Document:

EX-10.40

PLATO LEARNING, INC.

EMPLOYEE STOCK OPTION AGREEMENT (Form A)

PLATO Learning, Inc., a Delaware corporation (the “Company”), hereby grants to (the
“Employee”) on this day of , 200 (the “Option Date”), pursuant to the provisions of the PLATO
Learning, Inc. 2002 Stock Plan (the “Plan”), a non-qualified stock option (the “Option”) to
purchase from the Company shares of its Common Stock, $.01 par value (“Stock”), at the price of $
per share upon and subject to the terms and conditions set forth below.

1. Option Subject to Acceptance of Agreement.

The Option shall become null and void unless the Employee shall accept this Agreement by
executing it in the space provided below and return it to the Company within 60 days following the
Option Date.

2. Time and Manner of Exercise of Option.

2.1 Maximum Term of Option. In no event may the Option be exercised, in whole or in
part, after 5:00 p.m., Minneapolis time, on the date, which is eight (8) years after the Option
Date (the “Expiration Date”).

2.2 Exercise of Option. Except as otherwise provided in the Plan, the Option shall
become exercisable with respect to (i) 33-1/3% of the aggregate number of shares of Stock subject
to the Option on [date one year from grant date] (the “First Exercise Date”); (ii) with
respect to 66-2/3% of the aggregate number of shares subject to the Option on [date two years
from grant date] (the “Second Exercise Date”); and (iii) with respect to 100% of the aggregate
number of shares subject to the Option on [date three years from grant date] (the “Third
Exercise Date”) (the First Exercise Date, the Second Exercise Date and the Third Exercise Date each
being referred to herein as an “Exercise Date”).

2.3 Method of Exercise. Subject to the limitations set forth in this Agreement, the
Option may be exercised (i) by giving written notice to the Secretary of the Company or the
Secretary’s designee, specifying the number of whole shares to be purchased and accompanied by the
payment therefore in full in cash or, if permitted by the Compensation Committee, (A) in previously
owned whole shares of Stock (for which the Employee has good title, free and clear of all liens and
encumbrances) having a fair market value, determined as of the date of exercise, equal to the
aggregate purchase price payable pursuant to the Option by reason of such exercise, (B) in cash by
a broker-dealer to whom the Employee has submitted an irrevocable notice of exercise, or (C) a
combination of cash and Stock as described in this Section; and (ii) by executing such documents as
the Company may reasonably request. No shares shall be issued until the full purchase price and
all applicable taxes have been paid.

2.4 Termination of Option. In no event may the Option be exercised after it
terminates as set forth in this Section 2.4. The Option shall terminate on its Expiration Date, or
earlier to the extent not exercised pursuant to Section 2.2 and pursuant to Sections 6.8, 6.9,
6.10, 6.11 and 6.12 of the Plan.

In the event that the Employee shall forfeit rights to purchase all or a portion of the shares
to which this Option relates, the Employee shall, within 10 days of the date of the Company’s
written request, return this Agreement to the Company for cancellation.

3. Additional Terms and Conditions of Option.

3.1 Withholding Taxes. As a condition precedent to any exercise of the Option, the
Employee shall, upon request by the Company, pay to the Company in addition to the purchase price
of the shares such amount of cash as the Company may be required, under all applicable federal,
state or local laws or regulations. The employee will recognize ordinary income at the time of
exercise in an amount equal to the excess, if any, of the fair market value of a share of Common
Stock at the time of exercise over the option price, multiplied by the number of shares as to which
the option is exercised. The Employee may elect, by written notice to the Company, to satisfy part
or all of the withholding tax requirements associated with the exercise by delivering to the
Company from shares of Stock already owned by the Employee, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the Employee under this
Section 3.1. Any such election shall be in accordance with, and subject to, applicable tax and
securities laws, regulations and rulings.

3.2 Agreement Subject to Plan. This Agreement is subject to the provisions of the
Plan, and shall be interpreted in accordance therewith, except where specifically provided
otherwise in this Agreement. The Employee hereby acknowledges receipt of a copy of the Plan.

PLATO LEARNING, INC.

By:

Typed Name

Title

Accepted this      day of

     , 200

     

Typed Name

1

PLATO LEARNING, INC.

EMPLOYEE STOCK OPTION AGREEMENT (Form B)

PLATO Learning, Inc., a Delaware corporation (the “Company”), hereby grants to (the
“Employee”) on this day of , 200 (the “Option Date”), pursuant to the provisions of the PLATO
Learning, Inc. 2002 Stock Plan (the “Plan”), a non-qualified stock option (the “Option”) to
purchase from the Company shares of its Common Stock, $.01 par value (“Stock”), at the price of $
per share upon and subject to the terms and conditions set forth below.

1. Option Subject to Acceptance of Agreement.

The Option shall become null and void unless the Employee shall accept this Agreement by
executing it in the space provided below and return it to the Company within 60 days following the
Option Date.

2. Time and Manner of Exercise of Option.

2.1 Maximum Term of Option. In no event may the Option be exercised, in whole or in
part, after 5:00 p.m., Minneapolis time, on the date, which is eight (8) years after the Option
Date (the “Expiration Date”).

2.2 Exercise of Option. Except as otherwise provided in the Plan, the Option shall
become exercisable with respect to (i) 33-1/3% of the aggregate number of shares of Stock subject
to the Option on [date one year from grant date] (the “First Exercise Date”); (ii) with
respect to 66-2/3% of the aggregate number of shares subject to the Option on [date two years
from grant date] (the “Second Exercise Date”); and (iii) with respect to 100% of the aggregate
number of shares subject to the Option on [date three years from grant date] (the “Third
Exercise Date”) (the First Exercise Date, the Second Exercise Date and the Third Exercise Date each
being referred to herein as an “Exercise Date”).

2.3 Method of Exercise. Subject to the limitations set forth in this Agreement, the
Option may be exercised (i) by giving written notice to the Secretary of the Company or the
Secretary’s designee, specifying the number of whole shares to be purchased and accompanied by the
payment therefore in full in cash or, if permitted by the Compensation Committee, (A) in previously
owned whole shares of Stock (for which the Employee has good title, free and clear of all liens and
encumbrances) having a fair market value, determined as of the date of exercise, equal to the
aggregate purchase price payable pursuant to the Option by reason of such exercise, (B) in cash by
a broker-dealer to whom the Employee has submitted an irrevocable notice of exercise, or (C) a
combination of cash and Stock as described in this Section; and (ii) by executing such documents as
the Company may reasonably request. No shares shall be issued until the full purchase price and
all applicable taxes have been paid.

2.4 Termination of Option. In no event may the Option be exercised after it
terminates as set forth in this Section 2.4. The Option shall terminate on its Expiration Date, or
earlier to the extent not exercised pursuant to Section 2.2 and pursuant to Sections 6.8, 6.9,
6.10, 6.11 and 6.12 of the Plan.

In the event that the Employee shall forfeit rights to purchase all or a portion of the shares
to which this Option relates, the Employee shall, within 10 days of the date of the Company’s
written request, return this Agreement to the Company for cancellation.

2.5 Change in Control. Notwithstanding any other provisions as outlined in the Plan,
and unless otherwise specifically prohibited under applicable laws, or by the rules and regulations
of any governing governmental agencies or national securities exchanges, any and all outstanding
Options will become immediately exercisable, after a Change in Control and upon the Employee’s
termination for any reason other than cause after a Change in Control, and will remain exercisable
throughout their entire term.

3. Additional Terms and Conditions of Option.

3.1 Withholding Taxes. As a condition precedent to any exercise of the Option, the
Employee shall, upon request by the Company, pay to the Company in addition to the purchase price
of the shares such amount of cash as the Company may be required to withhold, under all applicable
federal, state or local laws or regulations. The employee will recognize ordinary income at the
time of exercise in an amount equal to the excess, if any, of the fair market value of a share of
Common Stock at the time of exercise over the option price, multiplied by the number of shares as
to which the option is exercised. The Employee may elect, by written notice to the Company, to
satisfy part or all of the withholding tax requirements associated with the exercise by delivering
to the Company from shares of Stock already owned by the Employee, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the Employee under this
Section 3.1. Any such election shall be in accordance with, and subject to, applicable tax and
securities laws, regulations and rulings.

3.2 Agreement Subject to Plan. This Agreement is subject to the provisions of the
Plan, and shall be interpreted in accordance therewith, except where specifically provided
otherwise in this Agreement. The Employee hereby acknowledges receipt of a copy of the Plan.

PLATO LEARNING, INC.

By:

Michael A. Morache

President and Chief Executive Officer

Accepted this      day of

     , 200

[Typed Name]

2

PLATO LEARNING, INC.

NON-EMPLOYEE DIRECTOR STOCK OPTION AGREEMENT

PLATO Learning, Inc., a Delaware corporation (the “Company”), hereby grants to (the
“Director”) on this day of , 200 (the “Option Date”), pursuant to the provisions of the PLATO
Learning, Inc. 2002 Stock Plan (the “Plan”), a non-qualified stock option (the “Option”) to
purchase from the Company shares of its Common Stock, $.01 par value (“Stock”), at the price of $
per share upon and subject to the terms and conditions set forth below.

1. Option Subject to Acceptance of Agreement.

The Option shall become null and void unless the Director shall accept this Agreement by
executing it in the space provided below and return it to the Company within 60 days following the
Option Date.

2. Time and Manner of Exercise of Option.

2.1 Maximum Term of Option. In no event may the Option be exercised, in whole or in
part, after 5:00 p.m., Minneapolis time, on the date, which is eight (8) years after the Option
Date (the “Expiration Date”).

2.2 Exercise of Option. Except as otherwise provided in the Plan, the Option shall
become immediately exercisable with respect to 100% of the shares subject to the Option.

2.3 Method of Exercise. Subject to the limitations set forth in this Agreement, the
Option may be exercised (i) by giving written notice to the Secretary of the Company or the
Secretary’s designee, specifying the number of whole shares to be purchased and accompanied by the
payment therefore in full in cash or, if permitted by the Compensation Committee, (A) in previously
owned whole shares of Stock (for which the Director has good title, free and clear of all liens and
encumbrances) having a fair market value, determined as of the date of exercise, equal to the
aggregate purchase price payable pursuant to the Option by reason of such exercise, (B) in cash by
a broker-dealer to whom the Director has submitted an irrevocable notice of exercise, or (C) a
combination of cash and Stock as described in this Section; and (ii) by executing such documents as
the Company may reasonably request. No shares shall be issued until the full purchase price and
all applicable taxes have been paid.

2.4 Termination of Option. In no event may the Option be exercised after it
terminates as set forth in this Section 2.4. The Option shall terminate on its Expiration Date, or
earlier to the extent not exercised pursuant to Section 2.2 and pursuant to Sections 6.8, 6.9,
6.10, 6.11 and 6.12 of the Plan.

In the event that the Director shall forfeit rights to purchase all or a portion of the shares
to which this Option relates, the Director shall, within 10 days of the date of the Company’s
written request, return this Agreement to the Company for cancellation.

2.5 Change in Control. Notwithstanding any other provisions as outlined in the Plan,
and unless otherwise specifically prohibited under applicable laws, or by the rules and regulations
of any governing governmental agencies or national securities exchanges, any and all outstanding
Options after a Change in Control will remain exercisable throughout their entire term.

3. Additional Terms and Conditions of Option.

3.1 Withholding Taxes. As a condition precedent to any exercise of the Option, the
Director shall, upon request by the Company, pay to the Company in addition to the purchase price
of the shares such amount of cash as the Company may be required, under all applicable federal,
state or local laws or regulations. The Director will recognize ordinary income at the time of
exercise in an amount equal to the excess, if any, of the fair market value of a share of Common
Stock at the time of exercise over the option price, multiplied by the number of shares as to which
the option is exercised. The Director may elect, by written notice to the Company, to satisfy part
or all of the withholding tax requirements associated with the exercise by delivering to the
Company from shares of Stock already owned by the Director, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the Director under this
Section 3.1. Any such election shall be in accordance with, and subject to, applicable tax and
securities laws, regulations and rulings.

3.2 Agreement Subject to Plan. This Agreement is subject to the provisions of the
Plan, and shall be interpreted in accordance therewith, except where specifically provided
otherwise in this Agreement. The Director hereby acknowledges receipt of a copy of the Plan.

PLATO LEARNING, INC.

By:

Michael A. Morache

President and Chief Executive Officer

Accepted this      day of

     , 200

     

[Typed Optionee Name]

CHI:1594869.2

3EX-10.42

PLATO Learning, Inc.

Fiscal 2005 Executive Annual Incentive Plan

Objectives: The Fiscal 2005 Executive Annual Incentive Plan is a reward program that directly
supports the achievement of financial goals and key strategic operational goals.

Eligibility: Employees in the named jobs are eligible to be considered for participation in the
Plan: Executive Chairman; President & CEO; Chief Financial Officer; Chief Technology Officer; Sr.
Vice President Operations; Chief Information Officer; Vice President, Human Resources; and Vice
President, School Market and Evaluation. The Company reserves the right to determine whether an
executive will actually participate in the Plan. Eligible employees will receive a notification
letter indicating they are eligible to participate in the Plan.

Performance Measures: Payment will be based on the level of achievement of the financial goals and
operational goals shown in this table.

	 	 	 	 	 
	 	 	Weighting
	Financial Goals	 	 	 	 
	1. Pre-tax earnings – Target[x] 1
	 	 	70	%
	 
	 	 	 	 
	Sub total
	 	 	70	%
	 
	 	 	 	 
	Operational Goals2:
	 	 	 	 
	1. Restructure the business to reduce SG&A costs [x]3
	 	 	10	%
	2. Complete the 3 year growth plan [x]
	 	 	5	%
	3. Increase the growth rate of the elementary market [x]4
	 	 	5	%
	4. Improve cost/development scheduling and market acceptance of
products and services[x]
	 	 	5	%
	5. Improve leadership effectiveness as measured by increased
diversity representation, quality of new hires and retention of key
talent
	 	 	5	%
	 
	 	 	 	 
	Sub total
	 	 	30	%
	 
	 	 	 	 

1The amount excludes restructuring and executive termination changes.

2Achievement of the operational goals can generally be substantiated. The level of
achievement is somewhat subjective in the case of near achievement or over achievement of
operational goals therefore it is to be determined by the Board in consultation with the CEO.

3Represents a [x] reduction from 2004 expenses [x] and excludes the impact of
restructuring and executive termination changes, as well as the impact of revenue changes on
commission and bad debt expense.

4Measured on the increase in elementary courseware orders (rather than revenue).

1

Target Incentive: Each executive’s payment will be based on their Annual Base Salary in
effect (on October 31, 2005), their Target Incentive percent, and the level of achievement of the
performance measures. Each executive’s Target Incentive is expressed as a percent of their Annual
Base Salary and shown in this table.

	 	 	 	 	 
	Executive	 	Target Incentive
	President & CEO
	 		75	%
	Executive Chairman
	 		60	%
	Chief Financial Officer
	 		50	%
	Chief Technology Officer
	 		50	%
	Sr. Vice President, Operations
	 		35	%
	Chief Information Officer
	 		35	%
	Vice President, Human Resources
	 		30	%
	Vice President, School Market and Evaluation
	 		25	%

Actual Payment: The plan rewards executives for achievement of goals and also encourages
performance that substantially exceeds goals. This chart shows how the actual payment will
increase (as a percent of the Target Incentive) as performance is increased. A threshold or
minimum level of performance has been established. Straight-line interpolation will be used to
determine the payment for any level of achievement falling between the stated levels of
performance. This is illustrated in the chart below.

	 	 	 
	Performance	 	Actual Payment
	% Of Goal Achievement	 	% Of Target Incentive
	 40%

60%

80%

100%

115%

130%

145%

160%

	 	50%

70%

85%

100%

125%

150%

175%

200%

General Provisions:

The obligations of the Company, as set forth in this document shall be subject to modification
in such manner and to such extent as the CEO and the Board of Directors deems necessary by
agreement, or as may be necessary to comply with any law, regulation or governmental order
pertaining to compensation. The Compensation Committee will receive the recommendations of the CEO
for the cash payment amount, and any actions related to termination of employment and/or change in
control, and after due deliberation determine the payment amount.

This Plan shall be cancelled in the event of termination of employment with the company. To remain
eligible for a cash payment amount from the Plan, a participant must be continuously employed by
the Company from date of hire or November 1, 2004, which ever is later, through the date of the
Plan payout (no later than December 31, 2005), except for the following circumstances:

Death or Disability. If a Participant dies or becomes disabled before October 31, 2005,
his/her cash payment amount will be prorated for the number of days the Participant was an active
PLATO employee. For the purposes of this Plan “Disability” means that as a result of physical or
mental incapacity Executive is unable for a period of 120 consecutive days during any consecutive
180-day period to perform his duties hereunder on a full-time basis. In the case of death, the
payment amount will be given to the Participant’s estate according to current law and established
guidelines and practices.

Unpaid Leave of Absence. If a Participant is on an unpaid leave of absence anytime between
November 1 2004 and October 31, 2005 his/her cash payment amount will be prorated on a daily basis
to exclude the time he/she was on such leave.

Termination with Cause or without Good Reason. In the event a Participant’s employment
with the Company is terminated with Cause or without Good Reason (as defined in Section 6 of their
employment agreement) after November 1, 2004 and before October 31, 2005 his/her cash payment
amount will be prorated for the number of days the Participant was an active PLATO employee.

Termination without Cause or with Good Reason. In the event a Participant’s employment
with the Company is terminated without Cause or with Good Reason (as defined in Section 6 of their
employment agreement) after November 1, 2004 and before October 31, 2005 his/her cash payment
amount will be prorated for the number of days the Participant was an active PLATO employee.

2

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