##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 April 30, 2001

Commission File Number 0-20842

PLATO LEARNING, INC.
(Exact name of Registrant as specified in its charter)

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

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

|                                                    |  | 
|--------------------------------------------------- |  | 
|Registrants telephone number, including area code: |  | 

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:

| |     |  |  |    |  | 
| | --- |  |  | -- |  | 
| | Yes |  |  | No | 

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 |  | 11,443,752 shares             
|Class                        |  | Outstanding as of May 31, 2001

(This document contains 22 pages)

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 AND SIX MONTHS ENDED APRIL 30, 2001 AND 2000
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 2001 AND OCTOBER 31, 2000                         
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 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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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries

INDEX

|           |  |  |                                                          |    |  |        |    | 
|---------- |  |  | -------------------------------------------------------- | -- |  | ------ | -- | 
|           |  |  |                                                          |    |  | Page   |   
|           |  |  |                                                          |    |  | Number |   
|           |  |  |                                                          |    |  |        |   
|PART I.    |  |  | FINANCIAL INFORMATION                                    |   
|          
|          
|          
|          
|Item 1.    |  |  | Condensed Consolidated Financial Statements (Unaudited): |   
|          
|          
|          
|          
|           |  |  | Condensed Consolidated Statements of Earnings for the    |   
|           |  |  | Three and Six Months Ended April 30, 2001 and 2000       |    |  |        | 3  | 
|          
|          
|          
|          
|           |  |  | Condensed Consolidated Balance Sheets as of              |   
|           |  |  | April 30, 2001 and October 31, 2000                      |    |  |        | 4  | 
|          
|          
|          
|          
|           |  |  | Condensed Consolidated Statements of Cash Flows for the  |   
|           |  |  | Six Months Ended April 30, 2001 and 2000                 |    |  |        | 5  | 
|          
|          
|          
|          
|           |  |  | Notes to Condensed Consolidated Financial Statements     |    |  |        | 6  | 
|          
|          
|          
|          
|Item 2.    |  |  | Management's Discussion and Analysis of                  |   
|           |  |  | Results of Operations and Financial Condition            |    |  |        | 13 | 
|          
|          
|          
|          
|PART II.   |  |  | OTHER INFORMATION                                        |   
|          
|          
|          
|          
|Item 1.    |  |  | Legal Proceedings                                        |    |  |        | 20 | 
|          
|          
|          
|          
|Item 2.    |  |  | Changes in Securities                                    |    |  |        | 20 | 
|          
|          
|          
|          
|Item 3.    |  |  | Defaults Upon Senior Securities                          |    |  |        | 20 | 
|          
|          
|          
|          
|Item 4.    |  |  | Submission of Matters to a Vote of Security Holders      |    |  |        | 20 | 
|          
|          
|          
|          
|Item 5.    |  |  | Other Information                                        |    |  |        | 20 | 
|          
|          
|          
|          
|Item 6.    |  |  | Exhibits and Reports on Form 8-K                         |    |  |        | 21 | 
|          
|          
|          
|          
|SIGNATURES |  |  |                                                          | 22 | 

2



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##### Table of Contents












PART I. FINANCIAL INFORMATION

PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands, except per share data)

|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |        |        |        |        |        |        |        |  
|------------------------------------------- | ---------------------------------------- | ------------------------ | ---------------------------------------------------- | ------ | ------------------ | ----- | ------ | ---------------- | ------ | --- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                            |                                          |                          |                                                      |        | Three Months Ended |       |        | Six Months Ended |       
|                                            |                                          |                          |                                                      |        | April 30,          |       |        | April 30,        |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |       
|                                            |                                          |                          |                                                      |        | 2001               |       |        | 2000             |        |     | 2001   |        |        | 2000   |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |        |        |        |       
|Revenues                                    |                                          | $                        | 15,364                                               |        |                    | $     | 12,240 |                  |        | $   | 25,118 |        |        | $      | 19,765 |       
|                                           
|                                           
|                                           
|                                           
|Cost of revenues                            |                                          |                          | 1,469                                                |        |                    |       | 1,609  |                  |        |     | 2,948  |        |        |        | 2,966  |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            |                                          | Gross profit             |                                                      |        | 13,895             |       |        |                  | 10,631 |     |        |        | 22,170 |        |        |        | 16,799 |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|Operating expenses:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative      |                          |                                                      | 10,157 |                    |       |        | 8,216            |        |     |        | 18,894 |        |        |        | 14,960 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Product development and customer support |                          |                                                      | 2,045  |                    |       |        | 1,542            |        |     |        | 3,832  |        |        |        | 3,091  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Goodwill and intangible amortization     |                          |                                                      | 386    |                    |       |        |                 |        |     |        | 594    |        |        |        |       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Special charges                          |                          |                                                      |       |                    |       |        |                 |        |     |        | 1,260  |        |        |        |       |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            |                                          | Total operating expenses |                                                      |        | 12,588             |       |        |                  | 9,758  |     |        |        | 24,580 |        |        |        | 18,051 |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            |                                          |                          | Operating profit (loss)                              |        |                    | 1,307 |        |                  |        | 873 |        |        |        | (2,410 | )      |        |        | (1,252 | )
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                          |                          | 71                                                   |        |                    |       | 253    |                  |        |     | 155    |        |        |        | 485    |       
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                          |                          | 13                                                   |        |                    |       | 63     |                  |        |     | 66     |        |        |        | 97     |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            |                                          |                          | Earnings (loss) before income taxes                  |        |                    | 1,223 |        |                  |        | 557 |        |        |        | (2,631 | )      |        |        | (1,834 | )
|                                           
|                                           
|                                           
|                                           
|Income tax expense (benefit)                |                                          |                          | 398                                                  |        |                    |       | 201    |                  |        |     | (1,105 | )      |        |        | (696   | )     
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            |                                          |                          | Net earnings (loss)                                  |        |                    | 825   |        |                  |        | 356 |        |        |        | (1,526 | )      |        |        | (1,138 | )
|                                           
|                                           
|                                           
|                                           
|Preferred stock accretion                   |                                          |                          |                                                     |        |                    |       |       |                  |        |     |       |        |        |        | (129   | )     
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            |                                          |                          | Net earnings (loss) available to common stockholders |        | $                  | 825   |        |                  | $      | 356 |        |        | $      | (1,526 | )      |        | $      | (1,267 | )
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|Earnings (loss) per share:                 
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                          | $                                                    | 0.10   |                    |       | $      | 0.05             |        |     | $      | (0.18  | )      |        | $      | (0.18  | )     
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            | Diluted                                  |                          | $                                                    | 0.09   |                    |       | $      | 0.05             |        |     | $      | (0.18  | )      |        | $      | (0.18  | )     
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                          |                                                      | 8,514  |                    |       |        | 7,310            |        |     |        | 8,388  |        |        |        | 7,120  |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       
|                                            | Diluted                                  |                          |                                                      | 9,205  |                    |       |        | 7,688            |        |     |        | 8,388  |        |        |        | 7,120  |       
|                                            |                                          |                          |                                                      |        |                    |       |        |                  |        |     |        |       

See Notes to Condensed Consolidated Financial Statements

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PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

|                                     |                                                                       |                                                    |     |        |        |             |     |        |             |  |  | 
|------------------------------------ | --------------------------------------------------------------------- | -------------------------------------------------- | --- | ------ | ------ | ----------- | --- | ------ | ----------- |  |  | 
|                                     |                                                                       |                                                    |     |        |        | April 30,   |     |        | October 31, | 
|                                     |                                                                       |                                                    |     |        |        | 2001        |     |        | 2000        | 
|                                     |                                                                       |                                                    |     |        |        |             |     |        |             | 
|                                     |                                                                       |                                                    |     |        |        | (Unaudited) |     |        | (See Note)  | 
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                     
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                             |                                                    | $   | 1,071  |        |             | $   | 6,415  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, less allowances of $1,786                       
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                       | and $2,308, respectively                           |     |        | 21,335 |             |     |        | 21,829      | 
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                           |                                                    |     | 393    |        |             |     | 615    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other current assets                             |                                                    |     | 883    |        |             |     | 627    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                                                 |                                                    |     | 2,315  |        |             |     | 2,315  |            
|                                     |                                                                       |                                                    |     |        |        |             |    
|                                     |                                                                       | Total current assets                               |     |        | 25,997 |             |     |        | 31,801      | 
|                                    
|                                    
|                                    
|                                    
|                                     | Equipment and leasehold improvements, less accumulated               
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                       | depreciation of $3,286 and $2,882, respectively    |     |        | 2,392  |             |     |        | 1,495       | 
|                                    
|                                    
|                                    
|                                    
|                                     | Product development costs, less accumulated amortization             
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                       | of $10,323 and $9,072, respectively                |     |        | 8,637  |             |     |        | 7,921       | 
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes, net                                            |                                                    |     | 4,211  |        |             |     | 4,229  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, less accumulated amortization of $507 and $79, respectively |                                                    |     | 17,416 |        |             |     | 3,014  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                                                          |                                                    |     | 4,975  |        |             |     | 2,130  |            
|                                     |                                                                       |                                                    |     |        |        |             |    
|                                     |                                                                       | Total assets                                       |     | $      | 63,628 |             |     | $      | 50,590      | 
|                                     |                                                                       |                                                    |     |        |        |             |    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                                     |                                                    | $   | 150    |        |             | $   | 600    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Revolving loan                                                        |                                                    |     | 934    |        |             |     |       |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                      |                                                    |     | 1,626  |        |             |     | 1,502  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued employee salaries and benefits                                |                                                    |     | 3,281  |        |             |     | 4,087  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                                                   |                                                    |     | 2,173  |        |             |     | 2,129  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred revenue                                                      |                                                    |     | 6,303  |        |             |     | 5,980  |            
|                                     |                                                                       |                                                    |     |        |        |             |    
|                                     |                                                                       | Total current liabilities                          |     |        | 14,467 |             |     |        | 14,298      | 
|                                    
|                                    
|                                    
|                                    
|Long-term debt                       |                                                                       |                                                    | 539 |        |        |             |    |       
|                                    
|                                    
|                                    
|                                    
|Deferred revenue                     |                                                                       |                                                    | 730 |        |        |             | 287 |       
|                                    
|                                    
|                                    
|                                    
|Other liabilities                    |                                                                       |                                                    | 135 |        |        |             | 160 |       
|                                     |                                                                       |                                                    |     |        |        |             |    
|                                     |                                                                       | Total liabilities                                  |     |        | 15,871 |             |     |        | 14,745      | 
|                                     |                                                                       |                                                    |     |        |        |             |    
|Stockholders equity:               
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.01 par value, 25,000 shares                          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                       | authorized; 9,186 shares issued and 9,030 shares  
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                       | outstanding at April 30, 2001; 8,348 shares issued
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                       | and 8,225 shares outstanding at October 31, 2000   |     |        | 90     |             |     |        | 82          | 
|                                    
|                                    
|                                    
|                                    
|                                     | Paid-in capital                                                       |                                                    |     | 49,610 |        |             |     | 35,526 |            
|                                    
|                                    
|                                    
|                                    
|                                     | Treasury stock at cost, 156 and 123 shares, respectively              |                                                    |     | (1,774 | )      |             |     | (1,209 | )          
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                     |                                                    |     | 755    |        |             |     | 2,281  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                                  |                                                    |     | (924   | )      |             |     | (835   | )          
|                                     |                                                                       |                                                    |     |        |        |             |    
|                                     |                                                                       | Total stockholders equity                         |     |        | 47,757 |             |     |        | 35,845      | 
|                                     |                                                                       |                                                    |     |        |        |             |    
|                                     |                                                                       | Total liabilities and stockholders equity         |     | $      | 63,628 |             |     | $      | 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.

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##### Table of Contents






PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |       |        |       |        |       |  
|---------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------------ | ----------------------------------------------------------- | ----------------------------------------- | ------ | ---------------- | ----- | ------ | ----- | ------ | ----- | -
|                                                     |                                                           |                                                        |                                                             |                                           |        | Six Months Ended |      
|                                                     |                                                           |                                                        |                                                             |                                           |        | April 30,        |      
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     |                                                           |                                                        |                                                             |                                           |        | 2001             |       |        | 2000  |       
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |       |        |       |       
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                  |                                                        | $                                                           | (1,526                                    | )      |                  | $     | (1,138 | )    
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     | Adjustments to reconcile net loss to net cash provided by
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | operating activities:                                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Deferred income taxes                                  |                                                             |                                           | (1,105 | )                |       |        | (696  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Depreciation and amortization                          |                                                             |                                           | 2,369  |                  |       |        | 1,415 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Provision for doubtful accounts                        |                                                             |                                           | 600    |                  |       |        | 700   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Stock-based compensation                               |                                                             |                                           | 536    |                  |       |        | 32    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Loss on disposal of fixed assets                       |                                                             |                                           | 17     |                  |       |        | 24    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           | Changes in assets and liabilities, net of acquisition:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        | Accounts receivable                                         |                                           |        | (25              | )     |        |       | 734    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        | Inventories                                                 |                                           |        | 222              |       |        |       | (30    | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        | Prepaid expenses and other current and noncurrent assets    |                                           |        | (914             | )     |        |       | 394    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        | Accounts payable                                            |                                           |        | (32              | )     |        |       | (241   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        | Accrued liabilities, accrued employee salaries and benefits
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        |                                                             | and other liabilities                     |        |                  | (502  | )      |       |        | (383  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                           |                                                        | Deferred revenue                                            |                                           |        | 736              |       |        |       | (169   | )    
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     |                                                           |                                                        |                                                             | Total adjustments                         |        |                  | 1,902 |        |       |        | 1,780 |  
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     |                                                           |                                                        |                                                             | Net cash provided by operating activities |        |                  | 376   |        |       |        | 642   |  
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition, net of cash acquired of $279                 |                                                        |                                                             | (4,327                                    | )      |                  |       |       |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                      |                                                        |                                                             | (527                                      | )      |                  |       | (708   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalization of product development costs               |                                                        |                                                             | (1,952                                    | )      |                  |       | (1,268 | )    
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     |                                                           |                                                        | Net cash used in investing activities                       |                                           |        | (6,806           | )     |        |       | (1,976 | )    
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from short-term borrowings                   |                                                        |                                                             | 825                                       |        |                  |       | 1,354  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from issuance of common stock                |                                                        |                                                             | 360                                       |        |                  |       | 128    |      
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     |                                                           | Net cash provided by (used in) financing activities    |                                                             |                                           | 1,185  |                  |       |        | 1,482 |       
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Effect of foreign currency on cash                   |                                                           |                                                        | (99                                                         | )                                         |        |                  | (92   | )     
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Net increase (decrease) in cash and cash equivalents |                                                           |                                                        | (5,344                                                      | )                                         |        |                  | 56    |       
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                           |                                                        | 6,415                                                       |                                           |        |                  | 63    |       
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Cash and cash equivalents at end of period           |                                                           | $                                                      | 1,071                                                       |                                           |        | $                | 119   |       
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Cash paid for interest                               |                                                           | $                                                      | 129                                                         |                                           |        | $                | 454   |       
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Cash paid for income taxes                           |                                                           | $                                                      | 237                                                         |                                           |        | $                | 99    |       
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|Non-cash investing and financing activities:        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Common stock issued for acquisition                       |                                                        | $                                                           | 12,000                                    |        |                  | $     |       |      
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     | Liabilities assumed in acquisition                        |                                                        | $                                                           | 557                                       |        |                  | $     |       |      
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     | Capital lease obligations incurred                        |                                                        | $                                                           | 722                                       |        |                  | $     |       |      
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      
|                                                     | Debt converted to common stock                            |                                                        | $                                                           | 600                                       |        |                  | $     |       |      
|                                                     |                                                           |                                                        |                                                             |                                           |        |                  |      

See Notes to Condensed Consolidated Financial Statements

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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(R) Learning System and PLATO(R) Web Learning Network provide
more than 3,500 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 K-12 schools, colleges, job training programs, correctional
institutions, military education programs, corporations and individuals.

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.

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 vendor-specific objective evidence of the relative fair value of
each deliverable. Upon delivery, future service costs, if any, are accrued.
Future service costs represent the Companys problem 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

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

Revenue Recognition,Continued

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. |  | ACQUISITION
|-- |  | -----------

In April 2001, the Company acquired Wasatch Interactive Learning Corporation
(Wasatch), a publicly held Washington corporation and provider of multimedia
courseware for K-8 education. Following the approval of Wasatch stockholders,
the Company acquired all of the outstanding securities of Wasatch in exchange
for approximately 656,000 shares of the Companys common stock with an aggregate
fair value of $12,000, and Wasatch became a wholly owned subsidiary. In
addition, the Company assumed all existing warrants to purchase Wasatch common
stock and converted them into warrants to purchase the Companys common stock.

In a separate transaction immediately prior to the closing date, the Company
purchased Wasatchs outstanding 7% convertible debenture from the holder for
approximately $4,056 with funds borrowed under the Companys revolving loan
agreement. The 7% convertible debenture was terminated upon the closing of the
acquisition.

The Wasatch acquisition was accounted for using the purchase method of
accounting and, accordingly, the net liabilities acquired were recorded at their
estimated fair values on the acquisition date. The purchase price consisted of
the $12,000 in common stock issued, $4,056 for the purchase of the Wasatch 7%
convertible debenture, $550 of estimated direct acquisition costs, $557 of
liabilities assumed and $31 of value assigned to the assumed warrants. The
preliminary allocation of the purchase price included approximately $595 to the
estimated fair value of tangible assets acquired, $1,131 to deferred tax
liabilities and $17,730 to identifiable intangible assets and goodwill. Goodwill
will be amortized over seven years and indentifiable intangible assets will be
amortized over their estimated useful lives, expected to be three to five years.

Due to the timing of the acquisition within the quarter, the allocation of the
purchase price as of April 30, 2001 is preliminary. The actual allocation may be
different after third party appraisals of the intangible assets are completed.

The unaudited pro forma consolidated results of operations of the Company, as if
the Wasatch acquisition had occurred at the beginning of the periods presented,
were as follows:

|                       |  |                  |        |   |             |   |        |  
|---------------------- |  | ---------------- | ------ | - | ----------- | - | ------ | -
|                       |  | Six Months Ended |       
|                       |  | April 30,        |       
|                       |  |                  |       
|                       |  | 2001             |        |   | 2000        |  
|                       |  |                  |        |   |             |  
|                       |  | (Unaudited)      |        |   | (Unaudited) |  
|Revenues               |  | $                | 25,651 |   |             | $ | 20,966 |  
|                       |  |                  |        |   |             |  
|Net loss               |  | $                | (4,434 | ) |             | $ | (3,138 | )
|                       |  |                  |        |   |             |  
|Diluted loss per share |  | $                | (0.50  | ) |             | $ | (0.42  | )
|                       |  |                  |        |   |             |  

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|2. |  | ACQUISITION, Continued
|-- |  | ----------------------

The unaudited pro forma consolidated results of operations are for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisition occurred at the beginning of the periods presented
or the results which may occur in the future.



|3. |  | ACCOUNTS RECEIVABLE
|-- |  | -------------------

Accounts receivable include installment receivables of $13,096 and $13,040 at
April 30, 2001 and October 31, 2000, respectively. Installment receivables to be
billed beyond one year from the balance sheet date were $340 and $193 at April
30, 2001 and October 31, 2000, respectively, and are included in other assets on
the consolidated balance sheets.



|4. |  | DEBT
|-- |  | ----

Revolving Loan

At April 30, 2001, borrowings of $934 were outstanding under the Companys
revolving loan agreement at an interest rate of 7.5%. The unused borrowing
capacity was approximately $12,700.

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 April 30, 2001, the Companys long-term 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.



|5. |  | 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 8,000 shares of common stock
pursuant to the adjustment warrants issued in connection with the private
placement of common stock in July 2000.

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|5. |  | STOCKHOLDERS EQUITY, Continued
|-- |  | -------------------------------

In April 2001, the Company issued approximately 656,000 shares of common stock
for the acquisition of Wasatch (see Note 2). In addition, the Company assumed
all existing warrants to purchase Wasatch common stock and converted them into
warrants to purchase approximately 232,000 shares of the Companys common stock,
at exercise prices ranging from $74.87 to $394.79 per share. These warrants
expire from 2002 to 2004.

The Company issued approximately 101,000 shares of common stock for the exercise
of outstanding stock options, and approximately 6,000 shares of common stock for
the exercise of outstanding stock warrants during the six months ended April 30,
2001.

Stock-based compensation for the six months ended April 30, 2001 includes
non-cash charges of $489 for the accelerated vesting of stock options related to
the Companys succession plans and $47 for restricted stock compensation.



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

The consolidated statement of earnings for the six months ended April 30, 2001
included special charges of $1,260. These charges represent costs associated
with the November 2000 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.

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|7. |  | EARNINGS (LOSS) PER SHARE
|-- |  | -------------------------

Earnings (loss) per share is calculated as follows:

|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |       |  |      |        |       |  |  | 
|---------------------------------------------------- | ------------------------------------- | - | ----- | ----- | ------------------ | - | ----- | ---------------- |  | - | ------ | ----- |  | ---- | ------ | ----- |  |  | 
|                                                     |                                       |   |       |       | Three Months Ended |   |       | Six Months Ended | 
|                                                     |                                       |   |       |       | April 30,          |   |       | April 30,        | 
|                                                     |                                       |   |       |       |                    |   |       |                  | 
|                                                     |                                       |   |       |       | 2001               |   |       | 2000             |  |   | 2001   |       |  | 2000 |       
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |       |  |      |       
|Basic                                                | :                                    
|                                                    
|Net earnings (loss) available to common stockholders |                                       | $ | 825   |       |                    | $ | 356   |                  |  | $ | (1,526 | )     |  | $    | (1,267 | )    
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Weighted average common shares outstanding           |                                       |   | 8,514 |       |                    |   | 7,310 |                  |  |   | 8,388  |       |  |      | 7,120  |      
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Basic earnings (loss) per share                      |                                       | $ | 0.10  |       |                    | $ | 0.05  |                  |  | $ | (0.18  | )     |  | $    | (0.18  | )    
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Diluted                                              | :                                    
|                                                    
|Net earnings (loss) available to common stockholders |                                       | $ | 825   |       |                    | $ | 356   |                  |  | $ | (1,526 | )     |  | $    | (1,267 | )    
|                                                    
|                                                    
|                                                    
|                                                    
|Preferred stock accretion                            |                                       |   |      |       |                    |   |      |                  |  |   |       |       |  |      |       |      
|                                                    
|                                                    
|                                                    
|                                                    
|Convertible debentures interest                      |                                       |   |      |       |                    |   |      |                  |  |   |       |       |  |      |       |      
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Net earnings (loss) for diluted earnings per share   |                                       | $ | 825   |       |                    | $ | 356   |                  |  | $ | (1,526 | )     |  | $    | (1,267 | )    
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Weighted average common shares outstanding           |                                       |   | 8,514 |       |                    |   | 7,310 |                  |  |   | 8,388  |       |  |      | 7,120  |      
|                                                    
|                                                    
|                                                    
|                                                    
|Potential common shares:                            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Stock options and warrants            |   |       | 691   |                    |   |       | 262              |  |   |        |      |  |      |        |      | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Convertible preferred stock           |   |       |      |                    |   |       | 116              |  |   |        |      |  |      |        |      | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Convertible debentures                |   |       |      |                    |   |       |                 |  |   |        |      |  |      |        |      | 
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Weighted average common and potential               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | common shares outstanding for diluted
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | earnings (loss) per share             |   |       | 9,205 |                    |   |       | 7,688            |  |   |        | 8,388 |  |      |        | 7,120 | 
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      
|Diluted earnings (loss) per share                    |                                       | $ | 0.09  |       |                    | $ | 0.05  |                  |  | $ | (0.18  | )     |  | $    | (0.18  | )    
|                                                     |                                       |   |       |       |                    |   |       |                  |  |   |        |      

For the three months ended April 30, 2000, potential common shares from the
convertible debentures were antidilutive and excluded from the calculation of
diluted earnings per share. The number of potential common shares excluded was
approximately 308,000.

The Company incurred a net loss for each of the six months ended April 30, 2001
and 2000, and potential common shares were antidilutive and excluded from the
calculations of diluted loss per share. The number of potential common shares
excluded from the diluted loss per share calculations was approximately 710,000
and 791,000 for the six months ended April 30, 2001 and 2000, respectively.

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|8. |  | COMPREHENSIVE INCOME (LOSS)
|-- |  | ---------------------------

Total comprehensive income (loss) was as follows:

|                                         |                                   |   |                    |     |  |                  |     |     |      |   |        |        |   |   |        |        |  
|---------------------------------------- | --------------------------------- | - | ------------------ | --- |  | ---------------- | --- | --- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                         |                                   |   | Three Months Ended |     |  | Six Months Ended |    
|                                         |                                   |   | April 30,          |     |  | April 30,        |    
|                                         |                                   |   |                    |     |  |                  |    
|                                         |                                   |   | 2001               |     |  | 2000             |     |     | 2001 |   |        | 2000   |  
|                                         |                                   |   |                    |     |  |                  |     |     |      |   |        |        |  
|Net earnings (loss)                      |                                   | $ | 825                |     |  | $                | 356 |     |      | $ | (1,526 | )      |   | $ | (1,138 | )     
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation adjustments |                                   |   | (43                | )   |  |                  | (82 | )   |      |   | (89    | )      |   |   | (103   | )     
|                                         |                                   |   |                    |     |  |                  |     |     |      |   |        |       
|                                         | Total comprehensive income (loss) |   | $                  | 782 |  |                  | $   | 274 |      |   | $      | (1,615 | ) |   | $      | (1,241 | )
|                                         |                                   |   |                    |     |  |                  |     |     |      |   |        |       

Accumulated other comprehensive loss is included as a separate component of
stockholders equity on the consolidated balance sheets.



|9. |  | SUBSEQUENT EVENT
|-- |  | ----------------

In May 2001, the Company completed a public stock offering, selling 2,400,000
shares of its common stock at a price of $21.00 per share. Net proceeds were
approximately $47,000, after payment of underwriting discounts, commissions and
estimated offering expenses. In addition, in June the underwriters exercised an
option to purchase 360,000 additional shares at a price of $21.00 per share to
cover over-allotments. Net proceeds were approximately $7,000 after payment of
underwriting discounts, commissions and estimated offering expenses.

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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(R) Learning System and PLATO(R) Web Learning Network provide
more than 3,500 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 K-12 schools, colleges, job training programs,
correctional institutions, military education programs, corporations and
individuals.

Acquisitions

In April 2001, the Company acquired Wasatch Interactive Learning Corporation
(Wasatch), a publicly held Washington corporation and provider of multimedia
courseware for K-8 education. Following the approval of Wasatch stockholders,
the Company acquired all of the outstanding securities of Wasatch in exchange
for approximately 656,000 shares of the Companys common stock
with an aggregate fair value of $12,000, and Wasatch
became a wholly owned subsidiary. In
addition, the Company assumed all existing warrants to purchase Wasatch common
stock and converted them into warrants to purchase the Companys common stock.

In a separate transaction immediately prior to the closing date, the Company
purchased Wasatchs outstanding 7% convertible debenture from the holder for
approximately $4,056 with funds borrowed under the Companys revolving loan
agreement. The 7% convertible debenture was terminated upon the closing
of the acquisition.

The Wasatch acquisition was accounted for using the purchase method of
accounting and, accordingly, the net liabilities acquired were recorded at their
estimated fair values on the acquisition date. The purchase price consisted of
the $12,000 in common stock issued, $4,056 for the purchase of the Wasatch 7%
convertible debenture, $550 of estimated direct acquisition costs, $557 of
liabilities assumed and $31 of value assigned to the assumed warrants. The
preliminary allocation of the purchase price included approximately $595 to the
estimated fair value of tangible assets acquired, $1,131 to deferred tax
liabilities and $17,730 to identifiable intangible assets and goodwill. Goodwill
will be amortized over seven years and indentifiable intangible assets will be
amortized over their estimated useful lives, expected to be three to
five years.

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RESULTS OF OPERATIONS, Continued

Acquisitions,Continued

Due to the timing of the acquisition within the quarter, the allocation of the
purchase price as of April 30, 2001 is preliminary. The actual allocation may be
different after third party appraisals of the intangible assets are completed.

In July 2000, the Company acquired CyberEd, Inc. (CyberEd), a privately held
Nevada corporation and provider of multimedia science courseware for high
schools, for approximately $4,400 in cash, net of cash acquired. This
acquisition was also accounted for using the purchase method of accounting.

The results of operations for Wasatch and CyberEd are not material to the
consolidated results of operations for the three and six months ended April 30,
2001.

Operating Results as a Percentage of Revenue

|                                                 |  |                    |       |                  |  |      |       |      |  |  |       |    |  |  |       |   
|------------------------------------------------ |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | -- |  |  | ----- | --
|                                                 |  | Three Months Ended |       | Six Months Ended
|                                                 |  | April 30,          |       | April 30,       
|                                                 |  |                    |       |                 
|                                                 |  | 2001               |       | 2000             |  | 2001 |       | 2000
|                                                 |  |                    |       |                  |  |      |       |      | 
|Revenues                                         |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | %  |  |  | 100.0 | % 
|                                                
|                                                
|                                                
|                                                
|Cost of revenues                                 |  |                    | 9.6   |                  |  |      | 13.1  |      |  |  | 11.7  |    |  |  | 15.0  |   
|                                                 |  |                    |       |                  |  |      |       |      | 
|Gross profit                                     |  |                    | 90.4  |                  |  |      | 86.9  |      |  |  | 88.3  |    |  |  | 85.0  |   
|                                                 |  |                    |       |                  |  |      |       |      | 
|Selling, general and administrative expense      |  |                    | 66.1  |                  |  |      | 67.1  |      |  |  | 75.2  |    |  |  | 75.7  |   
|                                                
|                                                
|                                                
|                                                
|Product development and customer support expense |  |                    | 13.3  |                  |  |      | 12.6  |      |  |  | 15.3  |    |  |  | 15.6  |   
|                                                
|                                                
|                                                
|                                                
|Goodwill and intangible amortization             |  |                    | 2.5   |                  |  |      |      |      |  |  | 2.4   |    |  |  |      |   
|                                                
|                                                
|                                                
|                                                
|Special charges                                  |  |                    |      |                  |  |      |      |      |  |  | 5.0   |    |  |  |      |   
|                                                 |  |                    |       |                  |  |      |       |      | 
|Total operating expenses                         |  |                    | 81.9  |                  |  |      | 79.7  |      |  |  | 97.9  |    |  |  | 91.3  |   
|                                                 |  |                    |       |                  |  |      |       |      | 
|Operating profit (loss)                          |  |                    | 8.5   |                  |  |      | 7.2   |      |  |  | (9.6  | )  |  |  | (6.3  | ) 
|                                                
|                                                
|                                                
|                                                
|Interest expense                                 |  |                    | 0.5   |                  |  |      | 2.1   |      |  |  | 0.6   |    |  |  | 2.5   |   
|                                                
|                                                
|                                                
|                                                
|Other expense, net                               |  |                    |      |                  |  |      | 0.5   |      |  |  | 0.3   |    |  |  | 0.5   |   
|                                                 |  |                    |       |                  |  |      |       |      | 
|Earnings (loss) before income taxes              |  |                    | 8.0   |                  |  |      | 4.6   |      |  |  | (10.5 | )  |  |  | (9.3  | ) 
|                                                
|                                                
|                                                
|                                                
|Income tax expense (benefit)                     |  |                    | 2.6   |                  |  |      | 1.7   |      |  |  | (4.4  | )  |  |  | (3.5  | ) 
|                                                 |  |                    |       |                  |  |      |       |      | 
|Net earnings (loss)                              |  |                    | 5.4   | %                |  |      | 2.9   | %    |  |  | (6.1  | )% |  |  | (5.8  | )%
|                                                 |  |                    |       |                  |  |      |       |      | 

Revenues

The following table highlights revenues by product line:

|                                           |                |   |                    |        |  |                  |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------------ | -------------- | - | ------------------ | ------ |  | ---------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                           |                |   | Three Months Ended |        |  | Six Months Ended |       
|                                           |                |   | April 30,          |        |  | April 30,        |       
|                                           |                |   |                    |        |  |                  |       
|                                           |                |   | 2001               |        |  | 2000             |        |        | 2001 |   |        | 2000   | 
|                                           |                |   |                    |        |  |                  |        |        |      |   |        |        | 
|Courseware and professional services       |                | $ | 14,472             |        |  | $                | 11,102 |        |      | $ | 23,290 |        |  | $ | 17,597 |       
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 892                |        |  |                  | 1,138  |        |      |   | 1,828  |        |  |   | 2,168  |       
|                                           |                |   |                    |        |  |                  |        |        |      |   |        |        | 
|                                           | Total revenues |   | $                  | 15,364 |  |                  | $      | 12,240 |      |   | $      | 25,118 |  |   | $      | 19,765 | 
|                                           |                |   |                    |        |  |                  |        |        |      |   |        |        | 

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RESULTS OF OPERATIONS, Continued

Revenues,Continued

Courseware and professional services revenue, the Companys core business,
increased $3,370 or 30% to $14,472 for the three months ended April 30, 2001, as
compared to $11,102 for the same period in 2000. For the six months ended April
30, 2001, courseware and professional services revenue increased $5,693 or 32%
to $23,290 as compared to $17,597 for the same period in 2000. The Company
continued to experience increased acceptance of its products and services in its
various markets. Revenue growth was achieved primarily through increased sales
volume to both new and existing customers. Total revenues were $15,364 for the
three months ended April 30, 2001, an increase of $3,124 or 26%, as compared to
$12,240 for the same period in 2000. Total revenues were $25,118 for the six
months ended April 30, 2001, an increase of $5,353 or 27%, as compared to
$19,765 for the same period in 2000.

Gross Profit

Gross profit increased $3,264 or 31% to $13,895 for the three months ended April
30, 2001 as compared to $10,631 for the same period in 2000. Gross profit
increased $5,371 or 32% to $22,170 for the six months ended April 30, 2001 as
compared to $16,799 for the same period in 2000. The increases were principally
due to the increased courseware and professional services revenue in 2001. Gross
profit margin was 90% for the three months ended April 30, 2001 as compared to
87% for the same period in 2000. Gross profit margin was 88% for the six months
ended April 30, 2001 as compared to 85% for the same period in 2000. The
increases were primarily due to the increased mix of higher margin courseware
and professional services revenue in 2001.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $1,941 or 24% to $10,157
for the three months ended April 30, 2001, as compared to $8,216 for the same
period in 2000. The increase was due primarily to infrastructure expansion of
the sales and marketing organization and commissions associated with revenue
growth. As a percentage of revenue, total selling, general and administrative
expense decreased to 66% for the three months ended April 30, 2001 from 67% for
the same period in 2000.

Selling, general and administrative expense increased $3,934 or 26% to $18,894
for the six months ended April 30, 2001, as compared to $14,960 for the same
period in 2000. The increase was due primarily to infrastructure expansion of
the sales and marketing organization and commissions associated with revenue
growth. As a percentage of revenue, total selling, general and administrative
expense decreased to 75% for the six months ended April 30, 2001 from 76% for
the same period in 2000.

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RESULTS OF OPERATIONS, Continued

Product Development and Customer Support Expense

Product development and customer support expense increased $503 or 33% to $2,045
for the three months ended April 30, 2001, as compared to $1,542 for the same
period in 2000. Product development expense increased primarily due to increased
spending associated with enhanced reading and math products, simulated test
products and the PLATO Web Learning Network and increased amortization of
previously capitalized costs, that was partially offset by increased
capitalization of current period expenditures. Customer support expense
increased primarily as a result of the Companys expanding customer base. As a
percentage of revenue, total product development and customer support expense
was 13% for the three months ended April 30, 2001 and 2000.

Product development and customer support expense increased $741 or 24% to $3,832
for the six months ended April 30, 2001, as compared to $3,091 for the same
period in 2000. Product development expense increased primarily due to increased
spending associated with enhanced reading and math products, simulated test
products and the PLATO Web Learning Network and increased amortization of
previously capitalized costs, that was partially offset by increased
capitalization of current period expenditures. Customer support expense
increased 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 15% for the six months ended April 30, 2001 from 16% for the same
period in 2000.

Goodwill and Intangible Amortization

Goodwill and intangible amortization for the three months ended April 30, 2001
includes $210 related to the Wasatch acquisition in the second quarter of 2001
(see Note 2 to Condensed Consolidated Financial Statements) and $176 related to
the CyberEd acquisition in the third quarter of 2000. Amortization for the six
months ended April 30, 2001 includes $210 related to Wasatch and $384 related to
CyberEd.

Special Charges

Special charges for the six months ended April 30, 2001 represent costs
associated with the November 2000 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 6 to Condensed
Consolidated Financial Statements).

Operating Profit (Loss)

Operating profit was $1,307 for the three months ended April 30, 2001, as
compared to $873 for the same period in 2000. This improvement in operating
results was due principally to the

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RESULTS OF OPERATIONS, Continued

Operating Profit (Loss),Continued

increased courseware and professional services revenue in 2001, partially offset
by the increased operating expenses and goodwill and intangible amortization in
2001, as explained above.

Operating loss was $2,410 for the six months ended April 30, 2001, as compared
to $1,252 for the same period in 2000. The increase in the operating loss was
due principally to special charges in 2001.

Interest Expense

Interest expense decreased $182 to $71 for the three months ended April 30, 2001
from $253 for the same period in 2000. Interest expense decreased $330 to $155
for the six months ended April 30, 2001 from $485 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 during 2000.

Income Taxes

An income tax benefit of $1,105 was recorded for the six months ended April 30,
2001 using the Companys estimated fiscal year 2001 effective income tax rate of
42%. The increase in the effective tax rate from fiscal year 2000 is due
primarily to non-deductible goodwill amortization in 2001.

FINANCIAL CONDITION

Liquidity and Capital Resources

At April 30, 2001, the Companys principal sources of liquidity included cash
and cash equivalents of $1,071, net accounts receivable of $21,335, and its line
of credit. The Company had total installment receivables of $13,436 at April 30,
2001, of which $13,096 are expected to be billed within one year and are
included in net accounts receivable. Working capital was $11,530 at April 30,
2001, a decrease of $5,973 from October 31, 2000, due primarily to decreased
cash and cash equivalents and increased short-term borrowings.

Net cash provided by the Companys operating activities was $376 for the six
months ended April 30, 2001 as compared to $642 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 $6,806 for the six
months ended April 30, 2001 as compared to $1,976 for the same period in 2000.
Net cash used in 2001 included $4,327 for the Wasatch acquisition (see Note 2 to
Condensed Consolidated Financial Statements), $527 for capital expenditures and
$1,952 for capitalized product development costs.

Net cash provided by the Companys financing activities was $1,185 for the six
months ended April 30, 2001, primarily from bank borrowings and the exercise of
stock options and warrants, as compared to $1,482 for the same period in 2000.
The Company has resources available under its revolving loan agreement to
provide borrowings of up to $15,000, as determined by the available borrowing
base. At April 30, 2001, borrowings of $934 were outstanding at an interest rate
of 7.5% and the unused borrowing capacity was approximately $12,700.

In May 2001, the Company completed a public stock offering, selling 2,400,000
shares of its common stock at a price of $21.00 per share. Net proceeds were
approximately $47,000, after payment of underwriting discounts, commissions and
estimated offering expenses. In addition, in June the underwriters exercised an
option to purchase 360,000 additional shares at a price of $21.00 per share to
cover over-allotments. Net proceeds were approximately $7,000 after payment of
underwriting discounts, commissions and estimated offering expenses.

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.

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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 April 30, 2001, the
Companys outstanding borrowings under this revolving loan were $934. As a
result, risk relating to interest fluctuation is considered minimal.

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 9% of total revenues were denominated in currencies other than the
U.S. dollar for the six months ended April 30, 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                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|        |  | On April 5, 2001, the Company issued approximately 656,000 shares
of common stock for the acquisition of Wasatch Interactive
Learning Corporation (see Note 2 to Condensed Consolidated
Financial Statements).
|       
|        |  | On June 5, 2001, the Company completed a public stock offering,
selling 2,760,000 shares of common stock at a price of $21 per
share (see Note 9 to Condensed Consolidated Financial Statements).             






|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------
|       
|        |  | Not Applicable.                






|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|       
|        |  | The Companys Annual Meeting of Stockholders was held on March 22,
2001 at which stockholders voted on and approved the following:



| | (a) |  | The election of Class II directors of the Company, each to
hold office until the 2004 Annual Meeting or until a successor
is elected. The voting was as follows:
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |           |     |         |  |          |  |  | 
|----------------- |  | --------- | --- | ------- |  | -------- |  |  | 
|Name              |  |           | For |         |  | Withheld | 
|                  |  |           |     |         |  |          | 
|John Murray       |  | 7,346,367 |     | 316,474 | 
|                 
|                 
|                 
|                 
|Arthur W. Stellar |  | 7,581,697 |     | 81,144  | 



| | (b) |  | The appointment of PricewaterhouseCoopers LLP as independent accountants for the Company for the fiscal
year ending October 31, 2001. The voting was as follows:
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|          |        |         |  |         |  |  |  | 
|--------- | ------ | ------- |  | ------- |  |  |  | 
|For       |        | Against |  | Abstain | 
|          |        |         |  |         | 
|7,630,859 | 28,166 | 3,816   | 






|Item 5. |  | Other Information
|------- |  | -----------------
|       
|        |  | Not Applicable.  

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|Item 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------



| | (a) |  | Exhibits  none                                                                                                                                     
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Reports on Form 8-K:                                                                                                                                
|
| |     |  | On April 12, 2001, the Company filed a Current Report on Form
8-K for the completion of the acquisition of Wasatch
Interactive Learning Corporation.

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##### Table of Contents






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 June 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)

22