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 March 1, 2008





[   ]
            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   TNo   £





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




Large
      accelerated filer
              £
              
              Accelerated
      filer
              TNon-accelerated
      filer
              £
              
              (Do
      not check if a smaller reporting company)
              
              Smaller
      reporting company
              £


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





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





19,585,855
shares of Common Stock as of April 1, 2008


Table of Contents


FranklinCovey
Co.
  INDEX









PART
      I.
            FINANCIAL INFORMATIONITEM
      1.
            Condensed Consolidated Balance
      SheetsCondensed Consolidated Income
      StatementsCondensed Consolidated Statements of Cash
      FlowsNotes to Condensed Consolidated Financial
      StatementsITEM
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of OperationsITEM
      3.
            Quantitative and Qualitative Disclosures About Market
      RiskITEM
      4.
            Controls and ProceduresPART
      II.
            OTHER INFORMATIONITEM
      1A.
            Risk FactorsITEM
      2.
            Unregistered Sales of Equity Securities and Use
      of ProceedsITEM
      4.
            Submission of Matters to a Vote of Security
      HoldersITEM
      6.
            ExhibitsSIGNATURES


2
 Table of Contents


PART
I.  FINANCIAL INFORMATION


ITEM
1.  FINANCIAL STATEMENTS








FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED BALANCE
SHEETS


(in
thousands, except per share amounts)





March
      1,
              2008
            
            
            August
      31,
              2007(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            5,334
            
            
            $
            6,126Accounts receivable, less
      allowance for doubtful accounts of $899 and $821
            
            
            29,723
            
            
            
            27,239Inventories
            
            
            21,190
            
            
            
            24,033Deferred
      income taxes
            
            
            3,706
            
            
            
            3,635Prepaid
      expenses and other assets
            
            
            7,748
            
            
            
            9,070Total
      current assets
            
            
            67,701
            
            
            
            70,103Property
      and equipment, net
            
            
            34,571
            
            
            
            36,063Intangible
      assets, net
            
            
            74,126
            
            
            
            75,923Deferred
      income taxes
            
            
            106
            
            
            
            101Other
      assets
            
            
            15,451
            
            
            
            14,441$
            191,955
            
            
            $
            196,631LIABILITIES AND SHAREHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of long-term debt and financing obligation
            
            $
            657
            
            
            $
            629Line
      of credit
            
            
            4,314
            
            
            
            15,999Accounts
      payable
            
            
            11,133
            
            
            
            12,190Income
      taxes payable
            
            
            1,101
            
            
            
            2,244Accrued
      liabilities
            
            
            29,180
            
            
            
            30,101Total
      current liabilities
            
            
            46,385
            
            
            
            61,163Long-term
      debt and financing obligation, less current portion
            
            
            32,681
            
            
            
            32,965Deferred
      income tax liabilities
            
            
            4,981
            
            
            
            565Other
      liabilities
            
            
            1,626
            
            
            
            1,019Total
      liabilities
            
            
            85,673
            
            
            
            95,712Shareholders’
      equity:Common stock – $0.05 par value;
      40,000 shares authorized, 27,056 shares issued and
    outstanding
            
            
            1,353
            
            
            
            1,353Additional paid-in
      capital
            
            
            185,003
            
            
            
            185,890Common stock
    warrants
            
            
            7,602
            
            
            
            7,602Retained earnings
            
            
            24,630
            
            
            
            19,489Accumulated other comprehensive
      income
            
            
            1,510
            
            
            
            970Treasury stock at cost, 7,249 and
      7,296 shares
            
            
            (113,816
            )
            
            
            (114,385
            )Total shareholders’
      equity
            
            
            106,282
            
            
            
            100,919$
            191,955
            
            
            $
            196,631



































See notes
to condensed consolidated financial statements.


3
 Table of Contents


FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED INCOME
STATEMENTS


(in
thousands, except per share amounts)





Quarter
      Ended
            
            
            Two
      Quarters EndedMarch
      1,
              2008
            
            
            March
      3,
              2007
            
            
            March
      1,
              2008
            
            
            March
      3,
              2007(unaudited)
            
            
            (unaudited)Net
      sales:Products
            
            $
            41,299
            
            
            $
            45,283
            
            
            $
            80,675
            
            
            $
            87,391Training
      and consulting services
            
            
            33,828
            
            
            
            31,593
            
            
            
            68,027
            
            
            
            65,01475,127
            
            
            
            76,876
            
            
            
            148,702
            
            
            
            152,405Cost
      of sales:Products
            
            
            17,776
            
            
            
            19,436
            
            
            
            34,682
            
            
            
            37,910Training
      and consulting services
            
            
            10,663
            
            
            
            10,251
            
            
            
            21,386
            
            
            
            20,90928,439
            
            
            
            29,687
            
            
            
            56,068
            
            
            
            58,819Gross profit
            
            
            46,688
            
            
            
            47,189
            
            
            
            92,634
            
            
            
            93,586Selling,
      general, and administrative
            
            
            37,652
            
            
            
            36,666
            
            
            
            76,424
            
            
            
            77,514Gain
      on sale of manufacturing facility
            
            
            -
            
            
            
            (1,227
            )
            
            
            -
            
            
            
            (1,227
            )Depreciation
            
            
            1,350
            
            
            
            1,366
            
            
            
            2,547
            
            
            
            2,403Amortization
            
            
            901
            
            
            
            900
            
            
            
            1,800
            
            
            
            1,802Income
      from operations
            
            
            6,785
            
            
            
            9,484
            
            
            
            11,863
            
            
            
            13,094Interest
      income
            
            
            15
            
            
            
            357
            
            
            
            24
            
            
            
            557Interest
      expense
            
            
            (761
            )
            
            
            (675
            )
            
            
            (1,672
            )
            
            
            (1,336
            )Income
      before provision for income taxes
            
            
            6,039
            
            
            
            9,166
            
            
            
            10,215
            
            
            
            12,315Provision
      for income taxes
            
            
            2,957
            
            
            
            4,452
            
            
            
            5,074
            
            
            
            6,186Net
      income
            
            
            3,082
            
            
            
            4,714
            
            
            
            5,141
            
            
            
            6,129Preferred
      stock dividends
            
            
            -
            
            
            
            (934
            )
            
            
            -
            
            
            
            (1,867
            )Net
      income available to common shareholders
            
            $
            3,082
            
            
            $
            3,780
            
            
            $
            5,141
            
            
            $
            4,262Net
      income available to common
              shareholders per
      share:Basic
            
            $
            .16
            
            
            $
            .19
            
            
            $
            .26
            
            
            $
            .22Diluted
            
            $
            .16
            
            
            $
            .19
            
            
            $
            .26
            
            
            $
            .21Weighted
      average number of common shares:Basic
            
            
            19,510
            
            
            
            19,589
            
            
            
            19,495
            
            
            
            19,750Diluted
            
            
            19,805
            
            
            
            19,870
            
            
            
            19,782
            
            
            
            20,031




































































See notes
to condensed consolidated financial statements.


4
 Table of Contents


FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(in
thousands)





Two
      Quarters EndedMarch
      1,
              2008
            
            
            March
      3,
              2007(unaudited)Cash
      flows from operating activities:Net
      income
            
            $
            5,141
            
            
            $
            6,129Adjustments to reconcile net
      income to net cash provided by operating activities:Depreciation
      and amortization
            
            
            4,907
            
            
            
            4,977Deferred
      income taxes
            
            
            3,656
            
            
            
            4,218Loss
      (gain) on disposals of property and equipment
            
            
            274
            
            
            
            (1,210
            )Share-based
      compensation expense
            
            
            (511
            )
            
            
            622Changes
      in assets and liabilities:Increase
      in accounts receivable, net
            
            
            (1,884
            )
            
            
            (433
            )Decrease
      (increase) in inventories
            
            
            3,270
            
            
            
            (1,616
            )Decrease
      in other assets
            
            
            1,132
            
            
            
            728Decrease
      in accounts payable and accrued liabilities
            
            
            (1,712
            )
            
            
            (5,196
            )Decrease
      in other long-term liabilities
            
            
            (116
            )
            
            
            (175
            )Increase
      in income taxes payable
            
            
            274
            
            
            
            743Net
      cash provided by operating activities
            
            
            14,431
            
            
            
            8,787Cash
      flows from investing activities:Proceeds
      on notes receivable from disposals of subsidiaries
            
            
            1,046
            
            
            
            -Purchases
      of property and equipment
            
            
            (2,345
            )
            
            
            (5,377
            )Curriculum
      development costs
            
            
            (1,567
            )
            
            
            (3,163
            )Proceeds
      from sales of property and equipment
            
            
            60
            
            
            
            2,258Net
      cash used for investing activities
            
            
            (2,806
            )
            
            
            (6,282
            )Cash
      flows from financing activities:Proceeds
      from line-of-credit borrowing
            
            
            40,029
            
            
            
            -Payments
      on line-of-credit borrowing
            
            
            (51,714
            )
            
            
            -Principal
      payments on long-term debt and financing obligation
            
            
            (312
            )
            
            
            (297
            )Proceeds
      from sales of common stock from treasury
            
            
            193
            
            
            
            137Purchases
      of treasury shares
            
            
            -
            
            
            
            (2,539
            )Payment
      of preferred stock dividends
            
            
            -
            
            
            
            (1,867
            )Net
      cash used for financing activities
            
            
            (11,804
            )
            
            
            (4,566
            )Effect
      of foreign exchange rates on cash and cash equivalents
            
            
            (613
            )
            
            
            94Net
      decrease in cash and cash equivalents
            
            
            (792
            )
            
            
            (1,967
            )Cash
      and cash equivalents at beginning of the period
            
            
            6,126
            
            
            
            30,587Cash
      and cash equivalents at end of the period
            
            $
            5,334
            
            
            $
            28,620Supplemental
      disclosure of cash flow information:Cash
      paid for interest
            
            $
            1,744
            
            
            $
            1,324Cash
      paid for income taxes
            
            $
            1,686
            
            
            $
            1,270Non-cash
      investing and financing activities:Accrued
      preferred stock dividends
            
            $
            -
            
            
            $
            934Acquisition
      of property and equipment through accounts payable
            
            
            252
            
            
            
            -



































See notes
to condensed consolidated financial statements.


5
 Table of Contents


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 following
popular workshops and curricula: FOCUS: Achieving Your Highest
PrioritiesTM; Leadership: Great Leaders, Great
Teams, Great ResultsTM; The 4 Roles of LeadershipTM;
Building Business Acumen: What
the CEO Wants You to KnowTM; the Advantage Series communication workshops;
and the Execution
Quotient (xQTM)
organizational assessment tool.  During fiscal 2007 we also introduced
a new leadership program based upon principles found in The 7 Habits of Highly Effective
People.





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, 2007.





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 1, 2007, March 1, 2008, and May 31,
2008 during fiscal 2008.  Under the modified 52/53-week fiscal year,
the quarter ended March 1, 2008 had the same number of business days as the
quarter ended March 3, 2007 and the two quarters ended March 1, 2008 had one
less business day than the two quarters ended March 3, 2007.





The
results of operations for the quarter and two quarters ended March 1, 2008 are
not necessarily indicative of results expected for the entire fiscal year ending
August 31, 2008.





6
 Table of Contents


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):





March
      1,
              2008
            
            
            August
      31,
              2007Finished
      goods
            
            $
            17,615
            
            
            $
            20,268Work
      in process
            
            
            583
            
            
            
            743Raw
      materials
            
            
            2,992
            
            
            
            3,022$
            21,190
            
            
            $
            24,033








NOTE
3 – SHARE-BASED COMPENSATION





We
utilize various share-based compensation plans as integral components of our
overall compensation and associate retention strategy.  Our
shareholders have approved various stock incentive plans that permit us to grant
performance awards, unvested stock awards, employee stock purchase plan (ESPP)
shares, and stock options.  In addition, our Board of Directors and
shareholders may, from time to time, approve fully vested stock
awards.  The compensation cost of our share-based compensation plans
was included in selling, general, and administrative expenses in the
accompanying condensed consolidated income statements and no share-based
compensation was capitalized during the two quarters ended March 1,
2008.  The Company generally issues shares of common stock for its
share-based compensation plans from shares held in treasury.  The
following is a description of recent developments in our share-based
compensation plans.





Performance
Awards





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.  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 actual and
estimated financial results of the Company 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
adjustment date based upon the revised estimate of common shares that are
expected to be awarded.  The Company granted performance awards under
provisions of the LTIP in fiscal 2006, which vest on August 31, 2008, and in
fiscal 2007, which vest on August 31, 2009.





Based
upon actual financial performance through December 1, 2007 and estimated
performance through the remaining service period of the fiscal 2006 LTIP grant,
the Company determined that no shares of common stock would be awarded to
participants under the terms of the fiscal 2006 LTIP grant.  Although
we expect sufficient levels of cumulative operating income to be recognized for
the fiscal 2006 award, anticipated sales growth is below the minimum threshold
for shares to be awarded under the plan.  We expect that our
anticipated sales growth in training and consulting sales will be insufficient
to offset forecasted product sales declines, which were revised using actual
product sales levels late in our first fiscal quarter and early second fiscal
quarter, and the impact of eliminated sales resulting from the sales of our
subsidiary in Brazil and our training operations in Mexico.  As a
result of this determination, we recorded a cumulative adjustment in the quarter
ended December 1, 2007 that reduced our selling, general, and administrative
expenses by $0.7 million and did not record any compensation expense for the
fiscal 2006 LTIP award during the quarter ended March 1, 2008.  We
also recorded cumulative


7
 Table of Contents


adjustments
totaling $0.1 million in the two quarters ended March 3, 2007 that reduced the
compensation expense recognized for the fiscal 2006 LTIP award.





We also
reevaluated the fiscal 2007 LTIP award based upon revised estimated sales growth
and cumulative operating income.  As a result of this reevaluation, we
reduced the expected number of shares to be awarded under the fiscal 2007 LTIP
to 227,535 shares, or 53 percent of the original target award of 429,312
shares.  We recorded cumulative adjustments totaling $0.3 million to
reduce selling, general, and administrative expenses during the two quarters
ending March 1, 2008 to reflect the new estimated shares to be
awarded.  At March 1, 2008, there was $0.7 million of estimated
unrecognized compensation expense remaining on the fiscal 2007 LTIP
award.  However, the number of shares to be issued is based on
estimates and may vary during periods prior to the vesting date.





Unvested
Stock Awards





The fair
value of our unvested stock awards is calculated based on the number of shares
issued and the closing market price of our common stock on the date of the
grant.  The corresponding compensation cost of unvested stock awards
is amortized to selling, general, and administrative expense on a straight-line
basis over the vesting period of the award, which generally ranges from three to
five years.  The following information applies to our unvested stock
awards granted to members of the Board of Directors under the Directors’ Plan
and to employees through the two quarters ended March 1, 2008:





Number
      of Shares
            
            
            Weighted-Average
      Grant-Date Fair Value Per ShareUnvested
      stock awards at
              August 31, 2007
            
            
            410,670
            
            
            $
            3.80Granted
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Vested
            
            
            -
            
            
            
            -Unvested
      stock awards at
              March 1, 2008
            
            
            410,670
            
            
            $
            3.80





Employee
Stock Purchase Plan





We have
an employee stock purchase plan that offers qualified employees the opportunity
to purchase shares of our common stock at a price equal to 85 percent of the
average fair market value of the Company’s common stock on the last trading day
of the calendar month in each fiscal quarter.  During the quarter and
two quarters ended March 1, 2008, a total of 18,128 and 34,027 shares were
issued to participants in the ESPP.





Stock
Options





The
Company has an incentive stock option plan whereby options to purchase shares of
our common stock are issued to key employees at an exercise price not less than
the fair market value of the Company’s common stock on the date of
grant.  The term, not to exceed ten years, and exercise period of each
incentive stock option awarded under the plan are determined by the Compensation
Committee of our Board of Directors.





Information
related to stock option activity during the two quarters ended March 1, 2008 is
presented below:


8
 Table of Contents





Number
      of Stock Options
            
            
            Weighted
      Avg. Exercise Price Per ShareOutstanding
      at
              August 31, 2007
            
            
            2,058,300
            
            
            $
            12.72Granted
            
            
            -
            
            
            
            -Exercised
            
            
            (12,500
            )
            
            
            1.70Forfeited
            
            
            (8,000
            )
            
            
            9.69Outstanding
      at
              March 1, 2008
            
            
            2,037,800
            
            
            $
            12.80Options
      vested and exercisable at
              March 1, 2008
            
            
            2,037,800
            
            
            $
            12.80








NOTE
4 – INCOME TAXES





Income
Tax Provision





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 our effective tax rates from quarter to quarter.





Our
effective tax rate for the two quarters ended March 1, 2008 of approximately 50
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.





Adoption
of FIN 48





In July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB Statement No. 109(FIN
48).  This interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements.  Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position.  The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement.  Interpretation No. 48 also
provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting for income taxes in interim periods, and requires
increased disclosure of various income tax items.





We
adopted the provisions of FIN 48 on September 1, 2007.  The amount of
gross unrecognized tax benefits at September 1, 2007 totaled $4.3 million, of
which $3.1 million would affect our effective tax rate, if
recognized.  The gross unrecognized tax benefit includes $2.9 million
related to individual states’ net operating loss carryforwards.  The
Company has determined that all material temporary differences, except for
certain states’ net operating loss carryforwards, can be fully recognized for
FIN 48 purposes.  At the date of adoption, we had approximately $0.2
million of accrued interest and penalties related to uncertain tax
positions.  Based upon guidance in FIN 48, interest and penalties
related to uncertain tax positions are now recognized as components of income
tax expense.  The amount of our unrecognized tax benefits did not
change significantly during the two quarters ended March 1, 2008.





Prior to
the adoption of FIN 48, the reserve for uncertain tax positions was classified
as a component of income taxes payable in our consolidated balance
sheets.  Consistent with the guidance found in FIN 48, our
unrecognized income tax benefits related to net operating loss carryforwards now
reduce the related


9
 Table of Contents


deferred
income tax asset and have the effect of increasing our net deferred income tax
liability.  All other unrecognized income tax benefits, which totaled
$0.7 million, were reclassified as other long-term liabilities in our
consolidated balance sheets.





The
Company anticipates that it is reasonably possible that unrecognized tax
benefits, including interest and penalties, of up to $0.3 million could be
recognized within the next twelve months due to the lapse of applicable statutes
of limitation, of which $0.2 million would affect our effective tax rate in
those periods.





We file
United States federal income tax returns as well as income tax returns in
various states and foreign jurisdictions. The tax years that remain subject to
examinations for the Company’s major tax jurisdictions are shown
below.  Additionally, any net operating losses that were generated in
prior years and utilized in these years may be subject to
examination.




2000-2007
            Canada2002-2007
            Japan,
      Mexico, United Kingdom2003-2007
            United
      States – state and local income taxes2004-2007
            United
      States – federal income tax








NOTE
5 – COMPREHENSIVE INCOME





Comprehensive
income is based on net income and includes charges and credits to equity
accounts that were not the result of transactions with
shareholders.  Comprehensive income for the Company was calculated as
follows (in thousands):





Quarter
      Ended
            
            
            Two
      Quarters EndedMarch
      1,
              2008
            
            
            March
      3,
              2007
            
            
            March
      1,
              2008
            
            
            March
      3,
              2007Net
      income
            
            $
            3,082
            
            
            $
            4,714
            
            
            $
            5,141
            
            
            $
            6,129Other
      comprehensive income
              (loss) items, net of tax:Foreign
      currency translation adjustments
            
            
            291
            
            
            
            (80
            )
            
            
            540
            
            
            
            16Comprehensive
      income
            
            $
            3,373
            
            
            $
            4,634
            
            
            $
            5,681
            
            
            $
            6,145








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, we determined that the shares of management stock loan participants
that were placed in the escrow account are participating securities as defined
by Emerging Issues Task Force (EITF) Issue No. 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):


10
 Table of Contents





Quarter
      Ended
            
            
            Two
      Quarters EndedMarch
      1,
              2008
            
            
            March
      3,
              2007
            
            
            March
      1,
              2008
            
            
            March
      3,
              2007Numerator
      for basic and diluted earnings per share:Net
      income
            
            $
            3,082
            
            
            $
            4,714
            
            
            $
            5,141
            
            
            $
            6,129Preferred
      stock dividends
            
            
            -
            
            
            
            (934
            )
            
            
            -
            
            
            
            (1,867
            )Net
      income available to common shareholders
            
            $
            3,082
            
            
            $
            3,780
            
            
            $
            5,141
            
            
            $
            4,262Denominator
      for basic and diluted earnings per share:Basic
      weighted average shares outstanding(1)
            
            
            19,510
            
            
            
            19,589
            
            
            
            19,495
            
            
            
            19,750Effect
      of dilutive securities:Stock
      options
            
            
            6
            
            
            
            24
            
            
            
            8
            
            
            
            29Unvested
      stock awards
            
            
            289
            
            
            
            257
            
            
            
            279
            
            
            
            252Common
      stock warrants(2)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Diluted
      weighted average shares outstanding
            
            
            19,805
            
            
            
            19,870
            
            
            
            19,782
            
            
            
            20,031Basic
      and diluted EPS:Basic
      EPS
            
            $
            .16
            
            
            $
            .19
            
            
            $
            .26
            
            
            $
            .22Diluted
      EPS
            
            $
            .16
            
            
            $
            .19
            
            
            $
            .26
            
            
            $
            .21





(1)
            Since
      the Company recognized net income for the quarter and two quarters ended
      March 1, 2008, basic weighted average shares for those periods include 3.5
      million shares of common stock held by management stock loan participants
      that were placed in escrow.(2)
            For
      the periods presented, the conversion of 6.2 million common stock warrants
      is not assumed because such conversion would be
anti-dilutive.


At March
1, 2008 and March 3, 2007, we had approximately 1.9 million and 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, and other dilutive securities, 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
product sales to individual customers and small business organizations and
includes the results of our domestic retail stores, consumer direct operations
(primarily eCommerce and call center), 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,
books, and various accessories, 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


11
 Table of Contents


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, public programs, 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 Chief Executive Officer (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, our consolidated
EBITDA can be calculated as our 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 fiscal 2008, we transferred our
public programs operations from CSBU to OSBU 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
                March
      1, 2008
              
              Sales
      to External Customers
              
              
              Gross
      Profit
              
              
              EBITDA
              
              
              Depreciation
              
              
              AmortizationConsumer
      Solutions
                Business Unit:Retail
              
              $
              17,628
              
              
              $
              11,072
              
              
              $
              3,815
              
              
              $
              265
              
              
              $
              -Consumer
      direct
              
              
              13,574
              
              
              
              7,700
              
              
              
              5,776
              
              
              
              67
              
              
              
              -Wholesale
              
              
              2,921
              
              
              
              1,554
              
              
              
              1,419
              
              
              
              -
              
              
              
              -CSBU
      International
              
              
              2,902
              
              
              
              1,514
              
              
              
              625
              
              
              
              8
              
              
              
              -Other
      CSBU
              
              
              1,276
              
              
              
              239
              
              
              
              (6,586
              )
              
              
              101
              
              
              
              -Total CSBU
              
              
              38,301
              
              
              
              22,079
              
              
              
              5,049
              
              
              
              441
              
              
              
              -Organizational
      Solutions
                Business Unit:Domestic
              
              
              21,662
              
              
              
              13,743
              
              
              
              1,107
              
              
              
              586
              
              
              
              899International
              
              
              15,164
              
              
              
              10,866
              
              
              
              4,646
              
              
              
              40
              
              
              
              2Total
      OSBU
              
              
              36,826
              
              
              
              24,609
              
              
              
              5,753
              
              
              
              626
              
              
              
              901Total
      operating segments
              
              
              75,127
              
              
              
              46,688
              
              
              
              10,802
              
              
              
              1,067
              
              
              
              901Corporate
      and eliminations
              
              
              -
              
              
              
              -
              
              
              
              (1,766
              )
              
              
              283
              
              
              
              -Consolidated
              
              $
              75,127
              
              
              $
              46,688
              
              
              $
              9,036
              
              
              $
              1,350
              
              
              $
              901Quarter
      Ended
                March
      3, 2007Consumer
      Solutions
                Business Unit:Retail
              
              $
              19,265
              
              
              $
              11,861
              
              
              $
              4,673
              
              
              $
              186
              
              
              $
              -Consumer
      direct
              
              
              14,574
              
              
              
              8,381
              
              
              
              6,252
              
              
              
              50
              
              
              
              -Wholesale
              
              
              3,581
              
              
              
              1,932
              
              
              
              1,747
              
              
              
              -
              
              
              
              -CSBU
      International
              
              
              2,643
              
              
              
              1,608
              
              
              
              709
              
              
              
              -
              
              
              
              -Other
      CSBU
              
              
              1,565
              
              
              
              393
              
              
              
              (5,421
              )
              
              
              533
              
              
              
              -Total CSBU
              
              
              41,628
              
              
              
              24,175
              
              
              
              7,960
              
              
              
              769
              
              
              
              -Organizational
      Solutions
                Business Unit:Domestic
              
              
              21,819
              
              
              
              13,896
              
              
              
              2,059
              
              
              
              155
              
              
              
              900International
              
              
              13,429
              
              
              
              9,118
              
              
              
              3,030
              
              
              
              204
              
              
              
              -Total
      OSBU
              
              
              35,248
              
              
              
              23,014
              
              
              
              5,089
              
              
              
              359
              
              
              
              900Total
      operating segments
              
              
              76,876
              
              
              
              47,189
              
              
              
              13,049
              
              
              
              1,128
              
              
              
              900Corporate
      and eliminations
              
              
              -
              
              
              
              -
              
              
              
              (2,526
              )
              
              
              238
              
              
              
              -Consolidated
              
              $
              76,876
              
              
              $
              47,189
              
              
              $
              10,523
              
              
              $
              1,366
              
              
              $
              900






12
 Table of Contents






Two
      Quarters Ended
                March
      1, 2008Consumer
      Solutions
                Business Unit:Retail
              
              $
              30,762
              
              
              $
              18,790
              
              
              $
              4,667
              
              
              $
              480
              
              
              $
              -Consumer
      direct
              
              
              28,386
              
              
              
              16,709
              
              
              
              12,715
              
              
              
              122
              
              
              
              -Wholesale
              
              
              7,181
              
              
              
              4,009
              
              
              
              3,714
              
              
              
              -
              
              
              
              -CSBU
      International
              
              
              5,574
              
              
              
              3,071
              
              
              
              1,285
              
              
              
              33
              
              
              
              -Other
      CSBU
              
              
              2,441
              
              
              
              429
              
              
              
              (13,546
              )
              
              
              390
              
              
              
              -Total CSBU
              
              
              74,344
              
              
              
              43,008
              
              
              
              8,835
              
              
              
              1,025
              
              
              
              -Organizational
      Solutions
                Business Unit:Domestic
              
              
              43,325
              
              
              
              27,454
              
              
              
              1,362
              
              
              
              819
              
              
              
              1,798International
              
              
              31,033
              
              
              
              22,172
              
              
              
              9,371
              
              
              
              227
              
              
              
              2Total
      OSBU
              
              
              74,358
              
              
              
              49,626
              
              
              
              10,733
              
              
              
              1,046
              
              
              
              1,800Total
      operating segments
              
              
              148,702
              
              
              
              92,634
              
              
              
              19,568
              
              
              
              2,071
              
              
              
              1,800Corporate
      and eliminations
              
              
              -
              
              
              
              -
              
              
              
              (3,358
              )
              
              
              476
              
              
              
              -Consolidated
              
              $
              148,702
              
              
              $
              92,634
              
              
              $
              16,210
              
              
              $
              2,547
              
              
              $
              1,800Two
      Quarters Ended
                March
      3, 2007Consumer
      Solutions
                Business Unit:Retail
              
              $
              33,392
              
              
              $
              20,260
              
              
              $
              5,909
              
              
              $
              377
              
              
              $
              -Consumer
      direct
              
              
              30,784
              
              
              
              18,231
              
              
              
              13,980
              
              
              
              70
              
              
              
              -Wholesale
              
              
              8,158
              
              
              
              4,710
              
              
              
              4,409
              
              
              
              -
              
              
              
              -CSBU
      International
              
              
              5,029
              
              
              
              3,093
              
              
              
              1,195
              
              
              
              -
              
              
              
              -Other
      CSBU
              
              
              2,837
              
              
              
              112
              
              
              
              (13,531
              )
              
              
              792
              
              
              
              -Total CSBU
              
              
              80,200
              
              
              
              46,406
              
              
              
              11,962
              
              
              
              1,239
              
              
              
              -Organizational
      Solutions
                Business Unit:Domestic
              
              
              43,288
              
              
              
              27,770
              
              
              
              3,295
              
              
              
              269
              
              
              
              1,802International
              
              
              28,917
              
              
              
              19,410
              
              
              
              6,217
              
              
              
              409
              
              
              
              -Total
      OSBU
              
              
              72,205
              
              
              
              47,180
              
              
              
              9,512
              
              
              
              678
              
              
              
              1,802Total
      operating segments
              
              
              152,405
              
              
              
              93,586
              
              
              
              21,474
              
              
              
              1,917
              
              
              
              1,802Corporate
      and eliminations
              
              
              -
              
              
              
              -
              
              
              
              (5,402
              )
              
              
              486
              
              
              
              -Consolidated
              
              $
              152,405
              
              
              $
              93,586
              
              
              $
              16,072
              
              
              $
              2,403
              
              
              $
              1,802




A
reconciliation of operating segment EBITDA to consolidated income before taxes
is provided below (in thousands):





Quarter
      Ended
            
            
            Two
      Quarters EndedMarch
      1,
              2008
            
            
            March
      3,
              2007
            
            
            March
      1,
              2008
            
            
            March
      3,
              2007Reportable
      segment EBITDA
            
            $
            10,802
            
            
            $
            13,049
            
            
            $
            19,568
            
            
            $
            21,474Corporate
      expenses
            
            
            (1,766
            )
            
            
            (2,526
            )
            
            
            (3,358
            )
            
            
            (5,402
            )Consolidated
      EBITDA
            
            
            9,036
            
            
            
            10,523
            
            
            
            16,210
            
            
            
            16,072Gain
      on sale of manufacturing facility
            
            
            -
            
            
            
            1,227
            
            
            
            -
            
            
            
            1,227Depreciation
            
            
            (1,350
            )
            
            
            (1,366
            )
            
            
            (2,547
            )
            
            
            (2,403
            )Amortization
            
            
            (901
            )
            
            
            (900
            )
            
            
            (1,800
            )
            
            
            (1,802
            )Income
      from operations
            
            
            6,785
            
            
            
            9,484
            
            
            
            11,863
            
            
            
            13,094Interest
      income
            
            
            15
            
            
            
            357
            
            
            
            24
            
            
            
            557Interest
      expense
            
            
            (761
            )
            
            
            (675
            )
            
            
            (1,672
            )
            
            
            (1,336
            )Income
      before provision for income taxes
            
            $
            6,039
            
            
            $
            9,166
            
            
            $
            10,215
            
            
            $
            12,315








13
 Table of Contents


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,
2007.








RESULTS
OF OPERATIONS





Overview





Our
second fiscal quarter, which includes the months of December, January, and
February, has historically reflected strong product sales, primarily from
seasonal holiday shopping, and generally good training and consulting service
sales.  For the quarter ended March 1, 2008, our income from
operations decreased to $6.8 million compared to $9.5 million for the same
quarter of fiscal 2007, which includes a $1.2 million gain from the sale of a
manufacturing facility.  Our income before provision for income taxes
also declined to $6.0 million compared to $9.2 million in the prior year and net
income available to common shareholders decreased to $3.1 million compared to
$3.8 million in fiscal 2007.





The
primary factors that influenced our operating results during the quarter ended
March 1, 2008 were as follows:





·
            Sales–Our consolidated
      sales declined $1.7 million, which was the result of a $4.0 million
      decrease in product sales that was partially offset by increased training
      and consulting services sales.  Product sales declined primarily
      due to reduced retail sales, consumer direct sales, and wholesale sales
      compared to the prior year.  Training and consulting services
      sales increased primarily due to increased sales from our international
      operations.





·
            Gross
      Profit – Our consolidated gross profit totaled $46.7 million for
      the quarter ended March 1, 2008 compared to $47.2 million for the same
      quarter in fiscal 2007.  The decrease was primarily due to
      decreased product sales during fiscal 2008 compared to the prior
      year.  Our consolidated gross margin, which is gross profit
      stated in terms of a percentage of sales, increased to 62.1 percent of
      sales compared to 61.4 percent in fiscal 2007.  The increase in
      gross margin percentage was primarily attributable to the continuing shift
      toward increased training and consulting sales, which generally have
      higher margins than our product sales.  Training and consulting
      service sales increased to 45 percent of total sales in the quarter ended
      March 1, 2008 compared to 41 percent in the same quarter of the prior
      year.





·
            Operating
      Costs – Our operating costs increased by $1.0 million compared to
      the prior year (not including the impact of a gain on the sale of our
      printing facility in fiscal 2007), which was primarily the result of
      increased selling, general, and administrative expenses as depreciation
      expense and amortization expense from our definite-lived intangible assets
      did not differ appreciably from the prior
year.


14
 Table of Contents


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 March 1, 2008
Compared to the Quarter Ended March 3, 2007





Sales





The
following table sets forth sales data by category and for our operating segments
(in thousands):





Quarter
      Ended
            
            
            Two
      Quarters EndedMarch
      1, 2008
            
            
            March
      3, 2007
            
            
            Percent
      Change
            
            
            March
      1, 2008
            
            
            March
      3, 2007
            
            
            Percent
      ChangeSales
      by Category:Products
            
            $
            41,299
            
            
            $
            45,283
            
            
            
            (9
            )
            
            $
            80,675
            
            
            $
            87,391
            
            
            
            (8
            )Training
      and consulting services
            
            
            33,828
            
            
            
            31,593
            
            
            
            7
            
            
            
            68,027
            
            
            
            65,014
            
            
            
            5$
            75,127
            
            
            $
            76,876
            
            
            
            (2
            )
            
            $
            148,702
            
            
            $
            152,405
            
            
            
            (2
            )Consumer
      Solutions Business Unit:Retail Stores
            
            $
            17,628
            
            
            $
            19,265
            
            
            
            (8
            )
            
            $
            30,762
            
            
            $
            33,392
            
            
            
            (8
            )Consumer Direct
            
            
            13,574
            
            
            
            14,574
            
            
            
            (7
            )
            
            
            28,386
            
            
            
            30,784
            
            
            
            (8
            )Wholesale
            
            
            2,921
            
            
            
            3,581
            
            
            
            (18
            )
            
            
            7,181
            
            
            
            8,158
            
            
            
            (12
            )CSBU
    International
            
            
            2,902
            
            
            
            2,643
            
            
            
            10
            
            
            
            5,574
            
            
            
            5,029
            
            
            
            11Other CSBU
            
            
            1,276
            
            
            
            1,565
            
            
            
            (18
            )
            
            
            2,441
            
            
            
            2,837
            
            
            
            (14
            )38,301
            
            
            
            41,628
            
            
            
            (8
            )
            
            
            74,344
            
            
            
            80,200
            
            
            
            (7
            )Organizational
      Solutions Business Unit:Domestic
            
            
            21,662
            
            
            
            21,819
            
            
            
            (1
            )
            
            
            43,325
            
            
            
            43,288
            
            
            
            -International
            
            
            15,164
            
            
            
            13,429
            
            
            
            13
            
            
            
            31,033
            
            
            
            28,917
            
            
            
            736,826
            
            
            
            35,248
            
            
            
            4
            
            
            
            74,358
            
            
            
            72,205
            
            
            
            3Total
      Sales
            
            $
            75,127
            
            
            $
            76,876
            
            
            
            (2
            )
            
            $
            148,702
            
            
            $
            152,405
            
            
            
            (2
            )





Product
Sales–Consolidated product sales, which primarily consists of planners,
binders, totes, software and related accessories that are primarily sold through
our Consumer Solutions Business Unit (CSBU) channels, declined $4.0 million
compared to the prior year.  Our product sales, primarily in retail
stores and through our consumer direct channels, have declined in recent periods
and this trend may continue in future periods.  We also believe that
the product sales declines in the quarter March 1, 2008 were worsened by
deteriorating economic conditions in the United States, which generally reduced
consumer spending during the 2007 holiday season.  The decline in
overall product sales during the quarter ended March 1, 2008 was primarily due
to the following performance in our CSBU channels:





·
            Retail Stores – The
      decline in retail sales was primarily due to reduced traffic in our retail
      locations, a significant increase in the number of wholesale outlets that
      sell our products and compete directly against Company-owned retail
      stores, reduced demand for technology and related products, and fewer
      store locations, which had a $0.3 million impact on retail
      sales.  Our retail store traffic, or the number of consumers
      entering our retail locations, declined by approximately 18 percent
      compared to the second quarter of fiscal 2007 and resulted in decreased
      sales of “core” products (e.g. planners, binders, totes, and accessories)
      compared to the prior year.  Due to declining demand for
      electronic handheld planning products, during late fiscal 2007 we decided
      to exit the low-margin handheld device and related electronics accessories
      business, which reduced retail sales by $0.4 million compared to the prior
      year.  These factors combined to produce a 6 percent decline in
      year-over-year comparable store (stores which were open during the
      comparable periods) sales versus the second quarter of fiscal
      2007.  We closed nine retail locations late in the quarter ended
      March 1, 2008 and were operating 78 domestic retail locations at March 1,
      2008 compared to 87 locations at March 3, 2007.  Based upon our
      continuing analyses of retail store performance we may close additional
      retail stores and continue to recognize decreased sales in future periods
      as a result of closing store
locations.


15
 Table of Contents


·
            Consumer Direct – Sales
      through our consumer direct channels (primarily eCommerce and call center)
      decreased $1.0 million, primarily due to a decline in the number of
      customers visiting our website and a decline in the number of orders that
      are being processed through the call center.  Visits to our
      website decreased from the prior year by approximately 13
      percent.  Declining consumer orders through the call center
      continues a long-term trend and decreased by approximately 11 percent
      compared to the prior year, which we believe is partially the result of a
      transition of customers to our other product
  channels.





·
            Wholesale– Sales
      through our wholesale channel, which includes sales to office superstores
      and other retail chains, decreased $0.7 million primarily due to the
      transition of a portion of our wholesale business to a new distributor and
      the timing of sales as the new distributor builds
      inventories.  We anticipate an increase in our wholesale sales
      during the last two quarters of fiscal 2008 compared to the prior year as
      the transition to the new wholesale partner is
  completed.





·
            CSBU International–
      This channel includes the product sales of our directly owned
      international offices in Canada, the United Kingdom, Mexico, and
      Australia.  Sales increased $0.3 million primarily due to
      increased demand for our products in these countries during the quarter
      ended March 1, 2008.





·
            Other CSBU – Other CSBU
      sales consist primarily of domestic printing and publishing sales and
      building sublease revenues.  The decrease in other CSBU sales
      was primarily due to a $0.4 million decrease in external printing sales
      compared to the prior year.  The decrease in external printing
      sales was primarily due to reduced demand for these
    products.





Training and
Consulting Services–We offer a variety of training courses, training related products, and
consulting services focused on leadership, productivity, strategy execution,
sales force performance, and effective communications that are provided both
domestically and internationally through the Organizational Solutions Business
Unit (OSBU).  Our consolidated training and consulting service sales
increased $2.2 million compared to the prior year and maintained the favorable
momentum in training and consulting sales that began in prior
periods.  Training and consulting service sales performance during the
quarter ended March 1, 2008 was primarily influenced by the following factors in
our OSBU divisions:





·
            Domestic–Our domestic division includes sales from our five geographic and
      two vertical direct sales offices, public programs, the sales performance
      group, book and audio channels, and various other
      sources.  Domestic division sales decreased by $0.2 million,
      primarily due to decreased sales performance group revenues and lower book
      royalty income.  The domestic sales performance during the
      quarter was also reflective of the successful launch of the Company's new
      leadership offering during the second quarter of fiscal 2007, which had a
      favorable impact on domestic training and consulting sales.  Book
      royalties decreased due to a reduction in the number of new publications
      that were launched in fiscal 2008.  We launched several new
      publications during fiscal 2007, including the best-selling The 6 Most Important Decisions
      You’ll Ever Make.Partially offsetting these declines
      were increased sales at our domestic direct sales offices.
              
              Sales
      in our direct sales offices continue to improve as a result of continued
      acceptance of our core product offerings, which includes The Seven Habits of Highly
      Effective People, Leadership: Great Leaders, Great Teams, Great Results,and The 4
      Disciplines of Execution programs.  As a result, sales
      from our direct sales offices increased four percent over the prior
      year.  Sales performance from our consultant-lead programs
      increased 12 percent, reflecting an increase in both the number of days
      given and the average revenue per day.  Facilitated training
      sales were flat compared to the prior year as the prior year sales were
      favorably impacted by the release of our new leadership
      program.  Our outlook for the remainder of fiscal 2008 continues
      to be strong as we continue to hire and train new sales
      people.  The current number of training days we
      have






16
 Table of Contents




scheduled
to be delivered in the third and fourth quarters have increased 15 percent
compared to the number of days we had scheduled at this time in the prior
year.  We believe that the introduction of new programs and refreshed
existing programs will continue to have a favorable impact on training and
consulting service sales in future periods, including the release of our Leadership Modularseries and
Leading at the Speed of
Trust program, which are scheduled to launch in the third quarter of
fiscal 2008.





·
            International–
      International sales increased $1.7 million compared to the same quarter of
      fiscal 2007.  Sales increased over the prior year at our
      directly owned foreign offices located in Japan, United Kingdom, Canada,
      and Australia, as well as from licensee royalty
      revenues.  Partially offsetting these increases was the
      elimination of sales from our wholly owned subsidiary in Brazil and our
      training operations located in Mexico.  We sold these operations
      to external licensees during fiscal 2007 and we now receive royalty
      revenue from their operations based upon gross sales.  The
      conversion of these operations to licensees had a $1.0 million unfavorable
      impact on our international sales, but the conversion of these entities
      improved our income from their operations during the
      quarter.  The translation of foreign sales to United States
      dollars resulted in a $1.0 million favorable impact to our consolidated
      sales as foreign currencies strengthened against the United States dollar
      during the quarter ended March 1,
2008.





Gross
Profit





Gross
profit consists of net sales less the cost of goods sold or the cost of services
provided.  Our consolidated gross profit totaled $46.7 million for the
quarter ended March 1, 2008 compared to $47.2 million in fiscal
2007.  The decrease was primarily due to decreased product sales
during fiscal 2008 compared to the prior year.  Our consolidated gross
margin, which is gross profit stated in terms of a percentage of sales,
increased to 62.1 percent of sales compared to 61.4 percent in fiscal
2007.  The slight increase in gross margin percentage was primarily
attributable to the continuing shift toward increased training and consulting
sales, which generally have higher margins than our product
sales.  Training and consulting service sales increased to 45 percent
of total sales in the quarter ended March 1, 2008 compared to 41 percent in the
same quarter of the prior year.





Our gross
margin on product sales remained relatively consistent at 57.0 percent of sales
compared to 57.1 percent in fiscal 2007.





For the
quarter ended March 1, 2008, our training and consulting services gross margin
was 68.5 percent compared to 67.6 percent in the prior year.  The
improvement was primarily attributable to continued improvements in gross margin
percentage at our international offices and increasing licensee royalty
revenues, which have virtually no corresponding cost of sales.





Operating
Expenses





Selling, General
and Administrative–Our selling, general, and administrative (SG&A) expenses increased
$1.0 million, or three percent, compared to the prior year (excluding the gain
on the sale of a manufacturing facility in the second quarter of fiscal
2007).  The increase in SG&A expenses was primarily due to 1)
increased compensation costs totaling $0.8 million that were primarily
generated by additional OSBU sales personnel; 2) increased promotional costs
totaling $0.7 million resulting from a change in the timing of catalog mailings
and our overall catalog strategy, which concentrated a greater amount of catalog
costs in the second quarter of fiscal 2008; 3) increased bad debt expense of
$0.4 million resulting primarily from the prior year adjustment of our bad debt
reserve, which produced a benefit in fiscal 2007 that did not occur in fiscal
2008; and 4) increased legal fees totaling $0.3 million incurred primarily for
ongoing litigation.  These increased SG&A costs were partially
offset by the sale of our subsidiary in Brazil and the training and consulting
operations of our subsidiary in Mexico and by reduced SG&A costs in various
other areas of the Company’s operations.  During the fourth quarter of
fiscal 2007, we


17
 Table of Contents


completed
the sales and conversions of our subsidiary in Brazil and our training
operations in Mexico to licensee operations.  The conversion of these
operations to licensees reduced our SG&A expenses by $0.8 million compared
to the prior year.





Gain on Sale of
Manufacturing Facility – 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 to potentially increase external printing service
sales.  Our reconfiguration plan included 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.  During the quarter ended March 3, 2007, 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 the date of sale was approximately $1.1
million and we recognized a $1.2 million gain on the sale of the manufacturing
facility during the quarter ended March 3, 2007.





Depreciation–Depreciation expense
remained consistent with the prior year at $1.4 million.  Our
depreciation expense for the quarter ended March 1, 2008 included an impairment
charge totaling $0.3 million for software that did not function as anticipated
and was written off during the quarter.  Depreciation expense in the
prior year included an impairment charge totaling $0.3 million that we recorded
to reduce the carrying value of one of our printing presses to be sold to its
anticipated sale price.  Based upon anticipated capital spending in
fiscal 2008 and purchases in prior years, we anticipate that total depreciation
expense in fiscal 2008 will approximate fiscal 2007 expense.





Income
Taxes





Our
income tax provision for the quarter ended March 1, 2008 decreased to $3.0
million, compared to $4.5 million in the same quarter of the prior
year.  The decrease in our income tax provision was primarily due to
reduced pre-tax income.  Our effective tax rate for the quarter ended
March 1, 2008 of approximately 49 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
Dividends





Due to
the redemption of all remaining shares of Series A preferred stock in the third
quarter of fiscal 2007, our preferred dividend obligation decreased $0.9 million
compared to the prior year.








Two Quarters Ended March 1,
2008 Compared to the Two Quarters Ended March 3, 2007





Sales





Product
Sales–Our
consolidated product sales, which are primarily generated by our CSBU channels,
declined $6.7 million compared to the prior year.  Our product sales
have declined in recent periods, primarily through our retail store and consumer
direct channels, and this trend may continue in future periods.  We
also believe that the product sales declines during the first two quarters of
fiscal 2008 were worsened by deteriorating economic conditions in the United
States, which generally reduced consumer spending during the 2007 holiday
season.  The following is a description of sales performance in our CSBU
channels for the two quarters ended March 1, 2008:





·
            Retail Stores – The
      decline in retail sales was primarily due to reduced traffic in our retail
      locations, a significant increase in the number of wholesale outlets that
      sell our products and compete directly against Company-owned retail
      stores, reduced demand for technology and related products, and fewer
      store locations, which had a $0.5 million impact on retail
      sales.  Our retail store traffic declined by approximately 19
      percent compared to the first two quarters of fiscal 2007 and resulted in
      decreased sales of “core” products compared to the prior
      year.  Due to declining demand for electronic handheld planning
      products, during late fiscal 2007 we decided to exit
  the


18
 Table of Contents


low-margin
handheld device and related electronics accessories business, which reduced
retail sales by $0.6 million compared to the prior year.  These
factors combined to produce a 7 percent decline in year-over-year comparable
store sales versus the prior year.





·
            Consumer Direct – Sales
      through our consumer direct channels decreased $2.4 million, primarily due
      to a decline in the number of customers visiting our website and a decline
      in the number of orders that are being processed through our call
      center.  Website visits decreased by 10 percent compared to the
      prior year and declining customer orders through the call center continues
      a long-term trend and decreased by 11 percent, which we believe is
      partially due to consumers transitioning to our other product
      channels.





·
            Wholesale– Sales
      through our wholesale channel, which includes sales to office superstores
      and other retail chains, decreased $1.0 million primarily due to the
      transition of a portion of our wholesale business to a new wholesale
      distribution partner.  We anticipate an increase in our
      wholesale sales during the last two quarters of fiscal 2008 compared to
      the prior year as the transition to the new wholesale partner is
      completed.





·
            CSBU International–
      This channel includes the product sales of our directly owned
      international offices in Canada, the United Kingdom, Mexico, and
      Australia.  Sales performance through these channels increased
      $0.5 million compared with the prior year primarily due to increased
      demand for products in certain
countries.





·
            Other CSBU – The $0.4
      million decrease in other CSBU sales was primarily due to decreased
      external printing sales that occurred during the second quarter of fiscal
      2008.





Training and
Consulting Services–Our consolidated training and consulting service sales increased $3.0
million compared to the prior year.  Training and consulting service
sales performance during the first two quarters of fiscal 2007 was influenced by
the following performance and trends in the OSBU divisions:





·
            Domestic–Our domestic training sales were flat compared to the two quarters
      ended March 3, 2007.  Sales performance through our direct sales
      offices continue to improve as a result of continued acceptance of our
      core product offerings, which includes The Seven Habits of Highly
      Effective People, Leadership: Great Leaders, Great Teams, Great Results,and The 4
      Disciplines of Execution.  However, these increases were
      offset by decreased sales performance group revenues and decreased book
      royalties.  Our current outlook for the remainder of fiscal 2008
      continues to be strong and current training days booked has increased
      compared to the prior year.





·
            International–
      International sales increased $2.1 million compared to the first two
      quarters of fiscal 2007.  Sales increased over the prior year at
      all of our directly owned foreign offices as well as from licensee royalty
      revenues.  Partially offsetting these increases was the
      elimination of sales from our wholly owned subsidiary in Brazil and our
      training operations located in Mexico.  We sold these operations
      to external licensees during fiscal 2007 and we now receive royalty
      revenue from their operations based upon gross sales.  The
      conversion of these operations to licensees had a $2.3 million unfavorable
      impact on our international sales but improved our income from these
      operations compared to the prior year.  The translation of
      foreign sales to United States dollars had a $1.9 million favorable impact
      on our consolidated sales as foreign currencies strengthened against the
      United States dollar during the two quarters ended March 1,
      2008.





19
 Table of Contents


Gross
Profit





For the
two quarters ended March 1, 2008, our consolidated gross profit decreased to
$92.6 million compared to $93.6 million in fiscal 2007.  The decrease
was primarily attributable to decreased product sales during fiscal 2008
compared to the prior year.  Our consolidated gross margin, which is
gross profit stated in terms of a percentage of sales, increased to 62.3 percent
of sales compared to 61.4 percent in the first two quarters of fiscal
2007.  The slight increase in gross margin percentage was primarily
attributable to the continuing shift toward increased training and consulting
sales, which generally have higher margins than our product
sales.  Training and consulting service sales increased to 46 percent
of total sales for the two quarters ended March 1, 2008 compared to 43 percent
in the prior year.





Our gross
margin on product sales remained relatively consistent at 57.0 percent of sales
compared to 56.6 percent in the prior year.





During
the first two quarters of fiscal 2008, our training and consulting services
gross margin was 68.6 percent compared to 67.8 percent in the prior
year.  The improvement was primarily attributable to improved gross
margins at our international offices and increasing licensee royalty revenues,
which have virtually no corresponding cost of sales.





Operating
Expenses





Selling, General
and Administrative–Consolidated SG&A expenses decreased $1.1 million, or 1 percent,
compared to the prior year (excluding the gain on the sale of a manufacturing
facility in the second quarter of fiscal 2007).  The decrease in
SG&A expenses was primarily due to 1) the fiscal 2007 sale of our subsidiary
in Brazil and the training and consulting operations of our subsidiary in
Mexico, which reduced SG&A expenses by $1.9 million; 2) a $1.1 million
decrease in share-based compensation primarily due to the determination that no
shares will be awarded under our fiscal 2006 long-term incentive plan and the
corresponding reversal of share-based compensation expense during the quarter
ended December 1, 2007; and 3) a $0.5 million decrease in audit and related
consulting costs primarily resulting from improved processes and procedures
combined with revised internal control testing standards.  These
decreases were partially offset by increased compensation expenses for
additional OSBU sales personnel, which totaled $1.2 million, increased legal
expenses for ongoing litigation, and increases in various other areas of the
Company.





Gain on Sale of
Manufacturing Facility–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 to potentially increase external
printing service sales.  Our reconfiguration plan included the sale of
our manufacturing facility and certain printing presses.  During the
quarter ended March 3, 2007, we completed the sale of the manufacturing facility
and recorded a gain on the sale for $1.2 million.  For further
information on the sale of the manufacturing facility, refer to the discussion
regarding this transaction in the comparison of the quarter ended March 1, 2008
to the quarter ended March 3, 2007.





Depreciation and
Amortization–Depreciation expense increased to $2.5 million compared to $2.4 million
in fiscal 2007.  Our depreciation expense for the two quarters ended
March 1, 2008 included an impairment charge totaling $0.3 million for software
that did not function as anticipated and was written
off.  Depreciation expense in the prior year also included an
impairment charge totaling $0.3 million that we recorded to reduce the carrying
value of one of our printing presses to be sold to its anticipated sale
price.  Based upon anticipated capital spending in fiscal 2008 and
purchases in prior years, we anticipate that total depreciation expense in
fiscal 2008 will approximate fiscal 2007 depreciation expense.





Amortization
expense from definite-lived intangible assets totaled $1.8 million for the two
quarters ended March 1, 2008 and March 3, 2007.  We currently expect
that intangible asset amortization expense will total $3.6 million in fiscal
2008.


20
 Table of Contents


Income
Taxes





Our
income tax provision for the two quarters ended March 1, 2008 totaled $5.1
million compared to $6.2 million for the first two quarters of fiscal
2007.  The decrease in our income tax provision was primarily due to
reduced pre-tax income.  Our effective tax rate for the two quarters
ended March 1, 2008 of approximately 50 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.





The
adoption of FIN 48 during our first quarter of fiscal 2008 did not have a
material impact on our income tax provision.





Preferred
Stock Dividends





Due to
the redemption of all remaining shares of Series A preferred stock in the third
quarter of fiscal 2007, our preferred dividend obligation decreased $1.9 million
compared to the prior year.








LIQUIDITY
AND CAPITAL RESOURCES





At March
1, 2008 we had $5.3 million of cash and cash equivalents compared to $6.1
million at August 31, 2007 and our net working capital (current assets less
current liabilities) increased to $21.3 million at March 1, 2008 compared to
$8.9 million at August 31, 2007.  The increase in working capital was
primarily due to reduced line of credit borrowing at March 1,
2008.  During fiscal 2007, we used substantially all of our cash on
hand combined with proceeds from a line of credit to redeem all of our remaining
preferred stock at its liquidation preference of $25 per share plus accrued
dividends.  Although we have incurred additional interest expense from
line of credit borrowings, we believe that the redemption of our remaining
preferred stock and elimination of the corresponding 10.0 percent dividend
obligation will continue to improve our cash flows and reported results of
operations in future periods.





Our debt
structure consists of a $25.0 million line of credit that may be used for
working capital and other general needs, a long-term variable rate mortgage on
our Canadian building, and a long-term lease on our corporate campus that is
accounted for as a financing obligation.  The $25.0 million line of
credit carries an interest rate equal to LIBOR plus 1.10 percent and expires on
March 14, 2010.  We may draw on the line of credit facility, repay,
and draw again, on a revolving basis, up to the maximum loan amount of $25.0
million so long as no event of default has occurred and is
continuing.  The working capital line of credit also contains
customary representations and guarantees as well as provisions for repayment and
liens.





In
addition to customary non-financial terms and conditions, our line of credit
requires us to be in compliance with specified financial covenants, including:
(i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a
limitation on annual capital expenditures; and (iv) a defined amount of minimum
net worth.  In the event of noncompliance with these financial
covenants and other defined events of default, the lenders are entitled to
certain remedies, including acceleration of the repayment of amounts outstanding
on the line of credit.  During the quarter ended March 1, 2008, we
believe that we were in compliance with the terms and financial covenants of our
credit facilities.  At March 1, 2008, we had $4.3 million outstanding
on the line of credit, which was classified as a current liability on our
condensed consolidated balance sheets.





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 two
quarters ended March 1, 2008.





21
 Table of Contents


Cash
Flows From Operating Activities





Our cash
provided by operating activities totaled $14.4 million for the two quarters
ended March 1, 2008 compared to $8.8 million during 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 provided by or used for changes in
working capital during the two quarters ended March 1, 2008 was primarily
related to 1) decreased inventory balances resulting from the sale of goods
during our seasonally busy months of December and January; 2) increased accounts
receivable balances resulting from improved OSBU sales; and 3) payments to
reduce accounts payable and accrued liabilities from seasonally high balances at
August 31.  We believe that our continued efforts to optimize working
capital balances, combined with existing and planned sales growth programs and
cost-reduction 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 $2.8 million for the two quarters ended
March 1, 2008.  Our primary uses of cash for investing activities were
the purchase of property and equipment and additional spending on curriculum
development.  Our purchases of property and equipment, which totaled
$2.3 million, consisted primarily of computer hardware, computer software, and
leasehold improvements.  During the first two quarters of fiscal 2008,
we spent $1.6 million for further investment in the development of various
programs and curriculum.  Partially offsetting these uses of cash was
the receipt of $1.0 million on notes receivable from the sales of our subsidiary
in Brazil and our training operations in Mexico, which were completed at August
31, 2007 through the use of notes receivable financing.





Cash
Flows From Financing Activities





Net cash
used for financing activities during the two quarters ended March 1, 2008
totaled $11.8 million, which primarily consisted of payments on our line of
credit and other debt obligations.  During the two quarters ended
March 1, 2008 we used substantially all of our available cash to reduce our line
of credit borrowings from $16.0 million at August 31, 2007 to $4.3 million at
March 1, 2008.  For a period during the quarter ended March 1, 2008,
we had repaid all amounts outstanding on our line of credit
facility.





Sources
of Liquidity





Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business.  We anticipate using cash on hand,
cash provided by the sale of goods and services to our clients on the condition
that we can continue to generate positive cash flows from operating activities,
proceeds from our line of credit, 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, purchases of our
common stock, 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 growth and capital
requirements.  However, there can be no assurance that such financing
alternatives will be available to us on acceptable terms.





22
 Table of Contents


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 1)
payments to EDS for outsourcing services related to information systems,
warehousing and distribution, and call center operations; 2) payments on a
financing obligation resulting from the sale of our corporate campus; 3) minimum
rent payments for retail store and sales office space; 4) mortgage payments on
certain buildings and property; and 5) short-term purchase obligations for
inventory and other products or services to be delivered in fiscal
2008.  There have been no significant changes to our expected required
contractual obligations from those disclosed at August 31, 2007.





Our
contractual obligations as disclosed in our Form 10-K for the year ended August
31, 2007 exclude unrecognized tax benefits under FIN 48 of $4.3 million for
which we cannot make a reasonably reliable estimate of the amount and period of
payment.  For further information regarding the adoption of FIN 48,
refer to Note 4 of the notes to the condensed consolidated financial statements
contained in this Form 10-Q.





Other
Items





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 10 to our consolidated financial statements on Form
10-K for the fiscal year ended August 31, 2007.  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.








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, 2007.  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 mainly sold through our CSBU
      channels.





·
            Training and Consulting
      Services – We provide training and consulting services to both
      organizations and individuals in leadership, productivity, strategic
      execution, goal alignment,


23
 Table of Contents


sales
force performance, and communication effectiveness skills.  These
training programs and services are principally 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   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.  Statement 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 wholly-owned operation.  Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
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.  The Company recognizes royalty
income each period based upon the sales information reported to us from the
licensees.





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 2006 vest


24
 Table of Contents


on August
31, 2008.  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,
based upon actual financial performance through December 1, 2007 and estimated
performance through the remaining service period of the fiscal 2006 LTIP grant,
the Company determined that no shares of common stock would be awarded under the
terms of the fiscal 2006 LTIP grant.  We expect that our anticipated
sales growth in training and consulting sales will be insufficient to offset
forecast product sales declines, which were revised using actual product sales
levels late in our first fiscal quarter and early second fiscal quarter, and the
impact of eliminated sales resulting from the disposal and conversion of our
subsidiary in Brazil and our training operations in Mexico to
licensees.  Although we expect sufficient levels of cumulative
operating income to be recognized for the fiscal 2006 award, anticipated sales
growth was below the minimum 7.5 percent threshold for shares to be awarded
under the plan (refer to the table below).  As a result of this
determination, we recorded a cumulative adjustment in the quarter ended December
1, 2007 that reduced our selling, general, and administrative expenses by $0.7
million and no compensation expense was recognized from the fiscal 2006 LTIP
award during the quarter ended March 1, 2008.





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)





During
fiscal 2007, the Compensation Committee granted performance awards for 429,312
shares of common stock under the terms of the LTIP.  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.  As shown in the table below, the minimum
sales growth for the fiscal 2007 LTIP is 10.0 percent (fiscal 2009 compared to
fiscal 2007) and the minimum cumulative operating income total during the
service period is $41.3 million.  We record compensation expense on
the fiscal 2007 LTIP 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.





Based
upon evaluations of the fiscal 2007 LTIP through March 1, 2008, we currently
estimate that 227,535 shares, or 53 percent of the original target award, will
be awarded under the terms of the fiscal 2007 LTIP grant.  We have
recorded cumulative adjustments to reduce operating expenses by $0.3 million
during the two quarters ended March 1, 2008 to reflect the revision to the
estimated shares to be awarded.  At March 1, 2008, there was $0.7
million of estimated unrecognized compensation expense remaining on the fiscal
2007 LTIP award.





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:


25
 Table of Contents





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
analysis of our LTIP plans contains uncertainties because we are required to
make assumptions and judgments about the eventual number of shares that will
vest in each LTIP grant.  The assumptions and judgments that are
essential to the analysis include forecasted sales and operating income levels
during the LTIP service periods.  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, and differ materially, 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 during the quarter or two quarters ended March 1, 2008
or the fiscal years ended August 31, 2007 and 2006, and we did not have any
remaining unrecognized compensation expense associated with unvested stock
options at March 1, 2008.





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 over 90 days past due, 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.





Our
allowance for doubtful accounts calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding the
collectibility of customer accounts, which may be influenced by a number of
factors that are not within our control, such as the financial health of each
customer.  We regularly review the collectibility assumptions of our
allowance for doubtful accounts calculation and compare them against historical
collections.  Adjustments to the assumptions are then based upon the
comparison, which may either increase or decrease our total allowance for
doubtful accounts.  For example, a 10 percent increase to our
allowance for doubtful accounts at March 1, 2008 would reduce our reported
income from operations by approximately $0.1 million.





Inventory
Valuation





Our
inventories are comprised primarily of dated calendar products and other
non-dated products such as binders, stationery, training products, and other
accessories.  Inventories are stated at the lower of cost or market
with cost determined using the first-in, first-out
method.  Inventories are reduced to their fair market value through
the use of inventory loss reserves, which are recorded during the normal course
of business.





Our
inventory loss reserve calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding a number of
factors, including future inventory demand requirements and pricing
strategies.  During the evaluation process we consider historical
sales patterns


26
 Table of Contents


and
current sales trends, but these may not be indicative of future inventory
losses.  While we have not made material changes to our inventory
reserves methodology during the past three years, our 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.  If our estimates
regarding consumer demand and other factors are inaccurate, we may be exposed to
losses that may have a materially adverse impact upon our financial position and
results of operations.  For instance, a 10 percent increase in our
inventory loss reserves at March 1, 2008 would reduce our income from operations
by approximately $0.4 million.





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 the carrying value of the Covey
trade name exceeds the fair value of its discounted estimated royalties on trade
name related revenues, an impairment loss is recognized for the
difference.  The adjusted basis becomes the carrying value until a
future impairment assessment determines that additional impairment charges are
necessary.





Our
impairment evaluation calculation for the Covey trade name contains
uncertainties because it requires us to make assumptions and apply judgment in
order to estimate future cash flows, to estimate an appropriate royalty rate,
and to select a discount rate that reflects the inherent risk of future cash
flows.  Our valuation methodology for the Covey trade name was
developed by an independent valuation firm and has remained materially unchanged
during the past three years.  However, if forecasts and assumptions
used to support the carrying value of our indefinite-lived intangible asset
change in future periods, significant impairment charges could result that would
have an adverse effect upon our results of operations and financial
condition.  Based upon the fiscal 2007 evaluation of the Covey trade
name, 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 their
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 calculate an impairment
loss.  The impairment loss calculation compares the carrying value of
the asset to the asset’s estimated fair value, which may be based upon
discounted cash flows over the estimated remaining useful life of the
asset.  If we recognize an impairment loss, the adjusted carrying
amount of the asset becomes its new cost basis, which is then depreciated or
amortized over the remaining useful life of the asset.  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.





Our
impairment evaluation calculations contain uncertainties because they require us
to make assumptions and apply judgment in order to estimate future cash flows,
forecast the useful lives of the assets, and select a discount rate that
reflects the risk inherent in future cash flows.  Although we have not
made any material changes to our long-lived assets impairment assessment
methodology during the past three years, if forecasts and assumptions used to
support the carrying value 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.  During the quarter and two


27
 Table of Contents


quarters
ended March 1, 2008, there were no events or circumstances that we believe
indicated a possible material impairment of our long-lived assets.





Income
Taxes





We
regularly evaluate our United States federal and various state and foreign
jurisdiction income tax exposures.  On September 1, 2007, the Company
adopted FIN 48, which addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements.  Under the provisions of FIN 48, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities, based on the technical merits of the
position.  The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50 percent likelihood of being realized upon final
settlement.  The provisions of FIN 48 also provide guidance on
de-recognition, classification, interest, and penalties on income taxes,
accounting for income taxes in interim periods, and requires increased
disclosure of various income tax items.  Taxes and penalties are
components of our overall income tax provision.  Prior to the adoption
of FIN 48, interest on income tax items was recorded as a component of
consolidated interest expense.  Beginning on September 1, 2007, in
conjunction with the adoption of FIN 48, interest on income taxes is included as
a component of overall income tax expense.





The
Company records previously unrecognized tax benefits in the financial statements
when it becomes more likely than not (greater than a 50 percent likelihood) that
the tax position will be sustained.  To assess the probability of
sustaining a tax position, the Company considers all available
evidence.  In many instances, sufficient positive evidence may not be
available until the expiration of the statute of limitations for audits by
taxing jurisdictions, at which time the entire benefit will be recognized as a
discrete item in the applicable period.





Our
unrecognized tax benefits result from uncertain tax positions about which we are
required to make assumptions and apply judgment to estimate the exposures
associated with our various tax filing positions.  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.  Our effective income tax rate is also affected by changes
in tax law and the results of tax audits by various
jurisdictions.  Although we believe that our judgments and estimates
discussed herein are reasonable, actual results could differ, and we could be
exposed to losses or gains that could be material.








NEW
ACCOUNTING PRONOUNCEMENTS





Fair Value
Measures – In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (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 2009.  Subsequent to the issuance of SFAS
No. 157, the FASB provided for a one-year deferral of certain provisions related
to non-financial assets and liabilities that are recognized or disclosed on a
non-recurring basis.  We have not yet completed our analysis of the
impact of SFAS No. 157 on our financial statements.


28
 Table of Contents


Fair Value Option
for Financial Assets and Financial Liabilities– In February 2007, the
FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities including an
Amendment of FASB Statement No. 115.  Statement No.159 permits
entities to choose to measure many financial instruments and certain other items
at fair value.  The provisions of SFAS No. 159 are effective for our
fiscal year beginning September 1, 2008 (fiscal 2009).  We have not
yet completed our analysis of the impact of SFAS No. 159 on our financial
statements.





Business
Combinations – In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  These standards aim to
improve, simplify, and converge internationally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements.  The provisions of SFAS No. 141R and SFAS No.
160 are effective for our fiscal year beginning September 1,
2009.  Although we have not yet completed our analysis of the impact
of these provisions, we do not currently anticipate that they will have a
material impact upon our financial condition or results of
operations.





Derivatives
Disclosures– In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  Statement No. 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance, and cash flows.  The provisions of SFAS No. 161 are
effective for our third quarter of fiscal 2009.  The Company is
currently evaluating the impact of the provisions of SFAS No. 161, but due to
our limited use of derivative instruments we do not currently anticipate that
the provisions of SFAS No. 161 will have a material impact 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 web casts, 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 as amended (the Exchange Act).  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 and amortization expense, expectations regarding
tangible and intangible asset valuation expenses, expected improvement in our
cash flows and reported results of operations as a result of the redemption of
our preferred stock, expected improvements in cash flows from operating
activities, the adequacy of our existing capital resources, future compliance
with the terms and conditions of our line of credit, expected timing of the
repayment of our line of credit, 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, 2007, 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


29
 Table of Contents


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 report
on Form 10-K for the year ended August 31, 2007.  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


30
 Table of Contents


consolidated
financial statements.  The following is a description of our use of
foreign currency derivative instruments.





During
the quarter and two quarters ended March 1, 2008 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
      Ended
            
            
            Two
      Quarters EndedMarch
      1,
              2008
            
            
            March
      3,
              2007
            
            
            March
      1,
              2008
            
            
            March
      3,
              2007Losses
      on foreign exchange contracts
            
            $
            (199
            )
            
            $
            (64
            )
            
            $
            (328
            )
            
            $
            (73
            )Gains
      on foreign exchange contracts
            
            
            -
            
            
            
            15
            
            
            
            -
            
            
            
            33Net
      gain (loss) on foreign exchange contracts
            
            $
            (199
            )
            
            $
            (49
            )
            
            $
            (328
            )
            
            $
            (40
            )





On March
1, 2008, all of our foreign currency forward contracts were
settled.  However, subsequent to March 1, 2008, we entered into new
foreign currency forward contracts that will settle near the end of our third
fiscal quarter ending May 31, 2008.  The notional amounts of these
foreign currency sell contracts that did not qualify for hedge accounting were
as follows (in thousands):





Contract
      Description
            
            Notional
      Amount in Foreign Currency
            
            
            Notional
      Amount in U.S. DollarsJapanese
      Yen
            
            
            81,000
            
            
            $
            786Mexican
      Pesos
            
            
            7,630
            
            
            
            696Great
      Britain Pounds
            
            
            320
            
            
            
            652Australian
      Dollars
            
            
            155
            
            
            
            141





During
the quarter and two quarters ended March 1, 2008, 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 United States interest rates primarily as
a result of our line of credit borrowings.  At March 1, 2008, our debt
balances consisted primarily of a fixed-rate financing obligation associated
with the sale of our corporate headquarters facility, a variable-rate line of
credit arrangement, and a variable rate long-term mortgage on certain of our
buildings and property.  The addition of the variable-rate line of
credit in fiscal 2007 increased our interest rate sensitivity and in the future
our overall interest rate sensitivity will be influenced by the amounts borrowed
on the line of credit and the prevailing interest rates, which may create
additional expense if interest rates increase in future
periods.  Accordingly, at March 1, 2008 borrowing levels, a 1 percent
increase on our variable rate debt would increase our interest expense over the
next year by approximately $0.1 million.





During
the quarter ended March 1, 2008 we were not party to any interest rate swap or
other interest related derivative instruments that would increase our interest
rate sensitivity.





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 Table of Contents


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
Exchange Act, as of the end of the period covered by this
report.  Based on this evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q.





There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f)) during the most recently completed fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.


32
 Table of Contents


PART II.  OTHER INFORMATION





Item
1A.         RISK
FACTORS





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,
2007.





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





The
Company acquired the following shares of its outstanding securities during the
fiscal quarter ended March 1, 2008:





Period
            
            Total
      Number of Shares Purchased
            
            
            Average
      Price Paid Per Share
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
            
            Approximate
      Dollar Value of Shares That May Yet Be Purchased Under the Plans or
      Programs
              (in
      thousands)Common
      Shares:December
      2, 2007 to
              January 5, 2008
            
            
            -
            
            
            $
            -
            
            none
            
            $
            2,413January
      6, 2008 to
              February 2, 2008
            
            
            1,549
            (2)
            
            
            7.64
            
            none
            
            
            2,413February
      3, 2008 to
              March 1, 2008
            
            
            -
            
            
            
            -
            
            none
            
            
            2,413
            (1)Total
      Common Shares
            
            
            1,549
            
            
            $
            7.64
            
            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 common stock purchase plan, we have purchased a total
      of 1,009,300 shares of our common stock for $7.6 million through March 1,
      2008.





(2)
            Amount
      represents shares withheld for statutory taxes from a distribution of
      common shares from our non-qualified deferred compensation
      plan.





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





We held
our Annual Meeting of Shareholders on Friday, January 18, 2008.  The
following represents a summary of each matter voted upon and the corresponding
voting results for each item considered by shareholders at the Annual
Meeting.





Further
information regarding each item can be found in the Company’s definitive Proxy
Statement which was filed with the Securities and Exchange Commission on
December 14, 2007.


33
 Table of Contents





1.
            Election of Directors –Three directors were elected for three-year terms that expire at
      the Annual Meeting of Shareholders to be held following the end of fiscal
      2010 or until their successors are elected and qualified.  The
      number of votes for each nominee for director was as
    follows:





Name
            
            Votes
      For
            
            Votes
      WithheldClayton
      M. Christensen
            
            14,645,105
            
            625,644E.J.
      “Jake” Garn
            
            14,606,389
            
            664,360Donald
      J. McNamara
            
            14,472,050
            
            798,699





2.
            Appointment of Independent
      Auditors –The shareholders ratified the appointment of KPMG LLP as
      the Company’s independent auditors for the fiscal year ending August 31,
      2008.  A total of 14,784,667 shares voted in favor of this
      appointment, 483,384 shares voted against, and 2,698 shares abstained from
      voting.





Item6.         
 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


34
 Table of Contents





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:
            April
      10, 2008
            
            By:
            /s/
      Robert A. WhitmanRobert
      A. WhitmanChief
      Executive OfficerDate:
            April
      10, 2008
            
            By:
            /s/
      Stephen D. YoungStephen
      D. YoungChief
      Financial Officer





35