##### Table of Contents



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 endedJuly 31, 2001

Commission File Number0-20842

(PLATO LEARNING, INC. LOGO)

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

|                                                                                      |  |                                                   
|------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction
of incorporation or organization)               |  | 36-3660532
(I.R.S. Employer
Identification Number)
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|10801 Nesbitt Avenue South, Bloomington, MN

(Address of principal executive offices) |  | 55437
(Zip Code)                                  
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|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 | (BALLOT BOX WITH X) |  | No | (OPEN BALLOT BOX)

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
valueClass |  | 12,201,936 shares
Outstanding as of August 31, 2001

(This document contains 21 pages)

1



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TABLE OF CONTENTS



|                                                                                              |                                                                                                          |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):                             
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2001 AND 2000
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 2001 AND OCTOBER 31, 2000                          
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000        
|                                                                                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                    
|ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|PART II. OTHER INFORMATION                                                                   
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2. CHANGES IN SECURITIES                                                                
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5. OTHER INFORMATION                                                                    
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   



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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries

INDEX

|           |  |  |                                                          |  |  |        |    | 
|---------- |  |  | -------------------------------------------------------- |  |  | ------ | -- | 
|           |  |  |                                                          |  |  | Page   |   
|           |  |  |                                                          |  |  | Number |   
|           |  |  |                                                          |  |  |        |   
|PART I.    |  |  | FINANCIAL INFORMATION                                    | 
|          
|          
|          
|          
|Item 1.    |  |  | Condensed Consolidated Financial Statements (Unaudited): | 
|          
|          
|          
|          
|           |  |  | Condensed Consolidated Statements of Earnings for the    | 
|          
|          
|          
|          
|           |  |  | Three and Nine Months Ended July 31, 2001 and 2000       |  |  |        | 3  | 
|          
|          
|          
|          
|           |  |  | Condensed Consolidated Balance Sheets as of              | 
|          
|          
|          
|          
|           |  |  | July 31, 2001 and October 31, 2000                       |  |  |        | 4  | 
|          
|          
|          
|          
|           |  |  | Condensed Consolidated Statements of Cash Flows for the  | 
|          
|          
|          
|          
|           |  |  | Nine Months Ended July 31, 2001 and 2000                 |  |  |        | 5  | 
|          
|          
|          
|          
|           |  |  | Notes to Condensed Consolidated Financial Statements     |  |  |        | 6  | 
|          
|          
|          
|          
|Item 2.    |  |  | Management's Discussion and Analysis of                  | 
|          
|          
|          
|          
|           |  |  | Results of Operations and Financial Condition            |  |  |        | 13 | 
|          
|          
|          
|          
|PART II.   |  |  | OTHER INFORMATION                                        | 
|          
|          
|          
|          
|Item 1.    |  |  | Legal Proceedings                                        |  |  |        | 20 | 
|          
|          
|          
|          
|Item 2.    |  |  | Changes in Securities                                    |  |  |        | 20 | 
|          
|          
|          
|          
|Item 3.    |  |  | Defaults Upon Senior Securities                          |  |  |        | 20 | 
|          
|          
|          
|          
|Item 4.    |  |  | Submission of Matters to a Vote of Security Holders      |  |  |        | 20 | 
|          
|          
|          
|          
|Item 5.    |  |  | Other Information                                        |  |  |        | 20 | 
|          
|          
|          
|          
|Item 6.    |  |  | Exhibits and Reports on Form 8-K                         |  |  |        | 20 | 
|          
|          
|          
|          
|SIGNATURES |  |  |                                                          |  |  |        | 21 | 

2



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##### Table of Contents












PART I. FINANCIAL INFORMATION

PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands, except per share data)

|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |        |        |       |        |        |        |       | 
|------------------------------------------- | ---------------------------------------- | ------------------------ | --------------------------------------------- | ------ | ------------------ | ----- | ------ | ----------------- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | 
|                                            |                                          |                          |                                               |        | Three Months Ended |       |        | Nine Months Ended |       
|                                            |                                          |                          |                                               |        | July 31,           |       |        | July 31,          |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |       
|                                            |                                          |                          |                                               |        | 2001               |       |        | 2000              |        |       | 2001   |        |        | 2000  |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |        |        |       |       
|Revenues                                    |                                          | $                        | 22,803                                        |        |                    | $     | 16,138 |                   |        | $     | 47,921 |        |        | $     | 35,903 |       
|                                           
|                                           
|                                           
|                                           
|Cost of revenues                            |                                          |                          | 1,667                                         |        |                    |       | 1,707  |                   |        |       | 4,615  |        |        |       | 4,673  |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            | Gross profit                             |                          |                                               | 21,136 |                    |       |        | 14,431            |        |       |        | 43,306 |        |       |        | 31,230 |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|Operating expenses:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative      |                          |                                               | 11,950 |                    |       |        | 8,965             |        |       |        | 30,844 |        |       |        | 23,925 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Product development and customer support |                          |                                               | 2,238  |                    |       |        | 1,521             |        |       |        | 6,070  |        |       |        | 4,612  |       
|                                           
|                                           
|                                           
|                                           
|                                            | Goodwill and intangible amortization     |                          |                                               | 818    |                    |       |        |                  |        |       |        | 1,412  |        |       |        |       |       
|                                           
|                                           
|                                           
|                                           
|                                            | Special charges                          |                          |                                               |       |                    |       |        |                  |        |       |        | 1,260  |        |       |        |       |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            |                                          | Total operating expenses |                                               |        | 15,006             |       |        |                   | 10,486 |       |        |        | 39,586 |       |        |        | 28,537 |      
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            |                                          |                          | Operating profit                              |        |                    | 6,130 |        |                   |        | 3,945 |        |        |        | 3,720 |        |        |        | 2,693 | 
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                          |                          | 273                                           |        |                    |       | 227    |                   |        |       | 428    |        |        |       | 712    |       
|                                           
|                                           
|                                           
|                                           
|Interest income                             |                                          |                          | (313                                          | )      |                    |       | (5     | )                 |        |       | (344   | )      |        |       | (9     | )     
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                          |                          | 10                                            |        |                    |       | 94     |                   |        |       | 107    |        |        |       | 195    |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            |                                          |                          | Earnings before income taxes                  |        |                    | 6,160 |        |                   |        | 3,629 |        |        |        | 3,529 |        |        |        | 1,795 | 
|                                           
|                                           
|                                           
|                                           
|Income tax expense                          |                                          |                          | 2,587                                         |        |                    |       | 1,306  |                   |        |       | 1,482  |        |        |       | 610    |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            |                                          |                          | Net earnings                                  |        |                    | 3,573 |        |                   |        | 2,323 |        |        |        | 2,047 |        |        |        | 1,185 | 
|                                           
|                                           
|                                           
|                                           
|Preferred stock accretion                   |                                          |                          |                                              |        |                    |       |       |                   |        |       |       |        |        |       | 129    |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            |                                          |                          | Net earnings available to common stockholders |        | $                  | 3,573 |        |                   | $      | 2,323 |        |        | $      | 2,047 |        |        | $      | 1,056 | 
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|Earnings per share:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                          | $                                             | 0.32   |                    |       | $      | 0.31              |        |       | $      | 0.22   |        |       | $      | 0.15   |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            | Diluted                                  |                          | $                                             | 0.30   |                    |       | $      | 0.28              |        |       | $      | 0.20   |        |       | $      | 0.14   |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                          |                                               | 11,069 |                    |       |        | 7,576             |        |       |        | 9,292  |        |       |        | 7,273  |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       
|                                            | Diluted                                  |                          |                                               | 11,965 |                    |       |        | 8,470             |        |       |        | 10,064 |        |       |        | 7,577  |       
|                                            |                                          |                          |                                               |        |                    |       |        |                   |        |       |        |       

See Notes to Condensed Consolidated Financial Statements

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##### Table of Contents






PLATO LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

|                                     |                                                                         |                                                    |     |         |         |             |     |        |             |  |  | 
|------------------------------------ | ----------------------------------------------------------------------- | -------------------------------------------------- | --- | ------- | ------- | ----------- | --- | ------ | ----------- |  |  | 
|                                     |                                                                         |                                                    |     |         |         | July 31,    |     |        | October 31, | 
|                                     |                                                                         |                                                    |     |         |         | 2001        |     |        | 2000        | 
|                                     |                                                                         |                                                    |     |         |         |             |     |        |             | 
|                                     |                                                                         |                                                    |     |         |         | (Unaudited) |     |        | (See Note)  | 
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                     
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                               |                                                    | $   | 57,741  |         |             | $   | 6,415  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, less allowances of $1,707                         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                         | and $2,308, respectively                           |     |         | 27,752  |             |     |        | 21,829      | 
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                             |                                                    |     | 422     |         |             |     | 615    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other current assets                               |                                                    |     | 875     |         |             |     | 627    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes                                                   |                                                    |     | 2,315   |         |             |     | 2,315  |            
|                                     |                                                                         |                                                    |     |         |         |            
|                                     |                                                                         | Total current assets                               |     |         | 89,105  |             |     |        | 31,801      | 
|                                    
|                                    
|                                    
|                                    
|                                     | Equipment and leasehold improvements, less accumulated                 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                         | depreciation of $3,530 and $2,882, respectively    |     |         | 2,395   |             |     |        | 1,495       | 
|                                    
|                                    
|                                    
|                                    
|                                     | Product development costs, less accumulated amortization               
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                         | of $11,185 and $9,072, respectively                |     |         | 9,362   |             |     |        | 7,921       | 
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred income taxes, net                                              |                                                    |     | 3,336   |         |             |     | 4,229  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill, less accumulated amortization of $1,167 and
$79, respectively |                                                    |     | 17,205  |         |             |     | 3,014  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Other assets                                                            |                                                    |     | 4,553   |         |             |     | 2,130  |            
|                                     |                                                                         |                                                    |     |         |         |            
|                                     |                                                                         | Total assets                                       |     | $       | 125,956 |             |     | $      | 50,590      | 
|                                     |                                                                         |                                                    |     |         |         |            
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                                       |                                                    | $   | 174     |         |             | $   | 600    |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                        |                                                    |     | 1,382   |         |             |     | 1,502  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued employee salaries and benefits                                  |                                                    |     | 2,988   |         |             |     | 4,087  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                                                     |                                                    |     | 4,629   |         |             |     | 2,129  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred revenue                                                        |                                                    |     | 8,125   |         |             |     | 5,980  |            
|                                     |                                                                         |                                                    |     |         |         |            
|                                     |                                                                         | Total current liabilities                          |     |         | 17,298  |             |     |        | 14,298      | 
|                                    
|                                    
|                                    
|                                    
|Long-term debt                       |                                                                         |                                                    | 497 |         |         |             |    |       
|                                    
|                                    
|                                    
|                                    
|Deferred revenue                     |                                                                         |                                                    | 828 |         |         |             | 287 |       
|                                    
|                                    
|                                    
|                                    
|Other liabilities                    |                                                                         |                                                    | 103 |         |         |             | 160 |       
|                                     |                                                                         |                                                    |     |         |         |            
|                                     |                                                                         | Total liabilities                                  |     |         | 18,726  |             |     |        | 14,745      | 
|                                     |                                                                         |                                                    |     |         |         |            
|Stockholders equity:               
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.01 par value, 25,000 shares                            
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                         | authorized;
12,464 shares issued and 12,190 shares
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                         | outstanding
at July 31, 2001; 8,348 shares issued 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                         | and 8,225
shares outstanding at October 31, 2000   |     |         | 122     |             |     |        | 82          | 
|                                    
|                                    
|                                    
|                                    
|                                     | Paid-in capital                                                         |                                                    |     | 108,545 |         |             |     | 35,526 |            
|                                    
|                                    
|                                    
|                                    
|                                     | Treasury stock at cost, 274 and 123 shares, respectively                |                                                    |     | (4,829  | )       |             |     | (1,209 | )          
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                       |                                                    |     | 4,328   |         |             |     | 2,281  |            
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                                    |                                                    |     | (936    | )       |             |     | (835   | )          
|                                     |                                                                         |                                                    |     |         |         |            
|                                     |                                                                         | Total stockholders equity                         |     |         | 107,230 |             |     |        | 35,845      | 
|                                     |                                                                         |                                                    |     |         |         |            
|                                     |                                                                         | Total liabilities and stockholders equity         |     | $       | 125,956 |             |     | $      | 50,590      | 
|                                     |                                                                         |                                                    |     |         |         |            

Note: The balance sheet at October 31, 2000 has been derived from the audited financial
statements at that date. See Notes to Condensed Consolidated Financial Statements.

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##### Table of Contents






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

|                                                 |                                                                   |                                                         |                                                             |                                           |        |                   |        |        |        |        |       |  
|------------------------------------------------ | ----------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ------ | ----------------- | ------ | ------ | ------ | ------ | ----- | -
|                                                 |                                                                   |                                                         |                                                             |                                           |        | Nine Months Ended |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        | July 31,          |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                   |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        | 2001              |        |        | 2000   |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                   |        |        |        |       
|Cash flows from operating activities:           
|                                                
|                                                
|                                                
|                                                
|                                                 | Net earnings                                                      |                                                         | $                                                           | 2,047                                     |        |                   | $      | 1,185  |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 | Adjustments to reconcile net earnings to net cash provided by    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | operating activities:                                  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | Deferred income taxes                                   |                                                             |                                           | 1,482  |                   |        |        | 610    |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | Depreciation and amortization                           |                                                             |                                           | 4,394  |                   |        |        | 2,053  |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | Provision for doubtful accounts                         |                                                             |                                           | 1,035  |                   |        |        | 1,400  |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | Stock-based compensation                                |                                                             |                                           | 556    |                   |        |        | 93     |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | Loss on disposal of fixed assets                        |                                                             |                                           | 29     |                   |        |        | 85     |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   | Changes in assets and liabilities, net of acquisitions:
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         | Accounts receivable                                         |                                           |        | (6,878            | )      |        |        | (2,882 | )    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         | Inventories                                                 |                                           |        | 193               |        |        |        | (14    | )    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         | Prepaid expenses and other current and noncurrent assets    |                                           |        | (1,165            | )      |        |        | 635    |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         | Accounts payable                                            |                                           |        | (276              | )      |        |        | (157   | )    
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         | Accrued liabilities, accrued employee salaries and benefits
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         |                                                             | and other liabilities                     |        |                   | (1,433 | )      |        |        | (82   | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                   |                                                         | Deferred revenue                                            |                                           |        | 2,655             |        |        |        | 1,002  |      
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 |                                                                   |                                                         |                                                             | Total adjustments                         |        |                   | 592    |        |        |        | 2,743 |  
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 |                                                                   |                                                         |                                                             | Net cash provided by operating activities |        |                   | 2,639  |        |        |        | 3,928 |  
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Cash flows from investing activities:           
|                                                
|                                                
|                                                
|                                                
|                                                 | Acquisitions, net of cash acquired of $279 and $686, respectively |                                                         |                                                             | (4,327                                    | )      |                   |        | (4,114 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital expenditures                                              |                                                         |                                                             | (811                                      | )      |                   |        | (825   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Capitalization of product development costs                       |                                                         |                                                             | (3,541                                    | )      |                   |        | (1,881 | )     
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 |                                                                   | Net cash used in investing activities                   |                                                             |                                           | (8,679 | )                 |        |        | (6,820 | )     
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Cash flows from financing activities:           
|                                                
|                                                
|                                                
|                                                
|                                                 | Repayments of capital lease obligations                           |                                                         |                                                             | (138                                      | )      |                   |        |       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Net repayments of short-term borrowings                           |                                                         |                                                             |                                          |        |                   |        | (1,668 | )     
|                                                 | Net proceeds from issuance of common stock                        |                                                         |                                                             | 57,603                                    |        |                   |        | 5,106  |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 |                                                                   | Net cash provided by financing activities               |                                                             |                                           | 57,465 |                   |        |        | 3,438  |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Effect of foreign currency on cash               |                                                                   |                                                         | (99                                                         | )                                         |        |                   | (134   | )     
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Net increase in cash and cash equivalents        |                                                                   |                                                         | 51,326                                                      |                                           |        |                   | 412    |       
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                   |                                                         | 6,415                                                       |                                           |        |                   | 63     |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Cash and cash equivalents at end of period       |                                                                   | $                                                       | 57,741                                                      |                                           |        | $                 | 475    |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Cash paid for interest                           |                                                                   | $                                                       | 240                                                         |                                           |        | $                 | 774    |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Cash paid for income taxes                       |                                                                   | $                                                       | 418                                                         |                                           |        | $                 | 99     |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|Non-cash investing and financing activities:    
|                                                
|                                                
|                                                
|                                                
|                                                 | Common stock issued for acquisition                               |                                                         | $                                                           | 12,000                                    |        |                   |        |       |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 | Liabilities assumed in acquisition                                |                                                         | $                                                           | 557                                       |        |                   | $      | 270    |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 | Capital lease obligations incurred                                |                                                         | $                                                           | 733                                       |        |                   |        |       |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 | Debt converted to common stock                                    |                                                         | $                                                           | 600                                       |        |                   | $      | 325    |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  
|                                                 | Stock option exercises using common stock                         |                                                         | $                                                           | 3,620                                     |        |                   |        |       |       
|                                                 |                                                                   |                                                         |                                                             |                                           |        |                  

See Notes to Condensed Consolidated Financial Statements

5



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##### Table of Contents






NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



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

Nature of Business

PLATO Learning, Inc. and its subsidiaries (the Company) provide
computer-based and e-learning instruction and related services, offering
basic to advanced level courseware in reading, writing, math, science, and
life and job skills. The Companys PLATO® Learning System and
PLATO® Web Learning Network provide more than 3,500 hours of
objective-based, problem-solving courseware and include assessment,
alignment, and management tools to facilitate the learning process. PLATO
courseware is delivered via networks, CD-ROM, private intranets, and the
Internet. In addition, single topic PLATO courseware is available through
the Companys e-commerce Web site and distributors. PLATO courseware is
marketed to K-12 schools, colleges, job training programs, correctional
institutions, military education programs, corporations and individuals.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. 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. In the opinion of the Companys management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the interim
periods presented 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 footnotes included in the Companys Annual Report on
Form 10-K for the fiscal year ended October 31, 2000.

Revenue Recognition

Revenue is recognized in accordance with the provisions of Statement of
Position No. 97-2, Software Revenue Recognition, as amended and modified.
Revenue from the sale of courseware licenses, computer hardware and related
services is recognized upon meeting the following criteria: (i) execution of a
written customer order, (ii) delivery of the courseware, hardware and related
services, (iii) the license fee is fixed or determinable and (iv)
collectibility of the proceeds is probable. For software arrangements that
include more than one element, the Company allocates the total arrangement fee
among each deliverable based on the vendor-specific objective evidence of the
relative fair value of each deliverable. Upon delivery, future service costs,
if any, are accrued. Future service costs represent the Companys problem
resolution and support hotline service for a one-year period. Service revenue
includes software support, which is deferred and recognized ratably over the
support period, and revenue from

6



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



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

Revenue Recognition, Continued

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

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under various
circumstances. The accounting and disclosures prescribed by SAB 101 will be
effective in the fourth quarter of fiscal year 2001, and retroactive to the
beginning of that fiscal year. The Company does not expect the requirements of
SAB 101 to have a significant impact on its consolidated financial statements.

Product Development, Enhancement and Maintenance Costs

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

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

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net earnings (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing net earnings (loss) available to common stockholders,
adjusted to add back any convertible preferred stock accretion and convertible
debt interest (if those securities are dilutive), by the weighted average
number of common and, where dilutive, potential common shares outstanding
during the period. Potential common shares include options, warrants and
convertible securities.

7



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



|2. |  | ACQUISITION
|-- |  | -----------

In April 2001, the Company acquired Wasatch Interactive Learning Corporation
(Wasatch), a publicly held Washington corporation and provider of multimedia
courseware for K-8 education. Following the approval of Wasatch stockholders,
the Company acquired all of the outstanding securities of Wasatch in exchange
for approximately 656,000 shares of the Companys common stock with an
aggregate fair value of $12,000, and Wasatch became a wholly owned subsidiary.
In addition, the Company assumed all existing warrants to purchase Wasatch
common stock and converted them into warrants to purchase the Companys common
stock.

In a separate transaction immediately prior to the closing date, the Company
purchased Wasatchs outstanding 7% convertible debenture from the holder for
approximately $4,056 with funds borrowed under the Companys revolving loan
agreement. The 7% convertible debenture was terminated upon the closing of the
acquisition.

The Wasatch acquisition was accounted for using the purchase method of
accounting and, accordingly, the net liabilities acquired were recorded at
their estimated fair values on the acquisition date. The purchase price
consisted of $12,000 of common stock issued, $4,056 for the purchase of the
Wasatch 7% convertible debenture, $611 of direct acquisition costs, $557 of
liabilities assumed and $31 of value assigned to the assumed warrants. The
allocation of the purchase price included approximately $595 to the estimated
fair value of tangible assets acquired, $858 to deferred tax liabilities,
$2,200 to identified intangible assets and $15,318 to goodwill. The valuation
of identified intangible assets, consisting of customer base, software and
assembled workforce, was performed by an independent appraisal firm in
conjunction with management. Intangible assets are being amortized over three
to five years and goodwill is being amortized over seven years.

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

|                       |  |                   |        |   |             |   |        |  
|---------------------- |  | ----------------- | ------ | - | ----------- | - | ------ | -
|                       |  | Nine Months Ended |       
|                       |  | July 31,          |       
|                       |  |                   |       
|                       |  | 2001              |        |   | 2000        |  
|                       |  |                   |        |   |             |  
|                       |  | (Unaudited)       |        |   | (Unaudited) |  
|Revenues               |  | $                 | 48,454 |   |             | $ | 37,480 |  
|                       |  |                   |        |   |             |  
|Net loss               |  | $                 | (885   | ) |             | $ | (2,190 | )
|                       |  |                   |        |   |             |  
|Diluted loss per share |  | $                 | (0.09  | ) |             | $ | (0.29  | )
|                       |  |                   |        |   |             |  

The unaudited pro forma consolidated results of operations are for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisition occurred at the beginning of the periods presented
or the results which may occur in the future.

8



---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



|3. |  | ACCOUNTS RECEIVABLE
|-- |  | -------------------

Accounts receivable include installment receivables of $12,953 and $13,040 at
July 31, 2001 and October 31, 2000, respectively. Installment receivables to
be billed beyond one year from the balance sheet date were $772 and $193 at
July 31, 2001 and October 31, 2000, respectively, and are included in other
assets on the consolidated balance sheets.



|4. |  | DEBT
|-- |  | ----

Revolving Loan

At July 31, 2001, there were no borrowings outstanding under the Companys
revolving loan agreement. The unused borrowing capacity was $15,000.

10% Subordinated Convertible Debentures

In November 2000, the remaining $600 of debentures were converted into
approximately 66,000 shares of the Companys common stock.

Capital Lease Obligations

At July 31, 2001, the Companys long-term debt consisted of various capital
lease obligations for equipment. Amounts due in the next twelve months under
these leases are classified as a current liability in the consolidated balance
sheets.



|5. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------

In November 2000, the remaining $600 of 10% subordinated convertible debentures
were converted by the holders into approximately 66,000 shares of the Companys
common stock.

In January 2001, the Company issued approximately 8,000 shares of common stock
pursuant to the adjustment warrants issued in connection with the private
placement of common stock in July 2000.

In April 2001, the Company issued approximately 656,000 shares of common stock
for the acquisition of Wasatch (see Note 2). In addition, the Company assumed
all existing warrants to purchase Wasatch common stock and converted them into
warrants to purchase approximately 232,000 shares of the Companys common
stock, at exercise prices ranging from $74.87 to $394.79 per share. These
warrants expire from 2002 to 2004.

In June 2001, the Company completed a public stock offering, selling 2,760,000
shares of common stock at a price of $21 per share. Net proceeds were
approximately $55,000 after payment of underwriting discounts, commissions and
offering costs.

9



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



|5. |  | STOCKHOLDERS EQUITY, Continued
|-- |  | -------------------------------

The Company issued approximately 601,000 shares of common stock for the
exercise of outstanding stock options, and approximately 26,000 shares of
common stock for the exercise of outstanding stock warrants during the nine
months ended July 31, 2001.

Stock-based compensation for the nine months ended July 31, 2001 included
non-cash charges of $489 for the accelerated vesting of stock options related
to the Companys succession plans and $67 for restricted stock compensation.



|6. |  | SPECIAL CHARGES
|-- |  | ---------------

The consolidated statement of earnings for the nine months ended July 31, 2001
included special charges of $1,260. These charges represent costs associated
with the November 2000 retirement of William R. Roach, the Companys founder
and former chief executive officer, and include non-cash amounts of $463 for
the accelerated vesting of stock options.

10



---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



|7. |  | EARNINGS PER SHARE
|-- |  | ------------------

Earnings per share is calculated as follows:

|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |        |  |      |       |       |  |  | 
|--------------------------------------------- | ------------------------------------- | - | ------ | ------ | ------------------ | - | ----- | ----------------- |  | - | ----- | ------ |  | ---- | ----- | ----- |  |  | 
|                                              |                                       |   |        |        | Three Months Ended |   |       | Nine Months Ended | 
|                                              |                                       |   |        |        | July 31,           |   |       | July 31,          | 
|                                              |                                       |   |        |        |                    |   |       |                   | 
|                                              |                                       |   |        |        | 2001               |   |       | 2000              |  |   | 2001  |        |  | 2000 |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |        |  |      |      
|Basic:                                       
|                                             
|                                             
|                                             
|                                             
|Net earnings available to common stockholders |                                       | $ | 3,573  |        |                    | $ | 2,323 |                   |  | $ | 2,047 |        |  | $    | 1,056 |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Weighted average common shares outstanding    |                                       |   | 11,069 |        |                    |   | 7,576 |                   |  |   | 9,292 |        |  |      | 7,273 |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Basic earnings per share                      |                                       | $ | 0.32   |        |                    | $ | 0.31  |                   |  | $ | 0.22  |        |  | $    | 0.15  |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Diluted:                                     
|                                             
|                                             
|                                             
|                                             
|Net earnings available to common stockholders |                                       | $ | 3,573  |        |                    | $ | 2,323 |                   |  | $ | 2,047 |        |  | $    | 1,056 |      
|                                             
|                                             
|                                             
|                                             
|Preferred stock accretion                     |                                       |   |       |        |                    |   |      |                   |  |   |      |        |  |      |      |      
|                                             
|                                             
|                                             
|                                             
|Convertible debentures interest               |                                       |   |       |        |                    |   | 47    |                   |  |   |      |        |  |      |      |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Net earnings for diluted earnings per share   |                                       | $ | 3,573  |        |                    | $ | 2,370 |                   |  | $ | 2,047 |        |  | $    | 1,056 |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Weighted average common shares outstanding    |                                       |   | 11,069 |        |                    |   | 7,576 |                   |  |   | 9,292 |        |  |      | 7,273 |      
|                                             
|                                             
|                                             
|                                             
|Potential common shares:                     
|                                             
|                                             
|                                             
|                                             
|                                              | Stock options and warrants            |   |        | 896    |                    |   |       | 609               |  |   |       | 772    |  |      |       | 304   | 
|                                             
|                                             
|                                             
|                                             
|                                              | Convertible preferred stock           |   |        |       |                    |   |       |                  |  |   |       |       |  |      |       |      | 
|                                             
|                                             
|                                             
|                                             
|                                              | Convertible debentures                |   |        |       |                    |   |       | 285               |  |   |       |       |  |      |       |      | 
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Weighted average common and potential        
|                                             
|                                             
|                                             
|                                             
|                                              | common shares outstanding for diluted
|                                             
|                                             
|                                             
|                                             
|                                              | earnings per share                    |   |        | 11,965 |                    |   |       | 8,470             |  |   |       | 10,064 |  |      |       | 7,577 | 
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       
|Diluted earnings per share                    |                                       | $ | 0.30   |        |                    | $ | 0.28  |                   |  | $ | 0.20  |        |  | $    | 0.14  |      
|                                              |                                       |   |        |        |                    |   |       |                   |  |   |       |       

For the nine months ended July 31, 2000, approximately 521,000 potential common
shares from the convertible preferred stock and convertible debentures were
antidilutive and excluded from the calculation of diluted earnings per share.

11



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

---



|8. |  | COMPREHENSIVE INCOME
|-- |  | --------------------

Total comprehensive income was as follows:

|                                         |                            |   |                    |       |  |                   |       |       |      |   |       |       |  |   |       |       | 
|---------------------------------------- | -------------------------- | - | ------------------ | ----- |  | ----------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                         |                            |   | Three Months Ended |       |  | Nine Months Ended |      
|                                         |                            |   | July 31,           |       |  | July 31,          |      
|                                         |                            |   |                    |       |  |                   |      
|                                         |                            |   | 2001               |       |  | 2000              |       |       | 2001 |   |       | 2000  | 
|                                         |                            |   |                    |       |  |                   |       |       |      |   |       |       | 
|Net earnings                             |                            | $ | 3,573              |       |  | $                 | 2,323 |       |      | $ | 2,047 |       |  | $ | 1,185 |      
|                                        
|                                        
|                                        
|                                        
|Foreign currency translation adjustments |                            |   | (12                | )     |  |                   | (46   | )     |      |   | (101  | )     |  |   | (149  | )    
|                                         |                            |   |                    |       |  |                   |       |       |      |   |       |      
|                                         | Total comprehensive income |   | $                  | 3,561 |  |                   | $     | 2,277 |      |   | $     | 1,946 |  |   | $     | 1,036 | 
|                                         |                            |   |                    |       |  |                   |       |       |      |   |       |      

Accumulated other comprehensive loss is included as a separate component of
stockholders equity on the consolidated balance sheets.



|9. |  | RECENT ACCOUNTING PRONOUNCEMENTS
|-- |  | --------------------------------

In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets. The statements eliminate the
pooling-of-interests method of accounting for business combinations and require
that goodwill and intangible assets with indefinite useful lives not be
amortized. Instead, these assets will be reviewed for impairment annually with
any related losses recognized when incurred. SFAS No. 141 is generally
effective for business combinations completed after June 30, 2001. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001 with early
application permitted in certain circumstances. At July 31, 2001, the net book
value of the Companys goodwill was $17,205, and goodwill amortization expense
for the nine months ended July 31, 2001 was $1,088. The Company is considering
adopting SFAS No. 142, effective November 1, 2001, but has not yet determined
the impact that this statement will have on its consolidated financial position
or results of operations.

12



---



##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

RESULTS OF OPERATIONS

Overview

The Company enhances the learning process by providing computer-based and
e-learning instruction and related services, and by offering basic to
advanced level courseware in reading, writing, math, science and life and
job skills. The Companys PLATO® Learning System and
PLATO® Web Learning Network provide more than 3,500 hours of
objective-based, problem-solving courseware and include assessment,
alignment and management tools to facilitate the learning process. PLATO
courseware is delivered via networks, CD-ROM, private intranets and the
Internet. In addition, single topic PLATO courseware is available through
the Companys e-commerce web site and a growing number of distributors.
PLATO courseware is marketed to K-12 schools, colleges, job training
programs, correctional institutions, military education programs,
corporations and individuals.

Acquisitions

In April 2001, the Company acquired Wasatch Interactive Learning Corporation
(Wasatch), a publicly held Washington corporation and provider of multimedia
courseware for K-8 education. Following the approval of Wasatch stockholders,
the Company acquired all of the outstanding securities of Wasatch in exchange
for approximately 656,000 shares of the Companys common stock with an
aggregate fair value of $12,000, and Wasatch became a wholly owned subsidiary.
In addition, the Company assumed all existing warrants to purchase Wasatch
common stock and converted them into warrants to purchase the Companys common
stock.

In a separate transaction immediately prior to the closing date, the Company
purchased Wasatchs outstanding 7% convertible debenture from the holder for
approximately $4,056 with funds borrowed under the Companys revolving loan
agreement. The 7% convertible debenture was terminated upon the closing of the
acquisition.

The Wasatch acquisition was accounted for using the purchase method of
accounting and, accordingly, the net liabilities acquired were recorded at
their estimated fair values on the acquisition date. The purchase price
consisted of $12,000 of common stock issued, $4,056 for the purchase of the
Wasatch 7% convertible debenture, $611 of direct acquisition costs, $557 of
liabilities assumed and $31 of value assigned to the assumed warrants. The
allocation of the purchase price included approximately $595 to the estimated
fair value of tangible assets acquired, $858 to deferred tax liabilities,
$2,200 to identified intangible assets and $15,318 to goodwill. The valuation
of identified intangible assets, consisting of customer base, software and
assembled work force, was performed by an independent appraisal firm in
conjunction with management. Intangible assets are being amortized over three
to five years and goodwill is being amortized over seven years.

13



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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

RESULTS OF OPERATIONS, Continued

Acquisitions,Continued

In July 2000, the Company acquired CyberEd, Inc. (CyberEd), a privately
held Nevada corporation and provider of multimedia science courseware for
high schools, for approximately $4,400 in cash, net of cash acquired.
This acquisition was also accounted for using the purchase method of
accounting.

The results of operations for Wasatch and CyberEd are not material to the
consolidated results of operations for the three and nine months ended
July 31, 2001.

Operating Results as a Percentage of Revenue

|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |   |  |  |       |  
|------------------------------------------------ |  | ------------------ | ----- | - | ----------------- |  | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                 |  | Three Months Ended |       |   | Nine Months Ended | 
|                                                 |  | July 31,           |       |   | July 31,          | 
|                                                 |  |                    |       |   |                   | 
|                                                 |  | 2001               |       |   | 2000              |  |       | 2001 |  |  | 2000  |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Revenues                                         |  |                    | 100.0 | % |                   |  | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                                
|                                                
|                                                
|                                                
|Cost of revenues                                 |  |                    | 7.3   |   |                   |  | 10.6  |      |  |  | 9.6   |   |  |  | 13.0  |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Gross profit                                     |  |                    | 92.7  |   |                   |  | 89.4  |      |  |  | 90.4  |   |  |  | 87.0  |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Selling, general and administrative expense      |  |                    | 52.4  |   |                   |  | 55.6  |      |  |  | 64.4  |   |  |  | 66.6  |  
|                                                
|                                                
|                                                
|                                                
|Product development and customer support
expense |  |                    | 9.8   |   |                   |  | 9.4   |      |  |  | 12.7  |   |  |  | 12.9  |  
|                                                
|                                                
|                                                
|                                                
|Goodwill and intangible amortization             |  |                    | 3.6   |   |                   |  |      |      |  |  | 2.9   |   |  |  |      |  
|                                                
|                                                
|                                                
|                                                
|Special charges                                  |  |                    |      |   |                   |  |      |      |  |  | 2.6   |   |  |  |      |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Total operating expenses                         |  |                    | 65.8  |   |                   |  | 65.0  |      |  |  | 82.6  |   |  |  | 79.5  |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Operating profit                                 |  |                    | 26.9  |   |                   |  | 24.4  |      |  |  | 7.8   |   |  |  | 7.5   |  
|                                                
|                                                
|                                                
|                                                
|Interest expense                                 |  |                    | 1.2   |   |                   |  | 1.4   |      |  |  | 0.9   |   |  |  | 2.0   |  
|                                                
|                                                
|                                                
|                                                
|Interest income                                  |  |                    | (1.3  | ) |                   |  |      |      |  |  | (0.7  | ) |  |  |      |  
|                                                
|                                                
|                                                
|                                                
|Other expense, net                               |  |                    |      |   |                   |  | 0.6   |      |  |  | 0.2   |   |  |  | 0.5   |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Earnings before income taxes                     |  |                    | 27.0  |   |                   |  | 22.4  |      |  |  | 7.4   |   |  |  | 5.0   |  
|                                                
|                                                
|                                                
|                                                
|Income tax expense                               |  |                    | 11.3  |   |                   |  | 8.1   |      |  |  | 3.1   |   |  |  | 1.7   |  
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  
|Net earnings                                     |  |                    | 15.7  | % |                   |  | 14.3  | %    |  |  | 4.3   | % |  |  | 3.3   | %
|                                                 |  |                    |       |   |                   |  |       |      |  |  |       |  

Revenues

The following table highlights revenues by product line:

|                                           |                |   |                    |        |  |                   |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------------ | -------------- | - | ------------------ | ------ |  | ----------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                           |                |   | Three Months Ended |        |  | Nine Months Ended |       
|                                           |                |   | July 31,           |        |  | July 31,          |       
|                                           |                |   |                    |        |  |                   |       
|                                           |                |   | 2001               |        |  | 2000              |        |        | 2001 |   |        | 2000   | 
|                                           |                |   |                    |        |  |                   |        |        |      |   |        |        | 
|Courseware and professional services       |                | $ | 21,799             |        |  | $                 | 14,898 |        |      | $ | 45,089 |        |  | $ | 32,495 |       
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 1,004              |        |  |                   | 1,240  |        |      |   | 2,832  |        |  |   | 3,408  |       
|                                           |                |   |                    |        |  |                   |        |        |      |   |        |       
|                                           | Total revenues |   | $                  | 22,803 |  |                   | $      | 16,138 |      |   | $      | 47,921 |  |   | $      | 35,903 | 
|                                           |                |   |                    |        |  |                   |        |        |      |   |        |       

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

RESULTS OF OPERATIONS, Continued

Revenues, Continued

Courseware and professional services revenue, the Companys core business,
increased $6,901 or 46% to $21,799 for the three months ended July 31, 2001, as
compared to $14,898 for the same period in 2000. For the nine months ended July
31, 2001, courseware and professional services revenue increased $12,594 or 39%
to $45,089 as compared to $32,495 for the same period in 2000. The Company
continued to experience increased acceptance of its products and services in
its various markets. Revenue growth was achieved primarily through increased
sales volume to both new and existing customers. Total revenues were $22,803
for the three months ended July 31, 2001, an increase of $6,665 or 41%, as
compared to $16,138 for the same period in 2000. Total revenues were $47,921
for the nine months ended July 31, 2001, an increase of $12,018 or 33%, as
compared to $35,903 for the same period in 2000.

Gross Profit

Gross profit increased $6,705 or 46% to $21,136 for the three months ended July
31, 2001 as compared to $14,431 for the same period in 2000. Gross profit
increased $12,076 or 39% to $43,306 for the nine months ended July 31, 2001 as
compared to $31,230 for the same period in 2000. The increases were
principally due to the increased courseware and professional services revenue
in 2001. Gross profit margin was 93% for the three months ended July 31, 2001
as compared to 89% for the same period in 2000. Gross profit margin was 90%
for the nine months ended July 31, 2001 as compared to 87% for the same period
in 2000. The increases were primarily due to the increased mix of higher
margin courseware and professional services revenue in 2001.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $2,985 or 33% to $11,950
for the three months ended July 31, 2001, as compared to $8,965 for the same
period in 2000. The increase was due primarily to infrastructure expansion of
the sales and marketing organization and commissions associated with revenue
growth. As a percentage of revenue, total selling, general and administrative
expense decreased to 52% for the three months ended July 31, 2001 from 56% for
the same period in 2000.

Selling, general and administrative expense increased $6,919 or 29% to $30,844
for the nine months ended July 31, 2001, as compared to $23,925 for the same
period in 2000. The increase was due primarily to infrastructure expansion of
the sales and marketing organization and commissions associated with revenue
growth. As a percentage of revenue, total selling, general and administrative
expense decreased to 64% for the nine months ended July 31, 2001 from 67% for
the same period in 2000.

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

RESULTS OF OPERATIONS, Continued

Product Development and Customer Support Expense

Product development and customer support expense increased $717 or 47% to
$2,238 for the three months ended July 31, 2001, as compared to $1,521 for the
same period in 2000. Product development expense increased primarily due to
increased spending associated with enhanced reading and math products,
simulated test products, the PLATO management system and the PLATO Web Learning
Network and increased amortization of previously capitalized costs, that was
partially offset by increased capitalization of current period expenditures.
Customer support expense increased primarily as a result of the Companys
expanding customer base. As a percentage of revenue, total product development
and customer support expense increased to 10% for the three months ended July
31, 2001 from 9% for the same period in 2000.

Product development and customer support expense increased $1,458 or 32% to
$6,070 for the nine months ended July 31, 2001, as compared to $4,612 for the
same period in 2000. Product development expense increased primarily due to
increased spending associated with enhanced reading and math products,
simulated test products, the PLATO management system and the PLATO Web Learning
Network and increased amortization of previously capitalized costs, that was
partially offset by increased capitalization of current period expenditures.
Customer support expense increased primarily as a result of the Companys
expanding customer base. As a percentage of revenue, total product development
and customer support expense was 13% for the nine months ended July 31, 2001
and 2000.

Goodwill and Intangible Amortization

Goodwill and intangible amortization was $818 for the three months and $1,412
for the nine months ended July 31, 2001 related to the Wasatch acquisition in
the second quarter of 2001 (see Note 2 to Condensed Consolidated Financial
Statements) and the CyberEd acquisition late in the third quarter of 2000.

Special Charges

Special charges for the nine months ended July 31, 2001 represent costs
associated with the November 2000 retirement of William R. Roach, the Companys
founder and former chief executive officer and include non-cash amounts of $463
for the accelerated vesting of stock options (see Note 6 to Condensed
Consolidated Financial Statements).

Operating Profit

Operating profit was $6,130 for the three months ended July 31, 2001, as
compared to $3,945 for the same period in 2000. Operating profit was $3,720
for the nine months ended July 31, 2001, as compared to $2,693 for the same
period in 2000. This improvement in operating results was

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

RESULTS OF OPERATIONS, Continued

Operating Profit,Continued

due principally to the increased courseware and professional services revenue
in 2001, partially offset by the increased operating expenses, goodwill and
intangible amortization and, for the nine months only, the special charges in
2001, as explained above.

Interest Expense

Interest expense was $273 for the three months ended July 31, 2001 comparable
to $227 for the same period in 2000. Interest expense decreased $284 to $428
for the nine months ended July 31, 2001 from $712 for the same period in 2000.
This was the result of the decreased level of bank borrowings compared to 2000
and the conversion of the 10% subordinated convertible debentures during 2000.

Interest Income

Interest income was $313 for the three months and $344 for the nine months
ended July 31, 2001. The increase from 2000 was due to interest income on the
invested proceeds from the public stock offering completed in June 2001 (see
Note 5 to Condensed Consolidated Financial Statements).

Income Taxes

Income tax expense of $2,587 and $1,482 was recorded for the three and nine
months ended July 31, 2001, respectively, using the Companys estimated fiscal
year 2001 effective income tax rate of 42%. The increase in the effective tax
rate from fiscal year 2000 is due primarily to non-deductible goodwill and
intangible amortization in 2001.

FINANCIAL CONDITION

Liquidity and Capital Resources

At July 31, 2001, the Companys principal sources of liquidity included cash
and cash equivalents of $57,741, net accounts receivable of $27,752, and its
line of credit. The Company had total installment receivables of $13,725 at
July 31, 2001, of which $12,953 are expected to be billed within one year and
are included in net accounts receivable. Working capital was $71,807 at July
31, 2001, an increase of $54,304 from October 31, 2000, due primarily to
increased cash and cash equivalents and accounts receivable partially offset by
increased accruals and deferred revenue.

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

FINANCIAL CONDITION, Continued

Liquidity and Capital Resources,Continued

Net cash provided by the Companys operating activities was $2,639 for the nine
months ended July 31, 2001 as compared to $3,928 for the same period in 2000.
Cash flows from operations were used principally to fund the Companys working
capital requirements.

Net cash used in the Companys investing activities was $8,679 for the nine
months ended July 31, 2001 as compared to $6,820 for the same period in 2000.
Net cash used in 2001 included $4,327 for the Wasatch acquisition (see Note 2
to Condensed Consolidated Financial Statements), $811 for capital expenditures
and $3,541 for capitalized product development costs.

Net cash provided by the Companys financing activities was $57,465 for the
nine months ended July 31, 2001, primarily from the public stock offering and the
exercise of stock options and warrants (see Note 5 to Condensed Consolidated
Financial Statements), as compared to $3,438 for the same period in 2000. The
Company has resources available under its revolving loan agreement to provide
borrowings of up to $15,000, as determined by the available borrowing base. At
July 31, 2001, there were no borrowings outstanding and the unused borrowing
capacity was $15,000.

In June 2001, the Company completed a public stock offering, selling 2,760,000
shares of its common stock at a price of $21.00 per share. Net proceeds were
approximately $55,000, after payment of underwriting discounts, commissions and
offering costs.

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

Factors Affecting Quarterly Operating Results

The Companys quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, client spending patterns, budget cycles
and fiscal year ends and promotional programs. The Company historically has
experienced its lowest revenues in the first quarter and increasingly higher
levels of revenues in each of the next three quarters. Because of these
factors, the results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.

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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)

---

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Companys borrowing capacity primarily consists of a revolving loan with
interest rates that fluctuate based upon market indexes. At July 31, 2001, the
Company had no outstanding borrowings under this revolving loan. As a result,
risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk

The Company markets its products worldwide and has operations in Canada and the
United Kingdom. As a result, financial results could be affected by changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Working funds necessary to facilitate the short-term operations of foreign
subsidiaries are kept in local currencies in which they do business.
Approximately 8% of total revenues were denominated in currencies other than
the U.S. dollar for the nine months ended July 31, 2001.

CAUTIONARY STATEMENTS

As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual 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 the Company. Net revenues could
be materially affected by products introduced by competitors with advanced
technology and better features and benefits or lower prices or government
funding priorities. Operations could be affected by the Companys ability to
execute its diversification strategy or to integrate acquired companies.

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##### Table of Contents






PART II. OTHER INFORMATION




|        |  |                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | Legal Proceedings                                                                                                                                                                                
|       
|       
|       
|       
|        |  | The Company is not a party to any litigation that is expected to
have a material adverse effect on the Company or its business.                                                                  
|       
|       
|       
|       
|Item 2. |  | Changes in Securities                                                                                                                                                                            
|       
|       
|       
|       
|        |  | On June 5, 2001, the Company completed a public stock offering,
selling 2,760,000 shares of common stock at a price of $21 per share
(see Note 5 to Condensed 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)      Exhibits  none                                                                                                                                                                         
|       
|       
|       
|       
|        |  | (b)      Reports on Form 8-K:                                                                                                                                                                    
|       
|       
|       
|       
|        |  | No Reports on Form 8-K were filed for the quarter ended July 31, 2001.                                                                                                                           

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on September 14, 2001.

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

21