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
                1934For
                the quarterly period ended November 26, 2005o
            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
            
            XNo





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).





YesNo
            
            X





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





YesNo
            
            X





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





20,311,785 shares
      of Common Stock as of January 6, 2006





**Table
      of Contents**


Condensed
                  Consolidated Balance
                  SheetsCondensed
                Consolidated Income
                StatementsCondensed
                  Consolidated Statements of Cash
                  FlowsNote
                  1 - Basis of PresentationNote
                  2 - Accounting for Stock-Based
                  CompensationNote
                  3 - Restricted CashNote
                  4 - InventoriesNote
                  5 - Intangible AssetsNote
                  6 - Preferred Stock RedemptionNote
                  7 - Comprehensive IncomeNote
                  8 - Earnings (Loss) Per common
                  ShareNote
                  9 - Segment InformationNote
                  10 - Subsequent EventResults
                  of OperationsLiquidity
                  and Capital ResourcesUse
                  of Estimates and Critical Accounting
                  PoliciesNew
                  Accounting
                  PronouncementsMarket
                  Risk of Financial
                  InstrumentsSafe
                  Harbor StatementOther
                  InformationExhibit
                  31Exhibit
                  32Signatures








PART
      I.
      FINANCIAL INFORMATION


ITEM
      1.
      FINANCIAL STATEMENTS




FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(in
      thousands, except per share amounts)





November
                26,
              2005
            
            August
                31,
              2005(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            32,828
            
            $
            51,690Restricted
                cash
            
            
            -
            
            
            699Accounts
                receivable, less allowance for doubtfulaccounts
                of $1,708 and $1,425
            
            
            27,531
            
            
            22,399Inventories
            
            
            24,740
            
            
            20,975Other
                current assets
            
            
            8,040
            
            
            9,419Total
                current assets
            
            
            93,139
            
            
            105,182Property
                and equipment, net
            
            
            33,989
            
            
            35,277Intangible
                assets, net
            
            
            82,249
            
            
            83,348Other
                long-term assets
            
            
            9,951
            
            
            9,426$
            219,328
            
            $
            233,233LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt and financing obligation
            
            $
            553
            
            $
            1,088Accounts
                payable
            
            
            12,794
            
            
            13,704Income
                taxes payable
            
            
            4,012
            
            
            3,996Accrued
                liabilities
            
            
            32,354
            
            
            36,536Total
                current liabilities
            
            
            49,713
            
            
            55,324Long-term
                debt and financing obligation, less current portion
            
            
            33,956
            
            
            34,086Other
                liabilities
            
            
            1,292
            
            
            1,282Deferred
                income tax liability
            
            
            9,715
            
            
            9,715Total
                liabilities
            
            
            94,676
            
            
            100,407Shareholders’
                equity:Preferred
                stock-Series A, no par value; 4,000 shares authorized, 1,894 and
                2,294
                shares issued; liquidation preference totaling $48,528 and
                $58,788
            
            
            47,345
            
            
            57,345Common
                stock - $0.05 par value; 40,000 shares authorized,27,056
                shares issued
            
            
            1,353
            
            
            1,353Additional
                paid-in capital
            
            
            188,415
            
            
            190,760Common
                stock warrants
            
            
            7,611
            
            
            7,611Accumulated
                deficit
            
            
            (11,265
            )
            
            (14,498
            )Deferred
                compensation on unvested stock grants
            
            
            -
            
            
            (1,055
            )Accumulated
                other comprehensive income
            
            
            191
            
            
            556Treasury
                stock at cost, 6,457 and 6,465 shares
            
            
            (108,998
            )
            
            (109,246
            )Total
                shareholders’ equity
            
            
            124,652
            
            
            132,826$
            219,328
            
            $
            233,233




See
      notes
      to condensed consolidated financial statements.





FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED INCOME
      STATEMENTS


(in
      thousands, except per share amounts)





Quarter
                EndedNovember
                26, 2005
            
            November
                27, 2004(unaudited)Net
                sales:Products
            
            $
            43,403
            
            $
            44,051Training
                and consulting services
            
            
            28,948
            
            
            25,05372,351
            
            
            69,104Cost
                of sales:Products
            
            
            18,664
            
            
            19,808Training
                and consulting services
            
            
            9,281
            
            
            7,86127,945
            
            
            27,669Gross
                margin
            
            
            44,406
            
            
            41,435Selling,
                general, and administrative
            
            
            37,767
            
            
            35,930Depreciation
            
            
            1,408
            
            
            2,178Amortization
            
            
            1,095
            
            
            1,043Income
                from operations
            
            
            4,136
            
            
            2,284Interest
                income
            
            
            330
            
            
            118Interest
                expense
            
            
            (643
            )
            
            (38
            )Income
                before provision for income taxes
            
            
            3,823
            
            
            2,364Provision
                for income taxes
            
            
            (590
            )
            
            (838
            )Net
                income
            
            
            3,233
            
            
            1,526Preferred
                stock dividends
            
            
            (1,379
            )
            
            (2,184
            )Net
                income (loss) available to common shareholders
            
            $
            1,854
            
            $
            (658
            )Net
                income (loss) available to common shareholdersper
                share:Basic
            
            $
            .09
            
            $
            (.03
            )Diluted
            
            $
            .09
            
            $
            (.03
            )Weighted
                average number of common shares:Basic
            
            
            20,331
            
            
            19,729Diluted
            
            
            20,642
            
            
            19,729




See
      notes
      to condensed consolidated financial statements.


FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS


(in
      thousands)


Quarter
                EndedNovember
                26,
              2005
            
            November
                27,
              2004(unaudited)Cash
                flows from operating activities:Net
                income
            
            $
            3,233
            
            $
            1,526Adjustments
                to reconcile net income to net cash used for operatingactivities:Depreciation
                and amortization
            
            
            3,037
            
            
            3,736Restructuring
                cost reversal
            
            
            -
            
            
            (306
            )Stock-based
                compensation cost
            
            
            77
            
            
            41Changes
                in assets and liabilities:Increase
                in accounts receivable, net
            
            
            (5,424
            )
            
            (4,404
            )Increase
                in inventories
            
            
            (3,865
            )
            
            (5,245
            )Decrease
                (increase) in other assets
            
            
            1,423
            
            
            (95
            )Decrease
                in accounts payable and accrued liabilities
            
            
            (4,597
            )
            
            (1,545
            )Increase
                (decrease) in other long-term liabilities
            
            
            (89
            )
            
            128Increase
                in income taxes payable
            
            
            39
            
            
            715Net
                cash used for operating activities
            
            
            (6,166
            )
            
            (5,449
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (599
            )
            
            (621
            )Purchases
                of short-term investments
            
            
            -
            
            
            (3,603
            )Sales
                of short-term investments
            
            
            -
            
            
            4,583Curriculum
                development costs
            
            
            (702
            )
            
            (558
            )Net
                cash used for investing activities
            
            
            (1,301
            )
            
            (199
            )Cash
                flows from financing activities:Principal
                payments on long-term debt and financing obligation
            
            
            (681
            )
            
            (31
            )Change
                in restricted cash
            
            
            699
            
            
            -Proceeds
                from sales of common stock from treasury
            
            
            126
            
            
            25Proceeds
                from management stock loan payments
            
            
            134
            
            
            -Redemption
                of preferred stock
            
            
            (10,000
            )
            
            -Purchase
                of treasury shares
            
            
            -
            
            
            (22
            )Payment
                of preferred stock dividends
            
            
            (1,629
            )
            
            (2,184
            )Net
                cash used for financing activities
            
            
            (11,351
            )
            
            (2,212
            )Effect
                of foreign exchange rates on cash and cash equivalents
            
            
            (44
            )
            
            (74
            )Net
                decrease in cash and cash equivalents
            
            
            (18,862
            )
            
            (7,934
            )Cash
                and cash equivalents at beginning of the period
            
            
            51,690
            
            
            31,174Cash
                and cash equivalents at end of the period
            
            $
            32,828
            
            $
            23,240Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            673
            
            $
            27Cash
                paid for income taxes
            
            $
            599
            
            $
            395Non-cash
                investing and financing activities:Accrued
                preferred stock dividends
            
            $
            1,184
            
            $
            2,184Capital
                lease financing of property and equipment purchases
            
            
            109




See
      notes
      to condensed consolidated financial statements.





FRANKLIN
      COVEY CO.





NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)







**NOTE
      1 - BASIS OF PRESENTATION**





Franklin
      Covey Co. (hereafter referred to as us, we, our, or the Company) provides
      integrated consulting, training, and performance enhancement solutions to
      organizations and individuals in strategy execution, productivity, leadership,
      sales force effectiveness, effective communications, and other areas. Each
      integrated solution may include components of training and consulting,
      assessment, and other application tools that are generally available in
      electronic or paper-based formats. Our products and services are available
      through professional consulting services, public workshops, retail stores,
      catalogs, and the Internet at www.franklincovey.com .
      The
      Company’s historically best-known offerings include the FranklinCovey PlannerTM,
      and a suite of new and updated individual-effectiveness and
      leadership-development training products based on the best-selling book *The
      7
      Habits of Highly Effective People* .
      We also
      offer a range of training and assessment products to help organizations achieve
      superior results by focusing and executing on top priorities, building the
      capability of knowledge workers, and aligning business processes. These
      offerings include the popular workshop *FOCUS:
      Achieving Your Highest Priorities* TM, *The
      4
      Disciplines of Execution* TM, *The
      4
      Roles of Leadership* TM, *Building
      Business Acumen: What the CEO Wants You to Know* TM,
      the
      Advantage Series communication workshops, and the *Execution
      Quotient* ( *xQ* TM)
      organizational assessment tool.





The
      accompanying unaudited condensed consolidated financial statements reflect,
      in
      the opinion of management, all adjustments (which include only normal recurring
      adjustments) necessary to present fairly the financial position and results
      of
      operations of the Company as of the dates and for the periods indicated. Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America have been condensed or omitted pursuant to Securities
      and Exchange Commission (SEC) rules and regulations. The information included
      in
      this quarterly report on Form 10-Q should be read in conjunction with the
      financial statements and related notes included in our Annual Report on Form
      10-K for the fiscal year ended August 31, 2005.





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 end on November 26, 2005, February 25, 2006, and May 27, 2006 during fiscal
      2006. Under the modified 52/53-week fiscal year, the quarter ended November
      26,
      2005 had one less business day than the quarter ended November 27,
      2004.





The
      results of operations for the quarter ended November 26, 2005 are not indicative
      of results expected for the entire fiscal year ending August 31,
      2006.





Certain
      reclassifications have been made to the fiscal 2005 financial statements to
      conform with the current period presentation.







**NOTE
      2 - ACCOUNTING FOR STOCK-BASED
      COMPENSATION**





On
      September 1, 2005, the Company adopted the provisions of Statement of Financial
      Accounting Standards No. 123 (Revised 2004), *Share-Based
      Payment* (SFAS
      No.
      123R), which is a revision of SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      Statement 123R supersedes Accounting Principles Board (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS No. 95, *Statement
      of Cash Flows* .
      Statement No. 123R requires all share based-payments to employees, including
      grants of stock options and the compensatory elements of employee stock purchase
      plans, to be recognized in the income statement based upon their fair values.
      Pro forma disclosure is no longer an alternative.





We
      previously accounted for our stock-based compensation using the intrinsic method
      as defined in APB Opinion No. 25 and accordingly, we have not previously
      recognized any expense for our employee stock purchase plan or incentive stock
      option plan in our consolidated financial statements. We used the modified
      prospective transition method during the quarter ended November 26, 2005 to
      adopt the provisions of SFAS No. 123R. Under this method, unvested awards at
      the
      date of adoption as well as awards that are granted, modified, or settled after
      the date of adoption will be measured and accounted for in accordance with
      Statement 123R. Based upon our analysis of the requirements of SFAS No. 123R,
      we
      determined that our employee stock purchase plan is a compensatory plan and
      we
      will be required to expense the discount on the shares purchased by the plan
      participants. In addition, SFAS No. 123R required us to reclassify our
      unamortized deferred compensation related to the issuance of unvested common
      stock awards reported in the equity section of our balance sheet to additional
      paid-in capital. Overall, the impact of adopting SFAS No. 123R had an immaterial
      effect upon our consolidated financial statements for the quarter ended November
      26, 2005 and we recorded approximately $9,000 in stock-based compensation
      expense related to stock options and shares issued under our employee stock
      purchase plan.





The
      following is a summary of our stock-based compensation plans at November 26,
      2005.





**Stock
      Options**





Our
      Board
      of Directors have approved an incentive stock option plan whereby options to
      purchase shares of our common stock are issued to key employees at an exercise
      price not less than the fair market value of the Company’s common stock on the
      date of grant. The term, not to exceed ten years, and exercise period of each
      incentive stock option awarded under the plan are determined by a committee
      appointed by our Board of Directors. In addition to stock options granted from
      the incentive stock option plan in prior years, we granted a fully vested stock
      award and other unvested stock awards during fiscal 2005 (refer to discussion
      below) from the incentive stock option plan, which also reduced the number
      of
      shares available for granting under the incentive option plan. At November
      26,
      2005, we had approximately 836,000 shares available to grant under this
      incentive stock option plan. A summary of our stock option activity is presented
      below:





Number
                of Stock Options
            
            Weighted
                Avg. Exercise PriceOutstanding
                at August 31, 2004
            
            
            2,505,659
            
            $
            12.37Granted
            
            
            -
            
            
            -Exercised
            
            
            (15,000
            )
            
            1.73Forfeited
            
            
            (204,775
            )
            
            12.58Outstanding
                at August 31, 2005
            
            
            2,285,884
            
            
            12.40Granted
            
            
            -
            
            
            -Exercised
            
            
            (20,000
            )
            
            4.49Forfeited
            
            
            (65,600
            )
            
            18.10Outstanding
                at November 26, 2005
            
            
            2,200,284
            
            
            12.30





Compensation
      expense associated with the remaining portion of requisite service under
      previously issued unvested stock options was immaterial during the quarter
      ended
      November 26, 2005 and the remaining unamortized service cost on previously
      issued stock options is immaterial in aggregate. The intrinsic value of stock
      options exercised during the quarter ended November 26, 2005 and for the fiscal
      year ended August 31, 2005 was less than $0.1 million in each period. The
      fair market value of options that vested during the quarter was approximately
      $6,000.





The
      following table summarizes exercisable stock option information for the periods
      indicated:





November
                26, 2005
            
            August
                31,
              2005Exercisable
                stock options
            
            
            2,175,284
            
            
            2,248,384Weighted
                average exercise price per share
            
            $
            12.43
            
            $
            12.58





The
      following additional information applies to our stock options outstanding at
      November 26, 2005:





·
            A
                total of 241,474 options outstanding have exercise prices between
                $1.70
                per share and $7.00 per share, with a weighted average exercise price
                of
                $5.33 per share and a weighted average remaining contractual life
                of 4.2
                years. At November 26, 2005, 216,474 of these options were exercisable
                and
                had a weighted average exercise price of $5.75 per share.  The
                aggregate intrinsic value of these stock options outstanding was
                $0.4
                million and for exercisable stock options in this price range was
                $0.3
                million.  The aggregate intrinsic value represents the total pre-tax
                intrinsic value, based on our closing stock price of $7.00 per share
                as of
                November 26, 2005, which would have been received by option holders
                had
                all option holders exercised their options as of that date.  As all
                other stock options have an exercise price higher than the closing
                stock
                price at the end of our first quarter of fiscal 2006, the intrinsic
                value
                of these options is zero.·
            We
                have 344,500 options outstanding that have exercise prices ranging
                from
                $7.19 per share to $9.69 per share, with a weighted average exercise
                price
                of $9.08 per share and a weighted average remaining contractual life
                of
                3.8 years. At November 26, 2005, all of these options were
                exercisable.·
            We
                granted 1,602,000 options to our CEO under terms of a Board and
                shareholder approved employment agreement. These options have an
                exercise
                price of $14.00 per share, with a weighted average remaining contractual
                life of 4.8 years. As a result of changes to the CEO’s compensation
                arrangement in fiscal 2005, all of these options were vested in fiscal
                2005 and were exercisable at November 26, 2005.·
            The
                remaining 12,310 stock options outstanding have exercise prices between
                $17.69 per share and $21.50 per share, with a weighted average exercise
                price of $18.94 per share and a weighted average remaining contractual
                life of 1.5 years. At November 26, 2005, all of these options were
                exercisable.





The
      Company did not issue any stock options to vendors or other non-employees for
      inventory or services provided during the quarter ended November 26,
      2005.





**Unvested
      Stock Awards**





During
      fiscal 2005, the Company granted shares of our common stock to certain employees
      and non-employee members of our Board of Directors in the form of unvested
      stock
      awards. At November 26, 2005, the weighted average vesting period of our
      unvested stock awards was 3.6 years, assuming no acceleration. The intrinsic
      value of our unvested stock awards was $2.9 million, which was based upon our
      closing stock price of $7.00 per share as of November 26, 2005.  A summary
      of our unvested stock award activity is presented below (in thousands, except
      share amounts):





Number
                of Unvested Shares
            
            Compensation
                CostOutstanding
                shares and unamortized compensation cost at August 31,
                2004
            
            
            303,660
            
            
            732Granted
            
            
            376,090
            
            
            1,147Vested
            
            
            (258,205
            )
            
            -Forfeited
            
            
            (12,250
            )
            
            (33
            )Amortization
                of compensation
            
            
            n/a
            
            
            (791
            )Outstanding
                shares and unamortized compensation cost at August 31,
                2005
            
            
            409,295
            
            $
            1,055Granted
            
            
            -
            
            
            -Vested
            
            
            -
            
            
            -Amortization
                of compensation
            
            
            n/a
            
            
            (68
            )Outstanding
                shares and unamortized compensation cost at November 26,
                2005
            
            
            409,295
            
            
            987





***Employee
      Awards*** **-** Unvested
      stock awards granted to employees vest five years from the grant date or on
      an
      accelerated basis if we achieve specified earnings levels. The compensation
      cost
      of the unvested stock awards was based on the fair value of the shares on the
      grant date. The compensation cost related to these unvested stock awards is
      expensed on a straight-line basis over the vesting (service) period of the
      awards and will be accelerated when we believe that it is probable that we
      will
      achieve the specified earnings thresholds and the shares will vest. In
      connection with these unvested stock awards, the participants were eligible
      to
      receive a cash bonus for a portion of the income taxes resulting from the grant.
      The participants could receive their cash bonus at the time of grant or when
      the
      award shares vest. These cash bonuses totaled $0.5 million for awards granted
      in
      fiscal 2005, which was expensed as the bonuses were paid to the participants
      on
      or around the grant date.





During
      our third quarter of fiscal 2005, we achieved the specified earnings thresholds
      required to accelerate the vesting for one-half of the unvested stock awards
      granted in fiscal 2004 and to our CEO in December 2004. Accordingly, we expensed
      an additional $0.5 million of deferred compensation for the accelerated vesting
      of these unvested stock awards during fiscal 2005.





The
      unvested award shares were issued from common stock held in treasury and had
      a
      cost basis of $5.2 million for awards granted in fiscal 2005. The difference
      between the fair value of the unvested shares granted and their cost, which
      totaled $4.2 million, was recorded as a reduction to additional paid-in
      capital.





During
      the quarter ended November 26, 2005, our Board of Directors approved a long-term
      incentive plan in which certain employees of the Company may be granted unvested
      share awards. This proposed long-term incentive plan is subject to shareholder
      approval at our Annual Shareholders’ Meeting scheduled to be held on January 20,
      2006 and no shares have been granted under this plan.





***Board
      of Director Awards*** **-** During
      fiscal 2005, we awarded 76,090 shares of common stock as unvested stock awards
      to non-employee members of the Board of Directors as part of a shareholder
      approved long-term incentive plan. The fair value of these shares was calculated
      on the grant date and the corresponding compensation cost will be recognized
      over the vesting period of the awards, which is three years. These awards were
      valued at the closing market price of our common stock on the measurement date
      and will result in $0.2 million of compensation cost over the vesting period
      of
      the awards. The cost of the common stock issued from treasury was $1.3 million
      and the difference between the cost of the treasury stock and fair value of
      the
      award, which totaled $1.1 million, was recorded as a reduction of additional
      paid-in capital.





**Pro
      Forma Disclosure of Stock-Based Compensation Cost**





Had
      compensation expense for our stock option plans and employee stock purchase
      plan
      been determined in accordance with the fair value method prescribed by SFAS
      No.
      123, *Accounting
      for Stock-Based Compensation* ,
      and
      SFAS No. 148, *Accounting
      for Stock-Based Compensation: An Amendment of FASB Statement No.* 123,
      our
      net loss attributable to common shareholders and corresponding basic and diluted
      loss per share would have been the following for the first quarter of fiscal
      2005 (in thousands, except for per share amounts):





November
                27,
              2004Net
                loss attributable to common shareholders, as reported
            
            $
            (658
            )Fair
                value of stock-based compensation, net of tax
            
            
            (187
            )Net
                loss attributable to common shareholders, pro forma
            
            $
            (845
            )Basic
                and diluted loss per share, as reported
            
            $
            (.03
            )Basic
                and diluted loss per share, pro forma
            
            $
            (.04
            )








**NOTE
      3 - RESTRICTED CASH**





Restricted
      cash at August 31, 2005 represents a portion of the proceeds from the fiscal
      2005 sale of our corporate campus that was held in escrow to repay the
      outstanding mortgage on one of the buildings that was sold. The mortgage,
      including a prepayment penalty of $0.1 million, was repaid in full during
      September 2005.








**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
                  26,
                2005
              
              August
                  31,
                2005Finished
                  goods
              
              $
              21,447
              
              $
              18,161Work
                  in process
              
              
              368
              
              
              825Raw
                  materials
              
              
              2,925
              
              
              1,989$
              24,740
              
              $
              20,975


**NOTE
      5 - INTANGIBLE ASSETS**





The
      Company’s intangible assets were comprised of the following (in
      thousands):





***November
                26, 2005***
            
            Gross
                Carrying Amount
            
            Accumulated
                Amortization
            
            Net
                Carrying Amount*Definite-lived
                intangible assets:*License
                rights
            
            $
            27,000
            
            $
            (6,715
            )
            $
            20,285Curriculum
            
            
            58,227
            
            
            (25,663
            )
            
            32,564Customer
                lists
            
            
            18,774
            
            
            (12,374
            )
            
            6,400Trade
                names
            
            
            1,277
            
            
            (1,277
            )
            
            -105,278
            
            
            (46,029
            )
            
            59,249*Indefinite-lived
                intangible asset:*Covey
                trade name
            
            
            23,000
            
            
            -
            
            
            23,000Balance
                at November 26, 2005
            
            $
            128,278
            
            $
            (46,029
            )
            $
            82,249***August
                31, 2005****Definite-lived
                intangible assets:*License
                rights
            
            $
            27,000
            
            $
            (6,480
            )
            $
            20,520Curriculum
            
            
            58,232
            
            
            (25,146
            )
            
            33,086Customer
                lists
            
            
            18,774
            
            
            (12,032
            )
            
            6,742Trade
                names
            
            
            1,277
            
            
            (1,277
            )
            
            -105,283
            
            
            (44,935
            )
            
            60,348*Indefinite-lived
                intangible asset:*Covey
                trade name
            
            
            23,000
            
            
            -
            
            
            23,000Balance
                at August 31, 2005
            
            $
            128,283
            
            $
            (44,935
            )
            $
            83,348





The
      Company’s aggregate amortization expense totaled $1.1 million for the quarter
      ended November 26, 2005 and $1.0 million during the quarter ended November
      27,
      2004.








**NOTE
      6 - PREFERRED STOCK REDEMPTION**





On
      November 11, 2005, we redeemed $10.0 million, or approximately 400,000 shares,
      of our currently outstanding Series A Preferred Stock at its liquidation
      preference ($25 per share plus accrued dividends). During the quarter ended
      November 26, 2005, we also announced that we intend to seek shareholder approval
      to amend our articles of incorporation to extend the period during which we
      have
      the right to redeem the outstanding preferred stock at 100 percent of the
      liquidation preference. The amendment would extend the current redemption
      deadline from March 8, 2006 to December 31, 2006. The extension agreement would
      also provide the right to extend the redemption period for an additional year
      to
      December 31, 2007, if another $10.0 million of preferred stock is redeemed
      before December 31, 2006. Knowledge Capital, an entity which holds nearly all
      of
      our outstanding preferred stock, has signed an agreement to vote in favor of
      the
      proposal to extend the redemption period.








**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
                26,
              2005
            
            November
                27,
              2004Net
                income
            
            $
            3,233
            
            $
            1,526Other
                comprehensive income (loss) items:Adjustment
                for fair value of hedge derivatives
            
            
            -
            
            
            (292
            )Foreign
                currency translation adjustments
            
            
            (365
            )
            
            635Comprehensive
                income
            
            $
            2,868
            
            $
            1,869








**NOTE
      8 - EARNINGS (LOSS) PER COMMON SHARE**





Basic
      earnings (loss) per common share (EPS) is calculated by dividing net income
      or
      loss available to common shareholders by the weighted-average number of common
      shares outstanding for the period. Diluted EPS is calculated by dividing net
      income or loss available to common shareholders by the weighted-average number
      of common shares outstanding plus the assumed exercise of all dilutive
      securities using the treasury stock method or the “as converted” method, as
      appropriate. Following the fiscal 2005 preferred stock recapitalization, our
      preferred stock is no longer convertible into common stock or entitled to
      participate in dividends payable to holders of common stock. Accordingly, we
      no
      longer use the two-class method of calculating EPS as defined in SFAS No. 128, *Earnings
      Per Share* ,
      and
      EITF Issue 03-6, *Participating
      Securities and the Two-Class Method under FASB Statement No.
      128* ,
      for
      periods after February 26, 2005.





The
      following table sets forth the computation of basic and diluted EPS for the
      periods indicated (in thousands, except per share amounts):





Quarter
                EndedNovember
                26,
              2005
            
            November
                27,
              2004**Numerator
                for basic and diluted earnings per share:**Net
                income
            
            $
            3,233
            
            $
            1,526Preferred
                stock dividends
            
            
            (1,379
            )
            
            (2,184
            )Net
                income available to common shareholders(1)
            
            $
            1,854
            
            $
            (658
            )**Denominator
                for basic and diluted earnings per share:**Basic
                weighted average shares outstanding
            
            
            20,331
            
            
            19,729Effect
                of dilutive securities(2):Stock
                options
            
            
            46
            
            
            -Unvested
                stock awards
            
            
            265
            
            
            -Diluted
                weighted average shares outstanding
            
            
            20,642
            
            
            19,729**Basic
                and diluted EPS:**Basic
                EPS
            
            $
            .09
            
            $
            (.03
            )Diluted
                EPS
            
            $
            .09
            
            $
            (.03
            )





(1)
            Preferred
                shareholders do not participate in any undistributed losses with
                common
                shareholders; therefore, the two-class method had no impact on the
                November 27, 2004 EPS computation.(2)
            For
              the quarter ended November 27, 2004, conversion of common share
              equivalents is not assumed because such conversion would be
              anti-dilutive.  A total of 6.2 million shares of Series A
              preferred stock on an "as converted" basis and options to purchase
              approximately 12,000 shares of common stock were excluded from the
              EPS
              calculation because of their anti-dilutive
              effect.






At
      November 26, 2005, we had approximately 2.0 million stock options outstanding
      which were not included in the computation of diluted EPS because the options’
exercise prices were greater than the average market price of the Company’s
      common shares. We also had 6.2 million common stock warrants with an exercise
      price of $8.00 per share that were not included in the Company’s EPS calculation
      because their exercise price was higher than the average market price of our
      common stock during the quarter. At November 27, 2004, the Company had
      approximately 2.5 million stock options outstanding and 0.3 million shares
      of
      non-vested restricted common stock that were not considered in the Company’s
      calculation of diluted EPS that may have a dilutive effect on the Company’s EPS
      calculation in future periods.








**NOTE
      9 - SEGMENT INFORMATION**





The
      Company has two segments: the Consumer and Small Business Unit (CSBU) and the
      Organizational Solutions Business Unit (OSBU). The following is a description
      of
      our segments, their primary operating components, and their significant business
      activities:





***Consumer
                and Small Business Unit -***This
                business unit is primarily focused on sales to individual customers
                and
                small business organizations and includes the results of our domestic
                retail stores, consumer direct operations (catalog, eCommerce, and
                public
                seminars programs), wholesale operations, and other related distribution
                channels, including government product sales and domestic printing
                and
                publishing sales. The CSBU results of operations also include the
                financial results of our paper planner manufacturing operations.
                Although
                CSBU sales primarily consist of products such as planners, binders,
                software, and handheld electronic planning devices, virtually any
                component of our leadership, productivity, and strategy execution
                solutions may be purchased through CSBU channels.***Organizational
                Solutions Business Unit -***The
                OSBU is primarily responsible for the development, marketing, sale,
                and
                delivery of strategic execution, productivity, leadership, sales
                force
                performance, and communication training and consulting solutions
                directly
                to organizational clients, including other companies, the government,
                and
                educational institutions. The OSBU includes the financial results
                of our
                domestic sales force and our international operations. The domestic
                sales
                force is responsible for the sale and delivery of our training and
                consulting services in the United States. Our international sales
                group
                includes the financial results of our directly owned foreign offices
                and
                royalty revenues from licensees.





The
      Company’s chief operating decision maker is the CEO, and each of the segments
      has a president who reports directly to the CEO. The primary measurement tool
      used in business unit performance analysis is earnings before interest, taxes,
      depreciation, and amortization (EBITDA), which may not be calculated as
      similarly titled amounts calculated by other companies. For segment reporting
      purposes, the Company’s consolidated EBITDA can be calculated as its
      income from operations excluding depreciation and amortization
      charges.





In
      the
      normal course of business, the Company may make structural and cost allocation
      revisions to its segment information to reflect new reporting responsibilities
      within the organization. During the quarter ended November 26, 2005, we
      transferred our public seminar programs from the domestic unit of OSBU to the
      consumer direct channel in CSBU. We also transferred the operations of certain
      corporate departments, such as Franklin Covey travel and accounts payable,
      to
      the operating segments. All prior period segment information has been revised
      to
      conform to the most recent classifications and organizational changes. The
      Company accounts for its segment information on the same basis as the
      accompanying condensed consolidated financial statements.





SEGMENT
      INFORMATION


(in
                thousands)*Quarter
                Ended*
              *November
                26, 2005*
            
            Sales
                to External Customers
            
            Gross
                Margin
            
            EBITDA
            
            Depreciation
            
            Amortization**Consumer
                and Small Business Unit:**Retail
            
            $
            14,670
            
            $
            8,687
            
            $
            101
            
            $
            441
            
            $
            -Consumer
                direct
            
            
            18,588
            
            
            11,405
            
            
            9,303
            
            
            12
            
            
            -Wholesale
            
            
            6,609
            
            
            3,131
            
            
            2,961
            
            
            -
            
            
            -Other
                CSBU
            
            
            1,163
            
            
            378
            
            
            (8,388
            )
            
            348
            
            
            57Total
                CSBU
            
            
            41,030
            
            
            23,601
            
            
            3,977
            
            
            801
            
            
            57**Organizational
                Solutions Business Unit:**Domestic
            
            
            16,393
            
            
            10,503
            
            
            640
            
            
            80
            
            
            1,036International
            
            
            14,928
            
            
            10,302
            
            
            3,948
            
            
            331
            
            
            2Total
                OSBU
            
            
            31,321
            
            
            20,805
            
            
            4,588
            
            
            411
            
            
            1,038Total
                operating segments
            
            
            72,351
            
            
            44,406
            
            
            8,565
            
            
            1,212
            
            
            1,095Corporate
                and eliminations
            
            
            -
            
            
            -
            
            
            (1,926
            )
            
            196
            
            
            -Consolidated
            
            $
            72,351
            
            $
            44,406
            
            $
            6,639
            
            $
            1,408
            
            $
            1,095*Quarter
                Ended*
              *November
                27, 2004***Consumer
                and Small Business Unit:**Retail
            
            $
            18,387
            
            $
            10,378
            
            $
            353
            
            $
            678
            
            $
            -Consumer
                direct
            
            
            18,859
            
            
            11,388
            
            
            7,872
            
            
            245
            
            
            -Wholesale
            
            
            3,583
            
            
            1,759
            
            
            1,545
            
            
            -
            
            
            -Other
                CSBU
            
            
            985
            
            
            (350
            )
            
            (7,306
            )
            
            686
            
            
            86Total
                CSBU
            
            
            41,814
            
            
            23,175
            
            
            2,464
            
            
            1,609
            
            
            86**Organizational
                Solutions Business Unit:**Domestic
            
            
            13,406
            
            
            8,786
            
            
            653
            
            
            76
            
            
            953International
            
            
            13,884
            
            
            9,474
            
            
            3,592
            
            
            326
            
            
            2Total
                OSBU
            
            
            27,290
            
            
            18,260
            
            
            4,245
            
            
            402
            
            
            955Total
                operating segments
            
            
            69,104
            
            
            41,435
            
            
            6,709
            
            
            2,011
            
            
            1,041Corporate
                and eliminations
            
            
            -
            
            
            -
            
            
            (1,204
            )
            
            167
            
            
            2Consolidated
            
            $
            69,104
            
            $
            41,435
            
            $
            5,505
            
            $
            2,178
            
            $
            1,043





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





Quarter
                EndedNovember
                26,
              2005
            
            November
                27,
              2004Reportable
                segment EBITDA
            
            $
            8,565
            
            $
            6,709Restructuring
                cost reversal
            
            
            
            
            
            306Corporate
                expenses
            
            
            (1,926
            )
            
            (1,510
            )Consolidated
                EBITDA
            
            
            6,639
            
            
            5,505Depreciation
            
            
            (1,408
            )
            
            (2,178
            )Amortization
            
            
            (1,095
            )
            
            (1,043
            )Income
                from operations
            
            
            4,136
            
            
            2,284Interest
                income
            
            
            330
            
            
            118Interest
                expense
            
            
            (643
            )
            
            (38
            )Income
                before provision for income taxes
            
            $
            3,823
            
            $
            2,364





**NOTE
      10 - SUBSEQUENT EVENT**





In
      fiscal
      2002, we filed legal action against World Marketing Alliance, Inc., a Georgia
      corporation (WMA), and World Financial Group, Inc., a Delaware corporation
      and
      purchaser of substantially all assets of WMA, for breach of contract. The case
      proceeded to trial and the jury rendered a verdict in our favor and against
      WMA
      on November 1, 2004 for the entire unpaid contract amount of approximately
      $1.1
      million. In addition to the verdict, we recovered legal fees totaling $0.3
      million and pre- and post-judgment interest of $0.3 million from WMA. During
      our
      fiscal quarter ended May 28, 2005, we received payment in cash from WMA for
      the
      total verdict amount, including legal fees and interest. However, shortly
      after paying the verdict amount, WMA appealed the jury decision to the 10th
      Circuit Court of Appeals and we recorded receipt of the verdict amount plus
      legal fees and interest with a corresponding increase to accrued liabilities
      and
      deferred the gain until the case was finally resolved. On December 30, 2005,
      the
      Company entered into a settlement agreement with WMA. Under the terms of the
      settlement agreement, WMA agreed to dismiss its appeal.  As a result of
      this settlement agreement and dismissal of WMA’s appeal, we will record the gain
      from the legal settlement, net of legal fees and related costs, in our
      financial statements for the quarter ended February 25, 2006.







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,
      2005.








**RESULTS
      OF OPERATIONS**





**Overview**





Our
      financial results for the quarter ended November 26, 2005 represented another
      quarter of year-over-year improvement and maintained the favorable momentum
      that
      was achieved in fiscal 2005. Our income from operations improved to $4.1 million,
      compared to $2.3 million
      in the prior year and we were able to increase our net income to $3.2 million
      from $1.5 million
      in the comparable quarter of fiscal 2005. Due to improved operating results
      and
      reduced preferred dividends resulting from preferred stock redemptions, we
      recognized $1.9 million
      of net income available to common shareholders compared to a $0.7 million
      net loss attributable to common shareholders in the corresponding quarter of
      fiscal 2005.





The
      primary factors that influenced our operating results for the quarter ended
      November 26, 2005 were as follows:





·
            ***Improved
                Sales Performance*****-**Training
                and consulting services sales increased$3.9million, which reflected increased training sales in both domestic
                and
                international delivery channels. Product sales declined by$0.7million, more than 100 percent of which was attributable to the
                impact of closed retail stores, reduced technology and specialty
                product
                sales, and one less business day than the prior year. Partially offsetting
                these product sales trends were increased wholesale sales. Total
                sales
                increased by$3.2million, or5percent, compared to the corresponding quarter of the prior
                year.·
            ***Gross
                Margin Improvement***-
                Our gross margin improved compared to the prior year due to increased
                training sales as a percent of total sales and favorable product
                mix
                changes.·
            ***Increased
                Operating Costs***-
                For the quarter ended November 26, 2005, our selling, general, and
                administrative expense increased by$1.8million,
                which was partially offset by a$0.8million decrease in depreciation expense. Total operating expenses
                increased by$1.1million over the first quarter of fiscal 2005, primarily as a result
                of
                growth initiatives.·
            ***Reduced
                Preferred Stock Dividends***-
                Due to preferred stock redemptions in the fourth quarter of fiscal
                2005
                and the first quarter of fiscal 2006 totaling$40.0million, our preferred stock dividend cost decreased by$0.8million compared to the corresponding quarter of fiscal
                2005.





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 26, 2005 Compared to the Quarter Ended November 27,
      2004





***Sales***





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




Quarter
                  EndedNovember
                  26,
                2005
              
              November
                  27,
                2004
              
              Percent
                Change*Consumer
                  and Small Business Unit:*Retail
                  Stores
              
              $
              14,670
              
              $
              18,387
              
              
              (20
              )Consumer
                  Direct
              
              
              18,588
              
              
              18,859
              
              
              (1
              )Wholesale
              
              
              6,609
              
              
              3,583
              
              
              84Other
                  CSBU
              
              
              1,163
              
              
              985
              
              
              1841,030
              
              
              41,814
              
              
              (2
              )*Organizational
                  Solutions Business*
                *Unit:*Domestic
              
              
              16,393
              
              
              13,406
              
              
              22International
              
              
              14,928
              
              
              13,884
              
              
              831,321
              
              
              27,290
              
              
              15Total
                  Sales
              
              $
              72,351
              
              $
              69,104
              
              
              5







**Product
      Sales -** Overall
      product sales, which primarily consist of planners, binders, software, and
      handheld electronic planning devices that are primarily sold through our
      Consumer and Small Business Unit (CSBU) channels, declined $0.6 million,
      or 1 percent,
      compared to the prior year. The decline in product sales was primarily due
      to
      the following performance in our CSBU channels:





·
            ***Retail
                Stores***-
                The$3.7million decline in retail sales was primarily due to fewer stores,
                which
                had a$3.3million impact on sales, and reduced technology and specialty product
                sales, which totaled$0.7million. Partially offsetting these declines were increased “core” product
                (e.g. planners, binders, and totes) sales during the quarter. At
                November
                26, 2005, we were operating 105 retail stores compared to 135 stores
                at
                November 27, 2004. Product sales trends were reflected by atwopercent decline in comparable store (stores which were open during
                the
                comparable periods) sales compared to the prior year.·
            ***Consumer
                Direct***-
                Sales through our consumer direct channels (catalog, eCommerce, and
                public
                seminars) remained relatively consistent with the prior year.·
            ***Wholesale*******-
                Sales through our wholesale channel, which includes sales to office
                superstores and other retail chains, increased due to the timing
                of
                product sales to these entities and increased demand from wholesale
                channel customers.·
            ***Other
                CSBU***-
                Other CSBU sales consist primarily of domestic printing and publishing
                sales and building sublease revenues. The increase in other CSBU
                revenues
                was due to increased sublease revenue. During fiscal 2005 we subleased
                a
                substantial portion of our corporate headquarters and recognized
                increased
                lease revenue, which is classified as other CSBU
                sales.




**Training
      and Consulting Services -** We
      offer
      a variety of training courses, training related products, and consulting
      services focused on productivity, leadership, strategy execution, sales force
      performance, and effective communications training programs that are provided
      both domestically and internationally through the Organizational Solutions
      Business Unit (OSBU). Our overall training and consulting service sales
      increased by $3.9 million,
      or 16 percent,
      compared to the same period of the prior year. The improvement in training
      sales
      was reflected in both domestic and international training program and consulting
      sales and was primarily attributable to the following sales performance in
      our
      OSBU divisions:





·
            ***Domestic
                -***Our
                domestic sales performance improved by$3.0million over the prior year and was primarily attributable to increased
                sales of our*The
                7 Habits of Highly Effective People*training courses and increased sales of our execution and business
                results
                programs. Sales of our productivity and sales performance programs
                remained relatively flat compared to the prior year.·
            ***International
                -***International sales increased$1.0million compared to the prior year primarily due to increased sales
                in
                Japan, Canada, and Brazil, as well as increased licensee royalty
                revenues.
                The translation of foreign sales resulted in a$0.1million unfavorable impact to our consolidated sales as certain foreign
                currencies, particularly in Japan, weakened against the United States
                dollar during much of the quarter ended November 26,
                2005.








**Gross
      Margin**





Gross
      margin consists of net sales less the cost of goods sold or services provided.
      Our overall gross margin improved to 61.4 percent
      of sales for the quarter, compared to 60.0 percent
      in the comparable quarter of fiscal 2005. The improvement in our overall gross
      margin was primarily due to increased training sales as a percent of total
      sales
      and favorable product mix changes. Training and consulting service sales, which
      typically have higher gross margins than our product sales, increased to 40 percent
      of total sales during the quarter ended November 26, 2005 compared to 36 percent
      in the prior year.





Our
      gross
      margin on product sales improved to 57.0 percent
      compared to 55.0 percent
      in fiscal 2005 and was primarily due to a favorable shift in our product mix
      as
      sales of higher-margin paper products and binders increased as a percent of
      total sales, while sales of lower-margin technology and specialty products
      continue to decline.





Training
      solution and related services gross margin, as a percent of sales, declined
      slightly to 67.9 percent
      compared to 68.6 percent
      in the first quarter of fiscal 2005.





**Operating
      Expenses**





***Selling,
      General and Administrative*** **-** Our
      selling, general, and administrative (“SG&A”) expenses increased $1.8 million,
      or 5 percent,
      compared to the prior year. Increased SG&A expenses were primarily due to
      investment in initiatives intended to grow our business in future periods,
      increased commissions and bonuses resulting from increased training and
      consulting sales, and increases in other SG&A expenses such as accounting
      fees. During late fiscal 2005 and the quarter ended November 26, 2005, we began
      specific initiatives designed to grow our business in future periods. These
      initiatives included hiring additional sales people in the OSBU and the CSBU,
      increased advertising and marketing programs, additional curriculum and product
      development, and increased spending on sales effectiveness training. Due to
      the
      time necessary to implement these growth strategies, including training new
      sales personnel and effectively rolling out new training offerings and products,
      these growth initiatives may not add material benefits to our fiscal 2006
      operating results. However, we believe that these investments in additional
      sales personnel, increased marketing, and new consulting, training and product
      offerings will allow us to increase our sales and improve our operating
      performance in future periods. Although we have incurred additional costs
      related to these investments in future growth, we continue to implement
      strategies designed to reduce our overall operating costs. Our cost-reduction
      efforts have included retail store closures, headcount reductions, consolidation
      of corporate office space, and other measures designed to focus our resources
      on
      critical activities and projects related to growth opportunities. The favorable
      impact of these efforts, including reduced associate costs and rent expense
      related to closed stores, partially offset the increase in other SG&A
      spending during the quarter ended November 26, 2005.





We
      regularly assess the operating performance of our retail stores, including
      previous operating performance trends and projected future profitability. During
      this assessment process, judgments are made as to whether under-performing
      or
      unprofitable stores should be closed. As a result of this evaluation process,
      we
      may close additional stores during fiscal 2006 if further analysis indicates
      that we can improve our operating results through additional store closures
      due
      to the higher costs associated with our retail store channel. No retail store
      locations were closed during the quarter ended November 26, 2005 and expenses
      incurred for previously closed stores were approximately $39,000 compared
      to $0.3 million
      for store closure costs in the prior year. The costs associated with closing
      retail stores are typically comprised of charges related to vacating the
      premises, which may include a provision for the remaining term on the lease,
      and
      severance and other personnel costs, which are included as a component of
      SG&A expenses. We may continue to incur store closing expenses in future
      periods if the Company determines to close additional retail
      locations.





On
      September 1, 2005, we adopted the provisions of Statement of Financial
      Accounting Standards No. 123 (Revised 2004), *Share-Based
      Payment* (SFAS
      No.
      123R), which is a revision of SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      Statement No. 123R requires all share based-payments to employees, including
      grants of stock options and the compensatory elements of employee stock purchase
      plans, to be recognized in the income statement based upon their fair values.
      Although the additional compensation expense resulting from the adoption of
      SFAS
      No. 123R was immaterial to the quarter ended November 26, 2005, our operating
      expenses may be unfavorably affected in future periods if we grant additional
      stock options or participation in the Company’s employee stock purchase program
      increases.





***Depreciation
      and Amortization*** **-** Depreciation
      expense decreased $0.8 million,
      or 35 percent,
      compared to the first quarter of fiscal 2005 primarily due to the full
      depreciation or disposal of certain property and equipment balances, primarily
      computer software and hardware, and the effects of significantly reduced capital
      expenditures during preceding fiscal years. Based upon these events and current
      capital spending trends, we expect that depreciation expense will continue
      to
      decline compared to prior periods during fiscal 2006.





Amortization
      expense on definite-lived intangible assets totaled $1.1 million
      for the quarter ended November 26, 2005 compared to $1.0 million
      in the prior year. We expect intangible asset amortization expense to total $3.8 million
      in fiscal 2006 as certain intangible assets become fully amortized during the
      fiscal year.





**Interest
      Income and Interest Expense**





***Interest
      Income*** *-* Our
      interest income increased $0.2 million
      primarily due to higher average cash balances and higher interest rates on
      our
      interest-bearing cash accounts.





***Interest
      Expense*** *-* Our
      interest expense increased $0.6 million
      primarily due to the sale of our corporate headquarters facility and the
      resulting interest component of our lease payments to the landlord. We are
      accounting for the lease on the corporate facility as a financing obligation,
      which is accounted for similar to long-term debt.





**Income
      Taxes**





The
      provision for income taxes decreased to $0.6 million
      for the quarter ended November 26, 2005 compared to $0.8 million
      in fiscal 2005. The decrease in our income tax provision was primarily due
      to
      fluctuations in our income taxes related to foreign tax jurisdictions. We were
      unable to offset our tax liabilities in foreign jurisdictions with our domestic
      operating loss carryforwards. In addition, a history of significant operating
      losses has precluded us from demonstrating that it is more likely than not
      that
      the benefits of domestic operating loss carryforwards, together with the
      benefits of other deferred income tax assets will be realized. Accordingly,
      we
      have recorded valuation allowances on the majority of our domestic deferred
      income tax assets.








**LIQUIDITY
      AND CAPITAL RESOURCES**





Historically,
      our primary sources of capital have been net cash provided by operating
      activities, line-of-credit financing, long-term borrowings, asset sales, and
      the
      issuance of preferred and common stock. We currently rely primarily upon cash
      flows from operating activities and cash on hand to maintain adequate liquidity
      and working capital levels. At November 26, 2005 we had $32.8 million
      of cash and cash equivalents compared to $51.7 million
      at August 31, 2005. Our net working capital (current assets less current
      liabilities) decreased to $43.4 million
      at November 26, 2005 compared to $49.9 million
      at August 31, 2005.





During
      fiscal 2005, we completed the sale of our corporate headquarters facility
      located in Salt Lake City, Utah and received net proceeds totaling $32.4 million.
      However, in connection with the sale of our corporate campus we incurred a
      long-term financing obligation for the purchase price. The annual payments
      on
      the financing obligation are approximately $3.0 million
      per year for the first five years with two percent annual increases thereafter.
      We used a portion of the proceeds from the sale of the campus to redeem $30.0 million
      of preferred stock during the fourth quarter of fiscal 2005 and we redeemed
      an
      additional $10.0 million
      of preferred stock during the quarter ended November 26, 2005. We currently
      anticipate that additional preferred stock redemptions will occur in future
      periods if our cash flows from operating activities continue to
      improve.





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 26, 2005.





**Cash
      Flows From Operating Activities**





During
      the quarter ended November 26, 2005, our net cash used for operating activities
      totaled $6.2 million
      compared to $5.4 million
      for the same quarter of the prior year. Our primary source of cash from
      operating activities was the sale of goods and services to our customers in
      the
      normal course of business. The primary uses of cash for operating activities
      are
      payments to suppliers for materials used in products sold, payments for direct
      costs necessary to conduct training programs, and payments for selling, general,
      and administrative expenses. Cash used for operating activities during the
      quarter was primarily related to 1) payments made to reduce accrued liabilities
      and accounts payable from seasonally high August 31 balances; 2) inventory
      purchases for our seasonally busy months of November, December, and January;
      and
      3) to finance growth in our accounts receivable that arose primarily in
      connection with improved OSBU and wholesale sales during the quarter. Although
      we used significant cash for these operating activities, due in part to the
      seasonality of our business, we expect to improve our cash flows from operating
      activities in future periods.





We
      believe that continued efforts to optimize working capital balances combined
      with existing and planned sales growth efforts and cost-cutting initiatives,
      will improve our cash flows from operating activities in future periods.
      However, the success of these efforts is dependent upon numerous factors, many
      of which are not within our control.


**Cash
      Flows From Investing Activities and Capital Expenditures**





Net
      cash
      used for investing activities totaled $1.3 million
      for the quarter ended November 26, 2005. Our primary uses of cash for investing
      activities were the purchase of property and equipment, which consisted
      primarily of computer hardware and software, and totaled $0.6 million,
      and further investment in curriculum development, primarily related to new
      and
      refreshed training courses based on *The
      7
      Habits of Highly Effective People* ,
      which
      totaled $0.7 million.





**Cash
      Flows From Financing Activities**





Net
      cash
      used for financing activities during the quarter ended November 26, 2005 totaled $11.4 million.
      Our primary uses of cash for financing activities were the redemption of $10.0 million,
      or approximately 400,000 shares, of Series A preferred stock and the payment
      of
      preferred stock dividends, which totaled $1.6 million
      (which included accrued dividends through the date of redemption) during the
      quarter. We also used restricted cash, generated from a portion of the proceeds
      of the corporate headquarters sale, totaling $0.7 million
      to repay the mortgage, including a $0.1 million
      prepayment penalty, on one of the buildings that was sold in the campus sale
      transaction that was completed in fiscal 2005.





**Contractual
      Obligations**





The
      Company has not structured any special purpose or variable interest entities,
      or
      participated in any commodity trading activities, which would expose us to
      potential undisclosed liabilities or create adverse consequences to our
      liquidity. Required contractual payments primarily consist of payments to EDS
      for outsourcing services related to information systems, warehousing and
      distribution, and call center operations; payments on the financing obligation
      resulting from the sale of our corporate campus; minimum rent payments for
      retail store and sales office space; cash payments for Series A preferred stock
      dividends; mortgage payments on certain buildings and property; required
      computer hardware and software purchases required by our outsourcing contracts;
      and monitoring fees paid to a Series A preferred stock investor. There have
      been
      no significant changes to our expected required contractual obligations from
      those disclosed at August 31, 2005.





**Other
      Items**





***Management
      Common Stock Loan Program*** **-** The
      Company is the creditor for a loan program that provided the capital to allow
      certain management personnel the opportunity to purchase shares of our common
      stock. In May 2004, our Board of Directors approved modifications to the terms
      of the management stock loans. While these changes have significant implications
      for most management stock loan program participants, the Company did not
      formally amend or modify the stock loan program notes. Rather, the Company
      is
      foregoing certain of its rights under the terms of the loans in order to
      potentially improve the participant’s ability to pay, and the Company’s ability
      to collect, the outstanding balances of the loans. Based upon guidance found
      in
      EITF Issue 00-23, *Issues
      Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
      FASB Interpretation No. 44* ,
      and
      EITF Issue 95-16, *Accounting
      for Stock Compensation Agreements with Employer Loan Features under APB Opinion
      No. 25* ,
      we
      determined that the management common stock loans should be accounted for as
      non-recourse stock compensation instruments due to the modifications approved
      in
      May 2004 and their effects to the Company and the loan participants. While
      this
      accounting treatment does not alter the legal rights associated with the loans
      to the employees, the modifications to the terms of the loans were deemed
      significant enough to adopt the non-recourse accounting model as described
      in
      EITF 00-23. As a result of this accounting treatment, the remaining carrying
      value of the notes and interest receivable related to financing common stock
      purchases by related parties, which totaled $7.6 million prior to the loan
      term
      modifications, was reduced to zero with a corresponding reduction in additional
      paid-in capital.





We
      currently account for the management common stock loans as variable stock option
      arrangements. Under the provisions of SFAS No. 123R, which we adopted on
      September 1, 2005, additional compensation expense will only be recognized
      on
      the loans if the Company takes action on the loans that in effect constitutes
      a
      modification that increases the fair value of an option. This accounting
      treatment also precludes us from reversing the amounts expensed as additions
      to
      the loan loss reserve, totaling $29.7 million, which were recognized in prior
      periods. As a result of these loan program modifications, the Company hopes
      to
      increase the total value received from loan participants; however, the inability
      of the Company to collect all, or a portion, of these receivables could have
      an
      adverse impact upon our financial position and future cash flows compared to
      full collection of the loans.





***Availability
      of Future Capital Resources*** **-** Going
      forward, we will continue to incur costs necessary for the operation of the
      business. We anticipate using cash on hand, cash provided by operating
      activities, on the condition that we can return to generating positive cash
      flows from operations, and other financing alternatives, if necessary, for
      these
      expenditures. We anticipate that our existing capital resources should be
      adequate to enable us to maintain our operations for at least the upcoming
      twelve months. However, our ability to maintain adequate capital for our
      operations in the future is dependent upon a number of factors, including sales
      trends, our ability to contain costs, levels of capital expenditures, collection
      of accounts receivable, and other factors. Some of the factors that influence
      our operations are not within our control, such as economic conditions and
      the
      introduction of new technology and products by our competitors. We will continue
      to monitor our liquidity position and may pursue additional financing
      alternatives, if required, to maintain sufficient resources for future operating
      and capital requirements. However, there can be no assurance such financing
      alternatives will be available to us on acceptable terms.








**USE
      OF ESTIMATES AND CRITICAL ACCOUNTING
      POLICIES**





Our
      consolidated financial statements were prepared in accordance with accounting
      principles generally accepted in the United States of America. The significant
      accounting polices that we used to prepare our consolidated financial statements
      are outlined in Note 1 to the consolidated financial statements, which are
      presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
      year ended August 31, 2005. Some of those accounting policies require us to
      make
      estimates and assumptions that affect the amounts reported in our consolidated
      financial statements. Management regularly evaluates its estimates and
      assumptions and bases those estimates and assumptions on historical experience,
      factors that are believed to be reasonable under the circumstances, and
      requirements under accounting principles generally accepted in the United States
      of America. Actual results may differ from these estimates under different
      assumptions or conditions, including changes in economic conditions and other
      circumstances that are not in our control, but which may have an impact on
      these
      estimates and our actual financial results.





The
      following items require significant judgment and often involve complex
      estimates:





**Revenue
      Recognition**





We
      derive
      revenues primarily from the following sources:





·
            ***Products***-
                We sell planners, binders, planner accessories, handheld electronic
                devices, and other related products that are primarily sold through
                our
                CSBU channels.·
            ***Training
                and Consulting Services***-
                We provide training and consulting services to both organizations
                and
                individuals in strategic execution, leadership, productivity, goal
                alignment, sales force performance, and communication effectiveness
                skills. These training programs and services are primarily sold through
                our OSBU channels.




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





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





Revenue
      is recognized on software sales in accordance with Statement of Position (SOP)
      97-2, *Software
      Revenue Recognition* as
      amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue earned
      on
      software arrangements involving multiple elements such as software products
      and
      support to be allocated to each element based on the relative fair value of
      the
      elements based on vendor specific objective evidence (VSOE). The majority of
      the
      Company’s software sales have elements, including a license and post contract
      customer support (PCS). Currently the Company does not have VSOE for either
      the
      license or support elements of its software sales. Accordingly, revenue is
      deferred until the only undelivered element is PCS and the total arrangement
      fee
      is recognized ratably over the support period.





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





**Accounts
      Receivable Valuation**





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





**Inventory
      Valuation**





Inventories
      are stated at the lower of cost or market with cost determined using the
      first-in, first-out method. Our inventories are comprised primarily of dated
      calendar products and other non-dated products such as binders, handheld
      electronic devices, stationery, training products, and other accessories.
      Provision is made to reduce excess and obsolete inventories to their estimated
      net realizable value. In assessing the realization of inventories, we make
      judgments regarding future demand requirements and compare these assessments
      with current and committed inventory levels. Inventory requirements may change
      based on projected customer demand, technological and product life cycle
      changes, longer or shorter than expected usage periods, and other factors that
      could affect the valuation of our inventories.





**Indefinite-Lived
      Intangible Assets**





Intangible
      assets that are deemed to have an indefinite life are not amortized, but rather
      are tested for impairment on an annual basis, or more often if events or
      circumstances indicate that a potential impairment exists. The Covey trade
      name
      intangible asset has been deemed to have an indefinite life. This intangible
      asset is assigned to the OSBU and is tested for impairment using the present
      value of estimated royalties on trade name related revenues, which consist
      primarily of training seminars, international licensee royalties, and related
      products. If forecasts and assumptions used to support the realizability of
      our
      indefinite-lived intangible asset change in the future, significant impairment
      charges could result that would adversely affect our results of operations
      and
      financial condition.





**Impairment
      of Long-Lived Assets**





Long-lived
      tangible assets and definite-lived intangible assets are reviewed for possible
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of such assets may not be recoverable. We use an estimate of
      undiscounted future net cash flows of the assets over the remaining useful
      lives
      in determining whether the carrying value of the assets is recoverable. If
      the
      carrying values of the assets exceed the anticipated future cash flows of the
      assets, we recognize an impairment loss equal to the difference between the
      carrying values of the assets and their estimated fair values. Impairment of
      long-lived assets is assessed at the lowest levels for which there are
      identifiable cash flows that are independent from other groups of assets. The
      evaluation of long-lived assets requires us to use estimates of future cash
      flows. If forecasts and assumptions used to support the realizability of our
      long-lived tangible and definite-lived intangible assets change in the future,
      significant impairment charges could result that would adversely affect our
      results of operations and financial condition.





**Income
      Taxes**





The
      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
      history of significant operating losses precludes us from demonstrating that
      it
      is more likely than not that the related benefits from deferred income tax
      deductions and foreign tax carryforwards will be realized. Accordingly, we
      recorded valuation allowances on the majority of our deferred income tax assets.
      These valuation allowances are based on estimates of future taxable income
      or
      losses that may or may not be realized.








**NEW
      ACCOUNTING
      PRONOUNCEMENTS**





In
      March
      2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      (FIN) No. 47, *Accounting
      For Conditional Asset Retirement Obligations - an Interpretation of FASB
      Statement No. 143* .
      This
      interpretation clarifies that the term *conditional
      asset retirement obligation* as used
      in SFAS No. 143, *Accounting
      for Asset Retirement Obligations* ,
      refers
      to a legal obligation to perform an asset retirement activity in which the
      timing and (or) method of settlement are conditional on a future event that
      may
      or may not be within the control of the Company. Thus, the timing and (or)
      method of settlement may be conditional on a future event. Accordingly, we
      will
      be required to recognize a liability for the fair value of a conditional asset
      retirement obligation if the fair value of the liability can be reasonably
      estimated. The fair value of a liability for the conditional asset retirement
      obligation should be recognized when incurred - generally upon acquisition,
      construction, development, and (or) through the normal operation of the asset.
      The effective date for FIN No. 47 is no later than the end of fiscal years
      ending after December 15, 2005, which is August 31, 2006 for the Company. As
      of
      November 26, 2005, we have not completed our analysis of the impact of FIN
      No.
      47 on our consolidated financial statements.





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
      Statement No. 3* .
      Statement No. 154 changes the requirements for the accounting for and reporting
      of a change in accounting principle and applies to all voluntary changes in
      accounting principle. This statement requires retrospective application to
      prior
      periods’ financial statements of changes in accounting principle, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of an accounting change. Further, SFAS No. 154 requires that the new
      accounting principle be applied to the balances of assets and liabilities as
      of
      the beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of shareholders’ equity)
      for that period that is being reported in an income statement. This statement
      also carries forward, without change, the guidance in APB Opinion No. 20 for
      reporting the correction of an error in previously issued financial statements
      and a change in accounting estimate. Statement No. 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005 and will thus be effective for our fiscal year beginning
      September 1, 2006.








ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





**MARKET
      RISK OF FINANCIAL INSTRUMENTS**





The
      primary financial instrument risks to which the Company is exposed are
      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 the Company’s operations, we are subject to risks
      associated with transactions that are denominated in currencies other than
      the
      United States dollar, which creates exposure to foreign currency exchange risk.
      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.





During
      the quarter ended November 26, 2005, 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 the Company’s consolidated statements of
      operations and resulted in the following net gains or losses for the periods
      indicated (in thousands):





Quarter
                EndedNovember
                26,
              2005
            
            November
                27, 2004Losses
                on foreign exchange contracts
            
            $
            (46
            )
            $
            (294
            )Gains
                on foreign exchange contracts
            
            
            217
            
            
            -Net
                gain (loss) on foreign exchange contracts
            
            $
            171
            
            $
            (294
            )





At
      November 26, 2005, the fair value of these contracts, which was determined
      using
      the estimated amount at which contracts could be settled based upon forward
      market exchange rates, was insignificant. The notional amounts of our foreign
      currency sell contracts that did not qualify for hedge accounting were as
      follows at November 26, 2005 (in thousands):





Contract
                Description
            
            Notional
                Amount in Foreign Currency
            
            Notional
                Amount in U.S. DollarsJapanese
                Yen
            
            
            315,000
            
            $
            2,645Australian
                Dollars
            
            
            1,535
            
            
            1,122Mexican
                Pesos
            
            
            5,100
            
            
            480





During
      the quarter ended November 27, 2004, we also entered into foreign currency
      forward contracts that were designed to manage foreign currency risks related
      to
      the value of our net investment in foreign operations located in Canada, Japan,
      and the United Kingdom. These foreign currency forward instruments, which
      expired on a monthly basis, qualified for hedge accounting and corresponding
      gains and losses were recorded as a component of other comprehensive income
      in
      the Company’s consolidated balance sheet. During the quarter ended November 27,
      2004, we recorded losses totaling $0.3 million from these
      contracts.





During
      the quarter ended November 26, 2005, we did not utilize net investment contracts
      or other derivative contracts that qualified for hedge accounting. However,
      the
      Company may utilize net investment hedge contracts in future periods as a
      component of its overall foreign currency risk strategy.





**Interest
      Rate Sensitivity**





The
      Company is exposed to fluctuations in U.S. interest rates primarily as a result
      of the cash and cash equivalents that we hold. Our debt balances consist
      primarily of a financing obligation associated with the sale of our corporate
      headquarters facility and a long-term mortgage on certain of our buildings
      and
      property. As such, the Company does not have significant exposure or additional
      liability due to interest rate sensitivity and we were not party to any interest
      rate swap or other interest related derivative instrument during the quarter
      ended November 26, 2005.








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.





As
      required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
      under the supervision and with the participation of our management, including
      the Chief Executive Officer and the Chief Financial Officer, of the
      effectiveness and the design and operation of our disclosure controls and
      procedures as of the end of the period covered by this report, and included
      consideration of the material weakness disclosed in our Form 10-K for the fiscal
      year ended August 31, 2005. Based on this evaluation, the Chief Executive
      Officer and the Chief Financial Officer concluded that because of this
      material weakness in our accounting for income taxes, our disclosure
      controls and procedures were ineffective as of the end of the period covered
      by
      this Quarterly Report on Form 10-Q. Specifically,
      our accounting personnel lacked sufficient technical expertise to properly
      account for income taxes in accordance with generally accepted accounting
      principles and our monitoring and review controls were inadequate.





**Changes
      in Internal Control Over Financial Reporting**





In
      order
      to remediate the aforementioned material weakness, management is in the process
      of implementing internal controls over financial reporting regarding income
      taxes through additional training on accounting for income taxes and
      establishing additional monitoring and review controls. Additional work is
      needed to fully remedy this material weakness and we intend to continue our
      efforts to improve and strengthen our control processes and procedures related
      to income taxes.





Other
      than as described above, there has been no change in the Company’s internal
      controls over financial reporting during the fiscal quarter ended November
      26,
      2005 that has materially affected, or is reasonable likely to materially affect,
      our internal controls over financial reporting.








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





Certain
      written and oral statements made by the Company or our representatives in this
      report, other reports, filings with the Securities and Exchange Commission,
      press releases, conferences, Internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
      Litigation reform Act of 1995 and Section 21E of the Securities Exchange Act
      of
      1934. Forward-looking statements include, without limitation, any statement
      that
      may predict, forecast, indicate, or imply future results, performance, or
      achievements, and may contain words such as “believe,” “anticipate,” “expect,”
“estimate,” “project,” or words or phrases of similar meaning. 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 under
      Business Environment and Risk in our annual report on Form 10-K for the fiscal
      year ended August 31, 2005, which are incorporated herein by this reference.
      In
      addition, such risks and uncertainties may include unanticipated developments
      in
      any one or more of the following areas: demand for our products and services,
      which depends to some extent on general economic conditions, so that we can
      avoid future declines in revenues; the ability of our products and services
      to
      successfully compete with alternative solutions and the products and services
      offered by others; unanticipated costs or capital expenditures; cost savings
      from the outsourcing of 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
      the
      Company’s strategic plans; dependence on existing products or services; the rate
      and consumer acceptance of new product introductions; the number and nature
      of
      customers and their product orders, including changes in the timing or mix
      of
      product or training orders; pricing of our products and services and those
      of
      competitors; adverse publicity; and other factors which may adversely affect
      our
      business.





The
      risks
      included here are not exhaustive. Other sections of this report may include
      additional factors that could adversely affect our business and financial
      performance. 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. Factors
      such
      as quarter-to-quarter variations in revenues and earnings or losses or our
      failure to meet expectations could have a significant impact on the market
      price
      of our common stock. In addition, the price of our common stock can change
      for
      reasons unrelated to our performance. Due to our low market capitalization
      and
      share price, 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. 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.





PART
      II. OTHER INFORMATION





Item
      1.   Legal
      Proceedings:





In
      fiscal
      2002, we filed legal action against World Marketing Alliance, Inc., a Georgia
      corporation (WMA), and World Financial Group, Inc., a Delaware corporation
      and
      purchaser of substantially all assets of WMA, for breach of contract. The case
      proceeded to trial and the jury rendered a verdict in our favor and against
      WMA
      on November 1, 2004 for the entire unpaid contract amount of approximately
      $1.1
      million. In addition to the verdict, we recovered legal fees totaling $0.3
      million and pre- and post-judgment interest of $0.3 million from WMA. During
      our
      fiscal quarter ended May 28, 2005, we received payment in cash from WMA for
      the
      total verdict amount, including legal fees and interest. However, shortly after
      paying the verdict amount, WMA appealed the jury decision to the 10th Circuit
      Court of Appeals and we recorded receipt of the verdict amount plus legal fees
      and interest with a corresponding increase to accrued liabilities and deferred
      the gain until the case was finally resolved. On December 30, 2005, the Company
      entered into a settlement agreement with WMA. Under the terms of the settlement
      agreement, WMA agreed to dismiss its appeal.  As a result of this
      settlement agreement and dismissal of WMA’s appeal, we will record the gain from
      the legal settlement, net of legal fees and related costs, in our financial
      statements for the quarter ended February 25, 2006.





Item
      2.   Unregistered
      Sales of Equity Securities and Use of Proceeds





The
      Company acquired the following securities during the quarter ended November
      26,
      2005 (in thousands except for per share amounts):





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
                Number of Shares That May Yet Be Purchased Under the Plans or
                ProgramsCommon
                Shares:September
                1, 2005 to October 1, 2005
            
            
            -
            
            $
            -
            
            
            none
            
            
            n/aOctober
                2, 2005 to October 29, 2005
            
            
            -
            
            
            -
            
            
            none
            
            
            n/aOctober
                30, 2005 to November 26, 2005
            
            
            18(1)
            
            
            7.00
            
            
            none
            
            
            n/aTotal
                Common Shares
            
            
            18
            
            $
            7.00
            
            
            
            
            
            426(3)Total
                Preferred Shares
            
            
            400(2)
            
            $
            25.00





(1)
            Amount
                represents shares received from a management stock loan program
                participant for payment on their loan.(2)
            Amount
                represents the redemption of $10.0 million of Series A preferred
                stock
                during the period from October 30, 2005 to November 26, 2005.(3)
            In
                previous fiscal years, the Company’s Board of Directors had approved
                various plans for the purchase of up to 8,000,000 shares of our common
                stock. As of November 25, 2000, the Company had purchased 7,705,000
                shares
                of common stock under these board-authorized purchase plans. On December
                1, 2000, the Board of Directors approved an additional plan to acquire
                up
                to $8.0 million of our common stock. To date, we have purchased $7.1
                million of our common stock under the terms of the December 2000
                Board
                approved purchase plan. The maximum number of shares that may yet
                be
                purchased under the plans was calculated for the December 2000 plan
                by
                dividing the remaining approved dollars by $7.00, which was the closing
                price of the Company’s common stock on November 25, 2005 (last trading day
                of fiscal quarter). These shares were added to the remaining shares
                from
                the Company’s other Board-approved plans to arrive at the maximum amount
                that may be purchased as of November 26, 2005. No shares of the Company’s
                common stock were purchased during the fiscal quarter ended November
                26,
                2005 under terms of any Board authorized purchase
                plan.




Item
      6.  Exhibits




(A)
            Exhibits:





31
            Rule
                13a-14(a) Certifications of the CEO and CFO.32
            Section
                1350 Certifications of the CEO and
                CFO.










SIGNATURES





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





FRANKLIN
                COVEY CO.Date:
            January
                10, 2006
            
            By:
            /s/
                ROBERT A. WHITMANRobert
                A. WhitmanChief
                Executive OfficerDate:
            January
                10, 2006
            
            By:
            /s/
                STEPHEN D. YOUNGStephen
                D. YoungChief
                Financial Officer