##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2005
 Commission File Number 0-20842
 PLATO LEARNING, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware(State or other jurisdiction of incorporation or organization)
    
    36-3660532(IRS Employer Identification Number)
 10801 Nesbitt Avenue South, Bloomington, MN 55437  (Address of principal executive offices)
 (952) 832-1000  (Registrants telephone number, including area code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
 þ o
 þ o
 o þ
    1




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PLATO LEARNING, INC.
Form 10-Q
Quarter Ended July 31, 2005
 TABLE OF CONTENTS
 PagePART I.  FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the Three and Nine Months Ended July 31, 2005 and 2004
    
    
    4Condensed Consolidated Balance Sheets as of July 31, 2005 and October 31, 2004
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2005 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    30PART II.  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    31Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits
    
    
    31SIGNATURES
    
    
    32Fifth Amendment to Credit AgreementEmployment AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (Unaudited)
 3




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PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:License fees
    
    $
    16,747
    
    
    $
    25,421
    
    
    $
    42,075
    
    
    $
    55,693Subscriptions
    
    
    4,400
    
    
    
    5,812
    
    
    
    13,450
    
    
    
    15,645Services
    
    
    7,440
    
    
    
    7,403
    
    
    
    26,544
    
    
    
    20,937Other
    
    
    2,652
    
    
    
    1,977
    
    
    
    6,054
    
    
    
    7,106Total revenues
    
    
    31,239
    
    
    
    40,613
    
    
    
    88,123
    
    
    
    99,381Cost of revenues:License fees
    
    
    3,001
    
    
    
    3,378
    
    
    
    9,302
    
    
    
    9,953Subscriptions
    
    
    1,780
    
    
    
    1,782
    
    
    
    6,235
    
    
    
    5,522Services
    
    
    4,892
    
    
    
    4,193
    
    
    
    17,126
    
    
    
    12,527Other
    
    
    2,560
    
    
    
    2,157
    
    
    
    6,245
    
    
    
    6,698Total cost of revenues
    
    
    12,233
    
    
    
    11,510
    
    
    
    38,908
    
    
    
    34,700Gross profit
    
    
    19,006
    
    
    
    29,103
    
    
    
    49,215
    
    
    
    64,681Operating expenses:Sales and marketing
    
    
    11,520
    
    
    
    14,897
    
    
    
    38,256
    
    
    
    45,875General and administrative
    
    
    5,141
    
    
    
    4,915
    
    
    
    14,193
    
    
    
    14,447Product development
    
    
    1,227
    
    
    
    1,293
    
    
    
    3,920
    
    
    
    4,842Amortization of intangibles
    
    
    1,075
    
    
    
    1,112
    
    
    
    3,247
    
    
    
    3,197Restructuring and other charges
    
    
    200
    
    
    
    
    
    
    
    3,121
    
    
    
    Total operating expenses
    
    
    19,163
    
    
    
    22,217
    
    
    
    62,737
    
    
    
    68,361Operating income (loss)
    
    
    (157
    )
    
    
    6,886
    
    
    
    (13,522
    )
    
    
    (3,680
    )Interest income
    
    
    251
    
    
    
    41
    
    
    
    631
    
    
    
    298Interest expense
    
    
    (46
    )
    
    
    (28
    )
    
    
    (89
    )
    
    
    (100
    )Other expense, net
    
    
    (209
    )
    
    
    (25
    )
    
    
    (362
    )
    
    
    (109
    )Earnings (loss) before income taxes
    
    
    (161
    )
    
    
    6,874
    
    
    
    (13,342
    )
    
    
    (3,591
    )Income tax expense
    
    
    150
    
    
    
    150
    
    
    
    450
    
    
    
    450Net earnings (loss)
    
    $
    (311
    )
    
    $
    6,724
    
    
    $
    (13,792
    )
    
    $
    (4,041
    )Earnings (loss) per share:Basic and diluted
    
    $
    (0.01
    )
    
    $
    0.29
    
    
    $
    (0.59
    )
    
    $
    (0.18
    )Weighted average common shares outstanding:Basic
    
    
    23,490
    
    
    
    23,012
    
    
    
    23,325
    
    
    
    22,497Diluted
    
    
    23,490
    
    
    
    23,556
    
    
    
    23,325
    
    
    
    22,497
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PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands, except per share amounts)
 July 31,
    
    
    October 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    38,926
    
    
    $
    29,235Marketable securities
    
    
    
    
    
    
    12,615Accounts receivable, net
    
    
    28,468
    
    
    
    41,852Prepaid expenses and other current assets
    
    
    11,510
    
    
    
    9,460Total current assets
    
    
    78,904
    
    
    
    93,162Long-term marketable securities
    
    
    
    
    
    
    3,608Equipment and leasehold improvements, net of accumulated
depreciation and amortization of $12,665 and $10,361, respectively
    
    
    6,717
    
    
    
    7,946Product development costs, net of accumulated amortization of
$24,166 and $18,835, respectively
    
    
    18,810
    
    
    
    17,116Goodwill
    
    
    71,589
    
    
    
    71,267Identified intangible assets, net
    
    
    33,228
    
    
    
    39,432Other assets
    
    
    920
    
    
    
    213Total assets
    
    $
    210,168
    
    
    $
    232,744LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,294
    
    
    $
    5,196Accrued employee salaries and benefits
    
    
    8,918
    
    
    
    8,772Accrued liabilities
    
    
    5,996
    
    
    
    6,383Deferred revenue
    
    
    36,122
    
    
    
    43,042Total current liabilities
    
    
    54,330
    
    
    
    63,393Long-term deferred revenue
    
    
    5,824
    
    
    
    8,533Deferred income taxes
    
    
    1,772
    
    
    
    1,322Other liabilities
    
    
    65
    
    
    
    46Total liabilities
    
    
    61,991
    
    
    
    73,294Commitments and contingencies (see Note 9)Stockholders equity:Common stock, $.01 par value, 50,000 shares authorized;
23,562 shares issued and 23,542 shares outstanding at July 31,
2005; 23,095 shares issued and 23,075 shares outstanding
at October 31, 2004
    
    
    235
    
    
    
    231Additional paid in capital
    
    
    165,803
    
    
    
    162,956Treasury stock at cost, 20 shares
    
    
    (205
    )
    
    
    (205
    )Accumulated deficit
    
    
    (16,642
    )
    
    
    (2,850
    )Accumulated other comprehensive loss
    
    
    (1,014
    )
    
    
    (682
    )Total stockholders equity
    
    
    148,177
    
    
    
    159,450Total liabilities and stockholders equity
    
    $
    210,168
    
    
    $
    232,744
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PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Nine Months EndedJuly 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (13,792
    )
    
    $
    (4,041
    )Adjustments to reconcile net loss to net cash provided by operating activities:Deferred income taxes
    
    
    450
    
    
    
    450Amortization of capitalized product development costs
    
    
    5,521
    
    
    
    5,160Amortization of identified intangible and other noncurrent assets
    
    
    6,318
    
    
    
    5,706Depreciation and amortization of equipment and leasehold improvements
    
    
    2,637
    
    
    
    2,600Provision for doubtful accounts
    
    
    1,291
    
    
    
    1,522Stock-based compensation
    
    
    39
    
    
    
    217Loss on disposal of equipment
    
    
    65
    
    
    
    79Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    12,093
    
    
    
    (357
    )Prepaid expenses and other current and noncurrent assets
    
    
    (2,924
    )
    
    
    (2,184
    )Accounts payable
    
    
    (1,902
    )
    
    
    (1,566
    )Accrued liabilities, accrued employee salaries and
benefits and other liabilities
    
    
    (150
    )
    
    
    (3,210
    )Deferred revenue
    
    
    (9,629
    )
    
    
    3,789Total adjustments
    
    
    13,809
    
    
    
    12,206Net cash provided by operating activities
    
    
    17
    
    
    
    8,165Investing activities:Acquisitions, net of cash acquired
    
    
    
    
    
    
    2,460Capitalized product development costs
    
    
    (7,906
    )
    
    
    (6,830
    )Purchases of equipment and leasehold improvements
    
    
    (1,450
    )
    
    
    (1,880
    )Purchases of marketable securities
    
    
    (9,266
    )
    
    
    (387
    )Sales and maturities of marketable securities
    
    
    25,544
    
    
    
    256Net cash provided by (used in) investing activities
    
    
    6,922
    
    
    
    (6,381
    )Financing activities:Net proceeds from issuance of common stock
    
    
    2,271
    
    
    
    1,812Repurchase of common stock
    
    
    
    
    
    
    (205
    )Repayments of capital lease obligations
    
    
    (185
    )
    
    
    (54
    )Net cash provided by financing activities
    
    
    2,086
    
    
    
    1,553Effect of currency exchange rate changes on cash and cash equivalents
    
    
    666
    
    
    
    (160
    )Net increase in cash and cash equivalents
    
    
    9,691
    
    
    
    3,177Cash and cash equivalents at beginning of period
    
    
    29,235
    
    
    
    23,834Cash and cash equivalents at end of period
    
    $
    38,926
    
    
    $
    27,011Supplemental cash flow information:Non-cash investing activities:Common stock and warrants issued for acquisitions
    
    
    
    
    
    $
    52,082
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PLATO Learning, Inc. and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
  1. Business
    2. Basis of Presentation
   3. Summary of Significant Accounting Policies
  7




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Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings (loss), as reported
    
    $
    (311
    )
    
    $
    6,724
    
    
    $
    (13,792
    )
    
    $
    (4,041
    )Stock-based compensation expense
included in reported net earnings (loss),
net of related tax effects
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    217Stock-based compensation expense
determined using the fair value based method
for all awards, net of related tax effects
    
    
    (547
    )
    
    
    (1,225
    )
    
    
    (2,052
    )
    
    
    (3,870
    )Pro forma net earnings (loss)
    
    $
    (858
    )
    
    $
    5,499
    
    
    $
    (15,805
    )
    
    $
    (7,694
    )Basic earnings (loss) per share:As reported
    
    $
    (0.01
    )
    
    $
    0.29
    
    
    $
    (0.59
    )
    
    $
    (0.18
    )Pro forma
    
    $
    (0.04
    )
    
    $
    0.24
    
    
    $
    (0.68
    )
    
    $
    (0.34
    )Diluted earnings (loss) per share:As reported
    
    $
    (0.01
    )
    
    $
    0.29
    
    
    $
    (0.59
    )
    
    $
    (0.18
    )Pro forma
    
    $
    (0.04
    )
    
    $
    0.23
    
    
    $
    (0.68
    )
    
    $
    (0.34
    )
   8




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4. Acquisitions
  Nine MonthsEndedJuly 31, 2004(Unaudited)Revenues
    
    $
    100,350Net loss
    
    
    (5,472
    )Basic and diluted loss per share
    
    
    (0.24
    )
  5. Accounts Receivable
  July 31,
    
    
    October 31,2005
    
    
    2004Trade accounts receivable
    
    $
    24,747
    
    
    $
    28,396Installment accounts receivable
    
    
    7,187
    
    
    
    16,168Allowance for doubtful accounts
    
    
    (3,466
    )
    
    
    (2,712
    )$
    28,468
    
    
    $
    41,852
  9




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6. Goodwill and Identified Intangible Assets
 Goodwill
  Balance, October 31, 2004
    
    $
    71,267Release of shares from escrow
    
    
    541Foreign currency translation
    
    
    (219
    )Balance,
July 31, 2005
    
    $
    71,589
  Identified Intangible Assets
  July 31, 2005
    
    
    October 31, 2004Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortization
    
    
    Value
    
    
    Value
    
    
    Amortization
    
    
    ValueAcquired technology
    
    $
    24,776
    
    
    $
    (8,768
    )
    
    $
    16,008
    
    
    $
    24,856
    
    
    $
    (5,882
    )
    
    $
    18,974Trademarks and
tradenames
    
    
    3,680
    
    
    
    (1,859
    )
    
    
    1,821
    
    
    
    3,680
    
    
    
    (1,328
    )
    
    
    2,352Customer relationships
and lists
    
    
    21,232
    
    
    
    (5,979
    )
    
    
    15,253
    
    
    
    21,238
    
    
    
    (3,653
    )
    
    
    17,585Noncompete agreements
    
    
    1,090
    
    
    
    (944
    )
    
    
    146
    
    
    
    1,090
    
    
    
    (569
    )
    
    
    521$
    50,778
    
    
    $
    (17,550
    )
    
    $
    33,228
    
    
    $
    50,864
    
    
    $
    (11,432
    )
    
    $
    39,432
   Remainder of 2005
    
    
    
    
    1,9502006
    
    
    
    
    7,1352007
    
    
    
    
    6,9122008
    
    
    
    
    6,3272009
    
    
    
    
    5,317Thereafter
    
    
    
    
    5,587$
    33,228
  10




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7. Debt
 Revolving Loan
   8. Deferred Revenue
  July 31,
    
    
    October 31,2005
    
    
    2004License fees
    
    $
    4,033
    
    
    $
    5,490Subscriptions
    
    
    10,482
    
    
    
    13,473Services
    
    
    27,167
    
    
    
    32,079Other
    
    
    264
    
    
    
    533Total
    
    
    41,946
    
    
    
    51,575Less: long-term amounts
    
    
    (5,824
    )
    
    
    (8,533
    )Current portion
    
    $
    36,122
    
    
    $
    43,042
 9. Commitments and Contingencies
 Employment Agreements
  Legal Proceedings
  11




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10. Restructuring and Other Charges
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJuly 31, 2005
    
    
    July 31, 2005Restructuring charges:U.K. facility closure liabilities
    
    $
    
    
    
    $
    313Severance and related benefits for U.K. headcount reduction
    
    
    
    
    
    
    452Severance and related benefits for U.S. headcount reduction
    
    
    118
    
    
    
    417Other
    
    
    70
    
    
    
    162188
    
    
    
    1,344Other charges:Executive officer changes
    
    
    
    
    
    
    1,595Other
    
    
    12
    
    
    
    18212
    
    
    
    1,777$
    200
    
    
    $
    3,121
 Restructuring Charges
   12




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##### Table of Contents



U.S.
    
    
    U.K.Severance and
    
    
    Severance and
    
    
    Facilityrelated benefits
    
    
    related benefits
    
    
    closingsProvision for restructuring
    
    $
    273
    
    
    $
    430
    
    
    $
    313Adjustments to provision
    
    
    144
    
    
    
    22
    
    
    
    Cash payments
    
    
    (417
    )
    
    
    (456
    )
    
    
    (72
    )Effect of currency exchange rate changes
    
    
    
    
    
    
    4
    
    
    
    (23
    )Reserve
balance at July 31, 2005

    
    $
    
    
    
    $
    
    
    
    $
    218
  Other Charges
   11. Income Taxes
   13




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12. Per Share Data
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net earnings (loss)
    
    $
    (311
    )
    
    $
    6,724
    
    
    $
    (13,792
    )
    
    $
    (4,041
    )Denominator:Weighted average common shares outstanding:Basic
    
    
    23,490
    
    
    
    23,012
    
    
    
    23,325
    
    
    
    22,497Options and warrants
    
    
    
    
    
    
    544
    
    
    
    
    
    
    
    Diluted
    
    
    23,490
    
    
    
    23,556
    
    
    
    23,325
    
    
    
    22,497Earnings (loss) per share:Basic and diluted
    
    $
    (0.01
    )
    
    $
    0.29
    
    
    $
    (0.59
    )
    
    $
    (0.18
    )
  14




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13. Comprehensive Earnings (Loss)
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings (loss)
    
    $
    (311
    )
    
    $
    6,724
    
    
    $
    (13,792
    )
    
    $
    (4,041
    )Unrealized gains on available for sale securities
    
    
    2
    
    
    
    
    
    
    
    54
    
    
    
    Foreign currency translation adjustments
    
    
    (684
    )
    
    
    83
    
    
    
    (386
    )
    
    
    87Total comprehensive earnings (loss)
    
    $
    (993
    )
    
    $
    6,807
    
    
    $
    (14,124
    )
    
    $
    (3,954
    )
  14. Segment and Geographic Information
  15. Subsequent Event
  15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    Recent Developments
  Critical Accounting Policies and Estimates
   16




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Revenue Recognition
          17




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Allowance for Doubtful Accounts
  Capitalized Product Development Costs
   18




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Valuation of Deferred Income Taxes
      Goodwill and Identified Intangible Assets
  19




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Acquisitions
  20




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RESULTS OF OPERATIONS
 Operating Results as a Percentage of Revenue
 Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:License fees
    
    
    53.6
    %
    
    
    62.6
    %
    
    
    47.7
    %
    
    
    56.0
    %Subscriptions
    
    
    14.1
    
    
    
    14.3
    
    
    
    15.3
    
    
    
    15.7Services
    
    
    23.8
    
    
    
    18.2
    
    
    
    30.1
    
    
    
    21.1Other
    
    
    8.5
    
    
    
    4.9
    
    
    
    6.9
    
    
    
    7.2Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:License fees
    
    
    9.6
    
    
    
    8.3
    
    
    
    10.6
    
    
    
    10.0Subscriptions
    
    
    5.7
    
    
    
    4.4
    
    
    
    7.1
    
    
    
    5.6Services
    
    
    15.7
    
    
    
    10.3
    
    
    
    19.4
    
    
    
    12.6Other
    
    
    8.2
    
    
    
    5.3
    
    
    
    7.1
    
    
    
    6.7Total cost of revenues
    
    
    39.2
    
    
    
    28.3
    
    
    
    44.2
    
    
    
    34.9Gross profit
    
    
    60.8
    
    
    
    71.7
    
    
    
    55.8
    
    
    
    65.1Operating expenses:Sales and marketing
    
    
    36.9
    
    
    
    36.7
    
    
    
    43.4
    
    
    
    46.2General and administrative
    
    
    16.5
    
    
    
    12.1
    
    
    
    16.1
    
    
    
    14.5Product development
    
    
    3.9
    
    
    
    3.2
    
    
    
    4.4
    
    
    
    4.9Amortization of intangibles
    
    
    3.4
    
    
    
    2.7
    
    
    
    3.7
    
    
    
    3.2Restructuring and other charges
    
    
    0.6
    
    
    
    
    
    
    
    3.5
    
    
    
    Total operating expenses
    
    
    61.3
    
    
    
    54.7
    
    
    
    71.1
    
    
    
    68.8Operating income (loss)
    
    
    (0.5
    )
    
    
    17.0
    
    
    
    (15.3
    )
    
    
    (3.7
    )Interest income and expense and
other expense, net
    
    
    
    
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    0.1Earnings (loss) before income taxes
    
    
    (0.5
    )
    
    
    16.9
    
    
    
    (15.1
    )
    
    
    (3.6
    )Income tax expense
    
    
    0.5
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.5Net earnings (loss)
    
    
    (1.0
    )%
    
    
    16.5
    %
    
    
    (15.6
    )%
    
    
    (4.1
    )%
  21




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##### Table of Contents



Revenues
 Total Revenues
    Three Months Ended July 31,2005
    
    
    2004
    
    
    % ChangeOrder Size
    
    Number
    
    
    Value
    
    
    Number
    
    
    Value
    
    
    Number
    
    
    Value$100 to $249
    
    
    40
    
    
    $
    6,370
    
    
    
    52
    
    
    $
    7,699
    
    
    
    -23.1
    %
    
    
    -17.3
    %$250 or greater
    
    
    10
    
    
    
    4,709
    
    
    
    18
    
    
    
    13,506
    
    
    
    -44.4
    %
    
    
    -65.1
    %50
    
    
    $
    11,079
    
    
    
    70
    
    
    $
    21,205
    
    
    
    -28.6
    %
    
    
    -47.8
    %
 Nine Months Ended July 31,2005
    
    
    2004 (Pro Forma)
    
    
    % ChangeOrder Size
    
    Number
    
    
    Value
    
    
    Number
    
    
    Value
    
    
    Number
    
    
    Value$100 to $249
    
    
    77
    
    
    $
    11,920
    
    
    
    122
    
    
    $
    17,969
    
    
    
    -36.9
    %
    
    
    -33.7
    %$250 or greater
    
    
    31
    
    
    
    14,693
    
    
    
    43
    
    
    
    29,543
    
    
    
    -27.9
    %
    
    
    -50.3
    %108
    
    
    $
    26,613
    
    
    
    165
    
    
    $
    47,512
    
    
    
    -34.5
    %
    
    
    -44.0
    %
 License Fees
   22




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##### Table of Contents



Total Revenues
 Subscriptions
   Services
   Other
   Backlog
  23




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##### Table of Contents



Cost of Revenues
     Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,Revenue category
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004License fees
    
    
    82.1
    %
    
    
    86.7
    %
    
    
    77.9
    %
    
    
    82.1
    %Subscriptions
    
    
    59.5
    %
    
    
    69.3
    %
    
    
    53.6
    %
    
    
    64.7
    %Services
    
    
    34.2
    %
    
    
    43.4
    %
    
    
    35.5
    %
    
    
    40.2
    %Other
    
    
    3.5
    %
    
    
    -9.1
    %
    
    
    -3.2
    %
    
    
    5.7
    %Total
    
    
    60.8
    %
    
    
    71.7
    %
    
    
    55.8
    %
    
    
    65.1
    %
  Operating Expenses
 Sales and Marketing
  24




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##### Table of Contents



General and Administrative
   Product Development
     25




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##### Table of Contents



Amortization of Intangibles
  Restructuring and Other Charges
    Income Taxes
   26




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##### Table of Contents



FINANCIAL CONDITION
 Liquidity and Capital Resources
       27




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##### Table of Contents



Disclosures about Off-Balance Sheet Arrangements
  Disclosures about Contractual Obligations and Commercial Commitments
     28




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##### Table of Contents



Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  New Accounting Pronouncements
  29




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 (a) Evaluation of Disclosure Controls and Procedures.
    (b) Changes
in Internal Control Over Financial Reporting.
 30




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##### Table of Contents



PART II.
 
 Item 1. Legal Proceedings
  
 Item 5. Other Information
   
 Item 6. Exhibits
 Exhibit Number and Description
 10.02
    
    
    Fifth Amendment to Credit Agreement.10.53
    
    
    Employment Agreement with Robert J. Rueckl.31.01
    
    
    Certification of Chief Executive Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    
    Certification of Chief Financial Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.01
    
    
    Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.02
    
    
    Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 31




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##### Table of Contents



SIGNATURES
  PLATO LEARNING, INC.
    By:
    /s/ MICHAEL A. MORACHESeptember 9, 2005
    
    Michael A. MorachePresident and Chief Executive Officer
(principal executive officer) /s/ LAURENCE L. BETTERLEYLaurence L. BetterleySenior Vice President and Chief Financial Officer
(principal financial officer) 32