##### 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, 2006
 Commission File Number 0-20842
 PLATO LEARNING, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    36-3660532(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)
 10801 Nesbitt Avenue South, Bloomington, MN 55437  (Address of principal executive offices)
 (952) 832-1000  (Registrants telephone number, including area code)
 Not Applicable  (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ o
  o þ
    1




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##### 



PLATO LEARNING, INC.
Form 10-Q
Quarterly Period Ended April 30, 2006
 TABLE OF CONTENTS
 PagePART I.FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements:Condensed Consolidated Statements of Operations for the Three and Six Months Ended April 30, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of April 30, 2006 and October 31, 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2006 and 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27ITEM 4.
    
    Controls and Procedures
    
    
    27PART II.OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    28ITEM 1A.
    
    Risk Factors
    
    
    28ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28ITEM 6.
    
    Exhibits
    
    
    28SIGNATURES
    
    
    
    
    29Certification of CEO Under Rule 13a-14(a)Certification of CFO Under Rule 13a-14(a)Certification of CEO Under 18 U.S.C. 1350Certification of CFO Under 18 U.S.C. 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Operations (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:License fees
    
    $
    6,920
    
    
    $
    15,299
    
    
    $
    15,969
    
    
    $
    27,301Subscriptions
    
    
    4,054
    
    
    
    4,517
    
    
    
    8,410
    
    
    
    9,050Services
    
    
    9,001
    
    
    
    11,613
    
    
    
    19,082
    
    
    
    20,533Total revenues
    
    
    19,975
    
    
    
    31,429
    
    
    
    43,461
    
    
    
    56,884Cost of revenues:License fees
    
    
    2,681
    
    
    
    4,243
    
    
    
    5,654
    
    
    
    8,647Subscriptions
    
    
    2,656
    
    
    
    2,142
    
    
    
    4,897
    
    
    
    4,455Services
    
    
    4,480
    
    
    
    6,719
    
    
    
    9,262
    
    
    
    13,573Total cost of revenues
    
    
    9,817
    
    
    
    13,104
    
    
    
    19,813
    
    
    
    26,675Gross profit
    
    
    10,158
    
    
    
    18,325
    
    
    
    23,648
    
    
    
    30,209Operating expenses:Sales and marketing
    
    
    9,576
    
    
    
    13,410
    
    
    
    19,310
    
    
    
    26,736General and administrative
    
    
    4,314
    
    
    
    4,842
    
    
    
    8,962
    
    
    
    9,052Product maintenance and development
    
    
    1,225
    
    
    
    1,222
    
    
    
    2,764
    
    
    
    2,693Amortization of intangibles
    
    
    933
    
    
    
    1,080
    
    
    
    1,902
    
    
    
    2,172Restructuring and other charges
    
    
    259
    
    
    
    632
    
    
    
    339
    
    
    
    2,921Total operating expenses
    
    
    16,307
    
    
    
    21,186
    
    
    
    33,277
    
    
    
    43,574Operating loss
    
    
    (6,149
    )
    
    
    (2,861
    )
    
    
    (9,629
    )
    
    
    (13,365
    )Other income (expense):Interest income
    
    
    406
    
    
    
    168
    
    
    
    871
    
    
    
    380Interest expense
    
    
    (6
    )
    
    
    (28
    )
    
    
    (27
    )
    
    
    (43
    )Other expense, net
    
    
    
    
    
    
    (83
    )
    
    
    (11
    )
    
    
    (153
    )Loss before income taxes
    
    
    (5,749
    )
    
    
    (2,804
    )
    
    
    (8,796
    )
    
    
    (13,181
    )Income tax expense
    
    
    150
    
    
    
    150
    
    
    
    300
    
    
    
    300Net loss
    
    $
    (5,899
    )
    
    $
    (2,954
    )
    
    $
    (9,096
    )
    
    $
    (13,481
    )Loss per share:Basic and diluted
    
    $
    (0.25
    )
    
    $
    (0.13
    )
    
    $
    (0.38
    )
    
    $
    (0.58
    )Weighted average common shares outstanding:Basic and diluted
    
    
    23,674
    
    
    
    23,378
    
    
    
    23,652
    
    
    
    23,240
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands, except per share amounts)
 April 30,
    
    
    October 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,794
    
    
    $
    46,901Marketable securities
    
    
    229
    
    
    
    213Accounts receivable, net
    
    
    13,784
    
    
    
    22,768Inventories
    
    
    3,330
    
    
    
    4,026Other current assets
    
    
    5,002
    
    
    
    6,351Total current assets
    
    
    53,139
    
    
    
    80,259Equipment and leasehold improvements, net
    
    
    5,174
    
    
    
    5,711Product development costs, net
    
    
    20,387
    
    
    
    14,753Goodwill
    
    
    71,865
    
    
    
    71,865Identified intangible assets, net
    
    
    20,000
    
    
    
    22,505Other long-term assets
    
    
    1,896
    
    
    
    2,235Total assets
    
    $
    172,461
    
    
    $
    197,328LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,499
    
    
    $
    2,938Accrued compensation
    
    
    5,259
    
    
    
    7,772Accrued liabilities
    
    
    7,222
    
    
    
    8,933Deferred revenue
    
    
    24,703
    
    
    
    35,218Total current liabilities
    
    
    38,683
    
    
    
    54,861Long-term deferred revenue
    
    
    4,262
    
    
    
    5,213Deferred income taxes
    
    
    2,231
    
    
    
    1,931Other long-term liabilities
    
    
    300
    
    
    
    496Total liabilities
    
    
    45,476
    
    
    
    62,501Stockholders equity:Common stock, $.01 par value, 50,000 shares authorized;
23,732 shares issued and 23,712 shares outstanding at April 30,
2006; 23,637 shares issued and 23,617 shares outstanding
at October 31, 2005
    
    
    237
    
    
    
    236Additional paid-in capital
    
    
    167,594
    
    
    
    166,295Treasury stock at cost
    
    
    (205
    )
    
    
    (205
    )Accumulated deficit
    
    
    (39,633
    )
    
    
    (30,537
    )Accumulated other comprehensive loss
    
    
    (1,008
    )
    
    
    (962
    )Total stockholders equity
    
    
    126,985
    
    
    
    134,827Total liabilities and stockholders equity
    
    $
    172,461
    
    
    $
    197,328
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Six Months EndedApril 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (9,096
    )
    
    $
    (13,481
    )Adjustments to reconcile net loss to net cash used in operating activities:Deferred income taxes
    
    
    300
    
    
    
    300Amortization of capitalized product development costs
    
    
    3,526
    
    
    
    3,463Amortization of identified intangible and other long-term assets
    
    
    2,672
    
    
    
    4,280Depreciation and amortization of equipment and leasehold improvements
    
    
    1,288
    
    
    
    1,743Provision for doubtful accounts
    
    
    335
    
    
    
    674Stock-based compensation
    
    
    803
    
    
    
    39Loss on disposal of equipment
    
    
    83
    
    
    
    32Changes in operating assets and liabilities:Accounts receivable
    
    
    8,649
    
    
    
    12,589Inventories
    
    
    696
    
    
    
    (926
    )Other current and long-term assets
    
    
    1,529
    
    
    
    (244
    )Accounts payable
    
    
    (1,439
    )
    
    
    (3,092
    )Other current and long-term liabilities
    
    
    (5,453
    )
    
    
    (2,667
    )Deferred revenue
    
    
    (11,466
    )
    
    
    (12,306
    )Total adjustments
    
    
    1,523
    
    
    
    3,885Net cash used in operating activities
    
    
    (7,573
    )
    
    
    (9,596
    )Investing activities:Capitalized internal product development costs
    
    
    (6,160
    )
    
    
    (5,211
    )Purchased product development
    
    
    (2,000
    )
    
    
    Purchases of equipment and leasehold improvements
    
    
    (828
    )
    
    
    (1,375
    )Purchases of marketable securities
    
    
    
    
    
    
    (9,266
    )Sales of marketable securities
    
    
    
    
    
    
    4,559Maturities of marketable securities
    
    
    
    
    
    
    15,000Net cash (used in) provided by investing activities
    
    
    (8,988
    )
    
    
    3,707Financing activities:Net proceeds from issuance of common stock
    
    
    587
    
    
    
    1,925Repayments of capital lease obligations
    
    
    (58
    )
    
    
    (127
    )Net cash provided by financing activities
    
    
    529
    
    
    
    1,798Effect of currency exchange rate changes on cash and cash equivalents
    
    
    (75
    )
    
    
    390Net decrease in cash and cash equivalents
    
    
    (16,107
    )
    
    
    (3,701
    )Cash and cash equivalents at beginning of period
    
    
    46,901
    
    
    
    29,235Cash and cash equivalents at end of period
    
    $
    30,794
    
    
    $
    25,534
 See Notes to Condensed Consolidated Financial Statements.
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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Note 1. General
 Basis of Presentation
  Consolidation
  Fiscal Periods
  Reclassifications
 Other Revenues:
 6




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##### Table of Contents



Revenue
    
    
    Cost of RevenueIn thousands
    
    License
    
    
    Service
    
    
    Other
    
    
    License
    
    
    Service
    
    
    OtherQuarter Ended January 31, 2005:As previously classified
    
    $
    11,095
    
    
    $
    8,196
    
    
    $
    1,631
    
    
    $
    3,432
    
    
    $
    6,126
    
    
    $
    1,700Reclassifications
    
    
    907
    
    
    
    724
    
    
    
    (1,631
    )
    
    
    972
    
    
    
    728
    
    
    
    (1,700
    )As reclassfied
    
    $
    12,002
    
    
    $
    8,920
    
    
    $
    
    
    
    $
    4,404
    
    
    $
    6,854
    
    
    $
    Quarter Ended April 30, 2005:As previously classified
    
    $
    14,233
    
    
    $
    10,908
    
    
    $
    1,771
    
    
    $
    2,869
    
    
    $
    6,108
    
    
    $
    1,985Reclassifications
    
    
    1,066
    
    
    
    705
    
    
    
    (1,771
    )
    
    
    1,374
    
    
    
    611
    
    
    
    (1,985
    )As reclassfied
    
    $
    15,299
    
    
    $
    11,613
    
    
    $
    
    
    
    $
    4,243
    
    
    $
    6,719
    
    
    $
    Quarter Ended July 31, 2005:As previously classified
    
    $
    16,747
    
    
    $
    7,440
    
    
    $
    2,652
    
    
    $
    3,001
    
    
    $
    4,892
    
    
    $
    2,560Reclassifications
    
    
    1,857
    
    
    
    795
    
    
    
    (2,652
    )
    
    
    1,857
    
    
    
    703
    
    
    
    (2,560
    )As reclassfied
    
    $
    18,604
    
    
    $
    8,235
    
    
    $
    
    
    
    $
    4,858
    
    
    $
    5,595
    
    
    $
    Year Ended October 31, 2005:As previously classified
    
    $
    57,803
    
    
    $
    38,342
    
    
    $
    7,662
    
    
    $
    12,353
    
    
    $
    21,809
    
    
    $
    7,876Reclassifications
    
    
    4,724
    
    
    
    2,938
    
    
    
    (7,662
    )
    
    
    5,327
    
    
    
    2,549
    
    
    
    (7,876
    )As reclassfied
    
    $
    62,527
    
    
    $
    41,280
    
    
    $
    
    
    
    $
    17,680
    
    
    $
    24,358
    
    
    $
    
 Cash Flow Statement:
 Note 2. Summary of Significant Accounting Policies
 General
  
    
    Revenue recognition
    
    Allowance for doubtful accounts
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  7




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment , Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
   Loss Per Share
  New Accounting Pronouncements
  Note 3. Stock-Based Compensation
   8




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##### Table of Contents



Share-Based Payment
 Fiscal Year2006
    
    Fiscal YearAwards to
    
    2005Date
    
    AwardsExpected life
    
    4.3 years
    
    
    5.0 yearsRisk-free rate of return
    
    4.0%- 4.5%
    
    
    3.9%Volatility
    
    49.0%
    
    
    62.0%Dividend yield
    
    0.0%
    
    
    0.0%
  9




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedApril 30, 2006
    
    
    April 30, 2006Stock options granted after the adoption of SFAS 123(R)
    
    $
    252
    
    
    $
    393Stock options granted prior to the adoption of SFAS 123(R)
    
    
    112
    
    
    
    253Restricted stock awards
    
    
    59
    
    
    
    59Bonus unit agreements
    
    
    54
    
    
    
    90Employee stock purchase plan
    
    
    4
    
    
    
    8$
    481
    
    
    $
    803
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedApril 30, 2005
    
    
    April 30, 2005Net loss, as reported
    
    $
    (2,954
    )
    
    $
    (13,481
    )Stock-based compensation expense included in
reported net loss
    
    
    39
    
    
    
    39Stock-based compensation expense determined using
the fair value based method for all awards
    
    
    (775
    )
    
    
    (1,505
    )Pro forma net loss
    
    $
    (3,690
    )
    
    $
    (14,947
    )Basic and diluted loss per share:As reported
    
    $
    (0.13
    )
    
    $
    (0.58
    )Pro forma
    
    $
    (0.16
    )
    
    $
    (0.64
    )
  10




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##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Term (in
    
    
    IntrinsicOutstanding
    
    
    per Share
    
    
    years)
    
    
    ValueOptions outstanding at October 31, 2005
    
    
    2,652
    
    
    $
    9.51Options granted
    
    
    797
    
    
    
    7.68Options exercised
    
    
    (85
    )
    
    
    6.61Options forfeited or cancelled
    
    
    (356
    )
    
    
    11.15Options outstanding at April 30, 2006
    
    
    3,008
    
    
    $
    8.91
    
    
    
    6.2
    
    
    $
    6,051Options exercisable at April 30, 2006
    
    
    2,093
    
    
    $
    9.54
    
    
    
    5.7
    
    
    $
    3,733
   Note 4. Accounts Receivable
  April 30,
    
    
    October 31,2006
    
    
    2005Trade accounts receivable
    
    $
    14,105
    
    
    $
    21,930Installment accounts receivable
    
    
    1,789
    
    
    
    2,485Allowance for doubtful accounts
    
    
    (2,110
    )
    
    
    (1,647
    )$
    13,784
    
    
    $
    22,768
  11




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##### Table of Contents



2006
    
    
    2005Balance, beginning of fiscal year
    
    $
    1,647
    
    
    $
    2,712Provision for doubtful accounts (included in general
and administrative expenses):Three months ended January 31
    
    
    227
    
    
    
    305Three months ended April 30
    
    
    108
    
    
    
    369Recoveries (write-offs) of doubtful accounts, net
    
    
    128
    
    
    
    (422
    )Balance, April 30
    
    $
    2,110
    
    
    $
    2,964
 Note 5. Inventories
  April 30,
    
    
    October 31,2006
    
    
    2005Third-party hardware
    
    $
    1,448
    
    
    $
    1,779Media, documentation, and packaging materials
    
    
    1,882
    
    
    
    2,247$
    3,330
    
    
    $
    4,026
 Note 6. Product Development Costs
  Gross Carrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    Net Carrying ValueBalance, October 31, 2005
    
    $
    29,142
    
    
    $
    (14,389
    )
    
    $
    14,753Capitalized internal product development costs
    
    
    6,160
    
    
    
    
    
    
    
    6,160Purchased product development
    
    
    3,000
    
    
    
    
    
    
    
    3,000Write-off of fully amortized costs
    
    
    (6,881
    )
    
    
    6,881
    
    
    
    Amortization of product development costs
    
    
    
    
    
    
    (3,526
    )
    
    
    (3,526
    )Balance, April 30, 2006
    
    $
    31,421
    
    
    $
    (11,034
    )
    
    $
    20,387
  12




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##### Table of Contents



Note 7. Goodwill and Identified Intangible Assets
   April 30, 2006
    
    
    October 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingValue
    
    
    Amortization
    
    
    Value
    
    
    Value
    
    
    Amortization
    
    
    ValueAcquired technology
    
    $
    23,029
    
    
    $
    (17,247
    )
    
    $
    5,782
    
    
    $
    23,029
    
    
    $
    (16,645
    )
    
    $
    6,384Trademarks and
tradenames
    
    
    3,680
    
    
    
    (2,390
    )
    
    
    1,290
    
    
    
    3,680
    
    
    
    (2,036
    )
    
    
    1,644Customer relationships
and lists
    
    
    21,100
    
    
    
    (8,172
    )
    
    
    12,928
    
    
    
    21,100
    
    
    
    (6,644
    )
    
    
    14,456Noncompete agreements
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    
    
    
    
    1,000
    
    
    
    (979
    )
    
    
    21$
    48,809
    
    
    $
    (28,809
    )
    
    $
    20,000
    
    
    $
    48,809
    
    
    $
    (26,304
    )
    
    $
    22,505
  Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Amortization of intangible assets included in:Cost of license fees and subscriptions revenues
    
    $
    302
    
    
    $
    957
    
    
    $
    603
    
    
    $
    2,108Operating expenses
    
    
    933
    
    
    
    1,080
    
    
    
    1,902
    
    
    
    2,172$
    1,235
    
    
    $
    2,037
    
    
    $
    2,505
    
    
    $
    4,280
  Cost of
    
    
    OperatingRevenues
    
    
    Expenses
    
    
    TotalRemainder of 2006
    
    $
    603
    
    
    $
    1,808
    
    
    $
    2,4112007
    
    
    1,206
    
    
    
    3,529
    
    
    
    4,7352008
    
    
    1,206
    
    
    
    3,105
    
    
    
    4,3112009
    
    
    1,069
    
    
    
    2,829
    
    
    
    3,8982010
    
    
    647
    
    
    
    2,829
    
    
    
    3,476Thereafter
    
    
    1,051
    
    
    
    118
    
    
    
    1,169$
    5,782
    
    
    $
    14,218
    
    
    $
    20,000
  13




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##### Table of Contents





Note 8. Debt




Note 9. Deferred Revenue




April 30,
    
    
    October 31,2006
    
    
    2005License fees
    
    $
    1,101
    
    
    $
    4,476Subscriptions
    
    
    10,237
    
    
    
    12,546Services and other
    
    
    17,627
    
    
    
    23,409Total
    
    
    28,965
    
    
    
    40,431Less: long-term amounts
    
    
    (4,262
    )
    
    
    (5,213
    )Current portion
    
    $
    24,703
    
    
    $
    35,218


Note 10. Commitments and Contingent Liabilities


License Agreement
  Legal Proceedings
  14




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Note 11. Restructuring and Other Charges




Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restructuring charges:Severance and related benefits for U.K.
headcount reduction
    
    $
    
    
    
    $
    22
    
    
    $
    
    
    
    $
    452Severance and related benefits for U.S.
headcount reduction
    
    
    161
    
    
    
    26
    
    
    
    241
    
    
    
    299U.K. facility closure liabilities
    
    
    
    
    
    
    313
    
    
    
    
    
    
    
    313Other
    
    
    98
    
    
    
    92
    
    
    
    98
    
    
    
    92259
    
    
    
    453
    
    
    
    339
    
    
    
    1,156Other charges:Executive officer changes
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    1,595Other
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170$
    259
    
    
    $
    632
    
    
    $
    339
    
    
    $
    2,921






Severanceand related
    
    
    Facilitybenefits
    
    
    closings
    
    
    Other
    
    
    TotalReserve balance at October 31, 2005
    
    $
    1,598
    
    
    $
    177
    
    
    $
    401
    
    
    $
    2,176Provision for restructuring
    
    
    241
    
    
    
    
    
    
    
    98
    
    
    
    339Cash payments
    
    
    (1,770
    )
    
    
    (131
    )
    
    
    (127
    )
    
    
    (2,028
    )Other
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    67Reserve balance at April 30, 2006
    
    $
    69
    
    
    $
    46
    
    
    $
    439
    
    
    $
    554


15



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##### Table of Contents





Note 12. Comprehensive Loss




Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (5,899
    )
    
    $
    (2,954
    )
    
    $
    (9,096
    )
    
    $
    (13,481
    )Unrealized gains on available for sale securities
    
    
    8
    
    
    
    10
    
    
    
    16
    
    
    
    52Foreign currency translation adjustments
    
    
    (39
    )
    
    
    81
    
    
    
    (69
    )
    
    
    298Total comprehensive loss
    
    $
    (5,930
    )
    
    $
    (2,863
    )
    
    $
    (9,149
    )
    
    $
    (13,131
    )




16



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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Business Description
    Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Allowance for doubtful accounts
    
    Capitalized product development costs
    
    Valuation of our deferred income taxes
    
    Valuation and impairment analysis of goodwill and identified intangible assets
  Share-Based Payment ,
 17




---



##### Table of Contents



General Factors Affecting our Financial Results
  Revenue
 Gross Margin
 Operating Expenses
   18




---



##### Table of Contents



Overview of Financial Results
       19




---



##### Table of Contents











Results of Operations


Revenues
   Orders Greater Than $100,000
 Three Months Ended
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    
    
    
    April 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % ChangeNumber
    
    
    19
    
    
    
    29
    
    
    
    -34.5
    %
    
    
    45
    
    
    
    58
    
    
    
    -22.4
    %Value ($000)
    
    $
    4,046
    
    
    $
    8,081
    
    
    
    -49.9
    %
    
    $
    9,371
    
    
    $
    15,534
    
    
    
    -39.7
    %Average Value ($000)
    
    $
    213
    
    
    $
    279
    
    
    
    -23.7
    %
    
    $
    208
    
    
    $
    268
    
    
    
    -22.4
    %
 20




---



##### Table of Contents



Revenue By Category (in thousands):
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedApril 30,
    
    
    
    
    
    
    April 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeLicense fees
    
    $
    6,920
    
    
    $
    15,299
    
    
    
    -54.8
    %
    
    $
    15,969
    
    
    $
    27,301
    
    
    
    -41.5
    %Subscriptions
    
    
    4,054
    
    
    
    4,517
    
    
    
    -10.3
    %
    
    
    8,410
    
    
    
    9,050
    
    
    
    -7.1
    %Services
    
    
    9,001
    
    
    
    11,613
    
    
    
    -22.5
    %
    
    
    19,082
    
    
    
    20,533
    
    
    
    -7.1
    %$
    19,975
    
    
    $
    31,429
    
    
    
    -36.4
    %
    
    $
    43,461
    
    
    $
    56,884
    
    
    
    -23.6
    %
    Gross Margin
   21




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##### Table of Contents



Percentage of Total Revenue
 Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,Revenue Category
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005License fees
    
    
    34.6
    %
    
    
    48.7
    %
    
    
    36.7
    %
    
    
    48.0
    %Subscriptions
    
    
    20.3
    %
    
    
    14.4
    %
    
    
    19.4
    %
    
    
    15.9
    %Services
    
    
    45.1
    %
    
    
    36.9
    %
    
    
    43.9
    %
    
    
    36.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Gross Margin Percentage
 Three Months Ended April 30,
    
    Six Months Ended April 30,Increase
    
    
    
    
    
    
    
    
    
    IncreaseRevenue Category
    
    2006
    
    2005
    
    (Decrease)
    
    2006
    
    2005
    
    (Decrease)License fees
    
    
    61.3
    %
    
    
    72.3
    %
    
    
    (11.0
    %)
    
    
    64.6
    %
    
    
    68.3
    %
    
    
    (3.7
    %)Subscriptions
    
    
    34.5
    %
    
    
    52.6
    %
    
    
    (18.1
    %)
    
    
    41.8
    %
    
    
    50.8
    %
    
    
    (9.0
    %)Services
    
    
    50.2
    %
    
    
    42.1
    %
    
    
    8.1
    %
    
    
    51.5
    %
    
    
    33.9
    %
    
    
    17.6
    %Total
    
    
    50.9
    %
    
    
    58.3
    %
    
    
    (7.4
    %)
    
    
    54.4
    %
    
    
    53.1
    %
    
    
    1.3
    %
     22




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##### Table of Contents



Operating Expenses
  Percentage of
    
    
    
    
    
    
    Percentage ofTotal Revenue
    
    
    Percent
    
    
    Total Revenue
    
    
    PercentThree Months Ended
    
    
    Increase
    
    
    Six Months Ended
    
    
    IncreaseApril 30,
    
    
    (Decrease)
    
    
    April 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    in Amount
    
    
    2006
    
    
    2005
    
    
    in AmountSales and marketing
    
    
    47.9
    %
    
    
    42.7
    %
    
    
    (28.6
    %)
    
    
    44.4
    %
    
    
    47.0
    %
    
    
    (27.8
    %)General and administrative
    
    
    21.6
    %
    
    
    15.4
    %
    
    
    (10.9
    %)
    
    
    20.6
    %
    
    
    15.9
    %
    
    
    (1.0
    %)Product maintenance and development
    
    
    6.1
    %
    
    
    3.9
    %
    
    
    0.2
    %
    
    
    6.4
    %
    
    
    4.7
    %
    
    
    2.6
    %Amortization of intangibles
    
    
    4.7
    %
    
    
    3.4
    %
    
    
    (13.6
    %)
    
    
    4.4
    %
    
    
    3.8
    %
    
    
    (12.4
    %)Operating expenses excluding
restructuring and other charges
    
    
    80.3
    %
    
    
    65.4
    %
    
    
    (21.9
    %)
    
    
    75.8
    %
    
    
    71.4
    %
    
    
    (19.0
    %)Restructuring and
other charges
    
    
    1.3
    %
    
    
    2.0
    %
    
    
    (59.0
    %)
    
    
    0.8
    %
    
    
    5.1
    %
    
    
    (88.4
    %)Total operating expenses
    
    
    81.6
    %
    
    
    67.4
    %
    
    
    (23.0
    %)
    
    
    76.6
    %
    
    
    76.5
    %
    
    
    (23.6
    %)
     23




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##### Table of Contents







Interest Income




Liquidity and Capital Resources


Cash and Cash Equivalents
  Working Capital and Liquidity
     24




---



##### Table of Contents



Contractual Obligations and Commercial Commitments
   Disclosures about Off-Balance Sheet Arrangements
  Fiscal Year 2006 Outlook
   25




---



##### Table of Contents



Forward-Looking Statements
  Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  26




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk Foreign Currency
Exchange Rate Risk
 
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  27




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    Election of Director Debra A. Janssen: For 20,134,584 and Withhold
1,392,340.2.
    
    Election of Director M. Lee Pelton: For 18,287,408 and Withhold
3,239,516.3.
    
    Election of Director John T. (Ted) Sanders: For 18,210,838 and Withhold
3,316,086.4.
    
    Approval of the PLATO Learning, Inc. 2006 Stock Incentive Plan: For
11,590,504, Against 6,159,403, Abstain 139,829, and Broker Non-Vote 3,637,188.5.
    
    Ratification of the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending October
31, 2006: For 21,397,311, Against 51,637, Abstain 77,976, and Broker Non-Vote 0.
 
 ITEM 6. EXHIBITS
 Exhibit Number and Description
 31.01
    
    Certification of Chief Executive Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    Certification of Chief Financial Officer under Rule 13a-14(a) adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.01
    
    Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.02
    
    Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 28




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##### Table of Contents



SIGNATURES
  PLATO LEARNING, INC.
June 9, 2006
    
    By
    
    /s/ michael a. morache

Michael A. MorachePresident and Chief Executive Officer(principal executive officer)/s/ laurence l. betterley

Laurence L. BetterleySenior Vice President and Chief Financial Officer(principal financial officer)
 29