##### Table of Contents













|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 36-3660532                             
|                                                               |  |                                        
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
Identification Number)

|                                            |  |  |  |           
|------------------------------------------- |  |  |  | ----------
|10801 Nesbitt Avenue South, Bloomington, MN |  |  |  | 55437     
|                                            |  |  |  |           
|(Address of principal executive offices)    |  |  |  | (Zip Code)

|                                                    |  |              
|--------------------------------------------------- |  | -------------
|Registrants telephone number, including area code: |  | (952)832-1000
|                                                    |  |              

|                                                                                  
|----------------------------------------------------------------------------------
|Not Applicable                                                                    
|                                                                                  
|(Former name, former address and former fiscal year,
if changed since last report)

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:

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                             |  |                                    
|---------------------------- |  | -----------------------------------
|Common stock, $.01 par value |  | 8,348,630 shares                   
|                             |  |                                    
|Class                        |  | Outstanding as of February 28, 2001

1



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TABLE OF CONTENTS



|                                                                                              |                                                                                                      |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):                             
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000  
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 2001 AND OCTOBER 31, 2000                   
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
|                                                                                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                
|ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
|PART II. OTHER INFORMATION                                                                   
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2. CHANGES IN SECURITIES                                                                
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5. OTHER INFORMATION                                                                    
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   



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|PART I     |  | FINANCIAL INFORMATION                                   
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|Item 1.    |  | Condensed Consolidated Financial Statements (Unaudited):
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|           |  | Condensed Consolidated Statements of Earnings for the   
|           |  | Three Months Ended January 31, 2001 and 2000             |  |        | 3  | 
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|           |  | Condensed Consolidated Balance Sheets as of             
|           |  | January 31, 2001 and October 31, 2000                    |  |        | 4  | 
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|           |  | Condensed Consolidated Statements of Cash Flows for the 
|           |  | Three Months Ended January 31, 2001 and 2000             |  |        | 5  | 
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|           |  | Notes to Condensed Consolidated Financial Statements     |  |        | 6  | 
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|Item 2.    |  | Managements Discussion and Analysis of                 
|           |  | Results of Operations and Financial Condition            |  |        | 10 | 
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|PART II.   |  | OTHER INFORMATION                                       
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|Item 1.    |  | Legal Proceedings                                        |  |        | 15 | 
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|Item 2.    |  | Changes in Securities                                    |  |        | 15 | 
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|Item 3.    |  | Defaults Upon Senior Securities                          |  |        | 15 | 
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|Item 4.    |  | Submission of Matters to a Vote of Security Holders      |  |        | 15 | 
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|Item 5.    |  | Other Information                                        |  |        | 15 | 
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|Item 6.    |  | Exhibits and Reports on Form 8-K                         |  |        | 15 | 
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|SIGNATURES |  |                                                          |  |        | 17 | 

2



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##### Table of Contents














|                                            |                                          |                          |                                           |       |                    |        |       |       |       |        |  
|------------------------------------------- | ---------------------------------------- | ------------------------ | ----------------------------------------- | ----- | ------------------ | ------ | ----- | ----- | ----- | ------ | -
|                                            |                                          |                          |                                           |       | Three Months Ended
|                                            |                                          |                          |                                           |       | January 31,       
|                                            |                                          |                          |                                           |       |                   
|                                            |                                          |                          |                                           |       | 2001               |        | 2000 
|                                            |                                          |                          |                                           |       |                    |        |      
|Revenues                                    |                                          | $                        | 9,754                                     |       |                    | $      | 7,525 |      
|                                           
|                                           
|                                           
|                                           
|Cost of revenues                            |                                          |                          | 1,479                                     |       |                    |        | 1,357 |      
|                                            |                                          |                          |                                           |       |                    |        |       |      
|                                            |                                          | Gross profit             |                                           |       | 8,275              |        |       |       | 6,168 |       
|                                            |                                          |                          |                                           |       |                    |        |       |      
|Operating expenses:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative      |                          |                                           | 8,945 |                    |        |       | 6,744 |      
|                                           
|                                           
|                                           
|                                           
|                                            | Product development and customer support |                          |                                           | 1,787 |                    |        |       | 1,549 |      
|                                           
|                                           
|                                           
|                                           
|                                            | Special charges                          |                          |                                           | 1,260 |                    |        |       |      |      
|                                            |                                          |                          |                                           |       |                    |        |       |      
|                                            |                                          | Total operating expenses |                                           |       | 11,992             |        |       |       | 8,293 |       
|                                            |                                          |                          |                                           |       |                    |        |       |      
|                                            |                                          |                          | Operating loss                            |       |                    | (3,717 | )     |       |       | (2,125 | )
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                          |                          | 84                                        |       |                    |        | 232   |      
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                          |                          | 53                                        |       |                    |        | 34    |      
|                                            |                                          |                          |                                           |       |                    |        |       |      
|                                            |                                          |                          | Loss before income taxes                  |       |                    | (3,854 | )     |       |       | (2,391 | )
|                                           
|                                           
|                                           
|                                           
|Income tax benefit                          |                                          |                          | (1,503                                    | )     |                    |        | (897  | )    
|                                            |                                          |                          |                                           |       |                    |        |       |      
|                                            |                                          |                          | Net loss                                  |       |                    | (2,351 | )     |       |       | (1,494 | )
|                                           
|                                           
|                                           
|                                           
|Preferred stock accretion                   |                                          |                          |                                          |       |                    |        | (129  | )    
|                                            |                                          |                          |                                           |       |                    |        |       |      
|                                            |                                          |                          | Net loss available to common stockholders |       | $                  | (2,351 | )     |       | $     | (1,623 | )
|                                            |                                          |                          |                                           |       |                    |        |       |      
|Loss per share:                            
|                                           
|                                           
|                                           
|                                           
|                                            | Basic and diluted                        |                          | $                                         | (0.28 | )                  |        | $     | (0.23 | )    
|                                            |                                          |                          |                                           |       |                    |        |       |      
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic and diluted                        |                          |                                           | 8,270 |                    |        |       | 6,933 |      
|                                            |                                          |                          |                                           |       |                    |        |       |      

3



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##### Table of Contents






|                      |                                                          |                                      |        |                                                      |   |             |        |             |   |   |        | 
|--------------------- | -------------------------------------------------------- | ------------------------------------ | ------ | ---------------------------------------------------- | - | ----------- | ------ | ----------- | - | - | ------ | 
|                      |                                                          |                                      |        |                                                      |   | January 31, |        | October 31,
|                      |                                                          |                                      |        |                                                      |   | 2001        |        | 2000       
|                      |                                                          |                                      |        |                                                      |   |             |        |            
|                      |                                                          |                                      |        |                                                      |   | (Unaudited) |        | (See Note) 
|                      |                                                          |                                      | ASSETS
|                     
|                     
|                     
|                     
|Current assets:      
|                     
|                     
|                     
|                     
|                      | Cash and cash equivalents                                |                                      | $      | 2,959                                                |   |             | $      | 6,415       |  
|                     
|                     
|                     
|                     
|                      | Accounts receivable, less allowances of $1,902          
|                     
|                     
|                     
|                     
|                      |                                                          |                                      |        | and $2,308, respectively                             |   |             | 19,513 |             |   |   | 21,829 | 
|                     
|                     
|                     
|                     
|                      | Inventories                                              |                                      |        | 539                                                  |   |             |        | 615         |  
|                     
|                     
|                     
|                     
|                      | Prepaid expenses and other current assets                |                                      |        | 1,005                                                |   |             |        | 627         |  
|                     
|                     
|                     
|                     
|                      | Deferred income taxes                                    |                                      |        | 2,315                                                |   |             |        | 2,315       |  
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          |                                      |        | Total current assets                                 |   |             | 26,331 |             |   |   | 31,801 | 
|                     
|                     
|                     
|                     
|                      | Equipment and leasehold improvements, less accumulated  
|                     
|                     
|                     
|                     
|                      |                                                          |                                      |        | depreciation of $3,046 and $2,882, respectively      |   |             | 2,245  |             |   |   | 1,495  | 
|                     
|                     
|                     
|                     
|                      | Product development costs, less accumulated amortization
|                     
|                     
|                     
|                     
|                      |                                                          |                                      |        | of $9,565 and $9,072, respectively                   |   |             | 8,333  |             |   |   | 7,921  | 
|                     
|                     
|                     
|                     
|                      | Deferred income taxes, net                               |                                      |        | 5,732                                                |   |             |        | 4,229       |  
|                     
|                     
|                     
|                     
|                      | Other assets                                             |                                      |        | 5,111                                                |   |             |        | 5,144       |  
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          |                                      |        | Total assets                                         |   | $           | 47,752 |             |   | $ | 50,590 | 
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          | LIABILITIES AND STOCKHOLDERS EQUITY
|                     
|                     
|                     
|                     
|Current liabilities: 
|                     
|                     
|                     
|                     
|                      | Current portion of long-term debt                        |                                      | $      | 140                                                  |   |             | $      | 600         |  
|                     
|                     
|                     
|                     
|                      | Accounts payable                                         |                                      |        | 1,322                                                |   |             |        | 1,502       |  
|                     
|                     
|                     
|                     
|                      | Accrued employee salaries and benefits                   |                                      |        | 2,460                                                |   |             |        | 4,087       |  
|                     
|                     
|                     
|                     
|                      | Accrued liabilities                                      |                                      |        | 1,913                                                |   |             |        | 2,129       |  
|                     
|                     
|                     
|                     
|                      | Deferred revenue                                         |                                      |        | 5,532                                                |   |             |        | 5,980       |  
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          |                                      |        | Total current liabilities                            |   |             | 11,367 |             |   |   | 14,298 | 
|                     
|                     
|                     
|                     
|Long-term debt        |                                                          |                                      | 529    |                                                      |   |             |       |            
|                     
|                     
|                     
|                     
|Deferred revenue      |                                                          |                                      | 778    |                                                      |   |             | 287    |            
|                     
|                     
|                     
|                     
|Other liabilities     |                                                          |                                      | 142    |                                                      |   |             | 160    |            
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          |                                      |        | Total liabilities                                    |   |             | 12,816 |             |   |   | 14,745 | 
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|Stockholders equity:
|                     
|                     
|                     
|                     
|                      | Common stock, $.01 par value, 25,000 shares             
|                     
|                     
|                     
|                     
|                      |                                                          |                                      |        | authorized; 8,466 shares issued and 8,343 shares    
|                     
|                     
|                     
|                     
|                      |                                                          |                                      |        | outstanding at January 31, 2001; 8,348 shares issued
|                     
|                     
|                     
|                     
|                      |                                                          |                                      |        | and 8,225 shares outstanding at October 31, 2000     |   |             | 83     |             |   |   | 82     | 
|                     
|                     
|                     
|                     
|                      | Paid-in capital                                          |                                      |        | 37,013                                               |   |             |        | 35,526      |  
|                     
|                     
|                     
|                     
|                      | Treasury stock at cost, 123 shares                       |                                      |        | (1,209                                               | ) |             |        | (1,209      | )
|                     
|                     
|                     
|                     
|                      | Retained earnings (accumulated deficit)                  |                                      |        | (70                                                  | ) |             |        | 2,281       |  
|                     
|                     
|                     
|                     
|                      | Accumulated other comprehensive loss                     |                                      |        | (881                                                 | ) |             |        | (835        | )
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          |                                      |        | Total stockholders equity                           |   |             | 34,936 |             |   |   | 35,845 | 
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  
|                      |                                                          |                                      |        | Total liabilities and stockholders equity           |   | $           | 47,752 |             |   | $ | 50,590 | 
|                      |                                                          |                                      |        |                                                      |   |             |        |             |  

|                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: The balance sheet at October 31, 2000 has been derived from the audited financial
statements at that date. See Notes to Condensed Consolidated
Financial Statements.

4



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|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |      |       |        |  
|---------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ------ | ---- | ----- | ------ | -
|                                                     |                                                           |                                                     |                                                             |                                                     |        | Three Months Ended
|                                                     |                                                           |                                                     |                                                             |                                                     |        | January 31,       
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                   
|                                                     |                                                           |                                                     |                                                             |                                                     |        | 2001               |        | 2000  
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |       
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                  |                                                     | $                                                           | (2,351                                              | )      |                    | $      | (1,494 | )   
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|                                                     | Adjustments to reconcile net loss to net cash provided by
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | (used in) operating activities:                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Deferred income taxes                               |                                                             |                                                     | (1,503 | )                  |        |        | (897 | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Depreciation and amortization                       |                                                             |                                                     | 946    |                    |        |        | 700  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Provision for doubtful accounts                     |                                                             |                                                     | 250    |                    |        |        | 300  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Stock-based compensation                            |                                                             |                                                     | 516    |                    |        |        | 32   |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Loss on disposal of fixed assets                    |                                                             |                                                     | 17     |                    |        |        | 2    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Changes in assets and liabilities:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     | Accounts receivable                                         |                                                     |        | 2,066              |        |        |      | 4,017 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     | Inventories                                                 |                                                     |        | 76                 |        |        |      | (58   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     | Prepaid expenses and other current and noncurrent assets    |                                                     |        | (553               | )      |        |      | 58    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     | Accounts payable                                            |                                                     |        | (180               | )      |        |      | 44    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     | Accrued liabilities, accrued employee salaries and benefits
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     |                                                             | and other liabilities                               |        |                    | (1,863 | )      |      |       | (1,254 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                     | Deferred revenue                                            |                                                     |        | 43                 |        |        |      | (138  | )     
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|                                                     |                                                           |                                                     |                                                             | Total adjustments                                   |        |                    | (185   | )      |      |       | 2,806  |  
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|                                                     |                                                           |                                                     |                                                             | Net cash provided by (used in) operating activities |        |                    | (2,536 | )      |      |       | 1,312  |  
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                      |                                                     |                                                             | (306                                                | )      |                    |        | (229   | )   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalization of product development costs               |                                                     |                                                             | (885                                                | )      |                    |        | (673   | )   
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|                                                     |                                                           |                                                     | Net cash used in investing activities                       |                                                     |        | (1,191             | )      |        |      | (902  | )     
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of long-term debt                                 |                                                     |                                                             | (52                                                 | )      |                    |        |       |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net repayments of short-term borrowings                   |                                                     |                                                             |                                                    |        |                    |        | (202   | )   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from issuance of common stock                |                                                     |                                                             | 372                                                 |        |                    |        | 19     |     
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|                                                     |                                                           | Net cash provided by (used in) financing activities |                                                             |                                                     | 320    |                    |        |        | (183 | )    
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Effect of foreign currency on cash                   |                                                           |                                                     | (49                                                         | )                                                   |        |                    | (17    | )     
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Net increase (decrease) in cash and cash equivalents |                                                           |                                                     | (3,456                                                      | )                                                   |        |                    | 210    |       
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                           |                                                     | 6,415                                                       |                                                     |        |                    | 63     |       
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Cash and cash equivalents at end of period           |                                                           | $                                                   | 2,959                                                       |                                                     |        | $                  | 273    |       
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Cash paid for interest                               |                                                           | $                                                   | 81                                                          |                                                     |        | $                  | 279    |       
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Cash paid for income taxes                           |                                                           | $                                                   | 191                                                         |                                                     |        | $                  | 71     |       
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|Non-cash financing activities:                      
|                                                     | Capital lease obligations incurred                        |                                                     | $                                                           | 722                                                 |        |                    | $      |       |     
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     
|                                                     | Debt converted to common stock                            |                                                     | $                                                           | 600                                                 |        |                    | $      |       |     
|                                                     |                                                           |                                                     |                                                             |                                                     |        |                    |        |        |     

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|1. |  | NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|-- |  | -----------------------------------------------------------------

Nature of Business

PLATO Learning, Inc. and its subsidiaries (the Company) provide
computer-based and e-learning instruction and related services, offering
basic to advanced level courseware in reading, writing, math, science, and
life and job skills. The Companys PLATO® Learning System and
PLATO® Web Learning Network provide more than 2,000 hours of
objective-based, problem solving courseware and include assessment,
alignment, and management tools to facilitate the learning process. PLATO
courseware is delivered via networks, CD-ROM, private intranets, and the
Internet. In addition, single topic PLATO courseware is available through
the Companys e-commerce Web site and distributors. PLATO courseware is
marketed to middle and high schools, colleges, job training programs,
correctional institutions, military education programs, corporations and
consumers.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of the Companys management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the interim
periods presented are not necessarily indicative of the results to be expected
for the full fiscal year. For further information, refer to the consolidated
financial statements and footnotes included in the Companys Annual Report on
Form 10-K for the fiscal year ended October 31, 2000.

Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation.

Revenue Recognition

Revenue is recognized in accordance with the provisions of Statement of
Position No. 97-2, Software Revenue Recognition, as amended and modified.
Revenue from the sale of courseware licenses, computer hardware and related
services is recognized upon meeting the following criteria: (i) execution of a
written customer order, (ii) delivery of the courseware, hardware and related
services, (iii) the license fee is fixed or determinable and (iv)
collectibility of the proceeds is probable. For software arrangements that
include more than one element, the
Company allocates the total arrangement fee among each deliverable based on the
relative fair value of each deliverable determined on vendor-specific objective
evidence. Upon delivery, future service costs, if any, are accrued. Future
service costs represent the Companys problem

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|1. |  | NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
|-- |  | ----------------------------------------------------------------------------

Revenue Recognition, Continued

resolution and support hotline service for a one-year period. Service revenue
includes software support, which is deferred and recognized ratably over the
support period, and revenue from installation and training services, which is
recognized as services are performed. Installation and training services are
customarily billed at a fixed daily rate. Deferred revenue represents the
portion of billings made or payments received in advance of services being
performed or products being delivered.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under various
circumstances. The accounting and disclosures prescribed by SAB 101 will be
effective in the fourth quarter of fiscal year 2001, and retroactive to the
beginning of that fiscal year. The Company is reviewing the requirements of
SAB 101 and has not yet determined the impact on its consolidated financial
statements.

Product Development, Enhancement and Maintenance Costs

Costs incurred in the development, enhancement and routine maintenance of the
Companys current generation courseware products are expensed as incurred.
Costs incurred in establishing the technological feasibility of new courseware
products are expensed as incurred. Once technological feasibility has been
established, costs incurred in the development of new generation courseware
products are capitalized.

Capitalized costs are amortized to product development and customer support
expense using the straight-line method over the estimated useful life of the
new courseware products, which is generally three years. Amortization begins
when the product is available for general release to customers. Unamortized
costs determined to be in excess of the net realizable value of the product, if
any, are expensed at the date of such determination.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net earnings (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing net earnings (loss) available to common stockholders,
adjusted to add back any convertible preferred stock accretion and convertible
debt interest (if those securities are dilutive), by the weighted average
number of common and, where dilutive, potential common shares outstanding
during the period. Potential common shares include options, warrants and
convertible securities.

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|2. |  | ACCOUNTS RECEIVABLE
|-- |  | -------------------

Accounts receivable include installment receivables of $9,845 and $13,040 at
January 31, 2001 and October 31, 2000, respectively. Installment receivables
to be billed beyond one year from the balance sheet date were $379 and $193 at
January 31, 2001 and October 31, 2000, respectively, and are included in other
assets on the consolidated balance sheets.



|3. |  | DEBT
|-- |  | ----

Revolving Loan

At January 31, 2001, there were no borrowings outstanding under the Companys
revolving loan agreement. The unused borrowing capacity was approximately
$11,700.

10% Subordinated Convertible Debentures

In November 2000, the remaining $600 of debentures were converted into
approximately 66,000 shares of the Companys common stock.

Capital Lease Obligations

At January 31, 2001, the Companys debt consisted of various capital lease
obligations for equipment. Amounts due in the next twelve months under these
leases are classified as a current liability in the consolidated balance
sheets.



|4. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------

In November 2000, the remaining $600 of 10% subordinated convertible debentures
were converted by the holders into approximately 66,000 shares of the Companys
common stock.

In January 2001, the Company issued approximately 7,700 shares of common stock
pursuant to the adjustment warrants issued in connection with the private
placement of common stock in July 2000.

The Company issued approximately 42,000 shares of common stock for the exercise
of outstanding stock options, and approximately 3,400 shares of common stock
for the exercise of outstanding stock warrants during the three months ended
January 31, 2001.

Stock-based compensation for the three months ended January 31, 2001 includes
non-cash charges of $489 for the accelerated vesting of stock options related
to the Companys succession plans and $27 for restricted stock compensation.

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|5. |  | EARNINGS (LOSS) PER SHARE
|-- |  | -------------------------

Basic and diluted loss per share is the same for the three months ended January
31, 2001 and for the three months ended January 31, 2000. The Company incurred
a net loss for all periods presented and potential common shares are
antidilutive and excluded from the calculation of diluted loss per share. The
number of potential common shares excluded from the diluted loss per share
calculations were approximately 579,000 and 897,000 for the three months ended
January 31, 2001 and 2000, respectively.



|6. |  | SPECIAL CHARGES
|-- |  | ---------------

The consolidated statement of earnings for the three months ended January 31,
2001 includes special charges of $1,260. These charges represent costs
associated with the retirement of William R. Roach, the Companys founder and
former chief executive officer, and include non-cash amounts of $463 for the
accelerated vesting of stock options (see Note 4).



|7. |  | SUBSEQUENT EVENT
|-- |  | ----------------

On January 31, 2001, the Company entered into an Agreement and Plan of Merger
with Wasatch Interactive Learning Corporation (Wasatch), a provider of
multimedia courseware for K-8 education. The Company plans to issue $12
million of its common stock to acquire Wasatch subject to the approval of
Wasatch stockholders in the second quarter of fiscal 2001. The acquisition
will be accounted for using the purchase method of accounting. Accordingly,
the purchase price will be allocated to the estimated fair value of assets
acquired, liabilities assumed, identifiable intangible assets and goodwill.

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RESULTS OF OPERATIONS

Overview

The Company enhances the learning process by providing computer-based and
e-learning instruction and related services, and by offering basic to
advanced level courseware in reading, writing, math, science and life and
job skills. The Companys PLATO® Learning System and
PLATO® Web Learning Network provide more than 2,000 hours of
objective-based, problem solving courseware and include assessment,
alignment and management tools to facilitate the learning process. PLATO
courseware is delivered via networks, CD-ROM, private intranets and the
Internet. In addition, single topic PLATO courseware is available through
the Companys e-commerce web site and a growing number of distributors.
PLATO courseware is marketed to middle and high schools, colleges, job
training programs, correctional institutions, military education programs,
corporations and consumers.

Operating Results as a Percentage of Revenue

|                                                 |  |                    |       |      |  |  |       |   
|------------------------------------------------ |  | ------------------ | ----- | ---- |  |  | ----- | --
|                                                 |  | Three Months Ended
|                                                 |  | January 31,       
|                                                 |  |                   
|                                                 |  | 2001               |       | 2000
|                                                 |  |                    |       |     
|Revenues                                         |  |                    | 100.0 | %    |  |  | 100.0 | % 
|                                                
|                                                
|                                                
|                                                
|Cost of revenues                                 |  |                    | 15.2  |      |  |  | 18.0  |   
|                                                 |  |                    |       |      |  |  |       |   
|                                                
|                                                
|                                                
|                                                
|Gross profit                                     |  |                    | 84.8  |      |  |  | 82.0  |   
|                                                 |  |                    |       |      |  |  |       |   
|                                                
|                                                
|                                                
|                                                
|Selling, general and administrative expense      |  |                    | 91.7  |      |  |  | 89.6  |   
|                                                
|                                                
|                                                
|                                                
|Product development and customer support expense |  |                    | 18.3  |      |  |  | 20.6  |   
|                                                
|                                                
|                                                
|                                                
|Special charges                                  |  |                    | 12.9  |      |  |  |      |   
|                                                 |  |                    |       |      |  |  |       |   
|Total operating expenses                         |  |                    | 122.9 |      |  |  | 110.2 |   
|                                                 |  |                    |       |      |  |  |       |   
|Operating loss                                   |  |                    | (38.1 | )    |  |  | (28.2 | ) 
|                                                
|                                                
|                                                
|                                                
|Interest expense                                 |  |                    | 0.9   |      |  |  | 3.1   |   
|                                                
|                                                
|                                                
|                                                
|Other expense, net                               |  |                    | 0.5   |      |  |  | 0.5   |   
|                                                 |  |                    |       |      |  |  |       |   
|Loss before income taxes                         |  |                    | (39.5 | )    |  |  | (31.8 | ) 
|                                                
|                                                
|                                                
|                                                
|Income tax benefit                               |  |                    | (15.4 | )    |  |  | (11.9 | ) 
|                                                 |  |                    |       |      |  |  |       |   
|                                                
|                                                
|                                                
|                                                
|Net loss                                         |  |                    | (24.1 | )%   |  |  | (19.9 | )%
|                                                 |  |                    |       |      |  |  |       |   

Revenues

The following table highlights revenues by product line:

|                                           |                |   |                    |       |      |   |       |       | 
|------------------------------------------ | -------------- | - | ------------------ | ----- | ---- | - | ----- | ----- | 
|                                           |                |   | Three Months Ended
|                                           |                |   | January 31,       
|                                           |                |   |                   
|                                           |                |   | 2001               |       | 2000
|                                           |                |   |                    |       |     
|Courseware and professional services       |                | $ | 8,818              |       |      | $ | 6,495 |      
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 936                |       |      |   | 1,030 |      
|                                           |                |   |                    |       |      |   |       |      
|                                          
|                                          
|                                          
|                                          
|                                           | Total revenues |   | $                  | 9,754 |      |   | $     | 7,525 | 
|                                           |                |   |                    |       |      |   |       |      

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RESULTS OF OPERATIONS, Continued

Revenues,Continued

Courseware and professional services revenue, the Companys core business,
increased $2,323 or 36% to $8,818 for the three months ended January 31, 2001
as compared to $6,495 for the same period in 2000. The Company continued to
experience increased acceptance of its products and services in its various
markets. This revenue growth was achieved primarily through increased sales
volume to both new and existing customers. Total revenues were $9,754 for the
three months ended January 31, 2001, an increase of $2,229 or 30%, as compared
to $7,525 for the same period in 2000.

Gross Profit

Gross profit increased $2,107 or 34% to $8,275 for the three months ended
January 31, 2001 as compared to $6,168 for the same period in 2000. This
increase was principally due to increased courseware and professional services
revenue. Gross margin was 85% for the three months ended January 31, 2001 as
compared to 82% for the same period in 2000.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $2,201 or 33% to $8,945
for the three months ended January 31, 2001 as compared to $6,744 for the same
period in 2000. Sales and marketing expenses increased $1,625 and general and
administrative expenses increased $280 due primarily to infrastructure
expansion of the sales and marketing organization. Commissions increased $153
due to the growth in revenue. Goodwill amortization of $208 from the CyberEd
acquisition in July 2000 also contributed to the increase. As a percentage of
revenue, total selling, general and administrative expense increased to 92% for
the three months ended January 31, 2001 from 90% for the same period in 2000.

Product Development and Customer Support Expense

Product development and customer support expense increased $238 or 15% to
$1,787 for the three months ended January 31, 2001 as compared to $1,549 for
the same period in 2000. Product development expense increased $72, primarily
due to increased spending associated with enhanced reading products, simulated
test products and the PLATO Web Learning Network, that was partially offset by
decreased amortization because certain previously capitalized costs were fully
amortized by the end of fiscal year 2000. Amortization expense is expected to
increase beginning in the second quarter of 2001 because certain projects will
be released to the market. Customer support expense increased $166 primarily
as a result of the Companys expanding customer base. As a percentage of
revenue, total product development and customer support expense decreased to
18% for the three months ended January 31, 2001 from 21% for the same period in
2000.

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RESULTS OF OPERATIONS, Continued

Special Charges

Special charges for the three months ended January 31, 2001 represent costs
associated with the retirement of William R. Roach, the Companys founder and
former chief executive officer and include non-cash amounts of $463 for the
accelerated vesting of stock options (see Notes 4 and 6 to Consolidated
Financial Statements).

Operating Loss

Operating loss for the three months ended January 31, 2001 was $3,717 as
compared to $2,125 for the same period in 2000. This change in operating
results is due principally to the special charges and increased selling,
general and administrative, and customer support expenses, partially offset by
the increased courseware and professional services revenue in 2001.

Interest Expense

Interest expense decreased $148 to $84 for the three months ended January 31,
2001 from $232 for the same period in 2000. This was the result of the
decreased level of bank borrowings compared to 2000 and the conversion of the
10% subordinated convertible debentures in November 2000 (see Notes 3 and 4 to
Consolidated Financial Statements).

Income Taxes

An income tax benefit of $1,503 was recorded for the three months ended January
31, 2001 using the Companys estimated fiscal year 2001 effective income tax
rate of 39%.

FINANCIAL CONDITION

Liquidity and Capital Resources

At January 31, 2001, the Companys principal sources of liquidity included cash
and cash equivalents of $2,959, net accounts receivable of $19,513, and its
line of credit. The Company had total installment receivables of $10,224 at
January 31, 2001, of which $9,845 are to be billed within one year and are
included in net accounts receivable. Working capital was $14,964 at January
31, 2001, a decrease of $2,539 from October 31, 2000, due primarily to
decreased cash and cash equivalents, accounts receivable and accrued expenses.

Net cash used in the Companys operating activities was $2,536 for the three
months ended January 31, 2001 as compared to net cash provided by operating
activities of $1,312 for the same period in 2000. Cash flows from operations
were used principally to fund the Companys working capital requirements.

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FINANCIAL CONDITION, Continued

Liquidity and Capital Resources,Continued

Net cash used in the Companys investing activities was $1,191 for the three
months ended January 31, 2001 as compared to $902 for the same period in 2000.
Net cash used included $306 for capital expenditures and $885 for capitalized
product development costs.

Net cash provided by the Companys financing activities was $320 for the three
months ended January 31, 2001, primarily from the exercise of stock options, as
compared to net cash used of $183 for the same period in 2000. The Company has
resources available under its revolving loan agreement to provide borrowings of
up to $15 million, as determined by the available borrowing base. At January
31, 2001, there were no borrowings outstanding and the unused borrowing
capacity was approximately $11,700.

On January 31, 2001, the Company entered into an Agreement and Plan of Merger
with Wasatch Interactive Learning Corporation (Wasatch), a provider of
multimedia courseware for K-8 education. The Company plans to issue $12
million of its common stock to acquire Wasatch subject to the approval of
Wasatch stockholders in the second quarter of fiscal 2001. The acquisition
will be accounted for using the purchase method of accounting.

The Company maintains adequate cash reserves and credit facilities to meet its
anticipated working capital, capital expenditure, and business investment
requirements.

Factors Affecting Quarterly Operating Results

The Companys quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, client spending patterns, budget cycles
and fiscal year ends and promotional programs. The Company historically has
experienced its lowest revenues in the first quarter and increasingly higher
levels of revenues in each of the next three quarters. Because of these
factors, the results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Companys borrowing capacity primarily consists of a revolving loan with
interest rates that fluctuate based upon market indexes. At January 31, 2001,
the Company did not have any outstanding borrowings under this revolving loan.
As a result, risk relating to interest fluctuation is considered minimal.

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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

Foreign Currency Exchange Rate Risk

The Company markets its products worldwide and has operations in Canada and the
United Kingdom. As a result, financial results could be affected by changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Working funds necessary to facilitate the short-term operations of foreign
subsidiaries are kept in local currencies in which they do business.
Approximately 6% of total revenues were denominated in currencies other than
the U.S. dollar for the three months ended January 31, 2001.

CAUTIONARY STATEMENTS

As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual future
results of operations to vary from those anticipated in previously made
forward-looking statements and any other forward-looking statements made in
this document and elsewhere by or on behalf of the Company. Net revenues could
be materially affected by products introduced by competitors with advanced
technology and better features and benefits or lower prices or government
funding priorities. Operations could be affected by the Companys ability to
execute its diversification strategy or to integrate acquired companies.

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Item 1.      Legal Proceedings

|                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------
|The Company is not a party to any litigation that is expected to
have a material adverse effect on the Company or its business.




Item 2.      Changes in Securities

|               
|---------------
|Not Applicable.




Item 3.      Defaults Upon Senior Securities

|               
|---------------
|Not Applicable.




Item 4.      Submission of Matters to a Vote of Security Holders

|               
|---------------
|Not Applicable.




Item 5.      Other Information

|               
|---------------
|Not Applicable.




Item 6.      Exhibits and Reports on Form 8-K

|    |  |         
|--- |  | --------
|(a) |  | Exhibits

|    |  |                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 |  | Agreement and Plan of Merger, dated as of January
31, 2001, by and among PLATO Learning, Inc., WILC Acquisition
Corporation and Wasatch Interactive Learning Corporation is
incorporated by reference to the Companys Registration
Statement on Form S-4 (File Number 333-56020).                    
|   
|   
|   
|   
|2.2 |  | Amendment No. 1 to Agreement and Plan of Merger,
dated as of February 20, 2001, by and among PLATO Learning,
Inc., WILC Acquisition Corporation and Wasatch Interactive
Learning Corporation is incorporated by reference to the
Companys Registration Statement on Form S-4 (File Number
333-56020).
|   
|   
|   
|   
|2.3 |  | Debenture Purchase Agreement, dated as of March
2, 2001, by and among WILC Acquisition Corporation, Wasatch
Interactive Learning Corporation and Brock Road LLC is
incorporated by reference to the Companys Registration
Statement on Form S-4 (File Number 333-56020).                             

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Item 6.      Exhibits and Reports on Form 8-K, Continued

|    |  |                     
|--- |  | --------------------
|(b) |  | Reports on Form 8-K:

|                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On November 29, 2000, the Company filed a Current Report on Form
8-K for the announcement of management changes including the
resignation of William R. Roach, chairman and chief executive
officer and founder of the Company, and the appointment of John M.
Buske as chief financial officer.
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|On December 29, 2000, the Company filed a Current Report on Form
8-K for the severance arrangements with William R. Roach.                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
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|                                                                                                                                                                                                                                                                                                
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|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
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|                                                                                                                                                                                                                                                                                                
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|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                
|On February 2, 2001, the Company filed Form 425, in lieu of a
Current Report on Form 8-K, for the announcement of the Agreement
and Plan of Merger with Wasatch Interactive Learning Corporation.                                                                                               

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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 on March 14, 2001.

| |                      |  |                                                                                                 
| | -------------------- |  | ------------------------------------------------------------------------------------------------
| | PLATO LEARNING, INC.
|
| | By                   |  | /s/John Murray                                                                                  
| |                      |  |                                                                                                 
| |                      |  | President and
Chief Executive Officer
(principal executive officer)                             
|
|
| |                      |  | /s/John M. Buske                                                                                
| |                      |  |                                                                                                 
| |                      |  | Vice President Finance and
Chief Financial Officer
(principal financial officer)                
|
|
| |                      |  | /s/Mary Jo Murphy                                                                               
| |                      |  |                                                                                                 
| |                      |  | Vice President, Corporate Controller and
Chief Accounting Officer
(principal accounting officer)

17