##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended January 31, 2004

Commission File Number 0-20842

PLATO LEARNING, INC.

(Exact name of Registrant as specified in its charter)


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

Not Applicable

---

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


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

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

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

|                             |  |                                    
|---------------------------- |  | -----------------------------------
|Common stock, $.01 par value |  | 22,984,145 shares                  
|                             |  |                                    
|Class                        |  | Outstanding as of February 29, 2004

1



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PLATO Learning, Inc.
Form 10-Q INDEX PageNumberPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (Unaudited):Consolidated Statements of Operations for the
Three Months Ended January 31, 2004 and 2003
    
    
    3Consolidated Balance Sheets as of
January 31, 2004 and October 31, 2003
    
    
    4Consolidated Statements of Cash Flows for the
Three Months Ended January 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of
Results of Operations and Financial Condition
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    36Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    36Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    
    
    37Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer


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PLATO Learning, Inc. and
Subsidiaries




Consolidated Statements of Operations (Unaudited, in
thousands, except per share amounts)
 Three Months EndedJanuary 31,2004
    
    2003Revenues:License fees
    
    $
    13,059
    
    
    $
    7,445Subscriptions
    
    
    4,508
    
    
    
    1,624Services
    
    
    6,337
    
    
    
    3,383Other
    
    
    2,544
    
    
    
    1,005Total revenues
    
    
    26,448
    
    
    
    13,457Cost of revenues:License fees
    
    
    3,341
    
    
    
    1,757Subscriptions
    
    
    1,679
    
    
    
    569Services
    
    
    3,764
    
    
    
    2,370Other
    
    
    2,199
    
    
    
    991Total cost of revenues
    
    
    10,983
    
    
    
    5,687Gross profit
    
    
    15,465
    
    
    
    7,770Operating expenses:Sales and marketing
    
    
    15,185
    
    
    
    9,238General and administrative
    
    
    4,492
    
    
    
    3,276Product development
    
    
    2,203
    
    
    
    561Amortization of intangibles
    
    
    983
    
    
    
    147Restructuring charge
    
    
    
    
    
    
    380Total operating expenses
    
    
    22,863
    
    
    
    13,602Operating loss
    
    
    (7,398
    )
    
    
    (5,832
    )Interest income
    
    
    119
    
    
    
    120Interest expense
    
    
    (35
    )
    
    
    (24
    )Other expense, net
    
    
    (71
    )
    
    
    (21
    )Loss before income taxes
    
    
    (7,385
    )
    
    
    (5,757
    )Income tax expense (benefit)
    
    
    150
    
    
    
    (2,350
    )Net loss
    
    $
    (7,535
    )
    
    $
    (3,407
    )Loss per share:Basic and diluted
    
    $
    (0.35
    )
    
    $
    (0.20
    )Weighted average common shares outstanding:Basic and diluted
    
    
    21,500
    
    
    
    16,775 See Notes to Consolidated Financial Statements


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##### Table of Contents





PLATO Learning, Inc. and
Subsidiaries




Consolidated Balance
Sheets


(In thousands, except
per share amounts)


|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------------------------------------------ | - | ----------- | ------- | ----------- | - | ------- | ------- | 
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   | January 31, |         | October 31,
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   | 2004        |         | 2003       
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |            
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   | (Unaudited) |         | (See Note) 
|Assets                                                                                                                    |                                                                                                                                                                                          |  |                            |                                            |   |             |         |            
|Current assets:                                                                                                           |                                                                                                                                                                                          |  |                            |                                            |   |             |         |            
|                                                                                                                          | Cash and cash equivalents                                                                                                                                                                |  | $                          | 24,196                                     |   |             | $       | 23,834      |  
|                                                                                                                          | Accounts receivable, net                                                                                                                                                                 |  |                            | 41,638                                     |   |             |         | 39,176      |  
|                                                                                                                          | Prepaid expenses and other current assets                                                                                                                                                |  |                            | 9,276                                      |   |             |         | 4,819       |  
|                                                                                                                          | Deferred income taxes                                                                                                                                                                    |  |                            |                                           |   |             |         | 2,218       |  
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|                                                                                                                          |                                                                                                                                                                                          |  | Total current assets       |                                            |   | 75,110      |         |             |   | 70,047  |        
|Long-term marketable securities                                                                                           |                                                                                                                                                                                          |  | 3,746                      |                                            |   |             | 3,862   |            
|Equipment and leasehold improvements, net of accumulated
depreciation and amortization of $7,894 and $7,536, respectively |                                                                                                                                                                                          |  | 7,367                      |                                            |   |             | 5,024   |            
|Product development costs, net of accumulated
amortization of $13,647 and $11,838, respectively                           |                                                                                                                                                                                          |  | 14,695                     |                                            |   |             | 14,738  |            
|Goodwill                                                                                                                  |                                                                                                                                                                                          |  | 69,393                     |                                            |   |             | 39,609  |            
|Identified intangible assets, net                                                                                         |                                                                                                                                                                                          |  | 45,562                     |                                            |   |             | 14,707  |            
|Other assets                                                                                                              |                                                                                                                                                                                          |  | 1,940                      |                                            |   |             | 1,975   |            
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|                                                                                                                          | Total assets                                                                                                                                                                             |  | $                          | 217,813                                    |   |             | $       | 149,962     |  
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|Liabilities and Stockholders Equity                                                                                      |                                                                                                                                                                                          |  |                            |                                            |   |             |         |            
|Current liabilities:                                                                                                      |                                                                                                                                                                                          |  |                            |                                            |   |             |         |            
|                                                                                                                          | Accounts payable                                                                                                                                                                         |  | $                          | 4,416                                      |   |             | $       | 2,876       |  
|                                                                                                                          | Accrued employee salaries and benefits                                                                                                                                                   |  |                            | 4,592                                      |   |             |         | 6,678       |  
|                                                                                                                          | Accrued liabilities                                                                                                                                                                      |  |                            | 13,390                                     |   |             |         | 3,600       |  
|                                                                                                                          | Deferred revenue                                                                                                                                                                         |  |                            | 34,931                                     |   |             |         | 22,192      |  
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|                                                                                                                          |                                                                                                                                                                                          |  | Total current liabilities  |                                            |   | 57,329      |         |             |   | 35,346  |        
|                                                                                                                          | Deferred revenue                                                                                                                                                                         |  |                            | 6,010                                      |   |             |         | 4,372       |  
|                                                                                                                          | Deferred income taxes                                                                                                                                                                    |  |                            | 863                                        |   |             |         |            |  
|                                                                                                                          | Other liabilities                                                                                                                                                                        |  |                            | 284                                        |   |             |         | 312         |  
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|                                                                                                                          |                                                                                                                                                                                          |  | Total liabilities          |                                            |   | 64,486      |         |             |   | 40,030  |        
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|Stockholders equity:                                                                                                     |                                                                                                                                                                                          |  |                            |                                            |   |             |         |            
|                                                                                                                          | Common stock, $.01 par value, 50,000 shares authorized;
22,979 shares issued and outstanding at January 31, 2004;
17,671 shares issued and 16,370 shares outstanding
at October 31, 2003 |  |                            | 230                                        |   |             |         | 164         |  
|                                                                                                                          | Additional paid in capital                                                                                                                                                               |  |                            | 162,110                                    |   |             |         | 123,135     |  
|                                                                                                                          | Treasury stock at cost, 0 and 1,301 shares, respectively                                                                                                                                 |  |                            |                                           |   |             |         | (11,652     | )
|                                                                                                                          | Accumulated deficit                                                                                                                                                                      |  |                            | (8,557                                     | ) |             |         | (1,022      | )
|                                                                                                                          | Accumulated other comprehensive loss                                                                                                                                                     |  |                            | (456                                       | ) |             |         | (693        | )
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|                                                                                                                          |                                                                                                                                                                                          |  | Total stockholders equity |                                            |   | 153,327     |         |             |   | 109,932 |        
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  
|                                                                                                                          |                                                                                                                                                                                          |  |                            | Total liabilities and stockholders equity |   | $           | 217,813 |             |   | $       | 149,962 | 
|                                                                                                                          |                                                                                                                                                                                          |  |                            |                                            |   |             |         |             |  

Note: The balance sheet at October 31, 2003 has been derived from our audited financial statements at that date. See Notes to Consolidated Financial Statements.

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PLATO Learning, Inc. and
Subsidiaries




Consolidated
Statements of Cash Flows


(Unaudited, in
thousands)


|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |        |        |       |     | 
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ------ | ------ | ----- | --- | 
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        | Three Months Ended
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        | January 31,       
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                   
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        | 2004               |        | 2003  
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Operating activities:                                                                     |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Net loss                                                                                  |                                                                       | $                                                                                 | (7,535            | )                                                   |        | $                  | (3,407 | )     
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|                                                                                          | Deferred income taxes                                                 |                                                                                   |                   | 150                                                 |        |                    |        | (2,350 | )     
|                                                                                          | Amortization of capitalized product development costs                 |                                                                                   |                   | 1,764                                               |        |                    |        | 1,294  |       
|                                                                                          | Amortization of identified intangible assets                          |                                                                                   |                   | 1,780                                               |        |                    |        | 476    |       
|                                                                                          | Depreciation and amortization of equipment and
leasehold improvements |                                                                                   |                   | 911                                                 |        |                    |        | 549    |       
|                                                                                          | Provision for doubtful accounts                                       |                                                                                   |                   | 346                                                 |        |                    |        | 525    |       
|                                                                                          | Loss on disposal of equipment                                         |                                                                                   |                   | 1                                                   |        |                    |        | 2      |       
|                                                                                          | Changes in assets and liabilities, net of effects of acquisitions:    |                                                                                   |                   |                                                     |        |                    |        |        |       
|                                                                                          |                                                                       | Accounts receivable                                                               |                   |                                                     | 5,741  |                    |        |        | 4,830  |      
|                                                                                          |                                                                       | Prepaid expenses and other current and noncurrent assets                          |                   |                                                     | (1,296 | )                  |        |        | (370   | )    
|                                                                                          |                                                                       | Accounts payable                                                                  |                   |                                                     | (1,314 | )                  |        |        | 1,029  |      
|                                                                                          |                                                                       | Accrued liabilities, accrued employee salaries and
benefits and other liabilities |                   |                                                     | (3,586 | )                  |        |        | (2,048 | )    
|                                                                                          |                                                                       | Deferred revenue                                                                  |                   |                                                     | 1,786  |                    |        |        | 429    |      
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|                                                                                          |                                                                       |                                                                                   | Total adjustments |                                                     |        | 6,283              |        |        |        | 4,366 |    
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|                                                                                          |                                                                       |                                                                                   |                   | Net cash provided by (used in) operating activities |        |                    | (1,252 | )      |        |       | 959 | 
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Investing activities:                                                                     |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Acquisitions, net of cash acquired                                                        |                                                                       |                                                                                   | 2,324             |                                                     |        |                    |       |       
|Capitalization of product development costs                                               |                                                                       |                                                                                   | (1,664            | )                                                   |        |                    | (1,667 | )     
|Capital expenditures                                                                      |                                                                       |                                                                                   | (572              | )                                                   |        |                    | (297   | )     
|Sales of marketable securities                                                            |                                                                       |                                                                                   | 116               |                                                     |        |                    |       |       
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|                                                                                          | Net cash provided by (used in) investing activities                   |                                                                                   |                   | 204                                                 |        |                    |        | (1,964 | )     
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Financing activities:                                                                     |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Repurchase of common stock                                                                |                                                                       |                                                                                   |                  |                                                     |        |                    | (540   | )     
|Net proceeds from issuance of common stock                                                |                                                                       |                                                                                   | 1,311             |                                                     |        |                    | 16     |       
|Repayments of capital lease obligations                                                   |                                                                       |                                                                                   | (60               | )                                                   |        |                    | (69    | )     
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|                                                                                          | Net cash provided by (used in) financing activities                   |                                                                                   |                   | 1,251                                               |        |                    |        | (593   | )     
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Effect of foreign currency on cash                                                        |                                                                       |                                                                                   | 159               |                                                     |        |                    | 81     |       
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Net increase (decrease) in cash and cash equivalents                                      |                                                                       |                                                                                   | 362               |                                                     |        |                    | (1,517 | )     
|Cash and cash equivalents at beginning of period                                          |                                                                       |                                                                                   | 23,834            |                                                     |        |                    | 30,390 |       
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       
|Cash and cash equivalents at end of period                                                |                                                                       | $                                                                                 | 24,196            |                                                     |        | $                  | 28,873 |       
|                                                                                          |                                                                       |                                                                                   |                   |                                                     |        |                    |        |       

See Notes to Consolidated Financial Statements

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##### Table of Contents



PLATO Learning, Inc. and
Subsidiaries




Notes to Consolidated Financial
Statements


(Dollars in thousands, except per share amounts)


1. Business

We enhance the learning process by providing computer-based and e-learning
instruction software for kindergarten through adult learners, offering
curricula in reading, writing, mathematics, science, social studies and life
and job skills. We also offer innovative online assessment and accountability
solutions and standards-based professional development services. With over
6,000 hours of objective-based, problem-solving courseware, plus assessment,
alignment and curriculum management tools, we create standards-based curricula
that facilitate learning and school improvement. PLATO courseware is delivered
via networks, CD-ROM, private intranets and the Internet. In addition, single
topic PLATO courseware is available through our e-commerce web site and
distributors. We market our courseware products and services primarily to K-12
schools and colleges. We also sell to job training programs, correctional
institutions, military education programs, corporations and individuals.

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

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. We have included all normal recurring adjustments considered
necessary to give a fair presentation of our operating results for the interim
periods shown. Operating results for these interim periods are not necessarily
indicative of the results to be expected for the full fiscal year. For further
information, refer to the consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2003.

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

Certain reclassifications of previously reported amounts have been made to
conform to the current period presentation in the consolidated statements of
operations. These reclassifications did not change previously reported
revenues, operating loss or net loss and related per share amounts. For more
information on these reclassifications, refer to Note 3 to Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
October 31, 2003.

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##### Table of Contents



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

3. Summary of Significant Accounting Policies

For more information on our significant accounting policies, refer to Note 2 to
Consolidated Financial Statements in our Annual Report on Form 10-K for the
year ended October 31, 2003.

Revenue Recognition

We recognize revenue in accordance with the provisions of Statement of Position
No. 97-2, Software Revenue Recognition, as amended and modified, as well as
Technical Practice Aids issued from time to time by the American Institute of
Certified Public Accountants, and Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. We license software under non-cancelable
license and subscription agreements. We also provide related professional
services, including consulting, training and implementation services, as well
as ongoing customer support and maintenance. Consulting, training and
implementation services are not essential to the functionality of our software
products. Accordingly, revenues from these services are recognized separately.

Revenue from the sale of courseware licenses is recognized upon meeting the
following criteria: (i) a written customer order has been executed, (ii)
courseware has been delivered, (iii) the license fee is fixed or determinable
and (iv) collectibility of the fee is probable.

For software arrangements that include more than one element, we allocate the
total arrangement fee among each deliverable based on vendor-specific objective
evidence (VSOE) of the relative fair value of each deliverable. VSOE is
determined using the price charged when that element is sold separately. For
software arrangements in which we do not have VSOE for undelivered elements,
revenue is deferred until the earlier of when VSOE is determined for the
undelivered elements or when all elements for which we do not have VSOE have
been delivered.

If collectibility of the fee is not probable, revenue is recognized as payments
are received from the customer provided all other revenue recognition criteria
have been met. If the fee due from the customer is not fixed or determinable,
revenue is recognized as the payments become due provided all other revenue
recognition criteria have been met.

Subscription revenue, primarily fees charged for our on-line subscription
products, is recognized on a ratable basis as the products are delivered over
the subscription period.

Services revenue consists of software support and maintenance, which is
deferred and recognized ratably over the support period, and consulting,
training and implementation services, which are recognized as the services are
performed.

Other revenue, primarily from hardware and third-party software products, is
recognized as the products are delivered and all other revenue recognition
criteria are met.

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##### Table of Contents



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

Stock-Based Compensation

We account for our stock-based
employee compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees and comply with the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of Financial Accounting
Standards Board (FASB) Statement No. 123.

We have adopted the disclosure-only provisions of SFAS No. 123. For purposes
of the pro forma disclosures below, the estimated fair value of stock options
is amortized to expense over the vesting period of the options. Had
compensation expense for the stock options been recognized based on the fair
value at the grant date consistent with the provisions of SFAS No. 123, net
loss would have been adjusted to the pro forma amounts presented below:

|                                                                                                                                 |             |   |                    |       |      |   |        |       |  
|-------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------ | ----- | ---- | - | ------ | ----- | -
|                                                                                                                                 |             |   | Three Months Ended
|                                                                                                                                 |             |   | January 31,       
|                                                                                                                                 |             |   |                   
|                                                                                                                                 |             |   | 2004               |       | 2003
|                                                                                                                                 |             |   |                    |       |     
|Net loss, as reported                                                                                                            |             | $ | (7,535             | )     |      | $ | (3,407 | )    
|Deduct: stock-based compensation expense determined
using the fair value based method for all awards,
net of related tax effects |             |   | (1,951             | )     |      |   | (1,117 | )    
|                                                                                                                                 |             |   |                    |       |      |   |        |      
|Pro forma net loss                                                                                                               |             | $ | (9,486             | )     |      | $ | (4,524 | )    
|                                                                                                                                 |             |   |                    |       |      |   |        |      
|Basic and diluted loss per share:                                                                                                |             |   |                    |       |      |   |        |      
|                                                                                                                                 | As reported |   | $                  | (0.35 | )    |   | $      | (0.20 | )
|                                                                                                                                 |             |   |                    |       |      |   |        |      
|                                                                                                                                 | Pro forma   |   | $                  | (0.44 | )    |   | $      | (0.27 | )
|                                                                                                                                 |             |   |                    |       |      |   |        |      

New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. In December 2003, the FASB
issued a revised version of this Interpretation, FIN 46(R). FIN 46(R)
addresses the requirements for business enterprises to consolidate related
entities, in which they do not have controlling interests through voting or
other rights, if they are determined to be the primary beneficiary of these
entities as a result of variable economic interests. FIN 46 or FIN 46(R) must
be applied to Special Purpose Entities (SPEs) created prior to February 1,
2003 and all entities, including SPEs, created subsequent to January 31, 2003
in our first quarter of fiscal year 2004. FIN 46(R) also must be applied for
all entities created prior to February 1, 2003 in our second quarter of fiscal
year 2004.

We adopted FIN 46(R) beginning in our first quarter of fiscal year 2004, and no
variable interests with SPEs or entities created subsequent to January 31, 2003
have been identified; therefore, there was no impact on our consolidated
financial statements, and no disclosures were required as of January 31, 2004.
The adoption of FIN 46(R) for entities created prior to February 1, 2003 is not
expected to have a material impact on our consolidated financial statements.
While we

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

currently have no arrangements of this nature, if we enter into any
such arrangements in the future, our consolidated financial statements may be
adversely effected.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability. Many of those instruments were previously classified as
equity. The effective dates of certain elements of SFAS No. 150 have been
deferred. We currently have no financial instruments of this nature and the
adoption of SFAS No. 150 had no impact on our consolidated financial
statements. However, if we enter into any such arrangements in the future, our
consolidated financial statements may be adversely effected.

In November 2003, the Emerging Issues Task Force (EITF) reached a partial
consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The consensus reached
requires quantitative and qualitative disclosure of debt and equity securities,
classified as available-for-sale or held-to-maturity, that are impaired at the
balance sheet date but an other-than-temporary impairment has not been
recognized. The disclosure must indicate the investments considered
temporarily impaired at the balance sheet date and provide narrative guidance
as to the determining factors in classifying the impairment as temporary. This
disclosure guidance is effective for our second quarter of fiscal year 2004.

4. Acquisitions

We account for business combinations in accordance with SFAS No. 141, Business
Combinations. All of our acquisitions, including those prior to the adoption
of SFAS No. 141, were accounted for using the purchase method of accounting.
The assets and liabilities acquired were recorded at their estimated fair
values on the dates of acquisition. Operating results of the acquired
companies were included in our consolidated financial statements from the dates
of acquisition. Acquisition-related goodwill and identified intangible assets
are subject to the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets, which require goodwill to be tested periodically for impairment, but
not be amortized. Identified intangible assets are amortized over their
estimated lives. See Note 6 for additional information regarding goodwill and
identified intangible assets.

Lightspan, Inc.

On November 17, 2003, we acquired Lightspan, Inc. (Lightspan), a
publicly-held corporation and provider of curriculum-based educational software
and online assessment products used in
schools, at home and in community colleges. This acquisition is expected to
strengthen our product offerings in the K-8 and post-secondary markets and
enhance our ability to provide comprehensive solutions to K-12 and adult

learning institutions.

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

We acquired all of the outstanding shares of Lightspan for 6,576,129 shares of
our common stock valued at $52,082 for accounting purposes, $26,031 for assumed
liabilities, $2,700 for estimated severance payments, $1,000 for estimated
lease termination costs, and direct acquisition fees of $1,931. Direct
acquisition fees consisted primarily of investment banking, legal and
professional fees. The number of shares issued included shares issued for
Lightspans in-the-money stock options. The fair value of the Lightspan
options and warrants assumed in connection with the merger and converted to
PLATO options and warrants was not significant.

The purchase price consisted of the following components:

|                                  |  |   |        | 
|--------------------------------- |  | - | ------ | 
|Fair value of common stock issued |  | $ | 52,082 | 
|Direct acquisition fees           |  |   | 1,931  | 
|Estimated severance payments      |  |   | 2,700  | 
|Estimated lease termination costs |  |   | 1,000  | 
|Liabilities assumed               |  |   | 26,031 | 
|                                  |  |   |        | 
|                                  |  | $ | 83,744 | 
|                                  |  |   |        | 

The allocation of the total purchase price, including acquisition fees, was as

follows:

|                                           |  |   |        |  
|------------------------------------------ |  | - | ------ | -
|Fair value of tangible assets acquired     |  | $ | 28,021 |  
|Fair value of identified intangible assets |  |   | 30,400 |  
|Estimated goodwill                         |  |   | 28,449 |  
|Deferred income taxes                      |  |   | (3,126 | )
|                                           |  |   |        |  
|                                           |  | $ | 83,744 |  
|                                           |  |   |        |  

An appraisal firm assisted us with the valuation of identified intangible
assets, consisting of $19,800 for customer relationships, $7,300 for developed
content and technology, $2,300 for trademarks and trade names and $1,000 for a
non-compete agreement. These identified intangible assets are being amortized
over periods of seven years for customer relationships, nine years for
developed content and technology, four and one-half years for trademarks and
trade names and two years for the non-compete agreement.

In connection with this acquisition, we developed plans for workforce and
facility reductions. The aggregate estimated costs of these plans is $3,700,
which consisted of $2,700 related to the elimination of 144 positions in the
United States and $1,000 related to lease termination, which ends October 31,
2004 and has a minimum monthly lease payment of $106. As of January 31, 2004,
approximately $1,300 of the estimated $2,700 of severance costs have been paid.
We
expect to complete these activities within one year from the acquisition date.
Until these activities are completed, the allocation of the purchase price is
preliminary and subject to adjustment.

New Media (Holdings) Limited

On December 17, 2003, we acquired New Media (Holdings) Limited (New Media), a
United Kingdom (U.K.) based publisher of curriculum-focused software
primarily for teaching

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

secondary school science and math, for approximately
$6,800 in cash. This acquisition enhances our science offering, provides a
science simulation development capability that we did not previously have and
will allow us to introduce New Medias products to markets in the United States
for the first time. Additionally, this acquisition is expected to provide
critical mass and revenue diversification in the U.K. and strengthen our
relationships with the U.K. Education Department.

The purchase price consisted of the following components:

|                        |  |   |       | 
|----------------------- |  | - | ----- | 
|Cash paid               |  | $ | 6,750 | 
|Direct acquisition fees |  |   | 429   | 
|Liabilities assumed     |  |   | 864   | 
|                        |  |   |       | 
|                        |  | $ | 8,043 | 
|                        |  |   |       | 

The allocation of the total purchase price, including acquisition fees, was as
follows:

|                                                     |  |   |       | 
|---------------------------------------------------- |  | - | ----- | 
|Fair value of tangible assets acquired               |  | $ | 1,664 | 
|Estimated fair value of identified intangible assets |  |   | 2,205 | 
|Estimated goodwill                                   |  |   | 4,174 | 
|                                                     |  |   |       | 
|                                                     |  | $ | 8,043 | 
|                                                     |  |   |       | 

An appraisal firm is continuing to assist us with the valuation of identified
intangible assets. The preliminary valuation consists of $2,070 for developed
content and technology and $135 for customer contracts and relationships.
These identified intangible assets are being amortized over periods of four to
seven years for developed content and technology and one to five years for
customer contracts and relationships. The allocation of the purchase price is
preliminary and subject to adjustment.

Unaudited Pro Forma Data

Our unaudited pro forma consolidated results of operations, as if the Lightspan
acquisition had occurred at the beginning of the periods presented, were as
follows:

|                                 |  |                    |        |             |  |   |        |  
|-------------------------------- |  | ------------------ | ------ | ----------- |  | - | ------ | -
|                                 |  | Three Months Ended
|                                 |  | January 31,       
|                                 |  |                   
|                                 |  | 2004               |        | 2003       
|                                 |  |                    |        |            
|                                 |  | (Unaudited)        |        | (Unaudited)
|Revenues                         |  | $                  | 27,417 |             |  | $ | 25,860 |  
|Net loss                         |  |                    | (9,116 | )           |  |   | (8,109 | )
|Basic and diluted loss per share |  |                    | (0.40  | )           |  |   | (0.35  | )

The unaudited pro forma data gives effect to actual operating results prior to
the acquisition and adjustments to reflect increased identified intangible
asset amortization and the current accounting treatment of income taxes. No
effect has been given to cost reductions or operating synergies in this
presentation. The unaudited pro forma consolidated results of operations are
for

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

comparative purposes only and do not necessarily reflect the results that
would have occurred had the acquisition occurred at the beginning of the
periods presented or the results which may occur in the future. The pro forma
data does not include New Media, as the effects of this acquisition were not
material on a pro forma basis.

5. Accounts Receivable

The components of accounts receivable were as follows:

|                                |  |             |        |             |  |   |        |  
|------------------------------- |  | ----------- | ------ | ----------- |  | - | ------ | -
|                                |  | January 31, |        | October 31,
|                                |  | 2004        |        | 2003       
|                                |  |             |        |            
|Trade accounts receivable       |  | $           | 29,198 |             |  | $ | 21,415 |  
|Installment accounts receivable |  |             | 17,420 |             |  |   | 22,015 |  
|Allowance for doubtful accounts |  |             | (4,980 | )           |  |   | (4,254 | )
|                                |  |             |        |             |  |   |        |  
|                                |  | $           | 41,638 |             |  | $ | 39,176 |  
|                                |  |             |        |             |  |   |        |  

The provision for doubtful accounts, included in general and administrative
expense on the consolidated statements of operations, was $346 and $525 for the
three months ended January 31, 2004 and 2003, respectively.

6. Goodwill and Identified Intangible Assets

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

Goodwill

The changes in goodwill from October 31, 2003 were as follows:

|                          |                               |   |        |        |  
|------------------------- | ----------------------------- | - | ------ | ------ | -
|                          |                               |   | 2003  
|                          |                               |   |       
|Balance, October 31, 2003 |                               | $ | 39,609 |       
|                          | Acquisition of Lightspan      |   |        | 28,449 |  
|                          | Acquisition of New Media      |   |        | 4,174  |  
|                          | Release of shares from escrow |   |        | (2,895 | )
|                          | Foreign currency translation  |   |        | 56     |  
|                          |                               |   |        |       
|Balance, January 31, 2004 |                               | $ | 69,393 |       
|                          |                               |   |        |       

Goodwill was decreased by $2,895 during the three months ended January 31, 2004
as a result of the release of escrow shares relating to the NetSchools
acquisition in 2002. As of January 31, 2004, 100,000 shares remained in escrow
relating to this acquisition.

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

Identified Intangible Assets

Identified intangible assets subject to amortization were as follows:

|                      |  |                  |        |              |  |              |        |                  |  |   |        |                |  |              |  |              |  |   |        |  |  |   |        |   |  |   |        | 
|--------------------- |  | ---------------- | ------ | ------------ |  | ------------ | ------ | ---------------- |  | - | ------ | -------------- |  | ------------ |  | ------------ |  | - | ------ |  |  | - | ------ | - |  | - | ------ | 
|                      |  | January 31, 2004 |        |              |  |              |        | October 31, 2003
|                      |  |                  |        |              |  |              |        |                 
|                      |  | Gross Carrying   |        | Accumulated  |  | Net Carrying |        |                  |  |   |        | Gross Carrying |  | Accumulated  |  | Net Carrying
|                      |  | Value            |        | Amortization |  | Value        |        |                  |  |   |        | Value          |  | Amortization |  | Value       
|                      |  |                  |        |              |  |              |        |                  |  |   |        |                |  |              |  |             
|Acquired technology   |  | $                | 25,116 |              |  | $            | (3,379 | )                |  | $ | 21,737 |                |  |              |  |              |  | $ | 15,717 |  |  | $ | (2,589 | ) |  | $ | 13,128 | 
|Trademark             |  |                  | 3,680  |              |  |              | (795   | )                |  |   | 2,885  |                |  |              |  |              |  |   | 1,380  |  |  |   | (640   | ) |  |   | 740    | 
|Customer lists        |  |                  | 21,237 |              |  |              | (1,293 | )                |  |   | 19,944 |                |  |              |  |              |  |   | 1,300  |  |  |   | (595   | ) |  |   | 705    | 
|Employment agreement  |  |                  | 413    |              |  |              | (313   | )                |  |   | 100    |                |  |              |  |              |  |   | 413    |  |  |   | (279   | ) |  |   | 134    | 
|Noncompete agreements |  |                  | 1,090  |              |  |              | (194   | )                |  |   | 896    |                |  |              |  |              |  |   | 90     |  |  |   | (90    | ) |  |   |       | 
|                      |  |                  |        |              |  |              |        |                  |  |   |        |                |  |              |  |              |  |   |        |  |  |   |        |   |  |   |        | 
|                      |  | $                | 51,536 |              |  | $            | (5,974 | )                |  | $ | 45,562 |                |  |              |  |              |  | $ | 18,900 |  |  | $ | (4,193 | ) |  | $ | 14,707 | 
|                      |  |                  |        |              |  |              |        |                  |  |   |        |                |  |              |  |              |  |   |        |  |  |   |        |   |  |   |        | 

Amortization expense for identified intangible assets was $1,780 and $476 for
the three months ended January 31, 2004 and 2003, respectively, of which $797
and $329 was included in cost of revenues for each period.

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

|           |      |   |        |       | 
|---------- | ---- | - | ------ | ----- | 
|           | 2004 |   |        | 7,729 | 
|           | 2005 |   |        | 7,643 | 
|           | 2006 |   |        | 6,966 | 
|           | 2007 |   |        | 6,743 | 
|           | 2008 |   |        | 6,157 | 
|Thereafter |      |   | 12,104 |      
|           |      |   |        |       | 
|           |      | $ | 47,342 |      
|           |      |   |        |       | 

7. Debt

Revolving Loan

Our revolving loan agreement with Wells Fargo Bank, N.A. provides for a maximum
$12,500 line of credit through July 1, 2004. Substantially all of our assets
are pledged as collateral under the agreement. There were no borrowings
outstanding at January 31, 2004 or October 31, 2003.

The agreement contains restrictive financial covenants (including Minimum
Tangible Net Worth, Minimum Debt Service Coverage, Maximum Leverage, Maximum
Cash Flow Leverage, Minimum Current Ratio, and Maximum Annual Capital
Expenditures) and restrictions on additional borrowings, asset sales and
dividends, as defined. We did not comply with the Minimum Tangible Net Worth
and Minimum Debt Service Coverage covenants for the twelve-month period ended
January 31, 2004 and the Minimum Current Ratio covenant at January 31,
2004. We received a waiver from our lender covering this noncompliance for the
periods indicated.

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

We are currently negotiating with our lender to extend the term of our
revolving loan agreement to July 1, 2005.

8. Deferred Revenue

The components of deferred revenue were as follows:

|                        |  |             |        |             |  |   |        |  
|----------------------- |  | ----------- | ------ | ----------- |  | - | ------ | -
|                        |  | January 31, |        | October 31,
|                        |  | 2004        |        | 2003       
|                        |  |             |        |            
|License fees            |  | $           | 7,096  |             |  | $ | 4,762  |  
|Subscriptions           |  |             | 11,675 |             |  |   | 4,134  |  
|Services                |  |             | 21,968 |             |  |   | 17,360 |  
|Other                   |  |             | 202    |             |  |   | 308    |  
|                        |  |             |        |             |  |   |        |  
|                        |  |             | 40,941 |             |  |   | 26,564 |  
|Less: long-term amounts |  |             | (6,010 | )           |  |   | (4,372 | )
|                        |  |             |        |             |  |   |        |  
|                        |  | $           | 34,931 |             |  | $ | 22,192 |  
|                        |  |             |        |             |  |   |        |  

9. Restructuring Charges

In May 2003, we replaced our Managing Director of operations in the United
Kingdom, and severed relationships with two senior executives (our Chief
Operating Officer and a co-founder of NetSchools) and three other employees in
connection with a restructuring plan to align our cost structure with future
expectations. The consolidated statement of operations for 2003 included a
restructuring charge of $422 for severance costs related to this action. As of
October 31, 2003, approximately $252 of these severance costs had been paid and
as of January 31, 2004 approximately $304 of these severance costs had been
paid, with the remaining costs expected to be paid by August 2004.

In December 2002, we reduced the size of our workforce by approximately 30
positions and closed approximately 30 open job requisitions, all in the United
States, which together represented about 10% of our planned workforce, in
connection with a restructuring plan to align our cost structure with future
expectations. The consolidated statement of operations for 2003 included a
restructuring charge of $380 for severance costs related to this reduction.
All of these severance costs were paid as of October 31, 2003.

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

10. Income Taxes

At October 31, 2003, we had a net deferred income tax asset of $2,218.
Approximately $7,377 of the deferred tax asset related to our net operating
loss carryforward in the United States of approximately $18,500, which expire
in varying amounts between 2004 and 2023. We also have net operating loss
carryforwards of approximately $3,000 related to our foreign subsidiaries. We
have provided a full valuation allowance related to these foreign deferred tax
assets due to the uncertainty in realization of future taxable income in these
foreign jurisdictions.

Realization of our deferred tax asset is dependent on generating sufficient
taxable income in the United States prior to expiration of these loss
carryforwards. Although realization was not assured at October 31, 2003, we
believed it was more likely than not that all of the deferred tax asset would
be realized. We based this belief upon the levels of taxable income generated
historically, as well as projections of future taxable income. However, our
merger with Lightspan impacted our assessment of the realization of deferred
tax assets because the merged company is considered one consolidated taxable
entity. As a result of the merger, we acquired approximately $290,000 of
Lightspans net operating loss carryforwards. Based on a preliminary Section
382 limitation analysis, the usage of these net operating loss carryforwards is
limited to approximately $2,500 per year and, therefore, approximately $35,000
of the acquired net operating loss carryforwards are available to the combined
entity. Our combined net operating loss carryforwards, including the first
quarter of 2004, were approximately $60,000 at January 31, 2004.
These amounts are preliminary and may change as the Section 382 limitation analysis is finalized.
The combined
net operating loss carryforwards, which represent the majority of the merged
companys deferred tax assets, must be reviewed for realization primarily based
upon historical results and secondarily upon projected results. Although we
expect taxable income in 2004, this expectation is highly dependent on the
integration of the Lightspan acquisition. Lightspan has historically incurred
significant operating losses which carry more weight than the projected
results. Consequently, it is our current view that, while we had cumulative
taxable income for the last three years, our historical operating results were
insufficient to support the combined post-merger deferred tax assets. As a
result, net deferred tax assets, excluding the deferred tax liability relating
to tax deductible goodwill, which cannot be used to support realization of the
other net deferred tax assets, were fully reserved for in the purchase
accounting for the Lightspan acquisition in our first quarter of 2004 thereby
increasing goodwill. Any subsequent reversal of the valuation allowance
recorded on the combined entitys pre-acquisition deferred tax assets will be
recorded as a reduction of goodwill.

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

11. Per Share Data

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

The calculation of basic and diluted loss per share was as follows:

|                                                                                           |                            |   |                    |   |      |   |            |   | 
|------------------------------------------------------------------------------------------ | -------------------------- | - | ------------------ | - | ---- | - | ---------- | - | 
|                                                                                           |                            |   | Three Months Ended
|                                                                                           |                            |   | January 31,       
|                                                                                           |                            |   |                   
|                                                                                           |                            |   | 2004               |   | 2003
|                                                                                           |                            |   |                    |   |     
|Net loss                                                                                   |                            | $ | (7,535             | ) |      | $ | (3,407     | )
|                                                                                           |                            |   |                    |   |      |   |            |  
|Basic:                                                                                     |                            |   |                    |   |      |   |            |  
|Weighted average common shares outstanding                                                 |                            |   | 21,500,000         |   |      |   | 16,775,000 |  
|                                                                                           |                            |   |                    |   |      |   |            |  
|Basic loss per share                                                                       |                            | $ | (0.35              | ) |      | $ | (0.20      | )
|                                                                                           |                            |   |                    |   |      |   |            |  
|Diluted:                                                                                   |                            |   |                    |   |      |   |            |  
|Weighted average common shares outstanding                                                 |                            |   | 21,500,000         |   |      |   | 16,775,000 |  
|Potential common shares:                                                                   |                            |   |                    |   |      |   |            |  
|                                                                                           | Stock options and warrants |   |                    |  |      |   |            |  | 
|                                                                                           |                            |   |                    |   |      |   |            |  
|Weighted average common and potential common
shares outstanding for diluted loss per share |                            |   | 21,500,000         |   |      |   | 16,775,000 |  
|                                                                                           |                            |   |                    |   |      |   |            |  
|Diluted loss per share                                                                     |                            | $ | (0.35              | ) |      | $ | (0.20      | )
|                                                                                           |                            |   |                    |   |      |   |            |  

The calculation of diluted loss per share for the three months ended January
31, 2004 and 2003 excluded the effect of approximately 3,676,000 and 3,101,000
potential common shares from the conversion of outstanding options and warrants
and common shares held in escrow, respectively, as they were antidilutive.

12. Comprehensive Loss

Total comprehensive loss was as follows:

|                                         |                          |   |                    |        |      |   |        |        |  
|---------------------------------------- | ------------------------ | - | ------------------ | ------ | ---- | - | ------ | ------ | -
|                                         |                          |   | Three Months Ended
|                                         |                          |   | January 31,       
|                                         |                          |   |                   
|                                         |                          |   | 2004               |        | 2003
|                                         |                          |   |                    |        |     
|Net loss                                 |                          | $ | (7,535             | )      |      | $ | (3,407 | )     
|Foreign currency translation adjustments |                          |   | 237                |        |      |   | 120    |       
|                                         |                          |   |                    |        |      |   |        |       
|                                         | Total comprehensive loss |   | $                  | (7,298 | )    |   | $      | (3,287 | )
|                                         |                          |   |                    |        |      |   |        |       

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

13. Segment and Geographic Information

We operate and manage our business as one segment, the development and
marketing of educational software and related services.

We have foreign subsidiaries in Canada and the United Kingdom. Our foreign
operations are not significant to our consolidated business, as less than 1% of
our long-term assets are located in foreign countries and less than 3% of our
revenues are from foreign countries.

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PLATO Learning, Inc. and
Subsidiaries




Managements Discussion and Analysis of Results of
Operations and Financial Condition


(Dollars in thousands)


OVERVIEW

We enhance the learning process by providing computer-based and e-learning
instruction software for kindergarten through adult learners, offering
curricula in reading, writing, mathematics, science, social studies and life
and job skills. We also offer innovative online assessment and accountability
solutions and standards-based professional development services. With over
6,000 hours of objective-based, problem-solving courseware, plus assessment,
alignment and curriculum management tools, we create standards-based curricula
that facilitate learning and school improvement. PLATO courseware is delivered
via networks, CD-ROM, private intranets and the Internet. In addition, single
topic PLATO courseware is available through our e-commerce web site and
distributors. We market our courseware products and services primarily to K-12
schools and colleges. We also sell to job training programs, correctional
institutions, military education programs, corporations and individuals.

In November 2003, we acquired Lightspan, Inc. (Lightspan), a provider of
curriculum-based educational software and on-line assessment products and
services that increase student achievement and enhance teacher professional
development. These products are used in schools and homes and align all key
federal reform initiatives, offering school districts a comprehensive
achievement and accountability system to assess, align, instruct and evaluate.
This acquisition is expected to strengthen our product offerings, with two
strong and complimentary brands, in the K-8 and post secondary markets. We
also expect this acquisition to enhance our ability to provide comprehensive
solutions to K-12 and adult learning institutions.

The combination of Lightspan and PLATO also unites Lightspans Academic Systems
products with our community college products to establish the largest provider
of on-line content for under-prepared college students. In addition, the
merger of sales forces will provide critical mass for servicing elementary,
secondary, district level, and colleges across all product lines and services.
We believe these advantages, plus the elimination of significant duplicate
costs, will provide greater earnings and cash flow potential for the combined
company, and ultimately greater valuation.

Lightspan generated revenues of approximately $50,000 in its fiscal year ended
January 31, 2003. We expect to achieve approximately $17.5 million of cost
reductions in 2004 and annualized cost reductions of between $20.0 and $25.0
million thereafter, primarily through workforce reductions and the elimination
of duplicate costs. The acquisition is expected to be modestly dilutive to our
earnings per share in 2004, particularly in the earlier quarters of the year.
Earnings per share will be impacted by non-cash charges for the amortization of
identified intangible assets acquired with this transaction.

In December 2003, we acquired New Media (Holdings) Limited (New Media), a
United Kingdom (U.K.) based publisher of curriculum-focused software
primarily for teaching secondary school science and math. This acquisition
enhances our science offering, provides a science simulation development
capability that we did not previously have and will allow us to

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

introduce New Medias products to markets in the United States for the first
time. Additionally, this acquisition is expected to provide critical mass and
revenue diversification in the U.K. and strengthen our relationships with the
U.K. Education Department.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

See Note 2 to Consolidated Financial Statements in our Annual Report on Form
10-K for the fiscal year ended October 31, 2003 for additional discussion on
these and other accounting policies and disclosures required by accounting
principles generally accepted in the United States of America.

Revenue Recognition

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

The significant judgments for revenue recognition typically involve whether
collectibility can be considered probable and whether fees are fixed or
determinable. In addition, our transactions often consist of multiple element
arrangements, which must be analyzed to determine the relative

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

fair value of each element, the amount of revenue to be recognized upon
shipment, if any, and the period and conditions under which deferred revenue
should be recognized.

We recognize revenue in accordance with the provisions of Statement of Position
No. 97-2, Software Revenue Recognition, as amended and modified, as well as
Technical Practice Aids issued from time to time by the American Institute of
Certified Public Accountants, and Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. We license software under non-cancelable
license and subscription agreements. We also provide related professional
services, including consulting, training and implementation services, as well
as ongoing customer support and maintenance. Consulting, training and
implementation services are not essential to the functionality of our software
products. Accordingly, revenues from these services are recognized separately.

Revenue from the sale of courseware licenses is recognized upon meeting the
following criteria: (i) a written customer order has been executed, (ii)
courseware has been delivered, (iii) the license fee is fixed or determinable
and (iv) collectibility of the fee is probable.

For software arrangements that include more than one element, we allocate the
total arrangement fee among each deliverable based on vendor-specific objective
evidence (VSOE) of the relative fair value of each deliverable. VSOE is
determined using the price charged when that element is sold separately. For
software arrangements in which we do not have VSOE for undelivered elements,
revenue is deferred until the earlier of when VSOE is determined for the
undelivered elements or when all elements for which we do not have VSOE have
been delivered.

If collectibility of the fee is not probable, revenue is recognized as payments
are received from the customer provided all other revenue recognition criteria
have been met. If the fee due from the customer is not fixed or determinable,
revenue is recognized as the payments become due provided all other revenue
recognition criteria have been met.

Subscription revenue, primarily fees charged for our on-line subscription
products, is recognized on a ratable basis as the products are delivered over
the subscription period.

Services revenue consists of software support and maintenance, which is
deferred and recognized ratably over the support period, and consulting,
training and implementation services, which are recognized as the services are
performed.

Other revenue, primarily from hardware and third-party software products, is
recognized as the products are delivered and all other revenue recognition
criteria are met.

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

Allowance for Doubtful Accounts

We determine an allowance for doubtful accounts based upon an analysis of the
collectibility of specific accounts, historical experience and the aging of the
trade and installment accounts receivable. Bad debt expense is included in
general and administrative expense in our consolidated statement of operations.
The assumptions and estimates used to determine the allowance are subject to
constant revision and involve significant assumptions and judgment. The
primary factors that impact these assumptions include the efficiency and
effectiveness of our billing and collection functions, our historical
experience and our credit assessment process. We believe that the current
budget difficulties facing many states will not have a significant impact on
the collection of our accounts receivable. However, a change in the underlying
conditions contributing to our belief could impact our assessment of
collectibility and, therefore, require a change in the allowance for doubtful
accounts and the amount of bad debt expense. Actual collection results could
differ materially from those estimated and have a significant impact on our
consolidated results of operations. Our provision for bad debts is based on
our historical experience using a detailed analysis of customer-specific
activity and receivable balances performed on a quarterly basis. Our allowance
for doubtful accounts increased to $4,980, or 10.7% of gross accounts
receivable, at January 31, 2004, from $4,254, or 9.8%, at October 31, 2003.

Capitalized Product Development Costs

Our product development costs relate to the research, development, enhancement
and maintenance of our courseware products. The amortization of capitalized
product development costs is included in cost of revenues. Research and
development costs, relating principally to the design and development of new
products, and the routine enhancement and maintenance of existing products are
expensed as incurred. We capitalize product development costs when the
projects under development reach technological feasibility. A significant
portion of our product development costs qualify for capitalization due to the
concentration of our development efforts on the content of our courseware.
Capitalization ends when a product is available for general release to our
customers, at which time amortization of the capitalized costs begins. We
amortize these costs using the greater of: (a) the amount determined by the
ratio of the products current revenue to total expected future revenue, or (b)
the straight-line method over the estimated useful life of the product, which
is generally three years. During all periods presented, we used the
straight-line method to amortize the capitalized costs as this method resulted
in greater amortization.

The significant judgment regarding capitalization of product development costs
involves the recoverability of capitalized costs. We continually evaluate our
capitalized costs to determine if the unamortized balance related to any given
product exceeds the estimated net realizable value of that product. Estimating
net realizable value requires us to estimate future revenues and cash flows to
be generated by the product and to use judgment in quantifying the amount, if
any, to be written off. Actual cash flows and amounts realized from the
courseware products could differ

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

materially from those estimated. In addition, any future changes to our
courseware product offerings could result in write-offs of previously
capitalized costs and have a significant impact on our consolidated results of
operations.

Valuation of Deferred Income Taxes

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

At October 31, 2003, we had a net deferred tax asset of $2,218. Approximately
$7,377 of the deferred tax asset relates to our net operating loss carryforward
in the United States of approximately $18,500, which expire in varying amounts
between 2004 and 2023. We also have net operating loss carryforwards of
approximately $3,000 related to our foreign subsidiaries. We have provided a
full valuation allowance related to these foreign deferred income tax assets
due to the uncertainty in realization of future taxable income in these foreign
jurisdictions.

Realization of our deferred tax asset is dependent on generating sufficient
taxable income in the United States prior to expiration of these loss
carryforwards. Although realization was not assured at October 31, 2003, we
believed it was more likely than not that all of the deferred tax asset would
be realized. We based this belief upon the levels of taxable income generated
historically, as well as projections of future taxable income. However, our
merger with Lightspan impacted our assessment of the realization of deferred
tax assets because the merged company is considered one consolidated taxable
entity. As a result of the merger, we acquired approximately $290,000 of
Lightspans net operating loss carryforwards. Based on a preliminary Section
382 limitation analysis, the usage of these net operating loss carryforwards is
limited to approximately $2,500 and, therefore, approximately $35,000 of the
acquired net operating loss carryforwards are available to the combined entity. These amounts are preliminary and may change as the Section 382 limitation analysis is finalized.

Our combined net operating loss carryforwards, including the first quarter of
2004, were approximately $60,000 at January 31, 2004.
The combined net
operating loss carryforwards, which represent the majority of the merged
companys deferred tax assets, must be reviewed for realization primarily based
upon historical results and secondarily upon projected results. Although we
expect taxable income in 2004, this expectation is highly dependent on the
integration of the Lightspan acquisition. Lightspan has historically incurred
significant operating losses which carry more weight than the projected
results. Consequently, it is our current view that, while we had cumulative
taxable income for the last three years, our historical operating results were
insufficient to support the combined post-merger deferred tax assets. As a
result, net deferred tax assets, excluding the deferred tax liability relating
to tax deductible goodwill, which cannot be used to support realization of the
other net deferred tax assets, were fully reserved for in the purchase
accounting for the Lightspan acquisition in our first quarter of 2004 thereby
increasing goodwill. Any subsequent reversal of the valuation allowance
recorded on the combined entitys pre-acquisition deferred tax assets will be
recorded as a reduction of goodwill.

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

Goodwill and Identified Intangible Assets

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

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

We account for goodwill and other intangible assets in accordance with the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are not amortized
to expense and must be reviewed for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired.
The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. We operate as one reporting unit and therefore
compare our book value to market value (market capitalization plus a control
premium). If our fair value exceeds our book value, goodwill is considered not
impaired, thus the second step of the impairment test is unnecessary. If our
book value exceeds our market value, the second step of the goodwill impairment
test shall be performed to measure the amount of impairment loss, if any. The
second step of the goodwill impairment test, used to measure the amount of
impairment loss, compares the implied fair value of the goodwill with the book
value of the goodwill. If the carrying amount of the goodwill exceeds the
implied fair value of the goodwill, an impairment loss would be recognized in
an amount equal to that excess. Any loss recognized cannot exceed the carrying
amount of goodwill. After a goodwill impairment loss is recognized, the
adjusted carrying amount of goodwill is its new accounting basis. Subsequent
reversal of a previously recognized goodwill impairment loss is prohibited once
the measurement of that loss is completed. We completed our annual goodwill
impairment assessment as of October 31, 2003, upon which no impairment charge
was recorded.

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

ACQUISITIONS

Our acquisition strategy is to acquire complementary products or businesses
that will enable us to achieve our strategic goals, including market
leadership, growth rates that exceed the market, and providing innovative,
leading and distinct products and services.

During the three months ended January 31, 2004, we acquired Lightspan, Inc. and
New Media (Holdings) Limited. Lightspan was acquired in a stock transaction
where we issued approximately 6.6 million shares of our common stock, valued at
approximately $52,000, for all of Lightspans outstanding stock. We acquired
New Media for approximately $6,800 in cash. See Note 4 to Consolidated
Financial Statements for more information on these strategic acquisitions.

RESULTS OF OPERATIONS

Operating Results as a Percentage of Revenue

|                         |                                                    |                          |        |                    |       |      |        |       |       | 
|------------------------ | -------------------------------------------------- | ------------------------ | ------ | ------------------ | ----- | ---- | ------ | ----- | ----- | 
|                         |                                                    |                          |        | Three Months Ended
|                         |                                                    |                          |        | January 31,       
|                         |                                                    |                          |        |                   
|                         |                                                    |                          |        | 2004               |       | 2003
|                         |                                                    |                          |        |                    |       |     
|Revenues:                |                                                    |                          |        |                    |       |      |        |      
|                         | License fees                                       |                          |        | 49.4               | %     |      |        | 55.3  | %    
|                         | Subscriptions                                      |                          |        | 17.0               |       |      |        | 12.1  |      
|                         | Services                                           |                          |        | 24.0               |       |      |        | 25.1  |      
|                         | Other                                              |                          |        | 9.6                |       |      |        | 7.5   |      
|                         |                                                    |                          |        |                    |       |      |        |       |      
|                         |                                                    | Total revenues           |        |                    | 100.0 |      |        |       | 100.0 | 
|                         |                                                    |                          |        |                    |       |      |        |       |      
|Cost of revenues:        |                                                    |                          |        |                    |       |      |        |      
|                         | License fees                                       |                          |        | 12.6               |       |      |        | 13.1  |      
|                         | Subscriptions                                      |                          |        | 6.4                |       |      |        | 4.2   |      
|                         | Services                                           |                          |        | 14.2               |       |      |        | 17.6  |      
|                         | Other                                              |                          |        | 8.3                |       |      |        | 7.4   |      
|                         |                                                    |                          |        |                    |       |      |        |       |      
|                         |                                                    | Total cost of revenues   |        |                    | 41.5  |      |        |       | 42.3  | 
|                         |                                                    |                          |        |                    |       |      |        |       |      
|                         | Gross profit                                       |                          |        | 58.5               |       |      |        | 57.7  |      
|                         |                                                    |                          |        |                    |       |      |        |       |      
|Operating expenses:      |                                                    |                          |        |                    |       |      |        |      
|                         | Sales and marketing                                |                          |        | 57.4               |       |      |        | 68.6  |      
|                         | General and administrative                         |                          |        | 17.0               |       |      |        | 24.3  |      
|                         | Product development                                |                          |        | 8.3                |       |      |        | 4.2   |      
|                         | Amortization of intangibles and goodwill           |                          |        | 3.7                |       |      |        | 1.1   |      
|                         | Restructuring charge                               |                          |        |                   |       |      |        | 2.8   |      
|                         |                                                    |                          |        |                    |       |      |        |       |      
|                         |                                                    | Total operating expenses |        |                    | 86.4  |      |        |       | 101.0 | 
|                         |                                                    |                          |        |                    |       |      |        |       |      
|Operating loss           |                                                    |                          | (27.9  | )                  |       |      | (43.3  | )    
|                         | Interest income and expense and other expense, net |                          |        |                   |       |      |        | 0.5   |      
|                         |                                                    |                          |        |                    |       |      |        |       |      
|Loss before income taxes |                                                    |                          | (27.9  | )                  |       |      | (42.8  | )    
|                         | Income tax expense (benefit)                       |                          |        | 0.6                |       |      |        | (17.5 | )    
|                         |                                                    |                          |        |                    |       |      |        |       |      
|Net loss                 |                                                    |                          | (28.5) | %                  |       |      | (25.3) | %    
|                         |                                                    |                          |        |                    |       |      |        |       |      

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

Certain reclassifications of previously reported amounts have been made to
conform to the current period presentation in the consolidated statements of
operations. These reclassifications did not change previously reported
revenues, operating loss or net loss and related per share amounts. For more
information on these reclassifications, refer to Note 3 to Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
October 31, 2003.

Revenues

Total Revenues.Total revenues increased 96.5% to $26,448 for the three months
ended January 31, 2004 from $13,457 for the same period in 2003. Our
significant revenue growth in 2004 reflected the acquisition of Lightspan, and,
while impacted by the economic conditions discussed below, also reflected our
increased focus on larger orders, subscriptions revenue, and correlation and
professional development services.

The following table presents total revenues, as reported and on a pro forma
basis, as if Lightspan revenues prior to the acquisition had been included for
all periods presented:

|                            |           |   |                                |              |      |   |       |              |   |          |        |        |  |  |       |       |   |  |      |     |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ----- | ------------ | - | -------- | ------ | ------ |  |  | ----- | ----- | - |  | ---- | --- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |      
|                            |           |   |                                |              |      |   |      
|                            |           |   | 2004                           |              | 2003 |   |       |              |  
|                            |           |   |                                |              |      |   |       |              |  
|Total Revenues              |           | $ |                                | % of revenue |      | $ |       | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |       |              |   |         
|PLATO (as reported)         |           | $ | 26,448                         |              |      |   | 100.0 | %            |   | $        | 13,457 |        |  |  | 100.0 | %     |   |  | 96.5 | %  
|Lightspan (pre-acquisition) |           |   | 969                            |              |      |   |       |              |   |          | 12,403 |        |  |  |       |       |   |  |      |    
|                            |           |   |                                |              |      |   |       |              |   |          |        |        |  |  |       |       |   |  |      |    
|                            | Pro forma |   | $                              | 27,417       |      |   |       | 100.0        | % |          | $      | 25,860 |  |  |       | 100.0 | % |  |      | 6.0 | %
|                            |           |   |                                |              |      |   |       |              |   |          |        |        |  |  |       |       |   |  |      |    

On a pro forma basis, assuming Lightspan had been included for all periods
presented, we executed 44 orders of $100 or greater during the three months
ended January 31, 2004, as compared to 29 for the same period in 2003. Orders
between $100 and $249 decreased in average size from $158 to $144, or 9%, while
the average size of orders of $250 and greater increased 25% from $519 to $651.
The number and magnitude of these larger orders can have a significant impact
on our operating results. Information regarding these orders was as follows:

|                |  |                                |    |       |  |          |        |       |  |        |    |       |  |   |       |  |  |  |      |   |  |  |      |  
|--------------- |  | ------------------------------ | -- | ----- |  | -------- | ------ | ----- |  | ------ | -- | ----- |  | - | ----- |  |  |  | ---- | - |  |  | ---- | -
|                |  | Three Months Ended January 31, |    |       |  |          |        |       |  |       
|                |  |                                |    |       |  |          |        |       |  |       
|Pro Forma       |  | 2004                           |    | 2003  |  | % Change
|                |  |                                |    |       |  |         
|Order Size      |  | Number                         |    | Value |  | Number   |        | Value |  | Number |    | Value
|                |  |                                |    |       |  |          |        |       |  |        |    |      
|$100 to $249    |  |                                | 30 |       |  | $        | 4,309  |       |  |        | 20 |       |  | $ | 3,150 |  |  |  | 50.0 | % |  |  | 36.8 | %
|$250 or greater |  |                                | 14 |       |  |          | 9,118  |       |  |        | 9  |       |  |   | 4,675 |  |  |  | 55.6 | % |  |  | 95.0 | %
|                |  |                                |    |       |  |          |        |       |  |        |    |       |  |   |       |  |  |  |      |   |  |  |      |  
|                |  |                                | 44 |       |  | $        | 13,427 |       |  |        | 29 |       |  | $ | 7,825 |  |  |  | 51.7 | % |  |  | 71.6 | %
|                |  |                                |    |       |  |          |        |       |  |        |    |       |  |   |       |  |  |  |      |   |  |  |      |  

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

License Fees.The following table presents license fees revenues, as reported
and on a pro forma basis, as if Lightspan revenues prior to the acquisition had
been included for all periods presented:

|                            |           |   |                                |              |      |   |      |              |   |          |       |        |  |  |      |      |   |  |      |      |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ---- | ------------ | - | -------- | ----- | ------ |  |  | ---- | ---- | - |  | ---- | ---- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |     
|                            |           |   |                                |              |      |   |     
|                            |           |   | 2004                           |              | 2003 |   |      |              |  
|                            |           |   |                                |              |      |   |      |              |  
|License Fees Revenues       |           | $ |                                | % of revenue |      | $ |      | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |      |              |   |         
|PLATO (as reported)         |           | $ | 13,059                         |              |      |   | 49.4 | %            |   | $        | 7,445 |        |  |  | 55.3 | %    |   |  | 75.4 | %   
|Lightspan (pre-acquisition) |           |   |                               |              |      |   |      |              |   |          | 6,182 |        |  |  |      |      |   |  |      |     
|                            |           |   |                                |              |      |   |      |              |   |          |       |        |  |  |      |      |   |  |      |     
|                            | Pro forma |   | $                              | 13,059       |      |   |      | 47.6         | % |          | $     | 13,627 |  |  |      | 52.7 | % |  |      | -4.2 | %
|                            |           |   |                                |              |      |   |      |              |   |          |       |        |  |  |      |      |   |  |      |     

The increase in license fees revenues for the three months ended January 31,
2004, as compared to the same period in 2003, was due to the Lightspan
acquisition. We continue to feel the effects of federal funding delays and
economic uncertainties, particularly state budget difficulties, which
significantly impacted the level of purchasing done by our customers. While
there continues to be some improvement in the flow of federal funds to
education, these conditions are expected to continue to impact our revenues
during the remainder of 2004. As a percentage of total revenues, license fees
revenues decreased for the three months ended January 31, 2004 from the same
period in 2003, reflecting the increase in subscriptions and services revenues
as discussed below.

Subscriptions.The following table presents subscriptions revenues, as
reported and on a pro forma basis, as if Lightspan revenues prior to the
acquisition had been included for all periods presented:

|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |       |     |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ---- | ------------ | - | -------- | ----- | ----- |  |  | ---- | ---- | - |  | ----- | --- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |     
|                            |           |   |                                |              |      |   |     
|                            |           |   | 2004                           |              | 2003 |   |      |              |  
|                            |           |   |                                |              |      |   |      |              |  
|Subscriptions Revenues      |           | $ |                                | % of revenue |      | $ |      | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |      |              |   |         
|PLATO (as reported)         |           | $ | 4,508                          |              |      |   | 17.0 | %            |   | $        | 1,624 |       |  |  | 12.1 | %    |   |  | 177.6 | %  
|Lightspan (pre-acquisition) |           |   | 531                            |              |      |   |      |              |   |          | 2,977 |       |  |  |      |      |   |  |       |    
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |       |    
|                            | Pro forma |   | $                              | 5,039        |      |   |      | 18.4         | % |          | $     | 4,601 |  |  |      | 17.8 | % |  |       | 9.5 | %
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |       |    

Revenues from subscriptions increased for the three months ended January 31,
2004, as compared to the same period in 2003, due to the Lightspan acquisition
and the growth in PLATO subscriptions revenue. We are experiencing an
increasing shift away from perpetual license sales and a growing customer
desire to license our products on a subscription basis. Orders for our
subscription-based products continue to grow, and, while this has a negative
impact on revenues in the short-term, it has positive implications for the
longer term, including greater predictability of future revenues. As a
percentage of total revenues, subscriptions revenues increased for the three
months ended January 31, 2004 from the same period in 2003, reflecting this
trend.

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

Services.The following table presents services revenues, as reported and on a
pro forma basis, as if Lightspan revenues prior to the acquisition had been
included for all periods presented:

|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |      |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ---- | ------------ | - | -------- | ----- | ----- |  |  | ---- | ---- | - |  | ---- | ---- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |     
|                            |           |   |                                |              |      |   |     
|                            |           |   | 2004                           |              | 2003 |   |      |              |  
|                            |           |   |                                |              |      |   |      |              |  
|Services Revenues           |           | $ |                                | % of revenue |      | $ |      | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |      |              |   |         
|PLATO (as reported)         |           | $ | 6,337                          |              |      |   | 24.0 | %            |   | $        | 3,383 |       |  |  | 25.1 | %    |   |  | 87.3 | %   
|Lightspan (pre-acquisition) |           |   | 438                            |              |      |   |      |              |   |          | 2,425 |       |  |  |      |      |   |  |      |     
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |     
|                            | Pro forma |   | $                              | 6,775        |      |   |      | 24.7         | % |          | $     | 5,808 |  |  |      | 22.5 | % |  |      | 16.6 | %
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |     

Revenues from services increased for the three months ended January 31, 2004,
as compared to the same period in 2003, due to the Lightspan acquisition and an
increase in PLATO services revenues, due primarily to increased correlation and
professional development services and the continued growth in customer demand
for our training and technical support services.

Other.The following table presents other revenues, as reported and on a pro
forma basis, as if Lightspan revenues prior to the acquisition had been
included for all periods presented:

|                            |           |   |                                |              |      |   |     |              |   |          |       |       |  |  |     |     |   |  |       |      |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | --- | ------------ | - | -------- | ----- | ----- |  |  | --- | --- | - |  | ----- | ---- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |    
|                            |           |   |                                |              |      |   |    
|                            |           |   | 2004                           |              | 2003 |   |     |              |  
|                            |           |   |                                |              |      |   |     |              |  
|Other Revenues              |           | $ |                                | % of revenue |      | $ |     | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |     |              |   |         
|PLATO (as reported)         |           | $ | 2,544                          |              |      |   | 9.6 | %            |   | $        | 1,005 |       |  |  | 7.5 | %   |   |  | 153.1 | %   
|Lightspan (pre-acquisition) |           |   |                               |              |      |   |     |              |   |          | 819   |       |  |  |     |     |   |  |       |     
|                            |           |   |                                |              |      |   |     |              |   |          |       |       |  |  |     |     |   |  |       |     
|                            | Pro forma |   | $                              | 2,544        |      |   |     | 9.3          | % |          | $     | 1,824 |  |  |     | 7.1 | % |  |       | 39.5 | %
|                            |           |   |                                |              |      |   |     |              |   |          |       |       |  |  |     |     |   |  |       |     

Other revenues, consisting primarily of hardware and third-party courseware
products, increased principally due to the Lightspan acquisition. The
elementary grade products acquired from Lightspan run on PlayStation® game
consoles which, along with the sale of related accessories, are a component of
other revenues.

Cost of Revenues

The following table presents our total cost of revenues, as reported and on a
pro forma basis, as if Lightspan cost of revenues prior to the acquisition had
been included for all periods presented:

|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |      |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ---- | ------------ | - | -------- | ----- | ----- |  |  | ---- | ---- | - |  | ---- | ---- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |     
|                            |           |   |                                |              |      |   |     
|                            |           |   | 2004                           |              | 2003 |   |      |              |  
|                            |           |   |                                |              |      |   |      |              |  
|Total Cost of Revenues      |           | $ |                                | % of revenue |      | $ |      | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |      |              |   |         
|PLATO (as reported)         |           | $ | 10,983                         |              |      |   | 41.5 | %            |   | $        | 5,687 |       |  |  | 42.3 | %    |   |  | 93.1 | %   
|Lightspan (pre-acquisition) |           |   | 242                            |              |      |   |      |              |   |          | 3,592 |       |  |  |      |      |   |  |      |     
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |     
|                            | Pro forma |   | $                              | 11,225       |      |   |      | 40.9         | % |          | $     | 9,279 |  |  |      | 35.9 | % |  |      | 21.0 | %
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |     

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

Total cost of revenues increased primarily due to the changes in revenue
discussed earlier, and increased professional development expenses of $346,
increased amortization of capitalized product development costs of $547,
increased amortization of acquired technology of $964 and increased costs
related to other revenue of $1,208, primarily the cost of PlayStation® game
consoles and related accessories, as mentioned earlier.

Amortization of previously capitalized product development costs, a component
of cost of sales, was $1,764 and $1,294 for the three months ended January 31,
2004 and 2003, respectively. Amortization has increased as projects completed
during prior periods are now being amortized to expense. We expect this
amortization to increase during the remainder of 2004 as additional products
are completed. Capitalized development costs were $1,664 and $1,667 for the
three months ended January 31, 2004 and 2003, respectively.

A comparison of gross profit margin by revenue category is as follows:

|                 |  |                                |      |           |  |             |      |           |  |  |      |   |  |  |      |  
|---------------- |  | ------------------------------ | ---- | --------- |  | ----------- | ---- | --------- |  |  | ---- | - |  |  | ---- | -
|                 |  | Three Months Ended January 31,
|                 |  |                               
|                 |  | 2004                           |      | 2003     
|                 |  |                                |      |          
|Revenue category |  | As Reported                    |      | Pro Forma |  | As Reported |      | Pro Forma
|                 |  |                                |      |           |  |             |      |          
|License fees     |  |                                | 74.4 | %         |  |             | 74.4 | %         |  |  | 76.4 | % |  |  | 75.7 | %
|Subscriptions    |  |                                | 62.8 | %         |  |             | 64.8 | %         |  |  | 65.0 | % |  |  | 81.7 | %
|Services         |  |                                | 40.6 | %         |  |             | 42.3 | %         |  |  | 29.9 | % |  |  | 38.2 | %
|Other            |  |                                | 13.6 | %         |  |             | 13.6 | %         |  |  | 1.4  | % |  |  | 15.4 | %
|Total            |  |                                | 58.5 | %         |  |             | 59.1 | %         |  |  | 57.7 | % |  |  | 64.1 | %

The decrease in pro forma gross profit margin from 2003 to 2004 resulted
primarily from the higher proportion of other revenues included in our product
sales mix in 2004, which carry lower margins, and the increased professional
development expenses, amortization of capitalized product development costs and
amortization of acquired technology as discussed above. Future gross profit
margin will be dependent primarily on our revenue mix, the amount of
professional development expenses and amortization of capitalized product
development costs and acquired technology.

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

Operating Expenses

Sales and Marketing.The following table presents sales and marketing
expenses, as reported and on a pro forma basis, as if Lightspan expenses prior
to the acquisition had been included for all periods presented:

|                            |           |   |                                |              |      |   |      |              |   |          |       |        |  |  |      |      |   |  |      |     |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ---- | ------------ | - | -------- | ----- | ------ |  |  | ---- | ---- | - |  | ---- | --- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |     
|                            |           |   |                                |              |      |   |     
|                            |           |   | 2004                           |              | 2003 |   |      |              |  
|                            |           |   |                                |              |      |   |      |              |  
|Sales and Marketing         |           | $ |                                | % of revenue |      | $ |      | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |      |              |   |         
|PLATO (as reported)         |           | $ | 15,185                         |              |      |   | 57.4 | %            |   | $        | 9,238 |        |  |  | 68.6 | %    |   |  | 64.4 | %  
|Lightspan (pre-acquisition) |           |   | 1,282                          |              |      |   |      |              |   |          | 6,798 |        |  |  |      |      |   |  |      |    
|                            |           |   |                                |              |      |   |      |              |   |          |       |        |  |  |      |      |   |  |      |    
|                            | Pro forma |   | $                              | 16,467       |      |   |      | 60.1         | % |          | $     | 16,036 |  |  |      | 62.0 | % |  |      | 2.7 | %
|                            |           |   |                                |              |      |   |      |              |   |          |       |        |  |  |      |      |   |  |      |    

Sales and marketing expenses increased for the three months ended January 31,
2004, as compared to the same period in 2003, due to the Lightspan acquisition,
slightly offset by the decrease in PLATO expenses. As a percentage of total
revenues, however, total sales and marketing expenses decreased. Our ability
to continue to leverage our cost structure and improve profitability is
primarily dependent on our ability to generate higher revenues, integrate our
acquisitions and realize sales force productivity improvements.

General and Administrative. The following table presents general and
administrative expenses, as reported and on a pro forma basis, as if Lightspan
expenses prior to the acquisition had been included for all periods presented:

|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |       |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | ---- | ------------ | - | -------- | ----- | ----- |  |  | ---- | ---- | - |  | ---- | ----- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |     
|                            |           |   |                                |              |      |   |     
|                            |           |   | 2004                           |              | 2003 |   |      |              |  
|                            |           |   |                                |              |      |   |      |              |  
|General and Administrative  |           | $ |                                | % of revenue |      | $ |      | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |      |              |   |         
|PLATO (as reported)         |           | $ | 4,492                          |              |      |   | 17.0 | %            |   | $        | 3,276 |       |  |  | 24.3 | %    |   |  | 37.1 | %    
|Lightspan (pre-acquisition) |           |   | 310                            |              |      |   |      |              |   |          | 2,367 |       |  |  |      |      |   |  |      |      
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |      
|                            | Pro forma |   | $                              | 4,802        |      |   |      | 17.5         | % |          | $     | 5,643 |  |  |      | 21.8 | % |  |      | -14.9 | %
|                            |           |   |                                |              |      |   |      |              |   |          |       |       |  |  |      |      |   |  |      |      

General and administrative expenses increased for the three months ended
January 31, 2004, as compared to the same period in 2003, due primarily to the
Lightspan acquisition. The decrease in pro forma general and administrative
expense reflects the synergistic benefits received from combining the PLATO and
Lightspan general and administrative activities.

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

Product Development. The following table presents product development
expenses, as reported and on a pro forma basis, as if Lightspan expenses prior
to the acquisition had been included for all periods presented:

|                            |           |   |                                |              |      |   |     |              |   |          |       |       |  |  |     |      |   |  |       |       |  
|--------------------------- | --------- | - | ------------------------------ | ------------ | ---- | - | --- | ------------ | - | -------- | ----- | ----- |  |  | --- | ---- | - |  | ----- | ----- | -
|                            |           |   | Three Months Ended January 31, |              |      |   |    
|                            |           |   |                                |              |      |   |    
|                            |           |   | 2004                           |              | 2003 |   |     |              |  
|                            |           |   |                                |              |      |   |     |              |  
|Product Development         |           | $ |                                | % of revenue |      | $ |     | % of revenue |   | % Change
|                            |           |   |                                |              |      |   |     |              |   |         
|PLATO (as reported)         |           | $ | 2,203                          |              |      |   | 8.3 | %            |   | $        | 561   |       |  |  | 4.2 | %    |   |  | 292.7 | %    
|Lightspan (pre-acquisition) |           |   | 327                            |              |      |   |     |              |   |          | 3,018 |       |  |  |     |      |   |  |       |      
|                            |           |   |                                |              |      |   |     |              |   |          |       |       |  |  |     |      |   |  |       |      
|                            | Pro forma |   | $                              | 2,530        |      |   |     | 9.2          | % |          | $     | 3,579 |  |  |     | 13.8 | % |  |       | -29.3 | %
|                            |           |   |                                |              |      |   |     |              |   |          |       |       |  |  |     |      |   |  |       |      

The decrease in pro forma product development expense reflects the synergistic
benefits received from combining the PLATO and Lightspan product development
activities and the blending of different capitalization circumstances between
PLATO and Lightspan. Lightspan experiences technological feasibility at a
later point, compared to PLATO, such that costs are expensed as incurred. A
significant portion of PLATOs product development costs qualify for
capitalization. Product development expense does not reflect these capitalized
costs, as they are amortized through cost of revenues. Accordingly, our
product development expense, as a percentage of revenue, does not demonstrate
our total level of development activity.

Product development spending, before capitalization, was 14.6% of total
revenues for the three months ended January 31, 2004, compared to 16.6% for the
same period in 2003. Our acquisitions of developed technologies and curriculum
content and the completion of several significant projects in prior years
contributed to the decrease in product development spending in 2004. As part
of our growth strategy, we intend to continually introduce new products and
product improvements. The extent of our future product development spending
and the amount of our future capitalized product development costs are
dependent on our ability to develop and introduce new products and product
improvements on a cost-effective and timely basis.

Amortization of Intangibles. Expenses for the three months ended January 31,
2004 and 2003 represented the amortization of identified intangible assets,
other than goodwill and acquired technology, from our previous acquisitions.
The increase from 2003 to 2004 was due primarily to the Lightspan acquisition.
With the adoption of SFAS No. 142 in 2002, goodwill is no longer amortized to
expense. Acquired technology intangible assets are amortized through cost of
revenues. See Note 6 to Consolidated Financial Statements for additional
information on goodwill and identified intangible assets.

Restructuring Charge.In December 2002, we reduced the size of our workforce by
approximately 30 positions and closed approximately 30 open job requisitions,
all in the United States, which together represented about 10% of our planned
workforce, in connection with a restructuring plan to align our cost structure
with future expectations. The consolidated statement of operations for the three months ended January 31, 2003 included a
restructuring

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

charge of $380 for severance costs related to this reduction.
All of these severance costs were paid as of October 31, 2003.

Income Taxes

As discussed earlier in the Critical Accounting Policies and Estimates
section of this Managements Discussion and Analysis, as a result of the
Lightspan acquisition, net deferred tax assets, excluding the deferred tax
liability relating to tax deductible goodwill which cannot be used to support
realization of the other net deferred tax assets, were fully reserved for in
purchase accounting, thereby increasing goodwill, in the first quarter of 2004.
Any subsequent reversal of the valuation allowance recorded on the combined
entitys pre-acquisition deferred tax assets will be recorded as a reduction to
goodwill.

We recorded an income tax provision of $150, despite a pre-tax loss of $7,385,
for the three months ended January 31, 2004 related to the tax amortization of
tax deductible goodwill. We recorded an income tax benefit of $2,350 on a
pre-tax loss of $5,757 for the three months ended January 31, 2003. This tax
benefit was recorded as it was more likely than not at that time that the tax
benefit would be realized.

FINANCIAL CONDITION

Liquidity and Capital Resources

At January 31, 2004, our principal sources of liquidity included cash and cash
equivalents of $24,196, net accounts receivable of $41,638, long-term
marketable securities of $3,746 and our unused line of credit. Working capital
was $17,781 and $34,701 at January 31, 2004 and October 31, 2003, respectively.
The decrease in working capital was primarily due to the decrease in deferred
income taxes of $2,218, and the increases in accrued liabilities of $9,790 and
deferred revenue of $12,739, offset by the increases in net accounts receivable
of $2,462 and prepaid expenses and other current assets of $4,457. Deferred
income taxes decreased due to our deferred income tax assets being fully
reserved through purchase accounting for the Lightspan acquisition. Accrued
liabilities and deferred revenue increased as a result of the Lightspan
acquisition. Deferred revenue also increased due to increased sales of our
services and subscription-based products. Accounts receivable increased due to
the Lightspan acquisition, offset by collections of year end balances. Prepaid
expenses and other current assets increased due to the Lightspan acquisition.

Cash used in operations, excluding changes in our working capital accounts, was
$2,583 and $2,911 for the three months ended January 31, 2004 and 2003,
respectively.

During the three months ended January 31, 2004, the net cash flow provided by
investing activities of $204 and financing activities of $1,251 was used to
fund the cash used in operations, excluding changes in our working capital accounts, of $2,583 and the changes in
our working

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

capital accounts of $1,331. Changes in our working capital
accounts were primarily due to decreased accounts receivable, accounts payable
and accrued liabilities, partially offset by increased prepaid expenses and
other current assets and deferred revenue.
During the three months ended January 31, 2003, the decrease in cash and cash
equivalents of $1,517 was used to fund the cash used in operations, excluding
changes in our working capital accounts, of $2,911, the changes in our working
capital accounts of $3,870, our investing activities of $1,964 and financing
activities of $593. Changes in our working capital accounts were primarily due
to decreased accounts receivable and increased accounts payable, which were
partially offset by decreased accrued liabilities.

Net cash provided by our investing activities was $204 for the three months
ended January 31, 2004, compared to net cash used of $1,964 for the same period
in 2003. In 2004, as compared to 2003, we had net cash provided from
acquisitions of $2,324 and we increased our capital expenditures by $275. Net
cash provided from the Lightspan acquisition was $8,696 and net cash used for
the New Media acquisition was $6,372.

Net cash provided by our financing activities was $1,251 for the three months
ended January 31, 2004, as compared to net cash used of $593 for the same
period in 2003. In 2004, we received $1,311 from the exercise of outstanding
stock options and warrants and common stock issued under our employee stock
purchase plan. In 2003, we repurchased shares of our common stock for an
aggregate cost of $540. Our Board of Directors approved a stock repurchase
plan in December 2001, which authorizes us to repurchase up to $15,000 of our
common stock in the open market and in privately negotiated transactions. The
plan has no set termination date and the timing of any repurchases will be
dependent on prevailing market conditions and alternative uses of capital.
Cumulatively, we have repurchased approximately 1,445,000 shares for an
aggregate cost of approximately $13,500 under the repurchase plan and
approximately $1,500 remains available for future repurchases, if any.

We have resources available under our revolving loan agreement, which expires
on July 1, 2004, to provide borrowings up to $12,500, as determined by the
available borrowing base. At January 31, 2004, there were no borrowings
outstanding and our unused borrowing capacity was $12,500. The agreement
contains restrictive financial covenants (including Minimum Tangible Net Worth,
Minimum Debt Service Coverage, Maximum Leverage, Maximum Cash Flow Leverage,
Minimum Current Ratio, and Maximum Annual Capital Expenditures) and
restrictions on additional borrowings, asset sales and dividends, as defined.
We did not comply with the Minimum Tangible Net Worth and Minimum Debt Service
Coverage covenants for the twelve-month period ended January 31, 2004 and the
Minimum Current Ratio covenant at January 31, 2004. We received a waiver from
our lender covering this noncompliance for the periods indicated.

We are currently negotiating with our lender to extend the term of our
revolving loan agreement to July 1, 2005.

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

From time to time, we evaluate potential acquisitions of products or businesses
that complement our core business. We may consider and acquire other
complementary businesses, products, or technologies in the future. As
discussed earlier, we acquired Lightspan, in a stock transaction, and New
Media, in a cash transaction, during the three months ended January 31, 2004.

We anticipate using cash during the first half of 2004 to fund expected losses
from operations and our capital expenditure needs given the historic
seasonality of our operations. Cash used during the first half of 2004 is
expected to be greater than cash used during the first half of 2003 as we
integrate the operations of Lightspan.

We maintain adequate cash balances and credit facilities to meet our
anticipated working capital, capital expenditure and business investment
requirements for at least the next twelve months.

Disclosures about Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as of January 31, 2004.

Disclosures about Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments consist of future
payments due under capital lease obligations and operating leases. In
addition, any future borrowings under our revolving loan agreement, which
provides for a maximum $12,500 line of credit through July 1, 2004, would
require future use of cash.

|                          |  |                        |       |        |  |           |       |        |  |        |       |         |  |   |       |  |  |   |       | 
|------------------------- |  | ---------------------- | ----- | ------ |  | --------- | ----- | ------ |  | ------ | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|                          |  | Payments Due by Period
|                          |  |                       
|                          |  |                        |       |        |  | Less than |       | 1 to 3 |  | 4 to 5 |       | After 5
|Contractual Obligations   |  | Total                  |       | 1 year |  | Years     |       | Years  |  | Years 
|                          |  |                        |       |        |  |           |       |        |  |       
|Capital lease obligations |  | $                      | 645   |        |  | $         | 337   |        |  | $      | 308   |         |  | $ |      |  |  | $ |      | 
|Operating leases          |  |                        | 8,922 |        |  |           | 2,764 |        |  |        | 2,547 |         |  |   | 2,062 |  |  |   | 1,549 | 
|                          |  |                        |       |        |  |           |       |        |  |        |       |         |  |   |       |  |  |   |       | 
|Total                     |  | $                      | 9,567 |        |  | $         | 3,101 |        |  | $      | 2,855 |         |  | $ | 2,062 |  |  | $ | 1,549 | 
|                          |  |                        |       |        |  |           |       |        |  |        |       |         |  |   |       |  |  |   |       | 

At January 31, 2004, we had no significant commitments for capital
expenditures. With the NetSchools acquisition in 2002, additional cash
consideration may be due of up to approximately $6,000, contingent on the
NetSchools product and services revenues generated through October 2004. If
earned, any additional consideration will be recorded as additional goodwill.
As of January 31, 2004, no additional consideration has been earned.

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

Interest Rate Risk

Our borrowing capacity primarily consists of a revolving loan with interest
rates that fluctuate based upon the Prime Rate and LIBOR market indexes. At
January 31, 2004, we did not have any outstanding borrowings under this
revolving credit facility. Our only debt consisted of capital lease
obligations at fixed interest rates. As a result, risk relating to interest
fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk

We market our products and services worldwide and have operations in Canada and
the United Kingdom. As a result, financial results and cash flows could be
affected by changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Working funds necessary to facilitate the
short-term operations of our foreign subsidiaries are kept in local currencies
in which they do business. Any gains or losses from foreign currency
transactions are included in the consolidated statements of operations.
Approximately 3%, 6% and 8% of our total revenues were denominated in
currencies other than the U.S. dollar for 2003, 2002 and 2001, respectively.
Our foreign subsidiaries are not a significant component of our business, and,
as a result, risk relating to foreign currency fluctuation is considered
minimal.

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PART I 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the information set forth under the captions, Interest Rate Risk and
Foreign Currency Exchange Rate Risk in Managements Discussion and Analysis
of Results of Operations and Financial Condition. 
 Item 4. CONTROLS AND PROCEDURES As of January 31, 2004, our Chief Executive Officer and Chief Financial Officer
have conducted an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to make known to them
in a timely fashion material information related to the Company required to be
filed in this report. There have been no significant changes in our internal
controls over financial reporting, or in other factors that could significantly
affect internal controls, subsequent to the date of their evaluation during the
most recent fiscal quarter. While we believe the present design of our disclosure controls and procedures
is effective to make known to our senior management in a timely fashion all
material information concerning our business, we will continue to improve the
design and effectiveness of our disclosure controls and procedures to the
extent necessary in the future to provide our senior management with timely
access to such material information, and to correct any deficiencies that we
may discover in the future.


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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings  We are not a party to any litigation that is expected to have a
material adverse effect on our business or our consolidated
financial statements. 
 Item 2. Changes in Securities and Use of Proceeds  On November 17, 2003, we issued 6,576,129 shares of our common stock
for the acquisition of Lightspan, Inc. (see Note 4 of Notes to
Consolidated Financial Statements). 
 Item 3. Defaults Upon Senior Securities  Not Applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders  Not Applicable. 
 Item 5. Other Information  Not Applicable. 
 Item 6. Exhibits and Reports on Form 8-K  (a) ExhibitsExhibit Number and Description  31.01
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.02
    
    Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.01
    
    Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.02
    
    Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.  (b) Reports on Form 8-K:On December 1, 2003 we filed a Current Report on Form 8-K, dated
November 17, 2003, and on January 9, 2004 we filed Amendment Number 1
to that report, both related to the acquisition of Lightspan, Inc.On December 19, 2003, we filed a Current Report on Form 8-K, dated
December 17, 2003 related to the acquisition of New Media (Holdings)
Limited.


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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on March 15, 2004. PLATO LEARNING, INCBy
    
    /s/ John MurrayChairman, President andChief Executive Officer(principal executive officer)/s/ Gregory J. MelsenVice President Finance andChief Financial Officer(principal financial officer)/s/ Mary Jo MurphyVice President, Corporate
Controller andChief Accounting Officer(principal accounting officer)


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