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 November 29, 2008





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





For the
transition period from __________ to __________





Commission
file no. 1-11107










FRANKLIN
COVEY CO.


(Exact
name of registrant as specified in its charter)







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







Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such, shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes   TNo   £





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








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








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








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





16,889,872
shares of Common Stock as of January 2, 2009





PART
I.  FINANCIAL INFORMATION


ITEM
1.  FINANCIAL STATEMENTS








FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED
BALANCE SHEETS


(in
thousands, except per share amounts)





November
      29,
                                    2008
                                  
                                  
                                  August
      31,
                                    2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  3,490
                                  
                                  
                                  $
                                  15,904Accounts receivable, less
      allowance for doubtful accounts of $1,143 and $1,066
                                  
                                  
                                  26,367
                                  
                                  
                                  
                                  27,114Inventories
                                  
                                  
                                  8,114
                                  
                                  
                                  
                                  8,397Deferred
      income taxes
                                  
                                  
                                  2,537
                                  
                                  
                                  
                                  2,472Receivable
      from equity method investee
                                  
                                  
                                  6,967
                                  
                                  
                                  
                                  7,672Income
      taxes receivable
                                  
                                  
                                  1,381
                                  
                                  
                                  
                                  -Prepaid
      expenses and other assets
                                  
                                  
                                  4,743
                                  
                                  
                                  
                                  5,102Total
      current assets
                                  
                                  
                                  53,599
                                  
                                  
                                  
                                  66,661Property
      and equipment, net
                                  
                                  
                                  26,752
                                  
                                  
                                  
                                  26,928Intangible
      assets, net
                                  
                                  
                                  71,425
                                  
                                  
                                  
                                  72,320Other
      assets
                                  
                                  
                                  11,419
                                  
                                  
                                  
                                  11,768$
                                  163,195
                                  
                                  
                                  $
                                  177,677LIABILITIES AND SHAREHOLDERS’
      EQUITYCurrent
      liabilities:Current
      portion of long-term debt and financing obligation
                                  
                                  $
                                  667
                                  
                                  
                                  $
                                  670Line
      of credit
                                  
                                  
                                  18,775
                                  
                                  
                                  
                                  -Accounts
      payable
                                  
                                  
                                  7,770
                                  
                                  
                                  
                                  8,713Income
      taxes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  384Tender
      offer obligation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  28,222Accrued
      liabilities
                                  
                                  
                                  20,937
                                  
                                  
                                  
                                  23,419Total
      current liabilities
                                  
                                  
                                  48,149
                                  
                                  
                                  
                                  61,408Long-term
      debt and financing obligation, less current portion
                                  
                                  
                                  32,039
                                  
                                  
                                  
                                  32,291Other
      liabilities
                                  
                                  
                                  1,045
                                  
                                  
                                  
                                  1,229Deferred
      income tax liabilities
                                  
                                  
                                  4,073
                                  
                                  
                                  
                                  4,572Total
      liabilities
                                  
                                  
                                  85,306
                                  
                                  
                                  
                                  99,500Shareholders’
      equity:Common stock – $0.05 par value;
      40,000 shares authorized, 27,056 shares issued and
    outstanding
                                  
                                  
                                  1,353
                                  
                                  
                                  
                                  1,353Additional paid-in
      capital
                                  
                                  
                                  184,284
                                  
                                  
                                  
                                  184,313Common stock
    warrants
                                  
                                  
                                  7,597
                                  
                                  
                                  
                                  7,597Retained earnings
                                  
                                  
                                  24,244
                                  
                                  
                                  
                                  24,811Accumulated other comprehensive
      income
                                  
                                  
                                  1,102
                                  
                                  
                                  
                                  1,007Treasury stock at cost, 7,271 and
      7,296 shares
                                  
                                  
                                  (140,691
                                  )
                                  
                                  
                                  (140,904
                                  )Total shareholders’
      equity
                                  
                                  
                                  77,889
                                  
                                  
                                  
                                  78,177$
                                  163,195
                                  
                                  
                                  $
                                  177,677





























See notes
to condensed consolidated financial statements.


2


FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED
INCOME STATEMENTS


(in
thousands, except per share amounts)




Quarter
      EndedNovember
      29,
                      2008
                    
                    
                    December
      1,
                      2007(unaudited)Net
      sales:Training and consulting
      services
                    
                    $
                    30,481
                    
                    
                    $
                    34,199Products
                    
                    
                    3,681
                    
                    
                    
                    38,802Leasing
                    
                    
                    919
                    
                    
                    
                    57335,081
                    
                    
                    
                    73,574Cost
      of sales:Training and consulting
      services
                    
                    
                    11,023
                    
                    
                    
                    10,723Products
                    
                    
                    1,886
                    
                    
                    
                    16,497Leasing
                    
                    
                    475
                    
                    
                    
                    36313,384
                    
                    
                    
                    27,583Gross profit
                    
                    
                    21,697
                    
                    
                    
                    45,991Selling,
      general, and administrative
                    
                    
                    20,610
                    
                    
                    
                    38,771Depreciation
                    
                    
                    903
                    
                    
                    
                    1,380Amortization
                    
                    
                    902
                    
                    
                    
                    899Income (loss) from
      operations
                    
                    
                    (718
                    )
                    
                    
                    4,941Interest
      income
                    
                    
                    53
                    
                    
                    
                    9Interest
      expense
                    
                    
                    (828
                    )
                    
                    
                    (910
                    )Income (loss) before income
      taxes
                    
                    
                    (1,493
                    )
                    
                    
                    4,040Income
      tax benefit (provision)
                    
                    
                    924
                    
                    
                    
                    (2,048
                    )Net income
    (loss)
                    
                    $
                    (569
                    )
                    
                    $
                    1,992Net
      income (loss) per share:Basic
                    
                    $
                    (.04
                    )
                    
                    $
                    .10Diluted
                    
                    $
                    (.04
                    )
                    
                    $
                    .10Weighted
      average number of common shares:Basic
                    
                    
                    13,378
                    
                    
                    
                    19,481Diluted
                    
                    
                    13,378
                    
                    
                    
                    19,760







































































See notes
to condensed consolidated financial statements.


3


FRANKLIN COVEY
CO.





CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)





Quarter
      EndedNovember
      29,
                      2008
                    
                    
                    December
      1,
                      2007(unaudited)Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    (569
                    )
                    
                    $
                    1,992Adjustments to reconcile net
      income to net cash provided by (used for) operating
      activities:Depreciation
      and amortization
                    
                    
                    1,813
                    
                    
                    
                    2,489Deferred
      income taxes
                    
                    
                    (499
                    )
                    
                    
                    1,497Share-based
      compensation expense (benefit)
                    
                    
                    70
                    
                    
                    
                    (739
                    )Changes
      in assets and liabilities:Decrease
      (increase) in accounts receivable, net
                    
                    
                    944
                    
                    
                    
                    (2,663
                    )Decrease
      in receivable from equity method investee
                    
                    
                    705
                    
                    
                    
                    -Decrease
      in inventories
                    
                    
                    670
                    
                    
                    
                    216Decrease
      (increase) in other assets
                    
                    
                    1,235
                    
                    
                    
                    (143
                    )Increase
      (decrease) in accounts payable and accrued liabilities
                    
                    
                    (3,975
                    )
                    
                    
                    3,185Increase
      (decrease) in other long-term liabilities
                    
                    
                    (191
                    )
                    
                    
                    18Decrease
      in income taxes payable
                    
                    
                    (1,885
                    )
                    
                    
                    (240
                    )Net
      cash provided by (used for) operating activities
                    
                    
                    (1,682
                    )
                    
                    
                    5,612Cash
      flows from investing activities:Proceeds
      on notes receivable from disposals of subsidiaries
                    
                    
                    -
                    
                    
                    
                    586Purchases
      of property and equipment
                    
                    
                    (585
                    )
                    
                    
                    (1,268
                    )Curriculum
      development costs
                    
                    
                    (412
                    )
                    
                    
                    (573
                    )Net
      cash used for investing activities
                    
                    
                    (997
                    )
                    
                    
                    (1,255
                    )Cash
      flows from financing activities:Proceeds
      from line of credit borrowing
                    
                    
                    33,337
                    
                    
                    
                    17,654Payments
      on line of credit borrowing
                    
                    
                    (14,562
                    )
                    
                    
                    (18,998
                    )Principal
      payments on long-term debt and financing obligation
                    
                    
                    (165
                    )
                    
                    
                    (148
                    )Proceeds
      from sales of common stock from treasury
                    
                    
                    115
                    
                    
                    
                    102Purchase
      of treasury shares through tender offer
                    
                    
                    (28,222
                    )
                    
                    
                    -Net
      cash used for financing activities
                    
                    
                    (9,497
                    )
                    
                    
                    (1,390
                    )Effect
      of foreign exchange rates on cash and cash equivalents
                    
                    
                    (238
                    )
                    
                    
                    (337
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (12,414
                    )
                    
                    
                    2,630Cash
      and cash equivalents at beginning of the period
                    
                    
                    15,904
                    
                    
                    
                    6,126Cash
      and cash equivalents at end of the period
                    
                    $
                    3,490
                    
                    
                    $
                    8,756Supplemental
      disclosure of cash flow information:Cash paid for
      interest
                    
                    $
                    784
                    
                    
                    $
                    923Cash paid for income
      taxes
                    
                    $
                    1,559
                    
                    
                    $
                    1,098Non-cash
      investing and financing activities:Acquisition of property and
      equipment through accounts payable
                    
                    $
                    759
                    
                    
                    $
                    563












































See notes
to condensed consolidated financial statements.


4


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) believes that
great organizations consist of great people who form great teams that in turn
produce great results.  To enable organizations and individuals to
achieve great results, we provide integrated consulting, training, and
performance solutions focused on leadership, strategy execution, productivity,
sales force effectiveness, effective communication, and other
areas.  Our services and products have historically been available
through professional consulting services, public workshops, retail stores,
catalogs, and the Internet at www.franklincovey.com
and our best-known offerings in the marketplace have included 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.





During
the fourth quarter of fiscal 2008, we completed the sale of substantially all of
the assets of our Consumer Solutions Business Unit (CSBU) to a newly formed
entity, Franklin Covey Products, LLC (Note 3).  The CSBU was primarily
responsible for the sale of our products, including the FranklinCovey PlannerTM,
to consumers through retail stores, catalogs, and our Internet
site.  Following the sale of the CSBU, our business primarily consists
of training, consulting, and assessment services and products to help
organizations achieve superior results by focusing on and executing on top
priorities, building the capability of knowledge workers, and aligning business
processes.  Our training, consulting, and assessment offerings include
services based upon the popular workshops The 7 Habits of Highly Effective
PeopleTM; Leadership:
Great Leaders—Great  Teams—Great ResultsTM; The 4 Disciplines of
ExecutionTM; FOCUS:
Achieving Your Highest PrioritiesTM;The 8 Habits of a Successful
Marriage;Building
Business AcumenTM;Championing Diversity;Leading at the Speed of Trust;Writing AdvantageTM, andPresentation
AdvantageTM.  Through interaction with our clients and
assessment of marketplace needs, we seek to create, develop, and introduce new
services and products that will help our clients achieve greatness.





The
accompanying unaudited condensed consolidated financial statements reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments, except for the correction of errors in prior periods as described
in Note 2) 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, 2008.





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 November 29, 2008, February 28, 2009, and May
30, 2009 during fiscal 2009.  Under the modified
52/53-


5


week
fiscal year, the quarter ended November 29, 2008 had one less business day than
the quarter ended December 1, 2007.  Unless otherwise noted,
references to fiscal years apply to the 12 months ended August 31 of the
specified year.





Certain
reclassifications have been made to prior period financial statements to conform
to the current period presentation.  These reclassifications included
a change in the classification of leasing income, corresponding leasing cost of
sales, and building depreciation costs related to sub-leased office space from
product cost of sales to depreciation expense.  The depreciation
expense reclassified from product cost of sales totaled $0.2 million for the
quarter ended December 1, 2007.





The
results of operations for the quarter ended November 29, 2008 are not
necessarily indicative of results expected for the entire fiscal year ending
August 31, 2009.








NOTE
2 – CORRECTION OF IMMATERIAL ERRORS





Subsequent
to the quarter ended November 28, 2009, we identified errors due to improper
accounting for certain product sales in the fourth quarter of fiscal 2008, and
the improper calculation of inventory reserves from late fiscal 2006 through the
fourth quarter of fiscal 2008 in the financial statements of our directly owned
subsidiary in Japan.





During
the fourth quarter of fiscal 2008, certain product sales were recorded where
delivery had not occurred resulting in an overstatement of
revenues.  In addition, we determined that our Japanese subsidiary’s
inventory reserve calculation did not appropriately capture all considerations
of old and outdated material resulting in an overstatement in the value of our
inventory.





The
revenue recognition error resulted in a $0.9 million overstatement of sales,
which had a $0.6 million impact on gross profit, in fourth quarter of fiscal
2008.  The inventory reserve calculation errors from the fourth
quarter of fiscal 2006 through August 31, 2008 cumulatively totaled $0.7 million
and were immaterial overall to previously reported quarterly and annual
periods.





We
assessed the materiality of these errors in accordance with Staff Accounting
Bulletin (SAB) No. 108 and determined that the errors were immaterial to
previously reported amounts contained in our periodic reports and we intend to
correct these errors through subsequent periodic filings.  The effects
of recording these immaterial corrections in the consolidated statements of
operations for the three fiscal years impacted, consolidated balance sheet as of
August 31, 2008, and for the fiscal 2008 quarterly periods to be reported in
subsequent periodic filings are as follows (in thousands):








6


For
      the Fiscal Year Ended
                                            August
      31, 2008As
      Reported
                                          
                                          
                                          As
      RevisedSales
                                          
                                          $
                                          260,092
                                          
                                          
                                          $
                                          259,193Gross
      profit
                                          
                                          
                                          161,243
                                          
                                          
                                          
                                          160,482Operating
      income
                                          
                                          
                                          16,760
                                          
                                          
                                          
                                          15,999Net
      income
                                          
                                          
                                          5,848
                                          
                                          
                                          
                                          5,527Accounts
      receivable
                                          
                                          
                                          28,019
                                          
                                          
                                          
                                          27,114Inventories
                                          
                                          
                                          8,742
                                          
                                          
                                          
                                          8,397Retained
      earnings
                                          
                                          
                                          25,337
                                          
                                          
                                          
                                          24,813Total
      shareholders’ equity
                                          
                                          
                                          78,754
                                          
                                          
                                          
                                          78,179For
      the Quarter Ended
                                            August
      31, 2008As
      Reported
                                          
                                          
                                          As
      RevisedSales
                                          
                                          $
                                          52,330
                                          
                                          
                                          $
                                          51,431Gross
      profit
                                          
                                          
                                          32,853
                                          
                                          
                                          
                                          32,267Operating
      income
                                          
                                          
                                          5,750
                                          
                                          
                                          
                                          5,164Net
      income
                                          
                                          
                                          2,218
                                          
                                          
                                          
                                          1,970For
      the Quarter Ended
                                            May
      31, 2008As
      Reported
                                          
                                          
                                          As
      RevisedGross
      profit
                                          
                                          $
                                          35,757
                                          
                                          
                                          $
                                          35,786Operating
      loss
                                          
                                          
                                          (852
                                          )
                                          
                                          
                                          (823
                                          )Net
      income
                                          
                                          
                                          (1,511
                                          )
                                          
                                          
                                          (1,482
                                          )Inventories
                                          
                                          
                                          7,034
                                          
                                          
                                          
                                          6,352Retained
      earnings
                                          
                                          
                                          23,119
                                          
                                          
                                          
                                          22,843Total
      shareholders’ equity
                                          
                                          
                                          104,344
                                          
                                          
                                          
                                          103,999For
      the Quarter Ended
                                            March
      1, 2008As
      Reported
                                          
                                          
                                          As
      RevisedGross
      profit
                                          
                                          $
                                          46,688
                                          
                                          
                                          $
                                          46,620Operating
      income
                                          
                                          
                                          6,785
                                          
                                          
                                          
                                          6,717Net
      income
                                          
                                          
                                          3,082
                                          
                                          
                                          
                                          3,047Inventories
                                          
                                          
                                          21,190
                                          
                                          
                                          
                                          20,469Retained
      earnings
                                          
                                          
                                          24,630
                                          
                                          
                                          
                                          24,325Total
      shareholders’ equity
                                          
                                          
                                          106,282
                                          
                                          
                                          
                                          105,898For
      the Quarter Ended
                                            December
      1, 2007As
      Reported
                                          
                                          
                                          As
      RevisedGross
      profit
                                          
                                          $
                                          45,945
                                          
                                          
                                          $
                                          45,809Operating
      income
                                          
                                          
                                          5,077
                                          
                                          
                                          
                                          4,941Net
      income
                                          
                                          
                                          2,059
                                          
                                          
                                          
                                          1,992Inventories
                                          
                                          
                                          24,176
                                          
                                          
                                          
                                          23,569Retained
      earnings
                                          
                                          
                                          21,548
                                          
                                          
                                          
                                          21,278Total
      shareholders’ equity
                                          
                                          
                                          102,590
                                          
                                          
                                          
                                          102,287For
      the Fiscal Year Ended
                                            August
      31, 2007As
      Reported
                                          
                                          
                                          As
      RevisedGross
      profit
                                          
                                          $
                                          174,377
                                          
                                          
                                          $
                                          174,004Operating
      income
                                          
                                          
                                          18,084
                                          
                                          
                                          
                                          17,711Net
      income
                                          
                                          
                                          5,414
                                          
                                          
                                          
                                          5,250Inventories
                                          
                                          
                                          24,033
                                          
                                          
                                          
                                          23,584Retained
      earnings
                                          
                                          
                                          19,489
                                          
                                          
                                          
                                          19,286Total
      shareholders’ equity
                                          
                                          
                                          100,919
                                          
                                          
                                          
                                          100,705For
      the Fiscal Year Ended
                                            August
      31, 2006As
      Reported
                                          
                                          
                                          As
      RevisedGross
      profit
                                          
                                          $
                                          167,385
                                          
                                          
                                          $
                                          167,320Operating
      income
                                          
                                          
                                          14,046
                                          
                                          
                                          
                                          13,981Net
      income
                                          
                                          
                                          24,188
                                          
                                          
                                          
                                          24,148Inventories
                                          
                                          
                                          21,790
                                          
                                          
                                          
                                          21,726Retained
      earnings
                                          
                                          
                                          14,075
                                          
                                          
                                          
                                          14,035Total
      shareholders’ equity
                                          
                                          
                                          133,349
                                          
                                          
                                          
                                          133,310











NOTE
3 – SALE OF CONSUMER SOLUTIONS BUSINESS UNIT





During
the fourth quarter of fiscal 2008, we joined with Peterson Partners to create a
new company, Franklin Covey Products, LLC (Franklin Covey
Products).  This new company purchased substantially all of the assets
of our Consumer Solutions Business Unit (CSBU) with the objective of expanding
the worldwide sales of Franklin Covey products as governed by a comprehensive
license agreement between us and Franklin Covey Products.  On the
closing date of the sale, the Company invested approximately $1.8 million to
purchase a 19.5 percent voting interest in Franklin Covey Products, made a $1.0
million priority capital contribution with a 10 percent return, and will have
the opportunity to earn contingent license fees if Franklin Covey Products
achieves specified performance objectives.  We recognized a gain
totaling $9.1 million on the sale of the CSBU assets and according to guidance
found in Emerging Issues Task Force (EITF) Issue No. 01-2, Interpretations of APB Opinion No.
29, we deferred a portion of the gain equal to our investment
in


7


Franklin
Covey Products.  We will recognize the deferred gain over the life of
the long-term assets acquired by Franklin Covey Products or when cash is
received for payment of the priority contribution.





Based
upon the guidance found in Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, EITF Issue No. 03-13, Applying the Conditions in Paragraph
42 of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations, and SAB No. 103, Topic 5Z4, Disposal of Operation with
Significant Interest Retained, we determined that the operations of CSBU
should not be reported as discontinued operations because we will continue to
have significant influence over the operations of Franklin Covey Products and
may participate in future cash flows.  As a result of this
determination, we have not presented the financial results of the CSBU as
discontinued operations in the accompanying condensed consolidated income
statement for the quarter ended December 1, 2007.





The
following unaudited pro forma condensed consolidated income statement for the
fiscal quarter ended December 1, 2007 gives effect to the sale of the CSBU
assets as if the sale transaction occurred at the beginning of the period
presented.  The pro forma information is not necessarily indicative of
the results of operations or indicative of results that would have actually
occurred had the transaction been completed as of the beginning of the period
presented.  The pro forma adjustments, which primarily consist of
entries to dispose of the CSBU for the period presented, are based upon
available information and certain assumptions we believe are
reasonable.  The pro forma financial information should be read in
conjunction with the consolidated financial statements and notes to the
consolidated financial statements included in our report on Form 10-K for the
fiscal year ended August 31, 2008 and our quarterly report on Form 10-Q for the
period ended December 1, 2007 (in thousands).





Pro
      Forma Quarter Ended December 1, 2007Sales
                            
                            $
                            38,104Cost
      of sales
                            
                            
                            13,014Gross
      profit
                            
                            
                            25,090Selling,
      general, and administrative
                            
                            
                            21,844Depreciation
                            
                            
                            896Amortization
                            
                            
                            899Income
      from operations
                            
                            
                            1,451Interest
      income
                            
                            
                            9Interest
      expense
                            
                            
                            (910
                            )Income
      before provision for income taxes
                            
                            
                            550Provision
      for income taxes
                            
                            
                            (279
                            )Net
      income
                            
                            $
                            271Diluted
      earnings per common share
                            
                            $
                            .01





Following
the sale of the CSBU assets, we do not have any obligation to fund the losses of
Franklin Covey Products and therefore our portion of the net loss incurred by
Franklin Covey Products in the first quarter of fiscal 2009 was not recorded in
our consolidated income statement.  Under the terms of the agreements
associated with the sale of the CSBU assets, we are entitled to receive
reimbursement for certain operating costs, such as warehousing and distribution
costs, which are billed to the Company by third-party providers.  At
November 29, 2008 we had a $7.0 million receivable from Franklin Covey Products,
which consisted of $3.5 million resulting from the working capital settlement
and reimbursable costs associated with the sale transaction that is due in
January 2009, and $3.5 million of reimbursable operating costs.





8


NOTE
4 – 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):





November
      29,
                    2008
                  
                  
                  August
      31,
                    2008Finished
      goods
                  
                  $
                  7,633
                  
                  
                  $
                  7,984Work
      in process
                  
                  
                  -
                  
                  
                  
                  -Raw
      materials
                  
                  
                  481
                  
                  
                  
                  413$
                  8,114
                  
                  
                  $
                  8,397








NOTE
5 – 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 November 29,
2008.  The Company generally issues shares of common stock for its
share-based compensation plans from shares held in treasury.  The
following is a description of recent developments in our share-based
compensation plans.





Performance
Awards





The
Company has a performance based long-term incentive plan (the LTIP) that
provides for annual grants of share-based performance awards to certain
managerial personnel and executive management as directed by the Organization
and Compensation Committee (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
specified financial performance objectives 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.





During
the quarter ended November 29, 2008, we granted LTIP awards for 205,700 shares
of common stock (the target award) to be awarded if we achieve 100 percent of
the specified financial results for the fiscal 2009 award, which are primarily
based on cumulative operating income growth over the performance period ending
August 31, 2011.  The grant date fair value of our common stock was
$4.60 per share and the fiscal 2009 LTIP award is being expensed on a straight
line basis over the performance period less a five percent estimated forfeiture
rate.





9


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.





Based
upon a report from its external compensation consultant regarding competitive
compensation practices for Boards of Directors of similar sized public
companies, and to provide closer alignment with current and emerging market
practices which support the Board’s stewardship role, the Compensation Committee
of the Board of Directors approved modifications to the Non-Employee Directors’
Plan during the quarter ended November 29, 2008.  These modifications
included 1) a change from an annual grant of 4,500 shares to a whole-share grant
equal to $40,000; 2) a change in the vesting period from three years to one
year; and 3) a change in the grant date from March 31 of each year to January
(following the Annual Shareholders’ Meeting) of each year.  These
modifications affect future awards under the Non-Employee Directors’ Plan and no
previously granted awards are subject to modification.





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 November 29, 2008, a total of 14,347 shares were issued to participants in
the ESPP.





Stock
Options





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





Information
related to stock option activity during the quarter ended November 29, 2008 is
presented below:





Number
      of Stock Options
                    
                    
                    Weighted
      Avg. Exercise Price Per ShareOutstanding
      at August 31, 2008
                    
                    
                    2,027,800
                    
                    
                    $
                    12.82Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    (1,000
                    )
                    
                    
                    6.56Forfeited
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      atNovember
      29, 2008
                    
                    
                    2,026,800
                    
                    
                    $
                    12.82Options
      vested and exercisable at November 29, 2008
                    
                    
                    2,026,800
                    
                    
                    $
                    12.82








10


NOTE
6 – INCOME TAXES





In order
to determine our quarterly provision for income taxes, we use an estimated
annual effective tax rate, which is based on expected annual income and
statutory tax rates in the various jurisdictions in which we
operate.  Certain significant or unusual items are separately
recognized in the quarter during which they occur and can be a source of
variability in the effective tax rates from quarter to quarter.





We
recognized an income tax benefit during the quarter ended November 29, 2008
based upon expected pre-tax income for the year ended August 31, 2009.  Our
effective tax benefit rate for the quarter ended November 29, 2008 of
approximately 62 percent was higher than statutory combined rates primarily due
to foreign withholding taxes for which we cannot utilize a foreign tax credit,
the accrual of taxable interest income on the management stock loan program, and
actual and deemed dividends from foreign subsidiaries for which we also cannot
utilize foreign tax credits.  The Company does not expect significant
increases or decreases in unrecognized tax benefits during the next 12
months.








NOTE
7 – COMPREHENSIVE INCOME





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





Quarter
      EndedNovember
      29,
                                2008
                              
                              
                              December
      1,
                                2007Net
      income (loss)
                              
                              $
                              (569
                              )
                              
                              $
                              1,992Other
      comprehensive income items net of tax:Foreign
      currency translation adjustments
                              
                              
                              95
                              
                              
                              
                              217Comprehensive
      income (loss)
                              
                              $
                              (474
                              )
                              
                              $
                              2,209








NOTE
8 – EARNINGS PER SHARE





Basic
earnings per common share (EPS) is calculated by dividing net income (loss) by
the weighted-average number of common shares outstanding for the
period.  Diluted EPS is calculated by dividing net income (loss) 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 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):


11





Quarter
      EndedNovember
      29,
                                2008
                              
                              
                              December
      1,
                                2007Numerator
      for basic and diluted earnings per share:Net
      income (loss)
                              
                              $
                              (569
                              )
                              
                              $
                              1,992Denominator
      for basic and diluted earnings per share:Basic
      weighted average shares outstanding(1)
                              
                              
                              13,378
                              
                              
                              
                              19,481Effect
      of dilutive securities:Stock
      options
                              
                              
                              -
                              
                              
                              
                              9Unvested
      stock awards
                              
                              
                              -
                              
                              
                              
                              270Common
      stock warrants(2)
                              
                              
                              -
                              
                              
                              
                              -Diluted
      weighted average shares outstanding
                              
                              
                              13,378
                              
                              
                              
                              19,760Basic
      and diluted EPS:Basic
      EPS
                              
                              $
                              (.04
                              )
                              
                              $
                              .10Diluted
      EPS
                              
                              $
                              (.04
                              )
                              
                              $
                              .10





(1)
            Since
      the Company recognized net income for the quarter ended December 1, 2007,
      basic weighted average shares for that period includes 3.5 million shares
      of common stock held by management stock loan participants that were
      placed in escrow.  These shares were excluded from basic
      weighted-average shares for the quarter ended November 29,
      2008.





(2)
            For
      the quarters ended November 29, 2008 and December 1, 2007, the conversion
      of 6.2 million common stock warrants is not assumed because such
      conversion would be anti-dilutive.





At
November 29, 2008 and December 1, 2007, we had approximately 2.0 million and 1.9
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.








12


NOTE
9 – SEGMENT INFORMATION





Prior to
the sale of the CSBU (Note 3), which closed during the fourth quarter of fiscal
2008, the Company had two operating segments:  the Organizational
Solutions Business Unit (OSBU) and the Consumer Solutions Business Unit
(CSBU).  The following is a description of these segments, their
primary operating components, and their significant business
activities:





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 and Canada.  Our international sales group includes the
financial results of our directly owned foreign offices and royalty revenues
from licensees.





Consumer
Solutions Business Unit – This business unit was primarily focused on
sales to individual customers and small business organizations and included the
results of our domestic retail stores, consumer direct operations (primarily
Internet sales 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 included the financial
results of our paper planner manufacturing operations.  Although CSBU
sales primarily consisted of products such as planners, binders, software,
totes, and related accessories, virtually any component of our leadership,
productivity, and strategy execution solutions may have been purchased through
the CSBU channels.





The
Company’s chief operating decision maker is the Chief Executive Officer (CEO),
and the primary measurement tool used in business unit performance analysis is
earnings before interest, taxes, depreciation, and amortization (EBITDA), which
may not be calculated as similarly titled amounts calculated by other
companies.  For segment reporting purposes, our consolidated EBITDA
can be calculated as our income from operations excluding depreciation and
amortization charges.





In the
normal course of business, we may make structural and cost allocation revisions
to our segment information to reflect new reporting responsibilities within the
organization.  During the first quarter of fiscal 2009, we closed our
directly owned Canadian office and assigned our Canadian sales and support
personnel to various domestic sales regions.  As a result of these
changes, the results of our Canadian operations are now included in the domestic
segment of the OSBU.  We also made other less significant
organizational changes during the quarter ended November 29,
2008.  All prior period segment information has been revised to
conform to the most recent classifications and organizational
changes.  We account for our segment information on the same basis as
the accompanying condensed consolidated financial statements.


13





SEGMENT
INFORMATION


(in
      thousands)Quarter
      Ended
                      November
      29, 2008
                    
                    Sales
      to External Customers
                    
                    
                    Gross
      Profit
                    
                    
                    EBITDA
                    
                    
                    Depreciation
                    
                    
                    AmortizationOrganizational
      Solutions
                      Business Unit:Domestic
                    
                    $
                    20,726
                    
                    
                    $
                    11,754
                    
                    
                    $
                    (2,081
                    )
                    
                    $
                    291
                    
                    
                    $
                    899International
                    
                    
                    13,436
                    
                    
                    
                    9,499
                    
                    
                    
                    4,407
                    
                    
                    
                    96
                    
                    
                    
                    3Total
      OSBU
                    
                    
                    34,162
                    
                    
                    
                    21,253
                    
                    
                    
                    2,326
                    
                    
                    
                    387
                    
                    
                    
                    902Consumer
      Solutions
                      Business
      Unit:Retail
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Consumer
      direct
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Wholesale
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -CSBU
      International
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      CSBU
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total CSBU
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      operating segments
                    
                    
                    34,162
                    
                    
                    
                    21,253
                    
                    
                    
                    2,326
                    
                    
                    
                    387
                    
                    
                    
                    902Corporate
      and eliminations
                    
                    
                    919
                    
                    
                    
                    444
                    
                    
                    
                    (1,239
                    )
                    
                    
                    516
                    
                    
                    
                    -Consolidated
                    
                    $
                    35,081
                    
                    
                    $
                    21,697
                    
                    
                    $
                    1,087
                    
                    
                    $
                    903
                    
                    
                    $
                    902Quarter
      Ended
                      December
      1, 2007Organizational
      Solutions
                      Business
      Unit:Domestic
                    
                    $
                    23,964
                    
                    
                    $
                    15,275
                    
                    
                    $
                    595
                    
                    
                    $
                    308
                    
                    
                    $
                    899International
                    
                    
                    13,567
                    
                    
                    
                    9,604
                    
                    
                    
                    4,104
                    
                    
                    
                    154
                    
                    
                    
                    -Total
      OSBU
                    
                    
                    37,531
                    
                    
                    
                    24,879
                    
                    
                    
                    4,699
                    
                    
                    
                    462
                    
                    
                    
                    899Consumer
      Solutions
                      Business
      Unit:Retail
                    
                    
                    13,135
                    
                    
                    
                    7,718
                    
                    
                    
                    852
                    
                    
                    
                    214
                    
                    
                    
                    -Consumer
      direct
                    
                    
                    14,812
                    
                    
                    
                    9,009
                    
                    
                    
                    6,301
                    
                    
                    
                    68
                    
                    
                    
                    -Wholesale
                    
                    
                    4,261
                    
                    
                    
                    2,455
                    
                    
                    
                    2,294
                    
                    
                    
                    -
                    
                    
                    
                    -CSBU
      International
                    
                    
                    2,671
                    
                    
                    
                    1,557
                    
                    
                    
                    660
                    
                    
                    
                    25
                    
                    
                    
                    -Other
      CSBU
                    
                    
                    591
                    
                    
                    
                    163
                    
                    
                    
                    (6,204
                    )
                    
                    
                    234
                    
                    
                    
                    -Total CSBU
                    
                    
                    35,470
                    
                    
                    
                    20,902
                    
                    
                    
                    3,903
                    
                    
                    
                    541
                    
                    
                    
                    -Total
      operating segments
                    
                    
                    73,001
                    
                    
                    
                    45,781
                    
                    
                    
                    8,602
                    
                    
                    
                    1,003
                    
                    
                    
                    899Corporate
      and eliminations
                    
                    
                    573
                    
                    
                    
                    210
                    
                    
                    
                    (1,382
                    )
                    
                    
                    377
                    
                    
                    
                    -Consolidated
                    
                    $
                    73,574
                    
                    
                    $
                    45,991
                    
                    
                    $
                    7,220
                    
                    
                    $
                    1,380
                    
                    
                    $
                    899





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





Quarter
      EndedNovember
      29,
                            2008
                          
                          
                          December
      1,
                            2007Reportable
      segment EBITDA
                          
                          $
                          2,326
                          
                          
                          $
                          8,602Corporate
      expenses
                          
                          
                          (1,239
                          )
                          
                          
                          (1,382
                          )Consolidated
      EBITDA
                          
                          
                          1,087
                          
                          
                          
                          7,220Depreciation
                          
                          
                          (903
                          )
                          
                          
                          (1,380
                          )Amortization
                          
                          
                          (902
                          )
                          
                          
                          (899
                          )Income (loss) from
      operations
                          
                          
                          (718
                          )
                          
                          
                          4,941Interest
      income
                          
                          
                          53
                          
                          
                          
                          9Interest
      expense
                          
                          
                          (828
                          )
                          
                          
                          (910
                          )Income
      (loss) before taxes
                          
                          $
                          (1,493
                          )
                          
                          $
                          4,040








NOTE
10 – SUBSEQUENT EVENT





On
December 31, 2008, we completed the acquisition of substantially all of the
assets of CoveyLink Worldwide, LLC (CoveyLink).  CoveyLink has
developed training courses and related materials based on the concepts found in
The SPEED of Trust,
which was written by Stephen M.R. Covey.  Under the terms of the
acquisition agreement, we paid $1.0 million in cash for the assets
at


14


the
closing date and will be required to pay contingent earnout payments to the
former owners of CoveyLink based on increases in earnings before interest,
taxes, depreciation, and amortization (EBITDA) over the next five
years.  In connection with the acquisition, we also amended our
existing intellectual property license with CoveyLink.  The new
license agreement grants the Company an exclusive, perpetual, worldwide license
to the intellectual property of CoveyLink.  The former owners of
CoveyLink, Stephen M.R. Covey and Greg Link, will also join the FranklinCovey
team and they will now direct our sales of the corporate training and services
that were previously provided by CoveyLink.  Additionally, Mr. Covey
and Mr. Link will continue to give speeches based on The SPEED of Trust and
related topics.  We also intend to make CoveyLink products and
services available worldwide through our international
operations.  Mr. Covey is the son of Steven R. Covey, who currently
serves as the Vice-Chairman of our Board of Directors.





15


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,
2008.








RESULTS
OF OPERATIONS





Overview





Our
financial results for the first quarter of fiscal 2009 are difficult to compare
to the first quarter of fiscal 2008 due to the sale of substantially all of the
assets of our Consumer Solutions Business Unit (CSBU) to Franklin Covey
Products, LLC, during the fourth quarter of fiscal 2008.  The CSBU was
primarily responsible for sales of the Company’s consumer products, including
the popular FranklinCovey Planner, binders, and related accessories, to
consumers and small businesses through retail, wholesale, Internet, and call
center channels.  Due to our ownership interest in and continuing
involvement with Franklin Covey Products, LLC, we were unable to present the
financial operations of the CSBU in a discontinued operations format for the
quarter ending December 1, 2007.  Our first fiscal quarter includes
the months of September, October, and November and in prior years, our first
quarter operating results were favorably impacted by product sales made during
the beginning of the traditionally busy holiday shopping season that generally
extends from November through January.  For our first quarter of
fiscal 2009, which ended on November 29, 2008, we recognized a loss from
operations of $0.7 million compared to $4.9 million of income from operations in
the first quarter of fiscal 2008.  Including the impact of a $0.9
million benefit for income taxes, we recognized a net loss of $0.6 million in
the first quarter of fiscal 2009 compared to net income (after income tax
expense) of $2.0 million in the same quarter of the prior year.





The
primary factors that influenced our operating results for the quarter ended
November 29, 2008 were as follows:





·
            Sales–Our consolidated
      sales declined to $35.1 million compared to $73.6 million in the first
      quarter of fiscal 2008.  Of the $38.5 million decline, $35.5
      million, or 92 percent of the decline, was attributable to the sale of our
      CSBU operations and the corresponding reduction in product
      sales.  Sales through our Organizational Solutions Business Unit
      (OSBU), which primarily consist of training and consulting sales,
      decreased $3.4 million due to sales declines in both our domestic and
      international operations.  We believe that these decreases were
      partially attributable to softening economic conditions in the United
      States and in other countries in which we operate wholly owned
      offices.  Decreased OSBU sales were partially offset by a $0.3
      million increase in lease revenues that are primarily generated from
      various arrangements to lease office space at our Salt Lake City, Utah
      headquarters campus.





·
            Gross
      Profit – Our gross profit was primarily affected by the sale of
      CSBU and the corresponding decrease in consolidated product
      sales.  Our consolidated gross margin, which is gross profit in
      terms of a percentage of sales, declined to 61.8 percent of
      sales


16


compared
to 62.5 percent in the prior year.  The fluctuation in our gross
margin was primarily due to the overall change in the mix of items sold and a
decreased gross margin on training and consulting sales during the
quarter.





·
            Operating
      Expenses – Our operating expenses decreased by $18.6 million
      compared to the prior year, which was primarily due to the sale of
      CSBU.  Decreased operating expenses consisted of an $18.2
      million decrease in selling, general, and administrative expenses and
      decreased 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 November 29,
2008 Compared to the Quarter Ended December 1, 2007





Sales





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





Quarter
      EndedNovember
      29, 2008
                              
                              
                              December
      1, 2007
                              
                              
                              Percent
      ChangeSales by CategoryTraining
      and consulting services
                              
                              $
                              30,481
                              
                              
                              $
                              34,199
                              
                              
                              
                              (11
                              )Products
                              
                              
                              3,681
                              
                              
                              
                              38,802
                              
                              
                              
                              (91
                              )Leasing
                              
                              
                              919
                              
                              
                              
                              573
                              
                              
                              
                              60$
                              35,081
                              
                              
                              $
                              73,574
                              
                              
                              
                              (52
                              )Sales by Business UnitOrganizational
      Solutions Business Unit:Domestic
                              
                              $
                              20,726
                              
                              
                              $
                              23,964
                              
                              
                              
                              (14
                              )International
                              
                              
                              13,436
                              
                              
                              
                              13,567
                              
                              
                              
                              (1
                              )34,162
                              
                              
                              
                              37,531
                              
                              
                              
                              (9
                              )Consumer
      Solutions Business Unit:Retail Stores
                              
                              
                              -
                              
                              
                              
                              13,135
                              
                              
                              
                              (100
                              )Consumer Direct
                              
                              
                              -
                              
                              
                              
                              14,812
                              
                              
                              
                              (100
                              )Wholesale
                              
                              
                              -
                              
                              
                              
                              4,261
                              
                              
                              
                              (100
                              )CSBU
    International
                              
                              
                              -
                              
                              
                              
                              2,671
                              
                              
                              
                              (100
                              )Other CSBU
                              
                              
                              -
                              
                              
                              
                              591
                              
                              
                              
                              (100
                              )-
                              
                              
                              
                              35,470
                              
                              
                              
                              (100
                              )Leasing
                              
                              
                              919
                              
                              
                              
                              573
                              
                              
                              
                              60Total
      Sales
                              
                              $
                              35,081
                              
                              
                              $
                              73,574
                              
                              
                              
                              (52
                              )





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 OSBU sales,
which primarily consist of training and consulting sales, decreased $3.4 million
compared to the prior year, which was attributable to performance in both the
domestic and international divisions.  During the quarter ended
November 29, 2008, we closed our directly owned Canadian office and transferred
all remaining sales and support personnel to one of our domestic regions,
depending on the location of the sales associate.  Sales information
presented for the period ended December 1, 2007 in the above table was adjusted
to reflect the transition of Canadian sales from the international division to
the domestic division.  The following is a description of the sales
activity in our domestic and international divisions for the quarter ended
November 29, 2008:





·
            Domestic–Our domestic training, consulting, and related sales decreased by
      $3.2 million compared to fiscal 2008.  The decrease in domestic
      sales was primarily due to: 1) reduced public seminar sales resulting from
      a reduction in the number of


17


events
that were scheduled during the quarter; 2) a decrease in facilitator sales
(training conducted by clients using their certified trainers); 3) a decrease in
the number of on-site events during the quarter resulting from a decrease in the
number of days booked at September 1 compared to the prior year; and 4)
decreased sales force performance training revenues.  These decreases
were partially offset by increased sales of our Customer Loyalty program during
the quarter.





We
believe that deteriorating economic conditions in the United States during the
quarter ended November 29, 2008 contributed to decreased training and consulting
sales during the quarter.  However, our training programs and
consulting services continue to be well accepted in the marketplace and our
number of days booked for future training events remains relatively consistent
with the prior year.  We believe that our training and consulting
offerings enable our clients to enhance the productivity and leadership of their
employees, develop customer loyalty, and improve the effectiveness of their
sales forces; and believe that these services are especially relevant to our
clients in the current economic environment.





·
            International–
      International sales decreased $0.1 million compared to the prior
      year.  Subsequent to the quarter ended November 28, 2009, we
      determined that the financial statements of our directly owned subsidiary
      in Japan contained errors due to improper accounting for certain product
      sales in the fourth quarter of fiscal 2008.  The correction of
      these errors, which were deemed to be immaterial, resulted in an
      additional $0.8 million of sales that were adjusted from the fourth
      quarter of fiscal 2008 to the quarter ended November 29,
      2008.  After considering the impact of this correction,
      international sales declined primarily due to decreased sales at our
      directly owned offices in the United Kingdom and Australia, and decreased
      international product sales as a majority of these sales transitioned to
      Franklin Covey Products, LLC.  Decreased sales in the United
      Kingdom and Australia were primarily due to weakening economic conditions
      and the translation impact of a strengthening United States dollar against
      the functional currencies of these offices.  Partially
      offsetting these decreases were increased sales in Japan, primarily
      resulting from the translation of a weakening United States dollar against
      the Japanese yen during the quarter, and increased licensee
      royalties.  Although the United States dollar fluctuated
      significantly against the currencies of the countries where we have
      directly owned international offices, the translation of foreign sales to
      United States dollars had a net $0.2 million favorable impact on our
      consolidated sales during the quarter ended November 29,
    2008.





Product
Sales–Consolidated product sales, which primarily consist of planners, binders,
totes, software, and handheld electronic planning devices that were primarily
sold through our CSBU channels, declined $35.1 million compared to the prior
year primarily due to the sale of our CSBU during the fourth quarter of fiscal
2008.  Remaining product sales primarily consist of products and
related accessories sold in Japan by our directly owned office in that
country.





Leasing
Sales – Following the sale of the CSBU and its corresponding impact on
consolidated sales, we determined that it was appropriate to separately disclose
leasing sales and cost of sales on our condensed consolidated income
statements.  Leasing revenues are primarily derived from various
sub-lease arrangements for office space on our corporate campus located in Salt
Lake City, Utah.  The corresponding cost of sales on these leases
represents certain costs associated with the operation of the leased space and
does not include any lease expense on the underlying corporate campus since we
account for that lease as a financing arrangement.





18


Gross
Profit





Gross
profit consists of net sales less the cost of services provided or the cost of
products sold.  For the quarter ended November 29, 2008, our
consolidated gross profit decreased to $21.7 million compared to $46.0 million
in the first quarter of fiscal 2008.  The decrease in gross profit was
primarily attributable to decreased product sales resulting from the sale of
CSBU.  Our consolidated gross margin, which is gross profit stated in
terms of a percentage of sales, decreased to 61.8 percent of sales compared to
62.5 percent in fiscal 2008.





Our
training and consulting services gross margin was 63.8 percent compared to 68.6
percent in the prior year.  The decrease was primarily attributable to
increased amortization of capitalized curriculum development costs and an
increase in the sales of certain training and consulting services, which have
lower gross margins than other training and consulting
offerings.  These decreases were partially offset by increased
licensee royalty revenues during the quarter, which have virtually no
corresponding cost of sales.





Gross
margin on product sales decreased to 48.8 percent compared to 57.5 percent in
the prior year.  The decrease was primarily due to the sale of CSBU,
which eliminated virtually all of our domestic product
sales.  Remaining product sales consist primarily of product sales
made in Japan, on which the gross margin decreased approximately one percent
compared to the prior year.





Operating
Expenses





Selling, General
and Administrative–Our selling, general, and administrative (SG&A) expenses decreased
$18.2 million compared to the prior year.  The decrease in SG&A
expenses was primarily due to 1) the sale of the CSBU, which reduced
consolidated SG&A by approximately $16.9 million compared to the prior year;
2) reduced advertising expense, primarily due to a reduction in the number of
planned public program events; 3) decreased conference costs, primarily due to
the cancelation of our annual sales and delivery conference; and 4) the
favorable impact of our restructuring plan that was announced in August
2008.  Following the sale of our CSBU in the fourth quarter of fiscal
2008, we initiated a restructuring plan that reduced the number of our domestic
regional sales offices, decentralized certain sales support functions, and
significantly changed the operations of our Canadian subsidiary.  The
restructuring plan is intended to strengthen the remaining domestic sales
offices and reduce our overall operating costs.  We believe that this
restructuring effort will further reduce SG&A expenses in future periods and
improve our operating results.  These reductions in SG&A were
partially offset by a $0.8 million increase in share-based compensation expense
and a $0.8 million increase in foreign exchange losses resulting from
transactions that were denominated in foreign currencies and the volatility of
foreign exchange rates during the quarter.  Our share-based
compensation expense increased due to changes in the estimated number of shares
expected to vest from our long-term incentive plan (LTIP) awards in the first
quarter of fiscal 2008.  As a result of these revisions, we made a
cumulative adjustment to our financial statements during the first quarter of
the prior year, which included a reversal of $0.8 million of compensation
expense recognized in prior periods.





Depreciation and
Amortization–Depreciation expense decreased $0.5 million compared to the same quarter
of fiscal 2008 primarily due to the sale of CSBU assets.  Based upon
expected fixed asset activity in fiscal 2009, we expect depreciation expense to
total approximately $4 million during fiscal 2009.





Amortization
expense from definite-lived intangible assets for the quarter ended November 29,
2008 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 2009 and believe that amortization expense will
total $3.6 million for the current fiscal year.





19


Income
Taxes





For the
quarter ended November 29, 2008, we recognized a $0.9 million income tax benefit
compared to an income tax provision of $2.0 million in the first quarter of the
prior year.  The income tax benefit was primarily due to a pre-tax
loss recognized for the quarter ended November 29, 2008.  Our
effective tax benefit rate for the quarter of approximately 62 percent was
higher than statutory combined rates primarily due to foreign withholding taxes
for which we cannot utilize a foreign tax credit, the accrual of taxable
interest income on the management stock loan program, and actual and deemed
dividends from foreign subsidiaries for which we also cannot utilize foreign tax
credits.








LIQUIDITY
AND CAPITAL RESOURCES





At
November 29, 2008 we had $3.5 million of cash and cash equivalents compared to
$15.9 million at August 31, 2008 and our net working capital (current assets
less current liabilities) totaled $5.5 million at November 29, 2008 compared to
$5.3 million at August 31, 2008.  During the first quarter of fiscal
2009, we used substantially all of the net cash proceeds from the sale of CSBU
to purchase approximately 3.0 million shares of our common stock in a modified
“Dutch Auction” tender offer.  The tender offer closed, fully
subscribed, prior to August 31, 2008 and we recorded a $28.2 million liability
for the shares on our consolidated balance sheet with a corresponding increase
to treasury stock in shareholders’ equity.  We paid the tender offer
obligation during the quarter ended November 29, 2008, which reduced our
available cash at the end of the quarter.





Our
primary sources of liquidity are cash flows from the sale of services in the
normal course of business and proceeds from our $25.0 million revolving line of
credit.  In connection with the sale of the CSBU assets during the
fourth quarter of fiscal 2008, our line of credit agreements with our previous
lenders were modified (the Modified Credit Agreement).  The Modified
Credit Agreement removed one lender from the credit facility, but continues to
provide a total of $25.0 million of borrowing capacity until June 30, 2009, when
the borrowing capacity will be reduced to $15.0 million.  In addition,
the interest rate on the credit facility increased from LIBOR plus 1.10 percent
to LIBOR plus 1.50 percent (5.5 percent at November 29, 2008), which was
effective on the date of the modification agreement.  The line of
credit obligation was classified as a component of current liabilities primarily
due to our intention to repay amounts outstanding before the agreement
expires.  The Modified Credit Agreement expires on March 14, 2010 (no
change) and we may draw on the credit facilities, repay, and draw again, on a
revolving basis, up to the maximum loan amount available so long as no event of
default has occurred and is continuing.  We may use the line of credit
facility for general corporate purposes as well as for other transactions,
unless prohibited by the terms of the Modified Credit Agreement.  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 November 29, 2008, we
believe that we were in compliance with the terms and financial covenants of our
credit facilities.  At November 29, 2008, we had $18.8 million
outstanding on the line of credit.





In
addition to our $25.0 million line of credit, we have 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 long-term financing obligation.


20


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 November 29, 2008.





Cash
Flows From Operating Activities





Our cash
used for operating activities totaled $1.7 million for the quarter ended
November 29, 2008 compared to $5.6 million of net cash provided by operating
activities for the quarter ended December 1, 2007.  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 for direct costs necessary to conduct
training programs, payments for selling, general, and administrative expenses,
and payments to suppliers for materials used in products sold.  Cash
provided by or used for changes in working capital during the quarter ended
November 29, 2008 was primarily related to 1) cash paid to decrease accrued
liabilities (primarily year-end bonuses and commissions) and accounts payable
from seasonally high August 31 balances; 2) cash received from Franklin Covey
Products, LLC to reduce the receivable from them; and 3) cash received from
collections of accounts receivable.  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 $1.0 million for the quarter ended
November 29, 2008.  Our primary uses of cash for investing activities
were the purchase of property and equipment and additional spending on
curriculum development.  Our purchases of property and equipment,
which totaled $0.6 million, consisted primarily of computer software, computer
hardware, and office furniture and equipment.  During the first
quarter of fiscal 2008, we spent $0.4 million for further investment in
curriculum development.





Cash
Flows From Financing Activities





Net cash
used for financing activities during the quarter ended November 29, 2008 totaled
$9.5 million, which consisted primarily of the payment of our $28.2 million
tender offer obligation (described above) that was partially offset by $18.8
million of net proceeds from our line of credit facility.





Sources
of Liquidity





Going
forward, we will continue to incur costs necessary for the operation and
potential growth of the business.  We anticipate using cash on hand,
cash provided by the sale of services and products to our clients on the
condition that we can continue to generate positive cash flows from operating
activities, and other financing alternatives, if necessary, for these
expenditures.  We anticipate that our existing capital resources
should be adequate to enable us to maintain our operations for at least the
upcoming twelve months.  However, our ability to maintain adequate
capital for our operations in the future is dependent upon a number of factors,
including sales trends, our ability to contain costs, levels of capital
expenditures, collection of accounts receivable, purchases of our common stock,
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, or at
all.





21


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)
lease payments resulting from the sale of our corporate campus (financing
obligation); 2) payments to EDS for outsourcing services related to information
systems, warehousing, and distribution services; 3) minimum rent payments for
office and warehouse space; 4) mortgage payments on certain buildings and
property; and 5) short-term purchase obligations for inventory items and other
products and services used in the ordinary course of business.  Except
for the payment of our tender obligation, which occurred in the quarter ended
November 29, 2008, there have been no significant changes to our expected
required contractual obligations from those disclosed at August 31,
2008.





Our
contractual obligations as disclosed in our Form 10-K for the year ended August
31, 2008 exclude unrecognized tax benefits under FIN 48 of $4.2 million for
which we cannot make a reasonably reliable estimate of the amount and period of
payment.





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 11 to our consolidated financial statements on Form
10-K for the fiscal year ended August 31, 2008.  The inability of the
Company to collect all, or a portion, of these receivables could have an adverse
impact upon our financial position and future cash flows compared to full
collection of the loans.








USE
OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES





Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.  The
significant accounting polices used to prepare our consolidated financial
statements are outlined in Note 1 of the consolidated financial statements
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2008.  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 within 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:





·
            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.


22





·
            Products – We sold
      planners, binders, planner accessories, handheld electronic devices, and
      other related products that were primarily delivered through our CSBU
      channels prior to the fourth quarter of fiscal 2008.  We
      continue to sell these products in certain international
      locations.





We
recognize revenue in accordance with SAB No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104, Revenue
Recognition.  Accordingly, we recognize 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 or
determinable, and 4) collectibility is reasonably assured.  For
training and service sales, these conditions are generally met upon presentation
of the training seminar or delivery of the consulting services.  For
product sales, these conditions are generally met upon shipment of the product
to the customer or by completion of the sales transaction in a retail
store.





Some of
our training and consulting contracts contain multiple deliverable elements that
include training along with other products and services.  For
transactions that contain more than one element, we recognize revenue in
accordance with EITF Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables.When fair value exists for all
contracted elements, the overall contract consideration is allocated among the
separate units of accounting based upon their relative fair
values.  Revenue for these units is recognized in accordance with our
general revenue policies once it has been determined that the delivered items
have standalone value to the customer.  If fair value does not exist
for all contracted elements, revenue for the delivered items is recognized using
the residual method, which generally means that revenue recognition is postponed
until the point is reached when the delivered items have standalone value and
fair value exists for the undelivered items.  Under the residual
method, the amount of revenue considered for recognition under our general
revenue policies is the total contract amount, less the aggregate fair value of
the undelivered items.  Fair value of the undelivered items is based
upon the normal pricing practices for our existing training programs, consulting
services, and other products, which are generally the prices of the items when
sold separately.





Our
international strategy includes the use of licensees in countries where we do
not have a wholly-owned operation.  Licensee companies are unrelated
entities that have been granted a license to translate our content and
curriculum, adapt the content and curriculum to the local culture, and sell our
training seminars and products in a specific country or
region.  Licensees are required to pay us royalties based upon a
percentage of the licensee’s sales.  We recognize royalty income each
period based upon the sales information reported to the Company from the
licensee.  Royalty revenue is reported as a component of training and
consulting service sales in our consolidated income statements.





Revenue
is recognized on software sales in accordance with 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
multiple elements, including a license and post contract customer support
(PCS).  Currently we do not have VSOE for either the license or
support elements of our software sales.  Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement fee
is recognized over the support period.





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





Share-Based
Compensation





We have 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


23


participants
is variable and is based entirely upon the achievement of specified financial
performance objectives 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.





During
the quarter ended November 29, 2008, we granted LTIP awards for 205,700 shares
of common stock (the target award) to be awarded if we achieve 100 percent of
the specified financial results for the fiscal 2009 award, which are primarily
based on cumulative operating income growth over the performance period ending
August 31, 2011.  The grant date fair value of our common stock was
$4.60 per share and the fiscal 2009 LTIP award is being expensed on a straight
line basis over the performance period less a five percent estimated forfeiture
rate.  The final amount of compensation expense recognized on the
fiscal 2009 LTIP will equal the number of shares finally awarded multiplied by
$4.60 per share.





We
currently do not anticipate that any shares of common stock will be awarded
under the terms of the fiscal 2007 LTIP and we did not record any compensation
expense for this award during the quarter ended November 29, 2008.





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 the corresponding use of estimated amounts produced additional
volatility in our consolidated financial statements as we recorded cumulative
adjustments to the estimated number of common shares to be awarded under the
LTIP grants as described above.





We
estimate the value of our stock option awards on the date of grant using the
Black-Scholes option pricing model.  However, we did not grant any
stock options during the quarter ended November 29, 2008 or during the fiscal
years ended August 31, 2008 or 2007 and we did not have any remaining
unrecognized compensation expense associated with unvested stock options at
November 29, 2008.





Accounts
Receivable Valuation





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





Our
allowance for doubtful accounts calculations contain uncertainties because the
calculations require us to make assumptions and judgments regarding the
collectibility of customer accounts, which may be influenced by a number of
factors that are not within our control, such as the financial health of each
customer.  We regularly review the collectibility assumptions of our
allowance for doubtful accounts calculation and compare them against historical
collections.  Adjustments to the assumptions may either increase or
decrease our total allowance for doubtful accounts.  For example, a 10
percent increase to our allowance for doubtful accounts at November 29, 2008
would reduce our reported income from operations by approximately $0.1
million.





24


Inventory
Valuation





Following
the sale of our CSBU, our inventories were comprised primarily of training
materials and related 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 reserves methodology during the past three years, our inventory
requirements may change based on projected customer demand, technological and
product life cycle changes, longer or shorter than expected usage periods, and
other factors that could affect the valuation of our inventories.  If
our estimates regarding consumer demand and other factors are inaccurate, we may
be exposed to losses that may have a materially adverse impact upon our
financial position and results of operations.





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 2008 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.


25


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.





Income
Taxes





We
regularly evaluate our United States federal and various state and foreign
jurisdiction income tax exposures.  We account for certain aspects of
our income tax provision using the provisions of 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.





We record
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, we consider all available evidence.  In many instances,
sufficient positive evidence may not be available until the expiration of the
statute of limitations for audits by taxing jurisdictions, at which time the
entire benefit will be recognized as a discrete item in the applicable
period.





Our
unrecognized tax benefits result from uncertain tax positions about which we are
required to make assumptions and apply judgment to estimate the exposures
associated with our various tax filing positions.  The calculation of
our income tax provision or benefit, as applicable, requires estimates of future
taxable income or losses.  During the course of the fiscal year, these
estimates are compared to actual financial results and adjustments may be made
to our tax provision or benefit to reflect these revised
estimates.  Our effective income tax rate is also affected by changes
in tax law and the results of tax audits by various
jurisdictions.  Although we believe that our judgments and estimates
discussed herein are reasonable, actual results could differ, and we could be
exposed to losses or gains that could be material.








ACCOUNTING
PRONOUNCEMENTS ISSUED NOT YET ADOPTED





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





Derivatives
Disclosures– In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  Statement No. 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to


26


enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows.  The provisions of SFAS No. 161
are effective for our third quarter of fiscal 2009.  The Company is
currently evaluating the impact of the provisions of SFAS No. 161, but due to
our limited use of derivative instruments we do not currently anticipate that
the provisions of SFAS No. 161 will have a material impact on our financial
statements.








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





Certain
written and oral statements made by the Company in this report 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 training and consulting sales
activity, expected acceptance of our offerings in the marketplace, anticipated
expenses, projected cost reduction and strategic initiatives, our expectations
about the effect of the sale of the CSBU on our business, our expectations about
our restructuring plan, expected levels of depreciation expense, expectations
regarding tangible and intangible asset valuation expenses, the seasonality of
future sales, the seasonal fluctuations in cash used for and provided by
operating activities, 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, the ability to borrow on
our line of credit, expected repayment of our line of credit in future periods,
estimated capital expenditures, the adequacy of our existing capital resources,
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 the report on Form 10-K for the fiscal year ended August 31, 2008, 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; further
deterioration of domestic or international economic conditions; 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.  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


27


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 November 29, 2008 we utilized foreign currency forward
contracts to manage the volatility of certain intercompany financing
transactions and other transactions that are denominated in foreign
currencies.  Because these contracts do not meet specific hedge
accounting requirements, gains and losses on these contracts, which expire on a
quarterly basis, are recognized currently and are used to offset a portion of
the gains or losses of the related accounts.  The gains and losses on
these contracts were recorded as a component of SG&A expense in our
consolidated income statements and had the following net impact on the periods
indicated (in thousands):





Quarter
      EndedNovember
      29,
                                2008
                              
                              
                              December
      1,
                                2007Losses
      on foreign exchange contracts
                              
                              $
                              (260
                              )
                              
                              $
                              (128
                              )Gains
      on foreign exchange contracts
                              
                              
                              23
                              
                              
                              
                              -Net
      gain (loss) on foreign exchange contracts
                              
                              $
                              (237
                              )
                              
                              $
                              (128
                              )





28


At
November 29, 2008, 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 contracts
that did not qualify for hedge accounting were as follows at November 29, 2008
(in thousands):





Contract
      Description
                
                Notional
      Amount in Foreign Currency
                
                
                Notional
      Amount in U.S. DollarsJapanese
      Yen
                
                
                140,000
                
                
                $
                1,528Great
      British Pounds
                
                
                500
                
                
                
                766Australian
      Dollars
                
                
                120
                
                
                
                78





During
the quarter ended November 29, 2008, 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 November 29, 2008, our debt
balances consisted primarily of a fixed-rate financing obligation associated
with the sale of our corporate headquarters facility, a variable-rate line of
credit arrangement, and a variable rate long-term mortgage on certain of our
buildings and property.  Our overall interest rate sensitivity will be
influenced primarily 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 November 29, 2008
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 November 29, 2008 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 not effective as of the end of the period covered by this Quarterly Report
on Form 10-Q.  Based upon our evaluation, we determined that material
weaknesses existed in our Japan subsidiary that relate to: i) the lack
of controls to ensure the approval and appropriate accounting treatment of
non-standard shipping terms on product sales and ii) the calculation of
inventory reserves which was not designed in a manner to evalute
obsolescene at the individual product level.  As a
result of these material weaknesses, errors occurred in our financial reporting
(see Note 2 to the condensed consolidated financial
statements).




29







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.





30


PART
II.  OTHER INFORMATION





Item
1A.         RISK
FACTIORS





For
further information regarding Risk Factors, please refer to Item 1A in our
Annual Report on Form 10-K for the fiscal year ended August 31,
2008.





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





The
Company acquired the following securities during the fiscal quarter ended
November 29, 2008:


Period
                    
                    Total
      Number of Shares Purchased
                    
                    
                    Average
      Price Paid Per Share
                    
                    Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                    
                    Maximum
      Dollar Value of Shares That May Yet Be Purchased Under the Plans or
      ProgramsCommon
      Shares:
                    
                    
                    
                    
                    
                    
                    
                    
                    (in
      thousands)September
      1, 2008 to
                      October
      4, 2008
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    none
                    
                    $
                    2,413October
      5, 2008 to
                      November
      1, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    none
                    
                    
                    2,413November
      2, 2008 to
                      November
      29, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    none
                    
                    
                    2,413
                    (1)Total
      Common Shares
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    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 November 29,
      2008.








Item
6.        EXHIBITS







(A)
                  Exhibits:10.1
                  Second
      Amendment to the Franklin Covey Co. 2004 Non-Employee Directors Stock
      Incentive Plan31.1
                  Rule
      13a-14(a) Certifications of the Chief Executive Officer31.2
                  Rule
      13a-14(a) Certifications of the Chief Financial Officer32
                  Section
      1350
Certifications

















31





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 13, 2009
                                              
                                              By:
                                              /s/ Robert A. WhitmanRobert A. WhitmanChief Executive OfficerDate:
                                              January 13, 2009
                                              
                                              By:
                                              /s/ Stephen D. YoungStephen D. YoungChief Financial
Officer

















32