UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





(Mark
      One)


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





For
      the
      quarterly period ended December 1, 2007





[   ]
            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, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.  (Check one):





Large
                accelerated filer
            £
            
            Accelerated
                filer
            T
            
            Non-accelerated
                filer
            £





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:







19,511,314
      shares of Common Stock as of January 2, 2008








PART
      I.  FINANCIAL INFORMATION


ITEM
      1.  FINANCIAL STATEMENTS








FRANKLIN
      COVEY
      CO.





CONDENSED
      CONSOLIDATED
      BALANCE SHEETS


(in
      thousands, except per share amounts)





December
                1,
              2007
            
            
            August
                31,
              2007(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            8,756
            
            
            $
            6,126Accounts
                receivable, less
                allowance for doubtful accounts of $960 and $821
            
            
            30,137
            
            
            
            27,239Inventories
            
            
            24,176
            
            
            
            24,033Deferred
                income taxes
            
            
            3,662
            
            
            
            3,635Prepaid
                expenses and other assets
            
            
            8,834
            
            
            
            9,070Total
                current assets
            
            
            75,565
            
            
            
            70,103Property
                and equipment, net
            
            
            35,587
            
            
            
            36,063Intangible
                assets, net
            
            
            75,024
            
            
            
            75,923Deferred
                income taxes
            
            
            106
            
            
            
            101Other
                assets
            
            
            14,963
            
            
            
            14,441$
            201,245
            
            
            $
            196,631LIABILITIES
                AND
                SHAREHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt and financing obligation
            
            $
            645
            
            
            $
            629Line
                of credit
            
            
            14,656
            
            
            
            15,999Accounts
                payable
            
            
            15,199
            
            
            
            12,190Income
                taxes payable
            
            
            599
            
            
            
            2,244Accrued
                liabilities
            
            
            30,135
            
            
            
            30,101Total
                current liabilities
            
            
            61,234
            
            
            
            61,163Long-term
                debt and financing obligation, less current portion
            
            
            32,838
            
            
            
            32,965Deferred
                income tax liabilities
            
            
            2,822
            
            
            
            565Other
                liabilities
            
            
            1,761
            
            
            
            1,019Total
                liabilities
            
            
            98,655
            
            
            
            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
            
            
            184,982
            
            
            
            185,890Common
                stock
                warrants
            
            
            7,602
            
            
            
            7,602Retained
                earnings
            
            
            21,548
            
            
            
            19,489Accumulated
                other comprehensive
                income
            
            
            1,220
            
            
            
            970Treasury
                stock at cost, 7,271 and
                7,296 shares
            
            
            (114,115
            )
            
            
            (114,385
            )Total
                shareholders’
                equity
            
            
            102,590
            
            
            
            100,919$
            201,245
            
            
            $
            196,631
















See
      notes
      to condensed consolidated financial statements.








FRANKLIN
      COVEY
      CO.





CONDENSED
      CONSOLIDATED
      INCOME STATEMENTS


(in
      thousands, except per share amounts)





Quarter
                EndedDecember
                1,
              2007
            
            
            December
                2,
              2006(unaudited)Net
                sales:Products
            
            $
            39,375
            
            
            $
            42,109Training
                and consulting
                services
            
            
            34,199
            
            
            
            33,42173,574
            
            
            
            75,530Cost
                of sales:Products
            
            
            16,906
            
            
            
            18,473Training
                and consulting
                services
            
            
            10,723
            
            
            
            10,65927,629
            
            
            
            29,132Gross
                profit
            
            
            45,945
            
            
            
            46,398Selling,
                general, and administrative
            
            
            38,771
            
            
            
            40,849Depreciation
            
            
            1,198
            
            
            
            1,037Amortization
            
            
            899
            
            
            
            902Income
                from
                operations
            
            
            5,077
            
            
            
            3,610Interest
                income
            
            
            9
            
            
            
            201Interest
                expense
            
            
            (910
            )
            
            
            (661
            )Income
                before provision for
                income taxes
            
            
            4,176
            
            
            
            3,150Provision
                for income taxes
            
            
            2,117
            
            
            
            1,734Net
                income
            
            
            2,059
            
            
            
            1,416Preferred
                stock dividends
            
            
            -
            
            
            
            (934
            )Net
                income available to common
                shareholders
            
            $
            2,059
            
            
            $
            482Net
                income available to common shareholders per share:Basic
            
            $
            .11
            
            
            $
            .02Diluted
            
            $
            .10
            
            
            $
            .02Weighted
                average number of common shares:Basic
            
            
            19,481
            
            
            
            19,910Diluted
            
            
            19,760
            
            
            
            20,192



















See
      notes
      to condensed consolidated financial statements.








FRANKLIN
      COVEY
      CO.





CONDENSED
      CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(in
      thousands)




Quarter
                EndedDecember
                1,
              2007
            
            
            December
                2,
              2006(unaudited)Cash
                flows from operating activities:Net
                income
            
            $
            2,059
            
            
            $
            1,416Adjustments
                to reconcile net
                income to net cash provided by
              (used for) operating activities:Depreciation
                and amortization
            
            
            2,489
            
            
            
            2,340Deferred
                income taxes
            
            
            1,497
            
            
            
            914Share-based
                compensation expense
            
            
            (739
            )
            
            
            119Changes
                in assets and liabilities:Increase
                in accounts receivable, net
            
            
            (2,663
            )
            
            
            (4,070
            )Decrease
                (increase) in inventories
            
            
            58
            
            
            
            (1,169
            )Increase
                in other assets
            
            
            (143
            )
            
            
            (613
            )Increase
                (decrease) in accounts payable and accrued liabilities
            
            
            3,185
            
            
            
            (2,861
            )Increase
                in other long-term liabilities
            
            
            18
            
            
            
            59Increase
                (decrease) in income taxes payable
            
            
            (171
            )
            
            
            73Net
                cash provided by (used for) operating activities
            
            
            5,590
            
            
            
            (3,792
            )Cash
                flows from investing activities:Proceeds
                on notes receivable from disposals of subsidiaries
            
            
            586
            
            
            
            -Purchases
                of property and equipment
            
            
            (1,268
            )
            
            
            (2,289
            )Curriculum
                development costs
            
            
            (573
            )
            
            
            (587
            )Net
                cash used for investing activities
            
            
            (1,255
            )
            
            
            (2,876
            )Cash
                flows from financing activities:Proceeds
                from line of credit borrowing
            
            
            17,654
            
            
            
            -Payments
                on line of credit borrowing
            
            
            (18,998
            )
            
            
            -Principal
                payments on long-term debt and financing obligation
            
            
            (148
            )
            
            
            (147
            )Proceeds
                from sales of common stock from treasury
            
            
            102
            
            
            
            70Purchase
                of treasury shares
            
            
            -
            
            
            
            (16
            )Payment
                of preferred stock dividends
            
            
            -
            
            
            
            (934
            )Net
                cash used for financing activities
            
            
            (1,390
            )
            
            
            (1,027
            )Effect
                of foreign exchange rates on cash and cash equivalents
            
            
            (315
            )
            
            
            (13
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            2,630
            
            
            
            (7,708
            )Cash
                and cash equivalents at beginning of the period
            
            
            6,126
            
            
            
            30,587Cash
                and cash equivalents at end of the period
            
            $
            8,756
            
            
            $
            22,879Supplemental
                disclosure of cash flow information:Cash
                paid for
                interest
            
            $
            923
            
            
            $
            668Cash
                paid for income
                taxes
            
            $
            1,098
            
            
            $
            818Non-cash
                investing and financing activities:Accrued
                preferred stock
                dividends
            
            $
            -
            
            
            $
            934Acquisition
                of property and
                equipment through accounts payable
            
            
            563
            
            
            
            -



















See
      notes
      to condensed consolidated financial statements.








FRANKLIN
      COVEY
      CO.





NOTES
      TO CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)











NOTE
      1– BASIS OF
      PRESENTATION





Franklin
      Covey Co.
      (hereafter referred to as us, we, our, or the Company) provides integrated
      consulting, training, and performance enhancement solutions to organizations
      and
      individuals in strategy execution, productivity, leadership, sales force
      effectiveness, effective communications, and other areas.  Each
      integrated solution may include components of training and consulting,
      assessment, and other application tools that are generally available in
      electronic or paper-based formats.  Our products and services are
      available through professional consulting services, public seminars, retail
      stores, catalogs, and the internet at www.franklincovey.com.  Historically,
      the Company’s best-known offerings include the FranklinCovey PlannerTM and a
      suite of individual-effectiveness and leadership-development training products
      based on the best-selling book, The
      7 Habits of Highly Effective People.  We also offer a range of
      training and assessment products to help organizations achieve superior results
      by focusing and executing on top priorities, building the capability of
      knowledge workers, and aligning business processes.  These offerings
      include the following popular workshops and curricula: FOCUS:
      Achieving Your Highest PrioritiesTM; The
      4 Disciplines of ExecutionTM; 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 programbased 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 December 1, 2007 had one less business day compared to the
      quarter ended December 2, 2006.





The
      results of operations for the quarter ended December 1, 2007 are not necessarily
      indicative of results expected for the entire fiscal year ending August 31,
      2008.





NOTE
      2– INVENTORIES





Inventories
      are stated at the lower of cost or market, cost being determined using the
      first-in, first-out method, and were comprised of the following (in
      thousands):





December
                1,
              2007
            
            
            August
                31,
              2007Finished
                goods
            
            $
            20,388
            
            
            $
            20,268Work
                in process
            
            
            901
            
            
            
            743Raw
                materials
            
            
            2,887
            
            
            
            3,022$
            24,176
            
            
            $
            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 quarter ended December 1,
      2007.  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 estimated probable number of common shares to
      be
      awarded.  The Company granted performance awards under provisions of
      the LTIP in fiscal 2006, which vest on August 31, 2008, and 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 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 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 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.  We also recorded a $0.2
      million cumulative adjustment in the quarter ended December 2, 2006 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 227,535shares, or 53
      percent of the original target award of 429,312shares.  We recorded a cumulative adjustment
      totaling $0.3
      million to reduce
      selling, general, and administrative expensesduring the quarter
      ended December 1, 2007 to reflect the new estimated shares to be
      awarded.  At December 1, 2007, there was $0.8
      million of estimated unrecognized compensation remaining on the fiscal 2007
      LTIP
      award.  However, the final number of shares 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 employees through the quarter ended December 1, 2007:





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 December 1, 2007
            
            
            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
      ended December 1, 2007, a total of 15,899
      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 a committee
      appointed by our Board of Directors.




Information
      related to stock option activity during the quarter ended December 1, 2007
      is
      presented below:




Number
                of Stock Options
            
            
            Weighted
                Avg. Exercise Price Per ShareOutstanding
                at August 31, 2007
            
            
            2,058,300
            
            
            $
            12.72Granted
            
            
            -
            
            
            
            -Exercised
            
            
            (12,500
            )
            
            
            1.70Forfeited
            
            
            -
            
            
            
            -Outstanding
                at
              December
                1, 2007
            
            
            2,045,800
            
            
            $
            12.79Options
                vested and exercisable at December 1, 2007
            
            
            2,045,800
            
            
            $
            12.79








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 the effective tax rates from quarter to quarter.





Our
      effective tax rate for the quarter ended December 1, 2007 of approximately
51
      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 totals$4.3million,of which$3.1millionwould affect
      our effective tax rate, if recognized.  The gross unrecognized tax
      benefit includes$2.9million 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 $0.2million 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
      unrecognized tax benefits did not change significantly during the quarter ended
      December 1, 2007.





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 deferred income tax asset
      and have the effect of increasing our net deferred income tax
      liability.  All other unrecognized income tax benefits, which totaled$0.7million, were
      reclassified as other long-term liabilities in our December 1, 2007 condensed
      consolidated balance sheets.





The
      Company anticipates that it is
      reasonably possible that unrecognized tax benefits, including interest and
      penalties, of up to $0.3million could be
      recognized within the next twelve months due to the lapse of applicable statutes
      of limitation, of which $0.2million 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 tax2004-2007
            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 are not the resultof
      transactions with shareholders.  Comprehensive income for the Company
      was calculated as follows (in thousands):





Quarter
                EndedDecember
                1,
              2007
            
            
            December
                2,
              2006Net
                income
            
            $
            2,059
            
            
            $
            1,416Other
                comprehensive income items net of tax:Foreign
                currency translation adjustments
            
            
            250
            
            
            
            96Comprehensive
                income
            
            $
            2,309
            
            
            $
            1,512








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 03-6, Participating Securities
      and the
      Two-Class Method under FASB Statement No. 128, because they continue to
      have equivalent common stock dividend rights.  Accordingly, these
      management stock loan shares are included in our basic EPS calculation during
      periods of net income and excluded from the basic EPS calculation in periods
      of
      net loss.




The
      following table presents the computation of our EPS for the periods indicated
      (in thousands, except per share amounts):





Quarter
                EndedDecember
                1,
              2007
            
            
            December
                2,
              2006Numerator
                for basic and diluted earnings per share:Net
                income
            
            $
            2,059
            
            
            $
            1,416Preferred
                stock dividends
            
            
            -
            
            
            
            (934
            )Net
                income available to common shareholders
            
            $
            2,059
            
            
            $
            482Denominator
                for basic and diluted earnings per share:Basic
                weighted average shares outstanding(1)
            
            
            19,481
            
            
            
            19,910Effect
                of dilutive securities:Stock
                options
            
            
            9
            
            
            
            35Unvested
                stock awards
            
            
            270
            
            
            
            247Common
                stock warrants(2)
            
            
            -
            
            
            
            -Diluted
                weighted average shares outstanding
            
            
            19,760
            
            
            
            20,192Basic
                and diluted EPS:Basic
                EPS
            
            $
            .11
            
            
            $
            .02Diluted
                EPS
            
            $
            .10
            
            
            $
            .02





(1)
            Since
                the Company recognized net income for the quarters ended December
                1, 2007
                and December 2, 2006, 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 quarters ended December 1, 2007 and December 2, 2006, the conversion
                of 6.2 million common stock warrants is not assumed because such
                conversion would be anti-dilutive.





At
      December 1, 2007 and December 2, 2006, 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 our common stock warrants 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 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 its income from operations excluding depreciation
      and amortization charges.





In
      the
      normal course of business, the Company may make structural and cost allocation
      revisions to its segment information to reflect new reporting responsibilities
      within the organization.  During the first quarter of fiscal 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
              December
                1, 2007
            
            Sales
                to External Customers
            
            
            Gross
                Profit
            
            
            EBITDA
            
            
            Depreciation
            
            
            AmortizationConsumer
                Solutions
              Business Unit:Retail
            
            $
            13,135
            
            
            $
            7,718
            
            
            $
            852
            
            
            $
            214
            
            
            $
            -Consumer
                direct
            
            
            14,812
            
            
            
            9,009
            
            
            
            6,939
            
            
            
            55
            
            
            
            -Wholesale
            
            
            4,261
            
            
            
            2,455
            
            
            
            2,294
            
            
            
            -
            
            
            
            -CSBU
                International
            
            
            2,671
            
            
            
            1,557
            
            
            
            660
            
            
            
            25
            
            
            
            -Other
                CSBU
            
            
            1,164
            
            
            
            191
            
            
            
            (6,959
            )
            
            
            288
            
            
            
            -Total
                CSBU
            
            
            36,043
            
            
            
            20,930
            
            
            
            3,786
            
            
            
            582
            
            
            
            -Organizational
                Solutions
              Business Unit:Domestic
            
            
            21,664
            
            
            
            13,710
            
            
            
            255
            
            
            
            234
            
            
            
            899International
            
            
            15,867
            
            
            
            11,305
            
            
            
            4,725
            
            
            
            187
            
            
            
            -Total
                OSBU
            
            
            37,531
            
            
            
            25,015
            
            
            
            4,980
            
            
            
            421
            
            
            
            899Total
                operating segments
            
            
            73,574
            
            
            
            45,945
            
            
            
            8,766
            
            
            
            1,003
            
            
            
            899Corporate
                and eliminations
            
            
            -
            
            
            
            -
            
            
            
            (1,592
            )
            
            
            195
            
            
            
            -Consolidated
            
            $
            73,574
            
            
            $
            45,945
            
            
            $
            7,174
            
            
            $
            1,198
            
            
            $
            899Quarter
                Ended
              December
                2, 2006Consumer
                Solutions
              Business Unit:Retail
            
            $
            14,127
            
            
            $
            8,399
            
            
            $
            1,236
            
            
            $
            191
            
            
            $
            -Consumer
                direct
            
            
            16,211
            
            
            
            9,850
            
            
            
            7,728
            
            
            
            20
            
            
            
            -Wholesale
            
            
            4,577
            
            
            
            2,778
            
            
            
            2,663
            
            
            
            -
            
            
            
            -CSBU
                International
            
            
            2,386
            
            
            
            1,485
            
            
            
            486
            
            
            
            -
            
            
            
            -Other
                CSBU
            
            
            1,272
            
            
            
            (281
            )
            
            
            (8,112
            )
            
            
            259
            
            
            
            -Total
                CSBU
            
            
            38,573
            
            
            
            22,231
            
            
            
            4,001
            
            
            
            470
            
            
            
            -Organizational
                Solutions
              Business Unit:Domestic
            
            
            21,470
            
            
            
            13,875
            
            
            
            1,236
            
            
            
            114
            
            
            
            902International
            
            
            15,487
            
            
            
            10,292
            
            
            
            3,187
            
            
            
            205
            
            
            
            -Total
                OSBU
            
            
            36,957
            
            
            
            24,167
            
            
            
            4,423
            
            
            
            319
            
            
            
            902Total
                operating segments
            
            
            75,530
            
            
            
            46,398
            
            
            
            8,424
            
            
            
            789
            
            
            
            902Corporate
                and eliminations
            
            
            -
            
            
            
            -
            
            
            
            (2,875
            )
            
            
            248
            
            
            
            -Consolidated
            
            $
            75,530
            
            
            $
            46,398
            
            
            $
            5,549
            
            
            $
            1,037
            
            
            $
            902





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





Quarter
                EndedDecember
                1,
              2007
            
            
            December
                2,
              2006Reportable
                segment EBITDA
            
            $
            8,766
            
            
            $
            8,424Corporate
                expenses
            
            
            (1,592
            )
            
            
            (2,875
            )Consolidated
                EBITDA
            
            
            7,174
            
            
            
            5,549Depreciation
            
            
            (1,198
            )
            
            
            (1,037
            )Amortization
            
            
            (899
            )
            
            
            (902
            )Income
                from
                operations
            
            
            5,077
            
            
            
            3,610Interest
                income
            
            
            9
            
            
            
            201Interest
                expense
            
            
            (910
            )
            
            
            (661
            )Income
                before taxes
            
            $
            4,176
            
            
            $
            3,150





The
      cumulative adjustments resulting from revisions to share-based compensation
      awards as described in Note 3 are included in corporate expenses in the above
      table.


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
      first
      fiscal quarter, which includes the months of September, October, and November,
      has historically reflected good product sales, from back-to-school and early
      holiday shopping, and generally strong training and consulting service
      sales.  For the quarter ended December 1, 2007, our income from
      operations increased to $5.1
      million compared to $3.6
      million in the first fiscal quarter of the prior year and our pre-tax income
      improved to $4.2
      million compared to $3.2
      million in the comparable quarter of fiscal 2007.  Partly due to the
      fiscal 2007 redemption of our remaining preferred stock and corresponding
      elimination of preferred dividends, our net income available to common
      shareholders increased to $2.1 million compared to $0.5
      million in the first quarter of fiscal 2007.





The
      primary factors that influenced our operating results for the quarter ended
      December 1, 2007 were as follows:





·
            Sales–Our
                consolidated sales
                declined $2.0 million, which was the result of decreased product
                sales
                totaling $2.7 million that were partially offset by increased training
                and
                consulting services sales.  Product sales declined primarily due
                to reduced consumer direct sales, retail sales, and wholesale sales
                compared to the prior year.  Training and consulting services
                sales increased $0.8 million due to increased sales from our international
                and domestic operations.·
            Gross
                Profit– When compared to the prior year, our gross profit declined
                primarily due to decreased consolidated sales.  Our consolidated
                gross margin, which is gross profit in terms of a percentage of sales,
                improved to 62.4
                percent of sales compared to 61.4
                percent in the prior year.  The improvement in gross margin was
                primarily due to increasing training and consulting sales as a percent
                of
                total sales, which generally have higher margins than our product
                sales,
                and improved margins on our product sales.·
            Operating
                Expenses– Our operating expenses decreased by $1.9
                million compared to the prior year, which was the result of decreased
                selling, general, and administrative expenses totaling $2.1
                million that were offset by a $0.2
                million increase in depreciation
                expense.





Further
      details regarding these factors and their impact on our operating results and
      liquidity are provided throughout the following management’s discussion and
      analysis.





Quarter
      Ended December 1,
      2007 Compared to the Quarter Ended December 2, 2006





Sales





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





Quarter
                EndedDecember
                1, 2007
            
            
            December
                2, 2006
            
            
            Percent
                ChangeSales
                by Category:Products
            
            $
            39,375
            
            
            $
            42,109
            
            
            
            (6
            )Training
                and consulting services
            
            
            34,199
            
            
            
            33,421
            
            
            
            2$
            73,574
            
            
            $
            75,530
            
            
            
            (3
            )Consumer
                Solutions Business Unit:Retail
                Stores
            
            $
            13,135
            
            
            $
            14,127
            
            
            
            (7
            )Consumer
                Direct
            
            
            14,812
            
            
            
            16,211
            
            
            
            (9
            )Wholesale
            
            
            4,261
            
            
            
            4,577
            
            
            
            (7
            )CSBU
                International
            
            
            2,671
            
            
            
            2,386
            
            
            
            12Other
                CSBU
            
            
            1,164
            
            
            
            1,272
            
            
            
            (8
            )36,043
            
            
            
            38,573
            
            
            
            (7
            )Organizational
                Solutions Business Unit:Domestic
            
            
            21,664
            
            
            
            21,470
            
            
            
            1International
            
            
            15,867
            
            
            
            15,487
            
            
            
            237,531
            
            
            
            36,957
            
            
            
            2Total
                Sales
            
            $
            73,574
            
            
            $
            75,530
            
            
            
            (3
            )





Product
      Sales–Overall
      product sales, which primarily consist of planners, binders, totes, software,
      and handheld electronic planning devices that are primarily sold through our
      Consumer Solutions Business Unit (CSBU) channels, declined $2.7
      million, or 6
      percent, 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.  The decline in
      product sales during the quarter ended December 1, 2007 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, reduced demand for technology and related products, and
                fewer
                store locations, which had a $0.2 million impact on retail
                sales.  Our retail store traffic, or the number of consumers
                entering our retail locations, declined by approximately 20 percent
                compared to the first 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 $0.3
                million compared to the prior year.  These factors combined to
                produce a six
                percent decline in year-over-year comparable store (stores which
                were open
                during the comparable periods) sales versus the first quarter of
                fiscal
                2007.  At December 1, 2007, we were operating 87 domestic retail
                locations compared to 89 locations at December 2, 2006, and based
                upon our
                continuing analyses of retail store performance we may close additional
                retail stores in fiscal 2008 and continue to recognize decreased
                sales in
                future periods as a result of closing store locations.·
            Consumer
                Direct– Sales
                through our consumer direct channels (primarily eCommerce and our
                call
                center) decreased $1.4
                million, primarily due to a decline in the number of customers visiting
                our website and a decline in the number of orders which are being
                processed through the call center.  Visits to our website
                decreased from the prior year by approximately 7
                percent, which we believe was a result of the change in timing of
                catalog
                mailings, which decreased in the first quarter and will increase
                in the
                second quarter of fiscal 2008 compared to the prior
                year.  Declining consumer orders through the call center
                continues a long-term trend and decreased by approximately 13
                percent compared to the prior year, which we believe is primarily
                a result
                of the transition of customers to our eCommerce site.·
            Wholesale–
Sales
                through our wholesale channel, which includes sales to office superstores
                and other retail chains, decreased $0.3
                million primarily due to the transition of wholesale products to
                a new
                wholesale partner.·
            CSBU
                International–
                This channel includes the product sales of our directly owned
                international offices in Canada, the United Kingdom, Mexico, and
                Australia.  The $0.3
                million increase was primarily due to improved demand for product
                in
                certain countries.·
            Other
                CSBU– Other CSBU
                sales consist primarily of domestic printing and publishing sales
                and
                building sublease revenues.  The slight decrease in other CSBU
                sales was primarily due to a $0.2
                million decrease in external printing sales, which was the result
                of
                increased demand during the quarter for internally produced paper
                products
                during the quarter.  Our ability to print paper products for
                external clients is dependent upon demand for Company products and
                may
                fluctuate from period to period.





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 OSBU.  Our consolidated
      training and consulting service sales increased $0.8
      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 first quarter of fiscal
      2008
      was primarily influenced by the following factors in our OSBU
      divisions:





·
            Domestic–Our domestic training, consulting, and related sales reported
                through the OSBU continued to show improvement over the prior year
                and
                increased by $0.2
                million, or one
                percent.  The improvement was primarily due to continued
                acceptance of our core product offerings, which includes The Seven Habits
                of Highly
                Effective People, Leadership:  Great Leaders, Great Teams, Great
                Results,and 4
                Disciplines of Execution curriculum.
              
              
              Generally,
                our training programs and consulting services continue to perform
                well in
                the marketplace as our five geographic regions, government services,
                educational solutions, and vertical market regions generated a combined
                19
                percent increase in year-over-year sales.  During the quarter
                ended December 1, 2007, the number of training and consulting days
                delivered increased eightpercent and the average revenue per day received increased
                14percent.  Sales of training materials to our
                client facilitators also improved compared to the prior
                year.  Partially offsetting these gains were decreases in our
                public program sales and our sales performance consulting group which
                primarily teaches our Helping Clients
                Succeed
                curriculum.  Our current outlook for fiscal 2008 remains strong
                and 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.·
            International–
                International sales increased $0.4
                million, or two
                percent, compared to fiscal 2007.  Sales from our wholly owned
                foreign offices and royalty revenues from third-party licensees increased
                compared to the prior year.  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
                $1.3
                million unfavorable impact on our international
                sales.  Excluding the impact of reduced sales from Brazil and
                Mexico, comparable sales from our licensees and remaining four direct
                offices increased 12
                percent compared to the prior year.  Our direct offices in the
                United Kingdom, Canada and Australia all recorded significant increases
                in
                sales, which were partially offset by declines in Japan.  We
                expect our sales performance in Japan to improve compared to the
                prior
                year during the remainder of fiscal 2008.  Our licensees also
                reported strong growth, primarily from offices located in Asia and
                Europe.  The translation of foreign sales to the United States
                dollar helped to improve reported sales and had a $0.8
                million favorable impact on our consolidated sales as foreign currencies
                strengthened against the United States dollar during the quarter
                ended
                December 1, 2007.








Gross
      Profit





Gross
      profit consists of net sales less the cost of goods sold or the cost of services
      provided.  Our consolidated gross margin, which is gross profit stated
      in terms of a percentage of sales, increased one percent to 62.4
      percent of sales compared to 61.4
      percent in fiscal 2007.  The increase was primarily attributable to
      the continuing shift toward increased training and consulting sales, which
      generally have higher margins than our product sales, and improved gross margins
      on our product sales.  Training and consulting service sales increased
      to 47
      percent of total sales in the first quarter of fiscal 2008 compared to 44
      percent in the prior year.





Gross
      margin on product sales increased to 57.1
      percent compared to 56.1
      percent in the prior year, which was primarily due to reduced printing costs
      that resulted from the fiscal 2007 reconfiguration of our printing
      services.





For
      the
      quarter ended December 1, 2007, our training and consulting services gross
      margin was 68.6
      percent compared to 68.1
      percent in the prior year.  The improvement was primarily attributable
      to improved gross margins in 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 decreased
$2.1
      million, or five
      percent, compared to the prior year.  The decrease in SG&A
      expenses was primarily due to 1) the sale of our subsidiary in Brazil and the
      training and consulting operations of our subsidiary in Mexico; 2) the reversal
      of share-based compensation expense; and 3) decreased audit and related
      consulting costs.  During the fourth quarter of fiscal 2007, we
      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 $1.2
      million.  Our share-based compensation expense decreased by $0.8
      million due to changes in the estimated number of shares expected to vest from
      our long-term incentive plan (LTIP).  As a result of these revisions,
      no shares of the fiscal 2006 LTIP grant are expected to vest and no further
      compensation expense from this compensation plan is expected to be recognized
      in
      fiscal 2008.  Accordingly, we made a cumulative adjustment to our
      financial statements during the quarter, which included reversal of compensation
      expense recognized in prior periods.  Our audit and associated
      consulting fees decreased by $0.5
      million compared to fiscal 2007.  Our prior year accounting fees
      included charges and consulting costs related to the first year of compliance
      with Section 404 of the Sarbanes-Oxley Act of 2002.  These fees
      declined during fiscal 2008 due to improved processes and procedures combined
      with revised internal control testing standards.  The decreases in
      SG&A from these sources were partially offset by increased associate costs
      resulting primarily from commissions and incentives on improving training and
      consulting sales.





Depreciation
      and
      Amortization–Depreciation
      expense increased $0.2
      million compared to the same quarter of fiscal 2007 primarily due to increased
      capital expenditures during the fiscal year ended August 31, 2007.  We
      currently expect fiscal 2008 depreciation expense to increase slightly compared
      to fiscal 2007 amounts.





Amortization
      expense from definite-lived intangible assets for the quarter ended December
      1,
      2007 remained consistent with the prior year at $0.9
      million.  We expect intangible asset amortization expense to remain
      consistent with prior year amounts throughout fiscal 2008 and believe that
      amortization expense will total $3.6 million for the current fiscal
      year.





Interest
      Income and Expense





Interest
      Income –Our interest income decreased by $0.2millioncompared to the same quarter of the prior fiscal year due to
      reduced cash and cash equivalents held during the quarter ended December 1,
      2007.  During the third quarter of fiscal 2007, we used substantially
      all of our available cash and cash equivalents combined with proceeds from
      a
      newly acquired line of credit to redeem the remaining outstanding shares of
      Series A preferred stock.





Interest
      Expense
–Interest expense increased $0.2
      million primarily due to line of credit borrowings that were used in conjunction
      with available cash to redeem the remaining shares of preferred
      stock.  Fluctuations in our interest expense during fiscal 2008 will
      be primarily impacted by our level of borrowing on our $25.0 million line of
      credit and will decrease if we are able to repay amounts outstanding on the
      facility.





Income
      Taxes





Our
      income tax provision for the quarter ended December 1, 2007 increased to $2.1
      million compared to $1.7
      million in the first quarter of the prior year.  The increase in our
      income tax provision was primarily due to improved pre-tax
      income.  Our effective tax rate for the quarter ended December 1, 2007
      of approximately 51
      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 the quarter ended December 1, 2007 did not have a
      material impact on our income tax provision.








LIQUIDITY
      AND CAPITAL RESOURCES





At
      December 1, 2007 we had $8.8
      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 $14.3million at December 1, 2007 compared to $8.9million at August 31, 2007.  During fiscal 2007, we used
      substantially all of our cash on hand combined with proceeds from a newly
      obtained line of credit to redeem all of our remaining preferred stock at its
      liquidation preference of $25 per share plus accrued
      dividends.  Although we will incur additional interest expense on 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
      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 December 1, 2007, we
believe thatwewere in compliance with the terms and financial covenants
      of our credit facilities.  At December 1, 2007, we had $14.7
      million outstanding on the line of credit, which was classified as a current
      liability on our consolidated balance sheet primarily due to our intention
      to
      repay the outstanding amount during fiscal 2008.





The
      following discussion is a description of the primary factors affecting our
      cash
      flows and their effects upon our liquidity and capital resources during the
      quarter ended December 1, 2007.





Cash
      Flows From Operating Activities





Our
      cash
      provided by operating activities totaled $5.6
      million compared to $3.8
      million of net cash used for operating activities during the quarter ended
      December 2, 2006.  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 quarter ended December 1, 2007 was
      primarily related to 1) increased accounts receivable balances resulting from
      improved OSBU sales; and 2) increased accounts payable resulting from seasonally
      high activity.  We believe that our continued efforts to optimize
      working capital balances, combined with existing and planned sales growth
      programs and cost-cutting initiatives, will improve our cash flows from
      operating activities in future periods.  However, the success of these
      efforts, and their eventual contribution to our cash flows, is dependent upon
      numerous factors, many of which are not within our control.





Cash
      Flows From Investing Activities and Capital Expenditures





Net
      cash
      used for investing activities totaled $1.3
      million for the quarter ended December 1, 2007.  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 $1.3
      million, consisted primarily of computer hardware, computer software, and
      leasehold improvements.  During the first quarter of fiscal 2008, we
      spent $0.6
      million for further investment in curriculum development.  Partially
      offsetting these uses of cash was the receipt of $0.6
      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 quarter ended December 1, 2007 totaled
      $1.4
      million, which primarily consisted of payments on our line of credit and other
      debt obligations.





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 such financing
      alternatives will be available to us on acceptable terms.





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 10toour 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.








USEOF 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 primarily 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, sales force performance, and communication
                effectiveness skills.  These training programs and services are
                primarily sold through our OSBU
                channels.





The
      Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
      2) delivery of product has occurred or services have been rendered, 3) the
      price
      to the customer is fixed and determinable, and 4) collectibility is reasonably
      assured.  For product sales, these conditions are generally met upon
      shipment of the product to the customer or by completion of the sale transaction
      in a retail store.  For training and service sales, these conditions
      are generally met upon presentation of the training seminar or delivery of
      the
      consulting services.





Some
      of
      our training and consulting contracts contain multiple deliverable elements
      that
      include training along with other products and services.  In
      accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements
      with Multiple Deliverables, sales arrangements with multiple deliverables
      are divided into separate units of accounting if the deliverables in the sales
      contract meet the following criteria: 1) the delivered training or product
      has
      value to the client on a standalone basis; 2) there is objective and reliable
      evidence of the fair value of undelivered items; and 3) delivery of any
      undelivered item is probable.  The overall contract consideration is
      allocated among the separate units of accounting based upon their fair values,
      with the amount allocated to the delivered item being limited to the amount
      that
      is not contingent upon the delivery of additional items or meeting other
      specified performance conditions.  If the fair value of all
      undelivered elements exits, but fair value does not exist for one or more
      delivered elements, the residual method is used.  Under the residual
      method, the amount of consideration allocated to the delivered items equals
      the
      total contract consideration less the aggregate fair value of the undelivered
      items.  Fair value of the undelivered items is based upon the normal
      pricing practices for the Company’s existing training programs, consulting
      services, and other products, which are generally the prices of the items when
      sold separately.





Revenue
      is recognized on software sales in accordance with Statement of Position (SOP)
      97-2, Software Revenue
      Recognition as amended by SOP 98-09.  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 the Company’s content and
      curriculum, adapt the content and curriculum to the local culture, and sell
      the
      Company’s training seminars and products in a specific country or
      region.  Licensees are required to pay us royalties based upon a
      percentage of the licensee’s sales.  The Company recognizes royalty
      income each period based upon the sales information reported to us from the
      licensee.





Revenue
      is recognized as the net amount to be received after deducting estimated amounts
      for discounts and product returns.





Share-Based
      Compensation





During
      fiscal 2006, we granted performance based compensation awards to certain
      employees in a Board of Director approved long-term incentive plan (the
      LTIP).  These performance-based share awards allow each participant
      the right to receive a certain number of shares of common stock based upon
      the
      achievement of specified financial goals at the end of a predetermined
      performance period.  The LTIP awards vest on August 31 of the third
      fiscal year from the grant date, which corresponds to the completion of a
      three-year performance cycle.  For example, the LTIP awards granted in
      fiscal 2006 vest 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 sales of our subsidiary in Brazil
      and our training operations in Mexico.  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.




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.





At
      December 1, 2007 we 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 227,535shares, or 53
      percent of the original target award.  We recorded a cumulative
      adjustment to
      reduce operating expenses by$0.3
      million during the quarter ended December 1, 2007 to reflect the new estimated
      shares to be awarded.  At December 1, 2007, there was $0.8
      million of estimated unrecognized compensation 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:




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 ended December 1, 2007 or the fiscal
      years ended August 31, 2007 and 2006, and we did not have any remaining cost
      associated with unvested stock options at December 1, 2007.





Accounts
      Receivable Valuation





Trade
      accounts receivable are recorded at the invoiced amount and do not bear
      interest.  The allowance for doubtful accounts represents our best
      estimate of the amount of probable credit losses in the existing accounts
      receivable balance.  We determine the allowance for doubtful accounts
      based upon historical write-off experience and current economic conditions
      and
      we review the adequacy of our allowance for doubtful accounts on a regular
      basis.  Receivable balances past due over 90 days, which exceed a
      specified dollar amount, are reviewed individually for
      collectibility.  Account balances are charged off against the
      allowance after all means of collection have been exhausted and the probability
      for recovery is considered remote.  We do not have any off-balance
      sheet credit exposure related to our customers.





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 December 1, 2007 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 and current sales trends, but these may not be indicative of
      future inventory losses.  While we have not made material changes to
      our inventory reserve calculations 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 December 1, 2007 would reduce
      our income from operations by approximately $0.5
      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 ended December 1, 2007, 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 will 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 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.  We have not yet completed our
      analysis of the impact of SFAS No. 157 on our financial statements.








SAFE
      HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
      1995





Certain
      written and oral statements made by the Company or our representatives in this
      report, other reports, filings with the Securities and Exchange Commission,
      press releases, conferences, internet 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 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
      fiscal 2008 repayment of the 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 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 consolidated financial statements.  The
      following is a description of our use of foreign currency derivative
      instruments.





During
      the quarter ended December 1, 2007 we utilized foreign currency forward
      contracts to manage the volatility of certain intercompany financing
      transactions and other transactions that are denominated in foreign
      currencies.  Because these contracts do not meet specific hedge
      accounting requirements, gains and losses on these contracts, which expire
      on a
      quarterly basis, are recognized currently and are used to offset a portion
      of
      the gains or losses of the related accounts.  The gains and losses on
      these contracts were recorded as a component of SG&A expense in our
      consolidated income statements and had the following net impact on the periods
      indicated (in thousands):





Quarter
                EndedDecember
                1,
              2007
            
            
            December
                2,
              2006Losses
                on foreign exchange contracts
            
            $
            (128
            )
            
            $
            (9
            )Gains
                on foreign exchange contracts
            
            
            -
            
            
            
            18Net
                gain (loss) on foreign exchange contracts
            
            $
            (128
            )
            
            $
            9





At
      December 1, 2007, the fair value of our foreign currency forward contracts,
      which was determined using the estimated amount at which contracts could be
      settled based upon forward market exchange rates, was
      insignificant.  The notional amounts of our foreign currency sell
      contracts that did not qualify for hedge accounting were as follows at December
      1, 2007 (in thousands):





Contract
                Description
            
            Notional
                Amount in Foreign Currency
            
            
            Notional
                Amount in U.S. DollarsJapanese
                Yen
            
            
            211,000
            
            
            $
            1,899Mexican
                Pesos
            
            
            11,689
            
            
            
            1,061Australian
                Dollars
            
            
            733
            
            
            
            643





During
      the quarter ended December 1, 2007, we did not utilize any derivative contracts
      that qualified for hedge accounting.  However, the Company may utilize
      foreign currency derivatives that qualify for hedge accounting in future periods
      as a component of our overall foreign currency risk strategy.





Interest
      Rate Sensitivity





The
      Company is exposed to fluctuations in U.S. interest rates primarily as a result
      of our line of credit borrowings.  At December 1, 2007, 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 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
      December 1, 2007 borrowing levels, a 1 percent increase on our variable rate
      debt would increase our interest expense over the next year by approximately
      $0.2
      million.





During
      the quarter ended December 1, 2007 we were not party to any interest rate swap
      or other interest related derivative instruments that would increase our
      interest rate sensitivity.








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.





PART
      II.  OTHER INFORMATION   Item
                  1A.
              RISK
                  FACTIORS
                
                
                For
                  information regarding Risk Factors, please refer to Item 1A in
                  our 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 securities during the fiscal quarter ended
        December 1, 2007:





Period
            
            Total
                Number of Shares Purchased
            
            
            Average
                Price Paid Per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
            
            Maximum
                Dollar Value of Shares That May Yet Be Purchased Under the Plans
                or
                ProgramsCommon
                Shares:
            
            
            
            
            
            
            
            
            (in
                thousands)September
                1, 2007 to October 6, 2007
            
            
            -
            
            
            $
            -
            
            none
            
            $
            2,413October
                7, 2007 to    November 3, 2007
            
            
            -
            
            
            
            -
            
            none
            
            
            2,413November
                4, 2007 to December 1, 2007
            
            
            3,240
            (2)
            
            
            6.56
            
            none
            
            
            2,413
            (1)Total
                Common Shares
            
            
            3,240
            
            
            $
            6.56
            
            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.  Pursuant
                    to the terms of this stock purchase plan, we have acquired 1,009,300
                    shares of our common stock for $7.6 million through December
                    1,
                    2007.(2)
                Amount
                    represents shares received from an employee of the Company as
                    consideration to exercise stock options and were valued using
                    the closing
                    price of our common stock on the date of
                    exercise.


Item
      6.  EXHIBITS





(A)
            Exhibits:31.1
            Rule
                13a-14(a) Certifications of the Chief Executive Officer31.2
            Rule
                13a-14(a) Certifications of the Chief Financial Officer32
            Section
                1350 Certifications











SIGNATURES





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





FRANKLIN
                COVEY CO.Date:
            January
                10, 2008
            
            By:
            /s/
                Robert A. WhitmanRobert
                A. WhitmanChief
                Executive OfficerDate:
            January
                10, 2008
            
            By:
            /s/
                Stephen D. YoungStephen
                D. YoungChief
                Financial Officer