UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~July~~January 31, ~~2009~~2010

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

For the transition period from _________________to__________________.

Commission File Number: 0-20842

PLATO LEARNING, INC.

(Exact name of Registrant as specified in its charter)

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

10801 Nesbitt Avenue South, Bloomington, MN 55437

(Address of principal executive offices)

(952) 832-1000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Yes x No p 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer p  Accelerated filer x Non-accelerated filer p Smaller reporting ~~companyp~~ company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes p No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 24,~~156~~410,~~314~~861 shares of common stock, $.01 par value, outstanding as of ~~August~~February 3126, ~~2009~~2010.

PLATO LEARNING, INC.

Form 10-Q

Quarterly Period Ended ~~July~~January 31, ~~2009~~2010

TABLE OF CONTENTS

	PART I.
	FINANCIAL INFORMATION
		Page
ITEM 1.	Financial Statements:
	Condensed Consolidated Statements of Operations for the
	Three and Nine Months Ended July 31, 2009 and 2008 (Unaudited)	3
	Three Months Ended January 31, 2010 and 2009 (Unaudited)	3
	Condensed Consolidated Balance Sheets as of
	July 31, 2009 (Unaudited) and October 31, 2008	4
	January 31, 2010 (Unaudited) and October 31, 2009	4
	Condensed Consolidated Statements of Cash Flows for the
	Nine Months Ended July 31, 2009 and 2008 (Unaudited)	5
	Three Months Ended January 31, 2010 and 2009 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
ITEM 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	1514
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	23
ITEM 4.	Controls and Procedures	2423
	PART II.
	OTHER INFORMATION
ITEM 1A.	Risk Factors	2524
ITEM 6.	Exhibits	2524
SIGNATURES		2625

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLATO Learning, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
	Three Months Ended						~~Nine Months Ended~~
	July 31,						July 31,
	January 31,
	2009			2008			2009			2008
	2010			2009
REVENUES
Subscriptions	$	10,~~774~~968		$	9,~~247~~868		$	~~30,368~~		$	~~25,691~~
License fees		~~1,328~~549			31,~~353~~004			~~3,338~~			~~7,113~~
Services		4,~~637~~070			65,~~038~~165			~~14,577~~			~~18,214~~
Total revenues		1615,~~739~~587			1816,~~638~~037			~~48,283~~			~~51,018~~
COST OF REVENUES
Subscriptions		4,~~095~~064			43,~~593~~888			~~12,165~~			~~14,058~~
License fees		~~611~~234			~~1,540~~439			~~1,467~~			~~4,060~~
Services		2,~~418~~186			32,~~172~~428			~~7,182~~			~~9,082~~
Total cost of revenues		76,~~124~~484			96,~~305~~755			~~20,814~~			~~27,200~~
GROSS PROFIT		9,~~615~~103			9,~~333~~282			~~27,469~~			~~23,818~~
OPERATING EXPENSES
Sales and marketing		5,~~969~~382			65,~~657~~887			~~17,460~~			~~21,182~~
General and administrative		21,~~209~~948			2,~~258~~424			~~6,504~~			~~7,909~~
Software maintenance and development		~~976~~495			~~1,128~~567			~~2,251~~			~~3,306~~
Amortization of intangibles		~~214~~213			~~388~~213			~~640~~			~~1,163~~
Restructuring charges		-			800			-			2,435
Total operating expenses		8,038			9,091
Total operating expenses		9,368			11,231			26,855			35,995
OPERATING INCOME		1,065			191
OPERATING INCOME (LOSS)		247			(1,898	)		614			(12,177	)
Other (expense) income, net		(63	)		68
Other (expense) income, net		(63	)		(11	)		(48	)		188
INCOME BEFORE INCOME TAXES		1,002			259
INCOME (LOSS) BEFORE INCOME TAXES		184			(1,909	)		566			(11,989	)
Income tax expense		-			-
Income tax expense		-			152			-			456
NET INCOME	$	1,002		$	259
NET INCOME (LOSS)	$	184		$	(2,061	)	$	566		$	(12,445	)
NET INCOME PER SHARE
NET INCOME (LOSS) PER SHARE
Basic	$	0.04		$	0.01
Basic	$	0.01		$	(0.09	)	$	0.02		$	(0.52	)
Diluted	$	0.04		$	0.01
Diluted	$	0.01		$	(0.09	)	$	0.02		$	(0.52	)
WEIGHTED AVERAGE COMMON
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
SHARES OUTSTANDING
Basic		24,298			23,983
Basic		24,106			23,881			24,052			23,825
Diluted		25,247			24,260
Diluted		24,757			23,881			24,383			23,825
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.

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PLATO Learning, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
	July 31,			October 31,
	January 31,			October 31,
	2009			2008
	2010			2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1427,~~185~~653		$	2028,~~018~~164
Accounts receivable, net		177,~~751~~995			610,~~834~~710
Other current assets		65,~~053~~828			76,~~408~~539
Total current assets		3741,~~989~~476			3445,~~260~~413
Equipment and leasehold improvements, net		2,~~698~~352			32,~~589~~472
Software development costs, net		2019,~~760~~051			2419,~~086~~904
Identified intangible assets, net		2,~~719~~050			32,~~723~~384
Other long-term assets		3,~~203~~231			3,~~309~~279
Total assets	$	6768,~~369~~160		$	6873,~~967~~452
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,~~305~~918		$	31,~~085~~070
Accrued compensation		32,~~383~~102			3,~~996~~805
Other accrued liabilities		21,~~371~~405			62,~~909~~457
Deferred revenue		3433,~~711~~700			3638,~~005~~020
Total current liabilities		4139,~~770~~125			4945,~~995~~352
Long-term deferred revenue		1315,~~859~~783			815,~~916~~678
Total liabilities		5554,~~629~~908			5861,~~911~~030
Stockholders' equity:
Common stock, $.01 par value, 50,000 shares authorized;
24,216 shares issued and 24,156 shares outstanding at
24,442 shares issued and 24,382 shares outstanding at
at July 31, 2009; 24,046 shares issued and 23,988
at January 31, 2010; 24,342 shares issued and 24,282
shares outstanding at October 31, 2008		242			240
shares outstanding at October 31, 2009		244			243
Additional paid-in capital		172,~~275~~381			~~171~~172,~~143~~560
Treasury stock at cost		(319	)		(~~315~~319	)
Accumulated deficit		(~~159~~157,~~224~~831	)		(~~159~~158,~~790~~833	)
Accumulated other comprehensive loss		(1,~~234~~223	)		(1,~~222~~229	)
Total stockholders' equity		1113,~~740~~252			1012,~~056~~422
Total liabilities and stockholders' equity	$	6768,~~369~~160		$	6873,~~967~~452
See Notes to Condensed Consolidated Financial Statements.

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PLATO Learning, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
	Nine Months Ended
	Three Months Ended
	July 31,
	January 31,
	2009			2008
	2010			2009
OPERATING ACTIVITIES:
Net income (loss)	$	566		$	(12,445	)
Net income	$	1,002		$	259
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes		-			456
Depreciation and amortization		3,170			2,840
Depreciation and amortization		9,215			12,868
Stock-based compensation		(71	)		264
Stock-based compensation		1,023			559
Other adjustments		-			14
Other adjustments		(166	)		105
Changes in operating assets and liabilities:
Accounts receivable		~~(10~~2,~~727~~715	)		~~(841~~2,132	)
Other current and long-term assets		~~1,330~~715			~~(238~~994	)
Accounts payable		~~(1,780~~848	)		(1,~~967~~506	)
Other current liabilities		(52,~~144~~752	)		(~~686~~5,366	)
Deferred revenue		3(4,~~649~~215	)		(15,~~275~~706	)
Total adjustments		~~(2,600~~410	)		8(6,~~981~~334	)
Net cash used in operating activities		(2,034	)		(3,464	)
Net cash provided by (used in) operating activities		1,412			(6,075	)
INVESTING ACTIVITIES:
Capitalized software development costs		(31,~~362~~564	)		(81,~~741~~648	)
Purchases of equipment and leasehold improvements		(~~525~~255	)		(~~318~~98	)
Net cash used in investing activities		(31,~~887~~819	)		(91,~~059~~746	)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of repurchases		(107	)		6037
Repayments of capital lease obligations		(73	)		(223	)
Net cash provided by financing activities		100			38
Net cash (used in) provided by financing activities		(110	)		34
EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS		~~(12~~6	)		2643
Net decrease in cash and cash equivalents		(~~5,833~~511	)		(127,~~459~~744	)
Cash and cash equivalents at beginning of period		2028,~~018~~164			2420,~~297~~018
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1427,~~185~~653		$	1112,~~838~~274
See Notes to Condensed Consolidated Financial Statements.

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PLATO LEARNING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. General

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The October 31, ~~2008~~2009 condensed consolidated balance sheet data was derived from our audited financial statements at that date. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. We have included all normal recurring and other adjustments considered necessary to give a fair statement 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, ~~2008~~2009.

Consolidation

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

Fiscal Periods

Our fiscal year is from November 1 to October 31. Unless otherwise stated, references herein to our ~~third~~first quarter relate to the three month period ended ~~July~~January 31.

Note 2. Summary of Significant Accounting Policies

General

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate our critical accounting policies and estimates, and have identified the policies relating to the following areas as those that are significant to our financial statement presentation as they involve subjective or complex judgments:

Revenue recognition

Capitalized software development costs

Valuation of deferred income taxes

· ~~Valuation~~Impairment analysis of identified intangible assets

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” The standard permits the use of estimated selling price to determine the value of separate units of accounting in multiple element arrangements if vendor-specific objective evidence (VSOE) or third-party evidence of selling price does not exist. The use of the residual method is no longer allowed.

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AtWe ~~the~~adopted ~~end~~ASU ~~of fiscal year 2008, we completed our transition to a software~~2009-~~as-a-service~~13 ~~business model~~ in ~~which~~the ~~substantially~~first ~~all~~quarter of ~~our~~2010 ~~products are now delivered~~ on a ~~hosted,~~prospective ~~subscription service~~ basis. ~~Based~~We onuse ~~the~~VSOE ~~completion~~to ofdetermine ~~this~~the ~~transition,~~fair ~~and~~value ~~in accordance with EITF 00-03, Application~~ of ~~SOP 97-2, “Software Revenue Recognition”, to Arrangements That Include~~ the ~~Right~~majority toof ~~Use~~our ~~Software~~products. In ~~Stored~~a onfew ~~Another Entity’s Hardware~~cases, we ~~have~~use ~~applied~~third ~~SOP~~party ~~98-1,~~evidence ~~Accounting~~(TPE) ~~for~~to determine the ~~Costs~~fair ofvalue. When ~~Computer~~VSOE ~~Software Developed~~ or ~~Obtained~~TPE ~~for~~exists ~~Internal Use” effective~~ for the ~~first~~products ~~quarter~~in ofmultiple ~~fiscal~~element ~~year 2009. Under EITF 00-03~~arrangements, ~~hosting~~the ~~arrangements~~amount inbilled ~~which customers do not have a contractual right~~ to ~~take~~the ~~possession~~customer offor the ~~software~~ ~~are~~entire ~~service~~order ~~arrangements,~~is ~~and~~allocated ~~such software, subject~~ to ~~certain~~the ~~exceptions,~~products isin ~~considered~~the ~~internal-use~~arrangement ~~software~~based ~~subject~~on tothese ~~SOP 98-1~~values. AsWith athe ~~result~~adoption of ~~our~~ASU ~~application of SOP 98-1 in fiscal year~~ 2009-13, ~~we are capitalizing software development costs upon completion of the preliminary project stage rather than~~ when ~~technological feasibility is achieved, which~~ we ~~did~~do ~~for~~not ~~prior~~have ~~years~~VSOE ~~pursuant~~or toTPE ~~SFAS~~on ~~No.~~a 86product, ~~“Accounting for~~ the ~~Costs~~estimated ofselling ~~Computer~~price ~~Software~~will to be ~~Sold,~~used ~~Leased,~~as orthe ~~Otherwise~~basis ~~Marketed” (“SFAS 86”). Application~~for ofthe ~~SOP 98-1 also allows us to capitalize only direct costs of software development, rather than both direct costs and an~~ allocation ~~of indirect costs, which was allowed under SFAS 86~~.

~~There~~We ~~have~~use ~~been~~stand noalone ~~other~~sales ~~significant~~of ~~new~~each ~~accounting~~type ~~principles~~of ~~applied~~product into ~~these~~determine ~~areas~~VSOE. Standard ~~during~~volume ~~the~~and ~~third~~term ~~quarter~~discounts ofare ~~2009~~taken into consideration when performing the analysis. ~~For~~In aorder ~~more~~to ~~complete~~establish ~~discussion~~VSOE, we follow the guideline that 80% of ~~our~~the ~~accounting~~standalone ~~policies~~transactions ~~refer~~fall towithin ~~Note~~plus 2or tominus ~~Consolidated~~15% ~~Financial~~of ~~Statements~~the inmedian price. Other factors taken into consideration that affect pricing of our ~~Annual~~products ~~Report~~include onthe ~~Form~~type 10of customer and their geographical location. Under ASU 2009-K13, ~~for~~estimated selling price will be used when VSOE or TPE do not exist. We consider a number of factors in the ~~year~~determination ~~ended~~of ~~October~~estimated 31selling price, ~~2008~~including, but not limited to, pricing practices, similar products and customer’s geographic location.

~~Income~~Prior to the adoption of ASU 2009-13, there were two types of arrangements for which we were not able to establish VSOE for all products in the arrangement. In these circumstances, revenue on products and services included in the arrangement that otherwise would have been recognized on delivery was deferred and recognized ratably over the term of the arrangement. Because ASU 2009-13 provides for the use of estimated selling price when VSOE (~~Loss~~or TPE) ~~per~~does ~~Share~~not exist, these arrangements will now be allocated on the basis of estimated selling price and revenue previously deferred will now be recognized on delivery.

~~Basic~~The ~~income~~adoption ~~(loss) per share is computed on the basis~~ of ~~the~~ASU ~~weighted~~2009-13 ~~average~~in ~~number~~our offirst ~~common~~quarter ~~shares~~fiscal ~~outstanding~~year ~~during~~2010 ~~the~~did ~~period. Diluted~~not ~~income~~have ~~(loss)~~a ~~per~~material ~~share~~effect ~~is computed~~ on ~~the~~our ~~basis~~consolidated offinancial ~~the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period~~statements. ~~Components of basic and diluted income (loss) per share were as follows (in thousands, except per share amounts):~~

	Three Months Ended July 31,					Nine Months Ended July 31,
	2009		2008			2009		2008
Net income (loss) available for common shareholders	$	184	$	(2,061	)	$	566	$	(12,445	)
Weighted average common shares outstanding		24,106		23,881			24,052		23,825
Dilutive effect of employee stock options and restricted stock awards		651		-			331		-
Common shares and common share equivalents		24,757		23,881			24,383		23,825
Income (loss) per share:
Basic	$	0.01	$	(0.09	)	$	0.02	$	(0.52	)
Diluted	$	0.01	$	(0.09	)	$	0.02	$	(0.52	)

There have been no other significant new accounting principles applied during the first three months of 2010. For a more complete discussion of our accounting policies refer to Note 2 to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2009.

Approximately, 1,976,000 and 2,624,000 stock options with exercise prices greater than the average market price of our common stock for the three months and nine months ended July 31, 2009, respectively, were excluded from the 2009 calculations of diluted income per share because they were antidilutive.

We incurred a net loss for the three and nine months ended July 31, 2008. Potential common shares in the amount of 2,616,000 and 2,728,000 were antidilutive and excluded from the calculation of diluted loss per share for those periods, respectively.

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Net Income per Share

Basic net income per share is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted net income per share is computed on the basis of the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period. Components of basic and diluted net income per share were as follows (in thousands, except per share amounts):

	Three Months Ended January 31,
	2010		2009

Net income available for common shareholders	$	1,002	$	259

Weighted average common shares outstanding		24,298		23,983
Dilutive effect of employee stock options and awards		949		277
Common shares and common share equivalents		25,247		24,260
Net income per share:
Basic	$	0.04	$	0.01
Diluted	$	0.04	$	0.01

Approximately 1,628,000 and 2,622,000 stock options with exercise prices greater than the average market price of our common stock for the three months ended January 31, 2010 and 2009, respectively, were excluded from the calculations of diluted income per share because they were anti-dilutive.

Recent Accounting Pronouncements

In ~~June~~January ~~2009~~2010, the FASB issued ~~SFAS~~authoritative ~~No.~~guidance ~~168,~~which ~~“The~~adds ~~FASB Accounting Standards Codification TM~~ and ~~the~~clarifies ~~Hierarchy~~certain ofdisclosures ~~Generally~~about ~~Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes~~ the ~~FASB~~use ~~Accounting Standards Codification (the “Codification”) as the source~~ of ~~authoritative~~fair ~~accounting~~value ~~principles~~measurements ~~recognized by the FASB to be applied by nongovernmental entities~~ in ~~the preparation of~~ financial statements ~~in conformity with US GAAP~~. The ~~Codification~~provisions ~~does~~are ~~not~~effective ~~change~~for ~~current~~our USsecond ~~GAAP,~~quarter ~~but~~of isfiscal ~~intended~~year to2010 ~~simplify~~and ~~user~~are ~~access~~not toexpected ~~all authoritative US GAAP by providing all the authoritative literature related~~ to have a ~~particular~~material ~~topic~~effect inon ~~one place. The existing accounting standard documents will be superseded. The provisions of SFAS 168 are effective for~~ our ~~quarter~~consolidated ~~ending~~financial ~~October 31, 2009~~statements.

In ~~June~~October 2009, the FASB’s ~~issued~~Emerging ~~SFAS~~Issues ~~No.~~Task ~~167,~~Force ~~“Amendments~~(EITF) toissued ~~FASB~~authoritative ~~Interpretation~~guidance ~~No.~~addressing ~~46(R)”~~revenue ~~(“SFAS~~arrangements ~~167”)~~with multiple deliverables. ~~SFAS~~The ~~167~~guidance ~~modifies~~eliminates ~~how~~the acriterion ~~company~~for ~~determines~~objective ~~when~~and anreliable ~~entity~~evidence ~~that~~of isfair ~~insufficiently~~value ~~capitalized~~for orthe isundelivered ~~not~~products ~~controlled through voting (~~or ~~similar rights)~~services. Instead, ~~should~~revenue bearrangements ~~consolidated. SFAS~~with ~~167~~multiple ~~clarifies~~deliverables ~~that~~should ~~the~~be ~~determination~~divided ofinto ~~whether~~separate aunits ~~company~~provided isthe ~~required~~deliverables tomeet ~~consolidate~~certain ancriteria. This ~~entity~~guidance isalso ~~based~~eliminates ~~on,~~the ~~among~~use ~~other~~of ~~things,~~the anresidual ~~entity’s~~method ~~purpose~~of allocation and ~~design~~requires ~~and~~that athe ~~company’s~~arrangement ~~ability~~consideration tobe ~~direct~~allocated at the ~~activities~~inception of the ~~entity~~arrangement ~~that~~to ~~most~~all ~~significantly~~deliverables ~~impact~~based ~~the~~on ~~entity’s~~their ~~economic~~relative ~~performance~~selling price. ~~SFAS~~The ~~167~~guidance ~~requires~~also anprovides ~~ongoing reassessment of whether~~ a ~~company~~hierarchy isfor estimating the ~~primary~~selling ~~beneficiary~~price of aeach ~~variable~~of ~~interest~~the ~~entity~~deliverables. ~~SFAS~~The ~~167~~guidance ~~also~~is ~~requires additional~~effective ~~disclosures~~prospectively ~~about~~for arevenue ~~company’s~~arrangements ~~involvement~~entered ininto ~~variable~~or ~~interest~~materially ~~entities~~modified ~~and~~at ~~any~~the ~~significant~~beginning ~~changes~~of inour ~~risk~~fiscal ~~exposure~~year ~~due~~2011; tohowever, ~~that~~earlier ~~involvement~~application is permitted. ~~The~~We ~~provisions~~adopted ofthis ~~SFAS~~guidance ~~167~~during ~~are~~our ~~effective~~first ~~for~~quarter ~~our~~of fiscal year ~~ending October 31~~2010, ~~2011~~ and ~~are~~it did not ~~expected to~~ have a material effect on our consolidated financial statements. See our “Summary of Significant Accounting Policies - General” section for more detailed information.

In October 2009, the FASB’s EITF issued authoritative guidance that updated software revenue arrangements that also include tangible products. The amendments exclude tangible products and software essential to the tangible product’s functionality from the software revenue guidance. The guidance required we adopt ASU 2009-14 simultaneously to our adoption of ASU 2009-13. The provisions did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. The provisions of SFAS 166 are effective for our fiscal year ending October 31, 2011 and are not expected to have a material effect on our consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS 165 sets forth the period after the balance sheet date, during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occur after the balance sheet date. The provisions of SFAS 165 were effective for our quarter ended July 31, 2009 and did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued staff position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FAS 157-4). FAS 157-4 provides guidance on estimating fair value when market activity has decreased and on identifying transactions that are not orderly. Additionally, entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value. The provisions of FAS 157-4 were effective for our quarter ended July 31, 2009 and did not have a material effect on our consolidated financial statements.

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In April ~~2009~~2008, the FASB issued ~~staff~~authoritative ~~position~~guidance ~~(“FSP”)~~amending ~~No.~~the ~~FAS~~factors ~~115-2~~that ~~and~~should ~~FAS~~be ~~124-2,~~considered ~~“Recognition~~in ~~and~~developing ~~Presentation~~renewal ofor ~~Other-Than-Temporary~~extension ~~Impairments”~~assumptions ~~(FAS~~used ~~115-2 and FAS 124-2). FAS 115-2 and FAS 124-2 modified existing accounting guidance~~ to ~~demonstrate~~determine the ~~intent~~useful ~~and~~life ~~ability~~of toa ~~hold~~recognized anintangible ~~investment~~asset. The ~~security~~intent ~~for a period~~ of ~~time~~this ~~sufficient~~guidance is to ~~allow~~improve ~~for~~the ~~any~~consistency ~~anticipated~~between ~~recovery in fair value. When~~ the ~~fair~~useful ~~value~~life of a ~~debt~~recognized orintangible ~~equity~~asset ~~security~~and ~~has declined below~~ the ~~amortized~~period ~~cost~~of atexpected ~~the~~cash ~~measurement~~flows ~~date,~~used ~~an entity that intends~~ to ~~sell~~measure ~~a security or is more-likely-than-not to sell~~ the ~~security~~fair ~~before~~value ~~the recovery~~ of the ~~security’s~~asset ~~cost~~as ~~basis,~~provided ~~must~~for ~~recognize~~under ~~the~~separate ~~other-than-temporary~~accounting ~~impairment in~~guidance ~~earnings~~topics. The provisions ~~of FSP No. FAS 115-2 and FAS 124-2~~ were effective for our first quarter ~~ended~~fiscal ~~July~~year ~~31,~~2010 ~~2009~~ and did not have a material effect on our consolidated financial statements.

In ~~April~~December ~~2009~~2007, the FASB issued ~~staff~~authoritative ~~position~~guidance ~~(“FSP”)~~that ~~No.~~establishes ~~FAS~~principles ~~107-1~~ and ~~APB~~requirements ~~28-1,~~for ~~“Interim~~how ~~Disclosures~~an ~~about~~acquirer ~~Fair~~recognizes ~~Value~~and ofmeasures ~~Financial~~in ~~Instruments”~~its ~~(FAS~~financial ~~107~~statements ~~and~~the ~~APB~~identifiable ~~28-1). FAS~~assets ~~107-1~~acquired, ~~and~~the ~~APB~~liabilities ~~28-1~~assumed, ~~amend SFAS~~any ~~No.~~noncontrolling ~~107,~~interest ~~“Disclosures~~in ~~about~~the ~~Fair~~acquiree ~~Value~~and ofthe ~~Financial~~goodwill ~~Instruments”~~acquired. The toguidance ~~require~~also anestablishes ~~entity~~disclosure requirements to ~~provide~~enable ~~disclosures~~the ~~about~~evaluation ~~fair~~of ~~value~~the ofnature and financial ~~instruments~~effects inof ~~interim~~the ~~financial~~business ~~statements~~combination. The provisions ofwere ~~FAS~~adopted ~~107-1~~by ~~and~~us ~~APB~~in ~~28-1~~the ~~were~~first ~~effective for our~~ quarter ~~ended~~of ~~July~~fiscal ~~31,~~2010 ~~2009~~ and did not have a material effect on our consolidated financial statements.

In ~~April~~December ~~2008~~2007, the FASB issued ~~staff~~a ~~position~~new ~~(“FSP”)~~accounting ~~No.~~pronouncement ~~FAS~~regarding ~~142-3,~~noncontrolling ~~“Determination~~interests ofand the ~~Useful~~deconsolidation ~~Life~~ of ~~Intangible~~a ~~Assets” (FAS 142-3)~~subsidiary. ~~FAS~~This ~~142-3~~will ~~amends~~change the ~~factors~~accounting ~~that~~and ~~should~~reporting befor ~~considered~~minority ininterests, ~~developing~~which ~~renewal~~will orbe ~~extension~~recharacterized ~~assumptions~~as ~~used to~~noncontrolling ~~determine~~interests ~~the~~(NCI) ~~useful~~and ~~life~~classified ofas a ~~recognized~~component ~~intangible~~of ~~asset under SFAS 142, “Goodwill and Other Intangible Assets~~equity.” ~~The~~This ~~intent~~new ofconsolidation ~~the~~method ~~position~~will issignificantly tochange ~~improve~~ the ~~consistency~~accounting ~~between~~for ~~the~~transactions ~~useful~~with ~~life~~minority ofinterest aholders. The ~~recognized~~provisions ~~intangible~~were ~~asset~~adopted ~~under~~by ~~SFAS~~us ~~142~~in ~~and~~ the ~~period~~first ofquarter ~~expected cash flows used to measure the fair value~~ of ~~the asset under SFAS 141R, and other U.S. generally accepted accounting principles. The provisions of FAS 142-3 are effective for our~~ fiscal year 2010 and ~~are~~did ~~currently~~ not ~~expected to~~ have a material effect on our consolidated financial statements.

InNote ~~December 2007, the FASB issued SFAS No~~3. ~~141(R) “Business Combinations” (“SFAS 141(R)”).~~ ~~SFAS~~Stock-Based 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by us in the first quarter of fiscal 2010. SFAS 141(R) is currently not expected to have a material effect on our consolidated financial statements.Compensation

InWe ~~December~~use ~~2007,~~ the ~~FASB~~straight-line ~~issued~~method ~~SFAS~~to ~~No.~~recognize ~~160,~~stock-based ~~“Noncontrolling~~compensation ~~Interests~~expense inover ~~Consolidated Financial Statements”, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 will change~~ the ~~accounting~~requisite ~~and~~service ~~reporting~~period ~~for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component~~ of ~~equity. This new consolidation method will significantly change~~ the ~~accounting for transactions with minority interest holders~~award. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of fiscal year 2010. SFAS 160 is currently not expected to have a material effect on our consolidated financial statements.

Stock option activity for the three months ended January 31, 2010 is as follows (in thousands):

	Options Outstanding
Options outstanding at October 31, 2009		2,946
Options granted		317
Options exercised		(5	)
Options forfeited or cancelled		(40	)
Options outstanding at January 31, 2010		3,218

Options exercisable at January 31, 2010		2,371

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115,” (“SFAS 159”). This standard permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of SFAS 159 were effective beginning in our fiscal year 2009 and did not have a material effect on our consolidated financial statements.

	Three Months Ended
	January 31,
	2010			2009
Stock-based compensation (benefit) expense
before adjustment	$	240		$	348
Adjustment for forfeitures		310			84
Total stock-based compensation (benefit) expense	$	(70	)	$	264

InAuthoritative ~~September~~guidance ~~2006,~~provides ~~the~~that ~~FASB~~differences ~~issued~~between ~~SFAS~~actual ~~No.~~and ~~157,~~estimated ~~“Fair~~stock ~~Value~~option ~~Measurements”~~forfeitures ~~(“SFAS~~are ~~157”),~~not torecognized ~~establish~~until athe ~~consistent~~first ~~framework~~vesting ~~for~~date ~~measuring~~following ~~fair~~the ~~value~~actual ~~and~~forfeiture ~~expand~~of ~~disclosures~~an ~~on fair value measurements~~option. ~~In February 2008~~ Generally, ~~the FASB~~our ~~issued~~stock ~~FSP~~options ~~157-2,~~are ~~which~~granted ~~delays~~during the ~~company’s~~first ~~fiscal~~quarter ~~year 2009 effective date~~ of ~~FAS~~each ~~157~~fiscal ~~for~~year, ~~all nonfinancial assets~~ and ~~nonfinancial~~therefore ~~liabilities,~~recorded ~~except~~stock ~~those~~option ~~recognized~~forfeitures orare ~~disclosed~~typically atgreatest ~~fair~~during ~~value~~that inquarter. Stock ~~the~~option ~~financial~~forfeitures ~~statements~~reduced onstock-based acompensation ~~recurring~~expense ~~basis~~by ~~(at~~$310,000 ~~least~~and ~~annually)~~$84,000 ~~until~~in ~~our~~the ~~fiscal~~first ~~year~~three ~~2010. The~~months ~~provisions~~ of ~~SFAS~~2010 ~~157~~and ~~were effective beginning in our fiscal year~~ 2009, ~~and did not have a material effect on our consolidated financial statements~~respectively.

Note 3. Stock-Based Compensation

We account for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”). We use the straight-line method to recognize compensation expense over the requisite service period of the award.

Stock option activity for the nine months ended July 31, 2009 is as follows (in thousands):

	Options Outstanding
Options outstanding at October 31, 2008		2,617
Options granted		889
Options exercised		-
Options forfeited or cancelled		(357	)
Options outstanding at July 31, 2009		3,149
Options exercisable at July 31, 2009		2,385

Total stock-based compensation expense recorded for the three and nine months ended July 31 was as follows (in thousands):

	2009		2008
Three months ended July 31	$	377	$	483
Nine months ended July 31	$	1,023	$	559

Under SFAS 123(R), differences between actual and estimated stock option forfeitures are not recognized until the first vesting date following the actual forfeiture of an option. Generally, our stock options are granted during the first quarter of each fiscal year, and therefore recorded stock option forfeitures are typically greatest during that quarter. Stock option forfeitures reduced stock-based compensation expense by $275,000 and $495,000 in the first three quarters of 2009 and 2008, respectively.

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Note 4. Deferred Commissions

Employee commissions on the sale of our products and services are earned at the time of invoicing and paid monthly. The related expense is deferred and amortized over the non-cancellable terms of the related customer contracts on the basis that the commission charges are so closely related to the revenue from such contracts that they should be recorded as an asset and charged to expense over the same period that the revenue is recognized. Total deferred commissions at ~~July~~January 31, ~~2009~~2010 and October 31, ~~2008~~2009 were $4,~~129~~205,000 and $4,~~268~~568,000, of which $1,~~176~~342,000 and $~~834~~1,333,000, respectively, were recorded as long-term deferred commissions and included in other long-term assets on our balance sheet.

Note 5. Software Development Costs

A reconciliation of capitalized software development costs is as follows (in thousands):

	Gross Carrying Value			Accumulated Amortization			Net Carrying Value
Balance, October 31, 2008	$	49,856		$	(25,770	)	$	24,086
Balance, October 31, 2009	$	47,129		$	(27,225	)	$	19,904
Capitalized software development costs		31,~~362~~564			-			31,~~362~~564
Amortization		-			(62,~~688~~417	)		(62,~~688~~417	)
Write-off of fully amortized costs		(7,569	)		7,569			-
Balance, January 31, 2010	$	48,693		$	(29,642	)	$	19,051
Balance, July 31, 2009	$	45,649		$	(24,889	)	$	20,760

In the first quarter of 2009, we wrote off approximately $7,569,000 of fully amortized software development costs and related accumulated amortization associated with software products no longer considered substantially in use.

Note 6. Identified Intangible Assets

Identified intangible assets subject to amortization were as follows (in thousands):

	As of July 31, 2009							As of October 31, 2008
	Gross Carrying Value		Accumulated Amortzation			Net Carrying Value		Gross Carrying Value		Accumulated Amortzation			Net Carrying Value
Acquired technology	$	7,300	$	(5,684	)	$	1,616	$	7,300	$	(5,320	)	$	1,980
Trademarks and
tradenames		-		-			-		1,380		(1,380	)		-
Customer relationships
and lists		19,800		(18,697	)		1,103		19,800		(18,057	)		1,743
	$	27,100	$	(24,381	)	$	2,719	$	28,480	$	(24,757	)	$	3,723

In the first quarter of 2009, we wrote off approximately $1,380,000 of fully amortized identified intangible assets, and related accumulated amortization, which were no longer considered substantially in use.

Amortization expense for the identified intangible assets presented above was as follows (in thousands):

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	Three Months Ended					Nine Months Ended
	As of January 31, 2010							As of October 31, 2009
	July 31,					July 31,
	Gross Carrying Value		Accumulated Amortzation			Net Carrying Value		Gross Carrying Value		Accumulated Amortzation			Net Carrying Value
	2009		2008			2009		2008
Acquired technology	$	7,300	$	(5,926	)	$	1,374	$	7,300	$	(5,805	)	$	1,495
Amortization of intangible assets included in:
Customer relationships
Cost of revenues	$	122	$	205		$	364	$	616
and lists		19,800		(19,124	)		676		19,800		(18,911	)		889
Operating expenses		213		388			640		1,163
	$	27,100	$	(25,050	)	$	2,050	$	27,100	$	(24,716	)	$	2,384
	$	335	$	593		$	1,004	$	1,779

Amortization expense for the identified intangible assets presented above was as follows (in thousands):

	Three Months Ended
	January 31,
	2010		2009
Amortization of intangible assets included in:
Cost of revenues	$	121	$	121
Operating expenses		213		214
	$	334	$	335

Estimated future annual amortization expense for identified intangible assets is as follows (in thousands):

	Cost of		Operating
	Revenues		Expenses		Total
Remainder of 2009	$	122	$	214	$	336
Remainder of 2010	$	364	$	641	$	1,005
2010		484		855		1,339
2011		485		35		520
2011		485		34		519
2012		485		-		485
2013		40		-		40
	$	1,~~616~~374	$	~~1,103~~676	$	2,~~719~~050

The future annual amortization amounts presented above are estimates. Actual amortization expense may be different due to the acquisition, impairment, or accelerated amortization of identified intangible assets.

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Note 7. Deferred Revenue

Deferred revenue ~~primarily~~ consists of billings ~~and~~made ~~payments received~~ in advance of ~~revenue~~delivery ~~recognition~~of ~~from~~subscription ~~our~~and ~~subscription~~other ~~service~~services and is recognized ~~as revenue~~ when revenue recognition criteria are met. We generally invoice our customers in full upon receipt of their subscription order. In circumstances where we do not bill the full subscription upon order, we do not include these unbilled amounts in deferred revenue. Accordingly, the deferred revenue balance does not represent the total remaining contract value of all non-cancelable subscription agreements. The components of deferred revenue were as follows (in thousands):

	As of			As of
	July 31,			October 31,
	2009			2008
Total deferred revenue	$	48,570		$	44,921
Less: Long-term portion		(13,859	)		(8,916	)
Current deferred revenue	$	34,711		$	36,005

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	As of			As of
	January 31,			October 31,
	2010			2009

Total deferred revenue	$	49,483		$	53,698
Less: Long-term portion		(15,783	)		(15,678	)
Current deferred revenue	$	33,700		$	38,020

Note 8. Restructuring and Other Charges

At various times over the past several years we have incurred restructuring costs related to our transition to a subscription-based business model during this period. These costs primarily include severance and facility closings in the U.S. and U.K.

The restructuring reserve activity (included in other accrued liabilities) from October 31, ~~2008~~2009 through ~~July~~January 31, ~~2009~~2010 was as follows (in thousands):

	Severance
	and related			Facility
	costs			closings			Total
Reserve balance at October 31, 2008	$	1,764		$	1,029		$	2,793
Reserve balance at October 31, 2009	$	204		$	367		$	571
Cash payments		(~~1,434~~134	)		(~~518~~35	)		(~~1,952~~169	)
Foreign currency translation adjustment		-			(110	)		(110	)
Reserve balance at July 31, 2009	$	330		$	510		$	840
Reserve balance at January 31, 2010	$	70		$	322		$	392

There were no restructuring charges during the first ~~nine~~three months of 2010 or 2009.

13Note 9. Comprehensive Income

Total comprehensive income was as follows (in thousands):

	Three Months Ended
	January 31,
	2010		2009
Net income	$	1,002	$	259
Foreign currency translation adjustments		6		43
Total comprehensive income	$	1,008	$	302

Income tax effects for the components of other comprehensive income were not significant because our deferred tax assets are fully reserved. Accumulated other comprehensive loss was $1,223,000 and $1,229,000 at January 31, 2010 and October 31, 2009, respectively.

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Note 9. Comprehensive Income (Loss)

Total comprehensive income (loss) was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2009			2008			2009			2008
Net income (loss)	$	184		$	(2,061	)	$	566		$	(12,445	)
Foreign currency translation adjustments		(49	)		(5	)		(12	)		26
Total comprehensive income (loss)	$	135		$	(2,066	)	$	554		$	(12,419	)

Income tax effects for the components of other comprehensive income (loss) were not significant because our deferred tax assets are fully reserved. Accumulated other comprehensive loss was $1,234,000 and $1,222,000 at July 31, 2009 and October 31, 2008, respectively.

Note 10. Income Taxes

In the fourth quarter of fiscal 2008, we determined that the tax deductible portion of goodwill for which we recorded income tax expense in the first three quarters of fiscal 2008, was fully impaired. As a result of the impairment, we are no longer recording this expense.

We have not expensed, and do not maintain any accrual balances related to, interest and penalties related to unrecognized tax benefits. For future periods in which we may incur unrecognized tax benefits or uncertainties, we would classify any associated interest and penalties as a component of the income tax provision.

14The majority of our deferred tax assets represent net operating loss carryforwards which are available to offset future taxable income. Our deferred tax assets are fully reserved and will remain fully reserved until the related tax benefits are realized through the generation of taxable income in a particular year, or until we can demonstrate a history of generating taxable income.

With our history of net operating losses and significant taxable losses over the past several years, we have not had the need to perform an extensive evaluation of the impact of the provisions of Section 382 of the Internal Revenue Code on potential limitations on the usability of those net operating losses. As we approach the possibility of taxable income in upcoming years, we are currently undergoing a more extensive Section 382 study to determine the limitations, if any, on the availability of our historical net operating losses to offset future taxable income. We expect this study to be completed by the end of fiscal 2010.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Description

PLATO Learning, Inc. is a Delaware corporation that was incorporated in 1989 and is headquartered in Bloomington, Minnesota. We are a leading provider of on-line instruction, curriculum management, assessment, and related professional development services to K–12 schools, community colleges and other educational institutions across the country. Our products are used by customers principally to provide alternative instruction to students performing below their grade level in order to help those students return to the classroom, recover course credits, pass high school exit exams or prepare for college and other post-secondary studies. In addition to the value provided to students, our solutions allow school districts to retain state and federal funding tied to student enrollment, and help educators meet the demands of state and federal student achievement initiatives for intervention, dropout prevention and college readiness. We also offer online and onsite staff professional development services to ensure optimal use of our products and to help schools meet their accountability requirements and school improvement plans.

Our research-based courseware library includes thousands of hours of mastery-based instruction covering discrete learning objectives in the subject areas of reading, writing, language arts, mathematics, science, and social studies. Our web-based assessment and alignment tools allow instruction to be personalized to each student’s unique needs ~~and~~with ~~the~~ curriculum that is aligned to local, state, and national standards. Using our web-based products, educators are able to identify each student’s instructional needs and prescribe an individual learning program of PLATO Learning courseware, educational web sites, the school’s textbooks and other core and supplemental instructional materials. A variety of reports are available to help educators identify gaps in student understanding, monitor student progress and ensure that standard learning objectives are being addressed.

Beginning in late fiscal year 2005, we implemented a strategy to deliver our products and solutions on a subscription basis using a new internet-based learning management platform we market as the PLATO Learning ~~EnvironmentTM~~Environment, or PLE TM. As of ~~July~~January 31, ~~2009~~2010, approximately 1,~~350~~400 school districts, community colleges and other educational institutions across 50 states subscribed to our instructional solutions delivered on ~~PLETM~~PLE, and over 1.48 million students, teachers and administrators at these institutions were registered to use PLE TM .

We operate our principal business in one industry segment, which is the development and marketing of online curriculum solutions and related services.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate our critical accounting policies and estimates, and have identified the policies relating to the following areas as those that are significant to our financial statement presentation, asand ~~they~~require ~~involve~~difficult, subjective, or complex judgments:

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Revenue recognition

Capitalized software development costs

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Valuation of deferred income taxes

· ~~Valuation~~Impairment analysis of identified intangible assets

AtIn ~~the~~October ~~end of fiscal year 2008~~2009, wethe ~~completed~~Financial ~~our~~Accounting ~~transition~~Standards toBoard a(FASB) ~~software-as-a-service~~issued ~~business~~Accounting ~~model~~Standards inUpdate ~~which~~(ASU) ~~substantially all of our products are now delivered on a hosted, subscription service basis~~No. ~~Based~~ ~~on the completion of this transition, and in accordance with EITF 00~~2009-0313, ~~Application of SOP 97~~“Multiple-2,Deliverable ~~“Software~~ Revenue ~~Recognition~~Arrangements.”, toThe ~~Arrangements~~standard ~~That~~permits ~~Include~~ the ~~Right~~use toof ~~Use~~estimated ~~Software~~selling ~~Stored~~price onto ~~Another~~determine ~~Entity’s Hardware, we have applied SOP 98-1, Accounting for~~ the ~~Costs~~value of ~~Computer~~separate ~~Software~~units ~~Developed or Obtained for Internal Use effective for the first quarter~~ of ~~fiscal~~accounting ~~year 2009. Under EITF 00-03, hosting arrangements~~ in ~~which~~multiple ~~customers~~element ~~do not have a contractual right to take possession of the software are service~~ arrangements, ~~and~~if ~~such software, subject to certain exceptions, is considered internal~~vendor-~~use~~specific ~~software~~objective ~~subject~~evidence to(VSOE) ~~SOP~~or 98third-~~1. As~~party aevidence ~~result~~ of ~~our~~selling ~~application~~price ofdoes ~~SOP~~not ~~98-1~~exist. inThe ~~fiscal~~use ~~year 2009, we are capitalizing software development costs upon completion~~ of the ~~preliminary~~residual ~~project~~method ~~stage rather than when technological feasibility~~ is ~~achieved,~~no ~~which~~longer ~~we did for prior years pursuant to SFAS No~~allowed. ~~86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”~~ ~~(“SFAS 86”). Application~~We ofadopted ~~SOP~~ASU 982009-113 ~~also~~in ~~allows~~the usfirst toquarter ~~capitalize only direct costs~~ of ~~software development, rather than both direct costs and an allocation of indirect costs, which was allowed under SFAS 86~~2010.

~~There~~In ~~have~~October ~~been~~2009, nothe ~~other~~FASB’s ~~significant~~EITF ~~new~~issued ~~accounting~~authoritative ~~principles~~guidance ~~applied~~that ~~during~~updated ~~the~~software ~~first~~revenue ~~nine~~arrangements ~~months~~that ofalso ~~2009~~include tangible products. ~~For~~The aamendments ~~more~~exclude ~~complete~~tangible ~~discussion~~products ofand ~~our~~software ~~accounting~~essential ~~policies~~to ~~refer~~the totangible ~~Note~~product’s 2functionality tofrom ~~Consolidated~~the ~~Financial~~software ~~Statements~~revenue inguidance. The ~~our~~guidance ~~Annual~~required ~~Report~~we onadopt ~~Form~~ASU 102009-K14 ~~for~~simultaneously ~~the~~to ~~year~~our ~~ended~~adoption ~~October~~of ~~31,~~ASU ~~2008~~2009-13. The provisions did not have a material effect on our consolidated financial statements.

General Factors Affecting our Financial Results

There are a number of general factors that affect our results from period to period. These factors are discussed below.

Revenue. In 2008, we completed a transition of our business model from one that sells one-time perpetual licenses to software, for which revenue is generally recognized up-front upon delivery, to one that sells subscription-based products, for which revenue is recognized over the subscription period. ~~The~~ ~~transition~~In ~~began~~2009, ina ~~2006~~meaningful, ~~when~~but wedeclining ~~introduced~~portion ~~many~~ of our ~~new~~revenues ~~subscription-based~~continued ~~products~~to ~~and~~be ~~affects~~derived ~~the~~from ~~comparability~~sales of ~~our~~perpetual licenses and related maintenance. These revenues ~~over~~are ~~this~~reported ~~period~~as license fees and software maintenance (included in services revenue) in our consolidated statement of operations. As these revenues decline and subscription revenues grow as a percentage of total revenues, we expect our period to period revenues to become more comparable and predictable.

Cost of ~~Revenue~~Revenues and Gross Profit. AOur cost of revenues and gross profit during a period is dependent on a number of factors. License fee and software maintenance revenues historically have had high gross profit due to the low direct cost of delivering these products and services. As a result, the mix of these revenues to total revenues in a given period significantly influences reported total gross profit. In addition, a large portion of our costs of revenue are fixed in nature. These costs include amortization of capitalized software development and purchased technology, depreciation and other infrastructure costs to support our hosted subscription services, customer support operations, and full-time professional services personnel who deliver our training services. Accordingly, increases in revenues allow us to leverage these costs resulting in higher gross profit, while decreases in revenues have the opposite effect.

Operating Expenses. General and administrative expenses are substantially fixed in nature. However, certain components such as professional fees and similar expenses can vary based on a number of factors including business results, individual events, or initiatives we may be pursuing at various times throughout the year.15

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Operating Expenses. Incentive compensation is a significant variable component of our sales and marketing expenses, approximating 8% to 109% of total revenues in any given period. Sales and marketing expenses also include costs such as travel, tradeshows, and conferences that can vary with revenue activity or individual events that occur during the period.

~~Software~~General ~~maintenance~~ and ~~development~~administrative ~~expense~~expenses ~~in our consolidated statement of operations does not reflect our total level of spending on our products and services. Costs to maintain existing products and preliminary project development costs~~ are ~~charged~~substantially tofixed ~~software~~in ~~maintenance and development expense as incurred~~nature. ~~Costs incurred to develop or enhance new products after preliminary project development costs are incurred~~However, ~~which~~certain ~~represent~~components ~~the~~may ~~majority~~vary ofbased ~~our~~on ~~total~~business ~~software development spending~~results, ~~are~~individual ~~capitalized and amortized to cost of revenues. Accordingly~~events, ~~software~~or ~~maintenance~~initiatives ~~and~~we ~~development~~may ~~expense~~be inpursuing ~~our~~at ~~consolidated~~various ~~statement~~times ofthroughout ~~operations can fluctuate from period to period, in terms of both total dollars and as a percentage of revenue, based on~~ the ~~nature and timing of activities occurring during the period~~year.

Software maintenance and development expense in our consolidated statements of operations does not reflect our total level of software product spending. Costs to enhance or maintain existing products, or to develop products prior to the application development stage, are charged to software maintenance and development expense as incurred. Costs incurred to develop new products after the preliminary project stage is completed, which represent the majority of our total development spending, are capitalized and amortized to cost of revenues. Accordingly, software maintenance and development expense in our consolidated statement of operations can fluctuate from period to period, in terms of both total dollars and as a percentage of revenue, based on the nature and timing of activities occurring during the period.

Amortization of intangibles represents the amortization of certain identified intangible assets acquired through various acquisitions. While these expenses are generally predictable from period to period because they are fixed over the course of their individual useful lives, they can be affected by events and other factors that result in impairment of these assets and a corresponding reduction in future amortization.

Cash Balances and Cash Flow. Our business is seasonal, with the largest portion of orders coming in our third and fourth fiscal quarters. These periods are when our customers’ budget spending typically peaks as they end their current budget period, begin a new budget period, and begin to plan their needs for the upcoming school year. As a result, cash balances generally decline during the first half of the fiscal year, and increase from those levels as order activity increases in the third and fourth quarter.

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Results of Operations

Revenues

The following table summarizes certain key information to aid in the understanding of our discussion and analysis of revenues and should be read in conjunction with Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, ~~2008~~2009, which discusses our accounting policies regarding revenue recognition:

Order Information (in thousands)

	Three Months Ended
	January 31,
	2010		2009		Percent Increase (Decrease)
Subscriptions & related services:
Subscriptions	$	8,545	$	6,674		28.0	%
Professional services		1,389		1,196		16.1	%
Other		652		758		(14.0	%)
Subtotal		10,586		8,628		22.7	%

Legacy products and services:
License fees		239		1,031		(76.8	%)
Software maintenance		673		1,180		(43.0	%)
Subtotal		912		2,211		(58.8	%)

Total orders	$	11,498	$	10,839		6.1	%

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Revenue by Category (in thousands):

	Three Months Ended							~~Nine Months Ended~~
	July 31,							July 31,
	January 31,
	2009		2008		% Change			2009		2008		% Change
	2010		2009		Percent Increase (Decrease)
Subscriptions	$	10,774	$	9,247		16.5	%	$	30,368	$	25,691		18.2	%
Subscriptions & related services:
License fees		1,328		3,353		(60.4	%)		3,338		7,113		(53.1	%)
Subscriptions	$	10,968	$	9,868		11.1	%
Services:
Professional services		1,972		1,951		1.1	%
Professional services		1,787		2,259		(20.9	%)		5,536		6,579		(15.9	%)
Other		652		747		(12.7	%)
Software maintenance		2,142		3,032		(29.4	%)		6,838		9,393		(27.2	%)
Subtotal		13,592		12,566		8.2	%
Other		708		747		(5.2	%)		2,203		2,242		(1.7	%)
Legacy products and services:
Total Services		4,637		6,038		(23.2	%)		14,577		18,214		(20.0	%)
License fees		549		1,004		(45.3	%)
Total revenues	$	16,739	$	18,638		(10.2	%)	$	48,283	$	51,018		(5.4	%)
Software maintenance		1,446		2,467		(41.4	%)
Subtotal		1,995		3,471		(42.5	%)
Total revenues	$	15,587	$	16,037		(2.8	%)

Total revenues for the ~~third~~first quarter of ~~2009~~2010 declined ~~10.~~2.8% to $1615.76 million, from $1816.60 million for the same period in ~~2008~~2009.

Subscription revenues grew $1.61 million, or 1611.51%, from $9.29 million in the ~~third~~first quarter of ~~2008~~2009 to $1011.80 million for the same period this year. The increase in subscription revenue reflects continued growth in our base of subscription customers. As of ~~July~~January 31, ~~2009~~2010, approximately 1,~~350~~400 educational institutions were subscribed to our PLE platform, up from approximately 1,~~100~~190 institutions as of ~~July~~January 31, ~~2008~~2009.

Revenues from license fees on the sale of legacy perpetual license products and related software maintenance revenue totaled $32.50 million, a decline of 4542.75% from the same period last year. The decline in license fees and software maintenance revenue reflects our ~~declining~~ de-emphasis on sales of non-strategic products licensed on a perpetual basis.

Professional services revenues ~~declined~~totaled $~~500,000~~2.0 ~~due~~million tofor ~~a reduction in~~ the ~~number of training days delivered resulting from lower training order levels in the fourth~~ quarter, ofconsistent ~~fiscal~~with ~~2008 when a large portion of training orders for delivery in~~ the ~~upcoming~~same ~~school~~period ~~year~~last ~~are placed by customers~~year..

~~Total~~Cost ~~revenues for the first nine months~~ of 2009 declined 5.4% to $48.3 million from $51.0 million for the same period in 2008. Subscription revenues grew $4.7 million or 18.2%, but less than the $6.3 million decline in non-strategic license fees and software maintenance revenue on perpetual products. Professional services revenue declined $1.0 million to $5.5 million. The changes in revenue for the first nine months of the year are due largely to the same reasons as those affecting the third quarter as discussed above.Revenue

Total cost of revenue for the first quarter decreased $0.2 million to $6.5 million, or 4.0%, from the same period in 2009. Subscription cost of revenue increased $0.2 million, or 4.5%, on increased software development amortization associated with the release of PLE version 1.3 earlier in fiscal 2009, and the release of PLE version 2.0 in the first quarter of this year.

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~~Cost~~License fee cost of ~~Revenue~~revenue in the first quarter declined $0.2 million compared to the first quarter of 2009 on lower license fee revenue as discussed above. Services cost of revenue decreased 10.0% to $2.2 million from $2.4 million for the same period last year due to lower support costs resulting from our declining base of customers using our legacy perpetual products.

Cost of Revenue by Category (in thousands):

	Three Months Ended							Nine Months Ended
	July 31,							July 31,
	2009		2008		% Change			2009		2008		% Change
Subscriptions	$	4,095	$	4,593		(10.8	%)	$	12,165	$	14,058		(13.5	%)
License fees		611		1,540		(60.3	%)		1,467		4,060		(63.9	%)
Services		2,418		3,172		(23.8	%)		7,182		9,082		(20.9	%)
Total cost of revenue	$	7,124	$	9,305		(23.4	%)	$	20,814	$	27,200		(23.5	%)

Total cost of revenue for the third quarter decreased $2.2 million to $7.1 million, or 23.4%, from the same period in 2008. Subscription cost of revenue declined $500,000 or 10.8%, on declines in software development amortization and royalty costs. The decline in amortization is due to asset impairments and reduced levels of capitalized software development spending in fiscal 2008. The decline in royalty costs relates to a royalty arrangement with a third party provider of curriculum content that was renegotiated in late fiscal 2008.

License fee cost of revenue in the third quarter declined $900,000 compared to the third quarter of 2008 due to lower product amortization, and to cost reduction initiatives undertaken in fiscal 2008. The services cost of revenue decreased 23.8% to $2.4 million from $3.2 million for the same period last year due to the lower professional services costs on lower revenue levels, and lower support costs due to our declining base of customers using our legacy perpetual products.

The total cost of revenue for the nine months ended July 31, 2009 decreased 23.5% to $20.8 million primarily due to the same reasons as those affecting the third quarter.

Operating Expenses

The following table summarizes the amounts and percentage change in amounts from the corresponding period during the previous year for certain operating expense line items.

	Three Months Ended				Percent			~~Nine Months Ended~~				~~Percent~~
	July 31,				Increase			July 31,				Increase
	January 31,				Increase
	2009		2008		(Decrease)			2009		2008		(Decrease)
	2010		2009		(Decrease)
Sales and marketing	$	5,~~969~~382	$	65,~~657~~887		(108.36	%)	$	~~17,460~~	$	~~21,182~~		~~(17.6~~	%)
General and administrative		21,~~209~~948		2,~~258~~424		(219.26	%)		~~6,504~~		~~7,909~~		~~(17.8~~	%)
Software maintenance and development		~~976~~495		~~1,128~~567		(1312.57	%)		~~2,251~~		~~3,306~~		~~(31.9~~	%)
Amortization of intangibles		~~214~~213		~~388~~213		~~(44~~0.80	%)		~~640~~		~~1,163~~		~~(45.0~~	%)
Restructuring		-		800		(100.0	%)		-		2,435		(100.0	%)
Total operating expenses	$	8,038	$	9,091		(11.6	%)
Total operating expenses	$	9,368	$	11,231		(16.6	%)	$	26,855	$	35,995		(25.4	%)

Total operating expenses were $98.40 million for the ~~third~~first quarter of ~~2009~~2010, a decrease of 1611.6%, or $1.~~9 million, from the same period in 2008. Total operating expenses for the first nine months of fiscal 2009 were $26.9 million, down $9.~~1 million, ~~or 25.4%,~~ from the same period ~~last year. The fiscal 2008 periods include restructuring charges of $0.8 million~~ in ~~the third quarter and $2.4 million in the year-to date period. The absence of these charges in fiscal~~ 2009 ~~accounted for declines in total operating expenses of 6~~.~~4% and 5.4%, respectively.~~ As discussed further below, the ~~balance~~decline ~~of the declines in both periods~~ generally reflects ~~the~~continued ~~actions~~efficiencies ~~taken~~of ~~last~~the ~~year to streamline our cost structure and complete our transition to a~~ software-as-a-service business model.

Sales and marketing expenses declined $0.5 million for the first quarter of 2010, on reduced travel costs and professional fees from the same period in 2009. None of these declines were due to a reduction in our field direct sales force, which has remained consistent from the same period last year.

General and administrative costs declined 19.6% to $1.9 million for the first quarter of 2010 from the same period in 2009 due primarily to reductions in headcount and stock compensation expense.

Software maintenance and development expenses in the first quarter of 2010 remained consistent with the same period in 2009, reflecting the increasing stability of our PLE platform, the quality of new product releases and reduced maintenance on legacy products.

Other (Expense) Income, Net

Other (expense) income consists primarily of interest income on our cash and cash equivalent balances, net of the costs of maintaining availability on our line of credit. The deterioration in other (expense) income from the first quarter 2009 to the same period of 2010 is primarily due to lower interest income from declining interest rates offset by higher average cash balances.

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~~Sales~~Revenue and marketing expenses declined $700,000 for the third quarter of 2009, and $3.7 million for the first nine months, on reduced indirect sales, travel and marketing costs from the same periods in 2008. None of these declines were due to a reduction in our field direct sales force, which has remained at about the same level throughout fiscal 2008 and 2009.Backlog

~~General~~We ~~and~~define ~~administrative~~revenue ~~costs~~backlog ~~declined~~as ~~2.2%~~the tototal ~~$2.2~~of ~~million~~deferred ~~for~~revenue ~~the~~reported ~~third~~on ~~quarter~~our ofbalance ~~2009~~sheet ~~from~~plus ~~the~~unbilled ~~same~~amounts ~~period in 2008~~ due ~~primarily~~under tonon-cancelable ~~reductions~~subscription ~~in headcount~~agreements, ~~compliance~~which ~~and~~are ~~other~~not ~~professional~~included ~~services costs. These factors combined with improved collections experience~~ in the ~~second~~balance ~~quarter~~sheet. Following ofis ~~2009 that resulted in~~ a ~~reduction in~~reconciliation ~~bad~~of ~~debt~~deferred ~~expense~~revenue ~~were~~to ~~the~~revenue ~~primary~~backlog, ~~contributors~~and to the ~~17.8%~~components ~~decline~~of inrevenue ~~general~~backlog, ~~and~~as ~~administrative~~of ~~expenses~~January ~~for~~31, ~~the~~2010 ~~first~~and ~~nine~~2009 ~~months~~(in ~~of the year.~~thousands):

Software maintenance and development expenses in the third quarter and first nine months of 2009 declined $150,000 and $1.1 million, respectively, compared to the same periods in 2008, reflecting increasing stability of our PLE platform, the quality of new product releases and reduced maintenance on legacy products. Third quarter 2009 software maintenance and development expenses also include a charge of approximately $300,000 related to the departure of our former Chief Technology Officer in the quarter.

	As of January 31,
	2010		2009		Percent Increase (Decrease)

Reconciliation:
Total deferred revenue	$	49,483	$	39,215		26.2	%
Add: Unbilled amounts due under
non-cancelable subscription agreements		14,592		9,329		56.4	%
Revenue Backlog	$	64,075	$	48,544		32.0	%

Components of Revenue Backlog:
Subscriptions and related services:
Subscriptions	$	53,688	$	38,360		40.0	%
Professional services		6,829		4,366		56.4	%
Subtotal		60,517		42,726		41.6	%
Legacy products and services:
License fees		85		488		(82.6	%)
Software maintenance		3,473		5,330		(34.8	%)
Subtotal		3,558		5,818		(38.8	%)

Total Revenue Backlog	$	64,075	$	48,544		32.0	%

~~Other~~At ~~(Expense)~~January ~~Income~~31, ~~Net~~2010, we expect approximately $29.0 million of our deferred revenue to be recognized subsequent to fiscal year 2010.

Other (expense) income consists primarily of interest income on our cash and cash equivalent balances, net of the costs of maintaining availability on our line of credit. The deterioration in other (expense) income from the fiscal 2008 to fiscal 2009 third quarter and year-to-date periods is primarily due to lower interest income from declining interest rates and generally lower cash balances.

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Backlog

We consider backlog to be the total of deferred revenue reported on our balance sheet plus unbilled amounts due under non-cancelable subscription agreements (“deferred revenue backlog”). On this basis, deferred revenue backlog was $62.7 million and $50.6 million at July 31, 2009 and 2008, respectively, as follows (in thousands):

	As of July 31,
	2009		2008		% Change
Total Deferred Revenue	$	48,570	$	43,324		12.1	%
Add: Unbilled amounts due under
non-cancelable subscription agreements		14,170		7,324		93.5	%
Deferred Revenue Backlog	$	62,740	$	50,648		23.9	%
Components of Deferred Revenue Backlog:
Subscriptions	$	51,771	$	38,413		34.8	%
License fees		99		349		(71.6	%)
Services		10,870		11,886		(8.5	%)
Deferred Revenue Backlog	$	62,740	$	50,648		23.9	%

At July 31, 2009, we expect approximately $49.3 million of our deferred revenue backlog to be recognized as revenue subsequent to fiscal year 2009.

Liquidity and Capital Resources

Cash and Cash Equivalents

At ~~July~~January 31, ~~2009~~2010, cash and cash equivalents were $1427.27 million, a decrease of $50.85 million from October 31, ~~2008~~2009. This decrease primarily represents ~~net~~ cash used infor ~~operations in 2009 of $2.0 million, and~~ investments in capitalized software development ofand ~~$3.4~~capital ~~million. Included~~equipment inof ~~the~~ $21.08 million, inoffset ~~net~~by cash ~~used in~~provided ~~operations~~by ~~were~~operating ~~approximately~~activities ~~$2.4 million in severance paid to terminated employees and a one-time payment~~ of $1.34 million ~~pursuant to a renegotiated royalty arrangement~~.

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Working Capital and Liquidity

At ~~July~~January 31, ~~2009~~2010, our principal sources of liquidity included cash and cash equivalents totaling $1427.27 million, net billed accounts receivable of $~~17.~~8.0 million, and unbilled commitments under non-cancelable subscription contracts totaling $14.26 million, of which $27.84 million is expected to be billed in ~~2009~~2010. We also have a three-year senior secured credit facility that provides us with a revolving line of credit up to the lesser of $20 million or the amount of our trailing twelve months subscription and software maintenance revenues. Under this agreement, which expires in June 2010, we have the option of selecting an interest rate for any drawdown under the facility equal to the applicable Prime or LIBOR Rate plus a sliding margin that is based on the amount of borrowings outstanding. Borrowings under the agreement are secured by all of our assets. Financial covenants apply only when the unused portion of the line of credit, plus cash and cash equivalents on hand, is less than $12.5 million, and are limited to minimum quarterly thresholds of earnings before interest, taxes, depreciation and amortization (EBITDA). At ~~July~~January 31, ~~2009~~2010 and October 31, ~~2008~~2009, availability under the line was $20 million and there were no borrowings outstanding.

Cash ~~used~~provided by operations in the first ~~nine~~three months ~~decreased~~of 2010 increased to $21.04 million in ~~2009~~2010, from cash used in operations of $36.51 million in the first ~~nine~~three months of ~~2008~~2009, due to increased orders over the prior year combined with reductions in overall spending. ~~partially~~Included ~~offset~~in the $6.1 million of cash used by operations in the first three months of 2009, was approximately $3.70 million inof non-recurring cash payments, ~~discussed~~including ~~under~~$1.7 ~~the~~million ~~caption~~in ~~“Cash~~severance paid to terminated employees and ~~Cash~~$1.3 ~~Equivalents”~~million ~~above~~in non-recurring royalty payments. Cash used in investing activities ~~declined~~increased slightly to $31.98 million for the first ~~nine~~three months of ~~2009~~2010, from $9.1.7 million for the same period last year ~~reflecting~~due ato ~~reduction~~increased ininvestments ~~our~~associated ~~software~~with ~~investment~~the ~~requirements~~release of PLE version 2.0 during the first quarter of 2010.

Our future liquidity needs will depend on, among other factors, the timing and extent of software development expenditures, order volume, the timing and collection of receivables, and expenditures in connection with possible acquisitions or stock repurchases. From time to time, we may evaluate potential acquisitions of products or businesses that complement our core business. We may consider and acquire other complementary businesses, products, or technologies in the future. We believe our existing cash, cash equivalents, anticipated cash provided by operating activities, and availability under our line of credit through June 2010, will be sufficient to meet our working capital and capital expenditure needs over the next 12 months.

Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments consist primarily of future minimum payments due under operating leases and royalty and software license agreements. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended October 31, ~~2008~~2009 for a table showing our contractual obligations. ~~There were no significant changes to our contractual obligations during the nine months ended July 31, 2009.~~

AtOn ~~July~~February 3116, ~~2009~~2010, we ~~had~~entered nointo ~~significant~~an ~~commitments~~eleven year agreement to lease approximately 27,000 square feet of office space for ~~capital~~our ~~expenditures~~corporate headquarters in Bloomington, Minnesota. The new lease expires on July 1, 2021. In conjunction with signing our new lease, we also entered into a $1.3 million commercial letter of credit with Wells Fargo Foothill, Inc.

~~Recent Accounting Pronouncements~~21

See Note 2 of the Condensed Consolidated Financial Statements for a summary of the new accounting pronouncements.

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There were no other significant changes to our contractual obligations during the three months ended January 31, 2010.

At January 31, 2010, we had no significant commitments for capital expenditures.

Recent Accounting Pronouncements

See Note 2 of the Condensed Consolidated Financial Statements for a summary of the recent accounting pronouncements.

Disclosures about Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of ~~July~~January 31, ~~2009~~2010.

Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements. These forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (“the Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should” and similar expressions are intended to identify “forward-looking statements” within the meaning of the Act. Forward-looking statements include, among others, statements about our future performance, the sufficiency of our sources of capital for future needs, and the expected impact of recently issued accounting pronouncements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part II Item 1A of this Form 10-Q and Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2008~~2009. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release any revision to these forward-looking statements based on circumstances or events, which occur in the future. Readers should carefully review the risk factors described in this report on Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission.

Interest Rate Risk

Our borrowing capacity primarily consists of a revolving line of credit with interest rates that fluctuate based upon the Prime Rate and LIBOR market indexes. At ~~July~~January 31, ~~2009~~2010, we did not have any outstanding borrowings under this revolving credit facility. As a result, risk relating to interest fluctuation is considered minimal.

Foreign Currency Exchange Rate Risk

Our foreign operations are not a significant component of our business, and as a result, risks relating to foreign currency fluctuation are considered minimal.

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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 Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the ~~third~~first quarter of fiscal ~~2009~~2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.

ITEM 1A. RISK FACTORS

Our business is subject to a number of risks and uncertainties which we discussed in detail in Part I, Item 1A of our ~~2008~~2009 Annual Report on Form 10-K.

ITEM 6. EXHIBITS

Exhibit Number and Description
31.01	Certification of Chief Executive Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1	Certification of Chief Executive Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of Chief Financial Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer under Rule 13a-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02	Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer under 18 U.S.C. 1350 pursuant to Section 906 of the Sarbanes-Oxley Act of 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.

PLATO LEARNING, INC.	By /s/ Vincent P. Riera
September 9, 2009	Vincent P. Riera
March 12, 2010	Vincent P. Riera
	President and Chief Executive Officer
	(principal executive officer)
	/s/ Robert J. Rueckl
	Robert J. Rueckl
	Vice President and Chief Financial Officer
	(principal financial officer)

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