##### Table of Contents



UNITED STATES
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 July 31, 2007
 Commission File Number 0-20842
 PLATO LEARNING, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    36-3660532(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 10801 Nesbitt Avenue South, Bloomington, MN 55437  (Address of principal executive offices)
 (952) 832-1000  (Registrants telephone number, including area code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o þ o
 o þ




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##### 



PLATO LEARNING, INC.
Form 10-Q
Quarterly Period Ended July 31, 2007
 TABLE OF CONTENTS
  
 PagePART I.  FINANCIAL INFORMATIONITEM 1. Financial Statements:Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended July 31, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of
July 31, 2007 and October 31, 2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 2007 and 2006 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21ITEM 4. Controls and Procedures
    
    
    21PART II.OTHER INFORMATIONITEM 1A. Risk Factors
    
    
    22ITEM 6. Exhibits
    
    
    22SIGNATURES
    
    
    23Forms of Employee Restricted Stock AgreementBoard of Directors' Compensation Plan, as AmendedCertificationCertificationCertificationCertification
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUESSubscriptions
    
    $
    6,532
    
    
    $
    4,373
    
    
    $
    17,045
    
    
    $
    12,783License fees
    
    
    5,940
    
    
    
    11,689
    
    
    
    13,652
    
    
    
    27,658Services
    
    
    6,731
    
    
    
    7,394
    
    
    
    20,745
    
    
    
    26,476Total revenues
    
    
    19,203
    
    
    
    23,456
    
    
    
    51,442
    
    
    
    66,917COST OF REVENUESSubscriptions
    
    
    4,140
    
    
    
    1,539
    
    
    
    11,075
    
    
    
    6,436License fees
    
    
    2,066
    
    
    
    4,051
    
    
    
    6,212
    
    
    
    9,705Services
    
    
    3,496
    
    
    
    4,174
    
    
    
    9,837
    
    
    
    13,436Total cost of revenues
    
    
    9,702
    
    
    
    9,764
    
    
    
    27,124
    
    
    
    29,577GROSS PROFIT
    
    
    9,501
    
    
    
    13,692
    
    
    
    24,318
    
    
    
    37,340OPERATING EXPENSESSales and marketing
    
    
    7,579
    
    
    
    9,539
    
    
    
    22,682
    
    
    
    28,849General and administrative
    
    
    2,865
    
    
    
    4,064
    
    
    
    8,983
    
    
    
    13,026Product maintenance and development
    
    
    499
    
    
    
    1,210
    
    
    
    3,412
    
    
    
    3,974Amortization of intangibles
    
    
    438
    
    
    
    904
    
    
    
    1,352
    
    
    
    2,806Restructuring, net
    
    
    (766
    )
    
    
    21
    
    
    
    (766
    )
    
    
    360Total operating expenses
    
    
    10,615
    
    
    
    15,738
    
    
    
    35,663
    
    
    
    49,015OPERATING LOSS
    
    
    (1,114
    )
    
    
    (2,046
    )
    
    
    (11,345
    )
    
    
    (11,675
    )Other income, net
    
    
    218
    
    
    
    405
    
    
    
    917
    
    
    
    1,238LOSS BEFORE INCOME TAXES
    
    
    (896
    )
    
    
    (1,641
    )
    
    
    (10,428
    )
    
    
    (10,437
    )Income tax expense
    
    
    150
    
    
    
    150
    
    
    
    450
    
    
    
    450NET LOSS
    
    $
    (1,046
    )
    
    $
    (1,791
    )
    
    $
    (10,878
    )
    
    $
    (10,887
    )NET LOSS PER SHAREBasic and diluted
    
    $
    (0.04
    )
    
    $
    (0.08
    )
    
    $
    (0.46
    )
    
    $
    (0.46
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDINGBasic and diluted
    
    
    23,762
    
    
    
    23,701
    
    
    
    23,747
    
    
    
    23,668
 See Notes to Condensed Consolidated Financial Statements.
 3




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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands, except per share amounts)
 July 31,
    
    
    October 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,351
    
    
    $
    33,094Accounts receivable, net
    
    
    15,173
    
    
    
    18,529Inventories
    
    
    970
    
    
    
    1,832Other current assets
    
    
    5,567
    
    
    
    6,346Total current assets
    
    
    44,061
    
    
    
    59,801Equipment and leasehold improvements, net
    
    
    5,971
    
    
    
    6,308Product development costs, net
    
    
    29,304
    
    
    
    25,363Goodwill
    
    
    71,865
    
    
    
    71,865Identified intangible assets, net
    
    
    8,576
    
    
    
    10,545Other long-term assets
    
    
    3,491
    
    
    
    2,348Total assets
    
    $
    163,268
    
    
    $
    176,230LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,258
    
    
    $
    4,685Accrued compensation
    
    
    6,324
    
    
    
    5,990Other accrued liabilities
    
    
    3,595
    
    
    
    6,622Deferred revenue
    
    
    33,640
    
    
    
    33,736Total current liabilities
    
    
    47,817
    
    
    
    51,033Long-term deferred revenue
    
    
    8,013
    
    
    
    8,110Deferred income taxes
    
    
    2,981
    
    
    
    2,531Other long-term liabilities
    
    
    
    
    
    
    106Total liabilities
    
    
    58,811
    
    
    
    61,780Stockholders equity:Common stock, $.01 par value, 50,000 shares authorized;
23,829 shares issued and 23,809 shares outstanding at
at July 31, 2007; 23,761 shares issued and 23,741
shares outstanding at October 31, 2006
    
    
    238
    
    
    
    237Additional paid-in capital
    
    
    169,612
    
    
    
    168,597Treasury stock at cost
    
    
    (205
    )
    
    
    (205
    )Accumulated deficit
    
    
    (63,896
    )
    
    
    (53,017
    )Accumulated other comprehensive loss
    
    
    (1,292
    )
    
    
    (1,162
    )Total stockholders equity
    
    
    104,457
    
    
    
    114,450Total liabilities and stockholders equity
    
    $
    163,268
    
    
    $
    176,230
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Nine Months EndedJuly 31,2007
    
    
    2006OPERATING ACTIVITIES:Net loss
    
    $
    (10,878
    )
    
    $
    (10,887
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Deferred income taxes
    
    
    450
    
    
    
    450Amortization of capitalized product development costs
    
    
    7,777
    
    
    
    5,443Amortization of identified intangible and other long-term assets
    
    
    2,248
    
    
    
    3,961Depreciation and amortization of equipment and leasehold improvements
    
    
    1,835
    
    
    
    1,848Provision for doubtful accounts
    
    
    (539
    )
    
    
    164Stock-based compensation
    
    
    888
    
    
    
    1,038Gain on sale of marketable securities
    
    
    
    
    
    
    (37
    )(Loss) gain on disposal of equipment
    
    
    (26
    )
    
    
    61Changes in operating assets and liabilities:Accounts receivable
    
    
    3,895
    
    
    
    1,201Inventories
    
    
    862
    
    
    
    2,001Other current and long-term assets
    
    
    (120
    )
    
    
    790Accounts payable
    
    
    (428
    )
    
    
    (1,065
    )Other current and long-term liabilities
    
    
    (2,793
    )
    
    
    (4,238
    )Deferred revenue
    
    
    (193
    )
    
    
    (1,313
    )Total adjustments
    
    
    13,856
    
    
    
    10,304Net cash provided by (used in) operating activities
    
    
    2,978
    
    
    
    (583
    )INVESTING ACTIVITIES:Capitalized internal product development costs
    
    
    (11,718
    )
    
    
    (10,665
    )Purchased product development
    
    
    
    
    
    
    (3,000
    )Purchases of equipment and leasehold improvements
    
    
    (1,471
    )
    
    
    (1,682
    )Purchases of marketable securities
    
    
    
    
    
    
    (4,250
    )Sales of marketable securities
    
    
    
    
    
    
    229Maturities of marketable securities
    
    
    
    
    
    
    2,750Net cash used in investing activities
    
    
    (13,189
    )
    
    
    (16,618
    )FINANCING ACTIVITIES:Net proceeds from issuance of common stock
    
    
    155
    
    
    
    670Payment of debt financing fees
    
    
    (523
    )Repayments of capital lease obligations
    
    
    (34
    )
    
    
    (84
    )Net cash (used in) provided by financing activities
    
    
    (402
    )
    
    
    586EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
    
    
    (130
    )
    
    
    (63
    )Net decrease in cash and cash equivalents
    
    
    (10,743
    )
    
    
    (16,678
    )Cash and cash equivalents at beginning of period
    
    
    33,094
    
    
    
    46,901CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    22,351
    
    
    $
    30,223SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    21
    
    
    $
    32ADDITIONAL NON-CASH INFORMATION:Capital lease additions
    
    $
    27
    
    
    $
    
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 Note 1. General
 Basis of Presentation
  Consolidation
  Fiscal Periods
  Note 2. Summary of Significant Accounting Policies
 General
  
    
    Revenue recognition
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  6




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License Agreements
  Net Loss Per Share
  Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (1,046
    )
    
    $
    (1,791
    )
    
    $
    (10,878
    )
    
    $
    (10,887
    )Basic and diluted weighted average common
shares outstanding
    
    
    23,762
    
    
    
    23,701
    
    
    
    23,747
    
    
    
    23,668Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.08
    )
    
    $
    (0.46
    )
    
    $
    (0.46
    )
  New Accounting Pronouncements
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109. Accounting for Income Taxes.
 Note 3. Stock-Based Compensation
 Share-Based Payment
 7




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##### Table of Contents



OptionsOutstanding(in thousands)Options outstanding at October 31, 2006
    
    
    2,876Options granted
    
    
    199Options exercised
    
    
    Options forfeited or cancelled
    
    
    (497
    )Options outstanding at July 31, 2007
    
    
    2,578Options exercisable at July 31, 2007
    
    
    2,058
  2007
    
    2006Three months ended
    
    $
    347
    
    
    $
    235Nine months ended
    
    $
    888
    
    
    $
    1,038
  Note 4. Accounts Receivable
  July 31,
    
    
    October 31,2007
    
    
    2006Trade accounts receivable
    
    $
    14,609
    
    
    $
    18,450Installment accounts receivable
    
    
    889
    
    
    
    1,007Allowance for doubtful accounts
    
    
    (325
    )
    
    
    (928
    )$
    15,173
    
    
    $
    18,529
  8




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##### Table of Contents





2007
    
    
    2006Balance, October 31
    
    $
    928
    
    
    $
    1,647Provision for doubtful accounts, net of other
reserve adjustments
    
    
    (539
    )
    
    
    164Write-offs net of recoveries
    
    
    (64
    )
    
    
    (303
    )Balance, July 31
    
    $
    325
    
    
    $
    1,508
   Note 5. Inventories
  July 31,
    
    
    October 31,2007
    
    
    2006Third-party hardware
    
    $
    474
    
    
    $
    1,027Media, documentation, and packaging materials
    
    
    496
    
    
    
    805$
    970
    
    
    $
    1,832
 Note 6. Product Development Costs
  Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortization
    
    
    ValueBalance, October 31, 2006
    
    $
    40,577
    
    
    $
    (15,214
    )
    
    $
    25,363Capitalized product development costs
    
    
    11,718
    
    
    
    
    
    
    
    11,718Write-off of fully amortized costs
    
    
    (4,843
    )
    
    
    4,843
    
    
    
    Amortization of product development costs
    
    
    
    
    
    
    (7,777
    )
    
    
    (7,777
    )Balance, July 31, 2007
    
    $
    47,452
    
    
    $
    (18,148
    )
    
    $
    29,304
 Note 7. Goodwill and Identified Intangible Assets
  9




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July 31, 2007
    
    
    October 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingValue
    
    

Amortization
    
    
    Value
    
    
    Value
    
    

Amortization
    
    
    ValueAcquired technology
    
    $
    13,563
    
    
    $
    (10,089
    )
    
    $
    3,474
    
    
    $
    21,940
    
    
    $
    (17,850
    )
    
    $
    4,090Trademarks and
tradenames
    
    
    1,380
    
    
    
    (1,380
    )
    
    
    
    
    
    
    2,892
    
    
    
    (2,744
    )
    
    
    148Customer relationships
and lists
    
    
    20,200
    
    
    
    (15,098
    )
    
    
    5,102
    
    
    
    21,100
    
    
    
    (14,793
    )
    
    
    6,307Noncompete agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    $
    35,143
    
    
    $
    (26,567
    )
    
    $
    8,576
    
    
    $
    46,932
    
    
    $
    (36,387
    )
    
    $
    10,545
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Amortization of intangible assets included in:Cost of revenues
    
    $
    205
    
    
    $
    301
    
    
    $
    616
    
    
    $
    904Operating expenses
    
    
    439
    
    
    
    905
    
    
    
    1,353
    
    
    
    2,807$
    644
    
    
    $
    1,206
    
    
    $
    1,969
    
    
    $
    3,711
   Cost of
    
    
    OperatingRevenues
    
    
    Expense
    
    
    TotalRemainder of 2007
    
    $
    205
    
    
    $
    388
    
    
    $
    5932008
    
    
    821
    
    
    
    1,550
    
    
    
    2,3712009
    
    
    749
    
    
    
    1,550
    
    
    
    2,2992010
    
    
    647
    
    
    
    1,550
    
    
    
    2,1972011
    
    
    526
    
    
    
    65
    
    
    
    591Thereafter
    
    
    525
    
    
    
    
    
    
    
    525$
    3,473
    
    
    $
    5,103
    
    
    $
    8,576
  10




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##### Table of Contents



Note 8. Deferred Revenue
  July 31,
    
    
    October 31,2007
    
    
    2006Subscriptions
    
    $
    26,134
    
    
    $
    20,192License fees
    
    
    928
    
    
    
    2,282Services
    
    
    14,591
    
    
    
    19,372Total
    
    
    41,653
    
    
    
    41,846Less: long-term amounts
    
    
    (8,013
    )
    
    
    (8,110
    )Current portion
    
    $
    33,640
    
    
    $
    33,736
 Note 9. Restructuring Charges
    Severanceand related
    
    
    Facilitycosts
    
    
    closings
    
    
    Other
    
    
    TotalReserve balance at October 31, 2006
    
    $
    1,235
    
    
    $
    1,754
    
    
    $
    85
    
    
    $
    3,074Provision for restructuring
    
    
    
    
    
    
    (766
    )
    
    
    
    
    
    
    (766
    )Cash payments
    
    
    (850
    )
    
    
    (488
    )
    
    
    (63
    )
    
    
    (1,401
    )Translation adjustment
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    111Reserve balance at July 31, 2007
    
    $
    385
    
    
    $
    611
    
    
    $
    22
    
    
    $
    1,018
 11




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Note 10. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (1,046
    )
    
    $
    (1,791
    )
    
    $
    (10,878
    )
    
    $
    (10,887
    )Unrealized gains on available for sale securities
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (1
    )Reclassifications to net loss of previously unrealized gain on
available-for-sale securities
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (20
    )Foreign currency translation adjustments
    
    
    (22
    )
    
    
    6
    
    
    
    (130
    )
    
    
    (63
    )Total comprehensive loss
    
    $
    (1,068
    )
    
    $
    (1,822
    )
    
    $
    (11,008
    )
    
    $
    (10,971
    )
  Note 11. Debt
   12




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Description
    Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  13




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General Factors Affecting our Financial Results
  Revenue
  Gross Profit
 Operating Expenses
   14




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##### Table of Contents



Overview of Financial Results
    15




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##### Table of Contents



Results of Operations
 Revenues
  Sales Order Information (in thousands)
 Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,Percent
    
    
    
    
    
    
    
    
    
    
    PercentIncrease
    
    
    
    
    
    
    
    
    
    
    Increase2007
    
    
    2006*
    
    
    (Decrease)
    
    
    2007
    
    
    2006*
    
    
    (Decrease)Order Value:SubscriptionsCourseware
    
    $
    11,118
    
    
    $
    7,005
    
    
    
    58.7
    %
    
    $
    19,692
    
    
    $
    10,320
    
    
    
    90.8
    %Assessment and other
    
    
    1,396
    
    
    
    4,397
    
    
    
    (68.3
    %)
    
    
    3,017
    
    
    
    7,075
    
    
    
    (57.4
    %)Total subscriptions
    
    
    12,514
    
    
    
    11,402
    
    
    
    9.8
    %
    
    
    22,709
    
    
    
    17,395
    
    
    
    30.5
    %License fees
    
    
    5,503
    
    
    
    13,216
    
    
    
    (58.4
    %)
    
    
    12,306
    
    
    
    28,417
    
    
    
    (56.7
    %)Services
    
    
    8,276
    
    
    
    9,759
    
    
    
    (15.2
    %)
    
    
    16,722
    
    
    
    20,896
    
    
    
    (20.0
    %)$
    26,293
    
    
    $
    34,377
    
    
    
    (23.5
    %)
    
    $
    51,737
    
    
    $
    66,708
    
    
    
    (22.4
    %)Percent of Total Order
Value:SubscriptionsCourseware
    
    
    42.3
    %
    
    
    20.4
    %
    
    
    
    
    
    
    38.1
    %
    
    
    15.5
    %Assessment and other
    
    
    5.3
    %
    
    
    12.8
    %
    
    
    
    
    
    
    5.8
    %
    
    
    10.6
    %Total subscriptions
    
    
    47.6
    %
    
    
    33.2
    %
    
    
    
    
    
    
    43.9
    %
    
    
    26.1
    %License fees
    
    
    20.9
    %
    
    
    38.4
    %
    
    
    
    
    
    
    23.8
    %
    
    
    42.6
    %Services
    
    
    31.5
    %
    
    
    28.4
    %
    
    
    
    
    
    
    32.3
    %
    
    
    31.3
    %100.0
    %
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %
    
    
    100.0
    %
 *Certain 2006 amounts previously reported as services orders have been reclassified to
subscriptions
orders to conform to the current period presentation. Orders Greater Than $100,000
 Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2007
    
    2006
    
    % Change
    
    2007
    
    2006
    
    % ChangeNumber
    
    
    37
    
    
    
    50
    
    
    
    (26.0
    %)
    
    
    70
    
    
    
    95
    
    
    
    (26.3
    %)Value ($000)
    
    $
    7,500
    
    
    $
    10,136
    
    
    
    (26.0
    %)
    
    $
    13,634
    
    
    $
    19,507
    
    
    
    (30.1
    %)Average Value ($000)
    
    $
    203
    
    
    $
    203
    
    
    
    0.0
    %
    
    $
    195
    
    
    $
    205
    
    
    
    (4.9
    %)
 16




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##### Table of Contents



Revenue By Category (in thousands):


Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    % Change
    
    
    2007
    
    
    2006
    
    
    % ChangeSubscriptions
    
    $
    6,532
    
    
    $
    4,373
    
    
    
    49.4
    %
    
    $
    17,045
    
    
    $
    12,783
    
    
    
    33.3
    %License fees
    
    
    5,940
    
    
    
    11,689
    
    
    
    (49.2
    %)
    
    
    13,652
    
    
    
    27,658
    
    
    
    (50.6
    %)Services
    
    
    6,731
    
    
    
    7,394
    
    
    
    (9.0
    %)
    
    
    20,745
    
    
    
    26,476
    
    
    
    (21.6
    %)$
    19,203
    
    
    $
    23,456
    
    
    
    (18.1
    %)
    
    $
    51,442
    
    
    $
    66,917
    
    
    
    (23.1
    %)
   Gross Margin
 Percentage of Total Revenue
 Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,Revenue Category
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Subscriptions
    
    
    34.0
    %
    
    
    18.7
    %
    
    
    33.1
    %
    
    
    19.1
    %License fees
    
    
    30.9
    %
    
    
    49.8
    %
    
    
    26.6
    %
    
    
    41.3
    %Services
    
    
    35.1
    %
    
    
    31.5
    %
    
    
    40.3
    %
    
    
    39.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Gross Margin Percentage
 Three Months Ended July 31,
    
    Nine Months Ended July 31,Increase
    
    
    
    
    
    
    
    
    
    IncreaseRevenue Category
    
    2007
    
    2006
    
    (Decrease)
    
    2007
    
    2006
    
    (Decrease)Subscriptions
    
    
    36.6
    %
    
    
    64.8
    %
    
    
    (28.2
    %)
    
    
    35.0
    %
    
    
    49.7
    %
    
    
    (14.7
    %)License fees
    
    
    65.2
    %
    
    
    65.3
    %
    
    
    (0.1
    %)
    
    
    54.5
    %
    
    
    64.9
    %
    
    
    (10.4
    %)Services
    
    
    48.1
    %
    
    
    43.5
    %
    
    
    4.6
    %
    
    
    52.6
    %
    
    
    49.3
    %
    
    
    3.3
    %Total
    
    
    49.5
    %
    
    
    58.4
    %
    
    
    (8.9
    %)
    
    
    47.3
    %
    
    
    55.8
    %
    
    
    (8.5
    %)
  17




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##### Table of Contents



Operating Expenses
  Percentage of
    
    
    
    
    
    
    Percentage ofTotal Revenue
    
    
    Percent
    
    
    Total Revenue
    
    
    PercentThree Months Ended
    
    
    Increase
    
    
    Nine Months Ended
    
    
    IncreaseJuly 31,
    
    
    (Decrease)
    
    
    July 31,
    
    
    (Decrease)2007
    
    
    2006
    
    
    in Amount
    
    
    2007
    
    
    2006
    
    
    in AmountSales and marketing
    
    
    39.5
    %
    
    
    40.7
    %
    
    
    (20.5
    %)
    
    
    44.1
    %
    
    
    43.1
    %
    
    
    (21.4
    %)General and administrative
    
    
    14.9
    %
    
    
    17.3
    %
    
    
    (29.5
    %)
    
    
    17.5
    %
    
    
    19.5
    %
    
    
    (31.0
    %)Product maintenance and development
    
    
    2.6
    %
    
    
    5.2
    %
    
    
    (58.8
    %)
    
    
    6.6
    %
    
    
    5.9
    %
    
    
    (14.1
    %)Amortization of intangibles
    
    
    2.3
    %
    
    
    3.9
    %
    
    
    (51.5
    %)
    
    
    2.6
    %
    
    
    4.2
    %
    
    
    (51.8
    %)Subtotal
    
    
    59.3
    %
    
    
    67.1
    %
    
    
    (27.6
    %)
    
    
    70.8
    %
    
    
    72.7
    %
    
    
    (25.1
    %)Restructuring and other charges
    
    
    (4.0
    %)
    
    
    0.1
    %
    
    
    (3,747.6
    %)
    
    
    (1.5
    %)
    
    
    0.5
    %
    
    
    (312.8
    %)Total operating expenses
    
    
    55.3
    %
    
    
    67.2
    %
    
    
    (32.6
    %)
    
    
    69.3
    %
    
    
    73.2
    %
    
    
    (27.2
    %)
    18




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##### Table of Contents



Other Income, Net
  Liquidity and Capital Resources
 Cash and Cash Equivalents
  Working Capital and Liquidity
  19




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##### Table of Contents



Contractual Obligations and Commercial Commitments
   Disclosures about Off-Balance Sheet Arrangements
  Forward-Looking Statements
  20




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##### Table of Contents



Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk Foreign Currency
Exchange Rate Risk
 
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  21




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##### Table of Contents



PART II.
 
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
 Exhibit Number and Description
 10.01
    
    Forms of employee restricted stock agreement for 2006 Stock Incentive Plan.10.02
    
    Board of Directors Compensation Plan, as amended.31.01
    
    Certification of Chief Executive Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    Certification of Chief Financial Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.01
    
    Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.02
    
    Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 22




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##### Table of Contents



SIGNATURES
  PLATO LEARNING, INC.
    
    By
    
    /s/ MICHAEL A. MORACHESeptember 10, 2007
    
    
    
    Michael A. MorachePresident and Chief Executive Officer(principal executive officer)/s/ ROBERT J. RUECKLRobert J. RuecklVice President and Chief Financial Officer(principal financial officer)
 23