UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q




(Mark
One)


x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended January 31, 2009


or


o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _________________to__________________.





Commission
File Number: 0-20842








PLATO
LEARNING, INC.


(Exact
name of Registrant as specified in its charter)





Delaware
              36-3660532(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)








10801
Nesbitt Avenue South, Bloomington, MN  55437


(Address
of principal executive offices)





(952)
832-1000


(Registrant’s
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)








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 x  No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


(Check
one):


Large
accelerated filer o    Accelerated
filer x     Non-accelerated
filer o     Smaller
reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o  No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  24,084,175 shares of common
stock, $.01 par value, outstanding as of February 28, 2009.







1


PLATO
LEARNING, INC.


Form
10-Q


Quarterly
Period Ended January 31, 2009





TABLE
OF CONTENTS





PagePART
      I.FINANCIAL
      INFORMATIONITEM
      1.
                              Financial Statements:Condensed Consolidated Statements of Operations for the Three
      Months Ended January 31, 2009 and 2008 (Unaudited)
                              
                              3Condensed Consolidated Balance Sheets as of January 31, 2009
      (Unaudited) and October 31, 2008
                              
                              4Condensed Consolidated Statements of Cash Flows for the Three
      Months Ended January 31, 2009 and 2008 (Unaudited)
                              
                              5Notes to Condensed Consolidated Financial Statements
      (Unaudited)
                              
                              6ITEM
      2.
                              Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                              
                              13ITEM
      3.
                              Quantitative and Qualitative Disclosures about Market
      Risk
                              
                              20ITEM
      4.
                              Controls and Procedures
                              
                              21PART
      II.OTHER
      INFORMATIONITEM
      1A.
                              Risk Factors
                              
                              22ITEM
      6.
                              Exhibits
                              
                              22SIGNATURES
                              
                              23




2
 Table of Contents




PART
I.       FINANCIAL INFORMATION
 
 ITEM
1.          FINANCIAL STATEMENTS
 
 PLATO
      Learning, Inc. and SubsidiariesCondensed
      Consolidated Statements of Operations (Unaudited)(In
      thousands, except per share amounts)Three
      Months EndedJanuary 31,2009
                                                        
                                                        
                                                        2008REVENUESSubscriptions
                                                        
                                                        $
                                                        9,868
                                                        
                                                        
                                                        $
                                                        7,969License
      fees
                                                        
                                                        
                                                        1,004
                                                        
                                                        
                                                        
                                                        2,251Services
                                                        
                                                        
                                                        5,165
                                                        
                                                        
                                                        
                                                        5,915Total
      revenues
                                                        
                                                        
                                                        16,037
                                                        
                                                        
                                                        
                                                        16,135COST
      OF REVENUESSubscriptions
                                                        
                                                        
                                                        3,888
                                                        
                                                        
                                                        
                                                        4,649License
      fees
                                                        
                                                        
                                                        439
                                                        
                                                        
                                                        
                                                        1,423Services
                                                        
                                                        
                                                        2,428
                                                        
                                                        
                                                        
                                                        2,595Total
      cost of revenues
                                                        
                                                        
                                                        6,755
                                                        
                                                        
                                                        
                                                        8,667GROSS
      PROFIT
                                                        
                                                        
                                                        9,282
                                                        
                                                        
                                                        
                                                        7,468OPERATING
      EXPENSESSales
      and marketing
                                                        
                                                        
                                                        5,887
                                                        
                                                        
                                                        
                                                        7,005General
      and administrative
                                                        
                                                        
                                                        2,424
                                                        
                                                        
                                                        
                                                        2,950Software
      maintenance and development
                                                        
                                                        
                                                        567
                                                        
                                                        
                                                        
                                                        1,076Amortization
      of intangibles
                                                        
                                                        
                                                        213
                                                        
                                                        
                                                        
                                                        388Total
      operating expenses
                                                        
                                                        
                                                        9,091
                                                        
                                                        
                                                        
                                                        11,419OPERATING
      INCOME (LOSS)
                                                        
                                                        
                                                        191
                                                        
                                                        
                                                        
                                                        (3,951
                                                        )Other
      income, net
                                                        
                                                        
                                                        68
                                                        
                                                        
                                                        
                                                        192INCOME
      (LOSS) BEFORE INCOME TAXES
                                                        
                                                        
                                                        259
                                                        
                                                        
                                                        
                                                        (3,759
                                                        )Income
      tax expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        152NET
      INCOME (LOSS)
                                                        
                                                        $
                                                        259
                                                        
                                                        
                                                        $
                                                        (3,911
                                                        )NET
      INCOME (LOSS) PER SHAREBasic
                                                        
                                                        $
                                                        0.01
                                                        
                                                        
                                                        $
                                                        (0.16
                                                        )Diluted
                                                        
                                                        $
                                                        0.01
                                                        
                                                        
                                                        $
                                                        (0.16
                                                        )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDINGBasic
                                                        
                                                        
                                                        23,983
                                                        
                                                        
                                                        
                                                        23,790Diluted
                                                        
                                                        
                                                        24,260
                                                        
                                                        
                                                        
                                                        23,790
 
 See
Notes to Condensed Consolidated Financial Statements.
  3
 Table of Contents
  PLATO
      Learning, Inc. and SubsidiariesCondensed
      Consolidated Balance Sheets(In thousands, except per share
      amounts)January
      31,
                      
                      
                      October
      31,2009
                      
                      
                      2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      12,274
                      
                      
                      $
                      20,018Accounts
      receivable, net
                      
                      
                      4,702
                      
                      
                      
                      6,834Other
      current assets
                      
                      
                      6,744
                      
                      
                      
                      7,408Total
      current assets
                      
                      
                      23,720
                      
                      
                      
                      34,260Equipment
      and leasehold improvements, net
                      
                      
                      3,187
                      
                      
                      
                      3,589Software
      development costs, net
                      
                      
                      23,760
                      
                      
                      
                      24,086Identified
      intangible assets, net
                      
                      
                      3,388
                      
                      
                      
                      3,723Other
      long-term assets
                      
                      
                      2,934
                      
                      
                      
                      3,309Total
      assets
                      
                      $
                      56,989
                      
                      
                      $
                      68,967LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                      
                      $
                      1,579
                      
                      
                      $
                      3,085Accrued
      compensation
                      
                      
                      2,378
                      
                      
                      
                      3,996Other
      accrued liabilities
                      
                      
                      3,158
                      
                      
                      
                      6,909Deferred
      revenue
                      
                      
                      31,931
                      
                      
                      
                      36,005Total
      current liabilities
                      
                      
                      39,046
                      
                      
                      
                      49,995Long-term
      deferred revenue
                      
                      
                      7,284
                      
                      
                      
                      8,916Total
      liabilities
                      
                      
                      46,330
                      
                      
                      
                      58,911Stockholders'
      equity:Common
      stock, $.01 par value, 50,000 shares authorized; 24,143 shares issued and
      24,084 shares outstanding at January 31, 2009; 24,046 shares issued and
      23,988shares outstanding at October 31, 2008
                      
                      
                      241
                      
                      
                      
                      240Additional
      paid-in capital
                      
                      
                      171,443
                      
                      
                      
                      171,143Treasury
      stock at cost
                      
                      
                      (315
                      )
                      
                      
                      (315
                      )Accumulated
      deficit
                      
                      
                      (159,532
                      )
                      
                      
                      (159,790
                      )Accumulated
      other comprehensive loss
                      
                      
                      (1,178
                      )
                      
                      
                      (1,222
                      )Total
      stockholders' equity
                      
                      
                      10,659
                      
                      
                      
                      10,056Total
      liabilities and stockholders' equity
                      
                      $
                      56,989
                      
                      
                      $
                      68,967
 
 See
Notes to Condensed Consolidated Financial Statements.
  4
 Table of Contents
  PLATO Learning, Inc. and SubsidiariesCondensed
      Consolidated Statements of Cash Flows (Unaudited)(In thousands)Three
      Months EndedJanuary 31,2009
                    
                    
                    2008OPERATING
      ACTIVITIES:Net
      income (loss)
                    
                    $
                    259
                    
                    
                    $
                    (3,911
                    )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Deferred
      income taxes
                    
                    
                    -
                    
                    
                    
                    152Depreciation
      and amortization
                    
                    
                    2,840
                    
                    
                    
                    4,360Stock-based
      compensation
                    
                    
                    264
                    
                    
                    
                    (162
                    )Loss
      on disposal of equipment
                    
                    
                    14
                    
                    
                    
                    3Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    2,132
                    
                    
                    
                    4,707Other
      current and long-term assets
                    
                    
                    994
                    
                    
                    
                    386Accounts
      payable
                    
                    
                    (1,506
                    )
                    
                    
                    (407
                    )Other
      current liabilities
                    
                    
                    (5,366
                    )
                    
                    
                    (2,301
                    )Deferred
      revenue
                    
                    
                    (5,706
                    )
                    
                    
                    (4,812
                    )Total
      adjustments
                    
                    
                    (6,334
                    )
                    
                    
                    1,926Net
      cash used in operating activities
                    
                    
                    (6,075
                    )
                    
                    
                    (1,985
                    )INVESTING
      ACTIVITIES:Capitalized
      software development costs
                    
                    
                    (1,648
                    )
                    
                    
                    (3,170
                    )Purchases
      of equipment and leasehold improvements
                    
                    
                    (98
                    )
                    
                    
                    (127
                    )Net
      cash used in investing activities
                    
                    
                    (1,746
                    )
                    
                    
                    (3,297
                    )FINANCING
      ACTIVITIES:Net
      proceeds from issuance of common stock, net of repurchases
                    
                    
                    37
                    
                    
                    
                    59Repayments
      of capital lease obligations
                    
                    
                    (3
                    )
                    
                    
                    (11
                    )Net
      cash provided by financing activities
                    
                    
                    34
                    
                    
                    
                    48EFFECT
      OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH
    EQUIVALENTS
                    
                    
                    43
                    
                    
                    
                    30Net
      decrease in cash and cash equivalents
                    
                    
                    (7,744
                    )
                    
                    
                    (5,204
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    20,018
                    
                    
                    
                    24,297CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                    
                    $
                    12,274
                    
                    
                    $
                    19,093
 
 See
Notes to Condensed Consolidated Financial Statements.
  5
 Table of Contents
 
 PLATO
LEARNING, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
 Note
1.  General
 
 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.  The
October 31, 2008 condensed consolidated balance sheet data was derived from our
audited financial statements at that date.  Accordingly, these
financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America.  We have included all normal recurring and other adjustments
considered necessary to give a fair statement of our operating results for the
interim periods shown.  Operating results for these interim periods
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 accompanying notes included in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2008.
 
 Consolidation
 
 The
accompanying unaudited condensed consolidated financial statements include the
accounts of PLATO Learning, Inc. and its wholly owned
subsidiaries.  All significant intercompany accounts and transactions
have been eliminated.
 
 Fiscal
Periods
 
 Our fiscal year is from November 1 to
October 31.  Unless otherwise stated, references herein to our first
quarter relate to the three month period ended January 31.
 
 Note
2.  Summary of Significant Accounting Policies
 
 General
 
 Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses.  We continually evaluate our
critical accounting policies and estimates, and have identified the policies
relating to the following areas as those that are significant to our financial
statement presentation, and require difficult, subjective, or complex
judgments:
 
 ·
              Revenue
      recognition
 ·
              Capitalized
      software development costs
 ·
              Valuation
      of deferred income taxes
 ·
              Valuation
      and impairment analysis of identified intangible
  assets
  6
 Table of Contents
 
 At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis.  Based on the completion of this
transition, and in accordance with EITF 00-03, Application of SOP 97-2, “Software
Revenue Recognition”, to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware,we have applied SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use” effective for the first
quarter of fiscal year 2009.  Under EITF 00-03, hosting arrangements
in which customers do not have a contractual right to take possession of the
software are service arrangements, and such software, subject to certain
exceptions, is considered internal-use software subject to SOP 98-1. We will
continue to use FAS 86, Accounting for the Costs of Computer
Software to Be Sold or Otherwise Leased for software sold under
contracts in which the customer has a right to take possession of the
software.
 
 There
have been no other significant new accounting principles applied in these areas
during the first quarter of 2009.  For a more complete discussion of
our accounting policies refer to Note 2 to Consolidated Financial Statements in
our Annual Report on Form 10-K for the year ended October 31, 2008.
 
 Income
(Loss) per Share
 
 Basic
income (loss) per share is computed on the basis of the weighted average number
of common shares outstanding during the period.  Diluted income (loss)
per share is computed on the basis of the weighted average number of common
shares plus the effect of dilutive potential common shares outstanding during
the period.  Components of basic and diluted income (loss) per share
were as follows (in thousands, except per share amounts):
 
 Three Months Ended January
    31,2009
                    
                    
                    2008Net
      income (loss) available for common shareholders
                    
                    $
                    259
                    
                    
                    $
                    (3,911
                    )Weighted
      average common shares outstanding
                    
                    
                    23,983
                    
                    
                    
                    23,790Dilutive
      effect of employee stock options and awards
                    
                    
                    277
                    
                    
                    
                    -Common
      shares and common share equivalents
                    
                    
                    24,260
                    
                    
                    
                    23,790Income
      per share:Basic
                    
                    $
                    0.01
                    
                    
                    $
                    (0.16
                    )Diluted
                    
                    $
                    0.01
                    
                    
                    $
                    (0.16
                    )
 
 
 Stock
options in the amount of 2,622,000 which had exercise prices greater than the
average market price of our common stock for the three months ended January 31,
2009, were excluded because they were antidilutive.
 
 We
incurred a net loss for the three months ended January 31,
2008.  Potential common shares in the amount of 2,449,000 were
antidilutive and excluded from the calculation of diluted loss per share for
that period.
 
 Recent
Accounting Pronouncements
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
162, “The Hierarchy of Generally Accepted Accounting
Principles.”  SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”). SFAS No. 162 concludes that the GAAP hierarchy should be directed
toward the entity and not its auditor, and should reside in the accounting
literature established by the FASB, as opposed to the American Institute of
Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69,
“The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.”  SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments
to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.”  We do not expect SFAS No. 162 to
have a material impact on our consolidated financial
statements.
  7
 Table of Contents
 
 In April
2008, the FASB issued staff position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets .”  FSP No. FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets.”  The intent of the position is
to improve the consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS No. 141R, and other U.S. generally
accepted accounting principles.  The provisions of FSP No. FAS 142-3
are effective for our fiscal year 2010 and are currently not expected to have a
material effect on our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (“SFAS
No. 141(R)”).  SFAS 141(R) establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired.  SFAS 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination.  SFAS 141(R) is
effective as of the beginning of an entity’s fiscal year that begins after
December 15, 2008, and will be adopted by us in the first quarter of fiscal
2010.  SFAS 141(R) is currently not expected to have a material effect
on our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”).  SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests (NCI) and
classified as a component of equity.  This new consolidation method
will significantly change the accounting for transactions with minority interest
holders.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of fiscal year
2010.  SFAS 160 is currently not expected to have a material effect on
our consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 ,” (“SFAS No. 159”).  This standard permits entities to
measure many financial instruments and certain other items at fair
value.  The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.  The provisions of SFAS No. 159
were effective beginning in our fiscal year 2009 and did not have a material
effect on our consolidated financial statements.
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), to establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements.  In
February 2008, the FASB issued FSP 157-2, which  delays the company’s
fiscal year 2009 effective date of FAS157 for all non-financial assets and
non-financial liabilities except those recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until our
fiscal year 2010.The provisions of SFAS No. 157 were adopted
beginning in our fiscal year 2009 and did not have a material effect on our
consolidated financial statements.
  8
 Table of Contents
  Note
3.  Stock-Based Compensation
 
 We
account for stock-based compensation under the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS
123(R)”), using the modified prospective transition application
method.  We use the straight-line method to recognize compensation
expense over the requisite service period of the award.
 
 Stock
option activity for the three months ended January 31, 2009 is as follows (in
thousands):
 
 Options
      OutstandingOptions
      outstanding at October 31, 2008
                      
                      
                      2,617Options
      granted
                      
                      
                      729Options
      exercised
                      
                      
                      -Options
      forfeited or cancelled
                      
                      
                      (81
                      )Options
      outstanding at January 31, 2009
                      
                      
                      3,265Options
      exercisable at January 31, 2009
                      
                      
                      2,327
  Total
stock-based compensation expense (benefit) recorded for the three months ended
January 31, 2009 and 2008 was $264,000 and ($162,000),
respectively.
 
 Under
SFAS 123(R), differences between actual and estimated stock option forfeitures
are not recognized until the first vesting date following the actual forfeiture
of an option.  Generally, our stock options are granted during the
first quarter of each fiscal year, and therefore recorded stock option
forfeitures are typically greatest during that quarter.Stock option forfeitures
reduced stock-based compensation expense by $275,000 and $495,000 in the first
three months of 2009 and 2008, respectively.
 
 Note
4.  Accounts Receivable, Net
 
 The
components of net accounts receivable were as follows (in
thousands):
 
 January
      31,
                      
                      
                      October
      31,2009
                      
                      
                      2008Total
      trade accounts receivable
                      
                      $
                      4,998
                      
                      
                      $
                      7,130Allowance
      for doubtful accounts
                      
                      
                      (296
                      )
                      
                      
                      (296
                      )Accounts
      receivable, net
                      
                      $
                      4,702
                      
                      
                      $
                      6,834
 
 
 A
reconciliation of the allowance for doubtful accounts from the beginning of the
fiscal year through the end of the first quarter is as follows (in
thousands):
 
 2009
                      
                      
                      2008Balance,
      beginning of fiscal year
                      
                      $
                      296
                      
                      
                      $
                      319Write-offs,
      net of recoveries
                      
                      
                      -
                      
                      
                      
                      (12
                      )Balance,
      January 31
                      
                      $
                      296
                      
                      
                      $
                      307
  9
 Table of Contents
 
 Note
5. Deferred Commissions
 
 Employee commissions on the sale of our
products and services are earned at the time of invoicing and paid
monthly.  The related expense is deferred and amortized over the
non-cancellable terms of the related customer contracts on the basis that the
commission charges are so closely related to the revenue from such contracts
that they should be recorded as an asset and charged to expense over the same
period that the revenue is recognized.  Total deferred commissions at
January 31, 2009 and October 31, 2008 were $3,499,000 and $4,268,000, of which
$703,000 and $834,000, respectively, were recorded as long-term deferred
commissions and included in other long-term assets on our balance
sheet.
 
 Note
6.  Software Development Costs
 
 A
reconciliation of capitalized software development costs is as follows (in
thousands):
 
 Gross Carrying Value
                    
                    
                    Accumulated Amortization
                    
                    
                    Net Carrying ValueBalance,
      October 31, 2008
                    
                    $
                    49,856
                    
                    
                    $
                    (25,770
                    )
                    
                    $
                    24,086Capitalized
      software development costs
                    
                    
                    1,648
                    
                    
                    
                    -
                    
                    
                    
                    1,648Amortization
                    
                    
                    -
                    
                    
                    
                    (1,974
                    )
                    
                    
                    (1,974
                    )Write-off
      of fully amortized costs
                    
                    
                    (7,569
                    )
                    
                    
                    7,569
                    
                    
                    
                    -Balance,
      January 31, 2009
                    
                    $
                    43,935
                    
                    
                    $
                    (20,175
                    )
                    
                    $
                    23,760
 
 
 In the
first quarter of 2009, we wrote off approximately $7,569,000 of fully amortized
software development costs and related accumulated amortization which were no
longer considered substantially in use.
 
 Note
7.  Identified Intangible Assets
 
 Identified
intangible assets subject to amortization were as follows (in
thousands):
 
 As
      of January 31, 2009
                    
                    
                    As
      of October 31, 2008Gross
      Carrying Value
                    
                    
                    Accumulated
      Amortzation
                    
                    
                    Net
      Carrying Value
                    
                    
                    Gross
      Carrying Value
                    
                    
                    Accumulated
      Amortzation
                    
                    
                    Net
      Carrying ValueAcquired
      technology
                    
                    $
                    7,300
                    
                    
                    $
                    (5,441
                    )
                    
                    $
                    1,859
                    
                    
                    $
                    7,300
                    
                    
                    $
                    (5,320
                    )
                    
                    $
                    1,980Trademarks
      and tradenames
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,380
                    
                    
                    
                    (1,380
                    )
                    
                    
                    -Customer
      relationships and lists
                    
                    
                    19,800
                    
                    
                    
                    (18,271
                    )
                    
                    
                    1,529
                    
                    
                    
                    19,800
                    
                    
                    
                    (18,057
                    )
                    
                    
                    1,743$
                    27,100
                    
                    
                    $
                    (23,712
                    )
                    
                    $
                    3,388
                    
                    
                    $
                    28,480
                    
                    
                    $
                    (24,757
                    )
                    
                    $
                    3,723
  In the
first quarter of 2009, we wrote off approximately $1,380,000 of fully amortized
identified intangible assets, and related accumulated amortization, which were
no longer considered substantially in use.
  10
 Table of Contents
  Amortization
expense for the identified intangible assets presented above was as follows (in
thousands):
 
 January 31,2009
                    
                    
                    2008Amortization
      of intangible assets included in:Cost
      of revenues
                    
                    $
                    121
                    
                    
                    $
                    205Operating
      expenses
                    
                    
                    214
                    
                    
                    
                    387$
                    335
                    
                    
                    $
                    592
 
 
 Estimated
future annual amortization expense for identified intangible assets is as
follows (in thousands):
 
 Cost
      of Revenues
                      
                      
                      Operating
      Expenses
                      
                      
                      TotalRemainder
      of 2009
                      
                      $
                      364
                      
                      
                      $
                      641
                      
                      
                      $
                      1,0052010
                      
                      
                      485
                      
                      
                      
                      854
                      
                      
                      
                      1,3392011
                      
                      
                      485
                      
                      
                      
                      34
                      
                      
                      
                      5192012
                      
                      
                      485
                      
                      
                      
                      -
                      
                      
                      
                      4852013
                      
                      
                      40
                      
                      
                      
                      -
                      
                      
                      
                      40$
                      1,859
                      
                      
                      $
                      1,529
                      
                      
                      $
                      3,388
  The future annual amortization amounts
presented above are estimates.  Actual amortization expense may be
different due to the acquisition, impairment, or accelerated amortization of
identified intangible assets.
 
 Note
8.  Deferred Revenue
 
 Deferred
revenue primarily consists of billings and payments received in advance of
revenue recognition from our subscription service and is recognized as the
revenue recognition criteria are met.  We generally invoice our
customers in full upon receipt of their subscription order. In circumstances
where we do not bill the full subscription upon order, we do not include these
unbilled amounts in deferred revenue.  Accordingly, the deferred
revenue balance does not represent the total remaining contract value of all
non-cancelable subscription agreements. The components of deferred revenue were
as follows (in thousands):
 
 As
      of
                      
                      
                      As
      ofJanuary
      31,
                      
                      
                      October
      31,2009
                      
                      
                      2008Total
      deferred revenue
                      
                      $
                      39,215
                      
                      
                      $
                      44,921Less:
      Long-term portion
                      
                      
                      (7,284
                      )
                      
                      
                      (8,916
                      )Current
      deferred revenue
                      
                      $
                      31,931
                      
                      
                      $
                      36,005
  11
 Table of Contents
 
 Note
9.  Restructuring and Other Charges
 
 At
various times over the past several years, we have incurred restructuring costs
related to severance and facility closings in the U.S. and U.K.
 
 The
restructuring reserve activity (included in other accrued liabilities) from
October 31, 2008 through January 31, 2009 was as follows (in
thousands):
 
 Severance
      and related costs
                      
                      
                      Facility
      closings
                      
                      
                      TotalReserve
      balance at October 31, 2008
                      
                      $
                      1,764
                      
                      
                      $
                      1,029
                      
                      
                      $
                      2,793Cash
      payments
                      
                      
                      (943
                      )
                      
                      
                      (170
                      )
                      
                      
                      (1,113
                      )Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      (43
                      )
                      
                      
                      (43
                      )Reserve
      balance at January 31, 2009
                      
                      $
                      821
                      
                      
                      $
                      816
                      
                      
                      $
                      1,637
 
 
 There were no restructuring charges
during the first quarter of 2009.
 
 Note
10. Comprehensive Income (Loss)
 
 Total comprehensive income (loss) was
as follows (in thousands):
 
 Three
      Months EndedJanuary 31,2009
                    
                    
                    2008Net
      income (loss)
                    
                    $
                    259
                    
                    
                    $
                    (3,911
                    )Foreign
      currency translation adjustments
                    
                    
                    43
                    
                    
                    
                    30Total
      comprehensive income (loss)
                    
                    $
                    302
                    
                    
                    $
                    (3,881
                    )
 
 
 Income tax effects for the components
of other comprehensive income (loss) were not significant because our deferred
tax assets are fully reserved.  Accumulated other comprehensive loss
was $1,178,000 and $1,222,000 at January 31, 2009 and October 31, 2008,
respectively.
 
 Note
11. Income Taxes
 
 In the first quarter of 2008, we
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (“FIN
48”).  The adoption of FIN 48 did not have a material impact on our
financial position or results of operations.
 
 We have not expensed, and do not
maintain any accrual balances related to, interest and penalties related to
unrecognized tax benefits.  For future periods in which we may incur
unrecognized tax benefits or uncertainties, we would classify any associated
interest and penalties as a component of the income tax provision.
 
 In the
fourth quarter of fiscal 2008 we determined that the tax deductible goodwill was
fully impaired for which we recorded income tax expense in the first three
quarters of fiscal 2008.  As a result of the impairment, we are no
longer recording this expense.
  12
 Table of Contents
  ITEM
2.          MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Business
Description
 
 PLATO
Learning, Inc. is a Delaware corporation that was incorporated in 1989 and is
headquartered in Bloomington, Minnesota.  We are a leading provider of
on-line instruction, curriculum management, assessment, and related professional
development services to K–12 schools, community colleges and other educational
institutions across the country. Our products are used by customers principally
to provide alternative instruction to students performing below their grade
level in order to help those students return to the classroom, recover course
credits, pass high school exit exams or prepare for college and other
post-secondary studies.  In addition to the value provided to
students, our solutions allow school districts to retain state and federal
funding tied to student enrollment.  Our courseware and assessment
products are designed primarily to help educators meet the demands of state and
federal student achievement initiatives for intervention, dropout prevention and
college readiness. We also offer online and onsite staff professional
development services to ensure optimal use of our products and to help schools
meet their accountability requirements and school improvement
plans.
 
 Our
research-based courseware library includes thousands of hours of mastery-based
instruction covering discrete learning objectives in the subject areas of
reading, writing, language arts, mathematics, science, and social studies. Our
web-based assessment and alignment tools ensure that instruction can be
personalized to each student’s unique needs and the curriculum is aligned to
local, state, and national standards. Using our web-based products, educators
are able to identify each student’s instructional needs and prescribe an
individual learning program of PLATO Learning courseware, educational web sites,
the school’s textbooks and other core and supplemental instructional materials.
A variety of reports are available to help educators identify gaps in student
understanding, monitor student progress and ensure that standard learning
objectives are being addressed.
 
 Beginning
in late fiscal year 2005, we implemented a strategy to deliver our products and
solutions on a subscription basis using a new internet-based learning management
platform we call the PLATO Learning EnvironmentTM, or
PLETM. The majority of our subscription periods range from one to three
years with a dollar value weighted average subscription period of approximately
two years in fiscal 2008. As of January 31, 2009, over 1,240 school districts,
community colleges and other educational institutions across 50 states
subscribed to our instructional solutions delivered on PLETM , and
nearly 1.3 million students, teachers and administrators at these institutions
were registered to use PLE TM
..
 
 We
operate our principal business in one industry segment, which is the development
and marketing of online curriculum solutions and related services.
 
 Critical
Accounting Policies and Estimates
 
 Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses.  We continually evaluate our
critical accounting policies and estimates, and have identified the policies
relating to the following areas as those that are significant to our financial
statement presentation, and require difficult, subjective, or complex
judgments:
  13
 Table of Contents
  ·
              Revenue
      recognition
 ·
              Capitalized
      software development costs
 ·
              Valuation
      of deferred income taxes
 ·
              Valuation
      and impairment analysis of identified intangible
  assets
 
 At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis.  Based on the completion of this
transition, and in accordance with EITF 00-03, Application of SOP 97-2, “Software
Revenue Recognition”, to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware,we have applied SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.” effective for the first
quarter of fiscal year 2009.  Under EITF 00-03, hosting arrangements
in which customers do not have a contractual right to take possession of the
software are service arrangements, and such software, subject to certain
exceptions,  is considered internal-use software subject to SOP 98-1.
We will continue to use FAS 86, Accounting for the Costs of Computer
Software to Be Sold or Otherwise Leased for software sold under
contracts in which the customer has a right to take possession of the
software.
 
 There
have been no other significant new accounting principles applied during the
first quarter of 2009.  For a more complete discussion of our
accounting policies refer to Note 2 to Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended October 31, 2008.
 
 General
Factors Affecting our Financial Results
  There are
a number of general factors that affect our results from period to period. These
factors are discussed below.
 
 Revenue. In 2008, we
completed a transition of our business model from one that sells one-time
perpetual licenses to software, for which revenue is generally recognized
up-front upon delivery, to one that sells subscription-based products, for which
revenue is recognized over the subscription period. The transition began in
2006 when we introduced many of our new subscription-based products and affects
the comparability of our revenues over this period.  As subscription
revenues grow as a percentage of total revenues, we expect our period to period
revenues to become more comparable and predictable.
 
 Gross Profit. A large portion
of our costs of revenue are fixed in nature. These costs include amortization of
capitalized software development and purchased technology, depreciation and
other infrastructure costs to support our hosted subscription services, customer
support operations, and full-time professional services personnel who deliver
our training services. Accordingly, increases in revenues allow us to leverage
these costs resulting in higher gross profit, while decreases in revenues have
the opposite effect.
 
 Operating Expenses. General
and administrative expenses are substantially fixed in nature. However, certain
components such as professional fees and similar expenses can vary based on
business results, individual events, or initiatives we may be pursuing at
various times throughout the year.
 
 Incentive
compensation is a significant variable component of our sales and marketing
expenses, approximating 9% to 10% of total revenues in any given period. Sales
and marketing expenses also include costs such as travel, tradeshows, and
conferences that can vary with revenue activity or individual events that occur
during the period.
  14
 Table of Contents
 
 Software
maintenance and development expense in our consolidated statement of operations
does not reflect our total level of spending on our products and services. Costs
to maintain existing products and preliminary project development costs are
charged to software maintenance and development expense as incurred. Costs
incurred to develop or enhance new products after preliminary project
development costs are incurred, which represent the majority of our total
software development spending, are capitalized and amortized to cost of
revenues. Accordingly, software maintenance and development expense in our
consolidated statement of operations can fluctuate from period to period, in
terms of both total dollars and as a percentage of revenue, based on the nature
and timing of activities occurring during the period.
 
 Amortization
of intangibles represents the amortization of certain identified intangible
assets acquired through various acquisitions. While these expenses are generally
predictable from period to period because they are fixed over the course of
their individual useful lives, they can be affected by events and other factors
that result in impairment of these assets and a corresponding reduction in
future amortization.
 
 Cash Balances and Cash
Flow.  Our business is seasonal, with the largest portion of
orders coming in our third and fourth fiscal quarters.  These periods
are when our customers’ budget spending typically peaks as they end their
current budget period, begin a new budget period, and begin to plan their needs
for the upcoming school year.  In addition, our costs are largely
fixed, and with some exceptions, do not vary significantly with the level of
order activity. As a result, cash balances generally decline during the first
half of the fiscal year, and increase from those levels as order activity
increases in the third and fourth quarter.
  15
 Table of Contents
  Results
of Operations
 
 Revenues
 
 The
following tables summarize certain key information to aid in the understanding
of our discussion and analysis of revenues and should be read in conjunction
with Note 2 to the Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended October 31, 2008, which discusses our accounting
policies regarding revenue recognition:
 
 Sales
Order Information (in thousands):
 
 Three
      Months EndedJanuary 31,2009
                    
                    
                    2008
                    
                    
                    Percent Increase (Decrease)Order
      Value:Subscriptions
                    
                    
                    6,674
                    
                    
                    
                    5,639
                    
                    
                    
                    18.4
                    %License
      fees
                    
                    
                    1,031
                    
                    
                    
                    1,483
                    
                    
                    
                    (30.5
                    %)Services
                    
                    
                    3,134
                    
                    
                    
                    3,480
                    
                    
                    
                    (9.9
                    %)Total
      Order Value
                    
                    $
                    10,839
                    
                    
                    $
                    10,602
                    
                    
                    
                    2.2
                    %Percent
      of Total Order Value:Subscriptions
                    
                    
                    61.6
                    %
                    
                    
                    53.2
                    %License
      fees
                    
                    
                    9.5
                    %
                    
                    
                    14.0
                    %Services
                    
                    
                    28.9
                    %
                    
                    
                    32.8
                    %Total
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
 
 
 Revenue
by Category (in thousands):
 
 Three
      Months EndedJanuary 31,2009
                    
                    
                    2008
                    
                    
                    % ChangeSubscriptions
                    
                    $
                    9,868
                    
                    
                    $
                    7,969
                    
                    
                    
                    23.8
                    %License
      fees
                    
                    
                    1,004
                    
                    
                    
                    2,251
                    
                    
                    
                    (55.4
                    %)Services
                    
                    
                    5,165
                    
                    
                    
                    5,915
                    
                    
                    
                    (12.7
                    %)Total
      revenues
                    
                    $
                    16,037
                    
                    
                    $
                    16,135
                    
                    
                    
                    (0.6
                    %)
 
 
 Percentage
of Total Revenue
 
 Three
      Months EndedJanuary
      31,Revenue
      Category
                      
                      2009
                      
                      
                      2008Subscription
                      
                      
                      61.5
                      %
                      
                      
                      49.4
                      %License
      fee
                      
                      
                      6.3
                      %
                      
                      
                      13.9
                      %Services
                      
                      
                      32.2
                      %
                      
                      
                      36.7
                      %Total
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
  16
 Table of Contents
 
 Total
revenues for the first quarter of 2009 declined slightly to $16.0 million, from
$16.1 million for the same period in 2008.  Subscription revenues grew
$1.9 million, or 23.8%, exceeding the $1.2 million decline in license fees on
perpetual products. The increase in subscription revenue reflects our growing
base of subscription customers. The decline in license fees revenue reflects our
declining emphasis on sales of products licensed on a perpetual basis. Services
revenues declined $750,000 on lower software maintenance revenues related to our
legacy perpetual products.
 
 Gross
Margin
 
 Gross
Margin Percentage
 
 Three
      Months Ended January 31,Revenue
      Category
                    
                    2009
                    
                    
                    2008
                    
                    
                    Increase
      (Decrease)Subscriptions
                    
                    
                    60.6
                    %
                    
                    
                    41.7
                    %
                    
                    
                    18.9
                    %License
      fees
                    
                    
                    56.3
                    %
                    
                    
                    36.8
                    %
                    
                    
                    19.5
                    %Services
                    
                    
                    53.0
                    %
                    
                    
                    56.1
                    %
                    
                    
                    (3.1
                    %)Total
                    
                    
                    57.9
                    %
                    
                    
                    46.3
                    %
                    
                    
                    11.6
                    %
 
 
 Total
gross margin rate increased to 57.9% for the first quarter of 2009, from 46.3%
for the same period in 2008.  The 18.9% increase in subscription gross
margin had the most significant effect on total gross margin.
 
 Subscription
gross margin rate improved to 60.6% in the first quarter of 2009 from 41.7% for
the same period in 2008.  This improvement reflects the $1.9 million
growth in subscription revenues as discussed above, and a $760,000 reduction in
subscription costs.  The decrease in subscription costs is due to a
decline in amortization of capitalized subscription software development costs,
and asset impairments, in fiscal 2008.
 
 Services
gross margin declined in the first quarter of 2009 to 53.0% from 56.1% for the
same period last year.  The margin decline was due to a decrease in
the mix of higher margin software support services revenues due to our declining
base of perpetual license customers.
 
 Operating
Expenses
 
 The following table summarizes the
amounts and percentage change in amounts from the corresponding period during
the previous year for certain operating expense line items.
 
 PercentThree
      Months Ended
                      
                      
                      IncreaseJanuary
      31,
                      
                      
                      (Decrease)2009
                      
                      
                      2008
                      
                      
                      in
      AmountSales
      and marketing
                      
                      $
                      5,887
                      
                      
                      $
                      7,005
                      
                      
                      
                      (16.0
                      %)General
      and administrative
                      
                      
                      2,424
                      
                      
                      
                      2,950
                      
                      
                      
                      (17.8
                      %)Software
      maintenance and development
                      
                      
                      567
                      
                      
                      
                      1,076
                      
                      
                      
                      (47.3
                      %)Amortization
      of intangibles
                      
                      
                      213
                      
                      
                      
                      388
                      
                      
                      
                      (45.1
                      %)Total
      operating expenses
                      
                      $
                      9,091
                      
                      
                      $
                      11,419
                      
                      
                      
                      (20.4
                      %)
  17
 Table of Contents
 
 Total operating expenses were $9.1
million for the first quarter of 2009, a decrease of 20.4%, or $2.3 million,
from $11.4 million for the same period in 2008.  In general, this
decline reflects the benefit of restructuring activities in the second half of
fiscal 2008, and the continued efficiencies of our software-as-a-service
business model.
 
 Sales and marketing expenses declined
$1.1 million on reduced indirect sales, travel and marketing
costs.  None of the decline was due to a reduction in our field sales
force, which remained about the same relative to the first quarter of 2008.
General and administrative costs declined 17.8% to $2.4 million on lower
headcount and a decline in legal and other professional services costs. Software
maintenance and development declined $0.5 million reflecting increasing
stability of our PLE platform and the quality of new product
releases.
 
 Other
Income, Net
 
 Other
income consists primarily of interest income on our cash and cash equivalent
balances, net of the costs of maintaining availability on our line of
credit.  Other income declined $124,000 for the first quarter of 2009
due to the decrease in our average cash and cash equivalent balances over the
prior year, as well as a decline in interest rates.
 
 Backlog
 
 We
consider backlog to be the total of deferred revenue reported on our balance
sheet plus unbilled amounts due under non-cancelable subscription agreements. On
this basis, backlog was $48.5 million and $44.4 million at January 31, 2009 and
January 31, 2008, respectively, as follows:
 
 As
      of January 31,2009
                    
                    
                    2008Gross
      deferred revenue including unbilled amounts under non-cancelable
      subscription agreements:Subscriptions
                    
                    $
                    38,360
                    
                    
                    $
                    30,661License
      fees
                    
                    
                    488
                    
                    
                    
                    600Services
                    
                    
                    9,696
                    
                    
                    
                    13,121Total
      backlog
                    
                    $
                    48,544
                    
                    
                    $
                    44,382
 
 
 At
January 31, 2009, we expect approximately $16.8 million of our backlog to be
recognized subsequent to fiscal year 2009.
 
 Liquidity
and Capital Resources
 
 Cash
and Cash Equivalents
 
 At
January 31, 2009, cash and cash equivalents were $12.3 million, a decrease of
$7.7 million from October 31, 2008.  This decrease primarily
represents net cash used in operations in 2009 of $6.1 million, and investments
in capitalized software development of $1.6 million.  Included in the
$6.1 million in net cash used in operations were approximately $3.0 million of
non-recurring cash payments, including $1.7 million in severance paid to
terminated employees and $1.3 million in non-recurring royalty
payments.  As discussed above under “General Factors Affecting Our
Financial Results”, cash flow from operations is typically lower in the first
and second quarter of our fiscal year due to the seasonal nature of our
business.
  18
 Table of Contents
 
 Working
Capital and Liquidity
 
 At January 31, 2009, our principal
sources of liquidity included cash and cash equivalents totaling $12.3 million,
net billed accounts receivable of $4.7 million, and unbilled commitments under
non-cancelable subscription contracts totaling $9.3 million, of which $3.9
million is expected to be billed in 2009.  We also have a three-year
senior secured credit facility that provides us with a revolving line of credit
up to the lesser of $20 million or the amount of our trailing twelve months
subscription and software maintenance revenues.  Under this agreement
we have the option of selecting an interest rate for any drawdown under the
facility equal to the applicable Prime or LIBOR Rate plus a sliding margin that
is based on the amount of borrowings outstanding.  Borrowings under
the agreement are secured by all of our assets.  Financial covenants
apply only when the unused portion of the line of credit, plus cash and cash
equivalents on hand, is less than $12.5 million, and are limited to minimum
quarterly thresholds of earnings before interest, taxes, depreciation and
amortization (EBITDA).  At January 31, 2009 and 2008, availability
under the line was $20 million and there were no borrowings
outstanding.
 
 Cash used
by operations in the first quarter increased to $6.1 million in 2009, from $2.0
million in 2008, due to the non-recurring cash payments discussed above, reduced
receivable collections resulting from lower total orders in the fourth quarter
of 2008 compared to 2007, partially offset by reductions in overall
spending.  Cash used in investing activities declined to $1.7 million
for the first quarter of 2009, from $3.3 million for the same period last year
reflecting a reduction in our software investment requirements.
 
 We
believe our existing cash, cash equivalents, anticipated cash provided by
operating activities, and availability under our line of credit will be
sufficient to meet our working capital and capital expenditure needs over the
next 12 months.  Our future capital requirements will depend on many
factors, including the timing and extent of software development expenditures,
order volume, and the timing and collection of receivables.
 
 Contractual
Obligations and Commercial Commitments
 
 Our
contractual obligations and commercial commitments consist primarily of future
minimum payments due under operating leases and royalty and software license
agreements.  Refer to “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the year ended October 31, 2008 for a table showing our contractual
obligations.  There were no significant changes to our contractual
obligations during the three months ended January 31, 2009.
 
 At
January 31, 2009, we had no significant commitments for capital
expenditures.
 
 Recent
Accounting Pronouncements
 
 See Note 2 of the Condensed
Consolidated Financial Statements for a summary of the new accounting
pronouncements.
  19
 Table of Contents
 
 Disclosures
about Off-Balance Sheet Arrangements
 
 We did not have any off-balance sheet
arrangements as of January 31, 2009.
 
 Forward-Looking
Statements
 
 In addition to historical information,
this Form 10-Q contains forward-looking statements. These forward-looking
statements are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (“the Act”).  The words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,”
“should” and similar expressions are intended to identify “forward-looking
statements” within the meaning of the Act. Forward-looking statements include,
among others, statements about our future performance, the sufficiency of our
sources of capital for future needs, and the expected impact of recently issued
accounting pronouncements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in Part II Item 1A of this Form 10-Q and Part I Item 1A of our Annual Report on
Form 10-K for the fiscal year ended October 31, 2008. Readers are cautioned not
to place undue reliance on these forward-looking statements, which reflect
management’s opinions only as of the date hereof. We undertake no obligation to
revise or publicly release any revision to these forward-looking statements
based on circumstances or events, which occur in the future. Readers should
carefully review the risk factors described in this report on Form 10-Q and in
other documents we file from time to time with the Securities and Exchange
Commission.
 
 Interest
Rate Risk
 
 Our borrowing capacity primarily
consists of a revolving line of credit with interest rates that fluctuate based
upon the Prime Rate and LIBOR market indexes.  At January 31, 2009, we
did not have any outstanding borrowings under this revolving credit facility. As
a result, risk relating to interest fluctuation is considered
minimal.
 
 Foreign
Currency Exchange Rate Risk
 
 Our
foreign operations are not a significant component of our business, and as a
result, risks relating to foreign currency fluctuation are considered
minimal.
 
 ITEM
3.          QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 See the information set forth under the
captions, “Interest Rate Risk” and “Foreign Currency Exchange Rate Risk” in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in this Quarterly Report on Form 10-Q.
  20
 Table of Contents
 
 ITEM 4.          CONTROLS AND
PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 Based on
our management’s evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the “Exchange Act”)) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms.  Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
 
 Changes
in Internal Control over Financial Reporting
 
 There was
no change in our internal control over financial reporting during the first
three months of fiscal 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  21
 Table of Contents
  PART
II.
 
 ITEM
1A.       RISK FACTORS
 
 Our business is subject to a number of
risks and uncertainties which we discussed in detail in Part I, Item 1A of our
2008 Annual Report on Form 10-K.
 
 ITEM
6.         EXHIBITS
 
 Exhibit Number and
Description
 
 10.01
              Agreement
      dated as of February 5, 2009, by and among PLATO Learning, Inc., Steven R.
      Becker, BC Advisors, LLC, SRB Management, L.P., and Matthew A. Drapkin, as
      filed as exhibit 10.1 to our Current Report on Form 8-K (filed February 5,
      2009) and incorporated herein by
reference.
 31.01
              Certification
      of Chief Executive Officer under Rule 13a-14(a) adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002.
 31.02
              Certification
      of Chief Financial Officer under Rule 13a-14(a) adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002.
 32.01
              Certification
      of Chief Executive Officer under 18 U.S.C. 1350 pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
 32.02
              Certification
      of Chief Financial Officer under 18 U.S.C. 1350 pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
  22
 Table of Contents
 
 SIGNATURES
 
 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.
 
 PLATO
      LEARNING, INC.
                      By
                      /s/ Vincent P. RieraMarch
      12, 2009
                      
                      Vincent
      P. RieraPresident
      and Chief Executive Officer(principal
      executive officer)/s/ Robert J. RuecklRobert
      J. RuecklVice
      President and Chief Financial Officer(principal
      financial
officer)
   23