Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995."

The Company suggests that the following discussion and analysis be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended August 31, 2008.

RESULTS OF OPERATIONS

Overview

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

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

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

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

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

· Operating Expenses - Our operating expenses decreased by $18.6 million compared to the prior year, which was primarily due to the sale of CSBU. Decreased operating expenses consisted of an $18.2 million decrease in selling, general, and administrative expenses and decreased depreciation expense.

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

Quarter Ended November 29, 2008 Compared to the Quarter Ended December 1, 2007

Sales

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

                                                    Quarter Ended
                               November 29,
                                   2008          December 1, 2007       Percent Change
Sales by Category
Training and consulting
services                        $     30,481      $         34,199                  (11 )
Products                               3,681                38,802                  (91 )
Leasing                                  919                   573                   60
                                $     35,081      $         73,574                  (52 )

Sales by Business Unit
Organizational Solutions
Business Unit:
Domestic                        $     20,726      $         23,964                  (14 )
International                         13,436                13,567                   (1 )
                                      34,162                37,531                   (9 )

Consumer Solutions Business
Unit:
Retail Stores                              -                13,135                 (100 )
Consumer Direct                            -                14,812                 (100 )
Wholesale                                  -                 4,261                 (100 )
CSBU International                         -                 2,671                 (100 )
Other CSBU                                 -                   591                 (100 )
                                           -                35,470                 (100 )
Leasing                                  919                   573                   60
Total Sales                     $     35,081      $         73,574                  (52 )

Training and Consulting Services - We offer a variety of training courses, training related products, and consulting services focused on leadership, productivity, strategy execution, sales force performance, and effective communications that are provided both domestically and internationally through the OSBU. Our OSBU sales, which primarily consist of training and consulting sales, decreased $3.4 million compared to the prior year, which was attributable to performance in both the domestic and international divisions. During the quarter ended November 29, 2008, we closed our directly owned Canadian office and transferred all remaining sales and support personnel to one of our domestic regions, depending on the location of the sales associate. Sales information presented for the period ended December 1, 2007 in the above table was adjusted to reflect the transition of Canadian sales from the international division to the domestic division. The following is a description of the sales activity in our domestic and international divisions for the quarter ended November 29, 2008:

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

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

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

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

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

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

Gross Profit

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

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

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

Operating Expenses

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

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

Amortization expense from definite-lived intangible assets for the quarter ended November 29, 2008 remained consistent with the prior year at $0.9 million. We expect intangible asset amortization expense to remain consistent with prior year amounts throughout fiscal 2009 and believe that amortization expense will total $3.6 million for the current fiscal year.

Income Taxes

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

In addition to customary non-financial terms and conditions, our line of credit requires us to be in compliance with specified financial covenants, including:
(i) a funded debt to earnings ratio; (ii) a fixed charge coverage ratio; (iii) a limitation on annual capital expenditures; and (iv) a defined amount of minimum net worth. In the event of noncompliance with these financial covenants and other defined events of default, the lenders are entitled to certain remedies, including acceleration of the repayment of amounts outstanding on the line of credit. During the quarter ended November 29, 2008, we believe that we were in compliance with the terms and financial covenants of our credit facilities. At November 29, 2008, we had $18.8 million outstanding on the line of credit.

In addition to our $25.0 million line of credit, we have a long-term variable rate mortgage on our Canadian building and a long-term lease on our corporate campus that is accounted for as a long-term financing obligation.

The following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the quarter ended November 29, 2008.

Cash Flows From Operating Activities

Our cash used for operating activities totaled $1.7 million for the quarter ended November 29, 2008 compared to $5.6 million of net cash provided by operating activities for the quarter ended December 1, 2007. Our primary source of cash from operating activities was the sale of goods and services to our customers in the normal course of business. The primary uses of cash for operating activities were payments for direct costs necessary to conduct training programs, payments for selling, general, and administrative expenses, and payments to suppliers for materials used in products sold. Cash provided by or used for changes in working capital during the quarter ended November 29, 2008 was primarily related to 1) cash paid to decrease accrued liabilities (primarily year-end bonuses and commissions) and accounts payable from seasonally high August 31 balances; 2) cash received from Franklin Covey Products, LLC to reduce the receivable from them; and 3) cash received from collections of accounts receivable. We believe that our continued efforts to optimize working capital balances, combined with existing and planned sales growth programs and cost-cutting initiatives, will improve our cash flows from operating activities in future periods. However, the success of these efforts, and their eventual contribution to our cash flows, is dependent upon numerous factors, many of which are not within our control.

Cash Flows From Investing Activities and Capital Expenditures

Net cash used for investing activities totaled $1.0 million for the quarter ended November 29, 2008. Our primary uses of cash for investing activities were the purchase of property and equipment and additional spending on curriculum development. Our purchases of property and equipment, which totaled $0.6 million, consisted primarily of computer software, computer hardware, and office furniture and equipment. During the first quarter of fiscal 2008, we spent $0.4 million for further investment in curriculum development.

Cash Flows From Financing Activities

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

Sources of Liquidity

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

Contractual Obligations

The Company has not structured any special purpose or variable interest entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. Required contractual payments primarily consist of 1) lease payments resulting from the sale of our corporate campus (financing obligation);
2) payments to EDS for outsourcing services related to information systems, warehousing, and distribution services; 3) minimum rent payments for office and warehouse space; 4) mortgage payments on certain buildings and property; and 5) short-term purchase obligations for inventory items and other products and services used in the ordinary course of business. Except for the payment of our tender obligation, which occurred in the quarter ended November 29, 2008, there have been no significant changes to our expected required contractual obligations from those disclosed at August 31, 2008.

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

Other Items

The Company is the creditor for a loan program that provided the capital to allow certain management personnel the opportunity to purchase shares of our common stock. For further information regarding our management common stock loan program, refer to Note 11 to our consolidated financial statements on Form 10-K for the fiscal year ended August 31, 2008. The inability of the Company to collect all, or a portion, of these receivables could have an adverse impact upon our financial position and future cash flows compared to full collection of the loans.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting polices used to prepare our consolidated financial statements are outlined in Note 1 of the consolidated financial statements presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended August 31, 2008. Some of those accounting policies require us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.

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

Revenue Recognition

We derive revenues primarily from the following sources:

· Training and Consulting Services - We provide training and consulting services to both organizations and individuals in leadership, productivity, strategic execution, goal alignment, sales force performance, and communication effectiveness skills. These training programs and services are primarily sold through our OSBU channels.

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

We recognize revenue in accordance with SAB No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition. Accordingly, we recognize revenue when: 1) persuasive evidence of an agreement exists, 2) delivery of product has occurred or services have been . . .