TABLE OF CONTENTS




|                                                                                       |                                                                        |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                                                       | PART I. FINANCIAL INFORMATION                                         
|CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands, except share and per share data)
|CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)                       
|                                                                                       | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 
|PART II. OTHER INFORMATION                                                            
|                                                                                       | Item 1. Legal Proceedings                                             
|                                                                                       | Item 2. Changes in Securities                                         
|                                                                                       | Item 3. Defaults Upon Senior Securities                               
|                                                                                       | Item 4. Submission of Matters to a Vote of Security Holders           
|                                                                                       | Item 4. Submission of Matters to a Vote of Security Holders, Continued
|                                                                                       | Item 5. Other Information                                             
|                                                                                       | Item 6. Exhibits and Reports on Form 8-K                              
|SIGNATURES                                                                            



---



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)



| |  |  | [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
| |  |  | -----------------------------------------------------
| |  |  | OF THE SECURITIES EXCHANGE ACT OF 1934               

For the quarterly period ended April 30, 2000

OR



| |  |  | [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
| |  |  | ------------------------------------------------------
| |  |  | OF THE SECURITIES EXCHANGE ACT OF 1934                

For the transition period from _____ to _____

Commission File Number 0-20842

PLATO LEARNING, INC.
(Exact name of Registrant as specified in its charter)

|                                                         |  |                    
|-------------------------------------------------------- |  | -------------------
|Delaware                                                 |  | 36-3660532         
|                                                        
|                                                        
|                                                        
|                                                        
|(State or other jurisdiction                             |  | (I.R.S. Employer   
|                                                        
|                                                        
|                                                        
|                                                        
|of incorporation or organization)                        |  | Identification No.)
|                                                        
|                                                        
|                                                        
|                                                        
|1721 Moon Lake Boulevard, Suite 555, Hoffman Estates, IL |  | 60194              
|                                                        
|                                                        
|                                                        
|                                                        
|(Address of principal executive offices)                 |  | (Zip Code)         
|                                                        
|                                                        
|                                                        
|                                                        
|Registrants telephone number, including area code:      |  | (847)781-7800      

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 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 |  | 7,519,830 shares              
|                            
|                            
|                            
|                            
|Class                        |  | Outstanding as of June 1, 2000

(This document contains 20 pages)

1



---



##### Table of Contents



PLATO Learning, Inc. and Subsidiaries

INDEX

|           |  |                                                                                              |  |        |    | 
|---------- |  | -------------------------------------------------------------------------------------------- |  | ------ | -- | 
|           |  |                                                                                              |  | Page  
|           |  |                                                                                              |  | Number
|           |  |                                                                                              |  |       
|PART I     |  | FINANCIAL INFORMATION                                                                       
|          
|          
|          
|          
|Item 1.    |  | Consolidated Financial Statements (Unaudited):                                              
|          
|          
|          
|          
|           |  | Consolidated Statements of Income for the
Three and Six Months Ended April 30, 2000 and 1999 |  |        | 3  | 
|          
|          
|          
|          
|           |  | Consolidated Balance Sheets as of
April 30, 2000 and October 31, 1999                        |  |        | 4  | 
|          
|          
|          
|          
|           |  | Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 2000 and 1999       |  |        | 5  | 
|          
|          
|          
|          
|           |  | Notes to Consolidated Financial Statements                                                   |  |        | 6  | 
|          
|          
|          
|          
|Item 2.    |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations        |  |        | 11 | 
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                           
|          
|          
|          
|          
|Item 1.    |  | Legal Proceedings                                                                            |  |        | 18 | 
|          
|          
|          
|          
|Item 2.    |  | Changes in Securities                                                                        |  |        | 18 | 
|          
|          
|          
|          
|Item 3.    |  | Defaults Upon Senior Securities                                                              |  |        | 18 | 
|          
|          
|          
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                          |  |        | 18 | 
|          
|          
|          
|          
|Item 5.    |  | Other Information                                                                            |  |        | 19 | 
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                             |  |        | 19 | 
|          
|          
|          
|          
|SIGNATURES |  |                                                                                              |  |        | 20 | 

2



---



##### Table of Contents






PART I. FINANCIAL INFORMATION
PLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share data)

|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |        |        |        |  
|------------------------------------------- | ---------------------------------------- | --------------------------------- | -------------------------------------------------- | ----- | ------------------ | --- | ---------------- | ----- | ----- | ---- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                            |                                          |                                   |                                                    |       | Three Months Ended |     | Six Months Ended
|                                            |                                          |                                   |                                                    |       | April 30,          |     | April 30,       
|                                            |                                          |                                   |                                                    |       |                    |     |                 
|                                            |                                          |                                   |                                                    |       | 2000               |     | 1999             |       | 2000  |      | 1999  
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |       
|Revenues                                    |                                          | $                                 | 12,240                                             |       |                    | $   | 9,545            |       |       | $    | 19,765 |        |        | $      | 15,206 |       
|                                           
|                                           
|                                           
|                                           
|Cost of revenues                            |                                          |                                   | 1,609                                              |       |                    |     | 1,402            |       |       |      | 2,966  |        |        |        | 2,363  |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                            |                                          | Gross profit                      |                                                    |       | 10,631             |     |                  |       | 8,143 |      |        |        | 16,799 |        |        |        | 12,843 |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|Operating expenses:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative      |                                   |                                                    | 8,216 |                    |     |                  | 6,297 |       |      |        | 14,960 |        |        |        | 11,843 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Product development and customer support |                                   |                                                    | 1,542 |                    |     |                  | 1,384 |       |      |        | 3,091  |        |        |        | 2,720  |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                          | Total operating expenses          |                                                    |       | 9,758              |     |                  |       | 7,681 |      |        |        | 18,051 |        |        |        | 14,563 |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                            | Operating income (loss)                  |                                   |                                                    | 873   |                    |     |                  | 462   |       |      |        | (1,252 | )      |        |        | (1,720 | )     
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                          |                                   | 253                                                |       |                    |     | 474              |       |       |      | 485    |        |        |        | 1,089  |       
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                          |                                   | 63                                                 |       |                    |     | 42               |       |       |      | 97     |        |        |        | 91     |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                            |                                          |                                   | Income (loss) before income taxes                  |       |                    | 557 |                  |       |       | (54  | )      |        |        | (1,834 | )      |        |        | (2,900 | )
|                                           
|                                           
|                                           
|                                           
|Income taxes                                |                                          |                                   | 201                                                |       |                    |     |                 |       |       |      | (696   | )      |        |        |       |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                          |                                   | Net income (loss)                                  |       |                    | 356 |                  |       |       | (54  | )      |        |        | (1,138 | )      |        |        | (2,900 | )
|                                           
|                                           
|                                           
|                                           
|Preferred stock accretion                   |                                          |                                   |                                                   |       |                    |     | (670             | )     |       |      | (129   | )      |        |        | (670   | )     
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                            |                                          |                                   | Net income (loss) available to
common stockholders |       | $                  | 356 |                  |       | $     | (724 | )      |        | $      | (1,267 | )      |        | $      | (3,570 | )
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|Earnings per share:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                                   | $                                                  | 0.05  |                    |     | $                | (0.11 | )     |      | $      | (0.18  | )      |        | $      | (0.56  | )     
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                            | Diluted                                  |                                   | $                                                  | 0.05  |                    |     | $                | (0.11 | )     |      | $      | (0.18  | )      |        | $      | (0.56  | )     
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                                   |                                                    | 7,310 |                    |     |                  | 6,439 |       |      |        | 7,120  |        |        |        | 6,427  |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                            | Diluted                                  |                                   |                                                    | 7,688 |                    |     |                  | 6,439 |       |      |        | 7,120  |        |        |        | 6,427  |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|Comprehensive income (loss):               
|                                           
|                                           
|                                           
|                                           
|                                            | Net income (loss)                        |                                   | $                                                  | 356   |                    |     | $                | (54   | )     |      | $      | (1,138 | )      |        | $      | (2,900 | )     
|                                           
|                                           
|                                           
|                                           
|                                            | Foreign currency translation adjustments |                                   |                                                    | (82   | )                  |     |                  | (11   | )     |      |        | (103   | )      |        |        | 33     |       
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       
|                                           
|                                           
|                                           
|                                           
|                                            |                                          | Total comprehensive income (loss) |                                                    | $     | 274                |     |                  | $     | (65   | )    |        | $      | (1,241 | )      |        | $      | (2,867 | )     
|                                            |                                          |                                   |                                                    |       |                    |     |                  |       |       |      |        |        |        |        |        |       

See Notes to Consolidated Financial Statements

3



---



##### Table of Contents






PLATO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share data)

|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |        |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------ | ------ | --------- | ------ | ----------- | ------ | - | ------ | 
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        | April 30, |        | October 31,
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        | 2000      |        | 1999       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |            
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      | ASSETS
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Current assets:                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Cash and cash equivalents                                                                                                                                                                                                  |                            | $                                    | 119    |        |           | $      | 63          |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Accounts receivable, less allowances of $1,272 and
$1,005, respectively                                                                                                                                                    |                            |                                      | 18,380 |        |           |        | 19,814      |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Inventories                                                                                                                                                                                                                |                            |                                      | 676    |        |           |        | 646         |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Prepaid expenses and other current assets                                                                                                                                                                                  |                            |                                      | 721    |        |           |        | 720         |       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            | Total current assets       |                                      |        | 19,896 |           |        |             | 21,243 |  
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Equipment and leasehold improvements, less accumulated
depreciation of $3,935    and $3,700, respectively                                                                                                                                                                   |                                                                                                                                                                                                                            |                            | 1,560                                |        |        |           | 1,269  |            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Product development costs, less accumulated amortization of
$8,070 and $7,037,    respectively                                                                                                                                                                              |                                                                                                                                                                                                                            |                            | 7,078                                |        |        |           | 6,843  |            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Deferred tax asset, net                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                            |                            | 11,053                               |        |        |           | 10,357 |            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Other assets                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                            |                            | 1,081                                |        |        |           | 1,476  |            
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        | $         | 40,668 |             |        | $ | 41,188 | 
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            | LIABILITIES
AND STOCKHOLDERS EQUITY
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Current liabilities:                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Revolving loan                                                                                                                                                                                                             |                            | $                                    | 5,941  |        |           | $      | 4,587       |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Accounts payable                                                                                                                                                                                                           |                            |                                      | 1,044  |        |           |        | 1,285       |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Accrued employee salaries and benefits                                                                                                                                                                                     |                            |                                      | 2,338  |        |           |        | 2,677       |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Accrued liabilities                                                                                                                                                                                                        |                            |                                      | 1,374  |        |           |        | 1,482       |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Deferred revenue                                                                                                                                                                                                           |                            |                                      | 4,126  |        |           |        | 4,173       |       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            | Total current liabilities  |                                      |        | 14,823 |           |        |             | 14,204 |  
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Long-term debt                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                            |                            | 2,750                                |        |        |           | 3,050  |            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Deferred revenue, less current portion                                                                                                                                                                                                                                      |                                                                                                                                                                                                                            |                            | 298                                  |        |        |           | 420    |            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Other liabilities                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                            |                            | 197                                  |        |        |           | 133    |            
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            | Total liabilities          |                                      |        | 18,068 |           |        |             | 17,807 |  
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|Convertible redeemable preferred stock, net of unamortized
discounts and    issuance costs; $10,000 stated value per share;
540 shares authorized; 285    shares issued and outstanding at
October 31, 1999; involuntary liquidation    value of $3,280 at
October 31, 1999 |                                                                                                                                                                                                                            |                            |                                     |        |        |           | 2,006  |            
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|Redeemable common stock, $.01 par value; 490,000 shares
outstanding at    October 31, 1999                                                                                                                                                                                  |                                                                                                                                                                                                                            |                            |                                     |        |        |           | 1,799  |            
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|Stockholders equity:                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Common stock, $.01 par value, 25,000,000 shares authorized;
7,641,000 shares    issued and 7,519,000 shares outstanding at
April 30, 2000; 6,560,000 shares    issued and 6,438,000 shares
outstanding at October 31, 1999 |                            |                                      | 75     |        |           |        | 64          |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Paid in capital                                                                                                                                                                                                            |                            |                                      | 28,093 |        |           |        | 23,839      |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Treasury stock at cost, 122,000 shares                                                                                                                                                                                     |                            |                                      | (1,186 | )      |           |        | (1,186      | )     
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Accumulated deficit                                                                                                                                                                                                        |                            |                                      | (3,699 | )      |           |        | (2,561      | )     
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            | Accumulated other comprehensive loss                                                                                                                                                                                       |                            |                                      | (683   | )      |           |        | (580        | )     
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            | Total stockholders equity |                                      |        | 22,600 |           |        |             | 19,576 |  
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        | $         | 40,668 |             |        | $ | 41,188 | 
|                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                            |                            |                                      |        |        |           |        |             |       

See Notes to Consolidated Financial Statements

4



---



##### Table of Contents






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

|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |       |        |        |  
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------- | ----- | ---------------- | ----- | ------ | ----- | ------ | ------ | -
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       | Six Months Ended
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       | April 30,       
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                 
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       | 2000             |       | 1999  
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |       
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                                  |                                           | $                                                                                 | (1,138                                              | )     |                  | $     | (2,900 | )    
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|                                                     | Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           | Deferred income taxes                     |                                                                                   |                                                     | (696  | )                |       |        |      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           | Depreciation and amortization             |                                                                                   |                                                     | 1,415 |                  |       |        | 1,465 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           | Provision for doubtful accounts           |                                                                                   |                                                     | 700   |                  |       |        | 562   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           | Loss on disposal of equipment             |                                                                                   |                                                     | 24    |                  |       |        | 2     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           | (Increase) decrease in assets:           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Accounts receivable                                                               |                                                     |       | 734              |       |        |       | 723    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Inventories                                                                       |                                                     |       | (30              | )     |        |       | (48    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Prepaid expenses and other current and noncurrent assets                          |                                                     |       | 394              |       |        |       | 270    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           | Increase (decrease) in liabilities:      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Accounts payable                                                                  |                                                     |       | (241             | )     |        |       | (796   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Accrued liabilities, accrued employee salaries and
benefits and other liabilities |                                                     |       | (383             | )     |        |       | (1,298 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Deferred revenue                                                                  |                                                     |       | (169             | )     |        |       | (196   | )     
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           |                                                                                   | Total adjustments                                   |       |                  | 1,748 |        |       |        | 684    |  
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           |                                                                                   | Net cash provided by (used in) operating activities |       |                  | 610   |        |       |        | (2,216 | )
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                                                      |                                           |                                                                                   | (708                                                | )     |                  |       | (376   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalization of product development costs                                               |                                           |                                                                                   | (1,268                                              | )     |                  |       | (1,386 | )    
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                           |                                           | Net cash used in investing activities                                             |                                                     |       | (1,976           | )     |        |       | (1,762 | )     
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from short-term borrowings                                                   |                                           |                                                                                   | 1,354                                               |       |                  |       | 1,482  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of long-term debt                                                               |                                           |                                                                                   |                                                    |       |                  |       | (2,441 | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from issuance of convertible redeemable preferred stock                      |                                           |                                                                                   |                                                    |       |                  |       | 4,529  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from issuance of common stock                                                |                                           |                                                                                   | 160                                                 |       |                  |       | 61     |      
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|                                                     |                                                                                           | Net cash provided by financing activities |                                                                                   |                                                     | 1,514 |                  |       |        | 3,631 |       
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|Effect of foreign currency on cash                   |                                                                                           |                                           | (92                                                                               | )                                                   |       |                  | 35    |       
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|Net increase (decrease) in cash and cash equivalents |                                                                                           |                                           | 56                                                                                |                                                     |       |                  | (312  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                           |                                           | 63                                                                                |                                                     |       |                  | 466   |       
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at end of period           |                                                                                           | $                                         | 119                                                                               |                                                     |       | $                | 154   |       
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      
|Supplemental cash flow information:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid for interest                                                                    |                                           | $                                                                                 | 454                                                 |       |                  | $     | 856    |      
|                                                     |                                                                                           |                                           |                                                                                   |                                                     |       |                  |       |        |      

See Notes to Consolidated Financial Statements

5



---



##### Table of Contents






PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



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

Nature of Business:

PLATO Learning, Inc. and its subsidiaries (the Company) develop and market
computer-based, interactive, self-paced instructional systems and related
services. Offering more than 2,000 hours and 10,000 learning objectives of
comprehensive academic and applied skills courseware designed for
adolescents and adults, the Companys PLATO® Learning Systems
are marketed to middle and high schools, colleges, job training programs,
correctional institutions, military education programs, corporations and
consumers. PLATO is delivered via networks, CD-ROM, the Internet, and
private intranets. In addition, single topic PLATO courseware is
available through the Companys e-commerce Web site.

On March 30, 2000, the Companys stockholders approved a change in the
Companys name from TRO Learning, Inc. to PLATO Learning, Inc.

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, these
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Companys Form 10-K
for the fiscal year ended October 31, 1999.

The financial information furnished reflects, in the opinion of the Company,
all adjustments of a normal, recurring nature necessary for a fair statement of
the results for the interim periods presented. Because of cyclical and other
factors, the results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.

Revenue Recognition:

Revenue from the sale of courseware licenses, computer hardware and related
services is recognized upon meeting the following criteria: (i) execution of a
written customer order, (ii) delivery of the courseware, hardware and related
services, (iii) the license fee is fixed and determinable, and (iv)
collectibility of the proceeds is probable. For software arrangements that
include more than one element, the Company allocates the total arrangement fee
among each deliverable based on the relative fair value of each deliverable
determined on vendor-specific objective evidence. Upon delivery, future
service costs, if any, are accrued. Future service costs represent the
Companys problem resolution and support hotline service for a one-year
period. Service revenue includes software support, which is deferred and
recognized ratably over the support period, and revenue from installation and
training services, which is recognized as

6



---



##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



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

Revenue Recognition,Continued:

services are performed. Installation and training services are customarily
billed at a fixed daily rate. Deferred revenue represents the portion of
billings made or payments received in advance
of services being performed or products being delivered.

Product Development, Enhancement, and Maintenance Costs:

Costs incurred in the development, enhancement and routine maintenance of the
Companys current generation courseware products are expensed as incurred.
Costs incurred in establishing the technological feasibility of new courseware
products are expensed as incurred. Once technological feasibility has been
established, costs incurred in the development of new generation courseware
products are capitalized.

Capitalized costs are amortized using the straight-line method over the
estimated useful life of the new courseware products, which is generally three
years. Amortization begins when the product is available for general release
to customers. Unamortized costs determined to be in excess of the net
realizable value of the product, if any, are expensed at the date of such
determination.

Earnings Per Share:

Basic earnings per share is calculated based only upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is calculated based upon the weighted average number of common and, where
dilutive, potential common shares outstanding during the period. Potential
common shares include options, warrants and convertible securities.



|2. |  | ACCOUNTS RECEIVABLE
|-- |  | -------------------

Accounts receivable include installment receivables of $10,481,000 and
$11,806,000 at April 30, 2000 and October 31, 1999, respectively. Installment
receivables to be billed beyond one year from the balance sheet date were
$596,000 and $978,000 at April 30, 2000 and October 31, 1999, respectively, and
are included in other assets on the consolidated balance sheets.



|3. |  | DEBT
|-- |  | ----

Revolving Loan:

At April 30, 2000, borrowings of $5,941,000 were outstanding under the
Companys revolving loan agreement at a weighted-average interest rate of 9.1%
and the unused borrowing capacity was $6,486,000.

7



---



##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



|3. |  | DEBT, Continued
|-- |  | ---------------

Long-Term Debt:

During the quarter ended April 30, 2000, $300,000 of the Companys 10%
subordinated convertible debentures were converted by the holders into
approximately 33,000 shares of the Companys common stock at $9.01 per share.
Pursuant to the terms of the debentures, the conversion price was adjusted from
$9.60 per share to $9.01 per share prior to the conversions.



|4. |  | CONVERTIBLE REDEEMABLE PREFERRED STOCK
|-- |  | --------------------------------------

In January 1999, the Company issued 540 shares of its Series C Convertible
Redeemable Preferred Stock (the Series C Preferred) and warrants to purchase
125,000 shares of the Companys common stock at $9.51 per share for an
aggregate purchase price of $5 million.

Additionally, in July 1999, the Company issued warrants to purchase
approximately 63,000 shares of the Companys common stock at $8.72 per share
related to the issuance of the Series C Preferred. The Company received
proceeds of $5,000,000 and paid offering costs of $501,000, resulting in net
proceeds of $4,499,000for the Series C Preferred and warrants. The warrants were assigned a value of
$541,000 resulting in an increase to paid in capital and a reduction to the
carrying value of the Series C Preferred.

Each share of the Series C Preferred had a par value of $0.01 and a stated
value of $10,000. The Series C Preferred ranked senior to the Companys common
stock, had no voting rights, and was not entitled to any dividends.

The Series C Preferred, as amended, was convertible after 90 days into shares
of the Companys common stock, at the option of the holder, and may have been
converted up to ten years from the issue date. Conversion was mandatory for
all such securities still outstanding on January 13, 2009.

The conversion price of the Series C Preferred was equal to the lower of (a)
$9.51 per share or (b) the applicable percentage of the average of the three
lowest closing prices of the Companys common stock during the 30 trading days
immediately prior to the date of conversion. The applicable percentage was to
decrease over time from 90% (after 90 days) to 82% (after 631 days from
issuance). The aggregate maximum number of shares of the Companys common
stock that could have been issued for all conversions was 1,151,525.

The conversion terms of the Series C Preferred included a beneficial conversion
feature at the issue date. The most beneficial conversion price was determined
to be 82% of the average of the three lowest closing prices of the Companys
common stock during the 30 trading days prior to the issue date. As of the
issue date, the Company allocated approximately $826,000 to the beneficial
conversion feature resulting in an increase to paid in capital and a reduction
to the carrying value of the Series C Preferred. The beneficial conversion
feature was to be recognized

8



---



##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



|4. |  | CONVERTIBLE REDEEMABLE PREFERRED STOCK, Continued
|-- |  | -------------------------------------------------

as a deemed dividend to the preferred stockholders over the 631 day period from
the issue date to the date of the most beneficial conversion percentage using
the greater of the effective interest method or the amount the holder can
realize at each reporting date. Amortization of the beneficial conversion
feature was $0 and $129,000 for the three and six months ended April 30, 2000.
Amortization of the beneficial conversion feature was $670,000 for the three
and six months ended April 30, 1999.

The Company was permitted to redeem the Series C Preferred in cash at any time,
provided the average closing price of the Companys common stock during the
defined period prior to such redemption was greater than $15.85 per share. The
redemption price was equal to the applicable percentage of the average closing
price of the Companys common stock during the defined period prior to
redemption. The applicable percentage was to be adjusted over time from 125%
to 156%.

The Series C Preferred, and shares of the Companys common stock obtained
through conversions of the Series C Preferred and currently held by the holder,
were subject to redemption in cash, at the option of the holder, upon certain
events, as defined, including a change in control of the Company and a trading
suspension of the Companys common stock on NASDAQ or another market. The
redemption price was equal to the greater of (a) 115% of the stated value or
(b) the number of common shares that would be received upon conversion at such
time multiplied by the closing price of the Companys common stock prior to
redemption, as defined. As these events are outside of the Companys control
and redemption would be in cash, the Series C Preferred, and shares of the
Companys common stock obtained through conversions of the Series C Preferred
and currently held by the holder, were presented between total liabilities and stockholders
equity on the consolidated balance sheets, as required by the Securities and
Exchange Commission.

During the quarter ended January 31, 2000, approximately five shares of the
Series C Preferred were converted by the holders into approximately 11,000
shares of the Companys common stock. The carrying value of the converted
Series C Preferred was approximately $37,000 and this amount was transferred to
redeemable common stock on the consolidated balance sheets.

During the quarter ended April 30, 2000, the remaining 280 shares of the Series
C Preferred were converted by the holders into approximately 560,000 shares of
the Companys common stock. The carrying value of the converted Series C
Preferred was approximately $2,098,000 and this amount was transferred to
redeemable common stock on the consolidated balance sheets.

Since all of the Series C Preferred has been converted, shares of the Companys
common stock obtained through conversions (approximately 1,061,000 shares) are
no longer subject to redemption in cash at the option of the holder upon
certain events. Accordingly, the carrying value of these common shares
(approximately $3,928,000) has been transferred to stockholders equity on the
consolidated balance sheets at April 30, 2000.

9



---



##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



|5. |  | EARNINGS PER SHARE
|-- |  | ------------------

Earnings per share is calculated as follows (in thousands, except per share
data):

|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |   | 
|------------------------------------------------------------------------------------------------- | --------------------------- | - | ------------------ | --- | ---------------- | - | ----- | - | ---- | - | ------ | - |  | - | ------ | - | 
|                                                                                                  |                             |   | Three Months Ended |     | Six Months Ended
|                                                                                                  |                             |   | April 30,          |     | April 30,       
|                                                                                                  |                             |   |                    |     |                 
|                                                                                                  |                             |   | 2000               |     | 1999             |   | 2000  |   | 1999
|                                                                                                  |                             |   |                    |     |                  |   |       |   |     
|Basic:                                                                                           
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Net income (loss) available to common stockholders                                                |                             | $ | 356                |     |                  | $ | (724  | ) |      | $ | (1,267 | ) |  | $ | (3,570 | )
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Weighted average common shares outstanding                                                        |                             |   | 7,310              |     |                  |   | 6,439 |   |      |   | 7,120  |   |  |   | 6,427  |  
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Basic earnings per share                                                                          |                             | $ | 0.05               |     |                  | $ | (0.11 | ) |      | $ | (0.18  | ) |  | $ | (0.56  | )
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Diluted:                                                                                         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Net income (loss) available to common stockholders                                                |                             | $ | 356                |     |                  | $ | (724  | ) |      | $ | (1,267 | ) |  | $ | (3,570 | )
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Preferred stock accretion                                                                         |                             |   |                   |     |                  |   |      |   |      |   |       |   |  |   |       |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Convertible debentures interest                                                                   |                             |   |                   |     |                  |   |      |   |      |   |       |   |  |   |       |  
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Net income (loss) for diluted earnings per share                                                  |                             | $ | 356                |     |                  | $ | (724  | ) |      | $ | (1,267 | ) |  | $ | (3,570 | )
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Weighted average common shares outstanding                                                        |                             |   | 7,310              |     |                  |   | 6,439 |   |      |   | 7,120  |   |  |   | 6,427  |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Potential common shares:                                                                         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Stock options and warrants  |   |                    | 262 |                  |   |       |  |      |   |        |  |  |   |        |  | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Convertible preferred stock |   |                    | 116 |                  |   |       |  |      |   |        |  |  |   |        |  | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Convertible debentures      |   |                    |    |                  |   |       |  |      |   |        |  |  |   |        |  | 
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Weighted average common and potential common
shares    outstanding for diluted earnings per share |                             |   | 7,688              |     |                  |   | 6,439 |   |      |   | 7,120  |   |  |   | 6,427  |  
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  
|Diluted earnings per share                                                                        |                             | $ | 0.05               |     |                  | $ | (0.11 | ) |      | $ | (0.18  | ) |  | $ | (0.56  | )
|                                                                                                  |                             |   |                    |     |                  |   |       |   |      |   |        |   |  |   |        |  

For the three months ended April 30, 2000, potential common shares from the
convertible debentures are antidilutive and excluded from the calculation of
diluted earnings per share.

For the six months ended April 30, 2000 and the three and six months ended
April 30, 1999, the Company incurred a net loss, and all potential common
shares are antidilutive and excluded from the calculation of diluted earnings
per share. Basic and diluted earnings per share are the same for these
periods.

10



---



##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

OVERVIEW

The Company is a leading developer and marketer of computer-based, interactive,
self-paced instructional systems and related services. Offering more than
2,000 hours and 10,000 learning objectives of comprehensive academic and
applied skills courseware designed for adolescents and adults, the Companys
PLATO® Learning Systems are marketed to middle and high schools,
colleges, job training programs, correctional institutions, military education
programs, corporations and consumers. PLATO is delivered via networks, CD-ROM,
the Internet and private intranets. In addition, single topic PLATO courseware
is available through the Companys e-commerce Web site.

RESULTS OF OPERATIONS

Second Quarter Fiscal 2000 Compared to Second Quarter Fiscal 1999

The following table presents income statement amounts as a percentage of
revenue:

| |                                                  |                                   |  |       |      |      |  |       |      |   
| | ------------------------------------------------ | --------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- | --
| |                                                  |                                   |  | 2000  |      | 1999
| |                                                  |                                   |  |       |      |     
| | Revenues                                         |                                   |  | 100.0 | %    |      |  | 100.0 | %   
|
|
|
|
| | Cost of revenues                                 |                                   |  | 13.1  |      |      |  | 14.7  |     
|
|
|
|
| |                                                  | Gross profit                      |  |       | 86.9 |      |  |       | 85.3 |   
| |                                                  |                                   |  |       |      |      |  |      
| | Selling, general and administrative expense      |                                   |  | 67.1  |      |      |  | 66.0  |     
|
|
|
|
| | Product development and customer support expense |                                   |  | 12.6  |      |      |  | 14.5  |     
|
|
|
|
| |                                                  | Total operating expenses          |  |       | 79.7 |      |  |       | 80.5 |   
| |                                                  |                                   |  |       |      |      |  |      
| | Operating income                                 |                                   |  | 7.2   |      |      |  | 4.8   |     
|
|
|
|
| | Interest expense                                 |                                   |  | 2.1   |      |      |  | 5.0   |     
|
|
|
|
| | Other expense, net                               |                                   |  | 0.5   |      |      |  | 0.4   |     
| |                                                  |                                   |  |       |      |      |  |      
| |                                                  | Income (loss) before income taxes |  |       | 4.6  |      |  |       | (0.6 | ) 
|
|
|
|
| | Income taxes                                     |                                   |  | 1.6   |      |      |  |      |     
|
|
|
|
| |                                                  | Net income (loss)                 |  |       | 3.0  | %    |  |       | (0.6 | )%
| |                                                  |                                   |  |       |      |      |  |       |     

Revenues:

The following table highlights revenues by product line (in 000s):

|                                           |                |   |         |        |            |  |         |       |            |   |       |       |  |  |      |       |  
|------------------------------------------ | -------------- | - | ------- | ------ | ---------- |  | ------- | ----- | ---------- | - | ----- | ----- |  |  | ---- | ----- | -
|                                           |                |   | 2000    |        | 1999      
|                                           |                |   |         |        |           
|                                           |                |   | Revenue |        | % of Total |  | Revenue |       | % of Total
|                                           |                |   |         |        |            |  |         |       |           
|Courseware and professional services       |                | $ | 11,102  |        |            |  | 90.7    | %     |            | $ | 8,668 |       |  |  | 90.8 | %    
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 1,138   |        |            |  | 9.3     |       |            |   | 877   |       |  |  | 9.2  |      
|                                          
|                                          
|                                          
|                                          
|                                           | Total revenues |   | $       | 12,240 |            |  |         | 100.0 | %          |   | $     | 9,545 |  |  |      | 100.0 | %
|                                           |                |   |         |        |            |  |         |       |            |   |       |       |  |  |      |      

Courseware and professional services revenue, the driver of the Companys
operations, increased $2,434,000 or 28% as compared to 1999. The Company
continues to experience increased acceptance of its products and services in
its various markets. This revenue growth was achieved

11



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS, Continued

Second Quarter Fiscal 2000 Compared to Second Quarter Fiscal 1999, Continued

Revenues, Continued

primarily through increased sales volume to both new and existing customers, as
well as an adjustment for the recognition of certain deferred revenue to
reflect the performance of the related services. Low margin revenues,
including hardware, third-party courseware and other services increased
$261,000. Total revenues were $12,240,000, an increase of $2,695,000 from
1999.

Gross Profit:

Gross profit for 2000 increased $2,488,000 or 31% to $10,631,000 as compared to
$8,143,000 for 1999. This increase was due to the increase in courseware and
professional services revenue. Gross margin was 87% for 2000 as compared to
85% for 1999.

Selling, General, and Administrative Expense:

Selling, general, and administrative expense for 2000 increased $1,919,000 or
30% to $8,216,000 as compared to $6,297,000 for 1999. Sales and marketing
expenses increased $1,075,000 and general and administrative expenses increased
$142,000 due primarily to the planned infrastructure expansion of the sales and
marketing organization. The remaining increase was principally due to increased
commissions resulting primarily from the growth in revenue. As a percentage of
revenue, total selling, general and administrative expense increased from 66%
in 1999 to 67% in 2000.

Product Development and Customer Support:

Product development and customer support expense for 2000 increased $158,000 or
11% to $1,542,000 as compared to $1,384,000 for 1999. Product development
expense was comparable to 1999, with increased spending being offset by
decreased amortization of previously capitalized costs. Customer support
expense increased $170,000 as a result of the Companys expanding customer
base. As a percentage of revenue, total product development and customer
support expense decreased from 15% in 1999 to 13% in 2000.

Operating Income:

Operating income for 2000 was $873,000 as compared to $462,000 for 1999. This
improvement in operating results is due principally to the increase in
courseware and professional services revenue, offset by the increased selling,
general and administrative, and customer support expenses in 2000.

12



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS, Continued

Second Quarter Fiscal 2000 Compared to Second Quarter Fiscal 1999, Continued

Interest Expense:

Interest expense decreased to $253,000 for 2000 from $474,000 for 1999
primarily as a result of the decreased level of bank borrowings at lower
interest rates in 2000 and the accelerated amortization of fees related to the
Companys previous revolving loan agreement in 1999.

Income Taxes:

In the fourth quarter of 1999, the Company reversed approximately $10.2 million
of valuation allowance placed on the Companys deferred tax asset. This
reversal was based on updated expectations about future years taxable income
to reflect continuing improvements in operating results influenced by the
Companys continued revenue growth, and other indications that certain concerns
that had previously limited managements expectations about future taxable
income no longer were applicable. Accordingly, income tax expense of $201,000
was recorded using the Companys estimated fiscal year 2000 effective income
tax rate.

RESULTS OF OPERATIONS

First Six Months Fiscal 2000 Compared to First Six Months Fiscal 1999

The following table presents income statement amounts as a percentage of
revenue:

| |                                                  |                          |  |       |      |      |  |       |       |   
| | ------------------------------------------------ | ------------------------ |  | ----- | ---- | ---- |  | ----- | ----- | --
| |                                                  |                          |  | 2000  |      | 1999
| |                                                  |                          |  |       |      |     
| | Revenues                                         |                          |  | 100.0 | %    |      |  | 100.0 | %    
|
|
|
|
| | Cost of revenues                                 |                          |  | 15.0  |      |      |  | 15.5  |      
|
|
|
|
| |                                                  | Gross profit             |  |       | 85.0 |      |  |       | 84.5  |   
| |                                                  |                          |  |       |      |      |  |      
| | Selling, general and administrative expense      |                          |  | 75.7  |      |      |  | 77.9  |      
|
|
|
|
| | Product development and customer support expense |                          |  | 15.6  |      |      |  | 17.9  |      
|
|
|
|
| |                                                  | Total operating expenses |  |       | 91.3 |      |  |       | 95.8  |   
| |                                                  |                          |  |       |      |      |  |      
| | Operating loss                                   |                          |  | (6.3  | )    |      |  | (11.3 | )    
|
|
|
|
| | Interest expense                                 |                          |  | 2.5   |      |      |  | 7.2   |      
|
|
|
|
| | Other expense, net                               |                          |  | 0.5   |      |      |  | 0.6   |      
| |                                                  |                          |  |       |      |      |  |      
| |                                                  | Loss before income taxes |  |       | (9.3 | )    |  |       | (19.1 | ) 
|
|
|
|
| | Income tax benefit                               |                          |  | (3.5  | )    |      |  |      |      
|
|
|
|
| |                                                  | Net loss                 |  |       | (5.8 | )%   |  |       | (19.1 | )%
| |                                                  |                          |  |       |      |      |  |       |      

13



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS, Continued

First Six Months Fiscal 2000 Compared to First Six Months Fiscal 1999,
Continued

Revenues:

The following table highlights revenues by product line (in 000s):

|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |       |  
|------------------------------------------ | -------------- | - | ------- | ------ | ---------- |  | ------- | ----- | ---------- | - | ------ | ------ |  |  | ---- | ----- | -
|                                           |                |   | 2000    |        | 1999      
|                                           |                |   |         |        |           
|                                           |                |   | Revenue |        | % of Total |  | Revenue |       | % of Total
|                                           |                |   |         |        |            |  |         |       |           
|Courseware and professional services       |                | $ | 17,597  |        |            |  | 89.0    | %     |            | $ | 13,738 |        |  |  | 90.3 | %    
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 2,168   |        |            |  | 11.0    |       |            |   | 1,468  |        |  |  | 9.7  |      
|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |      
|                                           | Total revenues |   | $       | 19,765 |            |  |         | 100.0 | %          |   | $      | 15,206 |  |  |      | 100.0 | %
|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |      

Courseware and professional services revenue, the driver of the Companys
operations, increased $3,859,000 or 28% as compared to 1999. The Company
continues to experience increased acceptance of its products and services in
its various markets. This revenue growth was achieved primarily through
increased sales volume to both new and existing customers. Low margin
revenues, including hardware, third-party courseware and other services
increased $700,000. Total revenues were $19,765,000, an increase of $4,559,000
from 1999.

Gross Profit:

Gross profit for 2000 increased $3,956,000 or 31% to $16,799,000 as compared to
$12,843,000 for 1999. This increase was due to the increase in courseware and
professional services revenue. Gross margin was 85% for both 2000 and 1999.

Selling, General, and Administrative Expense:

Selling, general, and administrative expense for 2000 increased $3,117,000 or
26% to $14,960,000 as compared to $11,843,000 for 1999. Sales and marketing
expenses increased $1,536,000 and general and administrative expenses increased
$467,000 due primarily to the planned infrastructure expansion of the sales and
marketing organization. The remaining increase was due principally to
increased commissions resulting primarily from the growth in revenue. As a
percentage of revenue, total selling, general and administrative expense
decreased from 78% in 1999 to 76% in 2000.

Product Development and Customer Support:

Product development and customer support expense for 2000 increased $371,000 or
14% to $3,091,000 as compared to $2,720,000 for 1999. Product development
expense increased $67,000, due primarily to increased spending offset by
decreased capitalization of costs and decreased amortization of previously
capitalized costs as compared to 1999.

14



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

RESULTS OF OPERATIONS, Continued

First Six Months Fiscal 2000 Compared to First Six Months Fiscal 1999,
Continued

Product Development and Customer Support, Continued

Customer support expense increased $304,000 as a result of the Companys
expanding customer base. As a percentage of revenue, total product development
and customer support expense decreased from 18% in 1999 to 16% in 2000.

Operating Loss:

The operating loss for 2000 was $1,252,000 as compared to $1,720,000 for 1999.
This improvement in operating results is due principally to the increase in
courseware and professional services revenue, offset by the increased selling,
general and administrative, and customer support expenses in 2000.

Interest Expense:

Interest expense decreased to $485,000 for 2000 from $1,089,000 for 1999
primarily as a result of the decreased level of bank borrowings at lower
interest rates in 2000 and the accelerated amortization of fees related to the
Companys previous revolving loan agreement in 1999.

Income Taxes:

In the fourth quarter of 1999, the Company reversed approximately $10.2 million
of valuation allowance placed on the Companys deferred tax asset. This
reversal was based on updated expectations about future years taxable income
to reflect continuing improvements in operating results influenced by the
Companys continued revenue growth, and other indications that certain concerns
that had previously limited managements expectations about future taxable
income no longer were applicable. Accordingly, an income tax benefit of
$696,000 was recorded using the Companys estimated fiscal year 2000 effective
income tax rate.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2000, the Companys principal sources of liquidity included cash
and cash equivalents of $119,000, net accounts receivable of $18,380,000, and
its line of credit. The Company had installment receivables of $11,077,000 at
April 30, 2000, of which $10,481,000 are to be billed within one year and are
included in net accounts receivable. Working capital was $5,073,000 at April
30, 2000, a decrease of $1,966,000 from October 31, 1999, due primarily to the
collection of accounts receivable and the increased short-term borrowings
offset by the payment of year end accruals.

15



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

LIQUIDITY AND CAPITAL RESOURCES, Continued

Net cash provided by the Companys operating activities was $610,000 for the
first six months of fiscal 2000 as compared to net cash used in operating
activities of $2,216,000 for the first six months of fiscal 1999. Cash flows
from operations were used principally to fund the Companys working capital
requirements.

Net cash used in the Companys investing activities was $1,976,000 for the
first six months of fiscal 2000 for capital expenditures and capitalized
product development costs.

Net cash provided by financing activities was $1,514,000 for the first six
months of fiscal 2000, primarily from short-term borrowings. The Company has
resources available under its revolving loan agreement to provide up to a
maximum $15 million line of credit. At April 30, 2000, borrowings of
$5,941,000 were outstanding at a weighted-average interest rate of 9.1% and the
unused borrowing capacity was $6,486,000.

The Company maintains adequate cash reserves and credit facilities to meet its
anticipated working capital, capital expenditure, and business investment
requirements.

FACTORS AFFECTING QUARTERLY OPERATING RESULTS

The Companys 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 by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures and promotional
programs. The Company historically has experienced higher levels of revenues
in the fourth fiscal quarter. Because of these factors, the results for
interim periods presented are not necessarily indicative of the results to be
expected for the full fiscal year.

YEAR 2000

The Company began addressing the Year 2000 (Y2K) issue in early 1998 and
developed and implemented a comprehensive Y2K readiness plan for the Companys
products and operations. As of June 1, 2000 the Company has not, nor to its
knowledge have any of the Companys key business partners, experienced any
material Y2K complications. However, there can be no absolute assurance that
the Company and its business partners will not experience some complications
resulting from the Y2K issue in the future. The Companys Y2K costs have not
been material to its financial condition or results of operations.

16



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

---

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk:

At April 30, 2000, the fair value of the Companys debt approximates market.
Market risk is estimated as the potential increase in fair value resulting from
a hypothetical one-half percent change in interest rates. The Companys
long-term debt is held at a fixed rate. As a result, risk relating to interest
fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk:

The Company markets its products worldwide and has operations in Canada and the
United Kingdom. As a result, financial results 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 foreign
subsidiaries are kept in local currencies in which they do business.
Approximately 4% and 3% of total revenues were denominated in currencies other
than the U.S. dollar for the three and six months ended April 30, 2000.

NOTE REGARDING FORWARD LOOKING INFORMATION

This Form 10-Q contains forward-looking statements identified by the use of
believes, expects, anticipates, and similar expressions. Such statements
are subject to risk and uncertainties that could cause actual results to differ
from those contemplated by the forward-looking statement. Such risks and
uncertainties include any change in the market acceptance of the Companys
products and services, the risk of failure of the Companys technology to
remain at market standards, the risk of the Company being able to finance its
business operations, and other similar business and market risks. Readers are
cautioned not to place undue reliance on such forward-looking statements.

17



---



##### Table of Contents






PART II. OTHER INFORMATION




Item 1.    Legal Proceedings



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | The Company is not a party to any litigation that is expected to
have a material adverse effect on the Company or its business.




Item 2.    Changes in Securities



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




Item 3.    Defaults Upon Senior Securities



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




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



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | The Companys Annual Meeting of Stockholders was held on
March 30, 2000 at which stockholders voted on and approved the
following:



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | (a)   The election of two Class I directors of the Company to
serve until the 2003 Annual Meeting. The voting was as follows:

|                 |  |     |           |          |  |  |         | 
|---------------- |  | --- | --------- | -------- |  |  | ------- | 
|Name             |  | For |           | Withheld
|                 |  |     |           |         
|William R. Roach |  |     | 5,842,101 |          |  |  | 198,584 | 
|                
|                
|                
|                
|John L. Krakauer |  |     | 5,867,601 |          |  |  | 173,084 | 



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b)  An amendment to the Companys certificate of
incorporation to effectuate a name change from TRO        Learning, Inc.
to PLATO Learning, Inc. The voting was as follows:

|          |  |         |        |          |  |  |       | 
|--------- |  | ------- | ------ | -------- |  |  | ----- | 
|For       |  | Against |        | Withheld
|          |  |         |        |         
|6,015,635 |  |         | 19,297 |          |  |  | 5,753 | 



| |                                                               
| | --------------------------------------------------------------
| | (c)  The 2000 Stock Incentive Plan. The voting was as
follows:

|          |  |         |           |          |  |  |        | 
|--------- |  | ------- | --------- | -------- |  |  | ------ | 
|For       |  | Against |           | Withheld
|          |  |         |           |         
|2,345,256 |  |         | 1,073,579 |          |  |  | 21,496 | 



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | (d)  The 2000 Non-Employee Directors Stock Option Plan. The
voting was as follows:

|          |  |         |         |          |  |  |        | 
|--------- |  | ------- | ------- | -------- |  |  | ------ | 
|For       |  | Against |         | Withheld
|          |  |         |         |         
|2,856,419 |  |         | 559,558 |          |  |  | 24,354 | 

18



---



##### Table of Contents






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



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (e)  The appointment of PricewaterhouseCoopers LLP as
independent accountants for the Company for        the fiscal year ending
October 31, 2000. The voting was as follows:

|          |  |         |        |          |  |  |        | 
|--------- |  | ------- | ------ | -------- |  |  | ------ | 
|For       |  | Against |        | Withheld
|          |  |         |        |         
|6,013,796 |  |         | 16,480 |          |  |  | 10,409 | 




Item 5.    Other Information



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




Item 6.    Exhibits and Reports on Form 8-K



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

|       |  |                         |  | 
|------ |  | ----------------------- |  | 
|Number |  | Description             |  | 
|       |  |                        
|27     |  | Financial Data Schedule |  | 



| |                          
| | -------------------------
| | (b)  Reports on Form 8-K:



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 24, 2000, the Company filed a Current Report on Form 8-K
to announce its name change       from TRO Learning, Inc. to PLATO Learning, Inc.

19



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on June 7, 2000.



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





|By | /s/William R. Roach,Chairman of the Board and
Chief Executive Officer
(principal executive officer)
|-- | ---------------------------------------------------------------------------------------------------





| | /s/John MurrayPresident, Chief Operating Officer and
Acting Chief Financial Officer
(principal financial officer)
| | -----------------------------------------------------------------------------------------------------------------





| | /s/Mary Jo MurphyVice President, Corporate Controller and
Chief Accounting Officer
(principal accounting officer)
| | -----------------------------------------------------------------------------------------------------------------

20