Management's discussion and analysis of financial condition and results of operations 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."

We suggest 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, 2011.

RESULTS OF OPERATIONS

Overview

Our third quarter of each fiscal year includes the months of March, April, and May. The quarter ended May 26, 2012 was the strongest third quarter ever for our current business. Following the substantial increase in our business during the third quarter of fiscal 2011 (34% increase in sales over fiscal 2010), our fiscal 2012 financial improvements were less dramatic but were consistent with our expectations. For the quarter ended May 26, 2012, our consolidated sales increased $0.4 million, or 1 percent, to $41.3 million compared to $40.9 million in the third quarter of fiscal 2011. Improved sales, a slight improvement in our gross margin, and reduced depreciation and amortization expenses combined to produce an overall improvement in our operating results as we recognized income from operations of $3.4 million in the third quarter of fiscal 2012 compared with $2.9 million in the prior year. For the quarter ended May 26, 2012, we recognized pre-tax earnings of $2.8 million compared with $2.2 million in the prior year. Including the impact of income taxes as discussed below, our net income more than doubled to $1.6 million ($.09 per diluted share) in the third quarter of fiscal 2012 compared with $0.7 million ($.04 per diluted share) for the quarter ended May 28, 2011.

The primary factors that influenced our operating results for the quarter ended May 26, 2012 were as follows:

· Sales - Our consolidated sales increased $0.4 million to $41.3 million, compared with $40.9 million for the corresponding quarter of fiscal 2011. Sales increased through nearly all of our primary sales channels but sales performance during the quarter was mixed in our practice lines and from some geographical locations.

· Gross Profit - Our gross profit totaled $26.1 million compared with $25.8 million for the quarter ended May 28, 2011. The increase was primarily attributable to the slight increase in sales during fiscal 2012. Our consolidated gross margin, which is gross profit as a percentage of sales, increased slightly to 63.3 percent of sales compared to 63.0 percent in the same quarter of the prior year.

· Operating Costs - Our operating expenses decreased by $0.2 million compared to the same quarter of fiscal 2011, which was primarily the result of a $0.4 million increase in selling, general, and administrative expenses that was offset by a $0.3 million decrease in depreciation expense and a $0.3 million decrease in amortization expense.

· Income Taxes - Our effective tax rate for the quarter ended May 26, 2012 of approximately 42 percent was higher than statutory combined rates primarily due to taxable interest income on outstanding management common stock loans and the tax differential on income subject to both foreign and U.S. taxation. The effective tax rate for the quarter ended May 26, 2012 includes the benefit of foreign tax credits to be claimed on our U.S. federal income tax returns. The effective tax rate for the quarter ended May 28, 2011 of approximately 67 percent did not include the benefit of such foreign tax credits because we did not initially believe the Company would be able to utilize the benefits during fiscal 2011.

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

The following table sets forth sales data by category and by our primary sales channels (in thousands):

                                    Quarter Ended                                Three Quarters Ended
                      May 26,      May 28,                            May 26,       May 28,
                        2012         2011        Percent Change        2012          2011         Percent Change
Sales by Category:
Training and
consulting services   $ 38,213     $ 37,368                    2     $ 110,201     $ 108,261                    2
Products                 2,291        2,958                  (23 )       7,057         5,777                   22
Leasing                    770          571                   35         2,183         1,753                   25
                      $ 41,274     $ 40,897                    1     $ 119,441     $ 115,791                    3

Sales by Channel:
U.S./Canada direct    $ 22,736     $ 22,535                    1     $  60,241     $  62,643                   (4 )
International
direct                   5,612        5,319                    6        20,693        19,423                    7
International
licensees                3,581        3,389                    6        10,793         9,480                   14
National account
practices                5,917        5,249                   13        17,197        14,011                   23
Self-funded
marketing                2,132        3,476                  (39 )       6,871         7,403                   (7 )
Other                    1,296          929                   40         3,646         2,831                   29
                      $ 41,274     $ 40,897                    1     $ 119,441     $ 115,791                    3

Quarter Ended May 26, 2012 Compared to the Quarter Ended May 28, 2011

Sales

We offer a variety of training courses, consulting services, and training related products that are focused on leadership, productivity, strategy execution, sales force performance, trust, and effective communications that are provided both domestically and internationally through our sales force, certified client facilitators, international licensee partners, or through the Internet in on-line presentations. For the quarter ended May 26, 2012, our consolidated sales increased by $0.4 million compared to the same quarter of the prior year. The following sales analysis for the quarter ended May 26, 2012 is based on activity through our primary sales channels:

U.S./Canada Direct - This channel includes our four regional field offices that serve clients in the United States and Canada and our government services group. For the quarter ended May 26, 2012, sales through our four regional offices increased by $0.8 million, or five percent, compared to the prior year. Partially offsetting this increase were expected sales reductions from contracts with a governmental agency. Sales through our government services group decreased $0.6 million compared with the third quarter of fiscal 2011. However, during the third quarter of fiscal 2012 we won a renewal of these contracts with the governmental agency and we expect to continue to deliver training and consulting services under these contracts for the upcoming 12 months at similar levels to those delivered in fiscal 2012.

International Direct - Our three directly owned international offices are located in Australia, Japan, and the United Kingdom. The increase in international direct sales was primarily due to improved sales in Japan, which increased $0.6 million compared to the same quarter of fiscal 2011. The increase in sales was attributable to improved training sales, which were adversely

affected in fiscal 2011 by the severe earthquake in that country. Increased sales in Japan were partially offset by a $0.3 million decrease in Australia and essentially flat sales at our office in the United Kingdom.

International Licensees - In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees, which may translate and adapt our curriculum to local preferences and customs, if necessary. During the quarter ended May 26, 2012, our licensee royalty revenues increased primarily due to increased sales at some of our foreign licensees compared with the prior year.

National Account Practices - Our national account practices are comprised of programs that are not typically offered in our regional field offices and include Helping Clients Succeed from the sales performance group, The Leader In Me curriculum designed for students from our education practice, and Winning Customer Loyalty from our customer loyalty practice. For the quarter ended May 26, 2012, our national account practice sales increased due to a $0.9 million increase in education practice sales resulting from a general increase in demand for these school-based services. Increased education practice sales were partially offset by decreased sales performance and customer loyalty practice sales during the quarter.

Self-Funded Marketing - This group includes our public programs, book and audio sales, and speeches. The decrease in sales was primarily due to decreased publication revenues resulting from royalties received from new books and publications delivered in fiscal 2011 that did not repeat in fiscal 2012 and by decreased speaking revenues resulting primarily from the retirement of Dr. Stephen R. Covey from public speaking events in late fiscal 2011.

Other - Our other sales are comprised primarily of leasing and shipping and handling revenues. The increase in other sales was primarily due to improved leasing revenues resulting from new lease contracts at our corporate headquarters. We continue to have vacant space available for lease at our corporate headquarters campus and we are actively seeking new tenants for this available property.

Gross Profit

Gross profit consists of net sales less the cost of services provided or the cost of products sold. Our consolidated gross profit increased to $26.1 million compared with $25.8 million in the same quarter of fiscal 2011. The increase in gross profit was primarily attributable to increased sales over the same quarter of the prior year. Our consolidated gross margin, which is gross profit stated in terms of a percentage of sales, was 63.3 percent compared to 63.0 percent in the same quarter of fiscal 2011.

Operating Expenses

Selling, General and Administrative - Our selling, general, and administrative (SG&A) expenses increased $0.4 million compared to the prior year. The increase in SG&A expenses was primarily due to 1) a $0.7 million increase in advertising and promotion expense primarily for new strategic marketing initiatives; 2) a $0.6 million increase in non-cash share-based compensation expense primarily resulting from performance awards granted in fiscal 2011; and 3) a $0.5 million increase in non-capitalized development costs primarily related to our curriculums. These increases were partially offset by 1) a $0.6 million decrease in associate costs primarily due to reduced bonuses and commissions compared with prior year bonuses and commissions generated by the significant increase in sales during fiscal 2011; 2) a $0.1 million decrease in legal services resulting from the successful resolution of certain litigation during the second quarter of fiscal 2012; 3) a $0.1 million reduction in rent and utilities charges, resulting primarily from reduced telephone and communications expenses; 4) a $0.1 million decrease in outsourced service charges; and 5) ongoing cost reduction efforts in various other areas of our operations.

Depreciation - Depreciation expense decreased by $0.3 million compared to the prior year primarily due to the full depreciation of certain capital assets during the quarter ended May 26, 2012. Based on current depreciation levels and expected capital asset acquisitions during the

remainder of fiscal 2012, we expect depreciation expense to total approximately $2.9 million during fiscal 2012.

Amortization - Amortization expense decreased by $0.3 million compared to the third quarter of fiscal 2011 due to the full amortization of certain intangible assets in the fourth quarter of fiscal 2011. We expect that intangible asset amortization expense in fiscal 2012 will continue to decrease compared to corresponding periods in fiscal 2011 and will total approximately $2.5 million in fiscal 2012.

Income Taxes

We expect that our cash paid for income taxes will remain significantly less than our income tax provision during the foreseeable future as we utilize domestic net operating loss carryforwards and other deferred income tax assets. After our domestic net operating loss carryforwards are utilized, we will be able to utilize our foreign tax credits, which will reduce our income tax liability in future periods. After utilization of these deferred tax assets, we expect our cash paid for income taxes to increase and match more closely a normalized provision for income taxes.

Three Quarters Ended May 26, 2012 Compared to the Three Quarters Ended May 28, 2011

Sales

Our consolidated sales increased $3.7 million, or three percent, compared to the first three quarters of fiscal 2011. The following sales analysis for the three quarters ended May 26, 2012 is based on activity through our primary sales channels as defined in the discussion for the quarter ended May 26, 2012 compared to the quarter ended May 28, 2011, which precedes this section.

U.S./Canada Direct - During the first three quarters of fiscal 2012, our sales performance through these offices was primarily impacted by expected sales reductions from contracts with a governmental agency. Excluding the impact of these expected government services decreases, our regional office sales increased six percent compared to fiscal 2011. The decrease in sales for the three quarters ended May 26, 2012 through our government services group totaled $5.0 million compared with the first three quarters of fiscal 2011. However, during the quarter ended May 26, 2012, we won the renewal of our contracts with the governmental agency and expect to continue to delivering training and consulting services in the upcoming 12 months at similar levels to those delivered in fiscal 2012.

International Direct - The increase in international direct sales was primarily due to improved sales in Japan, which increased $1.7 million compared to fiscal 2011. The increase in Japan sales was primarily attributable to improved publishing sales, due to the release of new publications, and increased training sales. The increases over the prior year were also partially attributable to the adverse impact of the natural disasters that occurred in fiscal 2011 on Japan's prior year financial statements. Increased sales in Japan were partially offset by decreased sales in Australia, while sales remained flat in the United Kingdom.

International Licensees - During the three quarters ended May 26, 2012, the majority of our foreign licensees had increased sales compared to the prior year, which resulted in higher royalty revenues during the first three quarters of fiscal 2012.

National Account Practices - For the three quarters ended May 26, 2012, our education practice had increased sales of $2.1 million and our sales performance practice increased its sales by $1.1 million. These increases were primarily due to new contracts and increased demand for these services during fiscal 2012 compared with the prior year.

Self-Funded Marketing - The decrease in sales was due to reduced public speaking revenues resulting primarily from the retirement of Dr. Stephen R. Covey from public speaking events in late fiscal 2011.

Other - The increase in other sales was primarily due to improved leasing revenues resulting from new lease contracts at our corporate headquarters. We continue to have vacant space available for lease at our corporate headquarters campus and we are actively seeking new tenants for this available property to increase leasing revenues in future periods.

Gross Profit

Our consolidated gross profit for the first three quarters of fiscal 2012 increased to $77.7 million compared to $74.0 million for the same period of fiscal 2011. For the first three quarters of fiscal 2012, our consolidated gross margin was 65.0 percent of sales compared to 63.9 percent for the corresponding period of fiscal 2011. The slight increase in gross margin was primarily due to increased book royalties in the first quarter of fiscal 2012 and increased licensee royalty revenues in the three quarters ended May 26, 2012.

Operating Expenses

Selling, General and Administrative - Our SG&A expenses increased $2.8 million compared to the prior year. As a percent of sales, SG&A expenses increased to 53.2 percent compared to 52.4 percent of sales in the first three quarters of fiscal 2011. The increase in SG&A expenses was primarily due to 1) a $2.0 million increase in non-cash share-based compensation costs, primarily resulting from performance awards granted in fiscal 2011; 2) a $1.6 million increase in advertising and promotional costs that were primarily related to the launch of our new productivity offering The 5 Choices to Extraordinary Productivity and the launch of new strategic marketing initiatives; and 3) a $0.9 million increase in associate costs resulting from increased commissions and bonuses on improved sales, and the addition of new personnel. These increases were partially offset by 1) a $0.8 million decrease in rent and utilities expenses primarily as a result of reduced rent expense at our Japan office and reduced telephone and communication expenses; 2) a $0.6 million decrease in legal expenses resulting primarily from the settlement of certain litigation and the reimbursement of previously expensed legal costs; and 3) $0.3 million of decreased professional services costs compared to the prior year.

Depreciation - Our consolidated depreciation expense decreased by $0.3 million compared to the prior year primarily due to the full depreciation of certain capital assets during the quarter ended May 26, 2012. We anticipate that depreciation expense will decrease compared to fiscal 2011 through the remainder of fiscal 2012.

Amortization - Amortization expense decreased by $0.9 million compared to the first three quarters of fiscal 2011 due to the full amortization of certain intangible assets in the fourth quarter of fiscal 2011.

Income Taxes

Our effective tax rate for the three quarters ended May 26, 2012 of approximately 45 percent was higher than statutory combined rates primarily due to taxable interest income on outstanding management common stock loans and the tax differential on income subject to both foreign and U.S. taxation. The effective tax rate for the three quarters ended May 26, 2012 includes the benefit of foreign tax credits to be claimed on our U.S. federal income tax returns. The effective tax rate for the three quarters ended May 28, 2011 of approximately 69 percent did not include the benefit of such foreign tax credits because we did not initially believe the Company would be able to utilize the benefits during fiscal 2011.

However, due to the utilization of net loss carryforwards and other deferred income tax assets, we expect our cash paid for income taxes will remain significantly less than our income tax provision during the

foreseeable future. During the three quarters ended May 26, 2012, we paid $1.7 million in cash for income taxes. After utilization of these deferred tax assets, we expect our cash paid for income taxes to increase and match more closely a normalized provision for income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity at May 26, 2012 continued to be strong as we had $6.5 million of cash and cash equivalents compared to $3.0 million at August 31, 2011 and our net working capital (current assets less current liabilities) increased to $26.3 million at May 26, 2012 compared to $16.7 million at August 31, 2011. Our primary sources of liquidity are cash flows from the sale of services and products in the normal course of business and proceeds from our revolving line of credit facility.

On March 13, 2012, we entered into the First Modification Agreement to our previously existing amended and restated secured credit agreement (the Restated Credit Agreement) with our existing lender. The primary purpose of the Modified Agreement was to extend the maturity date of the Restated Credit Agreement, which originally expired on March 14, 2012.

Subsequent to May 26, 2012 we entered into the Second Modification Agreement to the Restated Credit Agreement. The primary purpose of the Second Modification Agreement was to extend the maturity date of the credit facility from March 31, 2013 to March 31, 2015. We wanted to ensure the availability of our line of credit facility over the next three years so that we can use excess cash to pursue special initiatives, such as the potential repurchase of shares of our common stock, and for other growth opportunities.

The Second Modification Agreement continues to provide a revolving line of credit facility with a maximum borrowing amount of $10.0 million with interest continuing at LIBOR plus 2.50 percent. The other terms and conditions in the Second Modification Agreement are substantially the same as those defined in the Restated Credit Agreement.

The Second Modification Agreement requires us to be in compliance with specified financial covenants, including (a) a funded debt to EBITDAR (earnings before interest, taxes, depreciation, amortization, and rental expense) ratio of less than 3.00 to 1.00; (b) a fixed charge coverage ratio greater than 1.5 to 1.0; and (c) an annual limit on capital expenditures (not including capitalized curriculum development) of $8.0 million. The minimum net worth covenant was eliminated. In the event of noncompliance with the financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of amounts outstanding on the revolving line of credit facility and term loan. At May 26, 2012, we believe that we were in compliance with the terms and covenants applicable to the Restated Credit Agreement and its applicable modifications.

At May 26, 2012, we had $3.3 million outstanding on our term loan and a zero balance outstanding on the revolving line of credit facility. During a substantial portion of the first three quarters of fiscal 2012 we did not have a balance outstanding on the revolving line of credit facility.

In addition to our $10.0 million revolving line of credit facility and remaining term loan payable, we have 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 three quarters ended May 26, 2012.

Cash Flows From Operating Activities

Our cash provided by operating activities totaled $8.7 million for the three quarters ended May 26, 2012 compared to $6.2 million during the first three quarters of fiscal 2011. The improvement was primarily due to improved operating income in the first three quarters of fiscal 2012 compared to

the first three quarters of the prior year. Our primary source of cash from operating activities was the sale of services and goods to our customers in the normal course of business. The primary uses of cash for operating activities were payments for selling, general, and administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in products sold, and to fund working capital needs. Our primary sources and uses of cash from/for working capital included $0.6 million of cash from improved collections of accounts receivable and $6.7 million of cash used primarily to pay accrued bonuses and commissions from seasonally high amounts at August 31.

Cash Flows From Investing Activities and Capital Expenditures

During the three quarters ended May 26, 2012, we used $3.2 million of cash for investing activities. Our uses of cash for investing activities were additional spending on curriculum development and the purchase of property and equipment in the normal course of business. We spent $1.8 million during the first three quarters of fiscal 2012 to develop various new offerings. Our purchases of property and equipment, which totaled $1.4 million, consisted primarily of computer hardware, software, and office equipment.

Cash Flows From Financing Activities

Net cash used for financing activities during the three quarters ended May 26, 2012 totaled $2.0 million. Our primary uses of cash for financing activities were principal payments on our term loan and financing obligation that totaled $2.3 million. These uses were partially offset by $0.3 million of cash received from participants in the employee stock purchase plan to purchase shares of our common stock.

During the quarter ended May 26, 2012 we announced the approval of a plan to repurchase up to $10.0 million of our common stock. We intend to use available cash in excess of $10.0 million, provided we have no balance outstanding on our line of credit facility, for the purchases. We anticipate that the purchases of our common stock under this approved plan will increase the use of cash for financing activities in future periods.

Sources of Liquidity

Going forward, we will continue to incur costs necessary for the operation and potential growth of our business and for other initiatives, such as the potential repurchase of shares of our common stock. 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 items. 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 programs or 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

We have not structured any special purpose 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 (our financing obligation); 2) payments to HP Enterprise Services for outsourcing services related to information systems, . . .