              
              
              75,530
              
              
              46,398
              
              
              8,424
              
              
              789
              
              
              902Corporate
                  and eliminations
              
              
              -
              
              
              -
              
              
              (2,875
              )
              
              248
              
              
              -Consolidated
              
              $
              75,530
              
              $
              46,398
              
              $
              5,549
              
              $
              1,037
              
              $
              902*Quarter
                  Ended*
                *November
                  26, 2005***Consumer
                  Solutions Business Unit:**Retail
              
              $
              14,643
              
              $
              8,677
              
              $
              374
              
              $
              436
              
              $
              -Consumer
                  direct
              
              
              19,177
              
              
              11,678
              
              
              9,537
              
              
              12
              
              
              -Wholesale
              
              
              6,111
              
              
              2,801
              
              
              2,657
              
              
              -
              
              
              -CSBU
                  International
              
              
              2,644
              
              
              1,741
              
              
              879
              
              
              -
              
              
              -Other
                  CSBU
              
              
              1,163
              
              
              378
              
              
              (8,387
              )
              
              348
              
              
              57Total
                  CSBU
              
              
              43,738
              
              
              25,275
              
              
              5,060
              
              
              796
              
              
              57**Organizational
                  Solutions Business Unit:**Domestic
              
              
              16,330
              
              
              10,569
              
              
              437
              
              
              85
              
              
              1,036International
              
              
              12,283
              
              
              8,562
              
              
              3,069
              
              
              331
              
              
              2Total
                  OSBU
              
              
              28,613
              
              
              19,131
              
              
              3,506
              
              
              416
              
              
              1,038Total
                  operating segments
              
              
              72,351
              
              
              44,406
              
              
              8,566
              
              
              1,212
              
              
              1,095Corporate
                  and eliminations
              
              
              -
              
              
              -
              
              
              (1,927
              )
              
              196
              
              
              -Consolidated
              
              $
              72,351
              
              $
              44,406
              
              $
              6,639
              
              $
              1,408
              
              $
              1,095
 
 A
        reconciliation of operating segment EBITDA to consolidated income before
        taxes
        is provided below (in thousands):
 
 Quarter
                  EndedDecember
                  2,
                2006
              
              November
                  26,
                2005Reportable
                  segment EBITDA
              
              $
              8,424
              
              $
              8,566Corporate
                  expenses
              
              
              (2,875
              )
              
              (1,927
              )Consolidated
                  EBITDA
              
              
              5,549
              
              
              6,639Depreciation
              
              
              (1,037
              )
              
              (1,408
              )Amortization
              
              
              (902
              )
              
              (1,095
              )Income
                  from operations
              
              
              3,610
              
              
              4,136Interest
                  income
              
              
              201
              
              
              330Interest
                  expense
              
              
              (661
              )
              
              (643
              )Income
                  before taxes
              
              $
              3,150
              
              $
              3,823
 
 
 **NOTE
        8 - SUBSEQUENT EVENT**
 
 In
        August
        2006, we initiated a project to reconfigure our printing operations to improve
        our printing services’ efficiency, reduce operating costs, and improve our
        printing services’ flexibility in order to increase external printing service
        sales. Our reconfiguration plan includes moving our printing operations a
        short
        distance from its existing location to our corporate headquarters campus
        and the
        sale of the manufacturing facility and certain printing presses. Other existing
        presses will be moved to the new location as part of the reconfiguration
        plan.
        Because the manufacturing facility and printing presses were not available
        for
        immediate sale as defined by SFAS No. 144, *Accounting
        for the Impairment or Disposal of Long-Lived Assets* ,
        these
        assets were not classified as held for sale in our condensed consolidated
        balance sheet at December 2, 2006.
 
 Subsequent
        to December 2, 2006, we completed the sale of the manufacturing facility.
        The
        sale price was $2.5 million and, after deducting customary closing costs,
        the
        net proceeds to the Company from the sale totaled $2.3 million in cash. The
        carrying value of the manufacturing facility at December 2, 2006 was $1.1
        million and we expect to recognize a gain of $1.2 million when the accounting
        requirements are met to record the completion of the sale.
 
   **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 
 Management’s
        discussion and analysis contains forward-looking statements within the meaning
        of the Private Securities Litigation Reform Act of 1995. These statements
        are
        based upon management’s current expectations and are subject to various
        uncertainties and changes in circumstances. Important factors that could
        cause
        actual results to differ materially from those described in forward-looking
        statements are set forth below under the heading “Safe Harbor Statement Under
        the Private Securities Litigation Reform Act of 1995.”
 
 The
        Company suggests that the following discussion and analysis be read in
        conjunction with the Consolidated Financial Statements and Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        included in our Annual Report on Form 10-K for the year ended August 31,
        2006.
 
 
 **RESULTS
        OF OPERATIONS**
 
 **Overview**
 
 Our
        first
        fiscal quarter, which includes the months of September, October, and November,
        has historically reflected good product sales, from back-to-school and early
        holiday shopping, and generally good training and consulting service sales.
        Due
        to our modified 52/53 week fiscal calendar, the quarter ended December 2,
        2006
        included the financial results of 5 additional business days compared to
        the
        quarter ended November 26, 2005. For the quarter ended December 2, 2006,
        our
        income from operations decreased to $3.6 million compared to $4.1 million
        in the
        first fiscal quarter of the prior year and our pre-tax income declined to
        $3.2
        million compared to $3.8 million in the first quarter of fiscal 2006. Due
        to an
        increase in our effective tax rate, which was partially offset by reduced
        preferred stock dividends, our net income available to common shareholders
        decreased to $0.5 million compared to $1.9 million in the first quarter of
        fiscal 2006.
 
 The
        primary factors that influenced our operating results for the quarter ended
        December 2, 2006 were as follows:
 
 ·
              ***Sales*****-**Our
                  sales performance for both training and consulting services and
                  product
                  sales was favorably impacted by 5 additional business days in the
                  first
                  quarter of fiscal 2007 compared to the first quarter of the prior
                  year.
                  Training and consulting services sales increased $4.5 million primarily
                  due to increased international sales, increased domestic sales
                  of*The
                  7 Habits of Highly Effective People*training
                  programs, and improved sales effectiveness training sales. Product
                  sales
                  declined $1.3 million primarily due to reduced wholesale sales
                  and reduced
                  retail sales resulting from 16 fewer retail stores being open during
                  the
                  quarter compared to the prior year. Partially offsetting these
                  declines
                  were improved sales through our internet site atwww.franklincovey.com.
                  As a result of these factors, our total sales increased by $3.2
                  million,
                  or 4 percent, compared to the corresponding quarter of fiscal
                  2006.·
              ***Gross
                  Profit***-
                  When compared to the prior year, our gross profit increased primarily
                  due
                  to increased sales. Our consolidated gross margin, which is gross
                  profit
                  in terms of a percentage of sales, remained consistent at 61.4
                  percent of
                  sales in the first quarter of both fiscal 2007 and fiscal
                  2006.·
              ***Operating
                  Costs***-
                  Our operating costs increased by $2.5 million compared to the prior
                  year,
                  which was the result of increased selling, general, and administrative
                  expenses totaling $3.1 million, a $0.4 million decrease in depreciation
                  expense, and a $0.2 million decrease in amortization expense.·
              ***Income
                  Tax Provision***-
                  Our income tax provision for the quarter ended December 2, 2006
                  increased
                  to $1.7 million compared to $0.6 million in the first quarter of
                  fiscal
                  2006. During the fourth quarter of fiscal 2006, we determined that
                  it was
                  appropriate to reverse substantially all of the valuation allowances
                  on
                  our deferred income tax assets. Prior to the reversal of these
                  valuation
                  allowances, our income tax provisions were affected by reductions
                  in our
                  deferred income tax valuation allowance as we utilized net operating
                  loss
                  carryforwards. Our effective tax rate for the quarter ended December
                  2,
                  2006 of approximately 55 percent was higher than statutory combined
                  rates
                  primarily due to the accrual of taxable interest income on the
                  management
                  stock loan program and withholding taxes on royalty income from
                  foreign
                  licensees.·
              ***Preferred
                  Stock Dividends***-
                  Due to preferred stock redemptions in the first two quarters of
                  fiscal
                  2006 totaling $20.0 million, our preferred stock dividends decreased
                  by
                  $0.4 million compared to the first quarter of fiscal
                  2006.
 
 Further
        details regarding these factors and their impact on our operating results
        and
        liquidity are provided throughout the following management’s discussion and
        analysis.
 
 Quarter
        Ended December 2, 2006 Compared to the Quarter Ended November 26,
        2005
 
 **Sales**
 
 The
        following table sets forth sales data by category and for our operating segments
        (in thousands):
 
 Quarter
                  EndedDecember
                  2, 2006
              
              November
                  26, 2005
              
              Percent
                  Change*Sales
                  by Category:*Products
              
              $
              42,109
              
              $
              43,403
              
              
              (3
              )Training
                  and consulting services
              
              
              33,421
              
              
              28,948
              
              
              15$
              75,530
              
              $
              72,351
              
              
              4*Consumer
                  Solutions Business Unit:*Retail
                  Stores
              
              $
              14,127
              
              $
              14,643
              
              
              (4
              )Consumer
                  Direct
              
              
              19,936
              
              
              19,177
              
              
              4Wholesale
              
              
              4,577
              
              
              6,111
              
              
              (25
              )CSBU
                  International
              
              
              2,386
              
              
              2,644
              
              
              (10
              )Other
                  CSBU
              
              
              1,296
              
              
              1,163
              
              
              1142,322
              
              
              43,738
              
              
              (3
              )*Organizational
                  Solutions Business Unit:*Domestic
              
              
              17,721
              
              
              16,330
              
              
              9International
              
              
              15,487
              
              
              12,283
              
              
              2633,208
              
              
              28,613
              
              
              16Total
                  Sales
              
              $
              75,530
              
              $
              72,351
              
              
              4
 
 ***Product
        Sales*** **-** Overall
        product sales, which primarily consist of planners, binders, totes, software,
        and handheld electronic planning devices that are primarily sold through
        our
        Consumer Solutions Business Unit (CSBU) channels, declined $1.3 million,
        or 3
        percent, compared to the prior year. The decline in product sales was primarily
        due to the following performance in our CSBU channels:
 
 ·
              **Retail
                  Stores**-
                  The decline in retail sales was primarily due to fewer stores,
                  which had a
                  $1.6 million impact on sales, and reduced demand for technology
                  and
                  related products, which declined $0.2 million compared to the prior
                  year.
                  Partially offsetting these declines were increased sales resulting
                  from
                  additional business days during the quarter and increased demand
                  for
                  “core” products (e.g. planners, binders, forms, and totes). At December
                  2,
                  2006, we were operating 89 retail stores compared to 105 stores
                  at
                  November 26, 2005 and based upon our continuing analyses of retail
                  store
                  performance, we may close additional retail stores and continue
                  to
                  recognize decreases in sales as a result of closing stores in future
                  periods. With the additional business days included, comparable
                  store
                  (stores which were open during the comparable periods) sales increased
                  9
                  percent compared to the same quarter of the prior year. However,
                  excluding
                  the additional business days, comparable store sales declined by
                  2 percent
                  compared to the first quarter of fiscal 2006.·
              **Consumer
                  Direct**-
                  Sales through our consumer direct channels (primarily catalog,
                  eCommerce,
                  and public seminars) increased primarily due to increased sales
                  through
                  our internet channel and increased public seminar sales, which
                  were
                  partially offset by decreased government depot sales and decreased
                  catalog
                  channel sales. We believe that the transition of customers from
                  our
                  catalog and other product channels to our online web site is consistent
                  with general market trends toward increased internet shopping and
                  we
                  expect our internet sales to continue to grow in future periods.
                  Public
                  program sales increased due to an increase in the number of seminar
                  participants and an increased number of programs given compared
                  to the
                  prior year. Sales through government depots decreased due to a
                  decision by
                  the government to discontinue sales of dated paper products through
                  these
                  stores.·
              **Wholesale**-
                  Sales through our wholesale channel, which includes sales to office
                  superstores and other retail chains, decreased $1.5 million primarily
                  due
                  to reduced demand for our products from one of our wholesale customers
                  during the quarter.·
              **CSBU
                  International**-
                  This channel includes the product sales of our directly owned
                  international offices in Canada, the United Kingdom, Mexico, and
                  Australia. The $0.3 million decline was primarily due to product
                  sales
                  declines in the United Kingdom and Canada. We separated the product
                  sales
                  operations from the Organizational Solutions Business Unit in these
                  international locations during the quarter ended December 2, 2006
                  to
                  utilize existing product sales and marketing expertise to improve
                  overall
                  product sales performance at these offices.·
              **Other
                  CSBU**-
                  Other CSBU sales consist primarily of domestic printing and publishing
                  sales and building sublease revenues. The increase in other CSBU
                  sales was
                  primarily due to increased sublease revenue from new lease contracts
                  obtained in late fiscal 2006 and increased external printing
                  sales.
  ***Training
        and Consulting Services*** **-** We
        offer
        a variety of training courses, training related products, and consulting
        services focused on productivity, leadership, strategy execution, sales force
        performance, and effective communications training programs that are provided
        both domestically and internationally through the Organizational Solutions
        Business Unit (OSBU). Our overall training and consulting service sales
        increased $4.5 million, or 15 percent, compared to the same quarter of the
        prior
        year. Training and consulting service sales performance during the quarter
        was
        primarily attributable to the following factors in our OSBU
        divisions:
 
 ·
              **Domestic*****-***Our
                  domestic training sales increased by $1.4 million, or 9 percent,
                  primarily
                  due to additional business days resulting in increased sales of*The
                  Seven Habits of Highly Effective People*and
                  increased training effectiveness sales. Sales performance improved
                  in
                  nearly all of our domestic regions and our booked days delivered
                  increased
                  over the prior year. Our current outlook for fiscal 2007 remains
                  strong
                  and current training days booked for training in fiscal 2007 has
                  increased
                  compared to the prior fiscal year.·
              **International*****-***International sales increased $3.2 million, or 26 percent, compared
                  to the
                  prior year. Sales increased over the prior year at all of our directly
                  owned foreign offices, which are located in Japan, Canada, the
                  United
                  Kingdom, Mexico, Brazil, and Australia, as well as from licensee
                  royalty
                  revenues. The translation of foreign sales to United States dollars
                  resulted in a $0.1 million favorable impact to our consolidated
                  sales as
                  certain foreign currencies strengthened against the United States
                  dollar
                  during the quarter ended December 2,
                  2006.
  **Gross
        Profit**
 
 Gross
        profit consists of net sales less the cost of goods sold or the cost of services
        provided. Our overall gross margin, which is gross profit stated in terms
        of a
        percentage of sales, remained consistent with the prior year at 61.4 percent
        of
        sales. Although gross margin on product sales decreased slightly to 56.1
        percent
        compared to 57.0 percent in fiscal 2006, training and consulting service
        sales,
        which typically have higher gross margins than product sales, increased to
        44.2
        percent of total consolidated sales compared to 40.0 percent of total
        consolidated sales in the prior year.
 
 For
        the
        quarter ended December 2, 2006, our training and consulting services gross
        margin was 68.1 percent compared to 67.9 percent in the prior year.
 
 **Operating
        Expenses**
 
 ***Selling,
        General and Administrative*** **-** Our
        selling, general, and administrative (SG&A) expenses increased $3.1 million,
        or 8 percent, compared to the prior year. The increase in SG&A expenses was
        primarily due to 1) the impact of additional business days on associate costs,
        2) increased audit and consulting costs resulting from compliance with Section
        404 of the Sarbanes-Oxley Act of 2002 (SOX); and 3) increased promotional
        and
        advertising costs. Due to the 5 additional business days included in the
        first
        quarter of fiscal 2007, we incurred an additional $1.5 million of associate
        costs, including payroll and related benefits. Due to our fiscal calendar,
        our
        first quarter of fiscal 2007 has 5 additional business days and includes
        the
        additional associate costs compared to the prior year. Accordingly, our fourth
        quarter will have 5 less business days and associated costs in fiscal 2007
        than
        in fiscal 2006. During fiscal 2006, we were required to comply with Section
        404
        of SOX, which resulted in $1.0 million of additional auditing and consulting
        fees that were incurred and expensed during the quarter ended December 2,
        2006.
        We also incurred $0.4 million of increased catalog and promotion costs resulting
        from additional marketing efforts designed to improve sales.
 
 We
        are
        not satisfied with current levels of selling, general, and administrative
        expenses and are pursuing numerous cost reduction strategies designed to
        control
        costs and bring spending in line with desired business models. While we believe
        that these efforts will be successful in reducing our operating expenses,
        the
        success of these initiatives is dependent upon numerous factors, many of
        which
        are not within our control. Due to the time necessary to implement these
        cost
        reduction strategies, we may not be able to implement these new initiatives
        quickly enough to have a significant impact upon our fiscal 2007 operating
        results.
 
 ***Depreciation
        and Amortization*** **-** Depreciation
        expense decreased $0.4 million, or 26 percent, compared to the same quarter
        of
        fiscal 2006 primarily due to the full depreciation or disposal of certain
        property and equipment (including retail stores) and the effects of
        significantly reduced capital expenditures during preceding fiscal years.
        Based
        upon these events and current capital spending trends, we expect that
        depreciation expense for fiscal 2007 will approximate total fiscal 2006
        depreciation expense.
 
 Amortization
        expense from definite-lived intangible assets totaled $0.9 million for the
        quarter ended December 2, 2006 compared to $1.1 million in the prior year.
        We
        expect intangible asset amortization expense to total $3.6 million for fiscal
        2007.
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 Historically,
        our primary sources of capital have been net cash provided by operating
        activities, line-of-credit financing, long-term borrowings, asset sales,
        and the
        issuance of preferred and common stock. We currently rely primarily upon
        cash
        flows from operating activities and cash on hand to maintain adequate liquidity
        and working capital levels. Although our first fiscal quarter generally produces
        profitable operations, we commonly use cash for operating activities during
        the
        quarter as we pay seasonally high August 31 (fiscal year end) accrued
        liabilities and accounts payable and purchase inventory items for sale during
        our seasonally busy product-sale months of November, December, and January.
        At
        December 2, 2006, we had $22.9 million of cash and cash equivalents compared
        to
        $30.6 million at August 31, 2006. Our net working capital (current assets
        less
        current liabilities) increased to $40.0 million at December 2, 2006 compared
        to
        $38.7 million at August 31, 2006.
 
 The
        following discussion is a description of the primary factors affecting our
        cash
        flows and their effects upon our liquidity and capital resources during the
        quarter ended December 2, 2006.
 
 **Cash
        Flows From Operating Activities**
 
 During
        the quarter ended December 2, 2006, our net cash used for operating activities
        totaled $3.8 million compared to $6.2 million for the same period of the
        prior
        year. Our primary source of cash from operating activities was the sale of
        goods
        and services to our customers in the normal course of business. The primary
        uses
        of cash for operating activities were payments to suppliers for materials
        used
        in products sold, payments for direct costs necessary to conduct training
        programs, and payments for selling, general, and administrative expenses.
        Cash
        used for changes in working capital during the first quarter of fiscal 2007
        was
        primarily related to 1) increased accounts receivable balances resulting
        from
        improved OSBU sales; 2) payments made to reduce accrued liabilities and accounts
        payable from seasonally high August 31 balances; and 3) purchases of inventory
        items for our seasonally busy product sales months of November, December,
        and
        January. We believe that our continued efforts to optimize working capital
        balances, combined with existing and planned sales growth programs and
        cost-cutting initiatives, will improve our cash flows from operating activities
        in future periods. However, the success of these efforts, and their eventual
        contribution to our cash flows, is dependent upon numerous factors, many
        of
        which are not within our control.
 
 **Cash
        Flows From Investing Activities and Capital Expenditures**
 
 Net
        cash
        used for investing activities totaled $2.9 million for the first quarter
        of
        fiscal 2007. Our primary use of cash for investing activities was the purchase
        of property and equipment, which consisted primarily of payments for new
        printing presses, computer hardware, and computer software, which totaled
        $2.3
        million. Additionally, we spent $0.6 million for further investment in
        curriculum development, primarily related to new leadership and execution
        offerings.
 
 **Cash
        Flows From Financing Activities**
 
 Net
        cash
        used for financing activities during the quarter ended December 2, 2006 totaled
        $1.0 million. Our principal uses of cash for financing activities during
        this
        period were the payment of preferred stock dividends totaling $0.9 million
        and
        principal payments totaling $0.1 million on our long-term debt and financing
        obligation.
 
 **Contractual
        Obligations**
 
 The
        Company has not structured any special purpose or variable interest entities,
        or
        participated in any commodity trading activities, which would expose us to
        potential undisclosed liabilities or create adverse consequences to our
        liquidity. Required contractual payments primarily consist of payments to
        EDS
        for outsourcing services related to information systems, warehousing and
        distribution, and call center operations; payments on a financing obligation
        resulting from the sale of our corporate campus; minimum rent payments for
        retail store and sales office space; cash payments for Series A preferred
        stock
        dividends; mortgage payments on certain buildings and property; cash payments
        for new printing services equipment to be installed in fiscal 2007; short-term
        purchase obligations for inventory items; and monitoring fees paid to a Series
        A
        preferred stock investor. There have been no significant changes to our expected
        required contractual obligations from those disclosed at August 31,
        2006.
 
 **Other
        Items**
 
 ***Management
        Common Stock Loan Program*** **-** The
        Company is the creditor for a loan program that provided the capital to allow
        certain management personnel the opportunity to purchase shares of our common
        stock. For further information regarding our management common stock loan
        program, refer to Note 9 in our consolidated financial statements on Form
        10-K
        for the fiscal year ended August 31, 2006. The inability of the Company to
        collect all, or a portion, of these receivables could have an adverse impact
        upon our financial position and future cash flows compared to full collection
        of
        the loans.
 
 ***Availability
        of Future Capital Resources*** **-** Going
        forward, we will continue to incur costs necessary for the operation of the
        business. We anticipate using cash on hand, cash provided by operating
        activities, on the condition that we can continue generating positive cash
        flows
        from operations, and other financing alternatives, if necessary, for these
        expenditures. We anticipate that our existing capital resources should be
        adequate to enable us to maintain our operations for at least the upcoming
        twelve months. However, our ability to maintain adequate capital for our
        operations in the future is dependent upon a number of factors, including
        sales
        trends, our ability to contain costs, levels of capital expenditures, collection
        of accounts receivable, and other factors. Some of the factors that influence
        our operations are not within our control, such as economic conditions and
        the
        introduction of new technology and products by our competitors. We will continue
        to monitor our liquidity position and may pursue additional financing
        alternatives, if required, to maintain sufficient resources for future operating
        and capital requirements. However, there can be no assurance such financing
        alternatives will be available to us on acceptable terms.
  
 **USE
        OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES**
 
 Our
        consolidated financial statements were prepared in accordance with accounting
        principles generally accepted in the United States of America. The significant
        accounting polices that we used to prepare our consolidated financial statements
        are outlined in Note 1 to the consolidated financial statements, which are
        presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
        year ended August 31, 2006. Some of those accounting policies require us
        to make
        estimates and assumptions that affect the amounts reported in our consolidated
        financial statements. Management regularly evaluates its estimates and
        assumptions and bases those estimates and assumptions on historical experience,
        factors that are believed to be reasonable under the circumstances, and
        requirements under accounting principles generally accepted in the United
        States
        of America. Actual results may differ from these estimates under different
        assumptions or conditions, including changes in economic conditions and other
        circumstances that are not in our control, but which may have an impact on
        these
        estimates and our actual financial results.
 
 The
        following items require significant judgment and often involve complex
        estimates:
 
 **Revenue
        Recognition**
 
 We
        derive
        revenues primarily from the following sources:
 
 ·
              **Products**-
                  We sell planners, binders, planner accessories, handheld electronic
                  devices, and other related products that are primarily sold through
                  our
                  CSBU channels.·
              **Training
                  and Consulting Services**-
                  We provide training and consulting services to both organizations
                  and
                  individuals in strategic execution, leadership, productivity, goal
                  alignment, sales force performance, and communication effectiveness
                  skills. These training programs and services are primarily sold
                  through
                  our OSBU channels.
  The
        Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
        2) delivery of product has occurred or services have been rendered, 3) the
        price
        to the customer is fixed and determinable, and 4) collectibility is reasonably
        assured. For product sales, these conditions are generally met upon shipment
        of
        the product to the customer or by completion of the sale transaction in a
        retail
        store. For training and service sales, these conditions are generally met
        upon
        presentation of the training seminar or delivery of the consulting
        services.
 
 Some
        of
        our training and consulting contracts contain multiple deliverable elements
        that
        include training along with other products and services. In accordance with
        Emerging Issues Task Force (EITF) Issue No. 00-21, *Accounting
        for Revenue Arrangements with Multiple Deliverables* ,
        sales
        arrangements with multiple deliverables are divided into separate units of
        accounting if the deliverables in the sales contract meet the following
        criteria: 1) the delivered training or product has value to the client on
        a
        standalone basis; 2) there is objective and reliable evidence of the fair
        value
        of undelivered items; and 3) delivery of any undelivered item is probable.
        The
        overall contract consideration is allocated among the separate units of
        accounting based upon their fair values, with the amount allocated to the
        delivered item being limited to the amount that is not contingent upon the
        delivery of additional items or meeting other specified performance conditions.
        If the fair value of all undelivered elements exits, but fair value does
        not
        exist for one or more delivered elements, the residual method is used. Under
        the
        residual method, the amount of consideration allocated to the delivered items
        equals the total contract consideration less the aggregate fair value of
        the
        undelivered items. Fair value of the undelivered items is based upon the
        normal
        pricing practices for the Company’s existing training programs, consulting
        services, and other products, which are generally the prices of the items
        when
        sold separately.
 
 Revenue
        is recognized on software sales in accordance with Statement of Position
        (SOP)
        97-2, *Software
        Revenue Recognition* as
        amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue earned
        on
        software arrangements involving multiple elements such as software products
        and
        support to be allocated to each element based on the relative fair value
        of the
        elements based on vendor specific objective evidence (VSOE). The majority
        of the
        Company’s software sales have elements, including a license and post contract
        customer support (PCS). Currently the Company does not have VSOE for either
        the
        license or support elements of its software sales. Accordingly, revenue is
        deferred until the only undelivered element is PCS and the total arrangement
        fee
        is recognized ratably over the support period.
 
 Our
        international strategy includes the use of licensees in countries where we
        do
        not have a directly-owned operation. Licensee companies are unrelated entities
        that have been granted a license to translate the Company’s content and
        curriculum, adapt the content and curriculum to the local culture, and sell
        the
        Company’s training seminars and products in a specific country or region.
        Licensees are required to pay us royalties based upon a percentage of the
        licensee’s sales. We recognize royalty income each period based upon the sales
        information reported to us by the licensee.
 
 Revenue
        is recognized as the net amount to be received after deducting estimated
        amounts
        for discounts and product returns.
 
 **Share-Based
        Compensation**
 
 During
        fiscal 2006, we granted performance based compensation awards to certain
        employees in a Board of Director approved long-term incentive plan (the LTIP).
        These performance based share awards allow each participant the right to
        receive
        a certain number of shares of common stock based upon the achievement of
        specified financial goals at the end of a predetermined performance period.
        The
        LTIP awards vest on August 31 of the third fiscal year from the grant date,
        which corresponds to the completion of a three-year performance cycle. For
        example, the LTIP awards granted in fiscal 2007 vest on August 31, 2009.
        The
        number of shares that are finally awarded to LTIP participants is variable
        and
        is based entirely upon the achievement of a combination of performance
        objectives related to sales growth and cumulative operating income during
        the
        performance period. Due to the variable number of shares that may be issued
        under the LTIP, we reevaluate the LTIP grants on a quarterly basis and adjust
        the number of shares expected to be awarded for each grant based upon financial
        results of the Company as compared to the performance goals set for the award.
        Adjustments to the number of shares awarded, and to the corresponding
        compensation expense, are based upon estimated future performance and are
        made
        on a cumulative basis at the date of adjustment based upon the probable number
        of shares to be awarded.
 
 The
        Compensation Committee initially granted awards for 378,665 shares (the Target
        Award) of common stock under the LTIP during fiscal 2006. However, the actual
        number of shares finally awarded will range from zero shares, if a minimum
        level
        of performance is not achieved, to 200 percent of the target award, if
        specifically defined performance criteria is achieved during the three-year
        performance period. The minimum sales growth necessary for participants to
        receive any shares under the fiscal 2006 LTIP is 7.5 percent and the minimum
        cumulative operating income is $36.2 million. The number of shares finally
        awarded to LTIP participants under the fiscal 2006 LTIP grant is based upon
        the
        combination of factors as shown below:
 
 Sales
                Growth
              Percent
                  of Target Shares Awarded30.0%
              115%
              135%
              150%
              175%
              200%22.5%
              90%
              110%
              125%
              150%
              175%15.0%
              65%
              85%
              100%
              125%
              150%11.8
                  %
              50%
              70%
              85%
              110%
              135%7.5%
              30%
              50%
              65%
              90%
              115%$36.20
              $56.80
              $72.30
              $108.50
              $144.60Cumulative
                  Operating Income (millions)
 
 Based
        upon actual financial performance through December 2, 2006 and estimated
        performance through the remaining service period of the fiscal 2006 LTIP
        grant
        (fiscal 2007 and 2008), the number of performance awards granted during fiscal
        2006 was reduced to 213,946 shares, which resulted in a cumulative adjustment
        to
        reduce our operating expenses by $0.2 million in the quarter ended
        December 2, 2006. At December 2, 2006, there was $1.0 million of total
        unrecognized compensation cost related to our fiscal 2006 LTIP grant. The
        total
        compensation cost of the fiscal 2006 LTIP will be equal to the number of
        shares
        finally issued multiplied by $6.60 per share, which was the fair value of
        the
        common shares determined at the grant date.
 
 During
        the quarter ended December 2, 2006, the Compensation Committee granted
        performance awards for 429,312 shares of common stock under terms of the
        LTIP.
        The fiscal 2007 LTIP award was valued at $5.78 per share, which was the closing
        price of our common stock on the grant date. Consistent with the fiscal 2006
        LTIP grant, the Company must achieve minimum levels of sales growth and
        cumulative operating income in order for participants to receive any shares
        under the LTIP grant. The minimum sales growth for the fiscal 2007 LTIP is
        10.0
        percent (fiscal 2009 compared to fiscal 2006) and the minimum cumulative
        operating income total is $41.3 million. We will record compensation expense
        using a 5 percent estimated forfeiture rate during the vesting period. However,
        the total amount of compensation expense recorded for the fiscal 2007 LTIP
        will
        equal the number of shares awarded multiplied by $5.78 per share. The number
        of
        shares finally awarded to LTIP participants under the fiscal 2007 LTIP grant
        is
        based upon the combination of factors as shown below:
   
 Sales
                Growth
              Percent
                  of Target Shares Awarded40.0%
              115%
              135%
              150%
              175%
              200%30.0%
              90%
              110%
              125%
              150%
              175%20.0%
              65%
              85%
              100%
              125%
              150%15.7%
              50%
              70%
              85%
              110%
              135%10.0%
              30%
              50%
              65%
              90%
              115%$41.30
              $64.90
              $82.60
              $123.90
              $165.20Cumulative
                  Operating Income (millions)
 
 The
        evaluation of LTIP performance awards and corresponding use of estimated
        amounts
        may produce additional volatility in our consolidated financial statements
        as we
        record cumulative adjustments to the estimated number of common shares to
        be
        awarded under the LTIP grants. Actual results could differ from estimates
        made
        during the service, or vesting, period.
 
 We
        estimate the value of our stock option awards on the date of grant using
        the
        Black-Scholes option pricing model. However, the Company did not grant any
        stock
        options in the first quarter of fiscal 2007 or in fiscal years 2006 and 2005.
        At
        December 2, 2006 the remaining cost associated with our unvested stock options
        was insignificant.
 
 **Accounts
        Receivable Valuation**
 
 Trade
        accounts receivable are recorded at the invoiced amount and do not bear
        interest. The allowance for doubtful accounts represents our best estimate
        of
        the amount of probable credit losses in the existing accounts receivable
        balance. We determine the allowance for doubtful accounts based upon historical
        write-off experience and current economic conditions and we review the adequacy
        of our allowance for doubtful accounts on a regular basis. Receivable balances
        past due over 90 days, which exceed a specified dollar amount, are reviewed
        individually for collectibility. Account balances are charged off against
        the
        allowance after all means of collection have been exhausted and the probability
        for recovery is considered remote. We do not have any off-balance sheet credit
        exposure related to our customers.
 
 **Inventory
        Valuation**
 
 Inventories
        are stated at the lower of cost or market with cost determined using the
        first-in, first-out method. Our inventories are comprised primarily of dated
        calendar products and other non-dated products such as binders, handheld
        electronic devices, stationery, training products, and other accessories.
        Provision is made to reduce excess and obsolete inventories to their estimated
        net realizable value. In assessing the realization of inventories, we make
        judgments regarding future demand requirements and compare these assessments
        with current and committed inventory levels. Inventory requirements may change
        based on projected customer demand, technological and product life cycle
        changes, longer or shorter than expected usage periods, and other factors
        that
        could affect the valuation of our inventories.
 
 **Indefinite-Lived
        Intangible Assets**
 
 Intangible
        assets that are deemed to have an indefinite life are not amortized, but
        rather
        are tested for impairment on an annual basis, or more often if events or
        circumstances indicate that a potential impairment exists. The Covey trade
        name
        intangible asset has been deemed to have an indefinite life. This intangible
        asset is assigned to the OSBU and is tested for impairment using the present
        value of estimated royalties on trade name related revenues, which consist
        primarily of training seminars, international licensee royalties, and related
        products. If forecasts and assumptions used to support the realizability
        of our
        indefinite-lived intangible asset change in the future, significant impairment
        charges could result that would adversely affect our results of operations
        and
        financial condition. Based upon our fiscal 2006 evaluation, our trade-name
        related revenues and licensee royalties would have to suffer significant
        reductions before we would be required to impair the Covey trade
        name.
 
 **Impairment
        of Long-Lived Assets**
 
 Long-lived
        tangible assets and definite-lived intangible assets are reviewed for possible
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of such assets may not be recoverable. We use an estimate
        of
        undiscounted future net cash flows of the assets over the remaining useful
        lives
        in determining whether the carrying value of the assets is recoverable. If
        the
        carrying values of the assets exceed the anticipated future cash flows of
        the
        assets, we recognize an impairment loss equal to the difference between the
        carrying values of the assets and their estimated fair values. Impairment
        of
        long-lived assets is assessed at the lowest levels for which there are
        identifiable cash flows that are independent from other groups of assets.
        The
        evaluation of long-lived assets requires us to use estimates of future cash
        flows. If forecasts and assumptions used to support the realizability of
        our
        long-lived tangible and definite-lived intangible assets change in the future,
        significant impairment charges could result that would adversely affect our
        results of operations and financial condition.
 
 **Income
        Taxes**
 
 The
        Company regularly evaluates United States federal and various state and foreign
        jurisdiction income tax exposures. The tax benefits of tax exposure items
        are
        not recognized in the provision for income taxes unless it is probable that
        the
        benefits will be sustained, without regard to the likelihood of tax examination.
        A tax exposure reserve represents the difference between the recognition
        of
        benefits related to exposure items for income tax reporting purposes and
        financial reporting purposes. The tax exposure reserve is classified as a
        component of the current income taxes payable account. The Company adds interest
        and penalties, if applicable, each period to the reserve.
 
 The
        Company recognizes the benefits of the tax exposure items in the financial
        statements, that is, the reserve is reversed, when it becomes probable that
        the
        tax position will be sustained. To assess the probability of sustaining a
        tax
        position, the Company considers all available positive evidence. In many
        instances, sufficient positive evidence will not be available until the
        expiration of the statute of limitations for Internal Revenue Service audits,
        at
        which time the entire benefit will be recognized as a discrete item in the
        applicable period.
 
 The
        calculation of our income tax provision or benefit, as applicable, requires
        estimates of future taxable income or losses. During the course of the fiscal
        year, these estimates are compared to actual financial results and adjustments
        may be made to our tax provision or benefit to reflect these revised
        estimates.
 
 The
        Company continually assesses the need for valuation allowances against its
        deferred income tax assets, considering recent profitability, known trends
        and
        events, and expected future transactions. For several years prior to the
        year
        ended August 31, 2006, our history of significant operating losses precluded
        us
        from demonstrating that it was more likely than not that the related benefits
        from deferred income tax deductions and foreign tax carryforwards would be
        realized. Accordingly, we recorded valuation allowances on the majority of
        our
        deferred income tax assets.
 
 In
        fiscal
        2006 we reversed the majority of these valuation allowances. Due to improved
        operating performance, business models, and expectations regarding future
        taxable income, the Company has concluded that it is more likely than not
        that
        the benefits of domestic operating loss carryforwards, together with the
        benefits of other deferred income tax assets will be realized. Thus, we reversed
        the valuation allowances on certain of our domestic deferred income tax assets,
        except for $2.2 million related to foreign tax credits.
 
 **NEW
        ACCOUNTING PRONOUNCEMENTS**
 
 ***Sales
        Tax Presentation*** - In
        June 2006, the Emerging Issues Task Force (EITF) of the Financial Accounting
        Standards Board (FASB) reached a consensus on Issue No. 06-03, *How
        Taxes Collected from Customers and Remitted to Governmental Authorities Should
        Be Presented in the Income Statement (That Is, Gross versus Net
        Presentation)* .
        This
        consensus provides that the presentation of taxes assessed by a governmental
        authority that is directly imposed on a revenue-producing transaction between
        a
        seller and a customer on either a gross basis (included in revenues and costs)
        or on a net basis (excluded from revenues) is an accounting policy decision
        that
        should be disclosed. The provisions of EITF 06-03 become effective for interim
        and annual reporting periods beginning after December 15, 2006. The Company
        is
        currently evaluating the impact of adopting EITF 06-03 on the presentation
        of
        our consolidated financial statements and we will adopt the provisions of
        EITF
        06-03 in our fiscal quarter ending June 2, 2007.
 
 ***Uncertain
        Tax Positions*** - In
        July 2006, the FASB issued FIN No. 48, *Accounting
        for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
        109* .
        This
        interpretation prescribes a consistent recognition threshold and measurement
        standard, as well as criteria for subsequently recognizing, derecognizing,
        and
        measuring tax positions for financial statement purposes. This interpretation
        also requires expanded disclosure with respect to the uncertainties as they
        relate to income tax accounting and is effective for fiscal years beginning
        after December 15, 2006. The cumulative effect from the adoption of FIN No.
        48,
        if any, will be an adjustment to beginning retained earnings in the year
        of
        adoption. The Company will adopt the provisions of FIN No. 48 on September
        1,
        2007 (fiscal 2008). We are currently in the process of evaluating the impact
        of
        FIN No. 48 on our financial statements.
 
 ***Evaluation
        of Misstatements*** - In
        September 2006, the Securities and Exchange Commission (SEC) released Staff
        Accounting Bulletin (SAB) No. 108, *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements* ,
        which
        provides the Staff’s views regarding the process of quantifying financial
        statement misstatements, such as assessing both the carryover and reversing
        effects of prior year misstatements on the current year financial statements.
        The Company will adopt the misstatement evaluation requirements of SAB No.
        108
        for the Company's fiscal year ended August 31, 2007.
 
 ***Fair
        Value Measures*** - In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measures. This
        statement establishes a single authoritative definition of fair value, sets
        out
        a framework for measuring fair value, and requires additional disclosures
        about
        fair-value measurements. Statement No. 157 only applies to fair-value
        measurements that are already required or permitted by other accounting
        standards except for measurements of share-based payments and measurements
        that
        are similar to, but not intended to be, fair value. This statement is effective
        for the specified fair value measures for financial statements issued for
        fiscal
        years beginning after November 15, 2007, and will thus be effective for the
        Company in fiscal 2008. We have not yet completed our analysis of the impact
        of
        SFAS No. 157 on our financial statements.
   **SAFE
        HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
        1995**
 
 Certain
        written and oral statements made by the Company or our representatives in
        this
        report, other reports, filings with the Securities and Exchange Commission,
        press releases, conferences, internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
        Litigation Reform Act of 1995 and Section 21E of the Securities Exchange
        Act of
        1934. Forward-looking statements include, without limitation, any statement
        that
        may predict, forecast, indicate, or imply future results, performance, or
        achievements, and may contain words such as “believe,” “anticipate,” “expect,”
“estimate,” “project,” or words or phrases of similar meaning. In our reports
        and filings we may make forward looking statements regarding future product
        and
        training sales activity, anticipated expenses, projected cost reduction and
        strategic initiatives, expected levels of depreciation expense, expectations
        regarding tangible asset valuation expenses, expected improvements in cash
        flows
        from operating activities, estimated capital expenditures, and cash flow
        estimates used to determine the fair value of long-lived assets. These, and
        other forward-looking statements, are subject to certain risks and uncertainties
        that may cause actual results to differ materially from the forward-looking
        statements. These risks and uncertainties are disclosed from time to time
        in
        reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and
        10-K. Such risks and uncertainties include, but are not limited to, the matters
        discussed in Item 1A of our report on Form 10-K for the fiscal year ended
        August
        31, 2006, entitled “Risk Factors.” In addition, such risks and uncertainties may
        include unanticipated developments in any one or more of the following areas:
        unanticipated costs or capital expenditures; difficulties encountered by
        EDS in
        operating and maintaining our information systems and controls, including
        without limitation, the systems related to demand and supply planning, inventory
        control, and order fulfillment; delays or unanticipated outcomes relating
        to our
        strategic plans; dependence on existing products or services; the rate and
        consumer acceptance of new product introductions; competition; the number
        and
        nature of customers and their product orders, including changes in the timing
        or
        mix of product or training orders; pricing of our products and services and
        those of competitors; adverse publicity; and other factors which may adversely
        affect our business.
 
 The
        risks
        included here are not exhaustive. Other sections of this report may include
        additional factors that could adversely affect our business and financial
        performance, including the risk factors noted in Item 1A of our August 31,
        2006
        report on Form 10-K. Moreover, we operate in a very competitive and rapidly
        changing environment. New risk factors may emerge and it is not possible
        for our
        management to predict all such risk factors, nor can we assess the impact
        of all
        such risk factors on our business or the extent to which any single factor,
        or
        combination of factors, may cause actual results to differ materially from
        those
        contained in forward-looking statements. Given these risks and uncertainties,
        investors should not rely on forward-looking statements as a prediction of
        actual results.
 
 The
        market price of our common stock has been and may remain volatile. In addition,
        the stock markets in general have experienced increased volatility. Factors
        such
        as quarter-to-quarter variations in revenues and earnings or losses and our
        failure to meet expectations could have a significant impact on the market
        price
        of our common stock. In addition, the price of our common stock can change
        for
        reasons unrelated to our performance. Due to our low market capitalization,
        the
        price of our common stock may also be affected by conditions such as a lack
        of
        analyst coverage and fewer potential investors.
 
 Forward-looking
        statements are based on management’s expectations as of the date made, and the
        Company does not undertake any responsibility to update any of these statements
        in the future except as required by law. Actual future performance and results
        will differ and may differ materially from that contained in or suggested
        by
        forward-looking statements as a result of the factors set forth in this
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations and elsewhere in our filings with the SEC.
 
 
 **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 **Market
        Risk of Financial Instruments**
 
 The
        Company is exposed to financial instrument market risk primarily through
        fluctuations in foreign currency exchange rates and interest rates. To manage
        risks associated with foreign currency exchange and interest rates, we make
        limited use of derivative financial instruments. Derivatives are financial
        instruments that derive their value from one or more underlying financial
        instruments. As a matter of policy, our derivative instruments are entered
        into
        for periods consistent with the related underlying exposures and do not
        constitute positions that are independent of those exposures. In addition,
        we do
        not enter into derivative contracts for trading or speculative purposes,
        nor are
        we party to any leveraged derivative instrument. The notional amounts of
        derivatives do not represent actual amounts exchanged by the parties to the
        instrument, and, thus, are not a measure of exposure to us through our use
        of
        derivatives. Additionally, we enter into derivative agreements only with
        highly
        rated counterparties and we do not expect to incur any losses resulting from
        non-performance by other parties.
 
 **Foreign
        Currency Sensitivity**
 
 Due
        to
        the global nature of our operations, we are subject to risks associated with
        transactions that are denominated in currencies other than the United States
        dollar, as well as the effects of translating amounts denominated in foreign
        currencies to United States dollars as a normal part of the reporting process.
        The objective of our foreign currency risk management activities is to reduce
        foreign currency risk in the consolidated financial statements. In order
        to
        manage foreign currency risks, we make limited use of foreign currency forward
        contracts and other foreign currency related derivative instruments. Although
        we
        cannot eliminate all aspects of our foreign currency risk, we believe that
        our
        strategy, which includes the use of derivative instruments, can reduce the
        impacts of foreign currency related issues on our consolidated financial
        statements. The following is a description of our use of foreign currency
        derivative instruments.
 
 During
        the quarter ended December 2, 2006 we utilized foreign currency forward
        contracts to manage the volatility of certain intercompany financing
        transactions and other transactions that are denominated in foreign currencies.
        Because these contracts do not meet specific hedge accounting requirements,
        gains and losses on these contracts, which expire on a quarterly basis, are
        recognized currently and are used to offset a portion of the gains or losses
        of
        the related accounts. The gains and losses on these contracts were recorded
        as a
        component of SG&A expense in our consolidated income statements and had the
        following net impact on the periods indicated (in thousands):
 
 Quarter
                  EndedDecember
                  2,
                2006
              
              November
                  26,
                2005Losses
                  on foreign exchange contracts
              
              $
              (9
              )
              $
              (46
              )Gains
                  on foreign exchange contracts
              
              
              18
              
              
              217Net
                  gain on foreign exchange contracts
              
              $
              9
              
              $
              171
 
 At
        December 2, 2006, the fair value of our foreign currency forward contracts,
        which was determined using the estimated amount at which contracts could
        be
        settled based upon forward market exchange rates, was insignificant. The
        notional amounts of our foreign currency sell contracts that did not qualify
        for
        hedge accounting were as follows at December 2, 2006 (in
        thousands):
 
 Contract
                  Description
              
              Notional
                  Amount in Foreign Currency
              
              Notional
                  Amount in U.S. DollarsJapanese
                  Yen
              
              
              333,000
              
              $
              2,851Australian
                  Dollars
              
              
              1,500
              
              
              1,148Mexican
                  Pesos
              
              
              12,582
              
              
              1,134
 
 During
        the quarter ended December 2, 2006, we did not utilize any derivative contracts
        that qualified for hedge accounting. However, the Company may utilize net
        investment hedge contracts or other foreign currency derivatives in future
        periods as a component of our overall foreign currency risk
        strategy.
 
 **Interest
        Rate Sensitivity**
 
 The
        Company is exposed to fluctuations in U.S. interest rates primarily as a
        result
        of the cash and cash equivalents that we hold. Our debt balances consist
        primarily of a financing obligation associated with the sale of our corporate
        headquarters facility and a long-term mortgage on certain of our buildings
        and
        property. As such, we do not have significant exposure or additional liability
        due to interest rate sensitivity and we were not party to any interest rate
        swap
        or other interest related derivative instruments during the quarter ended
        December 2, 2006.
 
 
 **ITEM
        4. CONTROLS AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in the Company’s Exchange Act reports is
        recorded, processed, summarized and reported within the time periods specified
        in the Securities and Exchange Commission’s rules and forms and that such
        information is accumulated and communicated to our management, including
        the
        Chief Executive Officer and the Chief Financial Officer, as appropriate,
        to
        allow for timely decisions regarding required disclosure. In designing and
        evaluating the disclosure controls and procedures, management recognizes
        that
        any controls and procedures, no matter how well designed and operated, can
        provide only reasonable assurance of achieving the desired control objectives,
        and management is required to apply its judgment in evaluating the cost-benefit
        relationship of possible controls and procedures.
 
 We
        evaluated the effectiveness of the design and operation of our disclosure
        controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
        Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end
        of the period covered by this report. Our Chief Executive Officer and Chief
        Financial Officer supervised and participated in the evaluation. Based on
        this
        evaluation, our Chief Executive Officer and Chief Financial Officer concluded
        that, due to the material weakness in our internal controls over financial
        reporting identified in our fiscal 2006 Form 10-K related to capturing and
        recording accounts payable for services, our disclosure controls and procedures
        were not effective as of December 2, 2006.
 
 In
        light
        of the material weakness described in our fiscal 2006 Form 10-K, we performed
        additional procedures to ensure that our condensed consolidated financial
        statements were prepared in accordance with generally accepted accounting
        principles. Accordingly, management believes that the condensed consolidated
        financial statements included in this report fairly presents, in all material
        respects, our financial position, results of operations, and cash flows for
        the
        periods presented.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 We
        are in
        the process of instituting additional controls to remediate the material
        weakness described in our fiscal 2006 Form 10-K.  During the quarter ended
        December 2, 2006 we added new accounts payable processes and procedures,
        created
        new system generated reports to identify potential missing liabilities, and
        provided additional training to accounts payable personnel.  However, we
        were not able to remediate, and thereafter test the remediation of, the material
        weakness identified by the end of our first quarter of fiscal 2007.
  Other
        than described above, there were no changes in our internal control over
        financial reporting during the most recently completed fiscal quarter that
        have
        materially affected, or are reasonably likely to materially affect, our internal
        controls over financial reporting.
 
 **PART
        II. OTHER INFORMATION**
  **Item 1A.**
              **RISK
                FACTIORS**
  For
        information regarding Risk Factors, please refer to Item 1A in the Company’s
        Annual Report on Form 10-K for the fiscal year ended August 31,
        2006.
 
 **Item 2.**
              **UNREGISTERED SALES OF EQUITY
                SECURITIES AND USE OF PROCEEDS**
  The
        Company acquired the following securities during the fiscal quarter ended
        December 2, 2006:
 
 Period
                
                Total
                    Number of Shares Purchased
                
                Average
                    Price Paid Per Share
                
                Total
                    Number of Shares Purchased as Part of Publicly Announced Plans
                    or
                    Programs
                
                Maximum
                    Dollar Value of Shares That May Yet Be Purchased Under the Plans
                    or
                    Programs
                  (in
                    thousands)Common
                    Shares:September
                    1, 2006 to October 7, 2006
                
                
                -
                
                $
                -
                
                
                none
                
                $
                4,887October
                    8, 2006 to November 4, 2006
                
                
                -
                
                
                -
                
                
                none
                
                
                4,887November
                    5, 2006 to December 2, 2006
                
                
                3,078
                (2)
                
                5.18
                
                
                none
                
                
                4,887
                (1)Total
                    Common Shares
                
                
                3,078
                
                $
                5.18
                
                
                noneTotal
                    Preferred Shares
                
                
                none
                
                
                none
 (1)
              In
                  January 2006, our Board of Directors approved the purchase of up
                  to $10.0
                  million of our outstanding common stock. All previous authorized
                  common
                  stock purchase plans were canceled. Following the approval of this
                  stock
                  purchase plan, we have purchased a total of 681,300 shares of common
                  stock
                  for $5.1 million through December 2, 2006.(2)
              Amount
                  represents shares withheld for statutory taxes and penalties from
                  a
                  distribution of common shares to a participant in the Company’s
                  non-qualified deferred compensation
                  plan.
 **Item 6.**
              **EXHIBITS**
  (A)
              Exhibits:
 
 31.1
              Rule
                  13a-14(a) Certifications of the Chief Executive Officer
 31.2
              Rule
                  13a-14(a) Certifications of the Chief Financial
                  Officer
 
 32
              Section
                  1350 Certifications
  
 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 thereunto
        duly authorized.
 
 FRANKLIN
                  COVEY CO.Date:
              January
                  11, 2007
              
              By:
              /s/
                  ROBERT A. WHITMANRobert
                  A. WhitmanChief
                  Executive OfficerDate:
              January
                  11, 2007
              
              By:
              /s/
                  STEPHEN D. YOUNGStephen
                  D. YoungChief
                  Financial Officer