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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 30, 2002

Commission File Number 0-20842

PLATO LEARNING, INC.

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

Not Applicable

---

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 |  | 16,198,775 shares             
|                             |  |                               
|Class                        |  | Outstanding as of May 31, 2002

(This document contains 25 pages)

| |  | 
| |  | 

1



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TABLE OF CONTENTS



|                                                                                              |                                                                                                |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|Item 1. Consolidated Financial Statements (Unaudited):                                       
|                                                                                              | Consolidated Statements of Earnings for the Three and Six Months Ended April 30, 2002 and 2001
|                                                                                              | Consolidated Balance Sheets as of April 30, 2002 and October 31, 2001                         
|                                                                                              | Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2002 and 2001        
|                                                                                              | Notes to Consolidated Financial Statements                                                    
|Item 2. ManagementS Discussion and Analysis of Results Of Operations and Financial Condition
|Item 3. Quantitative and Qualitative Disclosures About Market Rrisk                          
|PART II. OTHER INFORMATION                                                                   
|Item 1. Legal Proceedings                                                                    
|Item 2. Changes in Securities                                                                
|Item 3. Defaults Upon Senior Securities                                                      
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 5. Other Information                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|EX-3.05 Amendment of Certificate of Incorporation                                            
|EX-3.06 Amendment of Amended Certificate of Inc.                                             



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##### Table of Contents



PLATO Learning, Inc. and Subsidiaries

INDEX

|           |  |                                                                                                |  |       
|---------- |  | ---------------------------------------------------------------------------------------------- |  | ------
|           |  |                                                                                                |  | Page  
|           |  |                                                                                                |  | Number
|           |  |                                                                                                |  |       
|PART I     |  | FINANCIAL INFORMATION                                                                          |  |       
|Item 1.    |  | Consolidated Financial Statements (Unaudited):                                                 |  |       
|           |  | Consolidated Statements of Earnings for the
Three and Six Months Ended April 30, 2002 and 2001 |  | 3     
|           |  | Consolidated Balance Sheets as of
April 30, 2002 and October 31, 2001                          |  | 4     
|           |  | Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 2002 and 2001         |  | 5     
|           |  | Notes to Consolidated Financial Statements                                                     |  | 6     
|Item 2.    |  | Managements Discussion and Analysis of
Results of Operations and Financial Condition          |  | 13    
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 22    
|PART II    |  | OTHER INFORMATION                                                                              |  |       
|Item 1.    |  | Legal Proceedings                                                                              |  | 23    
|Item 2.    |  | Changes in Securities                                                                          |  | 23    
|Item 3.    |  | Defaults Upon Senior Securities                                                                |  | 23    
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                            |  | 23    
|Item 5.    |  | Other Information                                                                              |  | 23    
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                               |  | 24    
|SIGNATURES |  |                                                                                                |  | 25    

2



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##### Table of Contents












PART I. FINANCIAL INFORMATION

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

|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |        |        |        |        |  
|------------------------------------------- | ---------------------------------------- | ------------------------ | ----------------------------------- | ------ | ------------------ | --- | --- | ---------------- | ------ | ----- | ---- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                            |                                          |                          |                                     |        | Three Months Ended |     |     | Six Months Ended |       
|                                            |                                          |                          |                                     |        | April 30,          |     |     | April 30,        |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |       
|                                            |                                          |                          |                                     |        | 2002               |     |     | 2001             |        |       | 2002 |        |        | 2001   |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |       
|Revenues:                                   |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |        |       
|                                            | License fees                             |                          | $                                   | 13,416 |                    |     | $   | 12,476           |        |       | $    | 24,000 |        |        | $      | 19,669 |       
|                                            | Services                                 |                          |                                     | 2,836  |                    |     |     | 1,996            |        |       |      | 5,187  |        |        |        | 3,621  |       
|                                            | Other                                    |                          |                                     | 960    |                    |     |     | 892              |        |       |      | 2,072  |        |        |        | 1,828  |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          | Total revenues           |                                     |        | 17,212             |     |     |                  | 15,364 |       |      |        | 31,259 |        |        |        | 25,118 |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|Cost of revenues:                           |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |        |       
|                                            | License fees                             |                          |                                     | 947    |                    |     |     | 443              |        |       |      | 1,783  |        |        |        | 695    |       
|                                            | Services                                 |                          |                                     | 306    |                    |     |     | 272              |        |       |      | 577    |        |        |        | 510    |       
|                                            | Other                                    |                          |                                     | 815    |                    |     |     | 754              |        |       |      | 1,763  |        |        |        | 1,743  |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          | Total cost of revenues   |                                     |        | 2,068              |     |     |                  | 1,469  |       |      |        | 4,123  |        |        |        | 2,948  |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          | Gross profit             |                                     |        | 15,144             |     |     |                  | 13,895 |       |      |        | 27,136 |        |        |        | 22,170 |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|Operating expenses:                         |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |        |       
|                                            | Selling, general and administrative      |                          |                                     | 11,960 |                    |     |     | 10,157           |        |       |      | 23,476 |        |        |        | 18,894 |       
|                                            | Product development and customer support |                          |                                     | 2,577  |                    |     |     | 2,045            |        |       |      | 5,358  |        |        |        | 3,832  |       
|                                            | Amortization of intangibles              |                          |                                     | 168    |                    |     |     | 386              |        |       |      | 362    |        |        |        | 594    |       
|                                            | Special charges                          |                          |                                     |       |                    |     |     |                 |        |       |      |       |        |        |        | 1,260  |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          | Total operating expenses |                                     |        | 14,705             |     |     |                  | 12,588 |       |      |        | 29,196 |        |        |        | 24,580 |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          |                          | Operating profit (loss)             |        |                    | 439 |     |                  |        | 1,307 |      |        |        | (2,060 | )      |        |        | (2,410 | )
|Interest income                             |                                          |                          | 189                                 |        |                    |     | 24  |                  |        |       | 557  |        |        |        | 31     |       
|Interest expense                            |                                          |                          | (31                                 | )      |                    |     | (71 | )                |        |       | (73  | )      |        |        | (155   | )     
|Other expense, net                          |                                          |                          | (25                                 | )      |                    |     | (37 | )                |        |       | (109 | )      |        |        | (97    | )     
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          |                          | Earnings (loss) before income taxes |        |                    | 572 |     |                  |        | 1,223 |      |        |        | (1,685 | )      |        |        | (2,631 | )
|Income tax expense (benefit)                |                                          |                          | 275                                 |        |                    |     | 398 |                  |        |       | (625 | )      |        |        | (1,105 | )     
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            |                                          |                          | Net earnings (loss)                 |        | $                  | 297 |     |                  | $      | 825   |      |        | $      | (1,060 | )      |        | $      | (1,526 | )
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|Earnings (loss) per share:                  |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |        |       
|                                            | Basic and diluted                        |                          | $                                   | 0.02   |                    |     | $   | 0.07             |        |       | $    | (0.06  | )      |        | $      | (0.14  | )     
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|Weighted average common shares outstanding: |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |        |        |        |        |       
|                                            | Basic                                    |                          |                                     | 16,448 |                    |     |     | 11,352           |        |       |      | 16,430 |        |        |        | 11,184 |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       
|                                            | Diluted                                  |                          |                                     | 17,140 |                    |     |     | 12,273           |        |       |      | 16,430 |        |        |        | 11,184 |       
|                                            |                                          |                          |                                     |        |                    |     |     |                  |        |       |      |       

See Notes to Consolidated Financial Statements

3



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

|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |             |       |         |             |  |  | 
|--------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------- | ----------- | ----- | ------- | ----------- |  |  | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         | April 30,   |       |         | October 31, | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         | 2002        |       |         | 2001        | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |             |       |         |             | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         | (Unaudited) |       |         | (See Note)  | 
|                      |                                                                                                                                                                                                      |                                            |                                      | ASSETS  |         |             |       |         |             |  |  | 
|Current assets:       |                                                                                                                                                                                                      |                                            |                                      |         |         |             |       |        
|                      | Cash and cash equivalents                                                                                                                                                                            |                                            | $                                    | 59,122  |         |             | $     | 61,568  |            
|                      | Accounts receivable, less allowances of $2,085
and $2,545, respectively                                                                                                                              |                                            |                                      | 25,803  |         |             |       | 28,739  |            
|                      | Prepaid expenses and other current assets                                                                                                                                                            |                                            |                                      | 1,296   |         |             |       | 1,317   |            
|                      | Deferred income taxes                                                                                                                                                                                |                                            |                                      | 2,468   |         |             |       | 2,468   |            
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      | Total current assets                       |                                      |         | 88,689  |             |       |         | 94,092      | 
|                      | Equipment and leasehold improvements, less accumulated
depreciation of $4,414 and $3,829, respectively                                                                                               |                                            |                                      | 4,116   |         |             |       | 2,803   |            
|                      | Product development costs, less accumulated amortization
of $14,036 and $12,094, respectively                                                                                                        |                                            |                                      | 11,274  |         |             |       | 9,949   |            
|                      | Deferred income taxes                                                                                                                                                                                |                                            |                                      | 7,926   |         |             |       | 6,832   |            
|                      | Goodwill, less accumulated amortization of $1,831                                                                                                                                                    |                                            |                                      | 16,171  |         |             |       | 16,152  |            
|                      | Identified intangible assets, less accumulated amortization of $1,113
and $601, respectively                                                                                                         |                                            |                                      | 3,122   |         |             |       | 3,634   |            
|                      | Other assets                                                                                                                                                                                         |                                            |                                      | 3,173   |         |             |       | 2,449   |            
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      | Total assets                               |                                      | $       | 134,471 |             |       | $       | 135,911     | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |         |         |             |       |         |             |  | 
|Current liabilities:  |                                                                                                                                                                                                      |                                            |                                      |         |         |             |       |        
|                      | Current portion of long-term debt                                                                                                                                                                    |                                            | $                                    | 248     |         |             | $     | 242     |            
|                      | Accounts payable                                                                                                                                                                                     |                                            |                                      | 1,486   |         |             |       | 2,216   |            
|                      | Accrued employee salaries and benefits                                                                                                                                                               |                                            |                                      | 4,182   |         |             |       | 4,539   |            
|                      | Accrued liabilities                                                                                                                                                                                  |                                            |                                      | 2,757   |         |             |       | 3,883   |            
|                      | Deferred revenue                                                                                                                                                                                     |                                            |                                      | 9,601   |         |             |       | 9,163   |            
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      | Total current liabilities                  |                                      |         | 18,274  |             |       |         | 20,043      | 
|Long-term debt        |                                                                                                                                                                                                      |                                            | 590                                  |         |         |             | 720   |        
|Deferred revenue      |                                                                                                                                                                                                      |                                            | 1,398                                |         |         |             | 1,170 |        
|Other liabilities     |                                                                                                                                                                                                      |                                            | 36                                   |         |         |             | 79    |        
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      | Total liabilities                          |                                      |         | 20,298  |             |       |         | 22,012      | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|Stockholders equity: |                                                                                                                                                                                                      |                                            |                                      |         |         |             |       |        
|                      | Common stock, $.01 par value, 50,000 shares
authorized; 16,779 shares issued and 16,496 shares
outstanding at April 30, 2002; 16,689 shares issued
and 16,411 shares outstanding at October 31, 2001 |                                            |                                      | 165     |         |             |       | 164     |            
|                      | Paid-in capital                                                                                                                                                                                      |                                            |                                      | 115,183 |         |             |       | 113,767 |            
|                      | Treasury stock at cost, 283 and 278 shares, respectively                                                                                                                                             |                                            |                                      | (4,986  | )       |             |       | (4,914  | )          
|                      | Retained earnings                                                                                                                                                                                    |                                            |                                      | 4,726   |         |             |       | 5,786   |            
|                      | Accumulated other comprehensive loss                                                                                                                                                                 |                                            |                                      | (915    | )       |             |       | (904    | )          
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      | Total stockholders equity                 |                                      |         | 114,173 |             |       |         | 113,899     | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            
|                      |                                                                                                                                                                                                      | Total liabilities and stockholders equity |                                      | $       | 134,471 |             |       | $       | 135,911     | 
|                      |                                                                                                                                                                                                      |                                            |                                      |         |         |            

Note: The balance sheet at October 31, 2001 has been derived from the audited financial
statements at that date. See Notes to Consolidated Financial Statements.

4



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

|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |        |        |        |        |       | 
|------------------------------------------------ | ------------------------------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | ----- | ---------------- | ------ | ------ | ------ | ------ | ----- | 
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       | Six Months Ended |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       | April 30,        |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       | 2002             |        |        | 2001   |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |        |        |        |       
|Operating activities:                            |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |        |       
|                                                 | Net loss                                                                        |                                                                  | $                                                                                 | (1,060                                    | )     |                  | $      | (1,526 | )     
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|                                                 | Adjustments to reconcile net loss to net cash provided by
operating activities: |                                                                  |                                                                                   |                                           |       |                  |        |        |       
|                                                 |                                                                                 | Depreciation and amortization                                    |                                                                                   |                                           | 3,102 |                  |        |        | 2,369  |       
|                                                 |                                                                                 | Deferred income taxes                                            |                                                                                   |                                           | (625  | )                |        |        | (1,105 | )     
|                                                 |                                                                                 | Provision for doubtful accounts                                  |                                                                                   |                                           | 901   |                  |        |        | 600    |       
|                                                 |                                                                                 | Stock-based compensation                                         |                                                                                   |                                           | 36    |                  |        |        | 536    |       
|                                                 |                                                                                 | Loss on disposal of equipment                                    |                                                                                   |                                           | 88    |                  |        |        | 17     |       
|                                                 |                                                                                 | Changes in assets and liabilities, net of effect of acquisition: |                                                                                   |                                           |       |                  |        |        |        |       
|                                                 |                                                                                 |                                                                  | Accounts receivable                                                               |                                           |       | 2,035            |        |        |        | (25    | )    
|                                                 |                                                                                 |                                                                  | Prepaid expenses and other current and noncurrent assets                          |                                           |       | (772             | )      |        |        | (692   | )    
|                                                 |                                                                                 |                                                                  | Accounts payable                                                                  |                                           |       | (730             | )      |        |        | (32    | )    
|                                                 |                                                                                 |                                                                  | Accrued liabilities, accrued employee salaries and benefits
and other liabilities |                                           |       | (1,526           | )      |        |        | (502   | )    
|                                                 |                                                                                 |                                                                  | Deferred revenue                                                                  |                                           |       | 666              |        |        |        | 736    |      
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|                                                 |                                                                                 |                                                                  |                                                                                   | Total adjustments                         |       |                  | 3,175  |        |        |        | 1,902 | 
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|                                                 |                                                                                 |                                                                  |                                                                                   | Net cash provided by operating activities |       |                  | 2,115  |        |        |        | 376   | 
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|Investing activities:                            |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |        |       
|                                                 | Capitalization of product development costs                                     |                                                                  |                                                                                   | (3,262                                    | )     |                  |        | (1,952 | )     
|                                                 | Capital expenditures                                                            |                                                                  |                                                                                   | (2,013                                    | )     |                  |        | (527   | )     
|                                                 | Acquisition, net of cash acquired of $279                                       |                                                                  |                                                                                   |                                          |       |                  |        | (4,327 | )     
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|                                                 |                                                                                 |                                                                  | Net cash used in investing activities                                             |                                           |       | (5,275           | )      |        |        | (6,806 | )    
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|Financing activities:                            |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |        |       
|                                                 | Net proceeds from issuance of common stock                                      |                                                                  |                                                                                   | 962                                       |       |                  |        | 360    |       
|                                                 | Repayments of capital lease obligations                                         |                                                                  |                                                                                   | (124                                      | )     |                  |        |       |       
|                                                 | Repurchase of common stock                                                      |                                                                  |                                                                                   | (72                                       | )     |                  |        |       |       
|                                                 | Net proceeds from short-term borrowings                                         |                                                                  |                                                                                   |                                          |       |                  |        | 825    |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|                                                 |                                                                                 | Net cash provided by financing activities                        |                                                                                   |                                           | 766   |                  |        |        | 1,185  |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|Effect of foreign currency on cash               |                                                                                 |                                                                  | (52                                                                               | )                                         |       |                  | (99    | )     
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|Net decrease in cash and cash equivalents        |                                                                                 |                                                                  | (2,446                                                                            | )                                         |       |                  | (5,344 | )     
|Cash and cash equivalents at beginning of period |                                                                                 |                                                                  | 61,568                                                                            |                                           |       |                  | 6,415  |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|Cash and cash equivalents at end of period       |                                                                                 | $                                                                | 59,122                                                                            |                                           |       | $                | 1,071  |       
|                                                 |                                                                                 |                                                                  |                                                                                   |                                           |       |                 
|Cash paid for interest                           |                                                                                 | $                                                                | 128                                                                               |                                           |       | $                | 129    |       
|Cash paid for income taxes                       |                                                                                 |                                                                  | 50                                                                                |                                           |       |                  | 237    |       
|Non-cash investing and financing activities:     |                                                                                 |                                                                  |                                                                                   |                                           |       |                  |        |       
|                                                 | Common stock issued for acquisition                                             |                                                                  |                                                                                   |                                          |       |                  |        | 12,000 |       
|                                                 | Assets acquired in acquisition                                                  |                                                                  |                                                                                   |                                          |       |                  |        | 595    |       
|                                                 | Liabilities assumed in acquisition                                              |                                                                  |                                                                                   |                                          |       |                  |        | 557    |       
|                                                 | Capital lease obligations incurred                                              |                                                                  |                                                                                   |                                          |       |                  |        | 722    |       
|                                                 | Debt converted to common stock                                                  |                                                                  |                                                                                   |                                          |       |                  |        | 600    |       

See Notes to Consolidated Financial Statements

5



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##### Table of Contents






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



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

Nature of Business

PLATO Learning, Inc. and its subsidiaries provide computer-based and e-learning
instruction software and related services, offering basic to advanced level
courseware in reading, writing, math, science, social studies and life and job
skills. Our PLATO® Learning System and PLATO® Web Learning Network provide more
than 3,500 hours of objective-based, problem solving courseware and include
assessment, alignment and management tools to create standards-based curricula
and 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 our e-commerce Web site and
distributors. We market our courseware products and services to K-12 schools,
colleges, job training programs, correctional institutions, military education
programs, corporations and individuals.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. We have included all normal recurring adjustments considered
necessary to give a fair presentation of our operating results for the interim
periods shown. Operating results for these interim periods are not necessarily
indicative of the results to be expected for the full fiscal year. For further
information, refer to the consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2001.

Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation and had no impact on net earnings
(loss), cash flows or stockholders equity.

Revenue Recognition

We recognize revenue in accordance with the provisions of Statement of Position
No. 97-2, Software Revenue Recognition, as amended and modified, and Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.

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

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



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

Revenue Recognition, Continued

proceeds is probable. For software arrangements that include more than one
element, we allocate the total arrangement fee among each deliverable based on
vendor-specific objective evidence of the relative fair value of each
deliverable. Vendor-specific objective evidence of fair value is determined
using the price charged when that element is sold separately. Upon delivery,
future service costs, if any, are accrued. Future service costs represent our
problem resolution and support hotline services 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 our
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. Technological feasibility is established when we
have completed all planning, designing, coding and testing activities.

Capitalized costs are amortized to product development and customer support
expense 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 our 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.

Amortization expense related to capitalized product development costs was
$1,001 and $759 for the three months and $1,940 and $1,251 for the six months
ended April 30, 2002 and 2001, respectively.

Earnings (Loss) Per Share

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

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



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

In April 2001, we acquired Wasatch Interactive Learning Corporation
(Wasatch). For further information regarding this acquisition, refer to Note
2 of Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the fiscal year ended October 31, 2001.

Our unaudited pro form consolidated results of operations, as if the Wasatch
acquisition had occurred at the beginning of the period presented, were as
follows:

|                       |  |                  |        |  
|---------------------- |  | ---------------- | ------ | -
|                       |  | Six Months Ended |       
|                       |  | April 30, 2001   |       
|                       |  |                  |       
|                       |  | (Unaudited)      |       
|Revenues               |  | $                | 25,651 |  
|                       |  |                  |       
|Net loss               |  | $                | (4,434 | )
|                       |  |                  |       
|Diluted loss per share |  | $                | (0.37  | )
|                       |  |                  |       

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



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

Accounts receivable include installment receivables of $16,216 and $16,087 at
April 30, 2002 and October 31, 2001, respectively. Installment receivables to
be billed beyond one year from the balance sheet date were $2,750 and $2,021 at
April 30, 2002 and October 31, 2001, respectively, and are included in other
assets on the consolidated balance sheets.



|4. |  | GOODWILL AND OTHER INTANGIBLE ASSETS
|-- |  | ------------------------------------

Effective November 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142).

Goodwill

Under SFAS 142, goodwill is no longer amortized to expense and must be
periodically reviewed for impairment with any related losses recognized when
incurred. We have completed the transitional impairment test of goodwill as of
November 1, 2001 and the carrying value of goodwill was not impaired. The
carrying value of our goodwill was $16,152 at November 1, 2001 and $16,171 at
April 30, 2002.

For the three and six months ended April 30, 2002, $651 and $1,277 of goodwill
amortization expense was not recognized that would have been recognized had
SFAS 142 not been adopted. For the full fiscal year 2002, we expect that
$2,578 of goodwill amortization expense will not be

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



|4. |  | GOODWILL AND OTHER INTANGIBLE ASSETS, Continued
|-- |  | -----------------------------------------------

Goodwill,Continued

recognized that would have been recognized had SFAS 142 not been adopted. For
the three and six months ended April 30, 2001, $283 and $414 of goodwill
amortization expense was recorded.

The following table presents the impact of SFAS 142 on net income (loss) and
the related per share amounts as if it had been in effect for the three and six
months ended April 30, 2001:

|                                            |  |                    |     |  |                  |                     |      |  |  |   |        |   |                     |   |       |  
|------------------------------------------- |  | ------------------ | --- |  | ---------------- | ------------------- | ---- |  |  | - | ------ | - | ------------------- | - | ----- | -
|                                            |  | Three Months Ended |     |  | Six Months Ended |                    
|                                            |  | April 30, 2001     |     |  | April 30, 2001   |                    
|                                            |  |                    |     |  |                  |                    
|                                            |  |                    |     |  |                  | Per Share           |      |  |  |   |        |   | Per Share           |  
|                                            |  |                    |     |  |                  | (Basic and Diluted) |      |  |  |   |        |   | (Basic and Diluted) |  
|                                            |  |                    |     |  |                  |                     |      |  |  |   |        |   |                     |  
|Reported net income (loss)                  |  | $                  | 825 |  |                  | $                   | 0.07 |  |  | $ | (1,526 | ) |                     | $ | (0.14 | )
|Add back goodwill amortization
(net of tax) |  |                    | 160 |  |                  |                     | 0.01 |  |  |   | 240    |   |                     |   | 0.02  |  
|                                            |  |                    |     |  |                  |                     |      |  |  |   |        |  
|Adjusted net income (loss)                  |  | $                  | 985 |  |                  | $                   | 0.08 |  |  | $ | (1,286 | ) |                     | $ | (0.12 | )
|                                            |  |                    |     |  |                  |                     |      |  |  |   |        |  

Other Intangible Assets

Acquired intangible assets subject to amortization at April 30, 2002 were as
follows:

|                      |  |                |       |  |              |   |        |                    |  |   |       | 
|--------------------- |  | -------------- | ----- |  | ------------ | - | ------ | ------------------ |  | - | ----- | 
|                      |  | Gross Carrying |       |  | Accumulated  |   |        |                    |  |  
|                      |  | Value          |       |  | Amortization |   |        | Net Carrying Value | 
|                      |  |                |       |  |              |   |        |                    | 
|Acquired technology   |  | $              | 1,452 |  |              | $ | (398   | )                  |  | $ | 1,054 | 
|Trademark             |  |                | 1,380 |  |              |   | (345   | )                  |  |   | 1,035 | 
|Customer list         |  |                | 900   |  |              |   | (214   | )                  |  |   | 686   | 
|Employment agreement  |  |                | 413   |  |              |   | (78    | )                  |  |   | 335   | 
|Noncompete agreements |  |                | 90    |  |              |   | (78    | )                  |  |   | 12    | 
|                      |  |                |       |  |              |   |        |                    | 
|                      |  | $              | 4,235 |  |              | $ | (1,113 | )                  |  | $ | 3,122 | 
|                      |  |                |       |  |              |   |        |                    | 

Amortization expense for intangible assets was $243 and $512 for the three and
six months ended April 30, 2002, respectively, of which $75 and $150 was
included in product development and customer support expense for each period.
Amortization expense for the three and six months ended April 30, 2001 was $128
and $205, respectively, of which $25 was included in product development and
customer support expense for each period.

Based on our intangible assets as of October 31, 2001, the estimated future
amortization expense for intangible assets is as follows:

|           |      |   |       |     | 
|---------- | ---- | - | ----- | --- | 
|           | 2002 |   | $     | 990 | 
|           | 2003 |   |       | 931 | 
|           | 2004 |   |       | 756 | 
|           | 2005 |   |       | 497 | 
|           | 2006 |   |       | 312 | 
|Thereafter |      |   | 148   |    
|           |      |   |      
|           |      | $ | 3,634 |    
|           |      |   |      

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



|5. |  | DEBT
|-- |  | ----

Revolving Loan

We closed a new revolving loan agreement on December 20, 2001 that provides for
a maximum $12,500 line of credit through July 1, 2003. Substantially all of
our assets are pledged as collateral under the agreement.

Borrowings are limited by the available borrowing base, as defined, consisting
of certain accounts receivable and bear interest at the prime rate plus 0.25%
or the London Interbank Offered Rate (LIBOR) plus 1.75 to 2.75%, depending on
cash flow leverage, as defined, at our option pursuant to the agreement. A
commitment fee is payable quarterly based on the unused portion of the line of
credit. The agreement contains restrictive financial covenants (including
Minimum Tangible Net Worth, Minimum Debt Service Coverage, Maximum Leverage,
Maximum Cash Flow Leverage, Minimum Current Ratio and Maximum Annual Capital
Expenditures) and restrictions on additional borrowings, asset sales and
dividends, as defined.

A commitment fee of approximately $63 was paid upon commencement of the new
facility.

At April 30, 2002, there were no borrowings outstanding under the revolving
loan agreement. The unused borrowing capacity was approximately $11,976.

Capital Lease Obligations

At April 30, 2002, our only debt consisted of various capital lease obligations
for equipment. Amounts due in the next twelve months under these leases are
classified as a current liability in the consolidated balance sheets.



|6. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------

We issued approximately 123,000 shares of common stock upon the exercise of
outstanding stock options during the six months ended April 30, 2002.

In December 2001, our Board of Directors approved a stock repurchase plan that
authorizes us to repurchase up to $15,000 of our common stock in the open
market and in privately negotiated transactions. The plan has no set
termination date and the timing of any repurchases will be dependent on
prevailing market conditions and alternative uses of capital. For the six
months ended April 30, 2002, we repurchased 5,000 shares of our common stock
for $72 and the repurchase had no significant impact on our reported net
earnings (loss) per share. See Note 9 regarding significant stockholders
equity transactions in May 2002.

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



|7. |  | EARNINGS (LOSS) PER SHARE
|-- |  | -------------------------

|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |      |  |   |        |   | 
|----------------------------------------------------------------------------------------------------- | -------------------------- | - | ------------------ | --- |  | ---------------- | ------ | --- | ---- | - | ------ | ---- |  | - | ------ | - | 
|                                                                                                      |                            |   | Three Months Ended |     |  | Six Months Ended |       
|                                                                                                      |                            |   | April 30,          |     |  | April 30,        |       
|                                                                                                      |                            |   |                    |     |  |                  |       
|                                                                                                      |                            |   | 2002               |     |  | 2001             |        |     | 2002 |   |        | 2001 | 
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |      | 
|Basic:                                                                                                |                            |   |                    |     |  |                  |        |     |      |   |        |      |  |   |        |  
|Net earnings (loss)                                                                                   |                            | $ | 297                |     |  | $                | 825    |     |      | $ | (1,060 | )    |  | $ | (1,526 | )
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     
|Weighted average common shares outstanding                                                            |                            |   | 16,448             |     |  |                  | 11,352 |     |      |   | 16,430 |      |  |   | 11,184 |  
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     
|Basic earnings (loss) per share                                                                       |                            | $ | 0.02               |     |  | $                | 0.07   |     |      | $ | (0.06  | )    |  | $ | (0.14  | )
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     
|Diluted:                                                                                              |                            |   |                    |     |  |                  |        |     |      |   |        |      |  |   |        |  
|Net earnings (loss)                                                                                   |                            | $ | 297                |     |  | $                | 825    |     |      | $ | (1,060 | )    |  | $ | (1,526 | )
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     
|Weighted average common shares outstanding                                                            |                            |   | 16,448             |     |  |                  | 11,352 |     |      |   | 16,430 |      |  |   | 11,184 |  
|Potential common shares:                                                                              |                            |   |                    |     |  |                  |        |     |      |   |        |      |  |   |        |  
|                                                                                                      | Stock options and warrants |   |                    | 692 |  |                  |        | 921 |      |   |        |     |  |   |        |  | 
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     
|Weighted average common and potential
common shares outstanding for diluted
earnings (loss) per share |                            |   | 17,140             |     |  |                  | 12,273 |     |      |   | 16,430 |      |  |   | 11,184 |  
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     
|Diluted earnings (loss) per share                                                                     |                            | $ | 0.02               |     |  | $                | 0.07   |     |      | $ | (0.06  | )    |  | $ | (0.14  | )
|                                                                                                      |                            |   |                    |     |  |                  |        |     |      |   |        |     

We incurred a net loss for each of the six months ended April 30, 2002 and
2001, and potential common shares are antidilutive and excluded from the
calculation of diluted loss per share. The number of potential common shares
excluded from the diluted loss per share calculation was approximately 647,000
and 947,000 for the six months ended April 30, 2002 and 2001, respectively.



|8. |  | COMPREHENSIVE INCOME (LOSS)
|-- |  | ---------------------------

Total comprehensive income (loss) was as follows:

|                                                       |                                   |   |                    |     |  |                  |     |     |      |   |        |        |   |   |        |        |  
|------------------------------------------------------ | --------------------------------- | - | ------------------ | --- |  | ---------------- | --- | --- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                       |                                   |   | Three Months Ended |     |  | Six Months Ended |    
|                                                       |                                   |   | April 30,          |     |  | April 30,        |    
|                                                       |                                   |   |                    |     |  |                  |    
|                                                       |                                   |   | 2002               |     |  | 2001             |     |     | 2002 |   |        | 2001   |  
|                                                       |                                   |   |                    |     |  |                  |     |     |      |   |        |        |  
|Net income (loss)                                      |                                   | $ | 297                |     |  | $                | 825 |     |      | $ | (1,060 | )      |   | $ | (1,526 | )     
|Cumulative foreign currency translation
gains (losses) |                                   |   | 95                 |     |  |                  | (43 | )   |      |   | (11    | )      |   |   | (89    | )     
|                                                       |                                   |   |                    |     |  |                  |     |     |      |   |        |       
|                                                       | Total comprehensive income (loss) |   | $                  | 392 |  |                  | $   | 782 |      |   | $      | (1,071 | ) |   | $      | (1,615 | )
|                                                       |                                   |   |                    |     |  |                  |     |     |      |   |        |       

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



|9. |  | SUBSEQUENT EVENTS
|-- |  | -----------------

Acquisition of NetSchools Corporation

In May 2002, we acquired NetSchools Corporation (NetSchools), a provider of
Internet-based e-learning software and services solutions for the K-12 market.
NetSchools offers a web-based curriculum and instructional management delivery
platform that facilitates delivery of school curriculum aligned to local, state
and national standards and facilitates online assessment, lesson planning and
content delivery. This acquisition will enhance our ability to provide
enterprise-wide solutions that align classroom education across all standards
and deliver compelling and effective content through NetSchools instructional
management platform.

We acquired all the shares of NetSchools for $6,000 in cash; 800,000 shares of
our common stock; 200,000 warrants to purchase shares of our common stock;
assumed liabilities and transaction expenses; and additional consideration of
up to approximately $6,000, contingent on the NetSchools product and services
revenues generated through October 2004. After adding transaction costs, this
acquisition had a total value of approximately $27,000. Total cash usage
related to this acquisition in 2002 is expected to be approximately $15,000.

Repurchases of Common Stock

During May 2002, we repurchased approximately 325,000 shares of our common
stock for an aggregate cost of approximately $4,125. See Note 6 for additional
information on stock repurchases.

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

OVERVIEW

We enhance the learning process by providing computer-based and e-learning
instruction software and related services, offering basic to advanced level
courseware in reading, writing, math, science, social studies and life and job
skills. Our PLATO® Learning System and PLATO® Web Learning Network provide
more than 3,500 hours of objective-based, problem solving courseware and include
assessment, alignment and management tools to create standards-based curricula
and 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 our e-commerce web site and distributors. We
market our courseware products and services to K-12 schools, colleges, job
training programs, correctional institutions, military education programs,
corporations and individuals.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of results of operations and financial condition is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. We continually evaluate our critical
accounting policies and have identified revenue recognition, the valuation of
accounts receivable, the capitalization of product development costs and the
valuation of our deferred tax asset as the critical accounting policies that are
significant to the financial statement presentation and require difficult,
subjective and complex judgments.

Revenue Recognition

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

The most significant judgments for revenue recognition typically involve whether
there are any significant uncertainties regarding customer acceptance and
whether collectibility can be considered reasonably assured. In addition, our
transactions often consist of multiple element arrangements which must be
analyzed to determine the relative fair value of each element, the amount of
revenue to be recognized upon shipment, if any, and the period and conditions
under which deferred revenue should be recognized.

For additional description of our revenue recognition policy, see Note 1 to
Consolidated Financial Statements.

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

CRITICAL ACCOUNTING POLICIES, Continued

Allowance for Doubtful Accounts

We determine an allowance for doubtful accounts based upon an analysis of the
collectibility of specific accounts, historical experience and the aging of the
accounts receivable. Bad debt expense is recorded as an operating expense in our
consolidated statement of earnings. The assumptions and estimates used to
determine the allowance are subject to constant revision. The primary factors
that impact these assumptions include the efficiency and effectiveness of our
billing and collection functions and our credit assessment process. Actual
collection results could differ materially from those estimated and have a
significant impact on our results of operations and financial condition.

Capitalization of Product Development Costs

Our product development expense includes costs related to the development,
enhancement and maintenance of our courseware products, and the effect of
product development cost capitalization and amortization. We capitalize our
product development costs when the projects under development reach
technological feasibility, as defined by the accounting standards, and amortize
these costs over the estimated useful lives of the courseware products.

The most significant judgments regarding capitalization of product development
costs typically involve the determination of when development efforts reach
technological feasibility and the recoverability of capitalized costs. We
continually evaluate our capitalized costs to determine if the unamortized
balance related to any given product exceeds the estimated net realizable value
of that product. Estimating net realizable value requires us to estimate future
cash flows to be generated by the product and to use judgment in quantifying the
amount, if any, to be written off. Actual cash flows and amounts realized from
the courseware products could differ materially from those estimated. In
addition, any future changes to our courseware product offerings could result in
write-offs of previously capitalized costs and have a significant impact on our
results of operations and financial condition.

For additional description of our policy regarding product development,
enhancement and maintenance costs, see Note 1 to Consolidated Financial
Statements.

Deferred Tax Asset

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

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

CRITICAL ACCOUNTING POLICIES, Continued

Deferred Tax Asset, Continued

At April 30, 2002 we have a net deferred tax asset of approximately $10,400.
This deferred tax asset is net of a valuation allowance related to a foreign net
operating loss carryforward. A substantial portion of the deferred tax asset
relates to our net operating loss carryforward in the United States. We have
recorded the net deferred tax asset as we believe that it is more likely than
not that we will be able to realize the asset through generation of future
taxable income in the United States. We base this belief upon the levels of
taxable income generated historically as well as projections of future taxable
income. If future levels of taxable income in the United States are not
consistent with our expectations, we may be required to record a valuation
allowance, which could reduce our net income by a material amount.

RESULTS OF OPERATIONS

Operating Results as a Percentage of Revenue

|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |       |  |       |      |       | 
|----------------------------------- | --------------------------------------------------- | ------------------------ | ---- | ------------------ | ----- |  | ---------------- | ---- | ----- | ---- | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                    |                                                     |                          |      | Three Months Ended |       |  | Six Months Ended |     
|                                    |                                                     |                          |      | April 30,          |       |  | April 30,        |     
|                                    |                                                     |                          |      |                    |       |  |                  |     
|                                    |                                                     |                          |      | 2002               |       |  | 2001             |      |       | 2002 |      |      | 2001  | 
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |       | 
|Revenues:                           |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |       |  |       |     
|                                    | License fees                                        |                          |      | 77.9               | %     |  |                  | 81.2 | %     |      |      | 76.8 | %     |  |       | 78.3 | %    
|                                    | Services                                            |                          |      | 16.5               |       |  |                  | 13.0 |       |      |      | 16.6 |       |  |       | 14.4 |      
|                                    | Other                                               |                          |      | 5.6                |       |  |                  | 5.8  |       |      |      | 6.6  |       |  |       | 7.3  |      
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      
|                                    |                                                     | Total revenues           |      |                    | 100.0 |  |                  |      | 100.0 |      |      |      | 100.0 |  |       |      | 100.0 | 
|Cost of revenues                    |                                                     |                          | 12.0 |                    |       |  | 9.6              |      |       |      | 13.2 |      |       |  | 11.7  |     
|                                    | Gross profit                                        |                          |      | 88.0               |       |  |                  | 90.4 |       |      |      | 86.8 |       |  |       | 88.3 |      
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      
|Operating expenses:                 |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |       |  |       |     
|                                    | Selling, general and administrative                 |                          |      | 69.5               |       |  |                  | 66.1 |       |      |      | 75.1 |       |  |       | 75.2 |      
|                                    | Product development and customer support            |                          |      | 15.0               |       |  |                  | 13.3 |       |      |      | 17.1 |       |  |       | 15.3 |      
|                                    | Amortization of intangibles                         |                          |      | 1.0                |       |  |                  | 2.5  |       |      |      | 1.2  |       |  |       | 2.4  |      
|                                    | Special charges                                     |                          |      |                   |       |  |                  |     |       |      |      |     |       |  |       | 5.0  |      
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      
|                                    |                                                     | Total operating expenses |      |                    | 85.5  |  |                  |      | 81.9  |      |      |      | 93.4  |  |       |      | 97.9  | 
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      
|Operating profit (loss)             |                                                     |                          | 2.5  |                    |       |  | 8.5              |      |       |      | (6.6 | )    |       |  | (9.6  | )   
|                                    | Interest income and interest and other expense, net |                          |      | 0.8                |       |  |                  | (0.5 | )     |      |      | 1.2  |       |  |       | (0.9 | )    
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      
|Earnings (loss) before income taxes |                                                     |                          | 3.3  |                    |       |  | 8.0              |      |       |      | (5.4 | )    |       |  | (10.5 | )   
|                                    | Income tax expense (benefit)                        |                          |      | 1.6                |       |  |                  | 2.6  |       |      |      | (2.0 | )     |  |       | (4.4 | )    
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      
|Net earnings (loss)                 |                                                     |                          | 1.7  | %                  |       |  | 5.4              | %    |       |      | (3.4 | )%   |       |  | (6.1  | )%  
|                                    |                                                     |                          |      |                    |       |  |                  |      |       |      |      |      |      

Revenues

Total Revenues. Total revenues increased 12.0% to $17,212 for the three months ended April 30, 2002 from $15,364
for the same period in 2001. The increase was primarily due to the $940 increase in license fees revenues and
the $840 increase in services revenues. Total revenues

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

RESULTS OF OPERATIONS, Continued

Revenues, Continued

increased 24.4% to $31,259 for the six months ended April 30, 2002 from $25,118
for the same period in 2001. The increase was primarily due to the $4,331
increase in license fees revenues and the $1,566 increase in services revenues.

License Fees. Revenues from license fees increased 7.5% to $13,416 for the three
months ended April 30, 2002 from $12,476 for the same period in 2001. As a
percentage of total revenues, license fees revenues were 77.9% for the three
months ended April 30, 2002, down from 81.2% for the same period in 2001.
Revenues from license fees increased 22.0% to $24,000 for the six months ended
April 30, 2002 from $19,669 for the same period in 2001. As a percentage of
total revenues, license fees revenues were 76.8% for the six months ended April
30, 2002, down from 78.3% for the same period in 2001. This revenue growth was
achieved primarily through increased sales volume to both new and existing
customers driven by increased acceptance of our courseware products. Sales of
our PLATO Web Learning Network (PWLN) product continue to grow. Our order intake
for PWLN during the three months ended April 30, 2002 was approximately $1,500
of which we recognized $760 of revenue. This compares to $935 of order intake
and $100 of recognized revenue in the comparable period of 2001. Since launching
this product, we have taken orders for $5,500 of PWLN product and have
recognized only $2,400 of revenues through April 30, 2002. New products from the
acquisitions of Wasatch Interactive Learning Corporation in April 2001 and
TeachMaster Technologies, Inc. in September 2001 contributed approximately
$1,500 and $2,200 of revenue for the three and six months ended April 30, 2002,
respectively.

Services. Revenues from services increased 42.1% to $2,836 for the three months
ended April 30, 2002 from $1,996 for the same period in 2001. As a percentage of
total revenues, services revenues were 16.5% for the three months ended April
30, 2002 up from 13.0% for the same period in 2001. Revenues from services
increased 43.2% to $5,187 for the six months ended April 30, 2002 from $3,621
for the same period in 2001. As a percentage of total revenues, services
revenues were 16.6% for the six months ended April 30, 2002 up from 14.4% for
the same period in 2001. This revenue increase resulted primarily from the
continued growth in license fees revenues and customer acceptance of our
training and technical support services. New services from the acquisitions of
Wasatch Interactive Learning Corporation in April 2001 and TeachMaster
Technologies, Inc. in September 2001 contributed approximately $200 and $300 of
revenue for the three and six months ended April 30, 2002, respectively.

Other. Other revenues, including hardware and third-party courseware products,
increased 7.6% to $960 for the three months ended April 30, 2002 from $892 for
the same period in 2001. As a percentage of total revenues, other revenues were
5.6% for the three months ended April 30, 2002 and 5.8% for the same period in
2001. Other revenues increased 13.3% to $2,072 for the six months ended April
30, 2002 from $1,828 for the same period in 2001. As a percentage of

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

RESULTS OF OPERATIONS, Continued

Revenues, Continued

total revenues, other revenues were 6.6% for the six months ended April 30, 2002
and 7.3% for the same period in 2001.

Cost of Revenues

Total cost of revenues increased 40.8% to $2,068 for the three months ended
April 30, 2002 from $1,469 for the same period in 2001. Total cost of revenues
increased 39.9% to $4,123 for the six months ended April 30, 2002 from $2,948
for the same period in 2001. The increase was primarily due to the increase in
license fees revenues and third party courseware product royalties. Gross profit
margin was 88.0% for the three months ended April 30, 2002, down from 90.4% for
the same period in 2001, and was 86.8% for the six months ended April 30, 2002,
down from 88.3% for the same period in 2001. This decrease in gross profit
margin resulted primarily from a higher proportion of third party products
included in our product sales mix. License fees and services, which have high
margins, were offset slightly by increased royalties on third party courseware
products. Our future gross profit margin will be dependent primarily on the
product mix of our revenues.

Operating Expenses

Selling, General and Administrative. Selling, general and administrative
expenses increased 17.8% to $11,960 for the three months ended April 30, 2002
from $10,157 for the same period in 2001. Selling, general and administrative
expenses increased 24.3% to $23,476 for the six months ended April 30, 2002 from
$18,894 for the same period in 2001. The increased expenses resulted from a
number of factors including increased headcount from the acquisitions of Wasatch
Interactive Learning Corporation in April 2001 and TeachMaster Technologies,
Inc. in September 2001, increased commissions due to the growth in revenue,
increased marketing costs necessary to generate revenue growth, and additions to
our management team and infrastructure necessary to grow the business. As a
percentage of total revenues, selling, general and administrative expenses were
69.5% for the three months ended April 30, 2002, up from 66.1% for the same
period in 2001, and 75.1% for the six months ended April 30, 2002 comparable to
75.2% for the same period in 2001. Our ability to continue to leverage our cost
structure and improve profitability is primarily dependent on our ability to
increase revenues and achieve our sales targets.

Product Development and Customer Support. Product development and customer
support expenses increased 26.0% to $2,577 for the three months ended April 30,
2002 from $2,045 for the same period in 2001. Product development and customer
support expenses increased 39.8% to $5,358 for the six months ended April 30,
2002 from $3,832 for the same period in 2001. As a percentage of total revenues,
product development and customer support expenses were 15.0%

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

RESULTS OF OPERATIONS, Continued

Operating Expenses, Continued

Product Development and Customer Support, Continued

for the three months ended April 30, 2002, up from 13.3% for the same period in
2001, and 17.1% for the six months ended April 30, 2002, up from 15.3% for the
same period in 2001. These increases reflect our increased spending to enhance
and replace certain existing courseware products and to develop a new
standards-based reference network. As part of our growth strategy, we intend to
introduce a number of new products and product improvements. The extent of our
future product development spending and the amount of our future capitalized
product development costs and related amortization are dependent on our ability
to introduce new products and product improvements on a cost-effective and
timely basis. Capitalized development costs were $1,917 and $3,262 for the three
and six months ended April 30, 2002, respectively, compared to $1,067 and $1,952
for the same periods in 2001. Amortization of previously capitalized development
costs was $1,001 and $1,940 for the three and six months ended April 30, 2002,
respectively, up from $759 and $1,251 for the same periods in 2001, as projects
completed during prior periods are now being amortized to expense.

Amortization of Intangibles.Expense for the three and six months ended April
30, 2002 represented amortization of intangible assets, other than goodwill,
from our previous acquisitions. Effective November 1, 2001, we adopted Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142). Under SFAS 142, goodwill is no longer amortized to expense
and must be periodically reviewed for impairment with any related losses
recognized when incurred. We have completed the transitional impairment test of
goodwill as of November 1, 2001 and the carrying value of goodwill was not
impaired. Expense for the same periods in 2001 included $283 and $414 of
goodwill amortization and $103 and $180 of intangible amortization,
respectively.

Special Charge.The special charge in 2001 represented costs associated with the
retirement of our founder and former chief executive officer and included
non-cash amounts of $463 for the accelerated vesting of stock options.

Interest Income

Interest income was $189 and $557 for the three and six months ended April 30,
2002 compared to $24 and $31 for the same periods in 2001. The increased
interest income is the result of higher invested balances in 2002. We completed
a public stock offering in June 2001, which significantly increased our cash and
cash equivalent balances.

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

RESULTS OF OPERATIONS, Continued

Income Taxes

Our effective income tax rate for the six months ended April 30, 2002 was 37%,
compared to the 42% effective rate for the same period in 2001. Our fiscal year
2002 effective tax rate will be highly dependent upon the taxable income in each
of our taxable jurisdictions.

FINANCIAL CONDITION

Liquidity and Capital Resources

At April 30, 2002, our principal sources of liquidity included cash and cash
equivalents of $59,122, net accounts receivable of $25,803, and our unused line
of credit. We had total installment receivables of $18,966 at April 30, 2002, of
which $16,216 is to be billed within one year from the balance sheet date and is
included in net accounts receivable. Working capital was $70,415 at April 30,
2002, a decrease of $3,634 from October 31, 2001, due primarily to decreased
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and increased deferred revenue. Cash and cash equivalents decreased
primarily due to the seasonality of the business as we typically use cash in the
first half of the year.

Cash flows from operations were used principally to fund our working capital
requirements. Net cash provided by operating activities was $2,115 for the six
months ended April 30, 2002 and $376 for the same period in 2001. The increase
in operating cash flows is due primarily to the improvement in operating results
and the decrease in accounts receivable, slightly offset by the decrease in
accounts payable and accrued expenses.

Net cash used in our investing activities was $5,275 for the six months ended
April 30, 2002 compared to $6,806 for the same period in 2001. The decrease in
net cash used was due to our increased capital expenditures in 2002, primarily
related to the installation of a new enterprise resource planning system that is
expected to be completed in 2002, and our increased investment in capitalized
product development costs as we continue to develop new courseware products,
offset by our acquisition of Wasatch Interactive Learning Corporation in April
2001.

Net cash provided by our financing activities was $766 for the six months ended
April 30, 2002 compared to $1,185 for the same period in 2001. Cash received
from the exercise of stock options was partially offset by repayments of capital
lease obligations and, in 2002, the repurchase of common stock. Additionally, in
2001, we borrowed funds under our revolving loan agreement. We have resources
available under our revolving loan agreement to provide borrowings up to
$12,500, as determined by the available borrowing base. At April 30, 2002, there
were no borrowings outstanding and the unused borrowing capacity was
approximately $11,976.

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

FINANCIAL CONDITION, Continued

Liquidity and Capital Resources, Continued

In May 2002, we acquired NetSchools Corporation (NetSchools), a provider of
Internet-based e-learning software and services solutions for the K-12 market.
NetSchools offers a web-based curriculum and instructional management delivery
platform that facilitates delivery of school curriculum aligned to local, state
and national standards and facilitates online assessment, lesson planning and
content delivery. This acquisition will enhance our ability to provide
enterprise-wide solutions that align classroom education across all standards
and deliver compelling and effective content through NetSchools instructional
management platform.

We acquired all the shares of NetSchools for $6,000 in
cash; 800,000 shares of our common stock; 200,000 warrants to purchase shares of
our common stock; assumed liabilities and transaction expenses; and additional
consideration of up to approximately $6,000, contingent on the NetSchools
product and services revenues generated through October 2004. After adding
transaction costs, this acquisition had a total value of approximately $27,000.
Total cash usage related to this acquisition in 2002 is expected to be
approximately $15,000.

In December 2001, our Board of Directors approved a stock repurchase plan that
authorizes us to repurchase up to $15,000 of our common stock in the open market
and in privately negotiated transactions. The plan has no set termination date
and the timing of any repurchases will be dependent on prevailing market
conditions and alternative uses of capital. For the six months ended April 30,
2002, we repurchased 5,000 shares of our common stock for $72 and the repurchase
had no significant impact on our reported net earnings (loss) per share. In May
2002, we repurchased approximately 325,000 shares of our common stock at various
times for an aggregate cost of approximately $4,125.

We maintain adequate cash balances and credit facilities to meet our anticipated
working capital, capital expenditure and business investment requirements.

Disclosures about Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments consist of future
payments due under capital lease obligations and operating leases. For the full
fiscal year 2002, payments of approximately $242 are due under capital lease
obligations and payments of approximately $1,437 are due under operating leases.

Factors Affecting Quarterly Operating Results

Our 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, client spending patterns, budget cycles and fiscal year ends and
promotional programs. We historically have experienced our lowest revenues in
the first quarter and increasingly higher levels of revenues in each of the

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

FINANCIAL CONDITION, Continued

Factors Affecting Quarterly Operating Results,Continued

next three quarters. Because of these factors, the results for the interim
periods presented are not necessarily indicative of the results to be expected
for the full fiscal year.

Interest Rate Risk

Our borrowing capacity primarily consists of a revolving loan with interest
rates that fluctuate based upon market indexes. At April 30, 2002, we did not
have any outstanding borrowings under this revolving loan. In addition, our only
debt consisted of capital lease obligations at fixed interest rates. As a
result, risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk

We market our products and services worldwide and have operations in Canada and
the United Kingdom. As a result, financial results and cash flows could be
affected by changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Working funds necessary to facilitate the
short-term operations of our foreign subsidiaries are kept in local currencies
in which they do business. Approximately 8% of our total revenues were
denominated in currencies other than the U.S. dollar for the six months ended
April 30, 2002.

CAUTIONARY STATEMENTS

Except for historical information contained herein, the disclosures in this
Quarterly Report on Form 10-Q are forward-looking statements made under the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated. These
risks and uncertainties include: the availability and unpredictability of
government funding on which our customers are dependent, the capital and
operating spending patterns of our customers, the ability to attract and retain
customers, the size, timing and product mix of customer orders, the introduction
and acceptance of competitive products, our ability to adapt to technological
changes and meet evolving industry standards, and our ability to economically
introduce new products on a timely basis. These risks and other relevant risks
are described in more detail in our Annual Report on Form 10-K for the fiscal
year ended October 31, 2001.

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Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the information set forth under the captions, Interest Rate Risk and
Foreign Currency Exchange Rate Risk in Managements Discussion and Analysis of
Results of Operations and Financial Condition.

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##### Table of Contents






PART II. OTHER INFORMATION




Item 1.    Legal Proceedings



| |  |  | We are not a party to any litigation that is expected to have a
material adverse effect on our business.
| |  |  | --------------------------------------------------------------------------------------------------------




Item 2.     Changes in Securities



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




Item 3.     Defaults Upon Senior Securities



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




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



| |  |  | Our Annual Meeting of Stockholders was held on March 14, 2002.
There were 16,380,181 shares of Common Stock entitled to vote at
the meeting and a total of 14,867,734 shares (90.77%) were
represented at the meeting. Voting was as follows:
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1. |  | Election of Directors:           
| | -- |  | ---------------------------------
| |    |  | Gen. Dennis J. Reimer, USA (Ret.)

|           |          |  | 
|---------- | -------- |  | 
|For        | Withhold | 
|14,425,123 | 442,611  | 



| | 2. |  | To approve the PLATO Learning, Inc. 2002 Stock Plan:
| | -- |  | ----------------------------------------------------

| |  |           |  |  |           |  |  |         |  |  |                 |  |  |  |  | 
| |  | --------- |  |  | --------- |  |  | ------- |  |  | --------------- |  |  |  |  | 
| |  | For       |  |  | Against   |  |  | Abstain |  |  | Broker Non-Vote | 
| |  | 6,465,107 |  |  | 5,477,754 |  |  | 17,259  |  |  | 2,907,614       | 



| | 3. |  | To approve an amendment to the Amended Certificate of
Incorporation to increase the number of authorized shares to
55,000,000 shares of stock, consisting of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |            |  |  |         |  |  |         |  |  |                 |  |  |  |  | 
| |  | ---------- |  |  | ------- |  |  | ------- |  |  | --------------- |  |  |  |  | 
| |  | For        |  |  | Against |  |  | Abstain |  |  | Broker Non-Vote | 
| |  | 13,856,961 |  |  | 999,896 |  |  | 10,877  |  |  | -0-             | 



| | 4. |  | Ratification of the appointment of PricewaterhouseCoopers LLP as independent
accountants for the fiscal year ending October 31, 2002:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------

| |  |            |  |  |         |  |  |         |  |  |                 |  |  |  |  | 
| |  | ---------- |  |  | ------- |  |  | ------- |  |  | --------------- |  |  |  |  | 
| |  | For        |  |  | Against |  |  | Abstain |  |  | Broker Non-Vote | 
| |  | 14,769,564 |  |  | 96,420  |  |  | 1,750   |  |  | -0-             | 




Item 5.     Other Information



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

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Item 6.     Exhibits and Reports on Form 8-K



| | (a)                            |  | Exhibits
| | ------------------------------ |  | --------
|
| | Exhibit Number and Description |  |         



| | 3.04                                                                    |  | Certificate of Amendment of Amended Certificate of
Incorporation, filed April 24, 2000 is incorporated by
reference to the corresponding exhibit to our Annual
Report on Form 10-K for the year ended October 31, 2001
| | ----------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3.05                                                                    |  | Certificate of Amendment of Certificate of Incorporation, filed
November 6, 1992                                                                                                                                      
|
| | 3.06                                                                    |  | Certificate of Amendment of Amended Certificate of Incorporation, filed March 20, 2002                                                                                                                                
|
| | (b)                                                                     |  | Reports on Form 8-K:                                                                                                                                                                                                  
|
| | No reports on Form 8-K were filed for the quarter ended April 30, 2002. |  |                                                                                                                                                                                                                       

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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 June 14, 2002.

| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | PLATO LEARNING, INC                                                                                              
|
| | By  /s/John MurrayPresident and
Chief Executive Officer
(principal executive officer)                            
|
| | /s/Gregory J. MelsenVice President Finance and
Chief Financial Officer
(principal financial officer)             
|
| | /s/Mary Jo MurphyVice President, Corporate Controller and Chief Accounting Officer
(principal accounting officer)

25