##### 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 January 31, 2002

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: |  | (952)832-1000         

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

YesX                      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 |  | 16,452,499 shares              
|                            
|                            
|                            
|                            
|Class                        |  | Outstanding as of March 1, 2002

(This document contains 20 pages)

1



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TABLE OF CONTENTS



|                                      |                                                                                                            |  |  |  |  |  |  | 
|------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION        
|                                      | CONSOLIDATED STATEMENTS OF EARNINGS                                                                       
|                                      | CONSOLIDATED BALANCE SHEETS                                                                               
|                                      | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                     
|                                      | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS                      AND FINANCIAL CONDITION
|                                      | 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                           
|Form of Employment Agreement         
|Form of Employment Agreement         
|Form of Employment Security Agreement



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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries

INDEX

|           |  |                                                                                            |  |       
|---------- |  | ------------------------------------------------------------------------------------------ |  | ------
|           |  |                                                                                            |  | Page  
|           |  |                                                                                            |  | Number
|PART I     |  | FINANCIAL INFORMATION                                                                      |  |       
|          
|          
|          
|          
|Item 1.    |  | Consolidated Financial Statements (Unaudited):                                             |  |       
|          
|          
|          
|          
|           |  | Consolidated Statements of Earnings for the
Three Months Ended January 31, 2002 and 2001   |  | 3     
|          
|          
|          
|          
|           |  | Consolidated Balance Sheets as of
January 31, 2002 and October 31, 2001                    |  | 4     
|          
|          
|          
|          
|           |  | Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 2002 and 2001 |  | 5     
|          
|          
|          
|          
|           |  | Notes to Consolidated Financial Statements                                                 |  | 6     
|          
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of
Results of Operations and Financial Condition      |  | 11    
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                 |  | 18    
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                          |  |       
|          
|          
|          
|          
|Item 1.    |  | Legal Proceedings                                                                          |  | 19    
|          
|          
|          
|          
|Item 2.    |  | Changes in Securities                                                                      |  | 19    
|          
|          
|          
|          
|Item 3.    |  | Defaults Upon Senior Securities                                                            |  | 19    
|          
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                        |  | 19    
|          
|          
|          
|          
|Item 5.    |  | Other Information                                                                          |  | 19    
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                           |  | 19    
|          
|          
|          
|          
|SIGNATURES |  |                                                                                            |  | 20    

2



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##### Table of Contents









PART I. FINANCIAL INFORMATIONPLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands, except per share amounts)

|                                            |                                          |                          |              |                          |        |                    |        |        |        |       |        |  
|------------------------------------------- | ---------------------------------------- | ------------------------ | ------------ | ------------------------ | ------ | ------------------ | ------ | ------ | ------ | ----- | ------ | -
|                                            |                                          |                          |              |                          |        | Three Months Ended
|                                            |                                          |                          |              |                          |        | January 31,       
|                                            |                                          |                          |              |                          |        |                   
|                                            |                                          |                          |              |                          |        | 2002               |        | 2001  
|Revenues:                                   |                                          |                          |              |                          |        |                    |        |       
|                                           
|                                           
|                                           
|                                           
|                                            | License fees                             |                          | $            | 10,620                   |        |                    | $      | 7,228  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Services                                 |                          |              | 2,315                    |        |                    |        | 1,590  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                    |                          |              | 1,112                    |        |                    |        | 936    |       
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          | Total revenues           |              |                          | 14,047 |                    |        |        | 9,754  |      
|                                            |                                          |                          |              |                          |        |                    |        |       
|Cost of revenues:                           |                                          |                          |              |                          |        |                    |        |       
|                                           
|                                           
|                                           
|                                           
|                                            | License fees                             |                          |              | 733                      |        |                    |        | 252    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Services                                 |                          |              | 271                      |        |                    |        | 238    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                    |                          |              | 1,051                    |        |                    |        | 989    |       
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          | Total cost of revenues   |              |                          | 2,055  |                    |        |        | 1,479  |      
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          |                          | Gross profit |                          |        | 11,992             |        |        |        | 8,275 |       
|                                            |                                          |                          |              |                          |        |                    |        |       
|Operating expenses:                         |                                          |                          |              |                          |        |                    |        |       
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative      |                          |              | 11,516                   |        |                    |        | 8,737  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Product development and customer support |                          |              | 2,781                    |        |                    |        | 1,787  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of intangibles              |                          |              | 194                      |        |                    |        | 208    |       
|                                           
|                                           
|                                           
|                                           
|                                            | Special charges                          |                          |              |                         |        |                    |        | 1,260  |       
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          | Total operating expenses |              |                          | 14,491 |                    |        |        | 11,992 |      
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          |                          |              | Operating loss           |        |                    | (2,499 | )      |        |       | (3,717 | )
|                                           
|                                           
|                                           
|                                           
|Interest income                             |                                          |                          | 368          |                          |        |                    | 7      |       
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                          |                          | (42          | )                        |        |                    | (84    | )     
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                          |                          | (84          | )                        |        |                    | (60    | )     
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          |                          |              | Loss before income taxes |        |                    | (2,257 | )      |        |       | (3,854 | )
|                                           
|                                           
|                                           
|                                           
|Income tax benefit                          |                                          |                          | (900         | )                        |        |                    | (1,503 | )     
|                                            |                                          |                          |              |                          |        |                    |        |       
|                                            |                                          |                          |              | Net loss                 |        | $                  | (1,357 | )      |        | $     | (2,351 | )
|                                            |                                          |                          |              |                          |        |                    |        |       
|Loss per share:                             |                                          |                          |              |                          |        |                    |        |       
|                                           
|                                           
|                                           
|                                           
|                                            | Basic and diluted                        |                          | $            | (0.08                    | )      |                    | $      | (0.21  | )     
|                                            |                                          |                          |              |                          |        |                    |        |       
|Weighted average common shares outstanding: |                                          |                          |              |                          |        |                    |        |       
|                                           
|                                           
|                                           
|                                           
|                                            | Basic and diluted                        |                          |              | 16,406                   |        |                    |        | 11,027 |       
|                                            |                                          |                          |              |                          |        |                    |        |       

See Notes to Consolidated Financial Statements

3



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##### Table of Contents






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

|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |             |         |  |  | 
|--------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------------------ | ------- | ------- | ----------- | ----- | ----------- | ------- |  |  | 
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         | January 31, |       | October 31,
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         | 2002        |       | 2001       
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         | (Unaudited) |       | (See Note) 
|                      |                                                                                                                                                                                                        |                                            |                                      | ASSETS  |         |             |       |             |         |  |  | 
|                     
|                     
|                     
|                     
|Current assets:       |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                     
|                     
|                     
|                     
|                      | Cash and cash equivalents                                                                                                                                                                              |                                            | $                                    | 59,740  |         |             | $     | 61,568      |        
|                     
|                     
|                     
|                     
|                      | Accounts receivable, less allowances of $2,559
and $2,545, respectively                                                                                                                                |                                            |                                      | 24,411  |         |             |       | 28,739      |        
|                     
|                     
|                     
|                     
|                      | Prepaid expenses and other current assets                                                                                                                                                              |                                            |                                      | 1,487   |         |             |       | 1,317       |        
|                     
|                     
|                     
|                     
|                      | Deferred income taxes                                                                                                                                                                                  |                                            |                                      | 2,468   |         |             |       | 2,468       |        
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        | Total current assets                       |                                      |         | 88,106  |             |       |             | 94,092  | 
|                     
|                     
|                     
|                     
|                      | Equipment and leasehold improvements, less accumulated
depreciation of $4,077 and $3,829, respectively                                                                                                 |                                            |                                      | 3,818   |         |             |       | 2,803       |        
|                     
|                     
|                     
|                     
|                      | Product development costs, less accumulated amortization
of $13,031 and $12,094, respectively                                                                                                          |                                            |                                      | 10,347  |         |             |       | 9,949       |        
|                     
|                     
|                     
|                     
|                      | Deferred income taxes                                                                                                                                                                                  |                                            |                                      | 8,038   |         |             |       | 6,832       |        
|                     
|                     
|                     
|                     
|                      | Goodwill, less accumulated amortization of $1,831                                                                                                                                                      |                                            |                                      | 16,152  |         |             |       | 16,152      |        
|                     
|                     
|                     
|                     
|                      | Other assets                                                                                                                                                                                           |                                            |                                      | 5,982   |         |             |       | 6,083       |        
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        | Total assets                               |                                      | $       | 132,443 |             |       | $           | 135,911 | 
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |         |         |             |       |             |         |  | 
|                     
|                     
|                     
|                     
|Current liabilities:  |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                     
|                     
|                     
|                     
|                      | Current portion of long-term debt                                                                                                                                                                      |                                            | $                                    | 245     |         |             | $     | 242         |        
|                     
|                     
|                     
|                     
|                      | Accounts payable                                                                                                                                                                                       |                                            |                                      | 1,436   |         |             |       | 2,216       |        
|                     
|                     
|                     
|                     
|                      | Accrued employee salaries and benefits                                                                                                                                                                 |                                            |                                      | 3,545   |         |             |       | 4,539       |        
|                     
|                     
|                     
|                     
|                      | Accrued liabilities                                                                                                                                                                                    |                                            |                                      | 2,937   |         |             |       | 3,883       |        
|                     
|                     
|                     
|                     
|                      | Deferred revenue                                                                                                                                                                                       |                                            |                                      | 9,309   |         |             |       | 9,163       |        
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        | Total current liabilities                  |                                      |         | 17,472  |             |       |             | 20,043  | 
|                     
|                     
|                     
|                     
|Long-term debt        |                                                                                                                                                                                                        |                                            | 651                                  |         |         |             | 720   |            
|                     
|                     
|                     
|                     
|Deferred revenue      |                                                                                                                                                                                                        |                                            | 920                                  |         |         |             | 1,170 |            
|                     
|                     
|                     
|                     
|Other liabilities     |                                                                                                                                                                                                        |                                            | 54                                   |         |         |             | 79    |            
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        | Total liabilities                          |                                      |         | 19,097  |             |       |             | 22,012  | 
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|Stockholders equity: |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                     
|                     
|                     
|                     
|                      | Common stock, $.01 par value, 25,000 shares
authorized; 16,720 shares issued and 16,437 shares
outstanding at January 31, 2002; 16,689 shares issued
and 16,411 shares outstanding at October 31, 2001 |                                            |                                      | 164     |         |             |       | 164         |        
|                     
|                     
|                     
|                     
|                      | Paid-in capital                                                                                                                                                                                        |                                            |                                      | 114,749 |         |             |       | 113,767     |        
|                     
|                     
|                     
|                     
|                      | Treasury stock at cost, 283 and 278 shares, respectively                                                                                                                                               |                                            |                                      | (4,986  | )       |             |       | (4,914      | )      
|                     
|                     
|                     
|                     
|                      | Retained earnings                                                                                                                                                                                      |                                            |                                      | 4,429   |         |             |       | 5,786       |        
|                     
|                     
|                     
|                     
|                      | Accumulated other comprehensive loss                                                                                                                                                                   |                                            |                                      | (1,010  | )       |             |       | (904        | )      
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        | Total stockholders equity                 |                                      |         | 113,346 |             |       |             | 113,899 | 
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            
|                      |                                                                                                                                                                                                        | Total liabilities and stockholders equity |                                      | $       | 132,443 |             |       | $           | 135,911 | 
|                      |                                                                                                                                                                                                        |                                            |                                      |         |         |             |       |            



| |  | Note: The balance sheet at October 31, 2001 has been derived from the audited
financial statements at that date. See Notes to Consolidated Financial Statements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

4



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##### Table of Contents






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

|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |      |        |   |        |  
|------------------------------------------------ | --------------------- | ------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------ | ------------------ | ------ | ---- | ------ | - | ------ | -
|                                                 |                       |                                             |                                                                                           |                                                                                   |        | Three Months Ended
|                                                 |                       |                                             |                                                                                           |                                                                                   |        | January 31,       
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                   
|                                                 |                       |                                             |                                                                                           |                                                                                   |        | 2002               |        | 2001
|                                                 | Operating activities: |                                             |                                                                                           |                                                                                   |        |                    |        |      |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Net loss                                    |                                                                                           | $                                                                                 | (1,357 | )                  |        | $    | (2,351 | )
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                 |                       |                                             | Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                                                                                   |        |                    |        |      |        |   |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Depreciation and amortization                                                     |        |                    | 1,516  |      |        |   | 946    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Deferred income taxes                                                             |        |                    | (900   | )    |        |   | (1,503 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Provision for doubtful accounts                                                   |        |                    | 601    |      |        |   | 250    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Stock-based compensation                                                          |        |                    | 20     |      |        |   | 516    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Loss on disposal of fixed assets                                                  |        |                    | 77     |      |        |   | 17     |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Changes in assets and liabilities:                                                |        |                    |        |      |        |   |        |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Accounts receivable                                                               |        |                    | 3,727  |      |        |   | 2,066  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Prepaid expenses and other current and noncurrent assets                          |        |                    | (388   | )    |        |   | (477   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Accounts payable                                                                  |        |                    | (780   | )    |        |   | (180   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Accrued liabilities, accrued employee salaries and benefits
and other liabilities |        |                    | (1,965 | )    |        |   | (1,863 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                       |                                             |                                                                                           | Deferred revenue                                                                  |        |                    | (104   | )    |        |   | 43     |  
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                 |                       |                                             |                                                                                           | Total adjustments                                                                 |        |                    | 1,804  |      |        |   | (185   | )
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                 |                       |                                             |                                                                                           | Net cash provided by (used in) operating activities                               |        |                    | 447    |      |        |   | (2,536 | )
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Investing activities:                            |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Capital expenditures                        |                                                                                           |                                                                                   | (1,369 | )                  |        |      | (306   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Capitalization of product development costs |                                                                                           |                                                                                   | (1,345 | )                  |        |      | (885   | )
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                 |                       |                                             |                                                                                           | Net cash used in investing activities                                             |        |                    | (2,714 | )    |        |   | (1,191 | )
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Financing activities:                            |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Net proceeds from issuance of common stock  |                                                                                           |                                                                                   | 706    |                    |        |      | 372    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Repayments of capital lease obligations     |                                                                                           |                                                                                   | (66    | )                  |        |      | (52    | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Repurchase of common stock                  |                                                                                           |                                                                                   | (72    | )                  |        |      |       |  
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                 |                       |                                             |                                                                                           | Net cash provided by financing activities                                         |        |                    | 568    |      |        |   | 320    |  
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Effect of foreign currency on cash               |                       |                                             | (129                                                                                      | )                                                                                 |        |                    | (49    | )   
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Net decrease in cash and cash equivalents        |                       |                                             | (1,828                                                                                    | )                                                                                 |        |                    | (3,456 | )   
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                       |                                             | 61,568                                                                                    |                                                                                   |        |                    | 6,415  |     
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Cash and cash equivalents at end of period       |                       | $                                           | 59,740                                                                                    |                                                                                   |        | $                  | 2,959  |     
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Cash paid for interest                           |                       | $                                           | 112                                                                                       |                                                                                   |        | $                  | 81     |     
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Cash paid for income taxes                       |                       | $                                           | 50                                                                                        |                                                                                   |        | $                  | 191    |     
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|Non-cash financing activities:                   |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                       | Capital lease obligations incurred          |                                                                                           | $                                                                                 |       |                    |        | $    | 722    |  
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     
|                                                 |                       | Debt converted to common stock              |                                                                                           | $                                                                                 |       |                    |        | $    | 600    |  
|                                                 |                       |                                             |                                                                                           |                                                                                   |        |                    |        |     

See Notes to Consolidated Financial Statements

5



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)



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

Nature of Business

PLATO Learning, Inc. and its subsidiaries provide computer-based and
e-learning instruction and related services, offering basic to advanced
level courseware in reading, writing, math, science, social studies and
life and job skills. Our PLATO® Learning System and PLATO® Web Learning
Network provide more than 3,500 hours of objective-based, problem solving
courseware and include assessment, alignment and management tools to
create standards-based curricula and 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 our e-commerce Web site and distributors. We market our
courseware products and services to K-12 schools, colleges, job training
programs, correctional institutions, military education programs,
corporations and individuals.

Basis of Presentation

The accompanying unaudited 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. We have included all normal recurring adjustments considered
necessary to give a fair presentation 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, 2001.

Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation and had no impact on net loss, cash
flows or stockholders equity.

Revenue Recognition

We recognize revenue in accordance with the provisions of Statement of Position
No. 97-2, Software Revenue Recognition, as amended and modified, and Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.

Revenue from the sale of courseware licenses and computer hardware is
recognized upon meeting the following criteria: (i) a written customer order
is executed, (ii) courseware and hardware are delivered, (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, we allocate the
total arrangement fee among each deliverable based on vendor-specific objective
6Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ContinuedRevenue Recognition, Continuedevidence of the relative fair value of each deliverable. Vendor-specific
objective evidence of fair value is determined using the price charged when
that element is sold separately. Upon delivery, future service costs, if any,
are accrued. Future service costs represent our problem resolution and support
hotline services for a one-year period. Service revenue includes software
support, which is deferred and recognized ratably over the support period, and
revenue from installation and training services, which is recognized as
services are performed. Installation and training services are customarily
billed at a fixed daily rate. Deferred revenue represents the portion of
billings made or payments received in advance of services being performed or
products being delivered.Product Development, Enhancement and Maintenance CostsCosts incurred in the development, enhancement and routine maintenance of our
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. Technological feasibility is established when we
have completed all planning, designing, coding and testing activities.Capitalized costs are amortized to product development and customer support
expense 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 our 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.Amortization expense related to capitalized product development costs was $939 and $492 for the three months ended January 31,
2002 and 2001, respectively.Earnings (Loss) Per ShareBasic earnings (loss) per share is calculated by dividing net earnings (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is calculated by dividing net earnings (loss)
by the weighted average number of common and, where dilutive, potential common
shares outstanding during the period. Potential common shares include options
and warrants.7Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)2. ACCOUNTS RECEIVABLEAccounts receivable include installment receivables of $14,937 and $16,087 at
January 31, 2002 and October 31, 2001, respectively. Installment receivables
to be billed beyond one year from the balance sheet date were $2,182 and $2,021
at January 31, 2002 and October 31, 2001, respectively, and are included in
other assets on the consolidated balance sheets.3. GOODWILL AND OTHER INTANGIBLE ASSETSEffective November 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142).GoodwillUnder SFAS 142, goodwill is no longer amortized to expense and must be
periodically reviewed for impairment with any related losses recognized when
incurred. We are required to complete a transitional impairment test of goodwill, as of November 1, 2001,
no later than April 30, 2002. While this testing has not yet been completed, we believe goodwill is not impaired. The effect of any future impairment on our consolidated financial
statements is unknown. The carrying value of our goodwill was $16,152 at
November 1, 2001.For the three months ended January 31, 2002, $626 of goodwill amortization
expense was not recognized that would have been recognized had SFAS 142 not
been adopted. For the full fiscal year 2002, we expect that $2,578 of goodwill
amortization expense will not be recognized that would have been recognized had
SFAS 142 not been adopted.For the three months ended January 31, 2001, $131 of goodwill amortization
expense was recorded. The following table presents the impact of SFAS 142 as
if it had been in effect for the three months ended January 31, 2001:

|                                            |  |   |        |   |  |                     |       |  
|------------------------------------------- |  | - | ------ | - |  | ------------------- | ----- | -
|                                            |  |   |        |   |  | Per Share          
|                                            |  |   |        |   |  | (Basic and Diluted)
|Reported net loss                           |  | $ | (2,351 | ) |  | $                   | (0.21 | )
|                                           
|                                           
|                                           
|                                           
|Add back goodwill amortization (net of tax) |  |   | 80     |   |  |                     |      |  
|                                            |  |   |        |   |  |                     |       |  
|Adjusted net loss                           |  | $ | (2,271 | ) |  | $                   | (0.21 | )
|                                            |  |   |        |   |  |                     |       |  

Other Intangible Assets

Acquired intangible assets subject to amortization at January 31, 2002 were as
follows:

|                      |  |          |       |              |  |          |      |     |  |   |       | 
|--------------------- |  | -------- | ----- | ------------ |  | -------- | ---- | --- |  | - | ----- | 
|                      |  | Gross    |       |              |  |          |      | Net
|                      |  | Carrying |       | Accumulated  |  | Carrying
|                      |  | Value    |       | Amortization |  | Value   
|                      |  |          |       |              |  |         
|Acquired technology   |  | $        | 1,452 |              |  | $        | (292 | )   |  | $ | 1,160 | 
|                     
|                     
|                     
|                     
|Trademark             |  |          | 1,380 |              |  |          | (296 | )   |  |   | 1,084 | 
|                     
|                     
|                     
|                     
|Customer list         |  |          | 900   |              |  |          | (170 | )   |  |   | 730   | 
|                     
|                     
|                     
|                     
|Employment agreement  |  |          | 413   |              |  |          | (44  | )   |  |   | 369   | 
|                     
|                     
|                     
|                     
|Noncompete agreements |  |          | 90    |              |  |          | (67  | )   |  |   | 23    | 
|                      |  |          |       |              |  |          |      |     |  |   |       | 
|                      |  | $        | 4,235 |              |  | $        | (869 | )   |  | $ | 3,366 | 
|                      |  |          |       |              |  |          |      |     |  |   |       | 

8



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars in thousands, except per share amounts)

3. GOODWILL AND OTHER INTANGIBLE ASSETS, Continued

Other Intangible Assets,Continued

Amortization expense for intangible assets was $269 for the three months ended
January 31, 2002, of which $75 was included in product development and customer
support expense. Amortization expense for the three months ended January 31,
2001 was $77.

The estimated annual amortization expense for intangible assets is as follows:

|           |      |   |       |     | 
|---------- | ---- | - | ----- | --- | 
|           | 2002 |   | $     | 990 | 
|          
|          
|          
|          
|           | 2003 |   |       | 931 | 
|          
|          
|          
|          
|           | 2004 |   |       | 756 | 
|          
|          
|          
|          
|           | 2005 |   |       | 497 | 
|          
|          
|          
|          
|           | 2006 |   |       | 312 | 
|          
|          
|          
|          
|Thereafter |      |   | 149   |    
|           |      |   |       |     | 
|           |      | $ | 3,635 |    
|           |      |   |       |     | 

4. DEBT

Revolving Loan

We closed a new revolving loan agreement on December 20, 2001 that provides for
a maximum $12,500 line of credit through July 1, 2003. Substantially all of
our assets are pledged as collateral under the agreement.

Borrowings are limited by the available borrowing base, as defined, consisting
of certain accounts receivable and bear interest at the prime rate plus 0.25%
or the London Interbank Offered Rate (LIBOR) plus 1.75 to 2.75%, depending on
cash flow leverage, as defined, at our option pursuant to the agreement. A
commitment fee is payable quarterly based on the unused portion of the line of
credit. The agreement contains restrictive financial covenants (including
Minimum Tangible Net Worth, Minimum Debt Service Coverage, Maximum Leverage,
Maximum Cash Flow Leverage, Minimum Current Ratio and Maximum Annual Capital
Expenditures) and restrictions on additional borrowings, asset sales and
dividends, as defined.

A commitment fee of approximately $63 was paid upon commencement of the new
facility.

At January 31, 2002, there were no borrowings outstanding under the revolving
loan agreement. The unused borrowing capacity was approximately $10,460.

Capital Lease Obligations

At January 31, 2002, our only 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.

9



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Dollars in thousands, except per share amounts)

5. STOCKHOLDERS EQUITY

We issued approximately 81,000 shares of common stock for the exercise of
outstanding stock options during the three months ended January 31, 2002.

In December 2001, our Board of Directors approved a stock repurchase plan that
authorizes us to repurchase up to $15,000 of our common stock in the open
market and in privately negotiated transactions. The plan has no set
termination date and the timing of any repurchases will be dependent on
prevailing market conditions and alternative uses of capital. For the three
months ended January 31, 2002, we repurchased 5,000 shares of our common stock
for $72 and the repurchase had no significant impact on our reported loss per
share.

6. EARNINGS (LOSS) PER SHARE

Basic and diluted loss per share is the same for the three months ended January
31, 2002 and for the three months ended January 31, 2001. We incurred a net
loss for all periods presented and potential common shares are antidilutive and
excluded from the calculation of diluted loss per share. The number of
potential common shares excluded from the diluted loss per share calculations
was approximately 621,000 and 579,000 for the three months ended January 31,
2002 and 2001, respectively.

7. COMPREHENSIVE LOSS

Total comprehensive loss was as follows:

|                                         |                          |   |                    |        |      |   |        |        |  
|---------------------------------------- | ------------------------ | - | ------------------ | ------ | ---- | - | ------ | ------ | -
|                                         |                          |   | Three Months Ended
|                                         |                          |   | January 31,       
|                                         |                          |   |                   
|                                         |                          |   | 2002               |        | 2001
|Net loss                                 |                          | $ | (1,357             | )      |      | $ | (2,351 | )     
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation adjustments |                          |   | (106               | )      |      |   | (46    | )     
|                                         |                          |   |                    |        |      |   |        |       
|                                         | Total comprehensive loss |   | $                  | (1,463 | )    |   | $      | (2,397 | )
|                                         |                          |   |                    |        |      |   |        |       

10



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##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

OVERVIEW

We enhance the learning process by providing computer-based and e-learning
instruction and related services, offering basic to advanced level
courseware in reading, writing, math, science, social studies and life and
job skills. Our PLATO® Learning System and PLATO® Web Learning Network
provide more than 3,500 hours of objective-based, problem solving
courseware and include assessment, alignment and management tools to
create standards-based curricula and 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 our e-commerce web site and distributors. We market our
courseware products and services to K-12 schools, colleges, job training
programs, correctional institutions, military education programs,
corporations and individuals.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of results of operations and financial condition is
based upon our consolidated financial statements, which 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 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 have identified revenue recognition, the
valuation of accounts receivable and the capitalization of product development
costs as the critical accounting policies that are significant to the financial
statement presentation and require difficult, subjective and complex judgments.

Revenue Recognition

Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments affect the application of our revenue
recognition policy. Revenue results are difficult to predict, and any shortfall
in revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter.

The most significant judgments for revenue recognition typically involve
whether there are any significant uncertainties regarding customer acceptance
and whether collectibility can be considered reasonably assured. In addition,
the Companys transactions often consist of multiple element arrangements which
must be analyzed to determine the relative fair value of each element, the
amount of revenue to be recognized upon shipment, if any, and the period and
conditions under which deferred revenue should be recognized.

For additional description of our revenue recognition policy, see Note 1 to
Consolidated Financial Statements.

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##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

CRITICAL ACCOUNTING POLICIES, Continued

Allowance for Doubtful Accounts

We determine an allowance for doubtful accounts based upon an analysis of the
collectibility of specific accounts, historical experience and the aging of the
accounts receivable. Bad debt expense is recorded as an operating expense in
our consolidated statement of earnings. The assumptions and estimates used to
determine the allowance are subject to constant revision. The primary factors
that impact these assumptions include the efficiency and effectiveness of our
billing and collection functions and our credit assessment process. Actual
collection results could differ materially from those estimated and have a
significant impact on our results of operations and financial condition.

Capitalization of Product Development Costs

Our product development expense includes costs related to the development,
enhancement and maintenance of our courseware products, and the effect of
product development cost capitalization and amortization. We capitalize our
product development costs when the projects under development reach
technological feasibility, as defined by the accounting standards, and amortize
these costs over the estimated useful lives of the courseware products.

The most significant judgments regarding capitalization of product development
costs typically involve the determination of when development efforts reach
technological feasibility and the recoverability of capitalized costs. We
continually evaluate our capitalized costs to determine if the unamortized
balance related to any given product exceeds the estimated net realizable value
of that product. Estimating net realizable value requires us to estimate
future cash flows to be generated by the product and to use judgment in
quantifying the amount, if any, to be written off. Actual cash flows and
amounts realized from the courseware products could differ materially from
those estimated. In addition, any future changes to our courseware product
offerings could result in write-offs of previously capitalized costs and have a
significant impact on our results of operations and financial condition.

For additional description of our policy regarding product development,
enhancement and maintenance costs, see Note 1 to Consolidated Financial
Statements.

Deferred Tax Asset

We account for deferred income taxes based upon differences between the
financial reporting and income tax bases of our assets and liabilities. The
measurement of the deferred tax asset is adjusted by a valuation allowance, if
necessary, to recognize the extent to which the future tax benefits will be
recognized.

12



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##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

CRITICAL ACCOUNTING POLICIES, Continued

At January 31, 2002 we have recorded a net deferred tax asset of approximately
$10,500. This deferred tax asset is net of a valuation allowance related to a
foreign net operating loss carryforward. A substantial portion of the deferred
tax asset relates to our net operating loss carryforward in the United States.
We have recorded the net deferred tax asset as we believe that it is more
likely than not that we will be able to realize the asset through generation of
future taxable income in the United States. We base this belief upon the
levels of taxable income generated historically as well as projections of
future taxable income. If future levels of taxable income in the United States
are not consistent with our expectations, we may be required to record a
valuation allowance, which could reduce our net income by a material amount.

RESULTS OF OPERATIONS

Operating Results as a Percentage of Revenue

|                         |                                                     |                          |       |                    |       |      |       |       |       | 
|------------------------ | --------------------------------------------------- | ------------------------ | ----- | ------------------ | ----- | ---- | ----- | ----- | ----- | 
|                         |                                                     |                          |       | Three Months Ended
|                         |                                                     |                          |       | January 31,       
|                         |                                                     |                          |       |                   
|                         |                                                     |                          |       | 2002               |       | 2001
|                         |                                                     |                          |       |                    |       |     
|Revenues:                |                                                     |                          |       |                    |       |      |       |      
|                        
|                        
|                        
|                        
|                         | License fees                                        |                          |       | 75.6               | %     |      |       | 74.1  | %    
|                        
|                        
|                        
|                        
|                         | Services                                            |                          |       | 16.5               |       |      |       | 16.3  |      
|                        
|                        
|                        
|                        
|                         | Other                                               |                          |       | 7.9                |       |      |       | 9.6   |      
|                         |                                                     |                          |       |                    |       |      |       |      
|                         |                                                     | Total revenues           |       |                    | 100.0 |      |       |       | 100.0 | 
|                        
|                        
|                        
|                        
|Cost of revenues         |                                                     |                          | 14.6  |                    |       |      | 15.2  |      
|                         |                                                     |                          |       |                    |       |      |       |      
|                         | Gross profit                                        |                          |       | 85.4               |       |      |       | 84.8  |      
|                         |                                                     |                          |       |                    |       |      |       |      
|Operating expenses:      |                                                     |                          |       |                    |       |      |       |      
|                        
|                        
|                        
|                        
|                         | Selling, general and administrative expense         |                          |       | 82.0               |       |      |       | 89.6  |      
|                        
|                        
|                        
|                        
|                         | Product development and customer support expense    |                          |       | 19.8               |       |      |       | 18.3  |      
|                        
|                        
|                        
|                        
|                         | Amortization of intangibles                         |                          |       | 1.4                |       |      |       | 2.1   |      
|                        
|                        
|                        
|                        
|                         | Special charges                                     |                          |       |                   |       |      |       | 12.9  |      
|                         |                                                     |                          |       |                    |       |      |       |      
|                         |                                                     | Total operating expenses |       |                    | 103.2 |      |       |       | 122.9 | 
|                         |                                                     |                          |       |                    |       |      |       |      
|Operating loss           |                                                     |                          | (17.8 | )                  |       |      | (38.1 | )    
|                        
|                        
|                        
|                        
|                         | Interest income and interest and other expense, net |                          |       | 1.7                |       |      |       | (1.4  | )    
|                         |                                                     |                          |       |                    |       |      |       |      
|Loss before income taxes |                                                     |                          | (16.1 | )                  |       |      | (39.5 | )    
|                        
|                        
|                        
|                        
|                         | Income tax benefit                                  |                          |       | (6.4               | )     |      |       | (15.4 | )    
|                         |                                                     |                          |       |                    |       |      |       |      
|Net loss                 |                                                     |                          | (9.7  | )%                 |       |      | (24.1 | )%   
|                         |                                                     |                          |       |                    |       |      |       |      

Revenues

Total Revenues.Total revenues increased 44.0% to $14,047 for the three months
ended January 31, 2002 from $9,754 for the same period in 2001. The increase
was primarily due to the $3,392 increase in license fees revenues and the $725
increase in services revenues.

License Fees.Revenues from license fees increased 46.9% to $10,620 for the
three months ended January 31, 2002 from $7,228 for the same period in 2001.
As a percentage of total

13



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##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

Revenues, Continued

revenues, license fees revenues were 75.6% for the three months ended January
31, 2002, up from 74.1% for the same period in 2001. This revenue growth was
achieved primarily through increased sales volume to both new and existing
customers driven by increased acceptance of our courseware products. New
products from the acquisitions of Wasatch Interactive Learning Corporation in
April 2001 and TeachMaster Technologies, Inc. in September 2001 contributed
approximately $800 of revenue for the three months ended January 31, 2002.

Services.Revenues from services increased 45.6% to $2,315 for the three
months ended January 31, 2002 from $1,590 for the same period in 2001. As a
percentage of total revenues, services revenues were 16.5% for the three months
ended January 31, 2002 and 16.3% for the same period in 2001. This revenue
increase resulted primarily from the continued growth in license fees revenues
and customer acceptance of our training and technical support services.

Other.Other revenues, including hardware and third-party courseware products,
increased 18.8% to $1,112 for the three months ended January 31, 2002 from $936
for the same period in 2001. As a percentage of total revenues, other revenues
were 7.9% for the three months ended January 31, 2002, down from 9.6% for the
same period in 2001.

Cost of Revenues

Total cost of revenues increased 38.9% to $2,055 for the three months ended
January 31, 2002 from $1,479 for the same period in 2001. The increase was
primarily due to the increase in license fees revenues. Gross profit margin
was 85.4% for the three months ended January 31, 2002, up from 84.8% for the
same period in 2001. This increase in gross profit margin resulted primarily
from the product mix, as revenue from license fees and services, both of which
have high margins, increased at a greater rate than our low margin revenues,
including hardware and third party courseware products. Our future gross
profit margin will be dependent primarily on the product mix of our revenues.

Operating Expenses

Selling, General and Administrative.Selling, general and administrative
expenses increased 31.8% to $11,516 for the three months ended January 31, 2002
from $8,737 for the same period in 2001. The increased expenses resulted from
a number of factors including increased headcount from the acquisitions of
Wasatch Interactive Learning Corporation in April 2001 and TeachMaster
Technologies, Inc. in September 2001, increased commissions due to the growth
in revenue, increased marketing costs necessary to generate revenue growth, and
additions to our management team and infrastructure necessary to grow the
business. As a percentage of total

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##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

Operating Expenses, Continued

revenues, selling, general and administrative expenses were 82.0% for the three
months ended January 31, 2002, down from 89.6% for the same period in 2001.
Our ability to continue to leverage our cost structure and improve
profitability is primarily dependent on our ability to increase revenues and
achieve our sales targets.

Product Development and Customer Support.Product development and customer
support expenses increased 55.6% to $2,781 for the three months ended January
31, 2002 from $1,787 for the same period in 2001. As a percentage of total
revenues, product development and customer support expenses were 19.8% for the
three months ended January 31, 2002, up from 18.3% for the same period in 2001.
These increases reflect our increased spending to enhance and replace certain
existing courseware products and to develop a new standards-based reference
network.

As part of our growth strategy, we intend to introduce a number of new products
and product improvements. The extent of our future product development
spending and the amount of our future capitalized product development costs and
related amortization are dependent on our ability to introduce new products and
product improvements on a cost-effective and timely basis. Capitalized
development costs were $1,345 for the three months ended January 31, 2002,
compared to $885 for the same period in 2001. Amortization of previously
capitalized development costs was $939 for the three months ended January 31,
2002, up from $492 for the same period in 2001, as projects completed during
prior periods are now being amortized to expense.

Amortization of Intangibles.Expense for the three months ended January 31,
2002 represented amortization of intangible assets, other than goodwill, from
our previous acquisitions. Effective November 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). Under SFAS 142, goodwill is no longer amortized to expense and
must be periodically reviewed for impairment with any related losses recognized
when incurred. The effect of any future impairment on our consolidated
financial statements is unknown. Expense for the same period in 2001 included
$131 of goodwill amortization and $77 of intangible amortization.

Special Charge.The special charge in 2001 represented costs associated with
the retirement of our founder and former chief executive officer and included
non-cash amounts of $463 for the accelerated vesting of stock options.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS, Continued

Interest Income

Interest income was $368 for the three months ended January 31, 2002 compared
to $7 for the same period in 2001. The increased interest income is the result
of higher invested balances in 2001. We completed a public stock offering in
June 2001, which significantly increased our cash and cash equivalent balances.

Income Taxes

Our effective income tax rate for the three months ended January 31, 2002 was
40%, comparable to the 39% effective rate for the same period in 2001. We
estimate the fiscal year 2002 effective tax rate to be approximately 40% to 42%,
down from the 50% effective rate for fiscal year 2001 due primarily to the
effect of no longer amortizing non-deductible goodwill.

FINANCIAL CONDITION

Liquidity and Capital Resources

At January 31, 2002, our principal sources of liquidity included cash and cash
equivalents of $59,740 net accounts receivable of $24,411, and our unused line
of credit. We had total installment receivables of $17,119 at January 31, 2002,
of which $14,937 is to be billed within one year from the balance sheet date
and is included in net accounts receivable. Working capital was $70,634 at
January 31, 2002, a decrease of $3,415 from October 31, 2001, due primarily to
decreased cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses.

Cash flows from operations were used principally to fund our working capital
requirements. Net cash provided by operating activities was $447 for the three
months ended January 31, 2002 compared to net cash used of $2,536 for the same
period in 2001. The increase in operating cash flows is due primarily to the
improvement in operating results and the decrease in accounts receivable
slightly offset by the decrease in accounts payable and accrued expenses.

Net cash used in our investing activities was $2,714 for the three months ended
January 31, 2002 compared to $1,191 for the same period in 2001. The increase
in net cash used was due to our increased capital expenditures in 2002,
primarily related to the installation of a new enterprise resource planning
system that is expected to be completed in 2002, and our increased investment
in capitalized product development costs as we continue to develop new
courseware products.

Net cash provided by our financing activities was $568 for the three months
ended January 31, 2002 compared to $320 for the same period in 2001. Cash
received from the exercise of stock options was partially offset by repayments
of capital lease obligations and, in 2002, the

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MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

FINANCIAL CONDITION, Continued

Liquidity and Capital Resources, Continued

repurchase of common stock. We have resources available under our revolving
loan agreement to provide borrowings up to $12,500, as determined by the
available borrowing base. At January 31, 2002, there were no borrowings
outstanding and the unused borrowing capacity was approximately $10,460.

We maintain adequate cash balances and credit facilities to meet our
anticipated working capital, capital expenditure and business investment
requirements.

Disclosures about Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments consist primarily of
future payments due under capital lease obligations and operating leases. For
the full fiscal year 2002, payments of approximately $242 are due under capital
lease obligations and payments of approximately $1,437 are due under operating
leases.

Factors Affecting Quarterly Operating Results

Our 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, client spending patterns, budget cycles and fiscal year ends and
promotional programs. We historically have experienced our 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.

Interest Rate Risk

Our borrowing capacity primarily consists of a revolving loan with interest
rates that fluctuate based upon market indexes. At January 31, 2002, we did
not have any outstanding borrowings under this revolving loan. In addition,
our only debt consisted of capital lease obligations at fixed interest rates.
As a result, risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk

We market our products and services worldwide and have operations in Canada and
the United Kingdom. As a result, financial results and cash flows 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 our foreign subsidiaries are kept in local currencies
in which they do business. Approximately 6% of our total revenues were
denominated in currencies other than the U.S. dollar for the three months ended
January 31, 2002.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share amounts)

CAUTIONARY STATEMENTS

Except for historical information contained herein, the disclosures in this
Quarterly Report on Form 10-Q are forward-looking statements made under the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated. These risks and uncertainties include: the availability and
unpredictability of government funding on which our customers are dependent,
the capital and operating spending patterns of our customers, the ability to
attract and retain customers, the size, timing and product mix of customer
orders, the introduction and acceptance of competitive products, our ability to
adapt to technological changes and meet evolving industry standards, and our
ability to economically introduce new products on a timely basis. These risks
and other relevant risks are described in more detail in our Annual Report on
Form 10-K for the fiscal year ended October 31, 2001.

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 Results of Operations
and Financial Condition.

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##### Table of Contents






PART II. OTHER INFORMATION




Item 1.         Legal Proceedings



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | We are not a party to any litigation that is expected to have a
material adverse effect on our business.




Item 2.         Changes in Securities



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




Item 3.         Defaults Upon Senior Securities



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




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



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




Item 5.         Other Information



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




Item 6.         Exhibits and Reports on Form 8-K



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



| |                               
| | ------------------------------
| | Exhibit Number and Description

|      |  |                                                                                                                                                                |  |  |  | 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10.11 |  | Form of Indemnification Agreement is incorporated by
reference to the corresponding exhibit on our Registration
Statement on Form S-1 (File Number 333-54296).
|     
|     
|     
|     
|10.37 |  | Form of Employment Agreement with five executive officers. *                                                                                                  
|     
|     
|     
|     
|10.38 |  | Form of Employment Agreement with five executive
officers. *                                                                                                  
|     
|     
|     
|     
|10.39 |  | Form of Employment Security Agreement with thirteen
executive officers. *                                                                                     



|* |  | Management contract or compensatory plan, contract or arrangement.
|- |  | ------------------------------------------------------------------



| |                                                                          
| | -------------------------------------------------------------------------
| | (b) Reports on Form 8-K:                                                 
|
| | No reports on Form 8-K were filed for the quarter ended January 31, 2002.

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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 on March 15, 2002.



| | PLATO LEARNING, INC.
| | --------------------



| | By /s/John Murray
President and
Chief Executive Officer
(principal executive officer)
| | -------------------------------------------------------------------------------------



| | /s/Gregory J. Melsen
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)
| | ------------------------------------------------------------------------------------------------------------------

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