##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended April 30, 2003

Commission File Number 0-20842

PLATO LEARNING, INC.




(Exact name of Registrant as specified in its charter)


|                                                    |  |                       
|--------------------------------------------------- |  | ----------------------
|Delaware                                            |  | 36-3660532            
|                                                    |  |                       
|(State or other jurisdiction                        |  | (I.R.S. Employer      
|of incorporation or organization)                   |  | Identification Number)
|                                                    |  |                       
|10801 Nesbitt Avenue South, Bloomington, MN         |  | 55437                 
|                                                    |  |                       
|(Address of principal executive offices)            |  | (Zip Code)            
|                                                    |  |                       
|Registrants telephone number, including area code: |  | (952)832-1000         
|                                                    |  |                       

Not Applicable

---

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


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X]   No [  ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act: Yes [X]   No [  ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                             |  |                               
|---------------------------- |  | ------------------------------
|Common stock, $.01 par value |  | 16,361,664 shares             
|                             |  |                               
|Class                        |  | Outstanding as of May 31, 2003

(This document contains 31 pages)

1



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TABLE OF CONTENTS



|                                               |                                                                    |                                                                                       |  |  |  |  |  | 
|---------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------------------------- |  |  |  |  |  | 
|                                               |                                                                    | Consolidated Statements of Operations                                                
|                                               |                                                                    | Consolidated Balance Sheets                                                          
|                                               |                                                                    | Consolidated Statements of Cash Flows                                                
|                                               |                                                                    | Notes to Consolidated Financial Statements                                           
|                                               |                                                                    | Managements Discussion and Analysis of Results of Operations and Financial Condition
|PART 1                                        
|                                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk
|                                               | Item 4. Controls and Procedures                                   
|PART II. OTHER INFORMATION                    
|                                               | Item 1. Legal Proceedings                                         
|                                               | Item 2. Changes in Securities and Use of Proceeds                 
|                                               | Item 3. Defaults Upon Senior Securities                           
|                                               | Item 4. Submission of Matters to a Vote of Security Holders       
|                                               | Item 5. Other Information                                         
|                                               | Item 6. Exhibits and Reports on Form 8-K                          
|SIGNATURES                                    
|CERTIFICATIONS                                
|EX-99.01 Certification Pursuant to Section 906



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##### Table of Contents



PLATO Learning, Inc.
Form 10-Q

INDEX

|               |                                                                                                  |  |        |    | 
|-------------- | ------------------------------------------------------------------------------------------------ |  | ------ | -- | 
|               |                                                                                                  |  | Page  
|               |                                                                                                  |  | Number
|               |                                                                                                  |  |       
|PART I.        | FINANCIAL INFORMATION                                                                            |  |        |    | 
|Item 1.        | Consolidated Financial Statements (Unaudited):                                                   |  |        |    | 
|               | Consolidated Statements of Operations for the
Three and Six Months Ended April 30, 2003 and 2002 |  |        | 3  | 
|               | Consolidated Balance Sheets as of
April 30, 2003 and October 31, 2002                            |  |        | 4  | 
|               | Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 2003 and 2002           |  |        | 5  | 
|               | Notes to Consolidated Financial Statements                                                       |  |        | 6  | 
|Item 2.        | Managements Discussion and Analysis of
Results of Operations and Financial Condition            |  |        | 15 | 
|Item 3.        | Quantitative and Qualitative Disclosures About Market Risk                                       |  |        | 27 | 
|Item 4.        | Controls and Procedures                                                                          |  |        | 27 | 
|PART II.       | OTHER INFORMATION                                                                                |  |        |    | 
|Item 1.        | Legal Proceedings                                                                                |  |        | 28 | 
|Item 2.        | Changes in Securities and Use of Proceeds                                                        |  |        | 28 | 
|Item 3.        | Defaults Upon Senior Securities                                                                  |  |        | 28 | 
|Item 4.        | Submission of Matters to a Vote of Security Holders                                              |  |        | 28 | 
|Item 5.        | Other Information                                                                                |  |        | 28 | 
|Item 6.        | Exhibits and Reports on Form 8-K                                                                 |  |        | 28 | 
|SIGNATURES     |                                                                                                  |  | 29     |   
|CERTIFICATIONS |                                                                                                  |  | 30     |   

2



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##### Table of Contents






PLATO Learning, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)

|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |        |        |  
|------------------------------------------- | ---------------------------------------- | ------------------------ | ------------------------- | ------ | ------------------ | ------ | ---------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | -
|                                            |                                          |                          |                           |        | Three Months Ended |        | Six Months Ended
|                                            |                                          |                          |                           |        | April 30,          |        | April 30,       
|                                            |                                          |                          |                           |        |                    |        |                 
|                                            |                                          |                          |                           |        | 2003               |        | 2002             |        | 2003   |        | 2002  
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |       
|Revenues:                                   |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |       
|                                            | License fees                             |                          | $                         | 11,519 |                    |        | $                | 13,416 |        |        | $      | 20,588 |        |        | $    | 24,000 |       
|                                            | Services                                 |                          |                           | 4,296  |                    |        |                  | 2,836  |        |        |        | 7,679  |        |        |      | 5,187  |       
|                                            | Other                                    |                          |                           | 1,652  |                    |        |                  | 960    |        |        |        | 2,657  |        |        |      | 2,072  |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            |                                          | Total revenues           |                           |        | 17,467             |        |                  |        | 17,212 |        |        |        | 30,924 |        |      |        | 31,259 |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|Cost of revenues:                           |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |       
|                                            | License fees                             |                          |                           | 866    |                    |        |                  | 947    |        |        |        | 1,407  |        |        |      | 1,783  |       
|                                            | Services                                 |                          |                           | 979    |                    |        |                  | 306    |        |        |        | 1,375  |        |        |      | 577    |       
|                                            | Other                                    |                          |                           | 1,311  |                    |        |                  | 815    |        |        |        | 2,302  |        |        |      | 1,763  |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            |                                          | Total cost of revenues   |                           |        | 3,156              |        |                  |        | 2,068  |        |        |        | 5,084  |        |      |        | 4,123  |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            |                                          |                          | Gross profit              |        |                    | 14,311 |                  |        |        | 15,144 |        |        |        | 25,840 |      |        |        | 27,136 |  
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|Operating expenses:                         |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |       
|                                            | Sales and marketing                      |                          |                           | 11,198 |                    |        |                  | 9,799  |        |        |        | 21,644 |        |        |      | 18,894 |       
|                                            | General and administrative               |                          |                           | 2,804  |                    |        |                  | 2,161  |        |        |        | 5,804  |        |        |      | 4,582  |       
|                                            | Product development and customer support |                          |                           | 3,200  |                    |        |                  | 2,577  |        |        |        | 6,334  |        |        |      | 5,358  |       
|                                            | Amortization of intangibles              |                          |                           | 419    |                    |        |                  | 168    |        |        |        | 820    |        |        |      | 362    |       
|                                            | Restructuring charge                     |                          |                           |       |                    |        |                  |       |        |        |        | 380    |        |        |      |       |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            |                                          | Total operating expenses |                           |        | 17,621             |        |                  |        | 14,705 |        |        |        | 34,982 |        |      |        | 29,196 |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            |                                          |                          | Operating earnings (loss) |        |                    | (3,310 | )                |        |        | 439    |        |        |        | (9,142 | )    |        |        | (2,060 | )
|Interest income                             |                                          |                          | 92                        |        |                    |        | 189              |        |        |        | 212    |        |        |        | 557  |       
|Interest expense                            |                                          |                          | (30                       | )      |                    |        | (31              | )      |        |        | (54    | )      |        |        | (73  | )     
|Other expense, net                          |                                          |                          | (8                        | )      |                    |        | (25              | )      |        |        | (29    | )      |        |        | (109 | )     
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            | Earnings (loss) before income taxes      |                          |                           | (3,256 | )                  |        |                  | 572    |        |        |        | (9,013 | )      |        |      | (1,685 | )     
|Income tax expense (benefit)                |                                          |                          | (1,435                    | )      |                    |        | 275              |        |        |        | (3,785 | )      |        |        | (625 | )     
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            | Net earnings (loss)                      |                          | $                         | (1,821 | )                  |        | $                | 297    |        |        | $      | (5,228 | )      |        | $    | (1,060 | )     
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|Earnings (loss) per share:                  |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |       
|                                            | Basic and diluted                        |                          | $                         | (0.11  | )                  |        | $                | 0.02   |        |        | $      | (0.31  | )      |        | $    | (0.06  | )     
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|Weighted average common shares outstanding: |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |       
|                                            | Basic                                    |                          |                           | 16,534 |                    |        |                  | 16,448 |        |        |        | 16,657 |        |        |      | 16,430 |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       
|                                            | Diluted                                  |                          |                           | 16,534 |                    |        |                  | 17,140 |        |        |        | 16,657 |        |        |      | 16,430 |       
|                                            |                                          |                          |                           |        |                    |        |                  |        |        |        |        |        |        |        |      |        |       

See Notes to Consolidated Financial Statements

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PLATO Learning, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)

|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |         |         |  | 
|------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ------- | ----------- | ------ | ----------- | ------- | ------- |  | 
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         | April 30,   |        | October 31,
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         | 2003        |        | 2002       
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |            
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         | (Unaudited) |        | (See Note) 
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            | Assets  |         |             |        |             |         |         |  | 
|Current assets:                                                                                                           |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |            
|                                                                                                                          | Cash and cash equivalents                                                                                                                                                                            |                            | $                                          | 24,202  |         |             | $      | 30,390      |        
|                                                                                                                          | Accounts receivable, net                                                                                                                                                                             |                            |                                            | 26,631  |         |             |        | 33,034      |        
|                                                                                                                          | Prepaid expenses and other current assets                                                                                                                                                            |                            |                                            | 4,519   |         |             |        | 4,870       |        
|                                                                                                                          | Deferred income taxes                                                                                                                                                                                |                            |                                            | 7,123   |         |             |        | 3,338       |        
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|                                                                                                                          |                                                                                                                                                                                                      | Total current assets       |                                            |         | 62,475  |             |        |             | 71,632  |        
|Equipment and leasehold improvements, net of accumulated
depreciation and amortization of $6,514 and $5,437, respectively |                                                                                                                                                                                                      |                            | 4,881                                      |         |         |             | 5,210  |            
|Product development costs, net of accumulated amortization
of $8,712 and $6,083, respectively                             |                                                                                                                                                                                                      |                            | 14,096                                     |         |         |             | 13,545 |            
|Deferred income taxes                                                                                                     |                                                                                                                                                                                                      |                            | 11                                         |         |         |             | 11     |            
|Goodwill                                                                                                                  |                                                                                                                                                                                                      |                            | 39,201                                     |         |         |             | 38,331 |            
|Identified intangible assets, net                                                                                         |                                                                                                                                                                                                      |                            | 14,404                                     |         |         |             | 15,374 |            
|Other assets                                                                                                              |                                                                                                                                                                                                      |                            | 2,395                                      |         |         |             | 1,552  |            
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|                                                                                                                          | Total assets                                                                                                                                                                                         |                            | $                                          | 137,463 |         |             | $      | 145,655     |        
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|Liabilities and Stockholders Equity                                                                                      |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |            
|Current liabilities:                                                                                                      |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |            
|                                                                                                                          | Accounts payable                                                                                                                                                                                     |                            | $                                          | 1,891   |         |             | $      | 888         |        
|                                                                                                                          | Accrued employee salaries and benefits                                                                                                                                                               |                            |                                            | 6,347   |         |             |        | 6,979       |        
|                                                                                                                          | Accrued liabilities                                                                                                                                                                                  |                            |                                            | 2,991   |         |             |        | 4,786       |        
|                                                                                                                          | Deferred revenue                                                                                                                                                                                     |                            |                                            | 15,438  |         |             |        | 14,891      |        
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|                                                                                                                          |                                                                                                                                                                                                      | Total current liabilities  |                                            |         | 26,667  |             |        |             | 27,544  |        
|                                                                                                                          | Deferred revenue                                                                                                                                                                                     |                            |                                            | 4,081   |         |             |        | 3,946       |        
|                                                                                                                          | Other liabilities                                                                                                                                                                                    |                            |                                            | 452     |         |             |        | 582         |        
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|                                                                                                                          |                                                                                                                                                                                                      | Total liabilities          |                                            |         | 31,200  |             |        |             | 32,072  |        
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|Stockholders equity:                                                                                                     |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |            
|                                                                                                                          | Common stock, $.01 par value, 50,000 shares authorized;
18,086 shares issued and 16,362 shares outstanding
at April 30, 2003; 18,078 shares issued and 16,812
shares outstanding at October 31, 2002 |                            |                                            | 164     |         |             |        | 168         |        
|                                                                                                                          | Paid in capital                                                                                                                                                                                      |                            |                                            | 129,837 |         |             |        | 129,802     |        
|                                                                                                                          | Treasury stock at cost, 1,724 and 1,266 shares, respectively                                                                                                                                         |                            |                                            | (18,401 | )       |             |        | (16,244     | )      
|                                                                                                                          | Retained earnings (accumulated deficit)                                                                                                                                                              |                            |                                            | (4,583  | )       |             |        | 645         |        
|                                                                                                                          | Accumulated other comprehensive loss                                                                                                                                                                 |                            |                                            | (754    | )       |             |        | (788        | )      
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|                                                                                                                          |                                                                                                                                                                                                      | Total stockholders equity |                                            |         | 106,263 |             |        |             | 113,583 |        
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        
|                                                                                                                          |                                                                                                                                                                                                      |                            | Total liabilities and stockholders equity |         | $       | 137,463     |        |             | $       | 145,655 | 
|                                                                                                                          |                                                                                                                                                                                                      |                            |                                            |         |         |             |        |             |        

Note: The balance sheet at October 31, 2002 has been derived from our audited financial statements at
that date. See Notes to Consolidated Financial Statements.

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PLATO Learning, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited, in thousands)

|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |        |        |       | 
|------------------------------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ---------------- | ----- | ------ | ------ | ------ | ----- | 
|                                                                                |                                                                      |                                                                                   |                                           |        | Six Months Ended
|                                                                                |                                                                      |                                                                                   |                                           |        | April 30,       
|                                                                                |                                                                      |                                                                                   |                                           |        |                 
|                                                                                |                                                                      |                                                                                   |                                           |        | 2003             |       | 2002  
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |       
|Operating activities:                                                           |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Net loss                                                                        |                                                                      | $                                                                                 | (5,228                                    | )      |                  | $     | (1,060 | )     
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |       
|Adjustments to reconcile net loss to net cash
provided by operating activities: |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|                                                                                | Deferred income taxes                                                |                                                                                   |                                           | (3,785 | )                |       |        | (625   | )     
|                                                                                | Amortization of capitalized product development costs                |                                                                                   |                                           | 2,624  |                  |       |        | 1,940  |       
|                                                                                | Amortization of identified intangible assets                         |                                                                                   |                                           | 970    |                  |       |        | 512    |       
|                                                                                | Depreciation
and amortization of equipment and leasehold improvement |                                                                                   |                                           | 1,106  |                  |       |        | 650    |       
|                                                                                | Provision for doubtful accounts                                      |                                                                                   |                                           | 1,052  |                  |       |        | 901    |       
|                                                                                | Stock-based compensation                                             |                                                                                   |                                           |       |                  |       |        | 36     |       
|                                                                                | Loss on disposal of equipment                                        |                                                                                   |                                           | 59     |                  |       |        | 88     |       
|                                                                                | Changes in assets and liabilities, net of effects of acquisitions:   |                                                                                   |                                           |        |                  |       |        |        |       
|                                                                                |                                                                      | Accounts receivable                                                               |                                           |        | 4,579            |       |        |        | 2,035  |      
|                                                                                |                                                                      | Prepaid expenses and other current and noncurrent assets                          |                                           |        | 280              |       |        |        | (772   | )    
|                                                                                |                                                                      | Accounts payable                                                                  |                                           |        | 1,003            |       |        |        | (730   | )    
|                                                                                |                                                                      | Accrued liabilities, accrued employee salaries and
benefits and other liabilities |                                           |        | (2,403           | )     |        |        | (1,526 | )    
|                                                                                |                                                                      | Deferred revenue                                                                  |                                           |        | (195             | )     |        |        | 666    |      
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|                                                                                |                                                                      |                                                                                   | Total adjustments                         |        |                  | 5,290 |        |        |        | 3,175 | 
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|                                                                                |                                                                      |                                                                                   | Net cash provided by operating activities |        |                  | 62    |        |        |        | 2,115 | 
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Investing activities:                                                           |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Capitalization of product development costs                                     |                                                                      |                                                                                   | (3,168                                    | )      |                  |       | (3,262 | )     
|Capital expenditures                                                            |                                                                      |                                                                                   | (828                                      | )      |                  |       | (2,013 | )     
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|                                                                                | Net cash used in investing activities                                |                                                                                   |                                           | (3,996 | )                |       |        | (5,275 | )     
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Financing activities:                                                           |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Repurchase of common stock                                                      |                                                                      |                                                                                   | (2,161                                    | )      |                  |       | (72    | )     
|Net proceeds from issuance of common stock                                      |                                                                      |                                                                                   | 35                                        |        |                  |       | 962    |       
|Repayments of capital lease obligations                                         |                                                                      |                                                                                   | (147                                      | )      |                  |       | (124   | )     
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|                                                                                | Net cash provided by (used in) financing activities                  |                                                                                   |                                           | (2,273 | )                |       |        | 766    |       
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Effect of foreign currency on cash                                              |                                                                      |                                                                                   | 19                                        |        |                  |       | (52    | )     
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Net decrease in cash and cash equivalents                                       |                                                                      |                                                                                   | (6,188                                    | )      |                  |       | (2,446 | )     
|Cash and cash equivalents at beginning of period                                |                                                                      |                                                                                   | 30,390                                    |        |                  |       | 61,568 |       
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|Cash and cash equivalents at end of period                                      |                                                                      | $                                                                                 | 24,202                                    |        |                  | $     | 59,122 |       
|                                                                                |                                                                      |                                                                                   |                                           |        |                  |       |        |       
|See Notes to Consolidated Financial Statements                                 

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

1. Business

We enhance the learning process by providing computer-based and e-learning
instruction software and related services, offering basic to advanced level
courseware in reading, writing, math, science, social studies and life and job
skills. Our PLATO Learning System and PLATO Web Learning Network provide
more than 4,000 hours of objective-based, problem-solving courseware and
include assessment, alignment and management tools to create standards-based
curricula and facilitate the learning process. PLATO courseware is delivered
via networks, CD-ROM, private intranets and the Internet. In addition, single
topic PLATO courseware is available through our e-commerce web site and
distributors. We market our courseware products and services primarily to K-12
schools. We also sell to colleges, job training programs, correctional
institutions, military education programs, corporations and individuals.

We are subject to risks and uncertainties including, but not limited to,
dependence on information technology spending by our customers,
well-established competitors, customers dependent on government funding,
fluctuations of our quarterly results, a lengthy and variable sales cycle,
dependence on key personnel, dependence on our intellectual property
rights, rapid technological change and our ability to integrate
acquisitions.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. We have included all normal recurring adjustments considered
necessary to give a fair presentation of our operating results for the interim
periods shown. Operating results for these interim periods are not necessarily
indicative of the results to be expected for the full fiscal year. For further
information, refer to the consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2002.

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

Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation. On the consolidated statements of
operations, sales and marketing expenses are now presented separately from
general and administrative expenses. Previously, they were presented together
as selling, general and administrative expenses. On the consolidated statement
of cash flows, depreciation and amortization is now presented as depreciation
and amortization of equipment and leasehold improvements, amortization of
capitalized product development costs and amortization of identified intangible
assets. For fiscal year 2002, the reclassifications by quarter are summarized
as follows:

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 
|--------------------------------------------------------------------- |  | ------------------ | ------ | -------- |  | ------- | ------ | ---------- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                      |  | Fiscal 2002       
|                                                                      |  |                   
|                                                                      |  | Three Months Ended |        |          |  |        
|                                                                      |  |                    |        |          |  |        
|                                                                      |  | January 31         |        | April 30 |  | July 31 |        | October 31 |  | Year
|                                                                      |  |                    |        |          |  |         |        |            |  |     
|Selling, general and administrative expense,
as previously reported   |  | $                  | 11,516 |          |  | $       | 11,960 |            |  | $    | 13,372 |  |  | $ | 15,142 |  |  | $ | 51,990 | 
|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 
|Sales and marketing expense                                           |  | $                  | 9,095  |          |  | $       | 9,799  |            |  | $    | 10,281 |  |  | $ | 11,180 |  |  | $ | 40,355 | 
|General and administrative expense                                    |  |                    | 2,421  |          |  |         | 2,161  |            |  |      | 3,091  |  |  |   | 3,962  |  |  |   | 11,635 | 
|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 
|                                                                      |  | $                  | 11,516 |          |  | $       | 11,960 |            |  | $    | 13,372 |  |  | $ | 15,142 |  |  | $ | 51,990 | 
|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 
|Depreciation and amortization,
as previously reported                 |  | $                  | 1,516  |          |  | $       | 1,586  |            |  | $    | 2,017  |  |  | $ | 2,076  |  |  | $ | 7,195  | 
|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 
|Amortization of capitalized product development costs                 |  | $                  | 939    |          |  | $       | 1,001  |            |  | $    | 1,066  |  |  | $ | 1,171  |  |  | $ | 4,177  | 
|Amortization of identified intangible assets                          |  |                    | 269    |          |  |         | 243    |            |  |      | 418    |  |  |   | 423    |  |  |   | 1,353  | 
|Depreciation and amortization of equipment
and leasehold improvements |  |                    | 308    |          |  |         | 342    |            |  |      | 533    |  |  |   | 482    |  |  |   | 1,665  | 
|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 
|                                                                      |  | $                  | 1,516  |          |  | $       | 1,586  |            |  | $    | 2,017  |  |  | $ | 2,076  |  |  | $ | 7,195  | 
|                                                                      |  |                    |        |          |  |         |        |            |  |      |        |  |  |   |        |  |  |   |        | 

3. Summary of Significant Accounting Policies

Revenue Recognition

We recognize revenue in accordance with the provisions of Statement of Position
No. 97-2, Software Revenue Recognition, as amended and modified, as well as
Technical Practice Aids issued from time to time by the American Institute of
Certified Public Accountants, and Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements.

Revenue from the sale of courseware licenses and computer hardware is
recognized upon meeting the following criteria: (i) a written customer order is
executed, (ii) courseware and
hardware are delivered, (iii) the license fee is fixed or determinable and (iv)
collectibility of the fee is probable. For software arrangements that include
more than one element, we allocate the total arrangement fee among each
deliverable based on vendor-specific objective evidence of the relative fair
value of each deliverable. Vendor-specific objective evidence of fair value is
determined using the price charged when that element is sold separately. Upon
delivery, future service costs, if any, are accrued. Future service costs
represent our problem resolution and support hotline services for a one-year
period. Revenue from our subscription-based products, primarily the PLATO Web
Learning Network, is deferred and recognized ratably over the contract period.

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Service revenue includes software support, which is deferred and recognized
ratably over the support period, and revenue from installation and training
services, which is recognized as services are performed. Installation and
training services are customarily billed at a fixed daily rate. Deferred
revenue represents services and products yet to be delivered.

4. Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123 (SFAS 148). This statement amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results.

As permitted by SFAS 123, we have elected to continue to account for our
stock-based compensation plans under the intrinsic value method of Accounting
Principles Board Opinion No. 25 Accounting for Stock Issued to Employees.
The intrinsic value method recognizes compensation expense equal to the excess,
if any, of the fair market value of our stock on the grant date over the
exercise price.

We have adopted the disclosure provisions of SFAS 148 and the following table
compares net earnings (loss) and the related per share amounts to the pro forma
amounts that would be reported had compensation expense been recognized in
accordance with the fair value method of SFAS 123, as amended by SFAS 148:

|                                                                                                                                 |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |       |  
|-------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                                 |             |   | Three Months Ended |       | Six Months Ended
|                                                                                                                                 |             |   | April 30,          |       | April 30,       
|                                                                                                                                 |             |   |                    |       |                 
|                                                                                                                                 |             |   | 2003               |       | 2002             |   | 2003   |       | 2002
|                                                                                                                                 |             |   |                    |       |                  |   |        |       |     
|Net earnings (loss), as reported                                                                                                 |             | $ | (1,821             | )     |                  | $ | 297    |       |      | $ | (5,228 | )     |   | $ | (1,060 | )    
|Deduct: stock-based compensation expense determined
using the fair value based method for all awards,
net of related tax effects |             |   | (829               | )     |                  |   | (1,223 | )     |      |   | (1,948 | )     |   |   | (2,455 | )    
|                                                                                                                                 |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Pro forma net earnings (loss)                                                                                                    |             | $ | (2,650             | )     |                  | $ | (926   | )     |      | $ | (7,176 | )     |   | $ | (3,515 | )    
|                                                                                                                                 |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Basic and diluted earnings (loss) per share:                                                                                     |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                                 | As reported |   | $                  | (0.11 | )                |   | $      | 0.02  |      |   | $      | (0.31 | ) |   | $      | (0.06 | )
|                                                                                                                                 |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                                 | Pro forma   |   | $                  | (0.16 | )                |   | $      | (0.02 | )    |   | $      | (0.43 | ) |   | $      | (0.21 | )
|                                                                                                                                 |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

5. Acquisitions

Unaudited Pro Forma Data

In May 2002, we acquired NetSchools Corporation (NetSchools). For further
information regarding this acquisition, refer to Note 4 of Notes to
Consolidated Financial Statements included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2002.

The operating results of NetSchools were included in our consolidated
statements of operations from the date of acquisition. Our unaudited pro forma
consolidated results of operations, as if the NetSchools acquisition had
occurred at the beginning of the period presented, were as follows:

|                                 |  |                  |        |  
|-------------------------------- |  | ---------------- | ------ | -
|                                 |  | Six Months Ended
|                                 |  | April 30, 2002  
|                                 |  |                 
|                                 |  | (Unaudited)     
|Revenues                         |  | $                | 36,495 |  
|Net loss                         |  |                  | (5,488 | )
|Basic and diluted loss per share |  |                  | (0.32  | )

The pro forma data gives effect to actual operating results prior to the
acquisition and adjustments to reflect increased identified intangible asset
amortization and income taxes. No effect has been given to cost reductions or
operating synergies in this presentation. The unaudited pro forma consolidated
results of operations are for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisition occurred at
the beginning of the period presented or the results which may occur in the
future.

6. Accounts Receivable

The components of accounts receivable were as follows:

|                                |  |           |        |             |  |   |        |  
|------------------------------- |  | --------- | ------ | ----------- |  | - | ------ | -
|                                |  | April 30, |        | October 31,
|                                |  | 2003      |        | 2002       
|                                |  |           |        |            
|Trade accounts receivable       |  | $         | 11,700 |             |  | $ | 14,865 |  
|Installment accounts receivable |  |           | 18,119 |             |  |   | 20,936 |  
|Allowance for doubtful accounts |  |           | (3,188 | )           |  |   | (2,767 | )
|                                |  |           |        |             |  |   |        |  
|                                |  | $         | 26,631 |             |  | $ | 33,034 |  
|                                |  |           |        |             |  |   |        |  

Installment receivables to be billed beyond one year from the balance sheet
date were $1,975 at April 30, 2003 and $1,144 at October 31, 2002, and are
included in other assets on the consolidated balance sheets.

The provision for doubtful accounts, included in general and administrative
expense on the consolidated statements of operations, was $527 and $300 for the
three months and $1,052 and $901 for the six months ended April 30, 2003 and
2002, respectively.

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

7. Goodwill and Identified Intangible Assets

We account for goodwill and identified intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (SFAS 142). Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized to expense and
must be periodically reviewed for impairment. If such review indicates that
the carrying amount of an intangible asset exceeds its fair value, an
impairment loss would be recognized equal to that excess amount.

Goodwill

SFAS 142 requires that goodwill of a reporting unit be tested for impairment on
an annual basis and between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting
unit below its carrying value. We operate one reporting unit and, therefore,
we test goodwill impairment on an enterprise wide basis. As of October 31,
2002, our annual impairment test indicated that goodwill was not impaired;
however, as of April 30, 2003, the market value of our common stock had
declined to a point where our market capitalization was below our net book
value. We consider the market capitalization, prevailing control premiums and
other factors when we test goodwill impairment. Based on the weight of
available evidence, we believe that events and circumstances do not indicate
the need to test goodwill impairment as of April 30, 2003; however, should
events and circumstances change, an interim goodwill impairment test may be
necessary prior to the annual test on October 31, 2003. Such events and
circumstances include a prolonged decline in our stock price and may result in
a future impairment loss that could have a significant impact on our
consolidated financial statements including a large non-cash charge to the
statement of operations.

Goodwill was increased by $870 during the three months ended January 31, 2003
as a result of the finalization of the purchase price allocation relating to
the NetSchools acquisition in May 2002. As provided by the purchase agreement,
there may be additional consideration of up to approximately $6,000, contingent
on the NetSchools product and services revenues generated through October 2004.
Additional consideration will be recorded as additional goodwill as earned.

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

Identified Intangible Assets

Identified intangible assets subject to amortization were as follows:

|                     |  |                |        |                  |  |          |        |   |  |   |        |          |  |         |  |          |  |   |        |        |  |   |        |   |  |   |        | 
|-------------------- |  | -------------- | ------ | ---------------- |  | -------- | ------ | - |  | - | ------ | -------- |  | ------- |  | -------- |  | - | ------ | ------ |  | - | ------ | - |  | - | ------ | 
|                     |  | April 30, 2003 |        | October 31, 2002
|                     |  |                |        |                 
|                     |  |                |        |                  |  | Accum-   |        |   |  |   |        |          |  |         |  |          |  |   |        | Accum- |  |   |        |  
|                     |  | Gross          |        | ulated           |  | Net      |        |   |  |   |        | Gross    |  | ulated  |  | Net     
|                     |  | Carrying       |        | Amort-           |  | Carrying |        |   |  |   |        | Carrying |  | Amort-  |  | Carrying
|                     |  | Value          |        | ization          |  | Value    |        |   |  |   |        | Value    |  | ization |  | Value   
|                     |  |                |        |                  |  |          |        |   |  |   |        |          |  |         |  |         
|Acquired technology  |  | $              | 14,145 |                  |  | $        | (1,613 | ) |  | $ | 12,532 |          |  |         |  |          |  | $ | 14,145 |        |  | $ | (936   | ) |  | $ | 13,209 | 
|Trademark            |  |                | 1,380  |                  |  |          | (542   | ) |  |   | 838    |          |  |         |  |          |  |   | 1,380  |        |  |   | (444   | ) |  |   | 936    | 
|Customer lists       |  |                | 1,300  |                  |  |          | (467   | ) |  |   | 833    |          |  |         |  |          |  |   | 1,300  |        |  |   | (339   | ) |  |   | 961    | 
|Employment agreement |  |                | 413    |                  |  |          | (212   | ) |  |   | 201    |          |  |         |  |          |  |   | 413    |        |  |   | (145   | ) |  |   | 268    | 
|                     |  |                |        |                  |  |          |        |   |  |   |        |          |  |         |  |          |  |   |        |        |  |   |        |   |  |   |        | 
|                     |  | $              | 17,238 |                  |  | $        | (2,834 | ) |  | $ | 14,404 |          |  |         |  |          |  | $ | 17,238 |        |  | $ | (1,864 | ) |  | $ | 15,374 | 
|                     |  |                |        |                  |  |          |        |   |  |   |        |          |  |         |  |          |  |   |        |        |  |   |        |   |  |   |        | 

Amortization expense for identified intangible assets was $494 and $243 for the
three months ended April 30, 2003 and 2002, respectively, of which $75 was
included in product development and customer support expense for each period.
Amortization expense for identified intangible assets was $970 and $512 for the
six months ended April 30, 2003 and 2002, respectively, of which $150 was
included in product development and customer support expense for each period.

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

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 2,044  | 
|2004       |  |   | 2,222  | 
|2005       |  |   | 2,325  | 
|2006       |  |   | 2,298  | 
|2007       |  |   | 2,276  | 
|Thereafter |  |   | 4,209  | 
|           |  |   |        | 
|           |  | $ | 15,374 | 
|           |  |   |        | 

8. Debt

There were no borrowings outstanding under our revolving loan agreement at
April 30, 2003. We did not comply with the Minimum Debt Service Coverage
covenant contained in our revolving loan agreement for the period ended April
30, 2003. We have received a waiver from our lender covering this
noncompliance for such period. For further information regarding our
revolving loan agreement, refer to Note 9 of Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2002.

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

9. Stockholders Equity

Common Stock Repurchased

We repurchased approximately 458,000 shares of our common stock for an
aggregate cost of $2,161 during the six months ended April 30, 2003. These
shares are presented as treasury stock in the consolidated balance sheet.

10. Restructuring Charge

The consolidated statement of operations for the six months ended April 30,
2003 included a restructuring charge of $380. In December 2002, we reduced the
size of our workforce by approximately 30 positions and closed approximately 30
open job requisitions, all in the United States, which represented
approximately 10% of our planned workforce. Substantially all of these
severance costs were paid as of January 31, 2003.

In May 2003, we severed relationships with three senior executives (our Chief
Operating Officer, our Managing Director of operations in the United Kingdom,
and a co-founder of NetSchools) and three other employees. Severance charges
of approximately $400 will be incurred in the third quarter of 2003.

11. Per Share Data

Basic earnings (loss) per share is calculated by dividing net earnings (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is calculated by dividing net earnings (loss)
by the weighted average number of common and, where dilutive, potential common
shares outstanding during the period. Potential common shares include options
and warrants.

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PLATO Learning, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

The calculation of basic and diluted net income (loss) per share was as
follows:

|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |   | 
|------------------------------------------------------------------------------------------ | -------------------------- | - | ------------------ | - | ---------------- | - | ---------- | ------- | ---- | - | ---------- | - |  | - | ---------- | - | 
|                                                                                           |                            |   | Three Months Ended |   | Six Months Ended
|                                                                                           |                            |   | April 30,          |   | April 30,       
|                                                                                           |                            |   |                    |   |                 
|                                                                                           |                            |   | 2003               |   | 2002             |   | 2003       |         | 2002
|                                                                                           |                            |   |                    |   |                  |   |            |         |     
|Net earnings (loss)                                                                        |                            | $ | (1,821             | ) |                  | $ | 297        |         |      | $ | (5,228     | ) |  | $ | (1,060     | )
|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Basic:                                                                                     |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Weighted average common shares outstanding                                                 |                            |   | 16,534,000         |   |                  |   | 16,448,000 |         |      |   | 16,657,000 |   |  |   | 16,430,000 |  
|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Basic earnings (loss) per share                                                            |                            | $ | (0.11              | ) |                  | $ | 0.02       |         |      | $ | (0.31      | ) |  | $ | (0.06      | )
|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Diluted:                                                                                   |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Weighted average common shares outstanding                                                 |                            |   | 16,534,000         |   |                  |   | 16,448,000 |         |      |   | 16,657,000 |   |  |   | 16,430,000 |  
|Potential common shares:                                                                   |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|                                                                                           | Stock options and warrants |   |                    |  |                  |   |            | 692,000 |      |   |            |  |  |   |            |  | 
|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Weighted average common and potential common
shares outstanding for diluted loss per share |                            |   | 16,534,000         |   |                  |   | 17,140,000 |         |      |   | 16,657,000 |   |  |   | 16,430,000 |  
|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  
|Diluted earnings (loss) per share                                                          |                            | $ | (0.11              | ) |                  | $ | 0.02       |         |      | $ | (0.31      | ) |  | $ | (0.06      | )
|                                                                                           |                            |   |                    |   |                  |   |            |         |      |   |            |   |  |   |            |  

The calculation of diluted loss per share for the three and six
months ended April 30, 2003 excluded the effect of approximately
3,146,000 potential common shares from the conversion of outstanding options
and warrants as they were antidilutive.

The calculation of diluted loss per share for the six
months ended April 30, 2002 excluded the effect of approximately
2,454,000 potential common shares from the conversion of outstanding options
and warrants as they were antidilutive.

12. Comprehensive Income (Loss)

Total comprehensive income (loss) was as follows:

|                                         |                                   |   |                    |        |      |                  |     |      |  |      |        |        |   |   |        |        |  
|---------------------------------------- | --------------------------------- | - | ------------------ | ------ | ---- | ---------------- | --- | ---- |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                         |                                   |   | Three Months Ended |        |      | Six Months Ended
|                                         |                                   |   | April 30,          |        |      | April 30,       
|                                         |                                   |   |                    |        |      |                 
|                                         |                                   |   | 2003               |        | 2002 |                  |     | 2003 |  | 2002
|                                         |                                   |   |                    |        |      |                  |     |      |  |     
|Net income (loss)                        |                                   | $ | (1,821             | )      |      | $                | 297 |      |  | $    | (5,228 | )      |   | $ | (1,060 | )     
|Foreign currency translation adjustments |                                   |   | (86                | )      |      |                  | 95  |      |  |      | 34     |        |   |   | (11    | )     
|                                         |                                   |   |                    |        |      |                  |     |      |  |      |        |        |   |   |        |        |  
|                                         | Total comprehensive income (loss) |   | $                  | (1,907 | )    |                  | $   | 392  |  |      | $      | (5,194 | ) |   | $      | (1,071 | )
|                                         |                                   |   |                    |        |      |                  |     |      |  |      |        |        |   |   |        |        |  

13. Segment and Geographic Information

We operate in the single business segment of educational software. Revenues
are attributed to geographic locations based upon the location of the customer.
Revenues from foreign customers, primarily in Canada and the United Kingdom,
were $407 and $1,630 for the three months and $831 and $2,507 for the six
months ended April 30, 2003 and 2002, respectively.

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PLATO Learning, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

14. New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). This statement
requires that we recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of commitment to an exit or
disposal plan. SFAS 146 is effective for any exit plans initiated after
December 31, 2002. We do not believe that the adoption of SFAS 146 will have a
material impact on our consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures required in financial statements concerning obligations under
certain guarantees. It also clarifies the requirements related to the
recognition of liabilities by a guarantor at the inception of certain
guarantees. We do not expect that the application of this interpretation will
have a material impact on our consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation addresses the requirements
for business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interest. The interpretation is intended to provide guidance in judging
multiple economic interests in an entity and in determining the primary
beneficiary. The interpretation outlines disclosure requirements for variable
interest entities in existence prior to January 31, 2003, and outlines
consolidation requirements for variable interest entities created after January
31, 2003. We do not expect that the application of this interpretation will
have a material impact on our consolidated financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Instruments that fall within
the scope of SFAS 150 must be classified as a liability. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003 (our fourth quarter of fiscal year 2003). We do not
believe that the adoption of SFAS 150 will have a material impact on our
consolidated financial statements.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

OVERVIEW

We enhance the learning process by providing computer-based and e-learning
instruction software and related services, offering basic to advanced level
courseware in reading, writing, math, science, social studies and life and job
skills. Our PLATO® Learning System and
PLATO® Web Learning Network provide more
than 4,000 hours of objective-based, problem solving courseware and include
assessment, alignment and management tools to create standards-based curricula
and facilitate the learning process. PLATO courseware is delivered via
networks, CD-ROM, private intranets and the Internet. In addition, single
topic PLATO courseware is available through our e-commerce web site and
distributors. We market our courseware products and services primarily to K-12
schools. We also sell to colleges, job training programs, correctional
institutions, military education programs, corporations and individuals.

We are subject to risks and uncertainties including, but not limited to,
dependence on information technology spending by our customers,
well-established competitors, customers dependent on government funding,
fluctuations of our quarterly results, a lengthy and variable sales cycle,
dependence on key personnel, dependence on our intellectual property
rights, rapid technological change and our ability to integrate
acquisitions. As provided for in the Private Securities Litigation Reform
Act of 1995, we caution investors that these factors could cause our
future results of operations to vary from those anticipated in previously
made forward-looking statements and any other forward-looking statements
made in this document and elsewhere by or on behalf of us.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of results of operations and financial condition is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We continually evaluate our critical
accounting policies and have identified revenue recognition, the valuation of
accounts receivable, the capitalization of product development costs, the
valuation of our deferred tax asset and goodwill and identified intangible
asset impairment testing as the critical accounting policies that are
significant to the financial statement presentation and require difficult,
subjective and complex judgments.

See Notes 2 and 3 to Consolidated Financial Statements for additional
discussion on these and other accounting policies and disclosures required by
accounting principles generally accepted in the United States of America.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

Revenue Recognition

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

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

Allowance for Doubtful Accounts

We determine an allowance for doubtful accounts based upon an analysis of the
collectibility of specific accounts, historical experience and the aging of the
trade and installment accounts receivable. Bad debt expense is recorded as an
operating expense in our consolidated statement of operations. The assumptions
and estimates used to determine the allowance are subject to constant revision
and involve significant assumptions and judgment. The primary factors that
impact these assumptions include the efficiency and effectiveness of our
billing and collection functions, our historical experience and our credit
assessment process. We believe that the current budget difficulties facing
many states will not have a significant impact on the collection of our
accounts receivable. However, a change in the underlying conditions
contributing to our belief could impact our assessment of collectibility and,
therefore, require a change in the allowance for doubtful accounts and the
amount of bad debt expense. Actual collection results could differ materially
from those estimated and have a significant impact on our consolidated
financial statements.

Capitalization of Product Development Costs

Our product development expense includes costs related to the development,
enhancement and maintenance of our courseware products, and the effect of
product development cost capitalization and amortization. Research and
development costs, relating principally to the design and development of new
products, and the routine enhancement of existing products are expensed as
incurred. We capitalize product development costs when the projects under
development reach technological feasibility, as defined by the accounting
standards. Capitalization ends when a product is available for general release
to our customers, at which time amortization of the capitalized costs begins.
We amortize these costs using the greater of (a) the amount determined by the
ratio of the products current revenue to total expected future

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

revenue, or (b) the straight-line method over the estimated useful life
of the product, which is generally three years. During all periods presented,
we used the straight-line method to amortize the capitalized costs as this
method resulted in greater amortization.

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

Deferred Income Tax Asset

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

At April 30, 2003 we had a net deferred tax asset of $7,134. This deferred tax
asset is net of a valuation allowance related to a foreign net operating loss
carryforward. A substantial portion of the deferred tax asset relates to our
net operating loss carryforward in the United States. At April 30, 2003, our
total net operating loss carryforwards were approximately $29,500. These loss
carryforwards expire in varying amounts between 2004 and 2022. Realization of
our deferred tax asset is dependent on generating sufficient taxable income in
the United States prior to expiration of these loss carryforwards. Although
realization is not assured, we believe it is more likely than not that all of
the deferred tax asset will be realized. We base this belief upon the levels
of taxable income generated historically as well as projections of future
taxable income. If future levels of taxable income in the United States are
not consistent with our expectations by the end of fiscal 2003, we may be
required to record a valuation allowance for the entire deferred tax asset,
which would have a significant impact on our consolidated financial statements.
We also have net operating loss carryforwards related to our foreign
subsidiaries. We have provided a full valuation allowance related to these
deferred income tax assets due to the uncertainty in realization of future
taxable income in these foreign jurisdictions.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

Goodwill and Identified Intangible Assets

We record our acquisitions in accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations. We allocate the cost of acquired
companies to the tangible and identified intangible assets and liabilities
acquired, with the remaining amount being recorded as goodwill. Certain
intangible assets, such as acquired technology, are amortized to expense over
their estimated useful lives, while in-process research and development, if
any, is recorded as a one-time charge at the acquisition date.

Most of the companies we acquire do not have significant tangible assets and,
as a result, the majority of the purchase price is typically allocated to
identified intangible assets or goodwill, which increases future amortization
expense of identified intangible assets and the potential for impairment
charges that we may incur. Accordingly, the allocation of the purchase price
to intangible assets may have a significant impact on our future operating
results. In addition, the allocation of the purchase price requires that we
make significant assumptions and estimates, including estimates of future cash
flows expected to be generated by the acquired assets. Should different
conditions prevail, we may have to record impairment charges, which may have a
significant impact on our consolidated financial statements.

As of October 31, 2002, our annual impairment test indicated that goodwill was
not impaired; however, as of April 30, 2003, the market value of our common
stock had declined to a point where our market capitalization was below our net
book value. Based on the weight of available evidence, we believe that events
and circumstances do not indicate the need to test goodwill impairment as of
April 30, 2003; however, should events and circumstances change, an interim
goodwill impairment test may be necessary prior to the annual test on October
31, 2003. Such events and circumstances include a prolonged decline in our
stock price and may result in a future impairment loss that could have a
significant impact on our consolidated financial statements including a large
non-cash charge to the statement of operations.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS

Operating Results as a Percentage of Revenue

|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |       | 
|----------------------------------- | -------------------------------------------------- | ------------------------ | ----- | ------------------ | ----- | ---------------- | ---- | ---- | ----- | ---- | ----- | ----- | ----- |  | ---- | ---- | ----- | 
|                                    |                                                    |                          |       | Three Months Ended |       | Six Months Ended
|                                    |                                                    |                          |       | April 30,          |       | April 30,       
|                                    |                                                    |                          |       |                    |       |                 
|                                    |                                                    |                          |       | 2003               |       | 2002             |      | 2003 |       | 2002
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |     
|Revenues:                           |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |     
|                                    | License fees                                       |                          |       | 65.9               | %     |                  |      | 77.9 | %     |      |       | 66.6  | %     |  |      | 76.8 | %    
|                                    | Services                                           |                          |       | 24.6               |       |                  |      | 16.5 |       |      |       | 24.8  |       |  |      | 16.6 |      
|                                    | Other                                              |                          |       | 9.5                |       |                  |      | 5.6  |       |      |       | 8.6   |       |  |      | 6.6  |      
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|                                    |                                                    | Total revenues           |       |                    | 100.0 |                  |      |      | 100.0 |      |       |       | 100.0 |  |      |      | 100.0 | 
|Cost of revenues                    |                                                    |                          | 18.1  |                    |       |                  | 12.0 |      |       |      | 16.4  |       |       |  | 13.2 |     
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|                                    | Gross profit                                       |                          |       | 81.9               |       |                  |      | 88.0 |       |      |       | 83.6  |       |  |      | 86.8 |      
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|Operating expenses:                 |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |     
|                                    | Sales and marketing                                |                          |       | 64.1               |       |                  |      | 56.9 |       |      |       | 70.0  |       |  |      | 60.4 |      
|                                    | General and administrative                         |                          |       | 16.1               |       |                  |      | 12.6 |       |      |       | 18.8  |       |  |      | 14.7 |      
|                                    | Product development and customer support           |                          |       | 18.3               |       |                  |      | 15.0 |       |      |       | 20.5  |       |  |      | 17.1 |      
|                                    | Amortization of intangibles                        |                          |       | 2.4                |       |                  |      | 1.0  |       |      |       | 2.7   |       |  |      | 1.2  |      
|                                    | Restructuring charges                              |                          |       |                   |       |                  |      |     |       |      |       | 1.2   |       |  |      |     |      
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|                                    |                                                    | Total operating expenses |       |                    | 100.9 |                  |      |      | 85.5  |      |       |       | 113.2 |  |      |      | 93.4  | 
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|Operating income (loss)             |                                                    |                          | (19.0 | )                  |       |                  | 2.5  |      |       |      | (29.6 | )     |       |  | (6.6 | )   
|                                    | Interest income and expense and other expense, net |                          |       | 0.3                |       |                  |      | 0.8  |       |      |       | 0.4   |       |  |      | 1.2  |      
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|Earnings (loss) before income taxes |                                                    |                          | (18.7 | )                  |       |                  | 3.3  |      |       |      | (29.2 | )     |       |  | (5.4 | )   
|                                    | Income tax expense (benefit)                       |                          |       | (8.2               | )     |                  |      | 1.6  |       |      |       | (12.2 | )     |  |      | (2.0 | )    
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      
|Net earnings (loss)                 |                                                    |                          | (10.5 | )%                 |       |                  | 1.7  | %    |       |      | (17.0 | )     |       |  | (3.4 | )%  
|                                    |                                                    |                          |       |                    |       |                  |      |      |       |      |       |       |       |  |      |      |      

Revenues

Total Revenues.Total revenues increased 1.5% to $17,467 for the three months
ended April 30, 2003 from $17,212 for the same period in 2002. The increase
was due to the $1,460 increase in services revenues and the $692 increase in
other revenues, offset by the $1,897 decrease in license fees revenues.

Total revenues decreased 1.1% to $30,924 for the six months ended April 30,
2003 from $31,259 for the same period in 2002. The decrease was due to the
$3,412 decrease in license fees revenues, offset by the $2,492 increase in
services revenues and the $585 increase in other revenues.

License Fees.Revenues from license fees decreased 14.1% to $11,519 for the
three months ended April 30, 2003 from $13,416 for the same period in 2002. As
a percentage of total revenues, license fees revenues were 65.9% for the three
months ended April 30, 2003, down from 77.9% for the same period in 2002.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

Revenues from license fees decreased 14.2% to $20,588 for the six months ended
April 30, 2003 from $24,000 for the same period in 2002. As a percentage of
total revenues, license fees revenues were 66.6% for the six months ended April
30, 2003, down from 76.8% for the same period in 2002.

License fees revenues decreased in 2003 compared to 2002 due to funding delays
and economic uncertainties, particularly state budget difficulties, which
significantly impacted the level of purchasing done by our customers. These
conditions are expected to continue to impact our revenues for the remainder of
fiscal 2003.

In addition, we are experiencing an increasing shift away from perpetual
license sales and a growing customer desire to license our products on a
subscription basis. While this has a negative impact on revenues in the
short-term, it has positive implications for the longer term, including greater
predictability of future revenues. Sales of our subscription-based products
continue to grow. Our order intake for subscription products was $1,993 and
$2,873 for the three and six months ended April 30, 2003, respectively, and we
recognized $1,766 and $3,391 of ratable revenue. This compares to $1,463 and
$2,143 of order intake and $755 and $1,439 of recognized revenue for the same
periods in 2002.

The acquisition of NetSchools in the second half of 2002 contributed $149 and
$320 of license fees revenues for the three and six months ended April 30,
2003, respectively.

Services.Revenues from services increased 51.5% to $4,296 for the three
months ended April 30, 2003 from $2,836 for the same period in 2002. As a
percentage of total revenues, services revenues were 24.6% for the three months
ended April 30, 2003 up from 16.5% for the same period in 2002.

Revenues from services increased 48.0% to $7,679 for the six months ended April
30, 2003 from $5,187 for the same period in 2002. As a percentage of total
revenues, services revenues were 24.8% for the six months ended April 30, 2003
up from 16.6% for the same period in 2002.

These revenue increases resulted from increased services to correlate
curriculum to standards and to aid in the professional development of teachers,
demonstrating the strategic value of our previous TeachMaster and NetSchools
acquisitions, and from the continued growth in customer acceptance of our
training and technical support services.

The acquisition of NetSchools in the second half of 2002 contributed $491 and
$627 of services revenues for the three and six months ended April 30, 2003,
respectively.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

Other.Other revenues, including hardware and third-party courseware products,
increased 72.1% to $1,652 for the three months ended April 30, 2003 from $960
for the same period in 2002. As a percentage of total revenues, other revenues
were 9.5% for the three months ended April 30, 2003 and 5.6% for the same
period in 2002.

Other revenues increased 28.2% to $2,657 for the six months ended April 30,
2003 from $2,072 for the same period in 2002. As a percentage of total
revenues, other revenues were 8.6% for the six months ended April 30, 2003 and
6.6% for the same period in 2002.

These revenue increases were primarily due to an increased level of hardware
sales, especially those necessary to satisfy a contract with a previous
Netschools customer.

Cost of Revenues

Total cost of revenues increased 52.6% to $3,156 for the three months ended
April 30, 2003 from $2,068 for the same period in 2002. Total cost of revenues
increased 23.3% to $5,084 for the six months ended April 30, 2003 from $4,123
for the same period in 2002. These increases were primarily due to the changes
in revenue discussed above, primarily the increased hardware sales and
secondarily the increase in services revenues.

Gross profit margin was 81.9% for the three months ended April 30, 2003, down
from 88.0% for the same period in 2002. Gross profit margin was 83.6% for the
six months ended April 30, 2003, down from 86.8% for the same period in 2002.

The gross profit margin calculation excludes customer support costs and the
amortization of capitalized product development costs which are presented in
operating expenses. These decreases in gross profit margin resulted primarily
from the higher proportion of other revenues included in our product sales mix
in 2003. Future gross profit margin will be dependent primarily on the product
mix underlying our revenues.

Operating Expenses

Sales and Marketing.Sales and marketing expenses increased 14.3% to $11,198
for the three months ended April 30, 2003 from $9,799 for the same period in
2002. As a percentage of total revenues, sales and marketing expenses were
64.1% for the three months ended April 30, 2003, up from 56.9% for the same
period in 2002.

Sales and marketing expenses increased 14.6% to $21,644 for the six months
ended April 30, 2003 from $18,894 for the same period in 2002. As a percentage
of total revenues, sales and marketing expenses were 70.0% for the six months
ended April 30, 2003, up from 60.4% for the same period in 2002.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

The increased expenses resulted from a number of factors including increased
headcount from the NetSchools acquisition in the second half of 2002,
additional investment in sales and marketing on the East Coast of the United
States, increased marketing costs necessary to generate our future revenue
growth, and additions to our management team and infrastructure necessary to
grow our business over the long-term. Sales and marketing expenses in 2003 are
expected to increase compared to 2002 given our expectations for revenue
growth. We continue to believe the benefits from this infrastructure
investment will generate increased revenues in the future. Our ability to
continue to leverage our cost structure and improve profitability is primarily
dependent on our ability to generate higher revenues, integrate our
acquisitions and realize sales force productivity improvements.

General and Administrative. General and administrative expenses increased
29.8% to $2,804 for the three months ended April 30, 2003 from $2,161 for the
same period in 2002. As a percentage of total revenues, general and
administrative expenses were 16.1% for the three months ended April 30, 2003,
up from 12.6% for the same period in 2002.

General and administrative expenses increased 26.7% to $5,804 for the six
months ended April 30, 2003 from $4,582 for the same period in 2002. As a
percentage of total revenues, general and administrative expenses were 18.8%
for the six months ended April 30, 2003, up from 14.7% for the same period in
2002.

The increased expenses resulted from a number of factors including increased
headcount from the NetSchools acquisition in the second half of 2002, increased
insurance and professional services costs resulting from the changing
regulatory environment, and additions to our management team and
infrastructure, including the installation of a new enterprise resource
planning system, necessary to grow our business over the long-term. We
continue to believe the benefits from this infrastructure investment will
generate increased revenues in the future. Our ability to continue to leverage
our cost structure and improve profitability is primarily dependent on our
ability to generate higher revenues, integrate our acquisitions and realize
sales force productivity improvements.

Product Development and Customer Support. Product development and customer
support expenses increased 24.2% to $3,200 for the three months ended April 30,
2003 from $2,577 for the same period in 2002. As a percentage of total
revenues, product development and customer support expenses were 18.3% for the
three months ended April 30, 2003, up from 15.0% for the same period in 2002.

Product development and customer support expenses increased 18.2% to $6,334 for
the six months ended April 30, 2003 from $5,358 for the same period in 2002.
As a percentage of total revenues, product development and customer support
expenses were 20.5% for the six months ended April 30, 2003, up from 17.1% for
the same period in 2002.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

These increases reflect our increased spending to enhance and replace certain
existing courseware products and to develop a new standards-based reference
network. As part of our growth strategy, we intend to continually introduce
new products and product improvements. The extent of our future product
development spending and the amount of our future capitalized product
development costs and related amortization are dependent on our ability to
develop and introduce new products and product improvements on a cost-effective
and timely basis.

Capitalized development costs were $1,501 and $3,168 for the three and six
months ended April 30, 2003, respectively, compared to $1,917 and $3,262 for
the same periods in 2002. Amortization of previously capitalized development
costs was $1,330 and $2,624 for the three and six months ended April 30, 2003,
respectively, up from $1,001 and $1,940 for the same periods in 2002, as
projects completed during prior periods are now being amortized to expense. We
expect amortization to increase throughout 2003 as additional products are
completed, and, as a result, product development expense is expected to
increase throughout the remainder of fiscal 2003.

Amortization of Intangibles. Amortization expense increased $251 and $458 for
the three and six months ended April 30, 2003, respectively, as compared to
2002, as a result of the NetSchools and Learning Elements acquisitions in the
second half of 2002.

Restructuring Charge. The restructuring charge in 2003 represented primarily
severance costs associated with the December 2002 reduction of our workforce.
We reduced the size of our workforce by approximately 30 positions and closed
approximately 30 open job requisitions, all in the United States, which
together represented approximately 10% of our planned workforce. Substantially
all of these severance costs were paid as of January 31, 2003.

In May 2003, we severed relationships with three senior executives (our Chief
Operating Officer, our Managing Director of operations in the United Kingdom,
and a co-founder of NetSchools) and three other employees. Severance charges
of approximately $400 will be incurred in the third quarter of 2003.

Interest Income

Interest income was $92 and $212 for the three and six months ended April 30,
2003 and $189 and $557 for the same periods in 2002. The decreased interest
income is due to lower invested balances at lower interest rates as compared to
2002. Invested balances decreased due to cash being used for our acquisitions
in 2002 and our stock repurchases in 2003.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

Income Taxes

Our effective income tax rate for the three months ended April 30, 2003 was
44.1%, compared to 48.1% for the same period in 2002. Our effective income tax
rate for the six months ended April 30, 2003 was 42.0%, compared to 37.1% for
the same period in 2002. Our 2003 annual effective tax rate is expected to be
in the 41% to 46% range. However, as was the case for fiscal year 2002, it
will be highly dependent upon the taxable income in each of our taxable
jurisdictions. We do not expect to incur significant losses in our foreign
subsidiaries; however, if we do, the effective income tax rate will increase.
Conversely, if our foreign subsidiaries are profitable in 2003, our effective
tax rate will decrease.

FINANCIAL CONDITION

Liquidity and Capital Resources

At April 30, 2003, our principal sources of liquidity included cash and cash
equivalents of $24,202, net accounts receivable of $26,631, and our unused line
of credit.

Working capital was $35,808 at April 30, 2003 and $44,088 at October 31, 2002.
Cash and cash equivalents decreased $6,188 as cash was used for product
development, capital expenditures and stock repurchases. Accounts receivable
decreased $6,403 as year end balances were collected, typical for the
seasonality of our business. Our current deferred tax asset increased $3,785
due to the income tax benefit recorded for the current year-to-date loss.
Accrued payables and liabilities decreased $1,424 as year end balances were
paid. Current deferred revenue increased $547 from year end as a result of
increased sales of our services and subscription-based products.

Cash flows from operations were used principally to fund our working capital
requirements. Net cash provided by operating activities was $62 and $2,115 for
the six months ended April 30, 2003 and 2002, respectively.

Net cash used in our investing activities was $3,996 and $5,275 for the six
months ended April 30, 2003 and 2002, respectively. In 2003, as compared to
2002, we decreased our investment in capitalized product development costs by
$94. We also decreased our capital expenditures by $1,185, primarily because
we purchased and installed a new enterprise resource planning system in 2002.
At April 30, 2003, we had no material commitments for capital expenditures

Net cash used in our financing activities was $2,273 for the six months ended
April 30, 2003, compared to net cash provided of $766 for the same period in
2002. In 2003, we repurchased 458,000 shares of our common stock for an
aggregate cost of $2,161. A stock repurchase plan was approved by our Board of
Directors in December 2001 and authorizes us to repurchase up to $15,000 of our
common stock in the open market and in privately negotiated transactions. The

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

plan has no set termination date and the timing of any repurchases will be
dependent on prevailing market conditions and alternative uses of capital.
Cumulatively, we have repurchased approximately 1,446,000 shares for an
aggregate cost of approximately $13,500 under the repurchase plan and
approximately $1,500 remains available for future repurchases, if any. In
2002, we received approximately $962 from the exercise of stock options and
warrants.

We have resources available under our revolving loan agreement to provide
borrowings up to $12,500, as determined by the available borrowing base. At
April 30, 2003, there were no borrowings outstanding and our unused borrowing
capacity was $12,500. The agreement contains restrictive financial covenants
(including Minimum Tangible Net Worth, Minimum Debt Service Coverage, Maximum
Leverage, Maximum Cash Flow Leverage, Minimum Current Ratio, and Maximum Annual
Capital Expenditures) and restrictions on additional borrowings, asset sales
and dividends, as defined. We did not comply with the Minimum Debt Service
Coverage covenant for the period ended April 30, 2003 and we have received a
waiver from our lender covering this noncompliance for such period.

From time to time, we evaluate potential acquisitions of products or businesses
that complement our core business. We may consider and acquire other
complementary businesses, products, or technologies in the future.

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

Disclosures about Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments consist of future
payments due under capital lease obligations and operating leases, and our line
of credit.

|                          |  |                             |       |      |  |      |       |      |  |         |       |         |  |       |       |  |  |   |       | 
|------------------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ------- | ----- | ------- |  | ----- | ----- |  |  | - | ----- | 
|                          |  | Payments Due by Fiscal Year
|                          |  |                            
|                          |  |                             |       |      |  |      |       |      |  | 2004 to |       | 2007 to |  | After
|Contractual Obligations   |  | Total                       |       | 2003 |  | 2006 |       | 2008 |  | 2008   
|                          |  |                             |       |      |  |      |       |      |  |        
|Capital lease obligations |  | $                           | 892   |      |  | $    | 325   |      |  | $       | 502   |         |  | $     | 65    |  |  | $ |      | 
|Operating leases          |  |                             | 7,499 |      |  |      | 2,372 |      |  |         | 2,194 |         |  |       | 1,272 |  |  |   | 1,661 | 
|                          |  |                             |       |      |  |      |       |      |  |         |       |         |  |       |       |  |  |   |       | 
|Total                     |  | $                           | 8,391 |      |  | $    | 2,697 |      |  | $       | 2,696 |         |  | $     | 1,337 |  |  | $ | 1,661 | 
|                          |  |                             |       |      |  |      |       |      |  |         |       |         |  |       |       |  |  |   |       | 

Our revolving loan agreement provides for a maximum $12,500 line of credit. In
January 2003, we amended this agreement to extend the term through July 1,
2004. For further information regarding our revolving loan agreement, refer to
Note 9 of Notes to Consolidated Financial Statements included in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2002.

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PLATO Learning, Inc.
Managements Discussion and Analysis of Results of
Operations and Financial Condition
(Dollars in thousands, except per share amounts)

Factors Affecting Quarterly Operating Results

Our quarterly operating results fluctuate as a result of a number of factors
including the business and sales cycle, the amount and timing of new product
introductions, client spending patterns, budget cycles and fiscal year ends and
promotional programs. The current budget difficulties facing many states may
have a significant impact on future revenues; however, we believe they will not
have a significant impact on the collection of our accounts receivable. A
change in the underlying conditions contributing to our belief could impact our
assessment of collectibility and, therefore, require a change in the allowance
for doubtful accounts and the amount of bad debt expense. We historically have
experienced our lowest revenues in the first quarter and increasingly higher
levels of revenues in each of the next three quarters. Because of these
factors, the results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.

Interest Rate Risk

Our borrowing capacity primarily consists of a revolving credit facility with
interest rates that fluctuate based upon market indexes. At April 30, 2003, we
did not have any outstanding borrowings under this revolving credit facility.
Our only debt consisted of capital lease obligations at fixed interest rates.
As a result, risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk

We market our products and services worldwide and have operations in Canada and
the United Kingdom. As a result, financial results and cash flows could be
affected by changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Working funds necessary to facilitate the
short-term operations of our foreign subsidiaries are kept in local currencies
in which they do business. Approximately 2.3% and 9.5% of our total revenues
were denominated in currencies other than the U.S. dollar for the three months
ended April 30, 2003 and 2002, respectively. Approximately 2.7% and 8.0% of
our total revenues were denominated in currencies other than the U.S. dollar
for the six months ended April 30, 2003 and 2002, respectively.

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PART I




Item 3. Quantitative and Qualitative Disclosures About Market Risk

See the information set forth under the captions, Interest Rate Risk and
Foreign Currency Exchange Rate Risk in Managements Discussion and Analysis
of Results of Operations and Financial Condition.




Item 4. Controls and Procedures

Within 90 days of the filing of this quarterly report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer have conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to make known to them
in a timely fashion material information related to us required to be filed in
this report.

From the date of that evaluation to the date of this quarterly report, there
have been no significant changes in our disclosure controls or in other factors
that could significantly affect our disclosure controls after the date of that
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Our management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, that breakdowns can occur because of simple
error or mistake, and that controls can be circumvented by the individual acts
of some persons or by collusion of two or more people. Because of the inherent
limitations in a control system, misstatements due to error or fraud may occur
and not be detected.

While we believe the present design of our disclosure controls and procedures
is effective to make known to our senior management in a timely fashion all
material information concerning our business, over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with its policies or procedures. We will continue to improve the
design and effectiveness of our disclosure controls and procedures to the
extent necessary in the future to provide our senior management with timely
access to such material information, and to correct any deficiencies that we
may discover in the future.

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##### Table of Contents






PART II. OTHER INFORMATION




Item 1. Legal Proceedings



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




Item 2. Changes in Securities and Use of Proceeds



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




Item 3. Defaults Upon Senior Securities



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




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



| |  | Our Annual Meeting of Stockholders was held on March 4, 2003. There were
16,750,223 shares of Common Stock entitled to vote at the meeting and a
total of 15,108,379 shares (90.2%) were represented at the meeting.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Voting was as follows:
| |  | ----------------------
|
| |  | 1.                    
|
| |  | 2.                    




Item 5. Other Information



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




Item 6. Exhibits and Reports on Form 8-K



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

| |  |                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------
| |  | 99.01
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.



| |  | (b) Reports on Form 8-K:                                               
| |  | -----------------------------------------------------------------------
|
| |  | No reports on Form 8-K were filed for the quarter ended April 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on June 16, 2003.

| |  |                      |  |                                         
| |  | -------------------- |  | ----------------------------------------
| |  | PLATO LEARNING, INC.
| |  |                      |  |                                         
| |  | By                   |  | /s/John Murray                          
| |  |                      |  |                                         
| |  |                      |  | President and                           
| |  |                      |  | Chief Executive Officer                 
| |  |                      |  | (principal executive officer)           
| |  |                      |  |                                         
| |  |                      |  | /s/Gregory J. Melsen                    
| |  |                      |  |                                         
| |  |                      |  | Vice President Finance and              
| |  |                      |  | Chief Financial Officer                 
| |  |                      |  | (principal financial officer)           
| |  |                      |  |                                         
| |  |                      |  | /s/Mary Jo Murphy                       
| |  |                      |  |                                         
| |  |                      |  | Vice President, Corporate Controller and
| |  |                      |  | Chief Accounting Officer                
| |  |                      |  | (principal accounting officer)          

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##### Table of Contents






CERTIFICATIONS

The undersigned, in his capacity as an officer of PLATO Learning, Inc.,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17
C.F.R.ss.240.13a-14.

I, John Murray, certify that:



|1. |  | I have reviewed this Quarterly Report on Form 10-Q of PLATO Learning,
Inc.;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have: (a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared; (b) evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the Evaluation Date); and (c)
presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
|  
|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors: (a) all significant
deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and (b) any fraud,
whether or not material, that involves management or other employees who
have a significant role in the registrants internal controls; and                                                                                                                                                                                                                                           
|  
|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                    |  |                                      
|------------------- |  | -------------------------------------
|Date: June 16, 2003 |  | /s/ John Murray                      
|                    |  |                                      
|                    |  | President and Chief Executive Officer

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##### Table of Contents



CERTIFICATIONS

The undersigned, in his capacity as an officer of PLATO Learning, Inc.,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17
C.F.R.ss.240.13a-14.

I, Gregory J. Melsen, certify that:



|1. |  | I have reviewed this Quarterly Report on Form 10-Q of PLATO Learning,
Inc.;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have: (a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared; (b) evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the Evaluation Date); and (c)
presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
|  
|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors: (a) all significant
deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and (b) any fraud,
whether or not material, that involves management or other employees who
have a significant role in the registrants internal controls; and                                                                                                                                                                                                                                           
|  
|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                    |  |                                                   
|------------------- |  | --------------------------------------------------
|Date: June 16, 2003 |  | /s/ Gregory J. Melsen                             
|                    |  |                                                   
|                    |  | Vice President Finance and Chief Financial Officer

31