UNITED
        STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





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





For
      the
      quarterly period ended February 25, 2006





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





For
      the
      transition period from __________ to __________





Commission
      file no. 1-11107










**FRANKLIN
      COVEY CO.**


(Exact
      name of registrant as specified in its charter)





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








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





Yes
            
            xNo
            
            o





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





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





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





Yes
            
            oNo
            
            x





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





20,140,974
      shares of Common Stock as of April 5, 2006







**Table
      of Contents**




Condensed
      Consolidated Balance Sheets


Condensed
      Consolidated Imcome Statements


Condensed
      Consolidated Statements of Cash
      Flows


Note
      1 - Basis of Presentation


Note
      2 - Accounting for Stock-Based Compensation


Note
      3 - Inventories


Note
      4 - Intangible Assets


Note
      5 - Preferred Stock Redemption


Note
      6 - Approval to Purchase Shares of Common
      Stock


Note
      7 - Legal Settlement


Note
      8 - Comprehensive Income


Note
      9 - Earnings Per Share


Note
      10 - Segment Information


Note
      11 - Subsequent Events


Results
      of Operations


Liquidity
      and Capital Resources


Use
      of Estimates and Critical Accounting
      Policies


New
      Accounting Pronouncements


Market
      Risk of Financial Instruments


Controls
      and Procedures


Safe
      Harbor Statement


Other
      Information


Exhibit
      31


Exhibit
      32


Signatures











PART I.
            FINANCIAL INFORMATIONITEM 1.
            FINANCIAL
              STATEMENTS




FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(in
      thousands, except per share amounts)





February
                25,
              2006
            
            August
                31,
              2005(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            36,354
            
            $
            51,690Restricted
                cash
            
            
            -
            
            
            699Accounts
                receivable, less allowance for doubtfulaccounts
                of $1,062 and $1,425
            
            
            23,037
            
            
            22,399Inventories
            
            
            22,905
            
            
            20,975Other
                current assets
            
            
            9,925
            
            
            9,419Total
                current assets
            
            
            92,221
            
            
            105,182Property
                and equipment, net
            
            
            34,265
            
            
            35,277Intangible
                assets, net
            
            
            81,341
            
            
            83,348Other
                long-term assets
            
            
            9,951
            
            
            9,426$
            217,778
            
            $
            233,233LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Current
                portion of long-term debt and financing obligation
            
            $
            563
            
            $
            1,088Accounts
                payable
            
            
            11,774
            
            
            13,704Income
                taxes payable
            
            
            5,516
            
            
            3,996Accrued
                liabilities
            
            
            33,646
            
            
            36,536Total
                current liabilities
            
            
            51,499
            
            
            55,324Long-term
                debt and financing obligation, less current portion
            
            
            33,826
            
            
            34,086Other
                liabilities
            
            
            1,277
            
            
            1,282Deferred
                income tax liability
            
            
            9,715
            
            
            9,715Total
                liabilities
            
            
            96,317
            
            
            100,407Shareholders’
                equity:Preferred
                stock - Series A, no par value; 4,000 shares authorized,1,494
                and 2,294 shares issued and outstanding; liquidation
                preferencetotaling
                $38,278 and $58,788
            
            
            37,345
            
            
            57,345Common
                stock - $0.05 par value; 40,000 sharesauthorized,27,056
                shares issued and outstanding
            
            
            1,353
            
            
            1,353Additional
                paid-in capital
            
            
            187,484
            
            
            190,760Common
                stock warrants
            
            
            7,611
            
            
            7,611Accumulated
                deficit
            
            
            (2,052
            )
            
            (14,498
            )Deferred
                compensation on unvested stock grants
            
            
            -
            
            
            (1,055
            )Accumulated
                other comprehensive income
            
            
            336
            
            
            556Treasury
                stock at cost, 6,673 and 6,465 shares
            
            
            (110,616
            )
            
            (109,246
            )Total
                shareholders’ equity
            
            
            121,461
            
            
            132,826$
            217,778
            
            $
            233,233




See
      notes
      to condensed consolidated financial statements.





FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED INCOME STATEMENTS


(in
      thousands, except per share amounts)





Quarter
                Ended
            
            Two
                Quarters EndedFebruary
                25,
              2006
            
            February
                26,
              2005
            
            February
                25,
              2006
            
            February
                26,
              2005(unaudited)
            
            (unaudited)Net
                sales:Products
            
            $
            50,841
            
            $
            55,175
            
            $
            94,244
            
            $
            99,226Training
                and consulting services
            
            
            27,492
            
            
            27,348
            
            
            56,440
            
            
            52,40178,333
            
            
            82,523
            
            
            150,684
            
            
            151,627Cost
                of sales:Products
            
            
            22,288
            
            
            24,581
            
            
            40,952
            
            
            44,389Training
                and consulting services
            
            
            7,872
            
            
            7,725
            
            
            17,152
            
            
            15,58630,160
            
            
            32,306
            
            
            58,104
            
            
            59,975Gross
                margin
            
            
            48,173
            
            
            50,217
            
            
            92,580
            
            
            91,652Selling,
                general, and administrative
            
            
            35,488
            
            
            38,939
            
            
            73,255
            
            
            74,868Depreciation
            
            
            1,221
            
            
            2,320
            
            
            2,629
            
            
            4,498Amortization
            
            
            908
            
            
            1,043
            
            
            2,003
            
            
            2,087Income
                from operations
            
            
            10,556
            
            
            7,915
            
            
            14,693
            
            
            10,199Interest
                income
            
            
            316
            
            
            165
            
            
            645
            
            
            282Interest
                expense
            
            
            (660
            )
            
            (29
            )
            
            (1,303
            )
            
            (66
            )Legal
                settlement
            
            
            873
            
            
            -
            
            
            873
            
            
            -Income
                before provision for income taxes
            
            
            11,085
            
            
            8,051
            
            
            14,908
            
            
            10,415Provision
                for income taxes
            
            
            1,872
            
            
            965
            
            
            2,462
            
            
            1,803Net
                income
            
            
            9,213
            
            
            7,086
            
            
            12,446
            
            
            8,612Preferred
                stock dividends
            
            
            1,139
            
            
            2,184
            
            
            2,518
            
            
            4,368Net
                income available to common shareholders
            
            $
            8,074
            
            $
            4,902
            
            $
            9,928
            
            $
            4,244Net
                income available to common
              shareholders
                per share (Note 9):Basic
            
            $
            .40
            
            $
            .19
            
            $
            .49
            
            $
            .16Diluted
            
            $
            .39
            
            $
            .19
            
            $
            .48
            
            $
            .16Weighted
                average number of common shares:Basic
            
            
            20,311
            
            
            19,880
            
            
            20,321
            
            
            19,790Diluted
            
            
            20,634
            
            
            19,940
            
            
            20,638
            
            
            19,804




See
      notes
      to condensed consolidated financial statements.





FRANKLIN
      COVEY CO.





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS


(in
      thousands)


Two
                Quarters EndedFebruary
                25,
              2006
            
            February
                26,
              2005(unaudited)Cash
                flows from operating activities:Net
                income
            
            $
            12,446
            
            $
            8,612Adjustments
                to reconcile net income to net cash provided by operatingactivities:Depreciation
                and amortization
            
            
            5,571
            
            
            7,665Restructuring
                cost reversal
            
            
            -
            
            
            (306
            )Stock-based
                compensation cost
            
            
            235
            
            
            371Compensation
                cost related to CEO common stock grant
            
            
            -
            
            
            404Changes
                in assets and liabilities:Decrease
                (increase) in accounts receivable, net
            
            
            (774
            )
            
            627Decrease
                (increase) in inventories
            
            
            (1,974
            )
            
            365Decrease
                (increase) in other assets
            
            
            (134
            )
            
            1,025Decrease
                in accounts payable and accrued liabilities
            
            
            (5,569
            )
            
            (8,222
            )Increase
                (decrease) in other long-term liabilities
            
            
            (102
            )
            
            169Increase
                in income taxes payable
            
            
            1,526
            
            
            1,530Net
                cash provided by operating activities
            
            
            11,225
            
            
            12,240Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (2,422
            )
            
            (1,120
            )Purchases
                of short-term investments
            
            
            -
            
            
            (10,653
            )Sales
                of short-term investments
            
            
            -
            
            
            8,963Curriculum
                development costs
            
            
            (961
            )
            
            (1,217
            )Net
                cash used for investing activities
            
            
            (3,383
            )
            
            (4,027
            )Cash
                flows from financing activities:Principal
                payments on long-term debt and financing obligation
            
            
            (822
            )
            
            (62
            )Change
                in restricted cash
            
            
            699
            
            
            -Proceeds
                from sales of common stock from treasury
            
            
            173
            
            
            35Proceeds
                from management stock loan payments
            
            
            134
            
            
            -Redemption
                of preferred stock
            
            
            (20,000
            )
            
            -Purchase
                of treasury shares
            
            
            (224
            )
            
            (22
            )Payment
                of preferred stock dividends
            
            
            (3,018
            )
            
            (4,368
            )Net
                cash used for financing activities
            
            
            (23,058
            )
            
            (4,417
            )Effect
                of foreign exchange rates on cash and cash equivalents
            
            
            (120
            )
            
            (128
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (15,336
            )
            
            3,668Cash
                and cash equivalents at beginning of the period
            
            
            51,690
            
            
            31,174Cash
                and cash equivalents at end of the period
            
            $
            36,354
            
            $
            34,842Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            1,337
            
            $
            53Cash
                paid for income taxes
            
            $
            1,093
            
            $
            602Non-cash
                investing and financing activities:Accrued
                preferred stock dividends
            
            $
            934
            
            $
            2,184Issuance
                of unvested common stock for compensation plans
            
            
            
            
            
            486Capital
                lease financing of property and equipment purchases
            
            
            109




See
      notes
      to condensed consolidated financial statements.





FRANKLIN
      COVEY CO.





NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)







**NOTE
      1 - BASIS OF PRESENTATION**





Franklin
      Covey Co. (hereafter referred to as us, we, our, or the Company) provides
      integrated consulting, training, and performance enhancement solutions to
      organizations and individuals in strategy execution, productivity, leadership,
      sales force effectiveness, effective communications, and other areas. Each
      integrated solution may include components of training and consulting,
      assessment, and other application tools that are generally available in
      electronic or paper-based formats. Our products and services are available
      through professional consulting services, public seminars, retail stores,
      catalogs, and the Internet at www.franklincovey.com .
      Historically, the Company’s best-known offerings include the FranklinCovey
      PlannerTM, and a suite of 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
      consolidated 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 February
      25,
      2006 had one more business day than the quarter ended February 26, 2005 and
      the
      two quarters ended February 25, 2006 had the same number of business days as
      the
      two quarters ended February 26, 2005.





The
      results of operations for the quarter and two quarters ended February 25, 2006
      are not necessarily 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.





We
      previously accounted for our stock-based compensation using the intrinsic method
      as defined in APB Opinion No. 25 and accordingly, prior to September 1, 2005
      we
      did not recognize 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 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 reclassified our unamortized deferred
      compensation related to the issuance of unvested common stock awards that was
      reported in the equity section of our balance sheet to additional paid-in
      capital. The following table presents the stock-based compensation expense
      included in our selling, general, and administrative expenses for the quarter
      and two quarters ended February 25, 2006 and the pro forma stock-based
      compensation amounts that would have been included in our income statements
      for
      the comparable periods of the prior year had stock-based compensation expense
      been determined in accordance with the fair value method prescribed by SFAS
      No.
      123 and SFAS No. 148, *Accounting
      for Stock-Based Compensation: An Amendment of FASB Statement No.
      123* (in
      thousands):





Quarter
                  Ended
              
              Two
                  Quarters EndedFebruary
                  25,
                2006
              
              February
                  26, 2005
              
              February
                  25,
                2006
              
              February
                  26, 2005Compensation
                  cost of stock options
              
              $
              2
              
              $
              1,915(1)
              
              $
              4
              
              $
              2,098Discount
                  on employee stock purchase plan
              
              
              8
              
              
              -
              
              
              15
              
              
              4Compensation
                  cost of unvested stock awards(2)
              
              
              148
              
              
              336
              
              
              216
              
              
              378Compensation
                  cost of fully vested stock award(2)
              
              
              -
              
              
              404(1)
              
              
              -
              
              
              404Total
                  stock-based compensation
              
              $
              158
              
              $
              2,655
              
              $
              235
              
              $
              2,884Net
                  income available to common shareholders, as reported
              
              
              
              
              $
              4,902
              
              
              
              
              $
              4,244Fair
                  value of stock-based compensation excluded from net income, net
                  of
                  tax
              
              
              
              
              
              (1,915
              )
              
              
              
              
              (2,102
              )Net
                  income available to common shareholders, pro forma
              
              
              
              
              $
              2,987
              
              
              
              
              $
              2,142Basic
                  earnings per share, as reported
              
              
              
              
              $
              .19
              
              
              
              
              $
              .16Diluted
                  earnings per share, as reported
              
              
              
              
              $
              .19
              
              
              
              
              $
              .16Basic
                  earnings per share, pro forma
              
              
              
              
              $
              .11
              
              
              
              
              $
              .08Diluted
                  earnings per share pro forma
              
              
              
              
              $
              .11
              
              
              
              
              $
              .08


(1)
            In
                connection with changes in the Company’s Chief Executive Officer (CEO)
                compensation plan during the quarter ended February 26, 2005, the
                CEO was
                granted 187,000 shares of fully-vested common stock and the Company
                accelerated the vesting of the CEO’s 1.6 million stock options with an
                exercise price of $14.00 per share.(2)
            The
                compensation cost of unvested stock awards and the fiscal 2005 fully
                vested stock award granted to the CEO was included in reported selling,
                general, and administrative expenses presented in the income statement
                for
                the respective fiscal periods.




The
      following is a description of activity in our stock-based compensation plans
      for
      the quarter and two quarters ended February 25, 2006.





**Stock
      Options**





The
      Company has an incentive stock option plan whereby options to purchase shares
      of
      our common stock are issued to key employees at an exercise price not less
      than
      the fair market value of the Company’s common stock on the date of grant. During
      the two quarters ended February 25, 2006 we did not issue any new stock options
      and the remaining unamortized service cost on previously issued stock options
      is
      immaterial in aggregate. The intrinsic value of stock options exercised during
      the two quarters ended February 25, 2006 was less than $0.1 million and there
      were no stock options exercised during the quarter ended February 25, 2006.
      The
      fair market value of options that vested during the quarter was zero and for
      the
      two quarters ended February 25, 2006 was approximately $6,000. The Company
      generally issues shares of common stock related to the exercise of stock options
      from shares held in treasury.





The
      Company did not issue any stock options to vendors or other non-employees during
      the two quarters ended February 25, 2006.





**Employee
      Stock Purchase Plan**





The
      Company has an employee stock purchase plan that offers qualified employees
      the
      opportunity to purchase shares of our common stock at a price equal to 85
      percent of the average fair market value of the Company’s common stock on the
      last trading day of each fiscal quarter. Based upon SFAS No. 123R, we determined
      that the discount offered to employees is compensatory and the amount is
      therefore expensed each quarter. A total of 8,150 and 14,374 shares were issued
      under this plan in the quarter and two quarters ended February 25, 2006,
      respectively.





**Unvested
      Stock Awards**





***Employee
      Awards*** **-** During
      fiscal 2006 and in prior periods, we have granted unvested stock awards to
      certain employees as long-term incentives. The following is a brief description
      of these unvested stock awards that have been granted to employees.





**Awards
      Granted in Fiscal 2005 and Prior Periods -** These
      awards cliff vest five years from the grant date or on an accelerated basis
      if
      we achieve specified earnings levels. The compensation cost of these unvested
      stock awards was based on the fair value of the shares on the grant date and
      is
      expensed on a straight-line basis over the vesting (service) period of the
      awards. The recognition of compensation cost will be accelerated when we believe
      that it is probable that we will achieve the specified earnings thresholds
      and
      the shares will vest. We did not accelerate the vesting of any of these awards
      during the two quarters ended February 25, 2006.





**Fiscal
      2006 Long-Term Incentive Plan -** On
      January 20, 2006, the Company’s shareholders approved a stock-based long-term
      incentive plan (the LTIP) that permits the grant of unvested share awards of
      common stock to certain employees as directed by the Compensation Committee
      of
      the Board of Directors. The LTIP share awards granted during the quarter ended
      February 25, 2006 cliff vest on August 31, 2008, which is the completion of
      a
      three-year performance period. The number of shares that are finally awarded
      to
      LTIP participants is variable and is based entirely upon the achievement of
      a
      combination of performance objectives related to sales growth and operating
      income during the three-year performance period. The Compensation Committee
      initially granted awards for 377,665 shares (target award) of common stock;
      the
      number of shares finally awarded will range from zero shares, if a minimum
      level
      of performance is not achieved, to 200 percent of the target award, if
      specifically defined performance criteria is achieved during the three-year
      performance period.





The
      LTIP
      shares were valued at $6.60 per share, which was the closing price of our common
      stock on the grant date. The corresponding compensation cost of the award,
      based
      upon the target award number of shares, totaled $2.5 million, which is being
      expensed over the service period of the award. Due to the variable number of
      shares that may be issued under the LTIP, we reevaluate the LTIP on a quarterly
      basis and adjust the number of shares expected to be awarded based upon
      financial results of the Company as compared to the performance goals set for
      the award. Adjustments to the number of shares awarded, and to the corresponding
      compensation expense, are made on a cumulative basis at the date of adjustment
      based upon the probable number of shares to be awarded. The total compensation
      cost of the LTIP is equal to the number of shares finally issued multiplied
      by
      $6.60 per share, the fair value of the common shares determined at the grant
      date.





***Board
      of Director Awards*** - During
      January 2006, the Company’s shareholders also approved changes to our
      non-employee directors’ stock incentive plan (the Directors’ Plan). The
      Directors’ plan was designed to provide non-employee directors of the Company,
      who are ineligible to participate in our employee stock incentive plan, an
      opportunity to acquire an interest in the Company through the acquisition of
      shares of common stock. Under the previous provisions of the Directors’ Plan,
      each non-employee director received an annual unvested stock award with a value
      (based on the trading price of the Company’s common stock on the date of the
      award) equal to $27,500. The primary modification to the Directors’ plan
      approved by the shareholders changes the annual unvested stock grant to 4,500
      shares of common stock rather than the dollar value previously defined in the
      plan. The amendment also eliminates the limitation on the maximum dollar value
      of all awards made under the Directors’ Plan in any given year. No shares were
      issued to members of our Board of Directors under the Directors’ Plan during the
      quarter ended February 25, 2006.




A
      summary
      of our unvested stock awards for the two quarters ended February 25, 2006 is
      as
      follows (in thousands, except share amounts):





Number
                of Unvested Shares
            
            Compensation
                CostOutstanding
                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
            
            
            987Granted
            
            
            377,655
            
            
            2,493Vested
            
            
            -
            
            
            -Amortization
                of compensation
            
            
            n/a
            
            
            (148
            )Outstanding
                shares and unamortized compensation cost at February 25,
                2006
            
            
            786,950
            
            $
            3,332





The
      intrinsic value of our unvested stock awards (both employee and Board of
      Director awards) was $6.0 million,
      which was based upon our closing stock price of $7.60 per
      share on February 25, 2006.




**NOTE
      3 - 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):





February
                25,
              2006
            
            August
                31,
              2005Finished
                goods
            
            $
            19,803
            
            $
            18,161Work
                in process
            
            
            318
            
            
            825Raw
                materials
            
            
            2,784
            
            
            1,989$
            22,905
            
            $
            20,975




**NOTE
      4 - INTANGIBLE ASSETS**





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





***February
                25, 2006***
            
            Gross
                Carrying Amount
            
            Accumulated
                Amortization
            
            Net
                Carrying Amount*Definite-lived
                intangible assets:*License
                rights
            
            $
            27,000
            
            $
            (6,949
            )
            $
            20,051Curriculum
            
            
            58,229
            
            
            (26,055
            )
            
            32,174Customer
                lists
            
            
            18,774
            
            
            (12,658
            )
            
            6,116Trade
                names
            
            
            1,277
            
            
            (1,277
            )
            
            -105,280
            
            
            (46,939
            )
            
            58,341*Indefinite-lived
                intangible asset:*Covey
                trade name
            
            
            23,000
            
            
            -
            
            
            23,000Balance
                at February 25, 2006
            
            $
            128,280
            
            $
            (46,939
            )
            $
            81,341***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 $0.9 million for the quarter
      ended February 25, 2006 and $1.0 million during the quarter ended February
      26,
      2005. For the two quarters ended February 25, 2006 our total amortization
      expense was $2.0 million compared to $2.1 million for the two quarters ended
      February 26, 2005.




**NOTE
      5 - PREFERRED STOCK REDEMPTIONS**





On
      February 13, 2006 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). For the two quarters ended February
      25,
      2006 we have redeemed $20.0 million, or approximately 800,000 shares of
      preferred stock. Since the recapitalization of our preferred stock in March
      2005, we have redeemed a total of $50.0 million, or approximately 2.0 million
      shares, of our outstanding Series A preferred stock. These preferred stock
      redemptions have reduced the Company’s annual preferred dividend obligation by
      $5.0 million.





At
      our
      Annual Meeting of Shareholders held in January 2006, we obtained shareholder
      approval of an amendment to our articles of incorporation that extends the
      period during which we have the right to redeem outstanding shares of preferred
      stock at 100 percent of its liquidation preference. The amendment extends the
      current redemption deadline from March 8, 2006 to December 31, 2006 and also
      provides 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. The February 13, 2006 preferred stock redemption
      satisfied the additional extension provision and the Company can redeem
      preferred stock at the liquidation preference through December 31,
      2007.




**NOTE
      6 - APPROVAL TO PURCHASE SHARES OF COMMON
      STOCK**





During
      January 2006, our Board of Directors authorized the purchase up to $10.0 million
      of our currently outstanding common stock. These purchases will be made at
      the
      Company’s discretion at prevailing market prices and will be subject to
      customary regulatory requirements and considerations. The Company does not
      have
      a timetable for the purchase of these common shares and the authorization by
      the
      Board of Directors does not have an expiration date. During the quarter ended
      February 25, 2006 we purchased 210,200 shares of our common stock under the
      terms of this newly authorized plan for $1.6 million.




**NOTE
      7 - LEGAL SETTLEMENT**





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 recorded a $0.9 million gain from
      the legal settlement in the quarter ended February 25, 2006. We also recorded
      a
      $0.3 million reduction in selling, general and, administrative expenses for
      recovered legal expenses.




**NOTE
      8 - 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
                Ended
            
            Two
                Quarters EndedFebruary
                25,
              2006
            
            February
                26,
              2005
            
            February
                25, 2006
            
            February
                26, 2005Net
                income
            
            $
            9,213
            
            $
            7,086
            
            $
            12,446
            
            $
            8,612Other
                comprehensive income (loss) items:Adjustment
                for fair value of foreign currency hedge derivatives
            
            
            -
            
            
            (26
            )
            
            -
            
            
            (318
            )Foreign
                currency translation adjustments
            
            
            145
            
            
            (232
            )
            
            (220
            )
            
            403Comprehensive
                income
            
            $
            9,358
            
            $
            6,828
            
            $
            12,226
            
            $
            8,697




**NOTE
      9 - EARNINGS PER SHARE**





Basic
      earnings per common share (EPS) is calculated by dividing net income available
      to common shareholders by the weighted-average number of common shares
      outstanding for the period. Diluted EPS is calculated by dividing net income
      available to common shareholders by the weighted-average number of common shares
      outstanding plus the assumed exercise of all dilutive securities using the
      treasury stock method or the “as converted” method, as appropriate. Following
      the preferred stock recapitalization that was completed in March 2005, 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
                Ended
            
            Two
                Quarters EndedFebruary
                25,
              2006
            
            February
                26,
              2005
            
            February
                25,
              2006
            
            February
                26,
              2005Net
                income
            
            $
            9,213
            
            $
            7,086
            
            $
            12,446
            
            $
            8,612Non-convertible
                preferred stock dividends
            
            
            (1,139
            )
            
            
            
            
            (2,518
            )Convertible
                preferred stock dividends
            
            
            -
            
            
            (2,184
            )
            
            -
            
            
            (4,368
            )Net
                income available to common shareholders
            
            $
            8,074
            
            $
            4,902
            
            $
            9,928
            
            $
            4,244Convertible
                preferred stock dividends
            
            $
            -
            
            $
            2,184
            
            $
            -
            
            $
            4,368Weighted
                average preferred shares on an as converted basis
            
            
            -
            
            
            6,239
            
            
            -
            
            
            6,239Distributed
                EPS - preferred
            
            $
            -
            
            $
            .35
            
            $
            -
            
            $
            .70Undistributed
                income
            
            $
            -
            
            $
            4,902
            
            $
            -
            
            $
            4,244Preferred
                ownership on an as converted basis
            
            
            -
            
            
            24
            %
            
            -
            
            
            24
            %Preferred
                shareholders interest in undistributed income
            
            
            -
            
            
            1,176
            
            
            -
            
            
            1,019Weighted
                average preferred shares on an as converted basis
            
            
            -
            
            
            6,239
            
            
            -
            
            
            6,239Undistributed
                EPS - preferred
            
            $
            -
            
            $
            .19
            
            $
            -
            
            $
            .16Undistributed
                income
            
            $
            8,074
            
            $
            4,902
            
            $
            9,928
            
            $
            4,244Common
                stock ownership
            
            
            100
            %
            
            76
            %
            
            100
            %
            
            76
            %Common
                shareholder interest in undistributed income
            
            $
            8,074
            
            $
            3,726
            
            $
            9,928
            
            $
            3,225Weighted
                average common shares outstanding - Basic
            
            
            20,311
            
            
            19,880
            
            
            20,321
            
            
            19,790Effect
                of dilutive securities:Stock
                options
            
            
            45
            
            
            60
            
            
            46
            
            
            14Unvested
                stock awards
            
            
            278
            
            
            -
            
            
            271
            
            
            -Weighted
                average common shares outstanding - Diluted
            
            
            20,634
            
            
            19,940
            
            
            20,638
            
            
            19,804Basic
                EPS - Common
            
            $
            .40
            
            $
            .19
            
            $
            .49
            
            $
            .16Diluted
                EPS - Common
            
            $
            .39
            
            $
            .19
            
            $
            .48
            
            $
            .16





At
      February 25, 2006, 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 and two quarters ended February 25, 2006. At
      February 26, 2005, we had approximately 2.3 million stock options that were
      not
      considered in our calculation of diluted EPS that may have a dilutive effect
      on
      the Company’s EPS calculation in future periods.




**NOTE
      10- 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 first quarter of fiscal 2006, 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*
              *February
                25, 2006*
            
            Sales
                to External Customers
            
            Gross
                Margin
            
            EBITDA
            
            Depreciation
            
            Amortization**Consumer
                and Small Business Unit:**Retail
            
            $
            23,836
            
            $
            14,324
            
            $
            5,321
            
            $
            341
            
            $
            -Consumer
                direct
            
            
            19,200
            
            
            11,427
            
            
            9,179
            
            
            15
            
            
            -Wholesale
            
            
            3,620
            
            
            1,917
            
            
            1,734
            
            
            -
            
            
            -Other
                CSBU
            
            
            1,291
            
            
            134
            
            
            (7,267
            )
            
            309
            
            
            -Total
                CSBU
            
            
            47,947
            
            
            27,802
            
            
            8,967
            
            
            665
            
            
            -**Organizational
                Solutions Business Unit:**Domestic
            
            
            15,223
            
            
            10,295
            
            
            1,706
            
            
            84
            
            
            907International
            
            
            15,163
            
            
            10,076
            
            
            3,957
            
            
            320
            
            
            1Total
                OSBU
            
            
            30,386
            
            
            20,371
            
            
            5,663
            
            
            404
            
            
            908Total
                operating segments
            
            
            78,333
            
            
            48,173
            
            
            14,630
            
            
            1,069
            
            
            908Corporate
                and eliminations
            
            
            -
            
            
            -
            
            
            (1,945
            )
            
            152
            
            
            -Consolidated
            
            $
            78,333
            
            $
            48,173
            
            $
            12,685
            
            $
            1,221
            
            $
            908*Quarter
                Ended*
              *February
                26, 2005***Consumer
                and Small Business Unit:**Retail
            
            $
            28,055
            
            $
            16,599
            
            $
            6,183
            
            $
            844
            
            $
            -Consumer
                direct
            
            
            18,387
            
            
            10,914
            
            
            7,526
            
            
            248
            
            
            -Wholesale
            
            
            4,897
            
            
            2,318
            
            
            2,157
            
            
            -
            
            
            -Other
                CSBU
            
            
            765
            
            
            (894
            )
            
            (7,185
            )
            
            680
            
            
            86Total
                CSBU
            
            
            52,104
            
            
            28,937
            
            
            8,681
            
            
            1,772
            
            
            86**Organizational
                Solutions Business Unit:**Domestic
            
            
            16,162
            
            
            11,341
            
            
            2,327
            
            
            78
            
            
            954International
            
            
            14,257
            
            
            9,939
            
            
            3,559
            
            
            337
            
            
            2Total
                OSBU
            
            
            30,419
            
            
            21,280
            
            
            5,886
            
            
            415
            
            
            956Total
                operating segments
            
            
            82,523
            
            
            50,217
            
            
            14,567
            
            
            2,187
            
            
            1,042Corporate
                and eliminations
            
            
            -
            
            
            -
            
            
            (3,289
            )
            
            133
            
            
            1Consolidated
            
            $
            82,523
            
            $
            50,217
            
            $
            11,278
            
            $
            2,320
            
            $
            1,043*Two
                Quarters Ended*
              *February
                25, 2006***Consumer
                and Small Business Unit:**Retail
            
            $
            38,506
            
            $
            23,012
            
            $
            5,422
            
            $
            782
            
            $
            -Consumer
                direct
            
            
            37,788
            
            
            22,832
            
            
            18,482
            
            
            27
            
            
            -Wholesale
            
            
            10,229
            
            
            5,048
            
            
            4,695
            
            
            -
            
            
            -Other
                CSBU
            
            
            2,454
            
            
            512
            
            
            (15,654
            )
            
            657
            
            
            57Total
                CSBU
            
            
            88,977
            
            
            51,404
            
            
            12,945
            
            
            1,466
            
            
            57**Organizational
                Solutions Business Unit:**Domestic
            
            
            31,616
            
            
            20,798
            
            
            2,346
            
            
            164
            
            
            1,943International
            
            
            30,091
            
            
            20,378
            
            
            7,905
            
            
            651
            
            
            3Total
                OSBU
            
            
            61,707
            
            
            41,176
            
            
            10,251
            
            
            815
            
            
            1,946Total
                operating segments
            
            
            150,684
            
            
            92,580
            
            
            23,196
            
            
            2,281
            
            
            2,003Corporate
                and eliminations
            
            
            -
            
            
            -
            
            
            (3,871
            )
            
            348
            
            
            -Consolidated
            
            $
            150,684
            
            $
            92,580
            
            $
            19,325
            
            $
            2,629
            
            $
            2,003*Two
                Quarters Ended*
              *February
                26, 2005***Consumer
                and Small Business Unit:**Retail
            
            $
            46,443
            
            $
            26,977
            
            $
            6,536
            
            $
            1,522
            
            $
            -Consumer
                direct
            
            
            37,245
            
            
            22,302
            
            
            15,398
            
            
            494
            
            
            -Wholesale
            
            
            8,480
            
            
            4,077
            
            
            3,702
            
            
            -
            
            
            -Other
                CSBU
            
            
            1,750
            
            
            (1,249
            )
            
            (14,491
            )
            
            1,366
            
            
            172Total
                CSBU
            
            
            93,918
            
            
            52,107
            
            
            11,145
            
            
            3,382
            
            
            172**Organizational
                Solutions Business Unit:**Domestic
            
            
            29,568
            
            
            20,127
            
            
            2,980
            
            
            153
            
            
            1,907International
            
            
            28,141
            
            
            19,418
            
            
            7,158
            
            
            663
            
            
            4Total
                OSBU
            
            
            57,709
            
            
            39,545
            
            
            10,138
            
            
            816
            
            
            1,911Total
                operating segments
            
            
            151,627
            
            
            91,652
            
            
            21,283
            
            
            4,198
            
            
            2,083Corporate
                and eliminations
            
            
            -
            
            
            -
            
            
            (4,499
            )
            
            300
            
            
            4Consolidated
            
            $
            151,627
            
            $
            91,652
            
            $
            16,784
            
            $
            4,498
            
            $
            2,087





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





Quarter
                Ended
            
            Two
                Quarters EndedFebruary
                25,
              2006
            
            February
                26,
              2005
            
            February
                25,
              2006
            
            February
                26,
              2005Reportable
                segment EBITDA
            
            $
            14,630
            
            $
            14,567
            
            $
            23,196
            
            $
            21,283Restructuring
                cost reversal
            
            
            
            
            
            
            
            
            
            
            
            306Corporate
                expenses
            
            
            (1,945
            )
            
            (3,289
            )
            
            (3,871
            )
            
            (4,805
            )Consolidated
                EBITDA
            
            
            12,685
            
            
            11,278
            
            
            19,325
            
            
            16,784Depreciation
            
            
            (1,221
            )
            
            (2,320
            )
            
            (2,629
            )
            
            (4,498
            )Amortization
            
            
            (908
            )
            
            (1,043
            )
            
            (2,003
            )
            
            (2,087
            )Income
                from operations
            
            
            10,556
            
            
            7,915
            
            
            14,693
            
            
            10,199Interest
                income
            
            
            316
            
            
            165
            
            
            645
            
            
            282Interest
                expense
            
            
            (660
            )
            
            (29
            )
            
            (1,303
            )
            
            (66
            )Legal
                settlement
            
            
            873
            
            
            -
            
            
            873
            
            
            -Income
                before provision for income taxes
            
            $
            11,085
            
            $
            8,051
            
            $
            14,908
            
            $
            10,415








**NOTE
      11 - SUBSEQUENT EVENTS**





***Management
      Common Stock Loan Modifications***





Subsequent
      to February 25, 2006, the Company offered participants in its management common
      stock loan program the opportunity to formally modify the terms of their loans
      in exchange for placing their shares of common stock obtained through the loan
      program in an escrow account that allows the Company to have a security interest
      in the loan program shares. The key modifications to the management common
      stock
      loans for the participants accepting the offer are as follows:





·**Modification
                of Promissory Note -**The
                management stock loan due date will be changed to be the earlier
                of (a)
                March 30, 2013, or (b) the date on which the Company’s stock closes, as
                reported by the exchange or market that is the principal market for
                our
                common stock, at or above the price per share such that the value
                of the
                shares acquired by the participants under the program is equal to
                the
                principal and accrued interest on the participants’ promissory notes
                (Breakeven Date). The interest rate on the loans will increase from
                3.16
                percent compounded annually to 4.72 percent compounded
                annually.·**Redemption
                of Management Loan Program Shares -**The
                Company will have the right to redeem the shares on the due date
                in
                satisfaction of the promissory notes as
                follows:





(a)
            On
                the Breakeven Date, the Company will purchase and redeem from the
                loan
                participants the number of loan program shares necessary to satisfy
                the
                participant’s obligation under the promissory note. The redemption price
                for each such loan program share will be equal to the closing price
                of our
                common stock on the Breakeven Date.(b)
            If
                the Company’s stock has not closed at or above the breakeven price on or
                before March 30, 2013, the Company will purchase and redeem from
                the
                participants all of their loan program shares at the closing price
                on that
                date as partial payment on the participant’s
                obligation.








Loan
      program participants may choose whether or not to place their loan program
      shares in the escrow account and accept the modification agreement. If a loan
      participant declines the offer to modify their management stock loan, their
      loan
      will continue to have the same terms and conditions that were previously
      approved in May 2004 by the Company’s Board of Directors and their loans will be
      due at the earlier of March 30, 2008 or the Breakeven Date. The Company believes
      that the new modifications improve its ability to collect the shares purchased
      by participants through establishing a security interest in the shares and
      facilitates redemption of the loan program shares from participants on the
      due
      date. Consistent with the May 2004 modifications, participants will be unable
      to
      realize a gain on the loan program shares unless they pay cash to satisfy the
      promissory note obligation prior to the due date.





Due
      to
      the loan program modifications that were approved in May 2004, we currently
      account for the management common stock loans as stock option arrangements.
      Under the provisions of SFAS No. 123R, which we adopted on September 1, 2005,
      additional compensation expense should be recognized only if the Company takes
      action that constitutes a modification that increases the fair value of the
      option arrangements. Since these new modifications do not increase the fair
      value of the option arrangements, no compensation expense was
      recognized.





***Amendment
      to Information Systems Outsourcing Agreement***





On
      April
      1, 2006, the Company and Electronic Data Systems Corporation and EDS Information
      Services L.L.C. (collectively “EDS”) entered into an amendment (the Amendment)
      to the Information Technology Services Agreement, dated April 1, 2001, as
      previously amended (the Outsourcing Contract). Under terms of the Outsourcing
      Contract, EDS operates our primary call center, provides warehousing and
      distribution services, supports software products, and supports our information
      systems. The Outsourcing Contract expires on June 30, 2016.





The
      key
      provisions of the Amendment include the following:





·Reduced
                pricing and decreased required minimum annual payments for information
                services support;·A
                modified provision increasing the Company’s contractual early termination
                charges if we elect to terminate the contract for convenience after
                September 1, 2007;·Clarification
                of existing requirements that the Company procure certain information
                services solely from EDS;·Clarification
                of existing provisions regarding the use of benchmarking services
                to
                measure the quality and cost effectiveness of services provided under
                the
                Outsourcing Contract; and·A
                new provision that allows EDS to share existing support personnel,
                whose
                services were previously dedicated solely to the Company, with other
                EDS
                customers.










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
      second fiscal quarter, which includes the months of December, January, and
      February, historically represents our seasonally busiest months for product
      sales as many of our clients renew their planners on a calendar-year basis
      as
      well as purchase gifts, including binders, leather totes, and planning tools
      for
      the holiday season. As a result of these seasonally strong product sales, our
      second fiscal quarter generally has better operating results than other quarters
      of our fiscal year. Our financial results for the quarter ended February 25,
      2006 represented another quarter of year-over-year improvement and maintained
      the favorable momentum that was realized in fiscal 2005 and the first quarter
      of
      fiscal 2006. Our income from operations improved to $10.6 million compared
      to
      $7.9 million in the prior year and we were able to increase our after-tax net
      income by $2.1 million to $9.2 million compared to $7.1 million in the
      comparable quarter of the prior year. Due to improved operating results and
      significantly reduced preferred dividends resulting from preferred stock
      redemptions, we recognized $8.1 million of net income available to common
      shareholders compared to $4.9 million in the corresponding quarter of fiscal
      2005.





The
      primary factors that influenced our operating results for the quarter ended
      February 25, 2006 were as follows:





·***Sales
                Performance*****-**Product
                sales declined $4.3 million due to fewer retail stores being open
                during
                the quarter and reduced technology and specialty product sales. Partially
                offsetting declines due to closed stores and technology and specialty
                products were improved comparable store sales performance and an
                increase
                in “core” product sales, including planners, binders, totes, and other
                planning tools and accessories. Training and consulting services
                sales
                increased by $0.1 million, which was the result of improved international
                sales and decreased sales effectiveness training. Other domestic
                training
                program sales increased compared to the prior year. As a result these
                performance factors, total sales decreased by $4.2 million, or 5
                percent,
                compared to the corresponding quarter of the prior year.·***Gross
                Margin***-
                When compared to the prior year, our gross margin in dollars declined
                due
                to decreased sales. However, our gross margin improved when measured
                as a
                percent of sales due to favorable product mix changes and increased
                training sales as a percent of total sales.·***Operating
                Costs***-
                Our operating costs declined by $4.7 million compared to the prior
                year,
                which was the result of selling, general, and administrative expense
                decreases totaling $3.5 million, a $1.1 million decrease in depreciation
                expense, and a $0.1 million decrease in amortization expense.·***Legal
                Settlement***-
                During the quarter ended February 25, 2006, we settled a legal case
                that
                was originally awarded in our favor and subsequently appealed. The
                final
                settlement of this litigation resulted in other income of $0.9 million
                that was recorded in the quarter.·***Preferred
                Stock Dividends***-
                Due to preferred stock redemptions in fiscal 2005 and the first two
                quarters of fiscal 2006 totaling $50.0 million, our preferred stock
                dividend cost decreased by $1.0 million 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 February 25, 2006 Compared to the Quarter Ended February 26,
      2005





**Sales**





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





Quarter
                Ended
            
            Two
                Quarters EndedFebruary
                25, 2006
            
            February
                26, 2005
            
            Percent
                Change
            
            February
                25, 2006
            
            February
                26, 2005
            
            Percent
                Change*Sales
                by Category:*Products
            
            $
            50,841
            
            $
            55,175
            
            
            (8)
            
            $
            94,244
            
            $
            99,226
            
            
            (5)Training
                and consulting services
            
            
            27,492
            
            
            27,348
            
            
            1
            
            
            56,440
            
            
            52,401
            
            
            8$
            78,333
            
            $
            82,523
            
            
            (5)
            
            $
            150,684
            
            $
            151,627
            
            
            (1)*Consumer
                and Small Business Unit:*Retail
                Stores
            
            $
            23,836
            
            $
            28,055
            
            
            (15)
            
            $
            38,506
            
            $
            46,443
            
            
            (17)Consumer
                Direct
            
            
            19,200
            
            
            18,387
            
            
            4
            
            
            37,788
            
            
            37,245
            
            
            1Wholesale
            
            
            3,620
            
            
            4,897
            
            
            (26)
            
            
            10,229
            
            
            8,480
            
            
            21Other
                CSBU
            
            
            1,291
            
            
            765
            
            
            69
            
            
            2,454
            
            
            1,750
            
            
            4047,947
            
            
            52,104
            
            
            (8)
            
            
            88,977
            
            
            93,918
            
            
            (5)*Organizational
                Solutions Business Unit:*Domestic
            
            
            15,223
            
            
            16,162
            
            
            (6)
            
            
            31,616
            
            
            29,568
            
            
            7International
            
            
            15,163
            
            
            14,257
            
            
            6
            
            
            30,091
            
            
            28,141
            
            
            730,386
            
            
            30,419
            
            
            -
            
            
            61,707
            
            
            57,709
            
            
            7Total
                Sales
            
            $
            78,333
            
            $
            82,523
            
            
            (5)
            
            $
            150,684
            
            $
            151,627
            
            
            (1)





***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 $4.3 million, or
      8
      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 $4.2 million decline in retail sales was due to fewer stores,
                which
                had a $4.9 million impact on sales, and reduced technology and specialty
                product sales, which totaled $0.4 million. Partially offsetting these
                declines were increased “core” product (e.g. planners, binders, and totes)
                sales during the quarter. At February 25, 2006, we were operating
                97
                retail stores compared to 121 stores at February 26, 2005. Improved
                core
                product sales trends were reflected in a three percent increase 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) increased primarily due to increased public seminar sales
                and
                the transition of clients from closed retail stores to consumer direct
                channels.·**Wholesale**-
                Sales through our wholesale channel, which includes sales to office
                superstores and other retail chains, decreased due to the timing
                of
                product sales to these entities.·**Other
                CSBU**-
                Other CSBU sales consist primarily of domestic printing and publishing
                sales and building sublease revenues. The increase in other CSBU
                sales was
                primarily due to increased sublease revenue. During fiscal 2005 we
                began
                subleasing a substantial portion of our corporate
                headquarters.




***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 $0.1 million, or one percent, compared to the same period of the
      prior year. The improvement in training and consulting service sales was
      primarily attributable to the following sales performance in our OSBU
      divisions:





·**Domestic*****-***Our
                domestic training sales declined by $0.9 million, or six percent,
                primarily due to a $2.2 million decrease in our sales effectiveness
                training sales. This decrease was primarily due to a large sales
                transaction that was completed during the second quarter of the prior
                year. This decline was partially offset by increased sales of other
                training courses, especially those related to our*The
                7 Habits of Highly Effective People*training courses. In addition, training manual sales increased by
                $0.8
                million and the number of training and consulting days sold increased
                by
                nine percent over the prior year. We anticipate that domestic training
                will strengthen in fiscal 2006 as we began our third fiscal quarter
                with
                more training days booked than at the same period in the prior
                year.·**International*****-***International sales increased $0.9 million, or six percent, compared
                to
                the prior year. The increase was the result of increased sales at
                our
                directly owned offices in Japan and Brazil, as well as a 19 percent
                increased in licensee royalty revenues. The translation of foreign
                sales
                resulted in a $0.7 million unfavorable impact to our consolidated
                sales as
                certain foreign currencies, particularly the Japanese Yen, weakened
                against the United States dollar during much of the quarter ended
                February
                25, 2006.




**Gross
      Margin**





Gross
      margin consists of net sales less the cost of goods sold or the cost of services
      provided. Our overall gross margin improved to 61.5 percent of sales for the
      quarter, compared to 60.9 percent in the comparable quarter of fiscal 2005.
      The
      improvement in our overall gross margin was primarily due to favorable product
      mix changes and increased training sales as a percent of total sales. Training
      and consulting service sales, which typically have higher gross margins than
      our
      product sales, increased to 35 percent of total sales during the quarter ended
      February 25, 2006 compared to 33 percent in the prior year.





Our
      gross
      margin on product sales improved to 56.2 percent compared to 55.4 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 71.4 percent compared to 71.8 percent in the prior
      year.





**Operating
      Expenses**





***Selling,
      General and Administrative*** **-** Our
      selling, general, and administrative (“SG&A”) expenses decreased $3.5
      million, or nine percent, compared to the prior year. The decrease in SG&A
      expenses was primarily due to reduced retail store costs resulting from fewer
      stores, reduced compensation costs from stock-based compensation awards, reduced
      bad debt expense, the recovery of legal expenses from a legal settlement (refer
      to discussion below), and the favorable results of initiatives to reduce overall
      operating costs. Our retail store costs decreased $1.3 million due to store
      closures that occurred in prior periods. During the quarter ended February
      26,
      2005, we recognized $0.7 million of compensation expense from unvested stock
      awards resulting from changes in CEO compensation and the acceleration of
      previously issued unvested stock awards. These costs did not repeat in the
      quarter ended February 25, 2006. Through improvements in our accounts receivable
      collections we reduced our bad debt expense during the quarter and recovered
      $0.3 million of legal costs from the WMA settlement. In addition to these
      decreases, we continue to implement strategies designed to reduce our overall
      operating costs. Our cost-reduction efforts have included retail store closures,
      headcount reductions, and other measures designed to focus our resources on
      critical activities and projects related to growth opportunities. The favorable
      impact of these efforts resulted in reduced SG&A expenses in many areas of
      the Company during the quarter ended February 25, 2006.





Partially
      offsetting these expense reductions were costs related to our investment in
      various growth initiatives. 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.





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
      closed eight retail store locations near the conclusion of the quarter ended
      February 25, 2006 and have closed three additional retail locations subsequent
      to the end of the quarter. We incurred and expensed $0.3 million of costs
      related to closed stores during the quarter ended February 25, 2006 compared
      to
      $0.4 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.





During
      the quarter ended February 25, 2006 our shareholders approved a long-term
      incentive plan (LTIP) that permits the grant of unvested share awards of common
      stock to certain employees. The LTIP share awards granted during the quarter
      ended February 25, 2006 cliff vest on August 31, 2008, which is the completion
      of a three-year performance period. The number of shares that are finally
      awarded to participants is variable and is based entirely upon the achievement
      of a combination of performance objectives related to sales growth and operating
      income during the three-year performance period. The award was initially for
      377,665 shares (target award) of common stock. The award shares were valued
      at
      $6.60 per share, and the corresponding initial compensation cost totaled $2.5
      million. However, the number of shares that will ultimately vest under the
      LTIP
      will vary depending on whether the performance criteria are met or exceeded.
      The
      award will be reviewed quarterly and the value may be adjusted, depending on
      the
      performance of the Company compared to the award criteria. The compensation
      cost
      of the award is being expensed over the three-year service period of the award.
      As a result, the award will increase our SG&A expense during the vesting
      period.





***Depreciation
      and Amortization*** **-** Depreciation
      expense decreased $1.1 million, or 47 percent, compared to the second quarter
      of
      fiscal 2005 primarily due to the full depreciation or disposal of certain
      property and equipment (including retail stores) and the effects of
      significantly reduced capital expenditures during preceding fiscal years. Based
      upon these events and current capital spending trends, we expect that
      depreciation expense will continue to decline during fiscal 2006 as compared
      to
      prior periods.





Amortization
      expense from definite-lived intangible assets totaled $0.9 million for the
      quarter ended February 25, 2006 compared to $1.0 million in the prior year.
      We
      expect intangible asset amortization expense to decline compared to the prior
      year as certain intangible assets become fully amortized during fiscal
      2006.





**Other
      Income and Expense Items**





***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.





***Legal
      Settlement*** **-** 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
      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. 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, we 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 recorded a $0.9
      million gain from the legal settlement.





**Income
      Taxes**





The
      provision for income taxes increased to $1.9 million compared to $1.0 million
      for the same quarter of the prior year. The increase in our income tax provision
      was primarily due to increased domestic income taxes resulting from improved
      domestic operating results and the Company’s inability to fully offset domestic
      taxable earnings with net operating loss carryforwards generated in prior years
      and an assessment received in a foreign jurisdiction. In addition, we were
      unable to offset our tax liabilities in foreign jurisdictions with our domestic
      operating loss carryforwards. Our 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
      at February 25, 2006.





As
      our
      operating results continue to improve and our taxable income continues to
      increase, we are accumulating positive evidence which may allow the Company
      to
      reverse these valuation allowances on our deferred income tax assets in the
      future.





Two
      Quarters Ended February 25, 2006 Compared to the Two Quarters Ended February
      26,
      2005





**Sales**





***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 $5.0 million, or
      5
      percent, compared to the prior year. The decline in product sales was primarily
      due to the following performance in our CSBU channels:





·**Retail
                Stores**-
                Retail sales declined $7.9 million compared to the prior year. The
                decrease was due to fewer stores, which had an $8.3 million impact
                on
                sales, and reduced technology and specialty product sales, which
                totaled
                $1.1 million. Partially offsetting these declines were increased
“core”
                product sales. Improved core product sales trends were reflected
                in a one
                percent increase in comparable store sales compared to the prior
                year.·**Consumer
                Direct**-
                Year-to-date sales through our consumer direct channels (catalog,
                eCommerce, and public seminars) remained relatively consistent with
                the
                prior year and increased slightly due to increased public seminar
                sales
                and the transition of clients from closed retail stores to consumer
                direct
                channels.·**Wholesale**-
                Sales through our wholesale channel 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 primarily due to increased sublease revenue compared to the prior
                year.




***Training
      and Consulting Services*** **-** Our
      overall training and consulting service sales increased by $4.0 million, or
      eight percent, compared to the same period of the prior year. The improvement
      in
      training and consulting service sales was primarily attributable to the
      following sales performance for the first two quarters of fiscal 2006 in our
      OSBU divisions:





·**Domestic*****-***Our
                domestic training sales increased by $2.0 million, or seven percent,
                compared to fiscal 2005. The increase was primarily due to improved
                sales
                of training courses related to our*The
                7 Habits of Highly Effective People*curriculum. Increased sales of these programs were partially offset
                by
                decreased sales effectiveness training sales. Training manual sales
                increased by $2.1 million and the number of training and consulting
                days
                sold increased by six percent over the prior year.·**International*****-***International sales increased $2.0 million, or seven percent, compared
                to
                the prior year. The increase was the result of increased sales at
                our
                directly owned offices in Japan, Mexico, and Brazil, as well as a
                16
                percent increase in licensee royalty revenues. The translation of
                foreign
                sales resulted in a $0.8 million unfavorable impact to our consolidated
                sales as certain foreign currencies, particularly in Japan, weakened
                against the United States dollar during the two quarters ended February
                25, 2006.




**Gross
      Margin**





Our
      overall gross margin for the two quarters ended February 25, 2006 improved
      to
      61.4 percent of sales, compared to 60.4 percent in the comparable period 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
      sales
      mix changes. Training and consulting service sales, which typically have higher
      gross margins than our product sales, increased to 38 percent of total sales
      in
      fiscal 2006 compared to 35 percent in the prior year.





Our
      gross
      margin on product sales improved to 56.5 percent compared to 55.3 percent 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
      and consulting services gross margin, as a percent of sales, declined slightly
      to 69.6 percent compared to 70.3 percent in fiscal 2005.




**Operating
      Expenses**





***Selling,
      General and Administrative*** **-** Our
      SG&A expenses decreased $1.6 million, or two percent, compared to the prior
      year. The decrease in SG&A expenses was primarily due to reduced retail
      store costs resulting from fewer stores, reduced compensation costs from
      stock-based compensation awards, and the favorable results of initiatives to
      reduce overall operating costs. Our retail store costs decreased $2.5 million
      due to store closures that occurred in prior periods. During the quarter ended
      February 26, 2005, we recognized $0.7 million of compensation expense from
      unvested stock awards resulting from changes in CEO compensation and the
      acceleration of previously issued unvested stock awards. These costs did not
      repeat in fiscal 2006. We also recovered $0.3 million of legal costs from the
      WMA settlement during the quarter ended February 25, 2006. In addition to these
      decreases, we continue to implement strategies designed to reduce our overall
      operating costs. The favorable impact of these efforts has resulted in reduced
      SG&A expenses in many areas of the Company during the two quarters ended
      February 25, 2006.





Partially
      offsetting these expense reductions were costs related to our investment in
      various initiatives intended 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.





We
      regularly assess the operating performance of our retail stores, including
      previous operating performance trends and projected future profitability. As
      a
      result of this evaluation process, we closed eight retail stores during the
      two
      quarters ended February 25, 2006 and have closed three additional retail
      locations subsequent to February 25, 2006. We incurred and expensed $0.3 million
      of costs related to store closure activities compared to $0.6 million for store
      closure costs in the same period of the prior year. 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 two quarters ended February 25, 2006, 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 $1.9 million, or 42 percent, compared to the first two
      quarters of fiscal 2005 primarily due to the full depreciation or disposal
      of
      certain property and equipment 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 during the remainder of fiscal 2006 as compared to prior
      periods.





Amortization
      expense on definite-lived intangible assets totaled $2.0 million for the two
      quarters ended February 25, 2006 compared to $2.1 million in the prior year.
      We
      expect intangible asset amortization expense to total $3.8 million in fiscal
      2006.





**Other
      Income and Expense Items**





***Interest
      Income*** *-* Our
      interest income increased $0.4 million primarily due to higher average cash
      balances and increased interest rates on our interest-bearing cash
      accounts.





***Interest
      Expense*** *-* Our
      interest expense increased $1.2 million primarily due to the sale of our
      corporate headquarters facility and the resulting interest component of our
      lease payments to the landlord.





***Legal
      Settlement*** **-** During
      the quarter ended February 25, 2006, we entered into a legal settlement with
      WMA. Under the terms of the settlement agreement, WMA agreed to dismiss its
      appeal of a jury award that was rendered in our favor for breach of contract.
      As
      a result of this settlement agreement and dismissal of WMA’s appeal, we recorded
      a $0.9 million gain from the legal settlement. For more information regarding
      the legal settlement, refer to the discussion under the quarter ended February
      25, 2006 compared to the quarter ended February 26, 2005.





**Income
      Taxes**





Our
      provision for income taxes increased by $0.7 million to $2.5 million for the
      two
      quarters ended February 25, 2006 compared to $1.8 million in the prior year.
      The
      increase in our income tax provision was primarily due to increased domestic
      income taxes resulting from improved domestic operating results and the
      Company’s inability to fully offset domestic taxable earnings with net operating
      loss carryforwards generated in prior years and an assessment the Company
      received in a foreign jurisdiction. In addition, we were unable to offset our
      tax liabilities in foreign jurisdictions with our domestic operating loss
      carryforwards. Our 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 at
      February 25, 2006.





As
      our
      operating results continue to improve and our taxable income continues to
      increase, we are accumulating positive evidence which may allow the Company
      to
      reverse these valuation allowances on our deferred income tax assets in a future
      period.




**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. Our second fiscal quarter, which includes our
      seasonally high-product sales months of December and January, has historically
      produced profitable operating results and significant cash flows from operating
      activities. At February 25, 2006 we had $36.4 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 $40.7 million
      at
      February 25, 2006 compared to $49.9 million at August 31, 2005.





During
      the first two quarters of fiscal 2006, one of our primary uses of cash has
      been
      the redemption of Series A preferred stock. During the quarter ended February
      25, 2006, we redeemed $10.0 million, or approximately 400,000 shares, of
      preferred stock and during the first two quarters of fiscal 2006 we redeemed
      a
      total of $20.0 million, or approximately 800,000 shares, of preferred stock.
      Since the fiscal 2005 sale of our corporate headquarters facility, we have
      redeemed $50.0 million of preferred stock which has reduced our preferred stock
      dividend obligation by $5.0 million per year. However, in connection with the
      sale of our corporate campus, which provided proceeds of $32.4 million, 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. The Company
      believes that its strategy related to the sale of the corporate campus and
      subsequent redemptions of preferred stock will improve overall cash flows in
      future periods. In addition to preferred stock redemptions, we also obtained
      authorization from the Board of Directors to purchase up to $10.0 million of
      our
      common stock. During the quarter ended February 25, 2006, we purchased 210,200
      shares of common stock for $1.6 million as part of the newly approved and
      announced program to purchase common shares. We currently anticipate that
      additional preferred stock redemptions and common stock purchases 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
      two
      quarters ended February 25, 2006.





**Cash
      Flows From Operating Activities**





During
      the two quarters ended February 25, 2006, our net cash provided by operating
      activities totaled $11.2 million compared to $12.2 million for the same period
      of the prior year. Our primary source of cash from operating activities was
      the
      sale of goods and services to our customers in the normal course of business.
      The primary uses of cash for operating activities were payments to suppliers
      for
      materials used in products sold, payments for direct costs necessary to conduct
      training programs, and payments for selling, general, and administrative
      expenses. Cash used for changes in working capital during the first two quarters
      of fiscal 2006 was primarily related to 1) payments made to reduce accrued
      liabilities and accounts payable from seasonally high August 31 balances; 2)
      inventory purchases for production to fulfill expected recurring wholesale
      orders; and 3) financing increased accounts receivable balances. We believe
      that
      our continued efforts to optimize working capital balances, combined with
      existing and planned sales growth programs and cost-cutting initiatives, will
      improve our cash flows from operating activities in future periods. However,
      the
      success of these efforts, and their eventual contribution to our cash flows,
      is
      dependent upon numerous factors, many of which are not within our
      control.





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





Net
      cash
      used for investing activities totaled $3.4 million for the two quarters ended
      February 25, 2006. 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 $2.4 million, and further investment in
      curriculum development, primarily related to new and refreshed training courses
      based primarily on *The
      7
      Habits of Highly Effective People* ,
      which
      totaled $1.0 million.





**Cash
      Flows From Financing Activities**





Net
      cash
      used for financing activities during the two quarters ended February 25, 2006
      totaled $23.1 million. Our primary uses of cash for financing activities during
      this period were the redemption of $20.0 million, or approximately 800,000
      shares, of Series A preferred stock and the payment of preferred stock
      dividends, which totaled $3.0 million (which included accrued dividends on
      redeemed shares through the date of redemption). We 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. As previously mentioned, we purchased 210,200
      shares of our common stock for $1.6 million, of which $1.4 million was accrued
      and then paid subsequent to the end of the quarter during the normal three-day
      settlement period for such transactions.





**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. Subsequent to the quarter ended February 25, 2006 we amended our
      outsourcing agreement with Electronic Data Systems Corporation (EDS). One of
      the
      key provisions of this amendment is reduced required minimum annual payments
      for
      information systems support. Although we may pay more than the minimum required
      payments due to actual usage and other factors, the contractually required
      minimum annual payments were reduced by a total of $84.2 million over the life
      of the outsourcing agreement, which extends through June 30, 2016. The following
      table has been revised to reflect the decreased minimum required annual payments
      to EDS for outsourcing services as well as the impact of fiscal 2006 preferred
      stock redemptions, totaling $20.0 million, on projected dividend payments and
      monitoring fees paid to a preferred stock investor. Contractual obligations
      in
      other captions presented have not changed materially from those disclosed in
      our
      fiscal 2005 report on Form 10-K and were not revised (in
      thousands).





Fiscal
            
            Fiscal
            
            Fiscal
            
            Fiscal
            
            FiscalContractual
                Obligations
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            Thereafter
            
            TotalMinimum
                required payments to EDS for outsourcing services
            
            $
            19,825
            
            $
            17,217
            
            $
            15,901
            
            $
            15,927
            
            $
            15,577
            
            $
            88,531
            
            $
            172,978Required
                payments on corporate campus financing obligation
            
            
            3,045
            
            
            3,045
            
            
            3,045
            
            
            3,045
            
            
            3,055
            
            
            53,072
            
            
            68,307Minimum
                operating lease payments
            
            
            8,509
            
            
            6,204
            
            
            5,346
            
            
            4,225
            
            
            3,148
            
            
            7,718
            
            
            35,150Preferred
                stock dividend payments
            
            
            4,385
            
            
            3,735
            
            
            3,735
            
            
            3,735
            
            
            3,735
            
            
            -
            
            
            19,325Debt
                payments
            
            
            866
            
            
            160
            
            
            155
            
            
            148
            
            
            143
            
            
            554
            
            
            2,026Contractual
                computer hardware and software purchases
            
            
            1,334
            
            
            680
            
            
            797
            
            
            1,072
            
            
            1,334
            
            
            6,059
            
            
            11,276Monitoring
                fees paid to a preferred stock investor
            
            
            195
            
            
            166
            
            
            166
            
            
            166
            
            
            166
            
            
            -
            
            
            859Total
                expected contractual
              obligation
                payments
            
            $
            38,159
            
            $
            31,207
            
            $
            29,145
            
            $
            28,318
            
            $
            27,158
            
            $
            155,934
            
            $
            309,921





**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 had 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
      chose
      to forego 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 the May 2004 modifications and this accounting
      treatment, the remaining carrying value of the notes and interest receivable
      related to the notes, which totaled $7.6 million, was reduced to zero with
      a
      corresponding reduction in additional paid-in capital.





We
      currently account for the management common stock loans as stock option
      arrangements. Under the provisions of SFAS No. 123R, which we adopted on
      September 1, 2005, additional compensation expense will be recognized only
      if
      the Company takes action that constitutes a modification which increases the
      fair value of the option arrangements. Subsequent to February 25, 2006, the
      Company offered management stock loan participants the opportunity to formally
      modify the terms of their stock loans in exchange for placing stock loan shares
      in an escrow account controlled by the Company. Under terms of the new
      modifications, the management stock loan due date will be changed to be the
      earlier of (a) March 30, 2013, or (b) the date on which the Company’s stock
      closes, as reported by the exchange or market that is the principal market
      for
      our common stock, at or above the price per share such that the value of the
      shares acquired by the participant equals the principal and accrued interest
      on
      the participant’s promissory note (the Breakeven Price). The modifications give
      the Company the right to redeem the stock on the due date of the promissory
      note. In addition, the interest rate on the loans will increase from 3.16
      percent compounded annually to 4.72 percent compounded annually. Since these
      new
      modifications do not increase the fair value of the option arrangements, we
      did
      not recognize any additional compensation expense.





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




**USE
      OF ESTIMATES AND CRITICAL ACCOUNTING
      POLICIES**





Our
      consolidated financial statements were prepared in accordance with accounting
      principles generally accepted in the United States of America. The significant
      accounting polices that we used to prepare our consolidated financial statements
      are outlined in Note 1 to the consolidated financial statements, which are
      presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
      year ended August 31, 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
      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 has historically precluded 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. As our operating results continue to improve and our taxable
      income continues to increase, we are accumulating positive evidence which may
      allow the Company to reverse all, or a portion of, our valuation allowances.
      We
      will continue to evaluate both positive and negative evidence and when it
      becomes more likely than not that all or a portion of our deferred tax assets
      will be realizable, we will reduce our valuation allowance. The decision to
      increase or decrease our valuation allowances requires significant judgment,
      including estimates of future income that may or may not be
      realized.




**NEW
      ACCOUNTINGPRONOUNCEMENTS**





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
      February 25, 2006, 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
      RISKOF 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 and two quarters ended February 25, 2006, we utilized foreign
      currency forward contracts to manage the volatility of certain intercompany
      financing transactions and other transactions that are denominated in foreign
      currencies. Because these contracts do not meet specific hedge accounting
      requirements, gains and losses on these contracts, which expire on a quarterly
      basis, are recognized currently and are used to offset a portion of the gains
      or
      losses of the related accounts. The gains and losses on these contracts were
      recorded as a component of SG&A expense in the Company’s consolidated
      statements of operations and resulted in the following net gains or losses
      for
      the periods indicated (in thousands):





Quarter
                Ended
            
            Two
                Quarters EndedFebruary
                25,
              2006
            
            February
                26, 2005
            
            February
                25,
              2006
            
            February
                26, 2005Losses
                on foreign exchange contracts
            
            $
            (22
            )
            $
            (58
            )
            $
            (68
            )
            $
            (353
            )Gains
                on foreign exchange contracts
            
            
            5
            
            
            3
            
            
            222
            
            
            3Net
                gain (loss) on foreign exchange contracts
            
            $
            (17
            )
            $
            (55
            )
            $
            154
            
            $
            (350
            )





At
      February 25, 2006, 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 February 25, 2006 (in thousands):





Contract
                Description
            
            Notional
                Amount in Foreign Currency
            
            Notional
                Amount in U.S. DollarsJapanese
                Yen
            
            
            340,000
            
            $
            2,870Australian
                Dollars
            
            
            1,550
            
            
            1,142Mexican
                Pesos
            
            
            5,200
            
            
            491





During
      the quarter and two quarters ended February 26, 2005, 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 our consolidated balance sheet. During the quarter
      and
      two quarters ended February 26, 2005, we recorded losses totaling less than
      $0.1
      million and $0.3 million, respectively, from these contracts.





During
      the quarter ended February 25, 2006, 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, we do not have significant exposure or additional liability
      due to interest rate sensitivity and we were not party to any interest rate
      swap
      or other interest related derivative instruments during the quarter ended
      February 25, 2006.




ITEM 4.
            CONTROLS
              AND
              PROCEDURES




**Evaluation
      of Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the Company’s Exchange Act reports is
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission’s rules and forms and that such
      information is accumulated and communicated to our management, including the
      Chief Executive Officer and the Chief Financial Officer, as appropriate, to
      allow for timely decisions regarding required disclosure. In designing and
      evaluating the disclosure controls and procedures, management recognizes that
      any controls and procedures, no matter how well designed and operated, can
      provide only reasonable assurance of achieving the desired control objectives,
      and management is required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures.





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, which included an
      evaluation of remediation efforts related to controls over income taxes, the
      Chief Executive Officer and the Chief Financial Officer concluded that our
      disclosure controls and procedures were effective as of the end of the period
      covered by this Quarterly Report on Form 10-Q.





**Changes
      in Internal Control Over Financial Reporting**





In
      order
      to remediate the aforementioned material weakness, management has implemented
      additional internal controls over financial reporting regarding income taxes
      through additional training on accounting for income taxes and through
      additional monitoring and review controls.





Other
      than as described above, there has been no change in the Company’s internal
      controls over financial reporting during the fiscal quarter ended February
      25,
      2006 that has materially affected, or is reasonably likely to materially affect,
      our internal controls over financial reporting.




**SAFE
      HARBORSTATEMENT 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
                ProceedingsDuring
                fiscal 2002, we received a subpoena from the Securities and Exchange
                Commission (SEC) seeking documents and information relating to our
                management stock loan program and previously announced, and withdrawn,
                tender offer. We provided the documents and information requested
                by the
                SEC, including the testimonies of our Chief Executive Officer, Chief
                Financial Officer, and other key employees. During February 2006,
                we
                received notification from the SEC that the investigation was terminated
                without a recommendation for enforcement action.Item
                2.
            Unregistered
                Sales of Equity Securities and Use of ProceedsThe
                Company acquired the following securities during the quarter ended
                February 25, 2006 (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:November
                  27, 2005 to December 31, 2005
              
              
              14(1)
              
              $
              6.82
              
              
              none
              
              
              n/aJanuary
                  1, 2006 to January 28, 2006
              
              
              -
              
              
              -
              
              
              none
              
              
              n/aJanuary
                  29, 2006 to February 25, 2006
              
              
              210(2)
              
              
              7.43
              
              
              210
              
              
              n/aTotal
                  Common Shares
              
              
              224
              
              $
              7.39
              
              
              
              
              
              1,110(2)Total
                  Preferred Shares
              
              
              400(3)
              
              $
              25.00


(1)
            Amount
                consists of shares purchased for distribution to participants in
                the
                Company’s employee stock purchase plan and shares received from a
                management stock loan program participant for payment on the associated
                loan.(2)
            In
                January 2006, the Company’s Board of Directors approved the purchase of up
                to $10.0 million of our outstanding common stock. All previous authorized
                common stock purchase plans were canceled. During the period from
                January
                29, 2006 through February 25, 2006, we purchased 210,200 shares of
                common
                stock for $1.6 million as part of the newly approved and announced
                program. The maximum number of shares that may yet be purchased under
                this
                plan was calculated by dividing the remaining approved dollars by
                $7.60,
                which was the closing price of the Company’s common stock on February 24,
                2006 (last trading day of fiscal quarter).(3)
            Amount
                represents the redemption of $10.0 million of Series A preferred
                stock
                during the period from January 29, 2006 to February 25,
                2006.




Item
                4.
            Submission
                of Matters to a Vote of Security HoldersWe
                held our Annual Meeting of Shareholders on January 20, 2006. The
                following
                represents a summary of each matter voted upon and the corresponding
                voting results for each item considered by shareholders at the Annual
                Meeting.Further
                information regarding each item can be found in the Company’s definitive
                Proxy Statement dated December 19,
                2005.





**1.**
            **Election
                of Directors -**Three
                directors were elected for three-year terms that expire at the Annual
                Meeting of Shareholders to be held following the end of fiscal 2008,
                or
                until their successors are elected and qualified. The number of shares
                voting in favor of each director was as
                follows:





Stephen
                R. Covey
            
            19,134,313Robert
                H. Daines
            
            19,148,952Dennis
                G. Heiner
            
            19,148,880





**2.**
            **Amendment
                of 1992 Stock Incentive Plan -**We
                amended our 1992 Stock Incentive Plan to 1) increase the maximum
                number of
                shares of common stock that may be issued from 6,000,000 shares to
                7,000,000 shares; 2) limit the number of shares that may be awarded
                under
                the Incentive Plan to any individual in a calendar year to 250,000
                shares;
                3) permit issuance of performance shares, which allows the Company
                to
                issue a designated number of shares to participants based upon the
                achievement of pre-determined conditions; and 4) specify performance
                share
                award criteria for certain employees. The number of shares that voted
                in
                favor of this amendment to the 1992 Stock Incentive Plan was 7,415,547
                shares, with 1,301,170 shares voted against, and 1,470 shares that
                abstained from voting.**3.**
            **Amendment
                to the 2004 Non-Employee Director Stock Incentive Plan -**Under
                the previous provisions of the 2004 Non-Employee Directors’ Plan, each
                eligible director received an annual unvested stock award with a
                value
                (based on the trading price of the Company’s common stock on the date of
                the award) equal to $27,500. This amendment changed the annual unvested
                stock grant to 4,500 shares of the Company’s common stock. A total of
                8,507,327 shares voted in favor of this amendment, with 197,776 shares
                voted against, and 13,084 shares that abstained from voting.**4.**
            **Amendment
                  to the Company’s Articles of Incorporation** -The
                  Company’s articles of incorporation were amended to extend the period
                  during which we have the right to redeem outstanding preferred
                  stock at
                  100 percent of its liquidation preference of $25 per share plus
                  accrued
                  dividends. The amendment extends the current redemption deadline
                  from
                  March 8, 2006 to December 31, 2006 and provides for the right to
                  extend
                  the redemption period for an additional year to December 31, 2007,
                  if
                  $10.0 million of preferred stock, in addition to prior preferred
                  stock
                  redemptions, is redeemed before December 31, 2006. The February
                  13, 2006
                  preferred stock redemption satisfied the additional extension provision
                  and we now can redeem preferred stock at the liquidation preference
                  through December 31, 2007. The number of shares that voted in favor
                  of
                  this amendment to the articles of incorporation was 8,665,042,
                  with 49,375
                  shares voted against, and 3,770 shares that abstained from
                  voting.**5.**
            **Appointment
              of Independent Auditors -**The shareholders also ratified the appointment of KPMG LLP as independent
              auditors for the fiscal year ending August 31, 2006. A total of 18,924,872
              shares voted in favor of this appointment, 59,260 shares voted against,
              and 20,575 shares abstained from voting.





Item
                5.
            Other
                InformationBased
                upon the market value of our voting and non-voting common equity
                held by
                non-affiliates at February 24, 2006, the last trading day of our
                second
                fiscal quarter, the Company has met the criteria to qualify as an
                accelerated filer under Rule 12b-2 of the Securities Exchange Act
                of 1934
                (as amended) at the end of our current fiscal year. Under current
                regulations, our annual report on Form 10-K for the year ended August
                31,
                2006 will be due 75 days from the end of the fiscal year, the Company
                will
                have to comply with section 404 of the Sarbanes-Oxley Act of 2002
                at
                August 31, 2006, and quarterly reports on Form 10-Q will be due 40
                days
                from the end of the fiscal quarter beginning in fiscal
                2007.





Item
                6.
            Exhibits





(A)
            Exhibits





3.1
            Amendment
                to Amended and Restated Articles of Incorporation of Franklin Covey
                was
                included as Appendix C to the Definitive Proxy Statement filed December
                12, 2005 and is incorporated herein by this reference.10.1
            The
                Fifth Amendment to the Franklin Covey Co. Amended and Restated 1992
                Stock
                Incentive Plan was included as Appendix A to the Definitive Proxy
                Statement filed December 12, 2005 and is incorporated herein by this
                reference.10.2
            The
                First Amendment to the Franklin Covey Co. 2004 Non-Employee Director
                Stock
                Incentive Plan was included as Appendix B to the Definitive Proxy
                Statement filed December 12, 2005 and is incorporated herein by this
                reference.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:
            April
                11, 2006
            
            By:
            /s/
                ROBERT A. WHITMANRobert
                A. WhitmanChief
                Executive OfficerDate:
            April
                11, 2006
            
            By:
            /s/
                STEPHEN D. YOUNGStephen
                D. YoungChief
                Financial Officer