##### Table of Contents



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



| |           
| | ----------
| | (Mark One)

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

For the quarterly period ended July 31, 2000

OR

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

For the transition period from _____ to _____

Commission File Number 0-20842

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

|                                                                                     |  |                                                
|------------------------------------------------------------------------------------ |  | -----------------------------------------------
|Delaware
(State or other jurisdiction
of incorporation or organization)              |  | 36-3660532
(I.R.S. Employer
Identification No.)
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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                                 

1721 Moon Lake Boulevard, Suite 555, Hoffman Estates, IL 60194
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days:

|    |   |    |  | 
|--- | - | -- |  | 
|Yes | X | No | 
|    |   |    | 

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

|                                   |  |                                                     
|---------------------------------- |  | ----------------------------------------------------
|Common stock, $.01 par value
Class |  | 7,909,952 shares
Outstanding as of September 1, 2000

(This document contains 21 pages)

1



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TABLE OF CONTENTS



|                                                                                              |                                                                                              |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):                                       
|                                                                                              | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2000 AND 1999
|                                                                                              | CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 2000 AND OCTOBER 31, 1999                        
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999      
|                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                  
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION                                                                   
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2. CHANGES IN SECURITIES                                                                
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5. OTHER INFORMATION                                                                    
|ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K                                                     
|SIGNATURES                                                                                   
|Financial Data Schedule                                                                      



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PLATO Learning, Inc. and Subsidiaries

INDEX

|           |                                                                                              |  |        |    | 
|---------- | -------------------------------------------------------------------------------------------- |  | ------ | -- | 
|           |                                                                                              |  | Page  
|           |                                                                                              |  | Number
|           |                                                                                              |  |       
|PART I.    | FINANCIAL INFORMATION                                                                       
|          
|          
|          
|          
|Item 1.    | Consolidated Financial Statements (Unaudited):                                              
|          
|          
|          
|          
|           | Consolidated Statements of Income for the Three and Nine Months Ended July 31, 2000 and 1999 |  |        | 3  | 
|          
|          
|          
|          
|           | Consolidated Balance Sheets as of
July 31, 2000 and October 31, 1999                         |  |        | 4  | 
|          
|          
|          
|          
|           | Consolidated Statements of Cash Flows for
the Nine Months Ended July 31, 2000 and 1999       |  |        | 5  | 
|          
|          
|          
|          
|           | Notes to Consolidated Financial Statements                                                   |  |        | 6  | 
|          
|          
|          
|          
|Item 2.    | Managements Discussion and Analysis of Financial Condition and Results of Operations        |  |        | 12 | 
|          
|          
|          
|          
|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




CONSOLIDATED STATEMENTS OF INCOME(Unaudited, in thousands, except per share data)

|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |        |        |        |  
|------------------------------------------- | ---------------------------------------- | --------------------------------- | -------------------------------------------------- | ----- | ------------------ | ----- | ----------------- | ----- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ------ | -
|                                            |                                          |                                   |                                                    |       | Three Months Ended |       | Nine Months Ended
|                                            |                                          |                                   |                                                    |       | July 31,           |       | July 31,         
|                                            |                                          |                                   |                                                    |       |                    |       |                  
|                                            |                                          |                                   |                                                    |       | 2000               |       | 1999              |       | 2000   |       | 1999  
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |       
|Revenues                                    |                                          | $                                 | 16,138                                             |       |                    | $     | 12,624            |       |        | $     | 35,903 |        |        | $     | 27,830 |       
|                                           
|                                           
|                                           
|                                           
|Cost of revenues                            |                                          |                                   | 1,707                                              |       |                    |       | 1,593             |       |        |       | 4,673  |        |        |       | 3,956  |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            |                                          | Gross profit                      |                                                    |       | 14,431             |       |                   |       | 11,031 |       |        |        | 31,230 |       |        |        | 23,874 |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|Operating expenses:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative      |                                   |                                                    | 8,965 |                    |       |                   | 6,736 |        |       |        | 23,925 |        |       |        | 18,579 |       
|                                           
|                                           
|                                           
|                                           
|                                            | Product development and customer support |                                   |                                                    | 1,521 |                    |       |                   | 1,403 |        |       |        | 4,612  |        |       |        | 4,123  |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            |                                          | Total operating expenses          |                                                    |       | 10,486             |       |                   |       | 8,139  |       |        |        | 28,537 |       |        |        | 22,702 |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            | Operating income                         |                                   |                                                    | 3,945 |                    |       |                   | 2,892 |        |       |        | 2,693  |        |       |        | 1,172  |       
|                                           
|                                           
|                                           
|                                           
|Interest expense                            |                                          |                                   | 227                                                |       |                    |       | 331               |       |        |       | 712    |        |        |       | 1,420  |       
|                                           
|                                           
|                                           
|                                           
|Other expense, net                          |                                          |                                   | 89                                                 |       |                    |       | 38                |       |        |       | 186    |        |        |       | 129    |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            |                                          |                                   | Income (loss) before income taxes                  |       |                    | 3,629 |                   |       |        | 2,523 |        |        |        | 1,795 |        |        |        | (377   | )
|                                           
|                                           
|                                           
|                                           
|Income taxes                                |                                          |                                   | 1,306                                              |       |                    |       |                  |       |        |       | 610    |        |        |       |       |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            |                                          |                                   | Net income (loss)                                  |       |                    | 2,323 |                   |       |        | 2,523 |        |        |        | 1,185 |        |        |        | (377   | )
|                                           
|                                           
|                                           
|                                           
|Preferred stock accretion                   |                                          |                                   |                                                   |       |                    |       |                  |       |        |       | 129    |        |        |       | 670    |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            |                                          |                                   | Net income (loss) available to common stockholders |       | $                  | 2,323 |                   |       | $      | 2,523 |        |        | $      | 1,056 |        |        | $      | (1,047 | )
|                                           
|                                           
|                                           
|                                           
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |        |        |        |  
|                                           
|                                           
|                                           
|                                           
|Earnings per share:                        
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                                   | $                                                  | 0.31  |                    |       | $                 | 0.38  |        |       | $      | 0.15   |        |       | $      | (0.16  | )     
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            | Diluted                                  |                                   | $                                                  | 0.28  |                    |       | $                 | 0.34  |        |       | $      | 0.14   |        |       | $      | (0.16  | )     
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|Weighted average common shares outstanding:
|                                           
|                                           
|                                           
|                                           
|                                            | Basic                                    |                                   |                                                    | 7,576 |                    |       |                   | 6,598 |        |       |        | 7,273  |        |       |        | 6,484  |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            | Diluted                                  |                                   |                                                    | 8,470 |                    |       |                   | 7,755 |        |       |        | 7,577  |        |       |        | 6,484  |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|Comprehensive income (loss):               
|                                           
|                                           
|                                           
|                                           
|                                            | Net income (loss)                        |                                   | $                                                  | 2,323 |                    |       | $                 | 2,523 |        |       | $      | 1,185  |        |       | $      | (377   | )     
|                                           
|                                           
|                                           
|                                           
|                                            | Foreign currency translation adjustments |                                   |                                                    | (46   | )                  |       |                   | (19   | )      |       |        | (149   | )      |       |        | 14     |       
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       
|                                            |                                          | Total comprehensive income (loss) |                                                    | $     | 2,277              |       |                   | $     | 2,504  |       |        | $      | 1,036  |       |        | $      | (363   | )     
|                                            |                                          |                                   |                                                    |       |                    |       |                   |       |        |       |        |        |        |       |        |       

See Notes to Consolidated Financial Statements

3



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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share data)

|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |        |        |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------ | -------- | - | ----------- | ------ | ------ |  | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        | July 31, |   | October 31,
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        | 2000     |   | 1999       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |            
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            | ASSETS                              
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Current assets:                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Cash and cash equivalents                                                                                                                                                                                           |                            | $                                    | 475    |          |   | $           | 63     |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Accounts receivable, less
allowances of $1,722 and $1,005, respectively                                                                                                                                             |                            |                                      | 21,685 |          |   |             | 19,814 |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Inventories                                                                                                                                                                                                         |                            |                                      | 666    |          |   |             | 646    |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Prepaid expenses and other current assets                                                                                                                                                                           |                            |                                      | 729    |          |   |             | 720    |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     | Total current assets       |                                      |        | 23,555   |   |             |        | 21,243 | 
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Equipment and leasehold
improvements, less accumulated depreciation of $2,728 and $3,700, respectively                                                                                                                                                             |                                                                                                                                                                                                                     |                            | 1,483                                |        |          |   | 1,269       |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Product development costs,
less accumulated amortization of $8,519 and $7,037, respectively                                                                                                                                                                        |                                                                                                                                                                                                                     |                            | 7,368                                |        |          |   | 6,843       |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Deferred income taxes                                                                                                                                                                                                                                              |                                                                                                                                                                                                                     |                            | 9,611                                |        |          |   | 10,357      |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Other assets                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                     |                            | 4,962                                |        |          |   | 1,476       |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     | $                          | 46,979                               |        |          | $ | 41,188      |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            | LIABILITIES AND STOCKHOLDERS EQUITY
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Current liabilities:                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Revolving loan                                                                                                                                                                                                      |                            | $                                    | 2,919  |          |   | $           | 4,587  |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Accounts payable                                                                                                                                                                                                    |                            |                                      | 1,171  |          |   |             | 1,285  |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Accrued employee salaries and benefits                                                                                                                                                                              |                            |                                      | 2,484  |          |   |             | 2,677  |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Accrued liabilities                                                                                                                                                                                                 |                            |                                      | 1,981  |          |   |             | 1,482  |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Deferred revenue                                                                                                                                                                                                    |                            |                                      | 5,344  |          |   |             | 4,173  |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     | Total current liabilities  |                                      |        | 13,899   |   |             |        | 14,204 | 
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Long-term debt                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                     |                            | 2,725                                |        |          |   | 3,050       |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Deferred revenue, less current portion                                                                                                                                                                                                                             |                                                                                                                                                                                                                     |                            | 251                                  |        |          |   | 420         |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Other liabilities                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                     |                            | 182                                  |        |          |   | 133         |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     | Total liabilities          |                                      |        | 17,057   |   |             |        | 17,807 | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|Convertible redeemable
preferred stock, net of unamortized discounts and issuance costs;
$10,000 stated value per share; 540 shares authorized; 285 shares
issued and outstanding at October 31, 1999; involuntary liquidation value of $3,280 at October 31, 1999 |                                                                                                                                                                                                                     |                            |                                     |        |          |   | 2,006       |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|Redeemable common stock, $.01
par value; 490,000 shares outstanding at October 31, 1999                                                                                                                                                                            |                                                                                                                                                                                                                     |                            |                                     |        |          |   | 1,799       |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|Stockholders equity:                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Common stock, $.01 par value,
25,000,000 shares authorized; 8,019,000 shares issued and 7,896,000
shares outstanding at July 31, 2000; 6,560,000 shares issued and
6,438,000 shares outstanding at October 31, 1999 |                            |                                      | 79     |          |   |             | 64     |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Paid in capital                                                                                                                                                                                                     |                            |                                      | 33,157 |          |   |             | 23,839 |       
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Treasury stock at cost, 123,000 and 122,000 shares, respectively                                                                                                                                                    |                            |                                      | (1,209 | )        |   |             | (1,186 | )     
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Accumulated deficit                                                                                                                                                                                                 |                            |                                      | (1,376 | )        |   |             | (2,561 | )     
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                   | Accumulated other comprehensive loss                                                                                                                                                                                |                            |                                      | (729   | )        |   |             | (580   | )     
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     | Total stockholders equity |                                      |        | 29,922   |   |             |        | 19,576 | 
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     | $                          | 46,979                               |        |          | $ | 41,188      |       
|                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                     |                            |                                      |        |          |   |             |       

See Notes to Consolidated Financial Statements

4



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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited, in thousands)

|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |        |       |        |        |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------- | ----- | ----------------- | ----- | ------ | ----- | ------ | ------ | -
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       | Nine Months Ended
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       | July 31,         
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                  
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       | 2000              |       | 1999  
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                                                                  |                                                                 | $                                                                                 | 1,185                                               |       |                   | $     | (377   | )    
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Deferred income taxes                                           |                                                                                   |                                                     | 610   |                   |       |        |      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Depreciation and amortization                                   |                                                                                   |                                                     | 2,053 |                   |       |        | 2,241 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Provision for doubtful accounts                                 |                                                                                   |                                                     | 1,400 |                   |       |        | 1,033 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Loss on disposal of equipment                                   |                                                                                   |                                                     | 85    |                   |       |        | 8     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | (Increase) decrease in assets, net of acquisition in 2000:     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                                 | Accounts receivable                                                               |                                                     |       | (2,882            | )     |        |       | (2,359 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                                 | Inventories                                                                       |                                                     |       | (14               | )     |        |       | 36     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                                 | Prepaid expenses and other current and noncurrent assets                          |                                                     |       | 635               |       |        |       | 316    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Increase (decrease) in liabilities, net of acquisition in 2000:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                                 | Accounts payable                                                                  |                                                     |       | (157              | )     |        |       | (1,590 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                                 | Accrued liabilities, accrued employee salaries and
benefits and other liabilities |                                                     |       | (82               | )     |        |       | (1,414 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                                 | Deferred revenue                                                                  |                                                     |       | 1,002             |       |        |       | 448    |       
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|                                                     |                                                                                                    |                                                                 |                                                                                   | Total adjustments                                   |       |                   | 2,650 |        |       |        | (1,281 | )
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|                                                     |                                                                                                    |                                                                 |                                                                                   | Net cash provided by (used in) operating activities |       |                   | 3,835 |        |       |        | (1,658 | )
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition, net of cash acquired                                                                  |                                                                 |                                                                                   | (4,114                                              | )     |                   |       |       |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                                                               |                                                                 |                                                                                   | (825                                                | )     |                   |       | (706   | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capitalization of product development costs                                                        |                                                                 |                                                                                   | (1,881                                              | )     |                   |       | (2,035 | )    
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|                                                     |                                                                                                    |                                                                 | Net cash used in investing activities                                             |                                                     |       | (6,820            | )     |        |       | (2,741 | )     
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from issuance of common stock                                                         |                                                                 |                                                                                   | 5,199                                               |       |                   |       | 109    |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net(repayments of) proceeds from short-term borrowings                                             |                                                                 |                                                                                   | (1,668                                              | )     |                   |       | 1,810  |      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of long-term debt                                                                        |                                                                 |                                                                                   |                                                    |       |                   |       | (2,441 | )    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from issuance of convertible redeemable preferred stock                               |                                                                 |                                                                                   |                                                    |       |                   |       | 4,499  |      
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|                                                     |                                                                                                    | Net cash provided by financing activities                       |                                                                                   |                                                     | 3,531 |                   |       |        | 3,977 |       
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Effect of foreign currency on cash                   |                                                                                                    |                                                                 | (134                                                                              | )                                                   |       |                   | 15    |       
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                    
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                                                 | 412                                                                               |                                                     |       |                   | (407  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                    |                                                                 | 63                                                                                |                                                     |       |                   | 466   |       
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Cash and cash equivalents at end of period           |                                                                                                    | $                                                               | 475                                                                               |                                                     |       | $                 | 59    |       
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       
|Supplemental cash flow information:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid for interest                                                                             |                                                                 | $                                                                                 | 774                                                 |       |                   | $     | 1,266  |      
|                                                     |                                                                                                    |                                                                 |                                                                                   |                                                     |       |                   |       |       

See Notes to Consolidated Financial Statements

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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Nature of Business:

PLATO Learning, Inc. and its subsidiaries (the "Company") 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 2,000 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 middle and high schools, colleges, job
training programs, correctional institutions, military education programs, corporations and consumers.

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

Basis of Presentation:

The accompanying consolidated financial statements are unaudited but reflect all adjustments (of a normal, recurring nature) which
the Companys management believes to be necessary for the fair presentation of the financial position, results of operations, and
changes in cash flows for the interim periods presented. The results for the interim periods presented are not necessarily indicative
of the results to be expected for the full fiscal year.

The preparation of financial statements in conformity with
generally accepted accounting principles requires the Companys management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

Revenue Recognition:

Revenue from the sale of courseware licenses, computer hardware and related services is recognized upon meeting the following
criteria: (i) execution of a written customer order, (ii) delivery of the courseware, hardware and related services, (iii) the
license fee is fixed and

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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Revenue Recognition, Continued:

determinable, and (iv) collectibility of the proceeds is probable. For software arrangements that include more than one element, the
Company allocates the total arrangement fee among each deliverable based on the relative fair value of each deliverable determined on
vendor-specific objective evidence. Upon delivery, future service costs, if any, are accrued. Future service costs represent the
Companys problem resolution and support "hotline" service for a one-year period. Service revenue includes software support, which is
deferred and recognized ratably over the support period, and revenue from installation and training services, which is recognized as
services are performed. Installation and training services are customarily billed at a fixed daily rate. Deferred revenue represents
the portion of billings made or payments received in advance
of services being performed or products being delivered.

Product Development, Enhancement, and Maintenance Costs:

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

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

Earnings Per Share:

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

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

Accounts receivable include installment receivables of $10,980,000 and $11,806,000 at July 31, 2000 and October 31, 1999,
respectively. Installment receivables to be billed beyond one year from the balance sheet date were $359,000 and $978,000 at July
31, 2000 and October 31, 1999, respectively, and are included in other assets on the consolidated balance sheets.

7



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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Revolving Loan:

At July 31, 2000, borrowings of $2,919,000 were outstanding under the Companys revolving loan agreement at an interest rate of 10.5%
and the unused borrowing capacity was $11,930,000.

Long-Term Debt:

For the nine months ended July 31, 2000, $325,000 of the Companys 10% subordinated convertible debentures were converted by the
holders into approximately 36,000 shares of the Companys common stock at $9.01 per share. Pursuant to the terms of the debentures,
the conversion price was adjusted from the original $9.60 per share to $9.01 per share prior to the conversions.

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

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

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

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

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

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

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PLATO LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The conversion terms of the Series C Preferred included a beneficial conversion feature at the issue date. The most beneficial
conversion price was determined to be 82% of the average of the three
lowest closing prices of the Companys common stock during the
30 trading days prior to the issue date. As of the issue date, the Company allocated approximately $826,000 to the beneficial
conversion feature resulting in an increase to paid in capital and a reduction to the carrying value of the Series C Preferred. The
beneficial conversion feature was to be recognized as a deemed dividend to the preferred stockholders over the 631 day period from
the issue date to the date of the most beneficial conversion percentage using the greater of the effective interest method or the
amount the holder can realize at each reporting date. Amortization of the beneficial conversion feature was $0 and $129,000 for the
three and nine months ended July 31, 2000, respectively. Amortization of the beneficial conversion feature was $0 and $670,000 for
the three and nine months ended July 31, 1999, respectively.

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

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

During the six months ended April 30, 2000, the remaining 285 shares of the Series C Preferred were converted by the holders into
approximately 571,000 shares of the Companys common stock.

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

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PLATO LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On July 17, 2000, the Company issued 356,125 shares of its common stock at $14.04 per share in a $5 million private placement. The
Company received net proceeds of approximately $4,850,000, which were used for the acquisition of CyberEd, Inc. (see Note 7 of Notes
to Consolidated Financial Statements).

Concurrent with this transaction, the Company issued (a) warrants to purchase 71,225 shares of its common stock at an exercise price
of $16.72 per share and (b) adjustment warrants for the automatic issuance, if at all, of shares of its common stock at an exercise
price of $0.01 per share. Pursuant to the adjustment warrants, the number of shares of common stock issued with this transaction
will be adjusted, if at all, during various adjustment periods over the eleven months subsequent to the issue date. During each
adjustment period, a portion of the common stock issued will be adjusted, and adjustment warrants issued, if the market price of the
Companys common stock, as defined, is less than $15.44 per share. All warrants expire in July 2003.

|   |  |                   
|-- |  | ------------------
|6. |  | EARNINGS PER SHARE

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

|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |   |   | 
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ------------------ | --- | ----------------- | ----- | ---- | --- | ---- | ----- |  | --- | - | ------ | - | - | 
|                                                                                               |  |                             |       | Three Months Ended |     | Nine Months Ended
|                                                                                               |  |                             |       | July 31,           |     | July 31,         
|                                                                                               |  |                             |       |                    |     |                  
|                                                                                               |  |                             |       | 2000               |     | 1999              |       | 2000 |     | 1999
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |     
|Basic:                                                                                        
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Net income (loss) available to common stockholders                                             |  | $                           | 2,323 |                    |     | $                 | 2,523 |      |     | $    | 1,056 |  |     | $ | (1,047 | )
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Weighted average common shares outstanding                                                     |  |                             | 7,576 |                    |     |                   | 6,598 |      |     |      | 7,273 |  |     |   | 6,484  |  
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Basic earnings per share                                                                       |  | $                           | 0.31  |                    |     | $                 | 0.38  |      |     | $    | 0.15  |  |     | $ | (0.16  | )
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Diluted:                                                                                      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Net income (loss) available to common stockholders                                             |  | $                           | 2,323 |                    |     | $                 | 2,523 |      |     | $    | 1,056 |  |     | $ | (1,047 | )
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Convertible debentures interest                                                                |  |                             | 47    |                    |     |                   | 76    |      |     |      |      |  |     |   |       |  
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Net income (loss) for diluted earnings per share                                               |  | $                           | 2,370 |                    |     | $                 | 2,599 |      |     | $    | 1,056 |  |     | $ | (1,047 | )
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Weighted average common shares outstanding                                                     |  |                             | 7,576 |                    |     |                   | 6,598 |      |     |      | 7,273 |  |     |   | 6,484  |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Potential common shares:                                                                      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |  | Stock options and warrants  |       |                    | 609 |                   |       |      | 44  |      |       |  | 304 |   |        |   |  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |  | Convertible preferred stock |       |                    |    |                   |       |      | 795 |      |       |  |    |   |        |   |  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |  | Convertible debentures      |       |                    | 285 |                   |       |      | 318 |      |       |  |    |   |        |   |  | 
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Weighted average common and
potential common shares outstanding for diluted earnings per share |  |                             | 8,470 |                    |     |                   | 7,755 |      |     |      | 7,577 |  |     |   | 6,484  |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  
|Diluted earnings per share                                                                     |  | $                           | 0.28  |                    |     | $                 | 0.34  |      |     | $    | 0.14  |  |     | $ | (0.16  | )
|                                                                                               |  |                             |       |                    |     |                   |       |      |     |      |       |  |     |   |        |  

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##### Table of Contents



PLATO LEARNING, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|   |  |                              
|-- |  | -----------------------------
|6. |  | EARNINGS PER SHARE, Continued

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

For the nine months ended July 31, 1999, basic and diluted earnings per share are the same. The Company incurred a net loss for the
period, and all potential common shares are antidilutive and excluded from the calculation of diluted earnings per share. The number
of potential common shares excluded was approximately 990,000.

|   |  |                     
|-- |  | --------------------
|7. |  | BUSINESS COMBINATION

On July 21, 2000, the Company acquired CyberEd, Inc.
("CyberEd"), a privately held Nevada corporation and provider of multimedia
science courseware for high schools, for $4.8 million in cash. The purchase price is subject to adjustment based upon the final
determination of net assets acquired.

The acquisition was accounted for using the purchase method of accounting and, accordingly, the net assets acquired were recorded at
their estimated fair values on the acquisition date. The preliminary allocation of the purchase price includes approximately $0.9
million to the fair value of net tangible assets acquired and approximately $4 million to identifiable intangible assets and
goodwill. Goodwill will be amortized over seven years and identifiable intangible assets will be amortized over their estimated
useful lives.

Due to the timing of the acquisition within the quarter, the allocation of the purchase price as of July 31, 2000 is preliminary.
The actual allocation may be different after the final purchase price adjustment and third party appraisals of the intangible assets
are completed.

The results of operations for CyberEd are not material to the Companys consolidated financial statements and, accordingly, proforma
financial disclosures are not presented.

11



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##### Table of Contents






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

OVERVIEW

The Company provides 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 2,000 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 middle and high schools, colleges, job training programs, correctional institutions, military
education programs, corporations and consumers.

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

On July 21, 2000, the Company acquired CyberEd, Inc.
("CyberEd"), a privately held Nevada corporation and provider of multimedia
science courseware for high schools, for $4.8 million in cash, subject to final adjustment. The acquisition was accounted for using
the purchase method of accounting (see Note 7 of Notes to Consolidated Financial Statements). The results of operations for CyberEd
are not material to the results of operations for the third quarter and first nine months of fiscal 2000.

RESULTS OF OPERATIONS

Third Quarter Fiscal 2000 Compared to Third Quarter Fiscal 1999

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

|                                                 |                            |  |       |      |      |  |       |      |  
|------------------------------------------------ | -------------------------- |  | ----- | ---- | ---- |  | ----- | ---- | -
|                                                 |                            |  | 2000  |      | 1999
|                                                 |                            |  |       |      |     
|Revenues                                         |                            |  | 100.0 | %    |      |  | 100.0 | %   
|                                                
|                                                
|                                                
|                                                
|Cost of revenues                                 |                            |  | 10.6  |      |      |  | 12.6  |     
|                                                 |                            |  |       |      |      |  |       |     
|                                                 | Gross profit               |  |       | 89.4 |      |  |       | 87.4 |  
|                                                 |                            |  |       |      |      |  |       |     
|Selling, general and administrative expense      |                            |  | 55.6  |      |      |  | 53.4  |     
|                                                
|                                                
|                                                
|                                                
|Product development and customer support expense |                            |  | 9.4   |      |      |  | 11.1  |     
|                                                 |                            |  |       |      |      |  |       |     
|                                                 | Total operating expenses   |  |       | 65.0 |      |  |       | 64.5 |  
|                                                 |                            |  |       |      |      |  |       |     
|Operating income                                 |                            |  | 24.4  |      |      |  | 22.9  |     
|                                                
|                                                
|                                                
|                                                
|Interest expense                                 |                            |  | 1.4   |      |      |  | 2.6   |     
|                                                
|                                                
|                                                
|                                                
|Other expense, net                               |                            |  | 0.6   |      |      |  | 0.3   |     
|                                                 |                            |  |       |      |      |  |       |     
|                                                 | Income before income taxes |  |       | 22.4 |      |  |       | 20.0 |  
|                                                
|                                                
|                                                
|                                                
|Income taxes                                     |                            |  | 8.1   |      |      |  |      |     
|                                                 |                            |  |       |      |      |  |       |     
|                                                 | Net income                 |  |       | 14.3 | %    |  |       | 20.0 | %
|                                                 |                            |  |       |      |      |  |       |     

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##### Table of Contents



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

RESULTS OF OPERATIONS, Continued

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

Revenues:

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

|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |       |  
|------------------------------------------ | -------------- | - | ------- | ------ | ---------- |  | ------- | ----- | ---------- | - | ------ | ------ |  |  | ---- | ----- | -
|                                           |                |   | 2000    |        | 1999      
|                                           |                |   |         |        |           
|                                           |                |   | Revenue |        | % of Total |  | Revenue |       | % of Total
|                                           |                |   |         |        |            |  |         |       |           
|Courseware and professional services       |                | $ | 14,898  |        |            |  | 92.3    | %     |            | $ | 11,488 |        |  |  | 91.0 | %    
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 1,240   |        |            |  | 7.7     |       |            |   | 1,136  |        |  |  | 9.0  |      
|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |      
|                                           | Total revenues |   | $       | 16,138 |            |  |         | 100.0 | %          |   | $      | 12,624 |  |  |      | 100.0 | %
|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |      

Courseware and professional services revenue, the driver of the Companys operations, increased $3,410,000 or 30% as compared to
1999. The Company continues to experience increased acceptance of its products and services in its various markets. This revenue
growth was achieved primarily through increased sales volume to both new and existing customers. Low margin revenues, including hardware, third-party
courseware and other services increased $104,000. Total revenues were $16,138,000, an increase of $3,514,000 from 1999.

Gross Profit:

Gross profit for 2000 increased $3,400,000 or 31% to $14,431,000 as compared to $11,031,000 for 1999. This increase was principally
due to the increase in courseware and professional services revenue. Gross margin was 89% for 2000 as compared to 87% for 1999.

Selling, General, and Administrative Expense:

Selling, general, and administrative expense for 2000 increased $2,229,000 or 33% to $8,965,000 as compared to $6,736,000 for 1999.
Sales and marketing expenses increased $952,000 and general and administrative expenses increased $257,000 due primarily to the
planned infrastructure expansion of the sales and marketing organization. Commissions increased $720,000 due to the growth in revenue
and account managers reaching higher commission levels earlier in the year. The provision for doubtful accounts increased $300,000
due primarily to the identification of certain accounts for which payment will not be received. As a percentage of revenue, total
selling, general and administrative expense increased from 53% in 1999 to 56% in 2000.

13



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##### Table of Contents



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

RESULTS OF OPERATIONS, Continued

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

Product Development and Customer Support
Expense:

Product development and customer support expense for 2000 increased $118,000 or 8% to $1,521,000 as compared to $1,403,000 for 1999.
Product development expense decreased $91,000 from 1999, primarily due to decreased amortization of previously capitalized costs.
Customer support expense increased $209,000 as a result of the Companys expanding customer base. As a percentage of revenue, total
product development and customer support expense decreased from 11% in 1999 to 9% in 2000.

Operating Income:

Operating income for 2000 was $3,945,000 as compared to $2,892,000 for 1999. This improvement in operating results is due
principally to the increase in courseware and professional services revenue, partially offset by the increased selling, general and
administrative, and customer support expenses in 2000.

Interest Expense:

Interest expense decreased to $227,000 for 2000 from $331,000 for 1999 primarily as a result of the decreased level of bank
borrowings at lower interest rates in 2000 and the accelerated amortization of fees related to the Companys previous revolving loan
agreement in 1999.

Income Taxes:

In the fourth quarter of 1999, the Company reversed approximately $10.2 million of valuation allowance placed on the Companys
deferred tax asset. This reversal was based on updated expectations about future years taxable income to reflect continuing
improvements in operating results influenced by the Companys continued revenue growth, and other indications that certain concerns
that had previously limited managements expectations about future taxable income no longer were applicable. Accordingly, income tax
expense of $1,306,000 was recorded in the third quarter of 2000 using the Companys estimated fiscal year 2000 effective income tax
rate.

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##### Table of Contents



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

RESULTS OF OPERATIONS, Continued

First Nine Months Fiscal 2000 Compared to First
Nine Months Fiscal 1999

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

|                                                 |                                   |  |       |      |      |  |       |      |   
|------------------------------------------------ | --------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- | --
|                                                 |                                   |  | 2000  |      | 1999
|                                                 |                                   |  |       |      |     
|Revenues                                         |                                   |  | 100.0 | %    |      |  | 100.0 | %   
|                                                
|                                                
|                                                
|                                                
|Cost of revenues                                 |                                   |  | 13.0  |      |      |  | 14.2  |     
|                                                 |                                   |  |       |      |      |  |       |     
|                                                 | Gross profit                      |  |       | 87.0 |      |  |       | 85.8 |   
|                                                 |                                   |  |       |      |      |  |       |     
|Selling, general and administrative expense      |                                   |  | 66.6  |      |      |  | 66.8  |     
|                                                
|                                                
|                                                
|                                                
|Product development and customer support expense |                                   |  | 12.8  |      |      |  | 14.8  |     
|                                                 |                                   |  |       |      |      |  |       |     
|                                                 | Total operating expenses          |  |       | 79.4 |      |  |       | 81.6 |   
|                                                 |                                   |  |       |      |      |  |       |     
|Operating income                                 |                                   |  | 7.6   |      |      |  | 4.2   |     
|                                                
|                                                
|                                                
|                                                
|Interest expense                                 |                                   |  | 2.0   |      |      |  | 5.1   |     
|                                                
|                                                
|                                                
|                                                
|Other expense, net                               |                                   |  | 0.5   |      |      |  | 0.5   |     
|                                                 |                                   |  |       |      |      |  |       |     
|                                                 | Income (loss) before income taxes |  |       | 5.1  |      |  |       | (1.4 | ) 
|                                                
|                                                
|                                                
|                                                
|Income taxes                                     |                                   |  | 1.7   |      |      |  |      |     
|                                                 |                                   |  |       |      |      |  |       |     
|                                                 | Net income (loss)                 |  |       | 3.4  | %    |  |       | (1.4 | )%
|                                                 |                                   |  |       |      |      |  |       |     

Revenues:

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

|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |       |  
|------------------------------------------ | -------------- | - | ------- | ------ | ---------- |  | ------- | ----- | ---------- | - | ------ | ------ |  |  | ---- | ----- | -
|                                           |                |   | 2000    |        | 1999      
|                                           |                |   |         |        |           
|                                           |                |   | Revenue |        | % of Total |  | Revenue |       | % of Total
|                                           |                |   |         |        |            |  |         |       |           
|Courseware and professional services       |                | $ | 32,495  |        |            |  | 90.5    | %     |            | $ | 25,226 |        |  |  | 90.6 | %    
|                                          
|                                          
|                                          
|                                          
|Hardware, third-party courseware and other |                |   | 3,408   |        |            |  | 9.5     |       |            |   | 2,604  |        |  |  | 9.4  |      
|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |      
|                                           | Total revenues |   | $       | 35,903 |            |  |         | 100.0 | %          |   | $      | 27,830 |  |  |      | 100.0 | %
|                                           |                |   |         |        |            |  |         |       |            |   |        |        |  |  |      |      

Courseware and professional services revenue, the driver of the Companys operations, increased $7,269,000 or 29% as compared to
1999. The Company continues to experience increased acceptance of its products and services in its various markets. This revenue
growth was achieved primarily through increased sales volume to both new and existing customers. Low margin revenues, including
hardware, third-party courseware and other services increased $804,000. Total revenues were $35,903,000, an increase of $8,073,000
from 1999.

Gross Profit:

Gross profit for 2000 increased $7,356,000 or 31% to $31,230,000 as compared to $23,874,000 for 1999. This increase was due to the
increase in courseware and professional services revenue. Gross margin was 87% for 2000 and 86% for 1999.

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##### Table of Contents



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

RESULTS OF OPERATIONS, Continued

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

Selling, General, and Administrative
Expense:

Selling, general, and administrative expense for 2000 increased $5,346,000 or 29% to $23,925,000 as compared to $18,579,000 for
1999. Sales and marketing expenses increased $2,488,000 and general and administrative expenses increased $724,000 due primarily to
the planned infrastructure expansion of the sales and marketing organization. Commissions increased $1,696,000 from the growth in
revenue and account managers reaching higher commission levels earlier in the year. The provision for doubtful accounts increased
$438,000 due primarily to the identification of certain accounts for which payment will not be received. As a percentage of revenue,
total selling, general and administrative expense was 67% for both 1999 and 2000.

Product Development and Customer Support
Expense:

Product development and customer support expense for 2000 increased $489,000 or 12% to $4,612,000 as compared to $4,123,000 for
1999. Customer support expense increased $513,000 as a result of the Companys expanding customer base. As a percentage of revenue,
total product development and customer support expense decreased from 15% in 1999 to 13% in 2000.

Operating Income:

Operating income for 2000 was $2,693,000 as compared to $1,172,000 for 1999. This improvement in operating results is due
principally to the increase in courseware and professional services revenue, partially offset by the increased selling, general and
administrative, and customer support expenses in 2000.

Interest Expense:

Interest expense decreased to $712,000 for 2000 from $1,420,000 for 1999 primarily as a result of the decreased level of bank
borrowings at lower interest rates in 2000 and the accelerated amortization of fees related to the Companys previous revolving loan
agreement in 1999.

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##### Table of Contents



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

RESULTS OF OPERATIONS, Continued

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

Income Taxes:

In the fourth quarter of 1999, the Company reversed approximately $10.2 million of valuation allowance placed on the Companys
deferred tax asset. This reversal was based on updated expectations about future years taxable income to reflect continuing
improvements in operating results influenced by the Companys continued revenue growth, and other indications that certain concerns
that had previously limited managements expectations about future taxable income no longer were applicable. Accordingly, income tax
expense of $610,000 was recorded for the first nine months of 2000 using the Companys estimated fiscal year 2000 effective income
tax rate.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2000, the Companys principal sources of liquidity included cash and cash equivalents of $475,000, net accounts
receivable of $21,685,000, and its line of credit. The Company had installment receivables of $11,339,000 at July 31, 2000, of which
$10,980,000 are to be billed within one year and are included in net accounts receivable. Working capital was $9,656,000 at July 31,
2000, an increase of $2,617,000 from October 31, 1999, due primarily to increased accounts receivable and decreased short-term
borrowings offset by increased accruals and deferred revenue.

Net cash provided by the Companys operating activities was $3,835,000 for the first nine months of fiscal 2000 as compared to net
cash used in operating activities of $1,658,000 for the first nine months of fiscal 1999. Cash flows from operations were used
principally to fund the Companys working capital requirements.

Net cash used in the Companys investing activities was $6,820,000 for the first nine months of fiscal 2000. The acquisition of
CyberEd, net of cash acquired, used $4,114,000 (see Note 7 of Notes to Consolidated Financial Statements). The remaining net cash
used in investing activities was $825,000 for capital expenditures and $1,881,000 for capitalized product development costs.

Net cash provided by financing activities was $3,531,000 for the first nine months of fiscal 2000. The Company completed a private
placement of common stock, resulting in net proceeds of $4,850,000 (see Note 5 of Notes to Consolidated Financial Statements),
partially offset by the $1,668,000 of net repayments of short-term borrowings. The Company has resources available under its
revolving loan agreement to provide borrowings of up to $15 million, as determined by the available borrowing base. At July 31,
2000, borrowings of $2,919,000 were outstanding at an interest rate of 10.5% and the unused borrowing capacity was $11,930,000.

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

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##### Table of Contents



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

FACTORS AFFECTING QUARTERLY OPERATING RESULTS

The Companys quarterly operating results fluctuate as a result of a number of factors including the business and sales cycle, the
amount and timing of new product introductions by the Company, product shipments, client funding issues, marketing expenditures,
product development expenditures and promotional programs. The Company historically has experienced higher levels of revenues in the
fourth fiscal quarter. Because of these factors, the results for interim periods presented are not necessarily indicative of the
results to be expected for the full fiscal year.

YEAR 2000

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

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk:

At July 31, 2000, the fair value of the Companys debt approximates market. Market risk is estimated as the potential increase in
fair value resulting from a hypothetical one-half percent change in interest rates. The Companys long-term debt is held at a fixed
rate. As a result, risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk:

The Company markets its products worldwide and has operations in Canada and the United Kingdom. As a result, financial results could
be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Working funds necessary to
facilitate the short-term operations of foreign subsidiaries are kept in local currencies in which they do business. Approximately
5% of total revenues were denominated in currencies other than the U.S. dollar for the three and nine months ended July 31, 2000.

18



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##### Table of Contents



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

NOTE REGARDING FORWARD LOOKING INFORMATION

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

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PART II. OTHER INFORMATION

|        |  |                                                                                                                                                                                                                                                        |         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------
|Item 1. |  | Legal Proceedings                                                                                                                                                                                                                                     
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|        |  | The Company is not a party to any litigation that is expected to
have a material adverse effect on the Company or its business.                                                                                                                       
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|Item 2. |  | Changes in Securities                                                                                                                                                                                                                                 
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|        |  | On July 17, 2000, the Company issued 356,125 shares of its common
stock, warrants to purchase 71,225 shares of its common stock, and
adjustment warrants in a $5 million private placement (see Note 5 of
Notes to Consolidated Financial Statements).
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|Item 3. |  | Defaults Upon Senior Securities                                                                                                                                                                                                                       
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|        |  | Not Applicable.                                                                                                                                                                                                                                       
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|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                   
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|        |  | Not Applicable.                                                                                                                                                                                                                                       
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|Item 5. |  | Other Information                                                                                                                                                                                                                                     
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|        |  | Not Applicable.                                                                                                                                                                                                                                       
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|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                      
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|        |  | (a)                                                                                                                                                                                                                                                    | Exhibits

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

| |  |     |                                                                                                                                            
| |  | --- | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) | Reports on Form 8-K:                                                                                                                       
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| |  |     | On August 3, 2000, the Company filed a Current Report on Form 8-K
for the completion of a $5 million private placement of its common
stock.
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| |  |     | On August 3, 2000, the Company filed a Current Report on Form 8-K
for the acquisition of CyberEd, Inc.                                     

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on September 14, 2000.

| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | PLATO LEARNING, INC                                                                                                                                                   
|
| | By  /s/ William R.
Roach______________________________
Chairman of the Board and
Chief Executive Officer
(principal executive officer)                                
|
| | /s/ John Murray______________________________
President, Chief Operating Officer and
Acting Chief Financial Officer
(principal financial officer)                     
|
| | /s/ Mary Jo
Murphy______________________________
Vice President, Corporate Controller, Assistant Secretary and
Chief Accounting Officer
(principal accounting officer)

21