UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q


(Mark
One)


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





For the
quarterly period ended April 30, 2009


or


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





For the
transition period from _________________to__________________.





Commission
File Number: 0-20842





PLATO
LEARNING, INC.


(Exact
name of Registrant as specified in its charter)





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





10801
Nesbitt Avenue South, Bloomington, MN  55437


(Address
of principal executive offices)





(952)
832-1000


(Registrant’s
telephone number, including area code)





Not
Applicable


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





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


Yes x  No p





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)


Yes
  No 





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


Large
accelerated filer p                                               Accelerated
filer x     Non-accelerated
filer p     Smaller
reporting companyp





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  24,126,502 shares of common
stock, $.01 par value, outstanding as of May 31, 2009.





PLATO
LEARNING, INC.


Form
10-Q


Quarterly
Period Ended April 30, 2009








TABLE OF CONTENTS





PART
      I.FINANCIAL
      INFORMATIONPageITEM
      1.
              Financial
      Statements:Condensed Consolidated Statements of Operations
      for theThree and Six Months Ended April 30, 2009 and 2008
      (Unaudited)
              3Condensed Consolidated Balance Sheets as
      ofApril 30, 2009 (Unaudited) and October 31,
      2008
              4Condensed Consolidated Statements of Cash Flows for
      theSix Months Ended April 30, 2009 and 2008
      (Unaudited)
              5Notes to Condensed Consolidated Financial Statements
      (Unaudited)
              6ITEM
      2.
              Management’s Discussion and Analysis of
      FinancialCondition and Results of Operations
              14ITEM
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              22ITEM
      4.
              Controls and Procedures
              23PART
      II.OTHER
      INFORMATIONITEM
      1A.
              Risk Factors
              24ITEM
      4.
              Submission of Matters to a Vote of Security
      Holders
              24ITEM
      6.
              Exhibits
              24SIGNATURES
              
              25


2
 Table of Contents


PART
I.  FINANCIAL INFORMATION





ITEM
1. FINANCIAL
STATEMENTS





PLATO
      Learning, Inc. and SubsidiariesCondensed Consolidated Statements of Operations
      (Unaudited)(In
      thousands, except per share amounts)Three
      Months Ended
                                        
                                        
                                        Six
      Months EndedApril
      30,
                                        
                                        
                                        April
      30,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008REVENUESSubscriptions
                                        
                                        $
                                        9,726
                                        
                                        
                                        $
                                        8,475
                                        
                                        
                                        $
                                        19,594
                                        
                                        
                                        $
                                        16,444License
      fees
                                        
                                        
                                        1,006
                                        
                                        
                                        
                                        1,509
                                        
                                        
                                        
                                        2,010
                                        
                                        
                                        
                                        3,760Services
                                        
                                        
                                        4,775
                                        
                                        
                                        
                                        6,261
                                        
                                        
                                        
                                        9,940
                                        
                                        
                                        
                                        12,176Total
      revenues
                                        
                                        
                                        15,507
                                        
                                        
                                        
                                        16,245
                                        
                                        
                                        
                                        31,544
                                        
                                        
                                        
                                        32,380COST
      OF REVENUESSubscriptions
                                        
                                        
                                        4,182
                                        
                                        
                                        
                                        4,816
                                        
                                        
                                        
                                        8,071
                                        
                                        
                                        
                                        9,465License
      fees
                                        
                                        
                                        418
                                        
                                        
                                        
                                        1,097
                                        
                                        
                                        
                                        856
                                        
                                        
                                        
                                        2,520Services
                                        
                                        
                                        2,335
                                        
                                        
                                        
                                        3,314
                                        
                                        
                                        
                                        4,763
                                        
                                        
                                        
                                        5,910Total
      cost of revenues
                                        
                                        
                                        6,935
                                        
                                        
                                        
                                        9,227
                                        
                                        
                                        
                                        13,690
                                        
                                        
                                        
                                        17,895GROSS
      PROFIT
                                        
                                        
                                        8,572
                                        
                                        
                                        
                                        7,018
                                        
                                        
                                        
                                        17,854
                                        
                                        
                                        
                                        14,485OPERATING
      EXPENSESSales
      and marketing
                                        
                                        
                                        5,604
                                        
                                        
                                        
                                        7,521
                                        
                                        
                                        
                                        11,491
                                        
                                        
                                        
                                        14,526General
      and administrative
                                        
                                        
                                        1,872
                                        
                                        
                                        
                                        2,701
                                        
                                        
                                        
                                        4,295
                                        
                                        
                                        
                                        5,651Software
      maintenance and development
                                        
                                        
                                        708
                                        
                                        
                                        
                                        1,101
                                        
                                        
                                        
                                        1,274
                                        
                                        
                                        
                                        2,177Amortization
      of intangibles
                                        
                                        
                                        213
                                        
                                        
                                        
                                        388
                                        
                                        
                                        
                                        427
                                        
                                        
                                        
                                        775Restructuring
      charges
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,635
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,635Total
      operating expenses
                                        
                                        
                                        8,397
                                        
                                        
                                        
                                        13,346
                                        
                                        
                                        
                                        17,487
                                        
                                        
                                        
                                        24,764OPERATING
      INCOME (LOSS)
                                        
                                        
                                        175
                                        
                                        
                                        
                                        (6,328
                                        )
                                        
                                        
                                        367
                                        
                                        
                                        
                                        (10,279
                                        )Other
      (expense) income, net
                                        
                                        
                                        (52
                                        )
                                        
                                        
                                        7
                                        
                                        
                                        
                                        15
                                        
                                        
                                        
                                        199INCOME
      (LOSS) BEFORE INCOME TAXES
                                        
                                        
                                        123
                                        
                                        
                                        
                                        (6,321
                                        )
                                        
                                        
                                        382
                                        
                                        
                                        
                                        (10,080
                                        )Income
      tax expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        152
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        304NET
      INCOME (LOSS)
                                        
                                        $
                                        123
                                        
                                        
                                        $
                                        (6,473
                                        )
                                        
                                        $
                                        382
                                        
                                        
                                        $
                                        (10,384
                                        )NET
      INCOME (LOSS) PER SHAREBasic
                                        
                                        $
                                        0.01
                                        
                                        
                                        $
                                        (0.27
                                        )
                                        
                                        $
                                        0.02
                                        
                                        
                                        $
                                        (0.44
                                        )Diluted
                                        
                                        $
                                        0.01
                                        
                                        
                                        $
                                        (0.27
                                        )
                                        
                                        $
                                        0.02
                                        
                                        
                                        $
                                        (0.44
                                        )WEIGHTED
      AVERAGE COMMONSHARES
      OUTSTANDINGBasic
                                        
                                        
                                        24,067
                                        
                                        
                                        
                                        23,812
                                        
                                        
                                        
                                        24,024
                                        
                                        
                                        
                                        23,800Diluted
                                        
                                        
                                        24,114
                                        
                                        
                                        
                                        23,812
                                        
                                        
                                        
                                        24,234
                                        
                                        
                                        
                                        23,800See
      Notes to Condensed Consolidated Financial Statements.


3
 Table of Contents





PLATO
      Learning, Inc. and SubsidiariesCondensed Consolidated Balance
Sheets(In
      thousands, except per share amounts)April
      30,
                            
                            
                            October
      31,2009
                            
                            
                            2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            10,245
                            
                            
                            $
                            20,018Accounts
      receivable, net
                            
                            
                            6,368
                            
                            
                            
                            6,834Other
      current assets
                            
                            
                            5,752
                            
                            
                            
                            7,408Total
      current assets
                            
                            
                            22,365
                            
                            
                            
                            34,260Equipment
      and leasehold improvements, net
                            
                            
                            3,101
                            
                            
                            
                            3,589Software
      development costs, net
                            
                            
                            22,111
                            
                            
                            
                            24,086Identified
      intangible assets, net
                            
                            
                            3,054
                            
                            
                            
                            3,723Other
      long-term assets
                            
                            
                            2,753
                            
                            
                            
                            3,309Total
      assets
                            
                            $
                            53,384
                            
                            
                            $
                            68,967LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                            
                            $
                            1,579
                            
                            
                            $
                            3,085Accrued
      compensation
                            
                            
                            3,005
                            
                            
                            
                            3,996Other
      accrued liabilities
                            
                            
                            2,299
                            
                            
                            
                            6,909Deferred
      revenue
                            
                            
                            27,662
                            
                            
                            
                            36,005Total
      current liabilities
                            
                            
                            34,545
                            
                            
                            
                            49,995Long-term
      deferred revenue
                            
                            
                            7,649
                            
                            
                            
                            8,916Total
      liabilities
                            
                            
                            42,194
                            
                            
                            
                            58,911Stockholders'
      equity:Common
      stock, $.01 par value, 50,000 shares authorized;24,185
      shares issued and 24,127 shares outstanding atat
      April 30, 2009; 24,046 shares issued and 23,988shares
      outstanding at October 31, 2008
                            
                            
                            241
                            
                            
                            
                            240Additional
      paid-in capital
                            
                            
                            171,861
                            
                            
                            
                            171,143Treasury
      stock at cost
                            
                            
                            (319
                            )
                            
                            
                            (315
                            )Accumulated
      deficit
                            
                            
                            (159,408
                            )
                            
                            
                            (159,790
                            )Accumulated
      other comprehensive loss
                            
                            
                            (1,185
                            )
                            
                            
                            (1,222
                            )Total
      stockholders' equity
                            
                            
                            11,190
                            
                            
                            
                            10,056Total
      liabilities and stockholders' equity
                            
                            $
                            53,384
                            
                            
                            $
                            68,967See
      Notes to Condensed Consolidated Financial Statements.





4
 Table of Contents








PLATO
      Learning, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows
      (Unaudited)(In
      thousands)Six
      Months EndedApril
      30,2009
                            
                            
                            2008OPERATING
      ACTIVITIES:Net
      income (loss)
                            
                            $
                            382
                            
                            
                            $
                            (10,384
                            )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Deferred
      income taxes
                            
                            
                            -
                            
                            
                            
                            304Depreciation
      and amortization
                            
                            
                            6,023
                            
                            
                            
                            8,685Stock-based
      compensation
                            
                            
                            645
                            
                            
                            
                            76Other
      adjustments
                            
                            
                            (175
                            )
                            
                            
                            9Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            656
                            
                            
                            
                            5,439Other
      current and long-term assets
                            
                            
                            2,122
                            
                            
                            
                            1,175Accounts
      payable
                            
                            
                            (1,506
                            )
                            
                            
                            (567
                            )Other
      current liabilities
                            
                            
                            (5,596
                            )
                            
                            
                            (558
                            )Deferred
      revenue
                            
                            
                            (9,610
                            )
                            
                            
                            (8,770
                            )Total
      adjustments
                            
                            
                            (7,441
                            )
                            
                            
                            5,793Net
      cash used in operating activities
                            
                            
                            (7,059
                            )
                            
                            
                            (4,591
                            )INVESTING
      ACTIVITIES:Capitalized
      software development costs
                            
                            
                            (2,348
                            )
                            
                            
                            (6,679
                            )Purchases
      of equipment and leasehold improvements
                            
                            
                            (468
                            )
                            
                            
                            (223
                            )Net
      cash used in investing activities
                            
                            
                            (2,816
                            )
                            
                            
                            (6,902
                            )FINANCING
      ACTIVITIES:Net
      proceeds from issuance of common stock, net of repurchases
                            
                            
                            70
                            
                            
                            
                            123Repayments
      of capital lease obligations
                            
                            
                            (5
                            )
                            
                            
                            (20
                            )Net
      cash provided by financing activities
                            
                            
                            65
                            
                            
                            
                            103EFFECT
      OF CURRENCY EXCHANGE RATE CHANGESON
      CASH AND CASH EQUIVALENTS
                            
                            
                            37
                            
                            
                            
                            31Net
      decrease in cash and cash equivalents
                            
                            
                            (9,773
                            )
                            
                            
                            (11,359
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            20,018
                            
                            
                            
                            24,297CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                            
                            $
                            10,245
                            
                            
                            $
                            12,938See
      Notes to Condensed Consolidated Financial Statements.


5
 Table of Contents


PLATO
LEARNING, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)





Note
1.  General





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  The
October 31, 2008 condensed consolidated balance sheet data was derived from our
audited financial statements at that date.  Accordingly, these
financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America.  We have included all normal recurring and other adjustments
considered necessary to give a fair statement of our operating results for the
interim periods shown.  Operating results for these interim periods
are not necessarily indicative of the results to be expected for the full fiscal
year.  For further information, refer to the consolidated financial
statements and accompanying notes included in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2008.





Consolidation





The
accompanying unaudited condensed consolidated financial statements include the
accounts of PLATO Learning, Inc. and its wholly owned
subsidiaries.  All significant intercompany accounts and transactions
have been eliminated.





Fiscal
Periods





Our
fiscal year is from November 1 to October 31.  Unless otherwise
stated, references herein to our second quarter relate to the three month period
ended April 30.





Note
2.  Summary of Significant Accounting Policies





General





The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and
expenses.  We continually evaluate our critical accounting policies
and estimates, and have identified the policies relating to the following areas
as those that are significant to our financial statement presentation, and
require difficult, subjective, or complex judgments:





·
            Revenue
      recognition


·
            Capitalized
      software development costs


·
            Valuation
      of deferred income taxes


·
            Valuation
      and impairment analysis of identified intangible
  assets





6
 Table of Contents


At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis.  Based on the completion of this
transition, and in accordance with EITF 00-03, Application of SOP 97-2, “Software
Revenue Recognition”, to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware,we have applied SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use” effective for the first
quarter of fiscal year 2009.  Under EITF 00-03, hosting arrangements
in which customers do not have a contractual right to take possession of the
software are service arrangements, and such software, subject to certain
exceptions, is considered internal-use software subject to SOP
98-1.





There
have been no other significant new accounting principles applied in these areas
during the second quarter of 2009.  For a more complete discussion of
our accounting policies refer to Note 2 to Consolidated Financial Statements in
our Annual Report on Form 10-K for the year ended October 31, 2008.





Income
(Loss) per Share





Basic
income (loss) per share is computed on the basis of the weighted average number
of common shares outstanding during the period.  Diluted income (loss)
per share is computed on the basis of the weighted average number of common
shares plus the effect of dilutive potential common shares outstanding during
the period.  Components of basic and diluted income (loss) per share
were as follows (in thousands, except per share amounts):








Three
      Months Ended April 30,
                        
                        
                        Six
      Months Ended April 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Net
      income (loss) available for common shareholders
                        
                        $
                        123
                        
                        
                        $
                        (6,473
                        )
                        
                        $
                        382
                        
                        
                        $
                        (10,384
                        )Weighted
      average common shares outstanding
                        
                        
                        24,067
                        
                        
                        
                        23,812
                        
                        
                        
                        24,024
                        
                        
                        
                        23,800Dilutive
      effect of employee stock options and restricted stock
    awards
                        
                        
                        47
                        
                        
                        
                        -
                        
                        
                        
                        210
                        
                        
                        
                        -Common
      shares and common share equivalents
                        
                        
                        24,114
                        
                        
                        
                        23,812
                        
                        
                        
                        24,234
                        
                        
                        
                        23,800Income
      (loss) per share:Basic
                        
                        $
                        0.01
                        
                        
                        $
                        (0.27
                        )
                        
                        $
                        0.02
                        
                        
                        $
                        (0.44
                        )Diluted
                        
                        $
                        0.01
                        
                        
                        $
                        (0.27
                        )
                        
                        $
                        0.02
                        
                        
                        $
                        (0.44
                        )





Approximately,
3,023,000 and 2,784,000 stock options with exercise prices greater than the
average market price of our common stock for the three months and six months
ended April 30, 2009, respectively, were excluded from the 2009 calculations of
diluted income per share because they were antidilutive.





We
incurred a net loss for the three and six months ended April 30,
2008.  Potential common shares in the amount of 2,550,000 were
antidilutive and excluded from the calculation of diluted loss per share for
that period.


7
 Table of Contents





Recent
Accounting Pronouncements





In April
2009, the FASB issued staff position (“FSP”) No. FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly”(FAS
157-4).  FAS 157-4 provides guidance on estimating fair value when
market activity has decreased and on identifying transactions that are not
orderly.  Additionally, entities are required to disclose in interim
and annual periods the inputs and valuation techniques used to measure fair
value.  The provisions of FAS 157-4 are effective for our quarter
ending July 31, 2009 and are currently not expected to have a material effect on
our consolidated financial statements.





In April
2009, the FASB issued staff position (“FSP”) No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”(FAS 115-2 and FAS 124-2).FAS 115-2 and FAS 124-2
modified existing accounting guidance to demonstrate the intent and ability to
hold an investment security for a period of time sufficient to allow for any
anticipated recovery in fair value.  When the fair value of a debt or
equity security has declined below the amortized cost at the measurement date,
an entity that intends to sell a security or is more-likely-than-not to sell the
security before the recovery of the security’s cost basis, must recognize the
other-than-temporary impairment in earnings.  The provisions of FSP
No. FAS 115-2 and FAS 124-2 are effective for our quarter ending July 31, 2009
and are currently not expected to have a material effect on our consolidated
financial statements.





In April
2009, the FASB issued staff position (“FSP”) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (FAS 107 and APB 28-1).FAS 107-1 and APB 28-1
amend SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”to require an entity to provide disclosures about
fair value of financial instruments in interim financial
statements.  The provisions of FAS 107-1 and APB 28-1 are effective
for our quarter ending July 31, 2009 and are currently not expected to have a
material effect on our consolidated financial statements.





In April
2008, the FASB issued staff position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (FAS 142-3).  FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142,
“Goodwill and Other Intangible
Assets.”  The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141R, and other U.S. generally accepted accounting
principles.  The provisions of FAS 142-3 are effective for our fiscal
year 2010 and are currently not expected to have a material effect on our
consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (“SFAS
141(R)”).  SFAS 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired.  SFAS 141(R) also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination.  SFAS 141(R) is effective as of
the beginning of an entity’s fiscal year that begins after December 15, 2008,
and will be adopted by us in the first quarter of fiscal 2010.  SFAS
141(R) is currently not expected to have a material effect on our consolidated
financial statements.


8
 Table of Contents


In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, an amendment of ARB No. 51 (“SFAS
160”).  SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests (NCI) and
classified as a component of equity.  This new consolidation method
will significantly change the accounting for transactions with minority interest
holders.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of fiscal
year 2010.  SFAS 160 is currently not expected to have a material
effect on our consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115,” (“SFAS 159”).  This standard permits entities to measure
many financial instruments and certain other items at fair value.  The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions.  The provisions of SFAS 159 were effective
beginning in our fiscal year 2009 and did not have a material effect on our
consolidated financial statements.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), to establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements.   In February
2008, the FASB issued FSP 157-2, which delays the company’s fiscal year 2009
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until our fiscal year
2010.  The provisions of SFAS 157 were effective beginning in our
fiscal year 2009 and did not have a material effect on our consolidated
financial statements.





Note
3.  Stock-Based Compensation





We
account for stock-based compensation under the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS
123(R)”).  We use the straight-line method to recognize compensation
expense over the requisite service period of the award.





Stock
option activity for the six months ended April 30, 2009 is as follows (in
thousands):








Options
      OutstandingOptions
      outstanding at October 31, 2008
                
                
                2,617Options
      granted
                
                
                849Options
      exercised
                
                
                -Options
      forfeited or cancelled
                
                
                (313
                )Options
      outstanding at April 30, 2009
                
                
                3,153Options
      exercisable at April 30, 2009
                
                
                2,246








Total
stock-based compensation expense recorded for the three and six months ended
April 30 was as follows (in thousands):








2009
                
                
                2008Three
      months ended
                
                $
                381
                
                
                $
                238Six
      months ended
                
                $
                645
                
                
                $
                76





9
 Table of Contents


Under
SFAS 123(R), differences between actual and estimated stock option forfeitures
are not recognized until the first vesting date following the actual forfeiture
of an option.  Generally, our stock options are granted during the
first quarter of each fiscal year, and therefore recorded stock option
forfeitures are typically greatest during that quarter.Stock option forfeitures
reduced stock-based compensation expense by $275,000 and $495,000 in the first
three of 2009 and 2008, respectively.





Note
4. Deferred Commissions





Employee
commissions on the sale of our products and services are earned at the time of
invoicing and paid monthly.  The related expense is deferred and
amortized over the non-cancellable terms of the related customer contracts on
the basis that the commission charges are so closely related to the revenue from
such contracts that they should be recorded as an asset and charged to expense
over the same period that the revenue is recognized.  Total deferred
commissions at April 30, 2009 and October 31, 2008 were $3,173,000 and
$4,268,000, of which $688,000 and $834,000, respectively, were recorded as
long-term deferred commissions and included in other long-term assets on our
balance sheet.





Note
5.  Software Development Costs





A
reconciliation of capitalized software development costs is as follows (in
thousands):








Gross
      Carrying Value
                      
                      
                      Accumulated
      Amortization
                      
                      
                      Net
      Carrying ValueBalance,
      October 31, 2008
                      
                      $
                      49,856
                      
                      
                      $
                      (25,770
                      )
                      
                      $
                      24,086Capitalized
      software development costs
                      
                      
                      2,348
                      
                      
                      
                      -
                      
                      
                      
                      2,348Amortization
                      
                      
                      -
                      
                      
                      
                      (4,323
                      )
                      
                      
                      (4,323
                      )Write-off
      of fully amortized costs
                      
                      
                      (7,569
                      )
                      
                      
                      7,569
                      
                      
                      
                      -Balance,
      April 30, 2009
                      
                      $
                      44,635
                      
                      
                      $
                      (22,524
                      )
                      
                      $
                      22,111








In the
first quarter of 2009, we wrote off approximately $7,569,000 of fully amortized
software development costs and related accumulated amortization associated with
software products no longer considered substantially in use.





Note
6.  Identified Intangible Assets





Identified
intangible assets subject to amortization were as follows (in
thousands):








As
      of April 30, 2009
                                
                                
                                As
      of October 31, 2008Gross
      Carrying Value
                                
                                
                                Accumulated
      Amortzation
                                
                                
                                Net
      Carrying Value
                                
                                
                                Gross
      Carrying Value
                                
                                
                                Accumulated
      Amortzation
                                
                                
                                Net
      Carrying ValueAcquired
      technology
                                
                                $
                                7,300
                                
                                
                                $
                                (5,562
                                )
                                
                                $
                                1,738
                                
                                
                                $
                                7,300
                                
                                
                                $
                                (5,320
                                )
                                
                                $
                                1,980Trademarks
      and tradenames
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,380
                                
                                
                                
                                (1,380
                                )
                                
                                
                                -Customer
      relationships and lists
                                
                                
                                19,800
                                
                                
                                
                                (18,484
                                )
                                
                                
                                1,316
                                
                                
                                
                                19,800
                                
                                
                                
                                (18,057
                                )
                                
                                
                                1,743$
                                27,100
                                
                                
                                $
                                (24,046
                                )
                                
                                $
                                3,054
                                
                                
                                $
                                28,480
                                
                                
                                $
                                (24,757
                                )
                                
                                $
                                3,723





10
 Table of Contents


In the
first quarter of 2009, we wrote off approximately $1,380,000 of fully amortized
identified intangible assets, and related accumulated amortization, which were
no longer considered substantially in use.


Amortization
expense for the identified intangible assets presented above was as follows (in
thousands):








Three
      Months Ended
                        
                        
                        Six
      Months EndedApril
      30,
                        
                        
                        April
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Amortization
      of intangible assets included in:Cost
      of revenues
                        
                        $
                        121
                        
                        
                        $
                        205
                        
                        
                        $
                        242
                        
                        
                        $
                        411Operating
      expenses
                        
                        
                        213
                        
                        
                        
                        388
                        
                        
                        
                        427
                        
                        
                        
                        775$
                        334
                        
                        
                        $
                        593
                        
                        
                        $
                        669
                        
                        
                        $
                        1,186








Estimated
future annual amortization expense for identified intangible assets is as
follows (in thousands):








Cost
      of
                      
                      
                      OperatingRevenues
                      
                      
                      Expenses
                      
                      
                      TotalRemainder
      of 2009
                      
                      $
                      243
                      
                      
                      $
                      428
                      
                      
                      $
                      6712010
                      
                      
                      485
                      
                      
                      
                      854
                      
                      
                      
                      1,3392011
                      
                      
                      485
                      
                      
                      
                      34
                      
                      
                      
                      5192012
                      
                      
                      485
                      
                      
                      
                      -
                      
                      
                      
                      4852013
                      
                      
                      40
                      
                      
                      
                      -
                      
                      
                      
                      40$
                      1,738
                      
                      
                      $
                      1,316
                      
                      
                      $
                      3,054








The
future annual amortization amounts presented above are
estimates.  Actual amortization expense may be different due to the
acquisition, impairment, or accelerated amortization of identified intangible
assets.


11
 Table of Contents





Note
7.  Deferred Revenue





Deferred
revenue primarily consists of billings and payments received in advance of
revenue recognition from our subscription service and is recognized as the
revenue recognition criteria are met.  We generally invoice our
customers in full upon receipt of their subscription order. In circumstances
where we do not bill the full subscription upon order, we do not include these
unbilled amounts in deferred revenue.  Accordingly, the deferred
revenue balance does not represent the total remaining contract value of all
non-cancelable subscription agreements. The components of deferred revenue were
as follows (in thousands):








As
      of
                    
                    
                    As
      ofApril
      30,
                    
                    
                    October
      31,2009
                    
                    
                    2008Total
      deferred revenue
                    
                    $
                    35,311
                    
                    
                    $
                    44,921Less:
      Long-term portion
                    
                    
                    (7,649
                    )
                    
                    
                    (8,916
                    )Current
      deferred revenue
                    
                    $
                    27,662
                    
                    
                    $
                    36,005








Note
8.  Restructuring and Other Charges





At
various times over the past several years we have incurred restructuring costs
related to severance and facility closings in the U.S. and U.K.





The
restructuring reserve activity (included in other accrued liabilities) from
October 31, 2008 through April 30, 2009 was as follows (in
thousands):








Severanceand
      related
                      
                      
                      Facilitycosts
                      
                      
                      closings
                      
                      
                      TotalReserve
      balance at October 31, 2008
                      
                      $
                      1,764
                      
                      
                      $
                      1,029
                      
                      
                      $
                      2,793Cash
      payments
                      
                      
                      (1,329
                      )
                      
                      
                      (343
                      )
                      
                      
                      (1,672
                      )Foreign
      currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      (39
                      )
                      
                      
                      (39
                      )Reserve
      balance at April 30, 2009
                      
                      $
                      435
                      
                      
                      $
                      647
                      
                      
                      $
                      1,082








There
were no restructuring charges during the first six months of 2009.





12
 Table of Contents


Note
9. Comprehensive Income (Loss)





Total
comprehensive income (loss) was as follows (in thousands):





Three
      Months Ended
                        
                        
                        Six
      Months EndedApril
      30,
                        
                        
                        April
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        123
                        
                        
                        $
                        (6,473
                        )
                        
                        $
                        382
                        
                        
                        $
                        (10,384
                        )Foreign
      currency translation adjustments
                        
                        
                        (6
                        )
                        
                        
                        1
                        
                        
                        
                        37
                        
                        
                        
                        31Total
      comprehensive income (loss)
                        
                        $
                        117
                        
                        
                        $
                        (6,472
                        )
                        
                        $
                        419
                        
                        
                        $
                        (10,353
                        )





Income
tax effects for the components of other comprehensive income (loss) were not
significant because our deferred tax assets are fully
reserved.  Accumulated other comprehensive loss was $1,185,000 and
$1,222,000 at April 30, 2009 and October 31, 2008, respectively.





Note
10. Income Taxes





In the
fourth quarter of fiscal 2008 we determined that the tax deductible portion of
goodwill for which we recorded income tax expense in the first three quarters of
fiscal 2008, was fully impaired.  As a result of the impairment, we
are no longer recording this expense.





We have
not expensed, and do not maintain any accrual balances related to, interest and
penalties related to unrecognized tax benefits.  For future periods in
which we may incur unrecognized tax benefits or uncertainties, we would classify
any associated interest and penalties as a component of the income tax
provision.





Note
11. Stockholders’ Equity





We
repurchased 1,471 shares of our common stock for an aggregate cost of
approximately $3,800 during the second quarter of 2009.  The shares
were repurchased in accordance with a restricted stock agreement that allows the
employee to elect that restricted stock be withheld in an amount sufficient to
fund tax withholdings due upon vesting.  Shares repurchased but not
reissued are presented as treasury stock in the consolidated balance
sheet.


13
 Table of Contents


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Business
Description





PLATO
Learning, Inc. is a Delaware corporation that was incorporated in 1989 and is
headquartered in Bloomington, Minnesota.  We are a leading provider of
on-line instruction, curriculum management, assessment, and related professional
development services to K–12 schools, community colleges and other educational
institutions across the country. Our products are used by customers principally
to provide alternative instruction to students performing below their grade
level in order to help those students return to the classroom, recover course
credits, pass high school exit exams or prepare for college and other
post-secondary studies.  In addition to the value provided to
students, our solutions allow school districts to retain state and federal
funding tied to student enrollment.  Our courseware and assessment
products are designed primarily to help educators meet the demands of state and
federal student achievement initiatives for intervention, dropout prevention and
college readiness. We also offer online and onsite staff professional
development services to ensure optimal use of our products and to help schools
meet their accountability requirements and school improvement
plans.





Our
research-based courseware library includes thousands of hours of mastery-based
instruction covering discrete learning objectives in the subject areas of
reading, writing, language arts, mathematics, science, and social studies. Our
web-based assessment and alignment tools ensure that instruction can be
personalized to each student’s unique needs and the curriculum is aligned to
local, state, and national standards. Using our web-based products, educators
are able to identify each student’s instructional needs and prescribe an
individual learning program of PLATO Learning courseware, educational web sites,
the school’s textbooks and other core and supplemental instructional materials.
A variety of reports are available to help educators identify gaps in student
understanding, monitor student progress and ensure that standard learning
objectives are being addressed.





Beginning
in late fiscal year 2005, we implemented a strategy to deliver our products and
solutions on a subscription basis using a new internet-based learning management
platform we market as the PLATO Learning EnvironmentTM, or
PLETM. The majority of our subscription periods range from one to three
years with a dollar value weighted average subscription period of approximately
two years in fiscal 2008. As of April 30, 2009, nearly 1,300 school districts,
community colleges and other educational institutions across 50 states
subscribed to our instructional solutions delivered on PLETM , and
nearly 1.4 million students, teachers and administrators at these institutions
were registered to use PLE TM
..





We
operate our principal business in one industry segment, which is the development
and marketing of online curriculum solutions and related services.





Critical
Accounting Policies and Estimates





Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses.  We continually evaluate our
critical accounting policies and estimates, and have identified the policies
relating to the following areas as those that are significant to our financial
statement presentation, and require difficult, subjective, or complex
judgments:


14
 Table of Contents


·
            Revenue
      recognition


·
            Capitalized
      software development costs


·
            Valuation
      of deferred income taxes


·
            Valuation
      and impairment analysis of identified intangible
  assets





At the
end of fiscal year 2008, we completed our transition to a software-as-a-service
business model in which substantially all of our products are now delivered on a
hosted, subscription service basis.  Based on the completion of this
transition, and in accordance with EITF 00-03, Application of SOP 97-2, “Software
Revenue Recognition”, to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware,we have applied SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.” effective for the first
quarter of fiscal year 2009.  Under EITF 00-03, hosting arrangements
in which customers do not have a contractual right to take possession of the
software are service arrangements, and such software, subject to certain
exceptions, is considered internal-use software subject to SOP 98-1.





There
have been no other significant new accounting principles applied during the
first six months of 2009.  For a more complete discussion of our
accounting policies refer to Note 2 to Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended October 31, 2008.





General
Factors Affecting our Financial Results





There are
a number of general factors that affect our results from period to period. These
factors are discussed below.





Revenue. In 2008, we
completed a transition of our business model from one that sells one-time
perpetual licenses to software, for which revenue is generally recognized
up-front upon delivery, to one that sells subscription-based products, for which
revenue is recognized over the subscription period. The transition began in
2006 when we introduced many of our new subscription-based products and affects
the comparability of our revenues over this period.  As subscription
revenues grow as a percentage of total revenues, we expect our period to period
revenues to become more comparable and predictable.





Gross Profit. A large portion
of our costs of revenue are fixed in nature. These costs include amortization of
capitalized software development and purchased technology, depreciation and
other infrastructure costs to support our hosted subscription services, customer
support operations, and full-time professional services personnel who deliver
our training services. Accordingly, increases in revenues allow us to leverage
these costs resulting in higher gross profit, while decreases in revenues have
the opposite effect.





Operating Expenses. General
and administrative expenses are substantially fixed in nature. However, certain
components such as professional fees and similar expenses can vary based on
business results, individual events, or initiatives we may be pursuing at
various times throughout the year.





Incentive
compensation is a significant variable component of our sales and marketing
expenses, approximating 9% to 10% of total revenues in any given period. Sales
and marketing expenses also include costs such as travel, tradeshows, and
conferences that can vary with revenue activity or individual events that occur
during the period.


15
 Table of Contents


Software
maintenance and development expense in our consolidated statement of operations
does not reflect our total level of spending on our products and services. Costs
to maintain existing products and preliminary project development costs are
charged to software maintenance and development expense as incurred. Costs
incurred to develop or enhance new products after preliminary project
development costs are incurred, which represent the majority of our total
software development spending, are capitalized and amortized to cost of
revenues. Accordingly, software maintenance and development expense in our
consolidated statement of operations can fluctuate from period to period, in
terms of both total dollars and as a percentage of revenue, based on the nature
and timing of activities occurring during the period.





Amortization
of intangibles represents the amortization of certain identified intangible
assets acquired through various acquisitions. While these expenses are generally
predictable from period to period because they are fixed over the course of
their individual useful lives, they can be affected by events and other factors
that result in impairment of these assets and a corresponding reduction in
future amortization.





Cash Balances and Cash
Flow.  Our business is seasonal, with the largest portion of
orders coming in our third and fourth fiscal quarters.  These periods
are when our customers’ budget spending typically peaks as they end their
current budget period, begin a new budget period, and begin to plan their needs
for the upcoming school year.  In addition, our costs are largely
fixed, and with some exceptions, do not vary significantly with the level of
order activity. As a result, cash balances generally decline during the first
half of the fiscal year, and increase from those levels as order activity
increases in the third and fourth quarter.





16
 Table of Contents


Results
of Operations





Revenues





The
following table summarizes certain key information to aid in the understanding
of our discussion and analysis of revenues and should be read in conjunction
with Note 2 to the Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended October 31, 2008, which discusses our accounting
policies regarding revenue recognition:





Revenue
by Category (in thousands):








Three
      Months Ended
                        
                        
                        Six
      Months EndedApril
      30,
                        
                        
                        April
      30,2009
                        
                        
                        2008
                        
                        
                        %
      Change
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        %
      ChangeSubscriptions
                        
                        $
                        9,726
                        
                        
                        $
                        8,475
                        
                        
                        
                        14.8
                        %
                        
                        $
                        19,594
                        
                        
                        $
                        16,444
                        
                        
                        
                        19.2
                        %License
      fees
                        
                        
                        1,006
                        
                        
                        
                        1,509
                        
                        
                        
                        (33.3
                        %)
                        
                        
                        2,010
                        
                        
                        
                        3,760
                        
                        
                        
                        (46.5
                        %)Services:Professional
      services
                        
                        
                        1,798
                        
                        
                        
                        2,377
                        
                        
                        
                        (24.4
                        %)
                        
                        
                        3,749
                        
                        
                        
                        4,320
                        
                        
                        
                        (13.2
                        %)Software
      maintenance
                        
                        
                        2,229
                        
                        
                        
                        3,136
                        
                        
                        
                        (28.9
                        %)
                        
                        
                        4,696
                        
                        
                        
                        6,361
                        
                        
                        
                        (26.2
                        %)Other
                        
                        
                        748
                        
                        
                        
                        748
                        
                        
                        
                        0.0
                        %
                        
                        
                        1,495
                        
                        
                        
                        1,495
                        
                        
                        
                        0.0
                        %Total
      Services
                        
                        
                        4,775
                        
                        
                        
                        6,261
                        
                        
                        
                        (23.7
                        %)
                        
                        
                        9,940
                        
                        
                        
                        12,176
                        
                        
                        
                        (18.4
                        %)Total
      revenues
                        
                        $
                        15,507
                        
                        
                        $
                        16,245
                        
                        
                        
                        (4.5
                        %)
                        
                        $
                        31,544
                        
                        
                        $
                        32,380
                        
                        
                        
                        (2.6
                        %)








Total
revenues for the second quarter of 2009 declined 4.5% to $15.5 million, from
$16.2 million for the same period in 2008.  Subscription revenues grew
$1.3 million, or 14.8%, from $8.5 million in the second quarter of 2008 to $9.7
million for the same period this year. Revenues from license fees on the sale of
legacy perpetual license products and related software maintenance revenue
totaled $3.2 million, a decline of 30.3%. The increase in subscription revenue
reflects continued growth in our base of subscription customers.  As
of April 30, 2009, approximately 1,300 educational institutions were subscribed
to our PLE platform, up from approximately 950 institutions as of April 30,
2008. The decline in license fees and software maintenance revenue reflects our
declining emphasis on sales of non-strategic products licensed on a perpetual
basis. Professional services revenues declined $600,000 due to a reduction in
training backlog going into the quarter primarily resulting from lower training
order levels in the fourth quarter of fiscal 2008.





Total
revenues for the first six months of 2009 declined slightly to $31.5 million
from $32.4 million for the same period in 2008.  Subscription revenues
grew $3.2 million or 19.2%, slightly less than the $3.4 million decline in
license fees and software maintenance revenue on perpetual
products.  Professional services revenue declined $600,000 to $3.7
million. The changes in revenue for the first six months of the year are due
largely to the same reasons as those affecting the second quarter.





17
 Table of Contents


Gross
Margin





Gross
Margin Percentage





Three
      Months Ended April 30,
                
                
                Six
      Months Ended April 30,Increase
                
                
                
                
                
                
                
                
                IncreaseRevenue
      Category
                
                2009
                
                
                2008
                
                
                (Decrease)
                
                
                2009
                
                
                2008
                
                
                (Decrease)Subscriptions
                
                
                57.0
                %
                
                
                43.2
                %
                
                
                13.8
                %
                
                
                58.8
                %
                
                
                42.4
                %
                
                
                16.4
                %License
      fees
                
                
                58.5
                %
                
                
                27.3
                %
                
                
                31.2
                %
                
                
                57.4
                %
                
                
                33.0
                %
                
                
                24.4
                %Services
                
                
                51.1
                %
                
                
                47.1
                %
                
                
                4.0
                %
                
                
                52.1
                %
                
                
                51.5
                %
                
                
                .6
                %Total
                
                
                55.3
                %
                
                
                43.2
                %
                
                
                12.1
                %
                
                
                56.6
                %
                
                
                44.7
                %
                
                
                11.9
                %








The total
gross margin percentage for the second quarter increased to 55.3% from 43.2% for
the same period in 2008.  The 13.8% increase in subscription gross
margin to 57.0% had the most significant effect on total gross
margin.  The improvement in the subscription gross margin percentage
reflects the $1.3 million growth in subscription revenues discussed above, and a
$600,000 reduction in subscription cost of revenue, primarily due to a decline
in amortization of capitalized software development costs.  The
decline in amortization is due to asset impairments and reduced levels of
capitalized software development spending in fiscal 2008.





License
fee margins in the second quarter improved to 58.5% from 27.3% in the second
quarter of 2008 due to lower product amortization, and to cost reduction
initiatives completed in fiscal 2008. The services gross margin increased to
51.1% from 47.1% for the same period last year.





The total
gross margin percentage for the six months ended April 30, 2009 increased 11.9%
to 56.6% due primarily to the 16.4% improvement in the subscription gross margin
percentage for the period. The improvements in the gross margin percentages in
the first six months of the year for all revenue categories were largely due to
the same reasons as those driving the margin improvements for the second
quarter.





Operating
Expenses





The
following table summarizes the amounts and percentage change in amounts from the
corresponding period during the previous year for certain operating expense line
items.








Three
      Months Ended
                            
                            
                            Percent
                            
                            
                            Six
      Months Ended
                            
                            
                            PercentApril
      30,
                            
                            
                            Increase
                            
                            
                            April
      30,
                            
                            
                            Increase2009
                            
                            
                            2008
                            
                            
                            (Decrease)
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            (Decrease)Sales
      and marketing
                            
                            $
                            5,604
                            
                            
                            $
                            7,521
                            
                            
                            
                            (25.5
                            %)
                            
                            $
                            11,491
                            
                            
                            $
                            14,526
                            
                            
                            
                            (20.9
                            %)General
      and administrative
                            
                            
                            1,872
                            
                            
                            
                            2,701
                            
                            
                            
                            (30.7
                            %)
                            
                            
                            4,295
                            
                            
                            
                            5,651
                            
                            
                            
                            (24.0
                            %)Software
      maintenance and development
                            
                            
                            708
                            
                            
                            
                            1,101
                            
                            
                            
                            (35.7
                            %)
                            
                            
                            1,274
                            
                            
                            
                            2,177
                            
                            
                            
                            (41.5
                            %)Amortization
      of intangibles
                            
                            
                            213
                            
                            
                            
                            388
                            
                            
                            
                            (45.1
                            %)
                            
                            
                            427
                            
                            
                            
                            775
                            
                            
                            
                            (44.9
                            %)Restructuring
                            
                            
                            -
                            
                            
                            
                            1,635
                            
                            
                            
                            (100.0
                            %)
                            
                            
                            -
                            
                            
                            
                            1,635
                            
                            
                            
                            (100.0
                            %)Total
      operating expenses
                            
                            $
                            8,397
                            
                            
                            $
                            13,346
                            
                            
                            
                            (37.1
                            %)
                            
                            $
                            17,487
                            
                            
                            $
                            24,764
                            
                            
                            
                            (29.4
                            %)





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Total
operating expenses were $8.4 million for the second quarter of 2009, a decrease
of 37.1%, or $4.9 million, from $13.3 million for the same period in
2008.  Total operating expenses for the first six months were down
$7.3 million to $17.5 million.  Total operating expenses in the second
quarter and first six months of fiscal 2008 included $1.6 million in
restructuring charges, which accounted for 12.3 % and 6.6%, respectively, of the
declines.  The balance of the declines generally reflects the actions
taken last year to streamline our cost structure, and the continued efficiencies
of our software-as-a-service business model.  Going forward, we expect
year-over-year declines in total operating expenses to moderate as most of the
benefits of our cost reduction initiatives that affected operating expenses were
in place by the middle of the third quarter last year.





Sales and
marketing expenses declined $1.9 million for the second quarter of 2009, and
$3.0 million for the first six months, on reduced indirect sales, travel and
marketing costs from the same periods in 2008.  None of these declines
were due to a reduction in our field sales force, which remained about the same
relative to the first six months of 2008.





General
and administrative costs declined 30.7% to $1.9 million for the second quarter
of 2009 from the same period in 2008 due primarily to reductions in headcount,
compliance and other professional services costs, and improved collections
resulting in a reduction in bad debt expenses.  These factors were
also the primary contributors to the 24% decline in general and administrative
expenses for the first six months of the year.





Software
maintenance and development expenses in the second quarter and first six months
of the year declined $400,000 and $900,000, respectively, reflecting increasing
stability of our PLE platform, the quality of new product releases and reduced
maintenance on legacy products.





Other
(Expense) Income, Net





Other
(expense) income consists primarily of interest income on our cash and cash
equivalent balances, net of the costs of maintaining availability on our line of
credit.  Other expense was $52,000 for the second quarter of 2009
compared to other income of $7,000 in the second quarter of 2008 due to the
decrease in our average cash and cash equivalent balances over the periods, as
well as a decline in interest rates.  These factors also contributed
to the decline on other income during the first six months of 2009 compared to
the same period in 2008.


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 Table of Contents


Backlog





We
consider backlog to be the total of deferred revenue reported on our balance
sheet plus unbilled amounts due under non-cancelable subscription agreements. On
this basis, backlog was $48.7 million and $41.7 million at April 30, 2009 and
2008, respectively, as follows:








As
      of April 30,2009
                    
                    
                    2008
                    
                    
                    %
      ChangeTotal
      Deferred Revenue
                    
                    $
                    35,311
                    
                    
                    $
                    35,830
                    
                    
                    
                    (1.4
                    %)Add:
      Unbilled amounts due undernon-cancelable
      subscription agreements
                    
                    
                    13,370
                    
                    
                    
                    5,869
                    
                    
                    
                    127.8
                    %Deferred
      Revenue Backlog
                    
                    $
                    48,681
                    
                    
                    $
                    41,699
                    
                    
                    
                    16.7
                    %Components
      of Deferred Revenue Backlog:Subscriptions
                    
                    $
                    39,696
                    
                    
                    $
                    29,965
                    
                    
                    
                    32.5
                    %License
      fees
                    
                    
                    222
                    
                    
                    
                    1,319
                    
                    
                    
                    (83.2
                    %)Services
                    
                    
                    8,763
                    
                    
                    
                    10,415
                    
                    
                    
                    (15.9
                    %)Deferred
      Revenue Backlog
                    
                    $
                    48,681
                    
                    
                    $
                    41,699
                    
                    
                    
                    16.7
                    %








At April 30, 2009, we expect
approximately $26.4 million of our backlog to be recognized as revenue
subsequent to fiscal year 2009.





Liquidity
and Capital Resources





Cash
and Cash Equivalents





At April
30, 2009, cash and cash equivalents were $10.2 million, a decrease of $9.8
million from October 31, 2008.  This decrease primarily represents net
cash used in operations in 2009 of $7.1 million, and investments in capitalized
software development of $2.3 million.  Included in the $7.1 million in
net cash used in operations were approximately $3.4 million of non-recurring
cash payments, including $2.1 million in severance paid to terminated employees
and $1.3 million in non-recurring royalty payments.  As discussed
above under “General Factors Affecting Our Financial Results”, cash flow from
operations is typically lower in the first and second quarter of our fiscal year
due to the seasonal nature of our business.





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 Table of Contents


Working
Capital and Liquidity





At April
30, 2009, our principal sources of liquidity included cash and cash equivalents
totaling $10.2 million, net billed accounts receivable of $6.4 million, and
unbilled commitments under non-cancelable subscription contracts totaling $13.4
million, of which $5.9 million is expected to be billed in 2009.  We
also have a three-year senior secured credit facility that provides us with a
revolving line of credit up to the lesser of $20 million or the amount of our
trailing twelve months subscription and software maintenance
revenues.  Under this agreement we have the option of selecting an
interest rate for any drawdown under the facility equal to the applicable Prime
or LIBOR Rate plus a sliding margin that is based on the amount of borrowings
outstanding.  Borrowings under the agreement are secured by all of our
assets.  Financial covenants apply only when the unused portion of the
line of credit, plus cash and cash equivalents on hand, is less than $12.5
million, and are limited to minimum quarterly thresholds of earnings before
interest, taxes, depreciation and amortization (EBITDA).  At April 30,
2009 and 2008, availability under the line was $20 million and there were no
borrowings outstanding.





Cash used
by operations in the first six months increased to $7.1 million in 2009, from
$4.6 million in 2008, due to the non-recurring cash payments discussed above,
reduced receivable collections in the first quarter resulting from lower order
levels in the fourth quarter of 2008 compared to 2007, partially offset by
reductions in overall spending.  Cash used in investing activities
declined to $2.8 million for the first six months of 2009, from $6.9 million for
the same period last year reflecting a reduction in our software investment
requirements.





We
believe our existing cash, cash equivalents, anticipated cash provided by
operating activities, and availability under our line of credit will be
sufficient to meet our working capital and capital expenditure needs over the
next 12 months.  Our future capital requirements will depend on many
factors, including the timing and extent of software development expenditures,
order volume, and the timing and collection of receivables.





Contractual
Obligations and Commercial Commitments





Our
contractual obligations and commercial commitments consist primarily of future
minimum payments due under operating leases and royalty and software license
agreements.  Refer to “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K
for the year ended October 31, 2008 for a table showing our contractual
obligations.  There were no significant changes to our contractual
obligations during the six months ended April 30, 2009.





At April
30, 2009, we had no significant commitments for capital
expenditures.





Recent
Accounting Pronouncements





See Note
2 of the Condensed Consolidated Financial Statements for a summary of the new
accounting pronouncements.


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 Table of Contents


Disclosures
about Off-Balance Sheet Arrangements





We did
not have any off-balance sheet arrangements as of April 30, 2009.





Forward-Looking
Statements





In
addition to historical information, this Form 10-Q contains forward-looking
statements. These forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (“the
Act”).  The words “believe,” “expect,” “anticipate,” “intend,”
“estimate,” “forecast,” “project,” “should” and similar expressions are intended
to identify “forward-looking statements” within the meaning of the Act.
Forward-looking statements include, among others, statements about our future
performance, the sufficiency of our sources of capital for future needs, and the
expected impact of recently issued accounting pronouncements. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in Part II Item 1A of this Form 10-Q and
Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended
October 31, 2008. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s opinions only as of the
date hereof. We undertake no obligation to revise or publicly release any
revision to these forward-looking statements based on circumstances or events,
which occur in the future. Readers should carefully review the risk factors
described in this report on Form 10-Q and in other documents we file from time
to time with the Securities and Exchange Commission.





Interest
Rate Risk





Our
borrowing capacity primarily consists of a revolving line of credit with
interest rates that fluctuate based upon the Prime Rate and LIBOR market
indexes.  At April 30, 2009, we did not have any outstanding
borrowings under this revolving credit facility. As a result, risk relating to
interest fluctuation is considered minimal.





Foreign
Currency Exchange Rate Risk





Our
foreign operations are not a significant component of our business, and as a
result, risks relating to foreign currency fluctuation are considered
minimal.





ITEM
3.                      QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





See the
information set forth under the captions, “Interest Rate Risk” and “Foreign
Currency Exchange Rate Risk” in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in this Quarterly Report on Form
10-Q.









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 Table of Contents




ITEM 4.                      CONTROLS AND
PROCEDURES




Evaluation
of Disclosure Controls and Procedures





Based on
our management’s evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the “Exchange Act”)) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms.  Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.





Changes
in Internal Control over Financial Reporting




There was
no change in our internal control over financial reporting during the second
quarter of fiscal 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.







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 Table of Contents


PART
II.





ITEM
1A.                      RISK FACTORS





Our
business is subject to a number of risks and uncertainties which we discussed in
detail in Part I, Item 1A of our 2008 Annual Report on Form 10-K.





ITEM
4.                      SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





Our
Annual Meeting of Stockholders was held on March 26, 2009.  There were
24,084,175 shares of our common stock entitled to vote at the meeting and a
total of 23,446,143 shares (97.4%) were represented at the
meeting.  Voting was as follows:





1.
            Election
      of Director M. Lee Pelton: For 20,464,952 and Withheld
      2,981,191.


2.
            Election
      of Director John T. (Ted) Sanders: For 23,051,347 and Withheld
      394,796.


3.
            Election
      of Director Steven R. Becker: For 23,322,183 and Withheld
      123,960.


4.
            Ratification
      of the appointment of Grant Thornton LLP as the Company’s independent
      registered public accounting firm for the fiscal year ending October 31,
      2009: For 23,417,154, Against 27,737 and Abstain
  1,252.





The
following people continued as directors following the meeting and have terms
that expire at the Annual Meeting of Stockholders in the year indicated for each
– Susan E. Knight (2010), David W. Smith (2010), Matthew A. Drapkin (2010), John
G. Lewis (2011), Robert S. Peterkin (2011) and Vincent P. Riera
(2011).





ITEM 6. EXHIBITS





Exhibit Number and
    Description31.01
            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.





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 Table of Contents


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





PLATO
      LEARNING, INC.
            By_/s/ Vincent P.
  Riera_____June
      9, 2009
            Vincent
      P. RieraPresident
      and Chief Executive Officer(principal
      executive officer)/s/ Robert J.
  Rueckl________Robert
      J. RuecklVice
      President and Chief Financial Officer(principal
      financial officer)








25