UNITED STATES ~~SECURITIES~~ ~~AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2011~~2012

o¨ 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: 001-34555

Archipelago Learning, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		27-0767387
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3232 McKinney Avenue, Suite 400, Dallas, Texas		75204
(Address of Principal Executive Offices)		(Zip Code)

(800) 419-3191 ~~(Registrant’s~~ ~~telephone number, including area code)~~

~~Indicate by check mark whether the registrant~~ (~~1) has~~Registrant’s ~~filed~~telephone ~~all~~number, ~~reports~~including ~~required~~area ~~to be filed by Section 13 or 15 (d~~code) 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 þ No o

Indicate by check mark whether the registrant (1) has ~~submitted~~filed ~~electronically~~all ~~and~~reports ~~posted on its corporate Web site, if any, every Interactive Data File~~ required to be ~~submitted~~filed ~~and~~by ~~posted pursuant~~Section 13 toor ~~Rule 405~~15 (d) of ~~Regulation S-T~~the ~~(§232.405~~Securities ofExchange ~~this~~Act ~~chapter)~~of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit~~file such reports), and ~~post~~(2) has been subject to such ~~files).~~filing ~~Yes þ~~requirements for the past 90 days. Yes x No ¨ o

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 x 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 o¨ Accelerated filer þx Non-accelerated filer o¨ ~~Smaller reporting company o~~ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Act). Yes o ¨ No x þ

As of ~~November~~May 27, ~~2011~~2012, the number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 26,~~335~~345,~~720~~675.

TABLE OF CONTENTS

	~~Page~~		Page
Special Note Regarding Forward-Looking Statements		3		3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		4
Item 1.	Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures		32
Item 4.	Controls and Procedures			29
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		33
Item 1.	Legal Proceedings			30
Item 1A. Risk Factors		33
Item 1A.	Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities		33
Item 3.	Defaults Upon Senior Securities			30
Item 5. Other Information		33
Item 4.	Mine Safety Disclosures			31
Item 6. Exhibits		33
Item 5.	Other Information			31
Signatures		34
Item 6.	Exhibits			31
Certifications
Signatures				32
EX-31.1
Certifications
EX-31.2
EX-31.1
EX-32.1
EX-31.2
EX-101 INSTANCE DOCUMENT
EX-32.1
EX-101 SCHEMA DOCUMENT
EX-101 INSTANCE DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Special Note Regarding Forward-Looking Statements

Certain disclosures and analyses in this Form 10-Q, including information incorporated herein by reference, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are considered forward-looking statements and reflect current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements generally can be identified by use of phrases or terminology such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely,” “future” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

These forward-looking statements are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. These statements are not guarantees of performance or results. They are subject to risks and uncertainties which may be beyond our control, including those discussed below, in the “Risk Factors” section in Item 1A of our Form 10-K, and elsewhere in this Form 10-Q and the documents incorporated by reference herein. Although we believe that these forward-looking statements are based on reasonable assumptions, many factors could cause actual results to vary materially from those anticipated in such forward-looking statements.

Any forward-looking statement contained herein speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

“Archipelago Learning,” “Study Island,” “Northstar Learning,” “EducationCity,” “~~Reading~~ESL ~~Eggs~~ReadingSmart”, ~~“ESL~~ ~~ReadingSmart~~“ReadingMate” and their respective logos are our trademarks. Solely for convenience, we refer to our trademarks in this Form 10-Q without the TM and ® symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this document are the property of their respective owners.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ARCHIPELAGO LEARNING, INC. ~~CONDENSED~~ ~~CONSOLIDATED BALANCE SHEETS — (UNAUDITED) (in thousands, except share data)~~

	As of		As of
	September 30,		December 31,
	2011		2010
Assets
Current assets:
Cash and cash equivalents	$	45,513	$	32,398
Accounts receivable, net		14,655		10,807
Deferred tax assets		3,775		3,463
Prepaid expenses and other current assets		1,393		3,560
Total		65,336		50,228
Property and equipment, net		4,569		3,760
Goodwill		167,992		165,694
Intangible assets, net		35,364		37,290
Investment		6,446		6,446
Notes receivable		2,102		1,934
Other long-term assets		1,272		1,610
Total assets	$	283,081	$	266,962
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable — trade	$	467	$	928
Accrued employee-related expenses		2,393		2,518
Other accrued expenses		1,970		1,247
Taxes payable		1,217		979
Deferred tax liabilities		126		384
Deferred revenue		51,940		44,733
Current portion of note payable to related party		2,462		2,352
Current portion of long-term debt		850		850
Other current liabilities		584		463
Total		62,009		54,454
Long-term deferred tax liabilities		15,908		15,478
Long-term deferred revenue		15,212		14,312
Long-term debt, net of current		74,276		74,913
Other long-term liabilities		930		488
Total liabilities		168,335		159,645
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued and outstanding at September 30, 2011 and December 31, 2010)		—		—
Common stock ($0.001 par value, 200,000,000 shares authorized, 26,335,720 and 26,354,198 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively)		26		26
Additional paid-in capital		97,815		95,395
Accumulated other comprehensive income		1,764		1,531
Retained earnings		15,141		10,365
Total stockholders’ equity		114,746		107,317
Total liabilities and stockholders’ equity	$	283,081	$	266,962

CONDENSED CONSOLIDATED BALANCE SHEETS — (UNAUDITED)

(in thousands, except share data)


	As of March 31, 2012		As of December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	60,137	$	64,628
Accounts receivable, net		10,186		8,942
Deferred tax assets		2,688		2,418
Prepaid expenses and other current assets		1,806		2,049

Total		74,817		78,037
Property and equipment, net		4,901		4,773
Goodwill		168,174		167,761
Intangible assets, net		33,853		34,026
Other long-term assets		2,515		1,747

Total assets	$	284,260	$	286,344

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable — trade	$	1,517	$	1,730
Accrued employee-related expenses		1,704		3,025
Other accrued expenses		2,439		1,221
Taxes payable		929		1,723
Deferred tax liabilities		245		118
Deferred revenue		44,629		48,915
Current portion of long-term debt		850		850
Other current liabilities		348		450

Total		52,661		58,032
Long-term deferred tax liabilities		15,521		15,222
Long-term deferred revenue		16,307		15,376
Long-term debt, net of current		74,063		74,063
Other long-term liabilities		1,545		1,462

Total liabilities		160,097		164,155
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued and outstanding at March 31, 2012 and December 31, 2011)		—		—
Common stock ($0.001 par value, 200,000,000 shares authorized, 26,344,759 and 26,340,135 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively)		26		26
Additional paid-in capital		98,976		98,356
Accumulated other comprehensive income		2,337		1,497
Retained earnings		22,824		22,310

Total stockholders’ equity		124,163		122,189

Total liabilities and stockholders’ equity	$	284,260	$	286,344

See the accompanying notes to the unaudited condensed consolidated financial statements.

ARCHIPELAGO LEARNING, INC. ~~CONDENSED~~ ~~CONSOLIDATED STATEMENTS OF OPERATIONS — (UNAUDITED) (in thousands, except share and per share data)~~

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenue	$	18,223		$	15,449		$	53,812		$	41,595
Cost of revenue		1,742			1,534			4,811			3,476
Gross profit		16,481			13,915			49,001			38,119
Operating Expense:
Sales and marketing		5,670			5,711			17,095			13,679
Content development		1,671			1,195			5,082			3,462
General and administrative		5,775			5,529			16,936			14,909
Total		13,116			12,435			39,113			32,050
Income from continuing operations		3,365			1,480			9,888			6,069
Other income (expense):
Interest expense		(1,115	)		(1,260	)		(3,313	)		(2,909	)
Interest income		85			136			233			439
Foreign currency gain (loss)		78			(121	)		(60	)		(220	)
Derivative loss		—			(32	)		—			(78	)
Total		(952	)		(1,277	)		(3,140	)		(2,768	)
Income before tax		2,413			203			6,748			3,301
Provision for income tax		421			51			1,972			1,227
Net income	$	1,992		$	152		$	4,776		$	2,074
Earnings per share:
Basic	$	0.08		$	0.01		$	0.18		$	0.08
Diluted	$	0.08		$	0.01		$	0.18		$	0.08
Weighted-average shares outstanding:
Basic		25,409,169			25,133,092			25,399,097			24,395,043
Diluted		25,582,347			25,491,238			25,594,762			24,770,214

CONDENSED CONSOLIDATED STATEMENTS OF INCOME — (UNAUDITED)

(in thousands, except share and per share data)


	Three Months Ended March 31,
	2012			2011
Revenue	$	19,185		$	17,303
Cost of revenue		1,755			1,707

Gross profit		17,430			15,596
Operating Expense:
Sales and marketing		6,214			5,921
Content development		1,729			1,707
General and administrative		7,543			5,453

Total		15,486			13,081

Operating income		1,944			2,515
Other income (expense):
Interest expense		(1,070	)		(1,094	)
Interest income		30			70
Foreign currency loss		(128	)		(121	)

Total		(1,168	)		(1,145	)

Income before tax		776			1,370
Provision for income tax		262			381


Net income	$	514		$	989

Earnings per share:
Basic	$	0.02		$	0.04
Diluted	$	0.02		$	0.04

Weighted-average shares outstanding:
Basic		25,546,030			25,381,150
Diluted		25,646,960			25,629,288

See the accompanying notes to the unaudited condensed consolidated financial statements.

ARCHIPELAGO LEARNING, INC. ~~CONDENSED~~ ~~CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY — (UNAUDITED) (in thousands)~~

	Preferred				Common							Accumulated
	Stock				Stock					Additional		Other
			Par					Par		Paid-in		Comprehensive		Retained		Total
	Shares		Value		Shares			Value		Capital		Income		Earnings		Equity
Balance at December 31, 2010		—	$	—		26,354		$	26	$	95,395	$	1,531	$	10,365	$	107,317
Stock-based compensation expense		—		—		—			—		2,381		—		—		2,381
Grants of common and restricted stock		—		—		24			—		—		—		—		—
Forfeiture of restricted stock		—		—		(44	)		—		—		—		—		—
Purchase of shares from employee stock purchase plan		—		—		2			—		18		—		—		18
Additional contributed capital		—		—		—			—		21		—		—		21
Comprehensive income:
Net income		—		—		—			—		—		—		4,776		4,776
Currency translation adjustment		—		—		—			—		—		233		—		233
Total																	5,009
Balance at September 30, 2011		—	$	—		26,336		$	26	$	97,815	$	1,764	$	15,141	$	114,746

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — (UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2012		2011
Net income	$	514	$	989
Foreign currency translation adjustment		840		842

Comprehensive income	$	1,354	$	1,831

See the accompanying notes to the unaudited condensed consolidated financial statements.

ARCHIPELAGO LEARNING, INC. ~~CONDENSED~~ ~~CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED) (in thousands)~~

	Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities
Net income	$	4,776		$	2,074
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt financing costs		338			249
Depreciation and amortization		4,797			2,964
Stock-based compensation		2,381			1,366
Unrealized gain on interest rate swap		—			(861	)
Deferred income taxes		(342	)		765
Loss on disposal of assets		13			166
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(3,952	)		(1,870	)
Prepaid expenses and other		1,517			(1,095	)
Accounts payable and accrued expenses		239			(61	)
Deferred revenue		7,896			11,496
Other long-term liabilities		(10	)		180
Foreign currency transaction loss		11			—
Net cash provided by operating activities		17,664			15,373
Cash flows from investing activities
Acquisitions, net of cash acquired		(1,978	)		(61,472	)
Proceeds from escrow for sale of TeacherWeb		653			650
Purchase of intangible assets		(500	)		—
Purchase of property and equipment		(2,146	)		(959	)
Net cash used in investing activities		(3,971	)		(61,781	)
Cash flows from financing activities
Proceeds from supplemental term note		—			15,000
Proceeds from revolver		—			10,000
Payment of debt financing costs		—			(804	)
Contribution from member in Reorganization		21			—
Purchase of common stock from ESPP		18			3
Payment of offering costs		—			(1,460	)
Payment of revolver		—			(10,000	)
Payments on term note		(637	)		(600	)
Net cash (used in) provided by financing activities		(598	)		12,139
Effect of foreign exchange on cash and cash equivalents		20			326
Net change in cash and cash equivalents		13,115			(33,943	)
Beginning of period		32,398			58,248
End of period	$	45,513		$	24,305
Supplemental information
Cash paid for interest	$	2,886		$	2,611
Cash paid for income taxes	$	2,057		$	1,270
Non-cash investing and financing activities
Accrued purchases of property and equipment	$	7		$	574
Issuance of common stock for purchase of EducationCity	$	—		$	17,393
Issuance of note payable for purchase of EducationCity	$	—		$	4,687

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND COMPREHENSIVE

INCOME— (UNAUDITED)

(in thousands)


	Preferred Stock				Common Stock					Additional		Accumulated Other
	Shares		Par Value		Shares			Par Value		Paid-in Capital		Comprehensive Income		Retained Earnings		Total Equity
Balance at December 31, 2011		—	$	—		26,340		$	26	$	98,356	$	1,497	$	22,310	$	122,189
Stock-based compensation expense		—		—		—			—		620		—		—		620
Grants of common stock and restricted stock		—		—		10			—		—		—		—		—
Forfeiture of restricted stock		—		—		(5	)		—		—		—		—		—
Net income		—		—		—			—		—		—		514		514
Other comprehensive income		—		—		—			—		—		840		—		840

Balance at March 31, 2012		—	$	—		26,345		$	26	$	98,976	$	2,337	$	22,824	$	124,163

See the accompanying notes to the unaudited condensed consolidated financial statements.

ARCHIPELAGO LEARNING, INC. ~~NOTES~~ ~~TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

1.CONDENSED ~~ORGANIZATION~~ CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	514		$	989
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of debt financing costs		121			109
Depreciation and amortization		1,609			1,482
Stock-based compensation		620			1,286
Deferred income taxes		32			121
Deferred rent		90			4
Changes in operating assets and liabilities:
Accounts receivable		(1,170	)		825
Prepaid expenses and other		(635	)		399
Accounts payable and accrued expenses		(696	)		(1,281	)
Deferred revenue		(3,705	)		(1,863	)
Other long-term liabilities		(48	)		14

Net cash (used in) provided by operating activities		(3,268	)		2,085

Cash flows from investing activities:
Purchase of property and equipment		(969	)		(1,020	)
Purchase of intangible asset		(500	)		—

Net cash used in investing activities		(1,469	)		(1,020	)

Cash flows from financing activities:
Contribution from member in Reorganization		—			20
Payments on term note		—			(212	)

Net cash provided by (used in) financing activities		—			(192	)

Effect of foreign exchange on cash and cash equivalents		246			330

Net change in cash and cash equivalents		(4,491	)		1,203
Beginning of period		64,628			32,398

End of period	$	60,137		$	33,601


Supplemental information:
Cash paid for interest	$	968		$	968

Cash paid for income taxes	$	1,024		$	13

Non-cash investing and financing activities:
Accrued purchases of property and equipment	$	65		$	203

See the accompanying notes to the unaudited condensed consolidated financial statements.

ARCHIPELAGO LEARNING, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The Company

Archipelago Learning, Inc. (the “Company”) is a leading subscription-based, software-as-a-service (“SaaS”) provider of education products. ~~The~~We ~~Company~~provide ~~provides~~ standards-based instruction, practice, assessments and productivity tools that ~~improve~~support ~~the~~educators’ ~~performance~~efforts ofto ~~educators and~~reach students atin ainnovative ~~low~~ways ~~cost~~and enhance the performance of students via proprietary web-based platforms.

Study Island, the Company’s core product line, helps students in Kindergarten through 12th grade (“K-12”), master grade level academic standards in a fun and engaging manner. In June 2010, the Company acquired Educationcity Limited (“EducationCity”), an online ~~preschool through sixth grade (“~~Pre-K-6”) educational content and assessment program for schools in the United Kingdom (“U.K.”) and United States (“U.S.”). In August 2010, ~~the~~we ~~Company~~ began selling Reading Eggs, an online product focused on teaching young children to read. Reading Eggs is sold under a distribution agreement with Blake Publishing, which requires ~~the~~us ~~Company~~ to pay a 35% royalty to Blake Publishing for every sale. In ~~June~~ November 2011, ~~the~~we ~~Company~~launched ~~acquired~~Reading Eggspress, a reading and comprehension program for grades 2 through 6, which is also published by Blake Publishing. In June 2011, we acquired Alloy Multimedia, which publishes ESL ReadingSmart, anand ~~online~~ReadingMate, online standards-based ~~program~~programs for English language learners (“ELL”) targeted toward grades 4- through 12. The Company also offers online postsecondary programs through its Northstar Learning product line.

On March 3, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Plato Learning, Inc., (“Plato”) and Project Cayman Merger Corp. (“Merger Sub”), a wholly owned subsidiary of Plato, providing for the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). Upon the Merger becoming effective, we will become a wholly owned subsidiary of Plato and each share of our common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive $11.10 in cash, without interest and less applicable withholding tax (“Merger Consideration”), on the terms and subject to the conditions set forth in the Merger Agreement.

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 (“GAAP”) ~~for~~ for interim financial information and with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the Company’s unaudited condensed consolidated financial statements and footnotes contained herein do not include all of the information and footnotes required by GAAP to be considered “complete financial statements.” However, in the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements and footnotes contain all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s consolidated financial information as of, and for, the periods presented. The condensed consolidated results of operations of the Company for an interim period are not necessarily indicative of its consolidated results of operations to be expected for its fiscal year. The December 31, ~~2010~~2011 consolidated balance sheet was included in the audited ~~consolidated~~ consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, ~~2010~~ 2011 (“~~2010~~2011 Annual Report”), which includes all disclosures required by GAAP. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the ~~2010~~2011 Annual Report.

Use of Estimates

~~The~~Management ~~preparation~~uses ofestimates and assumptions in preparing financial statements in ~~conformity~~accordance with GAAP. ~~requires~~Those ~~management to make~~ estimates and assumptions ~~that~~ affect the reported amounts of assets and liabilities, ~~and~~the disclosure of contingent assets and liabilities, ~~at the date of the financial statements~~ and the reported ~~amounts~~ ofsales ~~revenues~~ and expenses ~~during the reporting period~~. ~~The~~We ~~Company~~base ~~evaluates~~our estimates on an ~~ongoing basis, including those related to the allowance for doubtful accounts, intangible assets, and income taxes. The Company bases these estimates on~~ historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not ~~readily~~ readily apparent from other sources. Accordingly, actual results could differ from the estimates that were used. The Company’s most significant estimates and assumptions include those relating to stock-based compensation and valuation of goodwill and intangible assets. Actual results could differ from those estimates.

~~Seasonality~~ 9

In the United States, seasonal trends associated with school budget years and state testing calendars also affect the timing of the Company’s sales of subscriptions to new and existing customers. As a result, most new subscriptions and renewals occur in the third quarter because teachers and school administrators typically make

~~purchases~~Seasonality for the new academic year at the beginning of their district’s fiscal year, which is usually July 1. The Company’s fourth quarter has historically produced the second highest level of new subscriptions and renewals, followed by the second and first quarters.

In the United ~~Kingdom~~States, seasonal trends associated with school budget years and state testing calendars also affect the timing of our sales of subscriptions to new and existing customers. As a result, ~~there is a peak in new~~most new subscriptions and renewals ~~late~~occur in the ~~first~~third quarter because teachers and school administrators ~~often~~ typically make purchases for the new academic year at the ~~end~~beginning of their district’s fiscal year, which is usually ~~April 5~~July 1. ~~The~~Our fourth ~~quarter~~ isquarter ~~also~~has ~~typically~~historically ~~strong,~~produced ~~with~~the ~~some~~second ~~customers~~highest ~~working~~level toof ~~calendar~~new ~~year~~subscriptions ~~budget~~and ~~periods~~renewals, ~~while~~followed ~~third quarter~~by isour ~~weakest~~second ~~due~~and tofirst ~~the U~~quarters.K. ~~vacation period.~~

In the United Kingdom, seasonal trends associated with school budget years affect the timing of our sales of subscriptions to new and existing customers. As a result, there is a peak in new subscriptions and renewals late in the first quarter because teachers and school administrators often make purchases at the end of their fiscal year, which is usually April 5. The fourth quarter is also typically strong, with some customers working to calendar year budget periods, while third quarter is weakest due to the U.K. vacation period.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

InAdopted May 2011, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve the comparability of fair value measurements and related disclosures between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for the Company on January 1, 2012. We do not expect this standard to have a significant impact on our consolidated financial statements.

In ~~June~~ May 2011, the FASB issued updated guidance onto improve the ~~presentation~~comparability of ~~other~~fair ~~comprehensive income~~value inmeasurements ~~the~~and ~~financial~~related ~~statements.~~disclosures ~~The~~between ~~standard~~GAAP and ~~eliminates~~International ~~the~~Financial ~~option~~Reporting ofStandards. ~~presenting~~This ~~other comprehensive~~update ~~income~~amends ~~as part of~~ the ~~statement~~accounting ofrules ~~changes~~for infair ~~stockholders’~~value ~~equity~~measurements and ~~instead requires~~disclosure. ~~the~~The ~~entity~~amendments toare ~~present~~of ~~other~~two ~~comprehensive~~types: ~~income~~(i) those asthat ~~either~~clarify aFASB’s ~~single,~~intent ~~continuous~~about ~~statement of~~the ~~comprehensive~~application ~~income~~of orexisting fair asvalue ~~two~~measurement ~~separate~~and ~~but~~disclosure ~~consecutive~~requirements ~~statements.~~and ~~This~~(ii) those ~~amendment~~that ~~will~~change ~~be effective~~a ~~for~~particular ~~the~~principle ~~Company~~or requirement for ~~the~~measuring ~~first~~fair ~~quarter~~value ~~2012.~~or Wefor ~~currently~~disclosing ~~report~~information ~~other comprehensive~~about ~~income~~fair invalue ~~the~~measurements. ~~statement~~The ofCompany ~~stockholders’~~adopted ~~equity~~this ~~and comprehensive income and will be~~standard ~~required~~effective toJanuary 1, ~~update~~2012, ~~the~~which ~~presentation~~did ofnot ~~comprehensive~~have ~~income~~a tosignificant beimpact inon ~~compliance~~our ~~with~~consolidated ~~the~~financial ~~new standard~~statements.

In ~~September~~ June 2011, the FASB issued anupdated ~~update~~guidance toon ~~its~~the ~~authoritative~~presentation ~~guidance~~of ~~regarding~~other ~~goodwill impairment~~comprehensive ~~testing~~income ~~that~~in ~~grants~~the anfinancial ~~entity~~statements. The standard eliminates the option toof ~~first~~presenting ~~assess~~other ~~qualitative~~comprehensive ~~factors~~income ~~to determine~~as ~~whether~~part of the ~~existence~~statement of ~~events~~changes orin stockholders’ ~~circumstances~~equity ~~leads~~and toinstead arequires ~~determination~~the ~~that~~entity itto ispresent ~~more likely~~other ~~than~~comprehensive ~~not~~income ~~that~~as ~~the~~either ~~fair value of~~ a ~~reporting~~single, ~~unit~~continuous isstatement ~~less~~of ~~than~~comprehensive ~~its~~income ~~carrying~~or ~~amount.~~as Iftwo ~~an entity~~separate ~~determines~~but itconsecutive isstatements. ~~not~~The ~~more~~Company ~~likely~~adopted ~~than~~this ~~not~~standard effective ~~that~~in the ~~fair~~first ~~value~~quarter of a2012. ~~reporting unit is less than its carrying amount~~Previously, ~~then performing~~ the ~~two-step~~Company ~~impairment~~had ~~test~~reported isother ~~unnecessary.~~comprehensive ~~The~~income ~~updated guidance~~in ~~will~~the bestatement ~~effective~~of ~~for~~stockholders’ ~~annual~~equity, ~~and~~however ~~interim~~beginning ~~goodwill~~in ~~impairment~~the ~~tests~~first ~~performed~~quarter ~~for~~of ~~fiscal years~~2012, ~~beginning~~the ~~after~~Company ~~December 15,~~began ~~2011,~~to ~~with~~present ~~early~~other ~~adoption permitted.~~comprehensive Weincome doin ~~not~~two ~~expect~~separate ~~this~~but ~~standard~~consecutive tostatements ~~have~~in aaccordance ~~significant~~with ~~impact~~the onnew ~~our consolidated financial statements~~standard.

Issued

In September 2011, the FASB issued an update to its authoritative guidance regarding goodwill impairment testing that grants an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The updated guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not expect this standard to have a significant impact on our consolidated financial statements.

3. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs to valuation techniques used in fair value calculations are defined as follows:

	•		Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
	•		Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

•

Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

9 10

•

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

•

Level 3 — Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

The following table summarizes assets and liabilities measured at fair value on a recurring basis (in thousands):

	Level 1		Level 2		Level 3		Total
As of September 30, 2011
Assets — cash equivalents	$	31,739		—		—	$	31,739
As of December 31, 2010
Assets — cash equivalents	$	27,816		—		—	$	27,816

The Company’s cash equivalents consist of highly liquid money market funds. The fair values of our cash equivalents were determined based upon market prices.

The Company’s cash equivalents consist of highly liquid money market funds. The fair values of cash equivalents were determined based upon market prices.


	Level 1		Level 2		Level 3		Total
As of March 31, 2012
Assets — cash equivalents	$	32,148		—		—	$	32,148
As of December 31, 2011
Assets — cash equivalents	$	32,122		—		—	$	32,122

The carrying amounts and estimated fair values of the Company’s financial instruments that are not reflected in the financial statements at fair value are as follows (in thousands):

	As of September 30, 2011				As of December 31, 2010
	As of March 31, 2012				As of December 31, 2011
	Carrying				Carrying
	CarryingAmount		FairValue		CarryingAmount		FairValue
	Amount		Fair Value		Amount		Fair Value
Term loan	$	74,913	$	74,913	$	74,913	$	74,913
Cost investment	$	6,446	$	12,191	$	6,446		n/a
Notes receivable		2,102		2,102		1,934		1,934
Note payable to related party		2,462		2,462		2,352		2,352
Term loan		75,126		75,126		75,763		75,763

The ~~investment~~Company ~~included~~estimates in the ~~table~~fair ~~above~~value isof inits ~~Edline~~long-term ~~LLC~~debt ~~(“Edline”),~~primarily ausing ~~company~~quoted ~~that~~market ~~offers~~prices, which ~~web-based~~fall ~~technological~~under ~~solutions~~Level ~~for~~2 ~~schools~~of ~~and~~the ~~educators~~U.S. ~~Edline~~GAAP isfair ~~not~~value ~~publicly~~hierarchy ~~traded~~as ~~and~~defined ~~the fair~~by ~~value~~FASB ofASC ~~the~~Topic ~~investment~~820-10-35. ~~has~~The ~~not~~fair ~~been~~value ~~readily~~of ~~determinable~~the inCompany’s ~~prior~~long-term ~~periods.~~debt Onat ~~October 4~~March 31, ~~2011,~~ ~~the~~2012 ~~Company~~was ~~sold~~estimated to approximate its ~~entire~~carrying ~~investment~~value inbased ~~Edline~~on to(i) the ~~Bulldog~~recentness of ~~Super~~entering ~~Holdco~~into, ~~Inc.~~or amending, ~~which~~our ~~became~~credit facility, (ii) the ~~ultimate~~variable ~~parent~~rate nature of ~~Blackboard,~~our ~~Inc.,~~credit ~~for~~facility ~~$12.2~~and (iii) ~~million~~the ~~dollars,~~interest ~~which~~rate ~~the~~spreads ~~Company~~charged ~~believes~~on toour ~~be indicative~~loans offluctuating ~~fair~~with ~~value~~the astotal ofleverage ~~September 30~~ratio, ~~2011.~~which ~~See~~is ~~Note~~a 11measurement ~~for further discussion~~ of ~~this~~our ~~transaction~~creditworthiness.

As of September 30, 2011, the Company had two promissory notes receivable totaling $1.9 million plus interest from Edline. Both of these notes bore interest at 12.5% per annum payable in kind. The interest and principal amount on these notes receivable were due on June 30, 2016. On October 4~~, 2011, Edline repaid the promissory notes in full in connection with the Company’s sale of its investment in Edline~~. ~~The~~MERGER ~~Company~~AGREEMENT ~~received~~WITH ~~$2.1 million,~~PLATO ~~which represented the $1.9 million principal outstanding~~LEARNING, ~~and $0~~INC.~~2 million~~ ~~interest. The Company believes this repayment to be indicative of fair value.~~

AsOn ~~of September~~March 303, ~~2011~~2012, the Company ~~had~~entered into the Merger Agreement with Plato and Merger Sub, a ~~note~~wholly ~~payable~~owned subsidiary of ~~$2.5 million~~Plato, ~~related~~providing tofor the ~~acquisition~~ merger of ~~EducationCity~~Merger inSub ~~June 2010~~with ~~(see~~and ~~Notes~~into 4the ~~and~~Company, ~~10)~~with the Company continuing as the surviving corporation. The ~~note~~Company’s ~~payable~~Board ~~was~~of ~~estimated~~Directors to(the “Board”), acting upon the unanimous recommendation ~~approximate~~of ~~its~~a ~~carrying~~transaction ~~value~~committee ascomprised of independent directors of the ~~final~~Board, ~~scheduled~~unanimously ~~payment~~recommended isthat ~~within~~our ~~one~~stockholders ~~year~~approve the Merger Agreement and the Merger.

~~The~~Upon ~~fair~~the ~~value~~Merger ofbecoming ~~long-term~~effective, ~~debt~~the atCompany ~~September 30,~~will ~~2011~~become ~~was~~a ~~estimated~~wholly toowned ~~approximate~~subsidiary ~~its carrying~~of ~~value~~Plato ~~based~~and oneach ~~(i)~~ share of the Company’s ~~having~~common ~~recently~~stock ~~entered~~issued ~~into,~~and oroutstanding ~~amended,~~immediately prior to the ~~credit~~effective ~~facility,~~date ~~(ii)~~ of the ~~variable~~Merger ~~rate~~will ~~nature~~be ofconverted into the ~~credit~~right ~~facility~~to receive the Merger Consideration, on the terms and ~~(iii)~~ subject to the ~~interest~~conditions ~~rate~~set ~~spreads charged~~forth onin the ~~loans~~Merger ~~fluctuating~~Agreement. ~~with~~As of the ~~total~~effective ~~leverage~~date ~~ratio,~~of ~~which~~the isMerger, aall ~~measurement~~such shares of the Company’s common ~~creditworthiness.~~stock shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each holder of such common stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration.

4.Under ~~ACQUISITIONS~~ the terms of the Merger Agreement at the effective date of the Merger:

~~Alloy~~• ~~Multimedia~~ each outstanding stock option (whether vested or unvested) will be cancelled and converted into the right to receive a payment in cash equal to the excess, if any, of $11.10 over such option’s exercise price;

On• ~~June 24,~~each ~~2011,~~outstanding ~~pursuant~~share toof aour ~~Stock~~restricted ~~Purchase~~common ~~Agreement,~~stock ~~the~~that ~~Company~~is ~~purchased~~vested ~~100%~~or ofthat, ~~the equity~~upon consummation of ~~Alloy~~the ~~Multimedia (“Alloy”)~~Merger, ~~the~~will ~~publisher~~automatically ofvest ~~ESL~~in ~~ReadingSmart,~~accordance anwith ~~online~~its ~~standards-based program~~terms, ~~for~~will ~~English~~be ~~language~~cancelled ~~learners~~and ~~(“ELL”)~~converted ~~for~~into ~~$2.0 million~~the inright ~~cash.~~to Inreceive ~~addition~~a topayment ~~the~~in cash ~~paid~~ atequal ~~the~~to ~~time of~~ the ~~acquisition,~~Merger ~~the~~ Consideration;

10 • each outstanding restricted stock unit (whether vested or unvested) and related dividend equivalent right will be cancelled and converted into the right to receive a payment in cash equal to the Merger Consideration, which amounts will be paid to certain of our employees; and

Company is obligated to make contingent payments of up to $1.0 million based upon the achievement of certain sales objectives. The fair values of these payments were estimated to be $0.6 million and were included as a cost of the acquisition.

As part of the acquisition, the Company incurred $0.2 million in transaction costs, including legal and professional fees, which are recorded in general and administrative expense on the condensed consolidated statement of operations for the nine months ended September 30, 2011.

Between the acquisition date and June 30, 2011, Alloy’s revenues and expenses were not significant, and therefore, have not been included in the condensed consolidated statements of operations of the Company. Beginning July 1, 2011, Alloy’s results have been included in the condensed consolidated statements of operations of the Company.

The initial accounting for the acquisition of Alloy is incomplete, as the Company is currently evaluating the fair values of each asset and liability acquired and has not yet received the final valuation report on such assets and liabilities. Provisional amounts for assets and liabilities acquired have been recorded based on management’s best estimate of the values based on preliminary analysis performed. The following table presents the composition of the purchase price and the provisional amounts recorded in the Company’s balance sheet for assets and liabilities acquired on June 24, 2011(in thousands):

Purchase price:
Cash paid to seller, net of cash received	$	1,978
Estimated fair values of future contingent payments		573
Total purchase price	$	2,551
Assets (liabilities) acquired:
Accounts receivable	$	34
Deferred tax assets		65
Fixed assets		5
Intangible assets		651
Accounts payable and accrued expenses		(12	)
Deferred revenue		(185	)
Deferred tax liability		(185	)
Total	$	373
Remaining value, allocated to goodwill	$	2,178

The goodwill acquired is not expected to be deductible for tax purposes.

Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition is not material to the Company’s results.

EducationCity

On June 9, 2010, the Company acquired EducationCity pursuant to a Share Purchase Agreement with Matthew Drakard, Simon Booley and Tom Morgan. The Company purchased 100% of the equity of EducationCity for a purchase price of: (i) $65.1 million in cash; (ii) 1,242,408 shares of common stock of the Company; and (iii) $5.0 million in additional deferred cash consideration, of which $2.5 million was paid by the Company on December 31, 2010, and an additional $2.5 million will be paid on December 31, 2011. The acquisition was financed with cash on hand and the proceeds of a new $15.0 million supplemental term loan and $10.0 million in revolving loan commitments.

5.• ~~GOODWILL~~each ~~AND~~outstanding ~~INTANGIBLE~~shadow ~~ASSETS~~ option (whether vested or unvested) that represents the right to receive a cash payment based on the value of our common stock upon the occurrence of certain events will be cancelled and converted into the right to receive a cash amount equal to the excess, if any, of the Merger Consideration per share over our closing stock price on the date of grant.

~~The~~Each ~~changes~~share inof restricted stock that is unvested at the ~~carrying~~effective ~~amount~~time of ~~goodwill~~the ~~during~~Merger and is not automatically vested pursuant to its terms upon consummation of the ~~nine~~Merger ~~months~~will ~~ended~~be ~~September 30~~forfeited, ~~2011~~without any consideration paid to the holder thereof. Additionally, each outstanding stock option that has an exercise price equal to or greater than ~~are~~$11.10 aswill ~~follows~~be ~~(in~~cancelled ~~thousands):~~without the right to receive any cash payment or other consideration. As a result of the vesting of the equity awards noted above, any remaining unamortized compensation expense related to each respective equity award will be recognized at that time.

Balance as of December 31, 2010	$	165,694
Acquisition of Alloy Multimedia		2,178
Adjustment due to foreign currency		120
Balance as of September 30, 2011	$	167,992

The Merger Agreement contains customary representations, warranties and covenants, including covenants requiring each of the parties to use reasonable best efforts to cause the Merger to be consummated. The Merger Agreement also requires the Company to take all reasonable action necessary to convene and hold a stockholders’ meeting to vote on the adoption of the Merger Agreement.

The ~~changes~~completion inof the ~~carrying~~Merger ~~amount~~is subject to various closing conditions, including (i) the adoption of ~~intangible~~the ~~assets~~Merger ~~during~~Agreement by the ~~nine~~stockholders ~~months~~of ~~ended~~the ~~September~~Company entitled to vote thereon (“Stockholder Approval”), (ii) no court having issued an injunction that prohibits the consummation of the Merger and 30no court or governmental entity having enacted a law, ~~2011~~rule ~~are~~or regulation that prohibits the consummation of the Merger, (iii) the expiration or termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as ~~follows~~amended, (iniv) subject ~~thousands~~to specified materiality standards, the accuracy of representations and warranties of each party and (v): the compliance by each party in all material respects with their obligations under the Merger Agreement.

Balance as of December 31, 2010	$	37,290
Acquisition of Alloy Multimedia		651
Acquisition of intangible asset		500
Amortization		(3,262	)
Adjustment due to foreign currency		185
Balance as of September 30, 2011	$	35,364

Under the Merger Agreement, the Company is subject to a customary “no shop” restriction on its ability to solicit alternative acquisition proposals or to provide information to or engage in discussions or negotiations with third parties regarding alternative acquisitions proposals. The no-shop provision is subject to a customary “fiduciary out” provision that allows the Company, prior to receipt of Stockholder Approval, to provide information and participate in discussions with respect to unsolicited acquisition proposals that the Company’s Board of Directors reasonably believes could lead to a Superior Proposal and certain other conditions are met. The Board has agreed to recommend that the Company’s stockholders adopt the Merger Agreement. However, the Board may, subject to certain conditions, change its recommendation in favor of adoption of the Merger Agreement if, in connection with receipt of an alternative proposal, it determines in good faith that such action is necessary to comply with its fiduciary duties or if, in connection with a material development or change in material circumstances occurring or arising after the date of the Merger Agreement that is not an alternative acquisition proposal, it determines that such action is advisable in order to comply with its fiduciary duties. A “Superior Proposal” is a written acquisition proposal for more than 80% of the outstanding shares of the Company’s common stock or more than 80% of the consolidated assets of the Company on terms that the Company Board has determined in good faith, after taking into consideration all relevant factors, are more favorable to the Company’s stockholders than the Merger.

6The Merger Agreement contains certain termination rights, including a termination right of the Company in order to accept a Superior Proposal if certain requirements are met, and provides that (i) in the event of termination of the Merger Agreement under specified circumstances, the Company will owe Plato a cash termination fee of approximately $10.2 million; ~~COMMITMENTS~~and (ii) in ~~AND~~the ~~CONTINGENCIES~~event of termination of the Merger Agreement under specified circumstances, Plato will owe the Company a cash reverse termination fee of approximately $20.4 million. Thoma Bravo Fund X, L.P. (the “Thoma Bravo Fund”) has executed a Limited Guarantee, dated March 3, 2012, pursuant to and subject to the terms and conditions of which the Thoma Bravo Fund has guaranteed the payment of the reverse termination fee that may be payable by Plato under certain termination events pursuant to the Merger Agreement. In addition, subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated within 120 days of the effective date of the Merger Agreement, which period may be extended for up to 30 days in certain circumstances.

~~The~~Pursuant ~~Company~~to isthe ~~obligated,~~Merger ~~as lessee~~Agreement, ~~under~~the ~~non-cancelable~~Company’s credit ~~operating~~facility ~~leases~~is ~~for~~expected ~~office~~to ~~space~~be ~~in Dallas,~~terminated ~~Texas;~~and ~~Naperville,~~outstanding ~~Illinois;~~borrowings ~~Rutland,~~thereunder ~~United~~to ~~Kingdom;~~be ~~and~~repaid ~~Houston,~~upon ~~Texas~~closing ~~expiring~~of ~~through 2020~~the Merger. As ofa ~~September 30,~~condition ~~2011~~to Plato’s obligation to the close the Merger, the ~~future~~Company ~~minimum~~must ~~payments~~deliver ~~required~~payoff ~~under~~letters ~~all~~with ~~operating~~respect ~~leases~~to ~~with~~its ~~terms~~current incredit ~~excess~~agreement and releases of ~~one~~all ~~year~~liens ~~are~~thereunder, assubject ~~follows~~only (to the payment of the amounts set forth in ~~thousands):~~ the payoff letters.

Remainder of 2011	$	317
2012		1,126
2013		1,148
2014		1,159
2015		930
Thereafter		4,454
	$	9,134

Plato has obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement. The Thoma Bravo Fund has committed to provide equity funding and Credit Suisse Securities (USA) LLC, Credit Suisse AG and Jeffries

The Company also has a distribution agreement with a supplier that includes annual minimum royalty payments to keep the contract in effect, which are not included in the table above. The aggregate of those annual minimum requirements through December 31, 2020 under the contract total $12.3 million.

During the three months ended September 30, 2011, the Company entered into a perpetual license agreement with a third party that includes annual maintenance payments, which are not included in the table above. The aggregate amount of those annual requirements through December 31, 2020 under the contract total $1.9 million.

7. EARNINGS PER SHARE

Earnings per share is computed using the two-class method, considering the restricted common shares, due to their participation rights in dividends of the Company. Under this method, the Company’s net income is reduced by the portion of net income attributable to the restricted common shares, and this amount is divided by the weighted average shares of common stock outstanding.

The components of earnings per share are as follows for the three months ended September 30 (in thousands):

	2011						2010
	Net Income			Shares			Net Income			Shares
Net income	$	1,992			26,336		$	152			26,355
Less: Income attributable to restricted shares		(64	)		(927	)		(7	)		(1,222	)
Net income available to common stockholders		1,928			25,409			145			25,133
Basic earnings per share	$	0.08					$	0.01
Dilutive effect of restricted common stock					173						358
Diluted earnings per share	$	0.08			25,582		$	0.01			25,491

Finance LLC have committed to provide debt funding in connection with the transactions contemplated by the Merger Agreement. The ~~components~~Thoma ofBravo ~~earnings~~Fund ~~per~~has ~~share~~provided ~~are~~the asCompany ~~follows~~with ~~for~~a limited guarantee in favor of the ~~nine~~Company ~~months~~guaranteeing ~~ended~~the ~~September 30~~payment (of the cash termination fee, in ~~thousands):~~ the event it is payable by Plato.

	2011						2010
	Net Income			Shares			Net Income			Shares
Net income	$	4,776			26,336		$	2,074			25,628
Less: Income attributable to restricted shares		(170	)		(937	)		(100	)		(1,233	)
Net income available to common stockholders		4,606			25,399		$	1,974			24,395
Basic earnings per share	$	0.18					$	0.08
Dilutive effect of restricted common stock					196						375
Diluted earnings per share	$	0.18			25,595		$	0.08			24,770

In connection with the Merger Agreement, stockholders who collectively hold approximately 49% of the aggregate voting power of the Company have entered into voting agreements in support of the Merger (the “Support Agreements”). The obligations of the stockholders under the Support Agreements to vote in favor of the Merger, and against any alternative acquisition proposals, will terminate if the Merger Agreement is terminated or if the Board withdraws its recommendation for the Merger under the circumstances permitted by the Merger Agreement.

~~No shares of restricted common stock were excluded from the diluted earnings per share calculation for the three months ended September 30, 2011.~~ For the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2011, the ~~impact of 1,551 shares~~Company ofincurred ~~restricted~~expenses ~~common~~totaling ~~stock~~$0.9 ~~were~~million ~~excluded~~related ~~from~~to ~~the~~pursuing ~~diluted~~strategic ~~earnings per share calculation~~alternatives, aswhich ~~their~~ultimately ~~effect~~resulted ~~was~~in ~~antidilutive. For~~ the ~~three~~ ~~months~~signing ~~and~~of ~~nine~~the ~~months~~Merger ~~ended~~Agreement. ~~September 30,~~Those ~~2011,~~expenses ~~the~~were ~~impact~~recorded ~~of options~~ to ~~purchase~~general ~~948,196~~ and ~~969,263~~administrative ~~weighted-average~~expense ~~shares~~within ofthe ~~common~~consolidated statement ~~stock,~~of ~~respectively,~~income. ~~were~~Including ~~excluded from~~ the ~~diluted earnings~~expenses ~~per~~incurred ~~share~~in ~~calculation~~2011, aswe ~~their~~estimate ~~effect~~that ~~was~~total ~~antidilutive.~~expenses ~~For~~that ~~the~~will ~~three~~be ~~months~~incurred ~~and~~by ~~nine~~the ~~months~~Company ~~ended~~as ~~September 30,~~a ~~2010, options~~result toof ~~purchase~~this ~~694~~transaction,~~565~~ ~~and~~excluding ~~652,445 weighted~~non-~~average~~cash ~~shares~~stock ofbased ~~common~~compensation ~~stock,~~related ~~respectively~~expenses, ~~were excluded~~will ~~from~~be ~~the~~approximately $8.7 ~~diluted~~million ~~earnings~~to ~~per~~$9.7 ~~share calculation, as their effect was antidilutive~~million.

8Shortly after the announcement of the Merger, Stephen Bushansky v. ~~STOCK~~Archipelago Learning, Inc., et al., a putative stockholder class action lawsuit for which no class has yet been certified, was filed on March 7, 2012 in the County Court At Law No. 3 of Dallas County, Texas against the Company (“Parent”), Merger Sub, and the individual members of the Company’s Board at the time of entry into the Merger Agreement. The plaintiffs then filed an amended petition and application for temporary injunctive relief on April 10, 2012. The Bushansky Suit alleges that the individual defendants breached their fiduciary duties by failing to maximize stockholder value in negotiating and approving the Merger Agreement. Specifically, plaintiffs allege, among other things, (i) breaches of fiduciary duties by members of the Board in connection with the proposed Merger, (ii) a claim for aiding and abetting the breach of fiduciary duty against all defendants, (iii) that the proposed Merger is inadequate, unfair and unreasonable, (iv) that the Merger Agreement unfairly deters competitive offers, (v) improper conflicts of interest, (vi) that the Board conducted an insufficient sales process, (vii) that the Company failed to disclose all material information in its preliminary proxy statement filed on March 27, 2012, and (viii) that the Board agreed to lock-~~BASED~~up ~~COMPENSATION~~the acquisition with preclusive deal protection devices. The plaintiffs sought to enjoin the proposed Merger, to recover damages in the event that the proposed Merger is consummated and to award the named plaintiff in such suit its fees and expenses, including reasonable attorneys’ and experts’ fees and expenses. On April 10, 2012, the Company received a demand letter from the plaintiffs in the Bushansky Suit requesting certain modifications to the Merger Agreement and supplemental disclosure in the proxy statement.

~~During~~Another ~~the~~complaint, ~~nine~~captioned ~~months~~Len ~~ended~~Gostkowski ~~September~~v. Archipelago Learning, Inc., et al., was filed on March 3028, ~~2011~~2012, ~~the~~by ~~Company~~individual ~~issued~~stockholders ~~stock~~seeking ~~options~~class certification in the Court of Chancery of the ~~amounts~~State of Delaware, against the Company, Parent, Merger Sub, and ~~for~~the individual members of the ~~periods~~Company’s ~~shown~~Board inat the ~~following~~time ~~table~~of entry into the Merger Agreement. The ~~fair~~Gostkowski ~~value~~Suit ofalleges, ~~each~~among ~~option~~other ~~was~~things, (i) breaches of fiduciary duties ~~estimated~~by onmembers of the ~~date~~Board in connection with the proposed Merger, (ii) a claim for aiding and abetting the breach of ~~grant~~fiduciary ~~using~~duties against Parent and Merger Sub, (iii) prior improper related party transactions, (iv) that the ~~Black-Scholes~~Merger Consideration ~~option~~is ~~pricing~~unfair ~~model~~and inadequate, (v) improper conflicts of interest, (vi) that the Board conducted an insufficient sales process, and (vii) that the Board agreed to lock-up the acquisition with preclusive deal protection devices. Like the ~~following~~Bushansky Suit, the plaintiffs in the Gostkowski Suit sought to enjoin the proposed Merger, to recover damages in the event that the proposed Merger is consummated and to award the named plaintiff in such suit its fees and ~~assumptions:~~expenses, including reasonable attorneys’ and experts’ fees. On April 10, 2012, the Company received a demand letter from the plaintiffs in the Gostkowski Suit requesting certain modifications to the Merger Agreement and supplemental disclosure in the proxy statement.

	Nine months
	Ended September 30,
	2011
Number of options granted		559,976
Weighted average exercise price of options granted	$	10.15
Weighted average grant date fair value of options granted	$	4.97
Expected term (in years) (1)		6.25
Volatility (2)		47.6	%
Risk free interest rate (3)		2.4	%
Expected annual dividends	None

The Company and the other defendants have not yet filed a response to the complaints. The Company believes that these lawsuits are without merit. However, in order to avoid the burden, expense, risk, uncertainty, and distraction of continued litigation in connection with these lawsuits, the Company has reached a settlement in principle with the named plaintiffs, the principal terms of which are set forth in a Memorandum of Understanding entered into by all parties on April 26, 2012. The Memorandum of Understanding remains subject to court approval. The Company has recorded an immaterial accrual for the anticipated settlement amount in the March 31, 2012 financial statements. Such settlement required certain additional disclosures to be made in the proxy statement, but did not require modification to the Merger Agreement.

(1)		The expected term was calculated as the average between the vesting term and the contractual term. We used the simplified method due to the limited period of time the Company’s common stock has been publicly traded which provides insufficient historical exercise data.
(2)		Expected volatility was based on the historical volatility of guideline companies over a preceding period equal to the expected term of the award.

~~(3) The risk free rate is based on the U~~5.S. ~~Treasury~~ACQUISITION ~~yield~~OF ~~curve~~ALLOY atMULTIMEDIA ~~the time of grant for periods consistent with the expected term of the options.~~

~~The~~On ~~Company recognized $0.6~~June ~~million~~24, ~~and~~2011, ~~$2.5 million~~pursuant into ~~share-based~~a ~~compensation~~Stock ~~expense related~~Purchase toAgreement, ~~stock~~the ~~options~~Company ~~and~~purchased ~~restricted~~100% ~~stock~~of ~~awards during~~ the ~~three~~equity ~~and~~of ~~nine months ended September 30~~Alloy, ~~2011, respectively. Included in~~ the publisher ~~expense~~of ~~for~~ESL ~~the~~ReadingSmart ~~three~~ and ~~nine months ended September 30~~ReadingMate, ~~2011~~online isstandards-based ~~$0.1 million~~programs infor ~~cash~~English ~~settled~~language ~~awards~~learners ~~granted~~for ~~in February 2011, and settled in August 2011. The Company recognized~~ $02.50 million ~~and~~in $1cash.~~4 million~~ inIn ~~share-based~~addition ~~compensation expense related~~ to ~~stock~~the ~~options~~cash ~~and~~paid ~~restricted~~at ~~stock~~the ~~awards~~time ~~during~~of the ~~three~~acquisition, ~~and~~the ~~nine~~Company ~~months~~is ~~ended September 30,~~obligated ~~2010,~~to ~~respectively.~~make Ascontingent payments of ~~September 30,~~up ~~2011,~~to ~~there was approximately~~ $41.8 0 million ~~of unrecognized stock-~~based ~~compensation~~upon ~~expense~~the ~~related~~achievement toof ~~unvested~~certain ~~restricted~~sales ~~common~~objectives. The ~~stock~~fair ~~and options~~values ~~for~~of ~~common~~these ~~stock~~payments ~~that~~were isestimated ~~expected~~ to be ~~recognized~~$0.5 ~~over~~million aand ~~weighted~~were ~~average~~included ~~period~~as a cost of 2the acquisition.~~7 years.~~

InAs ~~addition~~part of the acquisition, the Company ~~has~~incurred ~~restricted stock awards outstanding subject to certain performance hurdles~~$0.5 million ~~The~~in ~~performance~~transaction ~~hurdles~~costs, ~~include~~including ~~Providence~~legal ~~Equity~~and ~~Partners’~~professional ~~achievement~~fees, ofwhich aare ~~return~~recorded ~~on their investment~~ in ~~the~~general ~~Company~~and ~~through~~administrative ~~distributions~~expense oron ~~sales.~~the ~~The~~consolidated ~~achievement~~statements of ~~the performance~~income ~~hurdles~~for ~~are~~the ~~not~~year ~~currently~~ended ~~considered~~December 31, ~~to be probable and cannot be estimated at this time~~2011.

~~Effective~~Between onthe ~~January~~acquisition date and June 3130, 2011, ~~Mr. James~~Alloy’s ~~Walburg~~revenues ~~retired~~and ~~from~~expenses ~~his~~were ~~position~~not assignificant, ~~the~~and ~~Company’s Chief~~therefore, ~~Financial~~have ~~Officer.~~not ~~Mr. Walburg’s~~been ~~separation~~included ~~agreement~~in ~~allowed for~~ the ~~acceleration~~consolidated statements of ~~his restricted~~income ~~stock as follows: 50%~~ of ~~his~~the ~~restricted common stock subject to time-based vesting~~Company. ~~vested~~Beginning ~~on January~~July 101, 2011, ~~50%~~Alloy’s ofresults ~~his~~have ~~restricted~~been ~~common~~included ~~stock~~in ~~subject~~the toconsolidated ~~time-based~~statements ~~vesting~~of ~~will vest~~income onof ~~January 10,~~the ~~2012,~~Company. ~~and~~Revenues ~~all~~ of ~~his~~$0.2 ~~restricted~~million ~~common~~and ~~stock~~net ~~subject~~losses toof ~~vesting~~$0.1 ~~based~~million ~~on performance~~arising ~~measures~~from ~~vested~~Alloy onare ~~January 10,~~included ~~2011.~~in ~~This~~the ~~accelerated~~consolidated ~~vesting~~statements ~~resulted in compensation~~of ~~expense~~income offor ~~$0.7 million being recorded during~~ the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2011.

OnThe ~~February 24,~~following ~~2011,~~table ~~the~~presents ~~Company granted an aggregate of 28,038 restricted stock units to Tim McEwen, Chairman, President and Chief Executive Officer of~~ the ~~Company,~~composition ~~as part his annual compensation for 2010. In accordance with the restricted stock unit agreement, on August 24, 2011, 11,682~~ of the ~~restricted~~purchase ~~stock~~price ~~units vested~~ and ~~were settled in cash for $0.1 million. Subject to~~the ~~Mr. McEwen’s~~final ~~continued~~amounts ~~employment,~~recorded ~~the remaining restricted stock units will be settled~~ in ~~common stock of~~ the Company’s ~~four~~balance ~~years~~sheet ~~from~~for ~~the~~assets ~~grant~~and ~~date~~liabilities acquired on ~~February~~June 24, 2015. Pursuant to the terms of the restricted stock unit agreement, Mr. McEwen also received 28,038 dividend equivalent rights. Each dividend equivalent right relates to one restricted stock unit and entitles him to an amount equal to the per share dividend, if any, paid by the Company during the period between the grant date and vesting date of the related restricted stock unit. Each dividend equivalent right will vest and be payable 2011(in ~~cash~~thousands): ~~at the time that the related restricted stock unit is settled.~~

9. BUSINESS SEGMENT DATA AND GEOGRAPHICAL INFORMATION


Purchase price:
Cash paid to seller, net of cash received	$	1,978
Estimated fair values of future contingent payments		475

Total purchase price	$	2,453


Assets (liabilities) acquired:
Accounts receivable	$	34
Deferred tax assets		65
Fixed assets		5
Intangible assets		651
Accounts payable and accrued expenses		(12	)
Deferred revenue		(185	)
Deferred tax liability		(185	)

Total	$	373

Remaining value, allocated to goodwill	$	2,080

As a result of the acquisition of EducationCity in June 2010, the Company had three operating segments, Study Island (including the Study Island, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines), Educationcity Limited (a United Kingdom company), and Educationcity Inc. (an Illinois company). Effective September 1, 2011, as a result of the financial and operational integration of Educationcity Inc. into Study Island, the Company now has two operating segments: the U.S. Market (including Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines) and the U.K. Market (Educationcity Limited). The ~~Company aggregates~~goodwill ~~the~~acquired ~~operating~~is ~~segments~~not ~~into~~expected ~~one reportable segment based on the similar nature of the products, content and technical production processes, types of customers, methods used~~ to ~~distribute~~ ~~the~~be ~~products,~~deductible ~~and~~for ~~similar~~tax ~~rates of profitability~~purposes.

~~The Company’s operating segments each offer subscription~~Pro-~~based~~forma ~~online~~results ~~products~~of ~~that provide instruction~~operations, ~~practice,~~assuming ~~assessment~~this ~~and~~acquisition ~~productivity~~was ~~tools~~made ~~for~~at ~~teachers and students. The content and engineering teams operate in a similar manner to enhance and maintain~~ the ~~products.~~beginning ~~The primary customer bases for each~~ of the ~~operating~~earliest ~~segments~~period ~~are~~presented, ~~schools.~~have ~~The~~not ~~markets~~been presented ~~for~~because the ~~U.S.~~effect ~~and~~of ~~U.K. are~~this ~~both~~acquisition ~~English-speaking, which~~ is ~~important~~not ~~from~~material ato ~~product~~the ~~marketing~~Company’s ~~and development perspective~~results. ~~The~~ ~~operating segments have similar rates of profitability.~~

6. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill during the three months ended March 31, 2012 are as follows (in thousands):


Balance as of December 31, 2011	$	167,761
Adjustment due to foreign currency		413

Balance as of March 31, 2012	$	168,174

~~Geographical~~The ~~areas~~changes ~~are~~in ~~North~~the ~~America~~carrying ~~(which~~amount ~~includes operations~~ of ~~the~~intangible ~~United~~assets ~~States~~during ~~and Canada)~~the ~~and~~three ~~United~~months ~~Kingdom. The following geographical area information includes revenues based on~~ended ~~the~~March 31, ~~physical~~2012 ~~location~~are ofas ~~the~~follows ~~operations~~ (in thousands):

	Three Months Ended					Nine months Ended
Balance as of December 31, 2011	$	34,026
	September 30,					September 30,
Acquisition of intangible asset		500
	2011			2010		2011		2010
Amortization		(1,142	)
Revenue:
Adjustment due to foreign currency		469
North America	$	16,342		$	14,184	$	48,719	$	40,000
Balance as of March 31, 2012	$	33,853
United Kingdom		1,881			1,265		5,093		1,595
	$	18,223		$	15,449	$	53,812	$	41,595

~~The~~7. ~~following~~COMMITMENTS ~~geographical~~AND ~~area~~CONTINGENCIES information includes total long-lived assets (which consist of all non-current assets, other than goodwill, indefinite-lived intangible assets and deferred tax assets) based on physical location (in thousands):

	September 30,		December 31,
	2011		2010
Assets:
North America	$	32,630	$	33,134
United Kingdom		12,937		13,791
	$	45,567	$	46,925

The Company is obligated, as lessee, under non-cancellable operating leases for office space in Dallas, Texas and Rutland, U.K. expiring through 2020. In addition, the Company is obligated, as lessee, under other non-cancellable operating leases for office equipment. As of March 31, 2012, the future minimum payments required under all operating leases with terms in excess of one year are as follows (in thousands):

10. RELATED-PARTY TRANSACTIONS


Remainder of 2012	$	820
2013		1,185
2014		1,026
2015		930
2016		931
Thereafter		3,523

	$	8,415

~~Providence~~The ~~Equity~~Company ~~Partners~~also ~~beneficially~~has ~~owns~~a ~~47%~~distribution ofagreement ~~the~~with ~~Company’s~~a ~~outstanding~~supplier ~~shares~~which ofincludes ~~common stock.~~a ~~The~~minimum ~~Company~~royalty ~~purchases~~payment requirement ~~equipment~~to ~~from~~keep anthe ~~affiliate~~contract ofin ~~Providence~~effect, ~~Equity~~which ~~Partners.~~is ~~Equipment purchases~~not ~~with~~included ~~this~~in ~~supplier~~the ~~totaled~~table $0above.~~3 million~~ ~~and~~The ~~$0.8 million~~aggregate ~~for~~minimum ~~the~~requirement ~~three~~over ~~and~~the ~~nine~~next ~~months ended~~ten ~~September 30,~~years ~~2011,~~under ~~respectively,~~the ~~and~~contract ~~totaled~~totals $013.~~4 million~~1 ~~and $0.7~~ million ~~for the three and nine months ended September 30, 2010, respectively~~.

AsDuring ~~part of the sale of TeacherWeb to Edline~~2011, the Company ~~signed~~entered into a ~~transition~~perpetual ~~services~~ license agreement with ~~Edline whereby the Company performed certain accounting and administrative functions related to TeacherWeb for~~ a ~~period~~third party that ~~was~~includes ~~subsequently~~annual ~~extended~~maintenance ~~until October 31~~payments, ~~2010.~~which ~~During~~are ~~the~~not ~~transition~~included ~~period,~~in ~~certain costs were paid by~~ the ~~Company~~table ~~on behalf of TeacherWeb, which were billed to and reimbursed by Edline~~above. The ~~Company~~aggregate ~~received~~amount ~~no fee for the performance~~ of ~~these services.~~those Noannual ~~amounts~~requirements ~~have~~through ~~been paid to Teacherweb vendors for the three and nine months ended September~~December 3031, ~~2011.~~2021 ~~For~~under the ~~three~~contract ~~and nine months ended September 30, 2010, the Company paid $0.1 million and $0.9 million, respectively, to TeacherWeb vendors on behalf of Edline, of which a~~ total of $0.1 ~~million was receivable from Edline as of September 30, 2010, and was recorded in other assets in the condensed consolidated balance sheet~~.5 Additionally, the Company agreed to pay severance costs for one employee for a period of one year, ending October 31, 2011 to be reimbursed by Edline. For the three and nine months ended September 30, 2011, the Company paid $0.1 million ~~and $0~~.~~2 million, respectively,~~ ~~to TeacherWeb on behalf of Edline related to these severance payments.~~

~~EducationCity~~Additionally, ~~U.K. leases office space~~ in ~~Rutland,~~connection ~~U.K.~~with ~~which is owned by~~ the ~~pension~~acquisition ~~funds~~ of ~~two~~ ~~former~~Alloy ~~officers~~Multimedia ~~and~~made ~~stockholders~~during of2011, the Company. ~~The~~is ~~Company~~obligated ~~made~~to ~~payments~~make ~~under~~contingent ~~this~~payments ~~lease~~of ~~for less~~up ~~than~~to $0.1 ~~million and $0~~.~~2 million for the three and nine months ended September 30, 2011, respectively. The Company made payments of $~~0.1 million ~~under~~based ~~this~~upon ~~lease for~~ the ~~three~~achievement ~~and~~of ~~nine~~certain ~~months~~sales ~~ended~~objectives ~~September 30,~~for ~~2010.~~products ~~The~~sold ~~Company~~from ~~concluded~~the ~~during~~acquired ~~purchase accounting that this lease is a market based lease~~company.

InContingent ~~connection~~on ~~with~~ the ~~purchase~~consummation of ~~EducationCity,~~ the ~~Company~~Merger ~~incurred~~(see ~~a $5.0 million~~ note ~~payable~~ ~~to the sellers~~4), ~~payable in equal installments on December 31, 2010 and 2011. Upon~~ the ~~purchase,~~Company ~~the~~will ~~sellers~~be ~~became~~required ~~officers~~to ofpay ~~the~~fees ~~Company~~of ~~and~~approximately ~~stockholders~~$5.2 Asmillion ofto ~~September 30,~~certain ~~2011, the~~advisors ~~remaining~~related ~~balance~~ to beservices ~~paid~~performed ~~under~~ that ~~note~~are ~~payable~~related ~~was~~to $2the Merger.~~5 million.~~

8. EARNINGS PER SHARE

The components of earnings per share are as follows for the three months ended March 31 (in thousands):


	2012						2011
	Net Income			Shares			Net Income			Shares
Net income	$	514			26,346		$	989			26,337
Less: Income attributable to restricted shares		(16	)		(800	)		(36	)		(956	)

Net income available to common stockholders		498			25,546			953			25,381
Basic earnings per share	$	0.02					$	0.04

Dilutive effect of restricted common stock					101						248

Diluted earnings per share	$	0.02			25,647		$	0.04			25,629

11For the three months ended March 31, 2012, 8,778 shares of restricted stock and options to purchase 745,294 weighted-average shares of common stock were excluded from the diluted earnings per share calculation, as their effect was antidilutive. ~~SUBSEQUENT~~For ~~EVENTS~~the three months ended March 31, 2011, 3,717 shares of restricted stock and options to purchase 922,212 weighted-average shares of common stock, were excluded from the diluted earnings per share calculation, as their effect was antidilutive.

~~On October 4, 2011, Archipelago Learning, LLC, a wholly owned subsidiary of the Company, entered into a Securities Purchase Agreement (the “Agreement”) with Bulldog Super Holdco, Inc~~9., aSTOCK-BASED ~~Delaware corporation,~~COMPENSATION which became the ultimate parent company of Blackboard, Inc (“Blackboard”). Pursuant to the Agreement, Archipelago Learning, LLC sold 656,882 shares of Series A Preferred Stock in Edline for a total of approximately $12.2 million (the “Edline Sale”). In addition, the Company received approximately $2.1 million for a notes receivable and a dividend of approximately $0.6 million in connection with the Edline Sale. The Edline Sale represents the Company’s entire investment in Edline Holdings, Inc. The Company expects to record a gain of $6.2 million before tax. As a result of the Edline Sale, Tim McEwen, the Chairman, President and Chief Executive Officer of the Company, has resigned from the Board of Directors of Edline. The Edline Sale was in connection with a series of transactions pursuant to which Blackboard was acquired by affiliates of Providence Equity Partners, which beneficially owns 47% of the Company’s outstanding shares of common stock and pursuant to which Edline became a subsidiary of Blackboard.

OnDuring ~~October 6,~~the ~~2011,~~three inmonths ~~order~~ended toMarch 31, ~~better~~2012, ~~market~~the ~~its~~Company ~~portfolio~~issued ofstock ~~products~~options in the ~~U.S.,~~amounts ~~the Company~~and ~~announced~~for athe ~~plan~~periods shown ~~to fully integrate its U.S. operations of EducationCity, resulting~~ in the ~~closing~~ offollowing ~~the EducationCity office in Naperville, Illinois by December~~table. ~~31,~~The ~~2011.~~fair Asvalue ~~a result~~ of ~~this~~ ~~integration,~~each ~~the~~option ~~Company~~was ~~anticipates~~estimated ~~incurring~~on ~~restructuring~~the ~~charges~~date of ~~approximately~~grant ~~$1.2 million~~using ~~(including~~the ~~$0.4 million~~Black-Scholes inoption ~~accelerated~~pricing ~~depreciation~~model ~~and~~with ~~other non-cash expenses), primarily during~~ the ~~fourth~~following ~~quarter~~assumptions: ~~of 2011.~~


	Three Months Ended March 31, 2012
Number of options granted		331,441
Weighted average exercise price of options granted	$	9.97
Weighted average grant date fair value of options granted	$	4.93
Expected term (in years) (1)		6.25
Volatility (2)		50.77	%
Risk free interest rate (3)		1.20	%
Expected annual dividends		None

(1)	The expected term was calculated as the average between the vesting term and the contractual term. We used the simplified method discussed in ASC 718-10-S99-1, as we do not have sufficient historical data in order to calculate a more appropriate estimate.

(2)	Expected volatility was based on the historical volatility of guideline companies over a preceding period equal to the expected term of the award.

(3)	The risk free rate is based on the U.S. Treasury yield curve at the time of grant for periods consistent with the expected term of the options.

We recognized $0.6 million and $1.3 million in share-based compensation expense related to stock options and restricted stock awards during the three months ended March, 31, 2012 and 2011, respectively. As of March 31, 2012, there was approximately $6.8 million of unrecognized stock-based compensation expense related to unvested restricted common stock and options for common stock that is expected to be recognized over a weighted average period of less than 2.8 years.

On January 31, 2011, Mr. James Walburg, the Company’s former Chief Financial Officer retired from his position at the Company. Mr. Walburg’s separation agreement allowed for the acceleration of his restricted stock as follows: 50% of his restricted common stock subject to time-based vested on January 10, 2011, 50% of his restricted common stock subject to time-based vested on January 10, 2012, and all of his restricted common stock subject to vesting based on performance measures vested on January 10, 2011. This accelerated vesting resulted in compensation expense of $0.7 million being recorded during the three months ended March 31, 2011.

On January 10, 2012, the Company granted an aggregate of 7,523 restricted stock units to Tim McEwen, Chairman, President and Chief Executive Officer of the Company. Pursuant to the terms of the restricted stock unit agreement and subject to Mr. McEwen’s continued employment, 41 2/3% of the restricted stock units is scheduled to be settled in cash on July 10, 2012, and the remaining restricted stock units are scheduled to be settled in common stock of the Company four years from the grant date on January 10, 2016.

~~Item~~ Pursuant to the terms of the restricted stock unit agreement, Mr. 2McEwen will receive 7,523 dividend equivalent rights. ~~Management’s~~See ~~Discussion~~note ~~and~~4 ~~Analysis~~for further discussion of ~~Financial~~the ~~Condition~~impact ~~and~~of ~~Results~~restricted stock units at the effective date of ~~Operations~~the Merger. Each dividend equivalent right relates to one restricted stock unit and entitles him to an amount equal to the per share dividend, if any, paid by the Company during the period between the grant date and vesting date of the related restricted stock unit. Each dividend equivalent right will vest and be payable in cash at the time that the related restricted stock unit is settled.

~~The~~At ~~following~~the ~~discussion~~effective istime ~~intended~~of tothe ~~assist~~Merger, incertain ~~the~~options, ~~understanding~~shares of ~~our~~restricted ~~consolidated financial~~stock, ~~position~~restricted stock units and ~~our~~shadow ~~results~~options will immediately vest, which will result in an estimated cash outlay of ~~operations~~$7.2 million. This ~~discussion~~includes ~~should~~approximately $5.4 million resulting from the vesting of 489,937 shares of restricted stock subject to performance conditions which will be ~~read~~met inas ~~conjunction~~a result of the Merger. Cash outlay with ~~our~~respect ~~unaudited~~to ~~condensed~~unvested ~~consolidated~~equity ~~financial~~awards ~~statements~~is ~~and~~subject to change resulting from forfeitures due to employee departures from the ~~related~~Company ~~notes~~prior into ~~Item 1~~the effective time of the Merger. Therefore, a total cash outlay for the ~~this~~settlement ~~report~~of these awards cannot be determined until the Merger effective date. See note 4 for further discussion of the impact on outstanding stock options, restricted stock, restricted stock units, and shadow options as a result of the Merger.

~~Overview~~ 10. BUSINESS SEGMENT DATA AND GEOGRAPHICAL INFORMATION

~~Archipelago~~As ~~Learning,~~a ~~Inc.~~result (of the ~~“Company”,~~acquisition ~~“we,”~~of ~~“us~~EducationCity in June 2010,” orthe ~~“our”)~~Company ishad athree ~~leading subscription-based~~operating segments, ~~software-as-a-service~~Study Island (~~“SaaS”)~~including ~~provider~~the ofStudy ~~education~~Island, ~~products.~~Northstar WeLearning, ~~provide standards-based~~Reading ~~instruction~~Eggs, ~~practice,~~and ~~assessments~~ESL ReadingSmart product lines), ~~reporting~~Educationcity ~~and~~Limited ~~productivity~~(a ~~tools~~United ~~that~~Kingdom ~~support educators’~~company), ~~efforts~~and toEducationcity ~~reach~~Inc. ~~students~~(an inIllinois ~~innovative~~company). ~~ways~~Effective ~~and~~September 1, ~~enhance~~2011, ~~the~~as ~~performance~~a result of ~~students at~~the afinancial ~~low~~and ~~cost~~operational ~~via~~integration ~~proprietary~~of ~~web-based~~Educationcity ~~platforms~~Inc. Asinto ofStudy ~~September 30~~Island, ~~2011,~~the ~~our~~Company ~~product~~now ~~lines,~~has ~~which include~~two operating segments: the U.S. Market (including Study Island, EducationCity, ~~Reading~~Northstar ~~Eggs~~Learning, ~~Northstar~~Reading ~~Learning~~Eggs, and ESL ReadingSmart, ~~were~~product lines) ~~utilized~~and bythe ~~over~~U.K. 14Market (Educationcity Limited).~~2 million~~ ~~students~~The inCompany ~~nearly~~aggregates ~~39,000~~the ~~schools~~operating insegments ~~all~~into 50one ~~states~~reportable segment based on the similar nature of the products, ~~Washington~~content and technical production processes, ~~D.C.~~types of customers, methods used to ~~Canada~~distribute the products, and ~~the~~similar ~~United~~rates ~~Kingdom~~of ~~(“U~~profitability.~~K.”).~~

WeThe ~~were~~two ~~founded~~operating insegments ~~2000.~~offer Insubscription-based ~~2001, we launched our first Study Island~~ online products inthat ~~two~~provide ~~states. By~~instruction, ~~2009~~practice, weassessment ~~had~~and ~~developed~~productivity ~~Study~~tools ~~Island products~~ for ~~all~~teachers 50and ~~states,~~students. inThe ~~the~~content ~~subject areas of reading, writing, mathematics, social studies~~ and ~~science,~~engineering ~~and~~teams ~~have~~operate ~~grown~~in ~~from~~a ~~serving~~similar 57manner ~~schools in 2001~~ to ~~nearly~~ ~~39,000~~enhance ~~schools~~and asmaintain ofthe ~~September 30,~~products. ~~2011~~The ~~with~~primary ~~our~~customer ~~five~~bases ~~product~~for ~~lines. Study Island helps~~both ~~students~~operating insegments ~~K-12~~are ~~master~~schools. ~~grade~~The ~~level~~markets ~~academic~~for ~~standards~~the inUnited aStates ~~fun~~ and ~~engaging~~United ~~manner.~~Kingdom Weare ~~entered the~~both ~~postsecondary educational market with the launch of Northstar Learning in April 2009~~English-speaking, which ~~uses~~ ~~the~~is ~~same~~important ~~web-based~~from ~~platform~~a asproduct ~~our~~marketing ~~Study~~and ~~Island~~development ~~products~~perspective. toBoth ~~provide~~operating ~~various~~segments ~~instruction, assessment~~have ~~and~~similar ~~exam~~rates ~~preparation~~of ~~content~~profitability.

InGeographical ~~June 2010,~~areas weare ~~entered~~ the ~~U.K.~~United ~~market~~States ~~with the acquisition of Educationcity Limited (“EducationCity”), a leading developer~~ and ~~publisher of EducationCity.com, an online preschool through sixth grade (“Pre-K-6”) educational content and assessment program for schools in~~ the ~~United~~ ~~Kingdom and~~ United ~~States~~Kingdom. ~~Similar~~The tofollowing ~~Study~~geographical ~~Island,~~area ~~EducationCity~~information ~~maps to standards,~~includes ~~combines~~revenues ~~rigorous~~based ~~content~~on and interactive animations, fun games, and motivational rewards to drive academic success in a fun and engaging manner. Unlike Study Island, EducationCity’s core classroom and individualized instruction is geared toward the ~~initial~~physical ~~teaching~~location ~~phases~~ of ~~academic~~the ~~content. EducationCity~~operations ~~helps students learn basic skills and concepts while Study Island helps assess, reinforce and master this knowledge. When used~~ (in ~~conjunction~~thousands): ~~with one another, EducationCity and Study Island provide a powerful comprehensive teaching and reinforcement solution to enhance student learning and teacher performance.~~

In August 2010, we began selling Reading Eggs, an online product focused on teaching young children to read. Reading Eggs is sold under a distribution agreement with Blake Publishing, which requires us to pay a 35% royalty to Blake Publishing for every sale. Beginning in 2011, we have been required to pay a minimum royalty each year of the agreement.

		XXXXXX.X		XXXXXX.X
	Three Months Ended March 31,
	2012		2011
Revenue:
United States	$	17,148	$	15,835
United Kingdom		2,037		1,468

Total Revenue	$	19,185	$	17,303

InThe ~~June 2011,~~following ~~through~~geographical ~~the~~area ~~acquisition~~information ofincludes ~~Alloy~~total ~~Multimedia~~long-lived assets (~~“Alloy”),~~which ~~publisher~~consist of ~~ESL ReadingSmart,~~all wenon-current ~~entered into the English language learners market. ESL ReadingSmart is an online~~assets, ~~standards-based~~other ~~program~~than ~~for English language learners targeted toward grades 4-12. The product offers individualized~~goodwill, ~~content~~indefinite-~~based~~lived ~~instruction~~intangible toassets ~~develop~~and ~~English~~deferred ~~language~~tax ~~proficiency~~assets) ~~with emphasis~~based on ~~literacy~~physical ~~and~~location ~~academic~~(in ~~language~~thousands): ~~development for newcomers, beginners, intermediate, early advanced, and advanced English learners.~~

Effective September 1, 2011, as a result of the financial and operational integration of Educationcity Inc. into Study Island, the Company now has two operating segments: the U.S. Market (including Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines) and the U.K. Market (Educationcity Limited). We aggregate the two operating segments into one reportable segment based on the similar nature of the products, content and technical production processes, types of customers, methods used to distribute the products, and similar rates of profitability. See Note 9 in our condensed consolidated financial statements for further information on segments and geographic area disclosures.

		XXXXXX.X		XXXXXX.X
	March 31 2012		December 31 2011
Long lived assets:
United States	$	24,527	$	23,951
United Kingdom		12,517		12,426

Total long-lived assets	$	37,044	$	36,377

~~Key~~11. ~~Legislative~~RELATED-PARTY ~~Developments~~TRANSACTIONS ~~that May Impact Our Business and Operations~~

InThe ~~the~~Company ~~United~~is ~~States,~~a ~~the~~party ~~increased~~to ~~focus~~an onagreement ~~higher~~with ~~academic~~MHT ~~standards~~Securities, ~~and~~L.P. ~~assessments~~to asprovide aadvisory services in connection with the ~~means~~identification, toevaluation ~~measure~~and ~~educator~~acquisition ~~accountability~~of businesses. MHT Securities, L.P. is ~~largely~~an ~~reflected~~affiliate of MHT-SI, L.P. and MHT-SI GP, L.L.C., both stockholders in ~~legislative~~the ~~efforts~~Company. ~~such~~Under asthe Noterms of the agreement, we must pay a transaction fee to MHT ~~Child~~Securities, ~~Left~~L.P. ~~Behind~~upon the successful consummation of a merger, acquisition, consolidation, divestiture or ~~NCLB~~similar transaction with any company initially identified and contacted by MHT Securities, ~~the~~L.P. ~~common~~as ~~name~~a potential acquisition for the ~~2001~~Company. ~~reauthorization~~The amount of this transaction fee is dependent upon the ~~Elementary~~size ~~and Secondary~~of ~~Education~~the ~~Act~~acquisition, orbut ~~ESEA~~in no circumstances less than $250,000. ~~ESEA~~Effective ~~required~~in ~~all~~October ~~states~~2011, towe ~~have~~amended ~~academic~~the ~~standards~~agreement inwith ~~place~~MHT ~~for K-12~~Securities, ~~students~~L.P., inincreasing ~~reading~~the transaction from a minimum of $250,000 ~~math~~to ~~and~~$650,000. ~~science~~Additionally, ~~and~~any toreasonable ~~assess~~expenses ~~student~~incurred ~~achievement~~in ~~annually~~connection with ~~end~~this ~~of school~~agreement ~~year~~are ~~assessments~~reimbursed. The Company paid $0.3 million under this agreement during the three months ended March 31, 2012. Contingent on the consummation of the Merger, the Company will owe this stockholder $0.7 million.

~~The~~Providence ~~original~~Equity ~~NCLB~~Partners ~~legislation~~beneficially ~~required all U.S. students to be performing at grade proficiency~~owns ~~levels~~47% inof ~~reading/ language arts and mathematics by~~ the ~~2013-2014~~Company’s ~~school~~outstanding ~~year~~shares ~~in order to achieve Adequate Yearly Progress (AYP). However, the U.S. Department~~ of ~~Education~~common ~~earlier this year estimated that about 80% of U~~stock.S. ~~schools~~Providence ~~would~~Equity ~~miss~~Partners ~~this~~paid ~~AYP milestone~~ for ~~the~~certain ~~current~~costs ~~2011-2012 school~~related ~~year~~to ~~and~~travel ~~the original legislation consequences for not achieving AYP were punitive~~ and ~~not practical,~~other ~~(e.g.,~~expenses ~~loss~~ of ~~federal~~members ~~funds,~~of ~~school~~the ~~closings~~Company’s ~~and/or~~Board ~~replacement~~ of ~~principals~~Directors and ~~staff,~~ ~~ability~~other ~~for~~staff ~~parents~~assisting tothose ~~receive~~Directors ~~vouchers to send children to another school). Moreover, ESEA~~in ~~was~~certain ~~supposed~~oversight tofunctions ~~be reviewed~~ and ~~reauthorized~~invoiced inthe ~~October 2008~~Company ~~and~~for ~~although~~reimbursement. ~~many~~During ~~politicians believe~~ the ~~nation’s~~three ~~primary~~months ~~education~~ended ~~law~~March 31, ~~needs to be revised~~2012, ~~reauthorization~~an ~~legislation~~insignificant ~~has~~amount ~~been delayed~~of ~~with~~these ~~NCLB~~costs ~~extended~~were ~~via~~paid aby ~~series~~the ~~of Congressional continual resolutions~~Company. ~~Democratic~~During ~~and Republican differences on~~ the ~~Federal~~same ~~role~~period in ~~public~~March ~~education~~2011, ~~and~~ the ~~best~~Company ~~strategies~~paid ~~for~~$0.1 ~~meaningful~~million ~~educational~~of ~~reforms,~~these ~~coupled with other higher priority legislative objectives, has led to gridlock~~costs.

~~With~~The noCompany ~~Congressional~~purchases ~~action~~equipment ~~pending~~from toan ~~address~~affiliate ~~ESEA~~of ~~reauthorization~~Providence ~~and~~Equity ~~the AYP issue, the U~~Partners.S. ~~Secretary~~Equipment ~~of Education, Arne Duncan, announced plans in August 2011 to grant waivers for parts~~purchases ofwith ~~the~~this ~~NCLB~~supplier ~~law,~~totaled if$0.4 ~~Congress~~million ~~does~~and ~~not reauthorize ESEA~~$0.3 ~~The~~million ~~waivers provide a framework~~ for ~~how states can be relieved of some of~~ the ~~more~~three ~~onerous~~months ~~restrictions~~ended ~~of NCLB~~March 31, ~~including~~2012 ~~AYP~~and ~~milestones~~2011, ~~provided~~ ~~states prove via an application process that they are working hard to improve the education they’re delivering to their students and that it’s having an impact on results~~respectively.

~~The~~In ~~waivers~~connection ~~take~~with ~~effect~~the ~~this~~Merger ~~school~~Agreement, ~~year~~Tim McEwen, ~~2011-2012~~our Chairman, Chief Executive Officer and ~~states~~President, ~~must~~and ~~notify~~stockholders ~~the~~affiliated ~~U.S.~~with ~~Department~~Providence Equity Partners, who collectively beneficially own approximately 49% of ~~Education~~the byCompany’s ~~October 12~~common stock, ~~2011~~have ifeach ~~they~~entered ~~intend~~into support agreements with the Company and Plato to ~~request~~vote ~~flexibility~~their shares for approval and adoption of the Merger Agreement. ~~Most~~Their ~~states~~obligations ~~are~~under ~~expected~~the support agreements to ~~apply~~vote in favor of the Merger Agreement will terminate if the Merger Agreement is terminated or if the Board withdraws its recommendation for the Merger under the circumstances ~~waivers~~permitted by the Merger Agreement.

Since the announcement of the U.S. Department of Education’s intent to grant NCLB waivers, Congressional activity related to ESEA reauthorization has accelerated. Senator Kline (Republican-MN) and fellow House Republicans have proposed a five-part plan to return greater control to state and local governments, eliminate federal red tape, scrap duplicative federal programs, recruit more effective teachers and expand charter schools.

~~Senator~~Item 2. ~~Harkin~~Management’s ~~(Democrat~~Discussion ~~– IA)~~ and ~~chairman~~Analysis of ~~the Senate Health, Education, Labor and~~ ~~Pensions~~Financial ~~Committee,~~Condition ~~also recently produced a reauthorization plan,~~ and ~~was~~Results able to gain some bipartisan support from Senator Enzi (Republican — Wyoming) and Senator Alexander (Republican — Tennessee). The bill maintains annual student testing but does away with the controversial NCLB notion of ~~AYP timetables,~~Operations ~~replacing them with an expectation of “continuous improvement” based on college and career readiness standards.~~

InThe ~~summary,~~following ~~ESEA~~discussion ~~reauthorization remains~~is ~~controversial~~intended ~~and~~to ~~may~~assist orin ~~may not occur before~~ the ~~end~~understanding of ~~2011.~~our consolidated ~~Regardless,~~financial weposition ~~believe that higher standards, more rigorous assessments~~ and ~~accountability~~ ~~will~~our ~~remain~~results ~~key~~of ~~components~~operations. ofThis ~~the~~discussion ~~revised~~should ~~legislation,~~be ~~whenever~~read itin ~~occurs,~~conjunction with anour ~~increased~~unaudited ~~focus~~condensed ~~on demonstrating~~consolidated ~~student~~financial ~~academic~~statements ~~achievement~~and ~~growth, improving~~the ~~high~~related ~~school~~notes ~~graduation~~in ~~rates~~Item 1 ~~and~~of ~~ensuring~~this ~~college and career readiness~~report.

InOverview addition, most of our U.S. customers are public schools and school districts that have to comply with state educational standards. As a result, our sales depend on the availability of public funds, with 47% of total education expenditures coming from state funds and 45% coming from local funds, which have become more limited as many states or districts face budget cuts due to decreases in their tax bases and rates. State and federal educational funding is primarily funded through income taxes, and local educational funding is primarily funded through property taxes. As a result of the ongoing recession, income tax revenue for the 2008 and 2009 tax years has decreased, which has put pressure on state and federal budgets. However, according to the Nelson A. Rockefeller Institute of Government, state tax revenues grew by 10.8% in the second quarter of 2011, representing the sixth consecutive quarter that states reported growth in collections on a year-over-year basis. For the year ending in June 2011, the period corresponding to 46 states’ fiscal years, total state tax collections increased by $58 billion or 8.4% from the previous year, the strongest annual gain since 2005. Despite continued growth, revenues were still slightly lower in the second quarter of 2011 than four years earlier. Preliminary figures for July and August 2011 indicate further but less robust growth in state tax revenues. Overall collections in 41 early-reporting states showed growth of 6.8% compared to the same months of 2010. However, local property tax revenues declined for the third consecutive quarter, driven by continuing weakness in housing markets.

~~Moreover~~Archipelago Learning, ~~according~~Inc. to (the ~~Center~~ on“Company”, ~~Budget~~“we,” ~~and~~“us,” ~~Policy~~or ~~Priorities~~“our”) is a leading subscription-based, ~~elementary~~SaaS ~~and~~provider ~~high~~of ~~schools~~education ~~facing~~products. ~~increased~~We ~~budget~~provide ~~cuts~~standards-based ~~attributable~~instruction, in ~~part~~practice, toassessments, ~~the~~reporting ~~failure~~and productivity oftools ~~the~~that ~~federal~~support ~~government~~educators’ efforts to ~~extend~~reach ~~emergency~~students ~~fiscal~~in ~~aid~~innovative toways ~~states~~ and ~~school~~ ~~districts,~~enhance ~~and~~ the ~~failure~~performance of ~~most~~students ~~states~~via toproprietary ~~enact~~web-based ~~needed~~platforms. ~~revenue~~As ~~increases~~of ~~and~~March 31, ~~instead~~2012, ~~to balance~~our ~~their~~products ~~budgets~~were ~~solely~~utilized ~~through~~by ~~spending~~over ~~cuts~~14.6 million students ~~While~~in ~~most~~approximately ~~states~~38,100 ~~are~~schools ~~cutting,~~in 16all 50 states, ~~are~~Washington ~~spending at levels higher than 2008~~D. ~~Some~~C., ~~historic~~Canada, ~~budget comparisons~~and ~~provided by~~ the ~~Center~~United ~~include~~Kingdom. ~~the following:~~

	•		37 states are providing less funding per student to local school districts in the new school year than they provided last year.
	•		30 states are providing less than they did four years ago,

We were founded in 2000. In 2001, we launched our first Study Island products in two states. By 2009, we had developed Study Island products for all 50 states, in the subject areas of reading, writing, mathematics, social studies and science, and have grown from serving 57 schools in 2001 to 38,100 schools as of March 31, 2012 with our five product lines, Study Island, EducationCity, Northstar Learning, Reading Eggs and ESL ReadingSmart.

Study Island helps students in K-12 master grade level academic standards in a fun and engaging manner. We entered the postsecondary educational market with the launch of Northstar Learning in April 2009, which uses the same web-based platform as our Study Island products to provide various instruction, assessment and exam preparation content.

In June 2010, we entered the U.K. market with the acquisition of Educationcity Limited (“EducationCity”), a leading developer and publisher of EducationCity.com, an online Pre-K-6 educational content and assessment program for schools in the United Kingdom and United States. Similar to Study Island, EducationCity maps to standards, combines rigorous content and interactive animations, fun games, and motivational rewards to drive academic success in a fun and engaging manner. Unlike Study Island, EducationCity core classroom and individualized instruction is geared toward the initial teaching phases of academic content. EducationCity helps students learn basic skills and concepts while Study Island helps assess, reinforce and master this knowledge. When used in conjunction with one another, EducationCity and Study Island provide a powerful comprehensive teaching and reinforcement solution to enhance student learning and teacher performance.

Effective September 1, 2011, as a result of the financial and operational integration of Educationcity Inc. into Study Island, we now have two operating segments: the U.S. Market (including Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines) and the U.K. Market (Educationcity Limited). We aggregate the two operating segments into one reportable segment based on the similar nature of the products, content and technical production processes, types of customers, methods used to distribute the products, and similar rates of profitability. See note 10 in our condensed consolidated financial statements for further information on segments and geographic area disclosures.

In August 2010 and November 2011, we began selling Reading Eggs and Reading Eggspress, respectively, online products focused on teaching young children to read. Reading Eggs and Reading Eggspress are sold under a distribution agreement with Blake Publishing, which requires us to pay a 35% royalty to Blake Publishing for every sale. Beginning in 2011, we are required to pay a minimum royality each year of the agreement. During 2011, we paid royalties based on actual sales which exceeded the agreed minimum royalties per the distribution agreement. Per the agreement, we receive credit against future minimum royalties when actual sales exceed minimum amounts.

In June 2011, through the acquisition of Alloy, publisher of ESL ReadingSmart and ReadingMate, we entered into the English language learners market. ESL ReadingSmart is an online, standards-based program for English language learners targeted toward grades 4 to 12. ESL ReadingSmart offers individualized, content-based instruction to develop English language proficiency with emphasis on literacy and academic language development for newcomers, beginners, intermediate, early advanced, and advanced English learners. For native English speakers, ReadingMate is a supplemental reading intervention program that prepares students to read at grade level and develop necessary reading skills.

	•		17 states have cut per-student funding by more than 10% from pre-recession levels.
	•		Almost two-thirds of states (30 of the 46 states surveyed ) are providing less per-student funding for K-12 education in the current 2012 fiscal year than they did in fiscal year 2008.

Subscriptions to our Study Island and EducationCity products generate the vast majority of our revenue. Our products are sold as subscriptions through purchase orders or other evidence of an arrangement. The average subscription period for our products is approximately 16 months, and we occasionally sell multi-year subscriptions. We rely significantly on our ability to secure renewals for subscriptions to our products as well as sales to new customers. We generally contact schools several months in advance of the expiration of their subscription, to attempt to secure renewal subscriptions. If a school does not renew its subscription within six months after its expiration, we categorize it as a lost school, and if a school subsequently purchases a subscription after this renewal period, we consider it to be a new subscription.

~~The~~On March 3, 2012, ~~U.S.~~we ~~federal~~entered ~~budget~~into ~~was~~a ~~supposed~~Merger toAgreement ~~take~~with ~~effect~~Plato onand ~~October 1,~~Merger ~~2011~~Sub, ~~however~~a ~~given~~wholly ~~the~~owned subsidiary ~~current~~of ~~macroeconomic environment~~Plato, ~~the~~providing ~~federal~~for ~~budget~~the ~~deficit,~~merger ~~the~~of ~~debt~~Merger ~~ceiling~~Sub ~~debate~~with and ~~congressional~~ ~~polarization~~into onthe ~~discretionary program spending~~Company, with the ~~final~~Company ~~outcome~~continuing ~~for~~as ~~next~~the ~~year’s education~~surviving ~~budget is uncertain at this time~~corporation. ~~Currently,~~Upon the ~~Obama~~Merger ~~administration~~becoming ~~has~~effective, ~~proposed spending~~we ~~$77.4 billion~~will onbecome ~~education~~a ~~next~~wholly ~~year.~~owned ~~The~~subsidiary ~~budget~~of ~~calls~~Plato ~~for~~and ~~funding~~each ~~changes~~share toof aour ~~wide~~common ~~variety~~stock ofissued ~~programs,~~and ~~including~~outstanding ~~sizable~~immediately ~~increases~~prior to ~~special~~the ~~education,~~effective ~~science~~time ~~and~~of ~~technology, career~~the ~~and~~Merger ~~college~~will ~~readiness,~~be ~~and~~converted ~~adult~~into ~~education. However,~~ the ~~President’s~~right ~~proposed~~to ~~budget~~receive ~~faces an~~$11.10 ~~uncertain future~~ in ~~Congress,~~cash inwithout ~~particular~~interest ~~the~~and ~~Republican-led~~less ~~House,~~applicable ~~which~~withholding istax ~~expected~~on tothe ~~seek significant~~terms ~~cuts~~and insubject ~~all~~to ~~discretionary~~the ~~spending~~conditions ~~areas,~~set ~~including~~forth in ~~education~~the ~~funding~~Merger Agreement.

InKey ~~August 2011,~~Legislative ~~the~~Developments federal administration reached an agreement to raise the debt ceiling in order to avoid financial default, while slashing more than $2 trillion in federal spending over the next decade. While the details of the spending cuts to states remain unclear, lawmakers from both parties have discussed the need to cut or impose caps on discretionary spending over the next decade, which could mean additional cuts in federal aid to states, which could shift more costs to states that ~~already~~May ~~are~~Impact ~~having~~Our ~~trouble~~Business ~~balancing~~and ~~their~~Operations ~~budgets.~~

IfIn ~~Congress~~the ~~cannot~~United ~~reach~~States, ~~agreement~~the byincreased ~~January 2012~~focus on ~~how~~higher academic standards and assessments as a means to ~~cut~~measure ~~$1.5~~educator ~~trillion~~accountability is largely reflected in ~~spending over~~legislative ~~the~~efforts ~~next~~such ~~10 years~~as No Child Left Behind, weor ~~may~~NCLB, ~~see~~the ~~cuts~~common inname ~~federal~~for ~~funding~~the to2001 ~~education~~reauthorization of the Elementary and Secondary Education Act, asor ~~automatic~~ESEA. ESEA required all states to have academic standards in place for ~~across~~K-~~the-board~~12 ~~reductions~~students ~~take~~in ~~effect~~reading, ~~beginning~~math inand ~~January 2013~~science, and to assess student achievement annually with end of school year assessments.

The original NCLB legislation required all U.S. students to be performing at grade proficiency levels in reading, language arts and mathematics by the 2013-2014 school year in order to achieve adequate yearly progress (“AYP”). However, the U.S. Department of Education has estimated that about 80% of U.S. schools would miss this AYP milestone for the current 2011-2012 school year, which would result in punitive consequences to those schools. The ESEA legislation was initially scheduled for reauthorization in October 2008, but has been continually delayed. While many politicians believe that the nation’s primary education law needs to be revised, reauthorization legislation has been delayed with NCLB extended via a series of Congressional continual resolutions. Democratic and Republican differences on the Federal role in public education and the best strategies for meaningful educational reforms, coupled with other higher priority legislative objectives, has led to gridlock. While uncertainty continues to surround the substance and timing of ESEA reauthorization, we believe that higher standards, more rigorous assessments and accountability will remain key components of the revised legislation, whenever it occurs, with an increased focus on demonstrating student academic achievement growth, improving high school graduation rates and ensuring college and career readiness. Moreover, we expect that use of technology to innovate and scale best teaching and learning practices will be a key component of the final reauthorization legislation. In the meantime, the requirements for seeking NCLB waivers continue the focus on high standards, assessment and accountability as summarized below.

With no Congressional action pending to address ESEA reauthorization and the AYP issue, in 2011 the Federal government granted waivers to provide a framework for relief of some of the more onerous restrictions of NCLB, including AYP milestones for the 2011-2012 school year. To be granted waivers, states must perform the following tasks: (1) set performance targets based on whether students graduate from high school ready for college and career rather than having to meet NCLB’s 2014 deadline based on arbitrary targets for proficiency; (2) design locally tailored interventions to help students achieve instead of one-size-fits-all remedies prescribed at the federal level; (3) be free to emphasize student growth and progress using multiple measures rather than just test scores; and (4) have more flexibility in how they spend federal funds to benefit students. During 2011, 11 states applied for these waivers and in February 2012 all 11 of those states were granted waivers. An additional 26 states and the District of Columbia submitted applications for waivers by the February 2012 deadline with approvals expected in May 2012

The U.S. Department of Education implemented its highly publicized Race to the Top (“RttT”) competition in 2010 whereby winning states were awarded funds totaling $3.4 billion in aggregate for agreeing to implement bold educational reforms. States receiving these RttT funds are expected to implement educational reforms over the next several years. Eleven states and the District of Columbia were awarded $3.9 billion and received the monies between August 2010 and January 2011. In March 2011, an additional $500 million in funds were made available through another state competition focused on early education (Pre-K and Kindergarten), the RttT-Early Learning Challenge, with nine state winners receiving grants ranging from $50 million to $100 million. These investments will impact all early learning programs, including Head Start, public pre-K, childcare, and private preschools. Key reforms will include: aligning and raising standards for existing early learning and development programs; improving training and support for the early learning workforce through evidence-based practices; and building robust evaluation systems that promote

~~The~~ effective ~~federal~~practices ~~budget~~and ~~negotiations~~programs ~~are~~to ~~complicated~~help byparents ~~the~~make ~~efforts~~informed ofdecisions. ~~the~~Also ~~Joint~~in ~~Select~~December ~~Committee~~2011, ~~also~~ ~~known~~the asU.S. ~~the~~Department ~~super~~of ~~committee,~~Education ~~which~~announced isthat ~~working~~seven onstates ~~recommendations~~will toeach ~~cut~~receive ~~$1.5~~a ~~trillion~~share inof the $200 ~~spending~~million ~~over~~in ~~the~~RttT ~~next~~Round ~~10 years.~~3 Iffunds ~~the~~to ~~committee’s~~advance ~~proposal,~~targeted ~~due~~K-12 byreforms ~~the~~aimed ~~end~~at ofimproving ~~November,~~student isachievement. ~~not signed~~RTT3 ~~into~~focuses ~~law~~on bysupporting ~~the~~efforts ~~end~~to ofleverage ~~this~~comprehensive ~~year~~statewide reform, ~~automatic~~while ~~$1.2~~also ~~trillion~~improving ~~across-the-board~~science, ~~cuts~~technology, ~~would~~engineering goand ~~into~~mathematics ~~effect~~education. ~~over~~The ~~the~~seven ~~next~~winning ~~10 years. Of~~applications ~~these~~include ~~cuts,~~commitments ~~50%~~to ~~would~~enhance ~~come~~data ~~from~~systems, ~~defense~~raise ~~spending~~academic standards, improve principal and ~~the~~teacher ~~other~~support ~~50%~~and ~~would~~evaluation ~~come~~systems ~~from~~and ~~discretionary~~implement ~~domestic~~school ~~programs,~~interventions ~~including~~in ~~education~~underperforming schools.

A ~~decrease~~requirement infor ~~the~~RttT ~~federal~~applicants ~~budget~~is ~~could~~to ~~mean~~signal ~~less~~their ~~money~~intent ~~for~~to officially adopt the ~~non~~Common Core Standards for K-~~government~~12 ~~vendors~~in ~~that~~reading ~~provide~~and ~~technology~~mathematics. As of December 31, ~~textbooks~~2011, ~~and~~45 ~~after-school~~states, ~~tutoring~~the ~~for~~District ~~students.~~of ~~School~~Columbia, ~~districts~~Puerto ~~spent~~Rico ~~about $49 billion~~and onthe ~~such~~U.S. ~~outside~~Virgin ~~services~~Islands ~~during~~had officially adopted the ~~2007-08~~new ~~school~~standards. ~~year~~Alaska, ~~according~~Minnesota, toNebraska, ~~the~~Texas ~~latest~~and ~~data from~~Virginia ~~the~~have ~~Department~~not ofadopted ~~Education.~~the new standards. For ~~now~~those that have signaled, ~~however~~adoption of the standards, wethe transition will take time and does not bring immediate change in the classroom. We believe ~~producers~~that implementation of ~~K-12~~the ~~print~~Common Core Standards will be a long-~~based~~term process, as states rethink ~~curriculum~~their ~~and~~teacher training, curriculum, instructional materials ~~are~~and ~~struggling~~testing. ~~while~~We ~~companies~~continue to believe that ~~are~~Common ~~focused~~Core ~~on technology-based~~Standards ~~instruction~~implementation will evolve in different ways across the adopting states and ~~tools~~will ~~for~~raise ~~data~~the ~~collection~~overall rigor of curriculum and assessments, ~~analysis~~but ~~are~~we ~~doing~~increasingly ~~much~~believe ~~better~~that the federal government will not mandate national standards and assessments. Furthermore, ~~according~~ there is now a growing movement in some states to ~~industry~~oppose ~~sources~~the Common Core Standards in order to prevent unwanted federal control over education. A study recently published by Pioneer Institute, the American Principles Project, and the Pacific Research Institute of California estimated that it will cost nearly $16 billion for 45 states plus the District of Columbia to implement the Common Core Standards over a seven year period.

InOur ~~2010,~~products ~~the~~are ~~U.S.~~specifically ~~Department~~built offrom ~~Education implemented its highly publicized Race to~~ the ~~Top~~ ~~(“RttT”)~~varying ~~competition~~academic ~~whereby 11 winning states~~ and ~~the~~assessment ~~District~~standards ofin ~~Columbia~~all ~~were~~50 ~~awarded~~states, ~~funds totaling~~which ~~$3.4 billion~~we inbelieve ~~aggregate~~differentiates ~~for~~them ~~agreeing~~from tothe ~~implement~~products ~~bold~~offered ~~educational~~by ~~reforms~~our competitors. ~~The~~However, ~~funds were~~given ~~awarded~~the touncertainty ~~states~~regarding ~~based on~~ the ~~quality~~implementation of ~~plans~~Common ~~designed~~Core toStandards, ~~implement~~we ~~bold~~have ~~educational reform~~invested ~~initiatives~~both ~~and~~in ~~likelihood~~development of ~~actually~~new ~~being~~Common ~~able~~Core toproducts ~~follow-through~~for ~~and~~the ~~execute.~~45 ~~However,~~adopting ~~every state~~states ~~but~~and ~~Georgia~~the ~~has~~District ~~now~~of ~~amended~~Columbia ~~its~~as ~~RttT~~well ~~plan~~as incontinued ~~some~~development ~~way,~~of ~~usually~~new ~~scaling~~products ~~back~~and ~~the~~enhancements ~~timeline~~for ~~or scaling~~existing ~~back~~state ~~an initiative~~standards.

InThe ~~2011,~~Federal anbudget ~~additional~~makes ~~$700 million~~up ~~will~~about be9% ~~awarded~~of toK-12 ~~states~~school asbudgets aand ~~part~~is an important source of ~~RttT~~funding for purchase of ~~which~~our ~~$200 million~~programs, ~~will~~particularly bein ~~held~~large, ~~back~~urban todistricts. ~~further~~In ~~support~~December ~~the~~2011, ~~reform~~Congress ~~efforts~~passed ~~underway~~an inomnibus ~~the~~spending 11bill ~~original~~for ~~winning~~fiscal ~~states~~year 2012. In ~~March~~Overall, the Department of ~~2011~~Education was funded at $71.3 billion, which is slightly less than last year and $9.3 billion below the ~~Obama~~President’s ~~administration~~request. ~~announced~~We believe that ~~the~~passage ~~remaining~~of ~~$500 million~~this ~~would~~budget will be ~~made available~~a positive for ~~another~~K-12 ~~state~~education ~~competition~~spending, ~~focused~~as onmany ~~early~~districts ~~education~~and ~~(Pre-K~~schools ~~and~~were ~~Kindergarten).~~fearful ~~The new~~throughout ~~Race~~the tofall of 2011 that the ~~Top-Early~~Congressional ~~Learning~~“Super ~~Challenge~~Committee” ismight ~~open~~not reach toa ~~all~~budget ~~states~~agreement, ~~with~~which ~~grants~~would ~~ranging~~trigger ~~from~~draconian ~~$50 million~~automatic cuts in federal funding to ~~$100 million,~~K-12 ~~depending~~education. onThis auncertainty ~~state’s~~had ~~population~~caused districts to be cautious in spending throughout the fall of 2011. ~~Thus~~ ~~far~~However, 35the ~~states~~uncertainty ~~have~~is ~~signaled~~gone ~~interest~~and inthe overall ~~applying~~federal budget is more favorable than expected.

AIn ~~requirement~~February ~~for~~2012, ~~RttT~~President ~~applicants~~Obama ~~was~~presented tohis ~~signal~~proposed ~~their~~FY ~~intent to officially adopt the Common~~2013 ~~Core~~federal ~~Standards~~budget ~~for~~to ~~K-12~~Congress, inwhich ~~reading~~would ~~and~~take ~~mathematics,~~effect ~~released in June~~October ~~2010~~1, 2012. AsUnder ofthis ~~September 30~~proposal, ~~2011,~~ ~~44 states,~~ the ~~District~~Department of ~~Columbia,~~Education ~~American~~would ~~Samoa~~receive ~~Islands,~~nearly ~~Guam,~~$70 ~~Northern~~billion. ~~Mariana~~The ~~Islands, Puerto~~proposal ~~Rico~~may ~~and~~encounter ~~the~~strong ~~U.S.~~opposition ~~Virgin~~from ~~Islands~~Congress, ~~had~~but ~~officially~~we ~~adopted~~believe ~~the~~this ~~new standards, although adoption~~initial ofproposal ~~the~~is ~~standards~~encouraging. ~~does~~In ~~not~~addition, ~~bring~~Representative ~~immediate~~Paul ~~change~~Ryan in(R-WI), the ~~classroom.~~ranking WeRepublican ~~believe~~on ~~that implementation of~~ the ~~Common~~House ~~Core~~Budget ~~Standards~~Committee, ~~will~~released behis abudget ~~long-term process~~proposal, asRoadmap ~~states~~for ~~rethink~~America’s ~~their teacher training~~Future, ~~curriculum,~~ ~~instructional~~in ~~materials~~January ~~and testing~~2012. WeAlthough ~~continue~~Congressman toRyan ~~believe that Common Core Standards~~reserved ~~implementation~~his ~~will~~most ~~evolve~~detailed inpolicy ~~different~~prescriptions ~~ways~~for ~~across~~Medicare, ~~the~~Medicaid, ~~adopting states~~ and ~~will~~Social ~~raise the overall rigor of curriculum and assessments~~Security, ~~but~~his weRoadmap ~~increasingly~~assumed ~~believe~~ that ~~the~~from ~~federal~~2010 ~~government~~through ~~will not~~2019 ~~mandate~~nondefense ~~national~~discretionary ~~standards~~spending, ~~and~~including ~~assessments. Furthermore~~education, ~~there~~would isbe ~~now~~frozen aat ~~growing~~2009 ~~movement~~levels in ~~some~~ ~~states~~nominal toterms. ~~oppose~~ With the ~~Common~~Democrats ~~Core~~and ~~Standards~~Republicans infar ~~order~~apart toon ~~prevent~~budget ~~unwanted~~policy ~~federal~~and ~~control~~priorities, ~~over education.~~we ~~For~~expect ~~instance,~~uncertainty ~~legislation~~to ~~has~~continue ~~recently~~and ~~been~~it ~~introduced~~is inpossible ~~four~~that ~~states~~the toFY ~~disallow adoption~~2013 ofbudget ~~the~~will ~~Common~~not ~~Core~~to ~~Standards,~~be ~~and~~finalized ~~several~~until ~~other~~after ~~states~~the ~~are~~autumn ~~considering~~Presidential ~~similar legislation~~election in November.

In addition, most of our U.S. customers are public schools and school districts that are dependent on the availability of public funds, with about 46% of total education expenditures coming from state funds and 45% coming from local funds, which have become more limited as many states or districts face budget cuts due to decreases in their tax bases and rates. State and federal educational funding is primarily funded through income taxes, and local educational funding is primarily funded through property taxes. As a result of the ongoing recession, income tax revenue for the 2008 and 2009 tax years has decreased, which has put pressure on state and federal budgets. However, according to the Nelson A. Rockefeller Institute of Government, state tax revenues grew by 3.6% in the fourth quarter of 2011, representing the eighth consecutive quarter that states reported growth in collections on a year-over-year basis. Overall, state tax revenues are now above the peak levels which occurred during 2007 and 2008. Local property tax revenues grew by a modest 0.6 % in the fourth quarter, but declined in inflation-adjusted terms. Preliminary figures for January and February 2012 indicate further growth in revenues. Overall collections in 45 early-reporting states showed growth of 4.0 % compared to the same months of 2011.

~~Study~~In ~~Island~~addition, ~~products~~the ~~are~~Center ~~specifically~~on ~~built~~Education ~~from~~Policy ~~the~~reported ~~varying~~in ~~academic~~February ~~and~~2012 ~~assessment standards~~that inaccording ~~all~~to 50a recent ~~states~~survey, ~~which~~“state webudget ~~believe~~cuts ~~differentiates~~for ~~them~~elementary ~~from~~and ~~the~~secondary ~~products~~education ~~offered~~appear byto ~~our competitors~~have bottomed out in many states.” ~~However,~~Several ~~given~~of the ~~uncertainty~~key ~~regarding~~findings ~~the~~were ~~implementation~~as offollows: ~~Common~~(1) Fewer ~~Core~~states ~~Standards,~~anticipated decreases in state funding for K-12 weeducation ~~have~~for ~~invested~~fiscal ~~both~~2012 than had decreases in ~~development~~fiscal of2011 ~~new~~(eight ~~Common~~states ~~Core~~projected ~~products~~decreases ~~for~~versus ~~the~~17 44prior ~~adopting~~year); (2) Only three states ~~and~~anticipated ~~the District~~cuts ofmore ~~Columbia~~than as5% ~~well~~for asfiscal ~~continued~~2012 ~~development~~versus of11 ~~new~~prior ~~products~~year; and ~~enhancements~~(3) 20 ~~for~~states ~~existing~~anticipated ~~state~~funding ~~standards~~increases for K-12 education in fiscal 2012 versus just 14 prior year, with the increases averaging 3%.

While the federal legislative efforts and budgetary challenges in schools could present challenges to our future sales, we believe that we are positioned to perform well in the current environment for various reasons: (1) we are well aligned with educational reform policies and initiatives, including the Common Core Standards, (2) we make innovation easy as schools shift from print-based solutions to online digital content, instruction, assessment and data reporting, (3) we have a proven model and track record for engaging and improving learning outcomes, (4) we are affordable compared to other educational product offerings and (5) we still have relatively low overall school penetration with room for growth.

The U.K. market and industry trends are also of importance to our business due to our EducationCity product. While the global economic recession has impacted the United Kingdom, the ~~new~~ government under British Prime Minister, David Cameron, has attempted to protect education, with the Department for Education budget rising from £35.4 billion to £39 billion over the next ~~four~~ four years. This is the money that goes directly to schools. In addition, we believe that teachers will be given greater freedom from bureaucratic burdens to use their professional judgment to meet the needs of their pupils. As a result, we believe that head teachers will have increased flexibility over their budgets, including through simpler, fairer and more transparent funding streams. That said, a new research report by the respected think tank Institute for Fiscal Studies (“IFS”), suggests that UKU.K. public spending on all forms of education could face a 13% cut in real terms over the next four years between 2011 and 2015. While higher education institutions would be the hardest hit, those primary and secondary schools with students from affluent backgrounds would see drastic funding cuts although schools with more deprived students would have their funding protected due to the introduction of the pupil premium. ~~But~~However, many schools would still see an annual 1% spending cut.

Results of Operations

Comparison of the Three Months Ended ~~September~~March 3031, ~~2011~~2012 and ~~2010~~ 2011

The following table summarizes our consolidated operating results for the three months ended ~~September~~ March 3031 (dollars in thousands):

							Change
	2011			2010			Dollars			Percentage
	2012			2011			Dollars			Percentage
Revenue	$	1819,~~223~~185		$	1517,~~449~~303		$	21,~~774~~882			1810.09	%
Cost of revenue		1,~~742~~755			1,~~534~~707			~~208~~48			133.60	%
Gross profit		1617,~~481~~430			1315,~~915~~596			21,~~566~~834			1811.48	%
Operating expense:
Sales and marketing		56,~~670~~214			5,~~711~~921			~~(41~~293	)		(04.79	%)
Content development		1,~~671~~729			1,~~195~~707			~~476~~22			391.83	%
General and administrative		57,~~775~~543			5,~~529~~453			~~246~~2,090			438.43	%
Total		1315,~~116~~486			1213,~~435~~081			~~681~~2,405			~~5.5~~18,4	%
Income from continuing operations		3,365			1,480			1,885			127.4	%
Operating income		1,944			2,515			(571	)		(22.7	%)
Other income (expense):
Interest expense		(1,~~115~~070	)		(1,~~260~~094	)		~~(145~~24	)		~~(11~~2.51	%)
Interest income		8530			~~136~~70			(5140	)		(3757.51	%)
Foreign currency gain (loss)		78			(121	)		199			164.5	%
Foreign currency loss		(128	)		(121	)		(7	)		5.0	%
Derivative loss		—			(32	)		32			*	*
Total		(1,168	)		(1,145	)		(22	)		(1.9	%)
Total		(952	)		(1,277	)		(325	)		(25.5	%)
Income before tax		776			1,370			(594	)		(43.4	%)
Income before tax		2,413			203			2,210			*	*
Provision for income tax		262			381			(119	)		(31.2	%)
Provision for income tax		421			51			370			*	*
Net income	$	514		$	989		$	(475	)		(48.0	%)
Net income	$	1,992		$	152		$	1,840			*	*

**Revenue ~~Percentage not meaningful for analysis.~~

We generate revenue from customer subscriptions to standards-based instruction, practice, assessments and productivity tools; training fees for onsite or online training sessions that are primarily provided to new customers; and individual buys, which are individual purchases for access to a product (one subject in a specific state for a specific grade level). Customer subscriptions provide the vast majority of our revenue.

Our subscription purchases are generally evidenced by a purchase order or other evidence of an arrangement. We recognize an invoiced sale in the period in which the purchase order or other evidence of an arrangement is received and the invoice is issued, which may be at a different time than the commencement of the subscription. Revenue for invoiced sales is deferred and recognized ratably over the subscription term beginning on the commencement date of the applicable subscription. The average subscription period for our products is approximately 16 months, and we occasionally sell multi-year subscriptions.

We generate revenue from: customer subscriptions to standards-based instruction, practice, assessments and productivity tools; training fees, for onsite or online training sessions that are primarily provided to new Study Island customers; and individual buys, which are individual purchases for access to a product (one subject in a specific state for a specific grade level). Customer subscriptions provide the vast majority of our revenue.

Our subscription purchases are generally evidenced by a purchase order or other evidence of an arrangement. We recognize an invoiced sale in the period in which the purchase order or other evidence of an arrangement is received and the invoice is issued, which may be at a different time than the commencement of the subscription. Revenue for invoiced sales is deferred and recognized ratably over the subscription term beginning on the commencement date of the applicable subscription. The average subscription period for our products is approximately15 months, and we occasionally sell multi-year subscriptions.

Factors affecting our revenue include: (i) the number of schools, classes or students purchasing our products; (ii) the term of the subscriptions; (iii) subscription renewals; (iv) the number of states or geographies in which we offer products; (v) the number of products we offer in a state or in a geographic region; (vi) the complexity and comprehensiveness of applicable standards, which impacts pricing; (vii) the effectiveness of our regional field-based and inside sales teams; (viii) recognition of revenue in any period from deferred revenue from subscriptions purchased or renewed during the current and prior periods; (ix) federal, state and local educational funding levels; and (x) discretionary purchasing funds available to our customers.

Pricing for ~~Study Island~~ subscriptions is based on a variety of factors. ~~Subscriptions~~Study ~~are~~Island, ReadingEggs, ESL ReadingSmart, and Northstar Learning subscriptions are priced on a fixed price per class or a variable price per school based on the number of students per grade using the products. In addition, subscriptions are priced on a per subject matter basis with discounts given if all of the subjects for a given grade are purchased. Subscription prices also vary by state based on the number, complexity and comprehensiveness of the applicable ~~standards.~~ ~~Our Study Island products are specifically built from the varying assessment~~ standards ~~in all 50 states, which we believe differentiates us from our competitors~~. For EducationCity, schools and/or districts (local authorities) pay a fixed annual subscription fee for each subject.

In the United States, seasonal trends associated with school budget years and state testing calendars also affect the timing of our sales of subscriptions to new and existing customers. As a result, most new subscriptions and renewals occur in the third quarter because teachers and school administrators typically make purchases for the new academic year at the beginning of their district’s fiscal year, which is usually July 1. Our fourth quarter has historically produced the second highest level of new subscriptions and renewals, followed by our second and first quarters.

Because revenue from customer subscriptions is deferred over the course of the subscription period and our customers pay for their subscriptions at the beginning of the subscription period, this seasonality does not cause our revenue to fluctuate significantly, but does impact our cash flow. In addition, subscription and training revenue is recognized over the term of the subscription, which averages 15 months. Consequently, our revenue in any month is impacted by invoiced sales from subscriptions purchased or renewed during the current and prior periods.

Revenue for the three months ended ~~September~~March 3031, ~~2011~~2012 was $1819.2 million, representing an increase of $21.8 9 million, or ~~18.0~~11%, as compared to revenue of $1517.4 3 million for the three months ~~ended~~ ~~September~~ended March 3031, ~~2010~~2011. OfThis ~~this~~ increase in revenue during the period is due to higher cash sales in the cumulative previous 5 quarters ending March 31, 2012 compared to the same period in 2011, This included approximately $0.6 4 million ~~was~~more ~~due~~in ReadingEggs tocash sales, which are recognized at the time of ~~Reading~~sale, ~~Eggs~~less the royalty payment, ~~which was~~and ~~introduced~~the asrun-off aof ~~product~~purchase accounting adjustments related to the EducationCity acquisition in ~~August~~ 2010. The ~~remaining~~Company ~~increase~~continues into ~~revenue~~be ~~during~~impacted ~~the~~by ~~period~~uncertainty ~~was~~in ~~due~~state toand ~~Study~~local ~~Island~~funding ~~and~~to ~~EducationCity’s~~schools ~~product~~as ~~offerings~~reflected in ~~our~~the ~~more~~1% ~~mature~~increase ~~states~~in ~~leading~~total ~~to additional~~invoiced sales tofor ~~existing~~the ~~customers,~~three ~~our~~months ~~increased~~ended ~~focus~~March 31, on2012 ~~existing~~compared ~~customers~~to ~~and~~the ~~renewal efforts,~~three ~~and~~months ~~our~~ended ~~expanded~~March 31, ~~sales force~~2011.

The following table sets forth information regarding our invoiced sales as well as other metrics that impact our revenue for the three months ended March 31 (dollars in thousands):


	2012		2011
Invoiced sales:
New customers	$	3,607	$	4,251
Existing customers		11,820		11,002
Other sales		123		145

Total		15,550		15,398

The following table sets forth information regarding our invoiced sales as well as other metrics that impact our revenue for the three months ended September 30 (dollars in thousands):


Royalties on invoiced sales		(246	)		(111	)
Change in deferred revenue		3,881			2,016

Revenue	$	19,185		$	17,303


Other metrics:
U.S. schools using our products		29,200			28,400
U.K. schools using our products		8,900			9,200
U.S. products available		2,305			2,280
U.K. products available		90			87

	2011			2010
Invoiced sales:
New customers	$	4,386		$	5,389
Existing customers		24,275			20,869
Other sales		445			446
Total		29,106			26,704
Royalties on invoiced sales		(199	)		(31	)
Change in deferred revenue		(10,684	)		(11,224	)
Revenue	$	18,223		$	15,449
Other metrics:
U.S. schools using our products		29,900			28,523
U.S. products available		2,278			2,207
U.K. schools using our products		9,100			8,583
U.K. products available		86			66

We present invoiced sales data to provide a supplemental measure of our operating performance. We believe the various invoiced sales metrics enable investors to evaluate our sales performance in isolation and on a consistent basis without the effects of revenue deferral and revenue recognition from sales in prior periods. In addition, invoiced sales to new customers and existing customers and invoiced other sales provide investors with important information regarding the source of orders for our products and services and our sales performance in a particular period. Invoiced sales are not recognized under accounting principles generally accepted in the United States, or GAAP, and should not be used an as indicator of, or an alternative to, revenue and deferred revenue. Invoiced sales metrics have significant limitations as analytical tools because they do not take into account the requirement to provide the applicable product or service over the subscription period and they do not match the recognition of revenue with the associated cost of revenue. Reconciliation is provided in the table above between invoiced sales and revenue, the closest GAAP measure to invoiced sales.

Due to purchase accounting for the acquisition of EducationCity, we do not recognize the full amounts paid by customers for acquired subscriptions prior to the acquisition. Consequently, the deferred revenue balance at the date of acquisition was reduced from $15.6 million to $9.9 million. The purchase accounting adjustment reduced our revenues by $0.4 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively. For the Alloy Multimedia acquisition, the deferred revenue balance at the date of acquisition was not materially reduced, and therefore, the purchase accounting adjustment did not materially impact revenue for the three months ended March 31, 2012.

As of March 31, 2012, approximately 29,200 schools used our U.S. products and approximately 8,900 schools used our U.K. products. A school is considered to be using our products if it has an active subscription for any or all of the products available to it. The number of schools using our products will increase for sales to new schools and will decrease if schools do not renew their subscriptions. We generally contact schools several months in advance of the expiration of their subscription to attempt to secure renewal subscriptions. If a school does not renew its subscription within six months after its expiration, we categorize it as a lost school. If the school subsequently purchases a subscription to our products after this renewal period, we consider it to be a new subscription.

Cost of Revenue

Cost of revenue consists of the costs to host and make available our products and services to our customers. A significant portion of the cost of revenue includes salaries and related expense for our engineering employees and contractors who maintain our servers and technical equipment and who work on our web-based hosted platform. Other costs include facility costs for our web platform servers and routers, network monitoring costs, depreciation of network assets and amortization of the technical development intangible assets.

Cost of revenue for the three months ended March 31, 2012 increased by $0.1 million, or 3.0%, to $1.8 million from $1.7 million for the three months ended March 31, 2011. The increase in cost of revenue was primarily attributable to increased costs for the Company’s disaster recovery sites.

Sales and Marketing Expense

Our sales and marketing expense consists primarily of salaries, commissions and related expense for personnel in our inside and field sales teams, marketing, customer service, training and account management. Commissions are earned when sales are invoiced to customers. Other costs include marketing costs, travel and amortization of customer relationship intangible assets. Marketing expense

We consists ~~present invoiced sales data to provide a supplemental measure~~ of ~~our~~direct ~~operating~~mail, ~~performance. We~~email ~~believe~~prospecting, ~~the~~“pay ~~various~~per ~~invoiced~~click” ~~sales~~advertising, ~~metrics~~search ~~enable~~engine ~~investors~~optimization, toprinted ~~evaluate~~material, ~~our~~marketing ~~sales~~research, ~~performance in isolation~~ and ontrade ashows. ~~consistent~~Marketing ~~basis~~expense ~~without~~generally increases ~~the~~as ~~effects~~our ~~of revenue deferral and revenue recognition from~~ sales inefforts ~~prior periods. In addition~~increase, ~~invoiced~~both ~~sales~~in to new ~~customers~~ and existing ~~customers and~~markets. ~~invoiced~~Our ~~other~~marketing ~~sales~~efforts ~~provide~~are ~~investors~~related ~~with~~to ~~important~~the ~~information~~launch ~~regarding~~of new product offerings, the ~~source~~introduction of ~~orders~~ ~~for~~ our products and services ~~and our sales performance~~ in anew ~~particular~~states ~~period. Invoiced sales are not recognized under accounting principles generally accepted in the United States, or GAAP,~~ and ~~should~~geographic ~~not be used an as indicator of~~regions, ~~or an alternative to, revenue~~ and ~~deferred~~ ~~revenue.~~opportunities ~~Invoiced~~within ~~sales~~a ~~metrics~~selected ~~have~~market ~~significant~~associated ~~limitations~~with asspecific ~~analytical~~events ~~tools~~such ~~because~~as ~~they~~timing ~~do not~~for ~~take into account~~ the ~~requirement~~standardized totesting ~~provide the applicable product or service over the subscription period and they do not match the recognition of revenue with the associated cost of revenue. Reconciliation is provided~~ in ~~the~~a ~~table~~particular ~~above~~state ~~between invoiced sales~~ and ~~revenue,~~upcoming ~~the closest~~trade ~~GAAP measure to invoiced sales~~shows.

~~Due~~Sales toand ~~purchase~~marketing ~~accounting~~expense for the ~~acquisition~~three ofmonths ~~EducationCity~~ended ~~and Alloy~~March 31, we2012 doincreased ~~not recognize the full amounts paid~~ by ~~customers for acquired subscriptions prior to the acquisition~~$0. ~~Consequently~~3 ~~for EducationCity~~million, ~~the~~or ~~deferred revenue balance at the date of acquisition was reduced from $15~~4.~~6 million~~9%, to $96.~~9 million.~~2 ~~The purchase accounting adjustment reduced our revenues by $0.5~~ million ~~and~~from $15.0 9 million for the three months ended ~~September~~March 3031, 2011 ~~and 2010, respectively~~. ~~For~~The ~~Alloy,~~increase ~~the~~was ~~deferred~~primarily ~~revenue~~attributable ~~balance~~to atincreases ~~the~~in ~~date~~salaries ~~of acquisition was not materially reduced,~~ and ~~therefore,~~ ~~the~~related ~~purchase~~costs ~~accounting~~resulting ~~adjustment~~from ~~did~~increased ~~not~~headcount ~~materially~~and ~~impact~~annual ~~revenue~~salary ~~for the three months ended September 30, 2011~~increases.

AsContent ofDevelopment ~~September 30,~~Expense 2011, approximately 29,900 schools used our U.S. products and approximately 9,100 schools used our U.K. products. A school is considered to be using our products if it has an active subscription for any or all of the products available to it. The number of schools using our products will increase for sales to new schools and will decrease if schools do not renew their subscriptions. We generally contact schools several months in advance of the expiration of their subscription to attempt to secure renewal subscriptions. If a school does not renew its subscription within six months after its expiration, we categorize it as a lost school. If the school subsequently purchases a subscription to our products after this renewal period, we consider it to be a new subscription.

~~Cost~~Our content development expense primarily consists of ~~Revenue~~salaries and related expense for our content development employees, who are responsible for writing the questions for our products, outsourced content writing costs, and amortization of our program content intangible assets.

~~Cost~~Content ofdevelopment ~~revenue~~expense ~~consists~~for of the ~~costs~~three tomonths ~~host~~ended ~~and~~March 31, ~~make~~2012 ~~available~~increased ~~our~~by ~~products~~1.3%, ~~and services~~ to ~~our~~ ~~customers~~$1.7 Amillion ~~significant~~for ~~portion of~~ the ~~cost~~three ofmonths ~~revenue includes salaries and related expense~~ended ~~for~~March 31, ~~our~~2011. ~~engineering~~The ~~employees~~increase ~~and~~was ~~contractors~~primarily ~~who~~attributable ~~maintain~~to ~~our~~increases ~~servers~~in ~~and~~salaries ~~technical equipment~~ and ~~who~~ ~~work~~related oncosts ~~our~~offset ~~web-based~~by ~~hosted~~a ~~platform.~~reduction ~~Other~~in ~~costs~~contract ~~include~~labor ~~facility~~of ~~costs~~$0.1 ~~for~~million ~~our web platform servers~~ and ~~routers,~~reduced ~~network~~dues ~~monitoring costs~~ and ~~amortization~~subscriptions of ~~our~~$0.1 ~~technical development intangible assets~~million.

~~Cost~~General of revenue for the three months ended September 30, 2011 increased by $0.2 million, or 13.6%, to $1.7 million from $1.5 million for the three months ended September 30, 2010. This increase in cost of revenue was attributable to additional salaries and ~~benefits~~Administrative ~~costs~~Expense ~~as a result of an increase in headcount and annual salary increases.~~

~~Sales~~Our general and ~~Marketing~~administrative ~~Expense.~~expense includes salaries and related expense for our executive, accounting, and other administrative employees, professional services, rent, insurance, travel and other corporate expense.

~~Our~~General ~~sales~~ and ~~marketing~~administrative expense ~~consists primarily of salaries, commissions and related expense~~ for ~~personnel~~the inthree ~~our~~months ~~inside~~ended ~~and field sales teams~~March 31, ~~our~~2012 ~~new~~increased ~~customer~~by ~~implementation and~~$2.1 ~~retention team~~million, ~~marketing,~~or ~~customer service~~38.3%, ~~training and account management. Commissions are earned when sales are invoiced~~ to ~~customers~~$7.5 ~~Other~~million ~~costs~~from ~~include marketing costs, travel and amortization of our customer relationship intangible assets~~$5.5 ~~Marketing~~million ~~expense~~for ~~consists~~the ofthree ~~direct mail,~~months ~~email~~ended ~~prospecting~~March 31, ~~“pay per click” advertising, search engine optimization, printed material, marketing research, and trade shows~~2011. ~~Marketing~~The ~~expense generally increases as our sales efforts~~ increase, ~~both~~was inprimarily ~~new~~due ~~and~~to ~~existing markets~~$3.0 ~~Our~~million ~~marketing~~of ~~efforts~~costs ~~are~~associated ~~related~~with to the ~~launch~~Merger ofoffset ~~new product~~by ~~offerings,~~a ~~the~~$0.8 ~~introduction~~million ofdecrease ~~our products and services~~ in ~~new~~stock-based ~~states and geographic~~compensation ~~regions,~~expenses ~~and~~primarily ~~opportunities within a selected market~~ associated with ~~specific~~non-cash ~~events~~equity ~~such~~compensation asto ~~timing for~~ the ~~standardized~~Company’s ~~testing~~former inChief aFinancial ~~particular~~Officer, ~~state~~who ~~and~~retired ~~upcoming~~in ~~trade~~January ~~shows~~2011.

~~Sales~~Other ~~and~~Income ~~marketing~~(Expense) ~~expense for the three months ended September 30, 2011 remained relatively flat at $5.7 million compared to $5.7 million for the three months ended September 30, 2010.~~

Our other income (expense) includes interest expense, interest income and foreign currency losses.

Other income (expense) totaled $1.2 million of net expense for the three months ended March 31, 2012, and was generally consistent in nature to net expense of $1.1 million for the three months ended March 31, 2011.

Interest expense includes interest on our $70.0 million term loan and $10.0 million revolving credit facility entered into in November 2007, interest on our $15.0 million supplemental term loan entered into in June 2010, and amortization of debt financing costs. No amounts were outstanding under the revolving credit facility during the three months ended March 31, 2012 or 2011. The amounts borrowed under our term loan bear interest at rates based upon LIBOR, plus an applicable margin.

Interest income includes income on our cash and cash equivalent investments.

The foreign currency loss was primarily related to payments of intercompany transactions between the Company in the United States and its EducationCity subsidiary in the United Kingdom.

Provision for Income Tax

Our provision for income tax is comprised of federal, foreign, state and local taxes based on our income in the appropriate jurisdictions. We recognized tax expense using an effective rate of 33.8% for the three months ended March 31, 2012 as compared to 27.8% for the three months ended March 31, 2011. The expected effective tax rate of 34.0% for March 31, 2011 was decreased to 27.8% due to a one-time tax benefit related to the decrease in the statutory tax rate in the United Kingdom.

Content Development Expense.

Our content development expense primarily consists of salaries and related expense for our content development employees, who are responsible for writing the questions, lessons, activities and games content for our Study Island, Northstar Learning and EducationCity products, outsourced content writing costs, and amortization of our program content intangible assets.

Content development expense for the three months ended September 30, 2011 increased by $0.5 million, or 39.8%, to $1.7 million from $1.2 million for the three months ended September 30, 2010. This increase was primarily attributable to $0.2 million in additional salaries and benefits costs as a result of an increase in headcount and annual salary increases and $0.2 million in professional services related to content development for the EducationCity product.

General and Administrative Expense.

Our general and administrative expense includes salaries and related expense for our executive, accounting, and other administrative employees, professional services, rent, insurance, travel and other corporate expense.

General and administrative expense for the three months ended September 30, 2011 increased by $0.3 million, or 4.4%, to $5.8 million from $5.5 million for the three months ended September 30, 2010. This increase was primarily attributable to an additional $0.6 million in salaries and benefits expense due to increased headcount and annual salary increases and a $0.3 million increase in professional services costs, which was offset by a decrease of $0.6 million primarily related to the Company’s headquarters move, which occurred during the three months ended September 30, 2010.

Other Income (Expense).

Our other income (expense) includes interest expense, interest income and derivative and foreign currency losses.

Other income (expense) totaled $1.0 million of net expense for the three months ended September 30, 2011, which was a decrease of expense of $0.3 million, or 25.5%, compared to net expense of $1.3 million for the three months ended September 30, 2010. The decrease was primarily due to decreased interest expense of $0.2 million during the period due to the payoff of the $10.0 million revolving credit facility in the third quarter of 2010, which was drawn in connection with the acquisition of EducationCity.

Interest expense includes interest on our $70.0 million term loan and $10.0 million revolving credit facility entered into in November 2007, interest on our $15.0 million supplemental term loan and $10.0 million supplemental revolving credit facility entered into in June 2010, and amortization of debt financing costs. We had no amounts outstanding under the revolving credit facility as of September 30, 2010 and September 30, 2011. The amounts borrowed under our term loan bear interest at rates based upon either a base rate or LIBOR, plus an applicable margin.

Interest income includes income on our cash and cash equivalent investments and from our note receivable from Edline.

The foreign currency loss was primarily related to payments of intercompany transactions between EducationCity in the United States and the United Kingdom and U.S. dollar cash accounts held at EducationCity UK.

Derivative loss includes changes in the fair value and realized interest income and expense on our interest rate swap, which is required by the terms of our credit facility and is part of our overall risk management strategy. We entered into the swap arrangement in December 2007 with an initial notional amount of $45.5 million. At September 2010, the notional amount of the interest rate swap was $30.5 million. We did not hold any derivative positions at September 30, 2011.

Provision for Income Tax.

Our provision for income tax is comprised of federal, foreign, state and local taxes based on our income in the appropriate jurisdictions. Upon our acquisition of EducationCity, we became a taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax expense using an effective rate of 17.4% for the three months ended September 30, 2011 as compared to 25.1% for the three months ended September 30, 2010. The effective tax rate for September 30, 2011 decreased due to a one-time tax benefit related to the decrease in the statutory tax rate in the United Kingdom along with the impact of an international tax planning strategy reflected in the third quarter of 2011.

Comparison of the Nine months Ended September 30, 2011 and 2010

The following table summarizes our consolidated operating results for the nine months ended September 30 (dollars in thousands):

							Change
	2011			2010			Dollars			Percentage
Revenue	$	53,812		$	41,595		$	12,217			29.4	%
Cost of revenue		4,811			3,476			1,335			38.4	%
Gross profit		49,001			38,119			10,882			28.5	%
Operating expense:
Sales and marketing		17,095			13,679			3,416			25.0	%
Content development		5,082			3,462			1,620			46.8	%
General and administrative		16,936			14,909			2,027			13.6	%
Total		39,113			32,050			7,063			22.0	%
Income from continuing operations		9,888			6,069			3,819			62.9	%
Other income (expense):
Interest expense		(3,313	)		(2,909	)		404			13.9	%
Interest income		233			439			(206	)		(46.9	%)
Foreign currency loss		(60	)		(220	)		(160	)		(72.7	%)
Derivative loss		—			(78	)		78			**
Total		(3,140	)		(2,768	)		372			13.4	%
Income before tax		6,748			3,301			3,447			104.4	%
Provision for income tax		1,972			1,227			745			60.7	%
Net income	$	4,776		$	2,074		$	2,702			130.3	%

** Percentage not meaningful for analysis.

Revenue.

Revenue for the nine months ended September 30, 2011 was $53.8 million, representing an increase of $12.2 million, or 29.4%, as compared to revenue of $41.6 million for the nine months ended September 30, 2010. Of this increase, $6.3 million was due to the acquisition of EducationCity. In addition, $1.5 million of the increase was due to sales of Reading Eggs, which was introduced as a product in August 2010. The remaining increase in revenue during the period was due to Study Island’s product offerings in our more mature states leading to additional sales to existing customers, our increased focus on existing customers and renewal efforts, and our expanded sales force.

The following table sets forth information regarding our invoiced sales as well as other metrics that impact our revenue for the nine months ended September 30 (dollars in thousands):

	2011			2010
Invoiced sales:
New customers	$	12,113		$	12,965
Existing customers		48,608			38,970
Other sales		1,320			1,047
Total		62,041			52,982
Royalties on invoiced sales		(475	)		(31	)
Change in deferred revenue		(7,754	)		(11,356	)
Revenue	$	53,812		$	41,595

Due to purchase accounting for the acquisition of EducationCity and Alloy, we do not recognize the full amounts paid by customers for acquired subscriptions prior to the acquisition. Consequently for EducationCity, the deferred revenue balance at the date of acquisition was reduced from $15.6 million to $9.9 million. The purchase accounting adjustment reduced our revenues by $1.8 million and $1.2 million for the nine months ended September 30, 2011 and 2010, respectively. For Alloy, the deferred revenue balance at the date of acquisition was not materially reduced, and therefore, the purchase accounting adjustment did not materially impact revenue for the nine months ended September 30, 2011.

Cost of Revenue.

Cost of revenue for the nine months ended September 30, 2011 increased by $1.3 million, or 38.4%, to $4.8 million from $3.5 million for the nine months ended September 30, 2010. Of this increase, $0.7 million was due to the acquisition of EducationCity on June 9, 2010, including additional salaries and benefits costs of $0.4 million, colocation costs of $0.2 million, and amortization expense on intangible assets of $0.1 million. The remainder of the increase in cost of revenue was attributable to increased costs for our disaster recovery site.

Sales and Marketing Expense.

Sales and marketing expense for the nine months ended September 30, 2011 increased by $3.4 million, or 25.0%, to $17.1 million from $13.7 million for the nine months ended September 30, 2010. Of this increase, $2.8 million was due to the acquisition of EducationCity on June 9, 2010, including $1.3 million in additional salaries and benefits costs, $0.7 million in amortization expense on intangible assets, $0.6 million in marketing costs, $0.5 million in contract labor costs. The remainder of the increase was primarily attributable to increases in salaries and related costs resulting from increased headcount and annual salary increases.

Content Development Expense.

Content development expense for the nine months ended September 30, 2011 increased by $1.6 million, or 46.8%, to $5.1 million from $3.5 million for the nine months ended September 30, 2010. Of this increase, $1.1 million was attributable to the acquisition of EducationCity, including additional salaries and benefits costs of $0.5 million, professional services costs of $0.3 million, and amortization expense on intangible assets of $0.1 million. The remainder of this increase was primarily attributable to increases in salaries and related costs of $0.3 million related to increased headcount and annual salary increases.

General and Administrative Expense.

General and administrative expense for the nine months ended September 30, 2011 increased by $2.0 million, or 13.6%, to $16.9 million from $14.9 million for the nine months ended September 30, 2010. Of this increase, $2.6 million was related to the acquisition of EducationCity on June 9, 2010, including $1.1 million in additional salaries and benefits costs, $0.3 million in office rent expense, $0.2 million in amortization expense on intangible assets, $0.1 million in contract labor costs, $0.1 million in depreciation expense, and $0.5 million in other corporate costs. The remainder of the increase was primarily due to a $1.8 million increase in salary expense due to increased headcount and annual salary increases and a $1.1 million increase in severance expense and stock-based compensation expense (see Note 7) as a result of the retirement of our former chief financial officer. The increases were offset in part by a reduction in acquisition costs of $3.1 million related to the $3.3 million in transaction costs from the EducationCity acquisition in June 2010 compared to $0.2 million in transaction costs from the acquisition of Alloy in June 2011 and a decrease of $0.6 million in rent expense primarily related to the Company’s move to new headquarters in 2010.

Other Income (Expense).

Other income (expense) totaled $3.1 million of net expense for the nine months ended September 30, 2011, which was an increase in expense of $0.3 million from a net expense of $2.8 million for the nine months ended September 30, 2010. Interest expense increased $0.4 million during the period due to our additional term loan of $15.0 million in connection with the acquisition of EducationCity coupled with a decrease of $0.2 million in interest income from our note receivable from Edline, which was offset by a decrease of $0.2 million of foreign currency loss.

Provision for Income Tax.

Our provision for income tax is comprised of federal, foreign, state and local taxes based on our income in the appropriate jurisdictions. Upon our acquisition of EducationCity, we became a taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax expense using an effective rate of 29.2% for the nine months ended September 30, 2011 as compared to 37.2% for the nine months ended September 30, 2010. The effective tax rate for September 30, 2011 decreased due to a one-time tax benefit related to the decrease in the

statutory tax rate in the United Kingdom along with the impact of an international tax planning strategy reflected in the third quarter of 2011.

Liquidity and Capital Resources

Our primary cash requirements include the payment of our operating expense, interest and principal payments on our debt, and capital expenditures. We do not anticipate paying any dividends on our capital stock for the foreseeable future. We may also incur unexpected costs and operating expenses related to any unforeseen disruptions to our servers, the loss of key personnel or changes in the credit markets and interest rates, which could increase our immediate cash requirements or otherwise impact our liquidity.

We finance our operations primarily through cash flow from operations. Several factors outside of our control may impact our cash flow. For example, we believe that there is substantial uncertainty around the substance and timing of the ESEA reauthorization. The terms of its extension, reauthorization or new legislation that would replace it may materially impact the demand for our products. If new legislation lessens the importance of ~~standards,~~state-by-state testing ~~assessments~~ and ~~accountability~~ assessments, ordemand ~~introduces~~for ~~national~~our ~~standards~~products ormay ~~assessments~~materially ~~that~~decrease, ~~would~~or ~~make~~if itcompetitors ~~easier~~can ~~for competitors~~more toeasily enter our markets, ~~demand~~because ~~for~~of ~~our~~the ~~products~~establishment ~~may~~of ~~materially~~national ~~decrease~~education standards, ~~and~~ we may experience lower cash flows, both of which would affect our liquidity. In addition, if state and local budget cuts in education continue, our public school and school district customers may lack funding to buy our products which may result in fewer sales or require us to lower prices for our ~~Study~~ ~~Island~~ products, either of which would have a negative impact on our cash flows.

Our primary sources of liquidity are our cash and cash equivalent balances as well as availability under our revolving credit facility. As of ~~September~~March 3031, ~~2011~~2012, we had cash and cash equivalents of $4560.5 1 million and $2010.0 million of availability under our revolving credit facility. Our total indebtedness was $7574.1 9 million at ~~September~~March 3031, ~~2011~~2012, including our additional term loan of $15.0 million in connection with the acquisition of EducationCity and our amended credit agreement. We believe that our ~~cash and cash equivalent balance,~~ consistent cash ~~flow~~flows and our $2010.0 million availability under our revolving credit facility, combined with our low capital expenditure costs will provide us with sufficient capital to continue to ~~organically~~ grow our business. There can be no assurance, however, that cash resources will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. Our ability to meet our debt service obligations and other capital requirements, including capital expenditures and acquisitions, ~~will~~ will depend upon our future results of operations and our ability to obtain additional debt or equity capital and our ability to stay in compliance with our financial covenants, which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. We may also need to obtain additional funds to finance acquisitions, which may be in the form of additional debt or equity. Although we believe we have sufficient liquidity under our revolving credit facility, as discussed above, under extreme market conditions there can be no assurance that such funds would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on favorable terms, or at all.

OnPursuant ~~October 4,~~to ~~2011,~~the ~~Archipelago~~Merger ~~Learning~~Agreement, ~~LLC, a wholly owned subsidiary of~~ the Company,’s ~~entered~~credit ~~into~~facility ais ~~Securities~~expected ~~Purchase~~to ~~Agreement~~be ~~(the~~terminated ~~“Agreement”)~~and ~~with~~outstanding ~~Bulldog~~borrowings ~~Super~~thereunder ~~Holdco,~~to ~~Inc.,~~be arepaid ~~Delaware corporation,~~upon ~~which~~closing ~~became~~of the ~~ultimate~~Merger. ~~parent~~As ~~Company~~a ofcondition ~~Blackboard,~~to ~~Inc~~Plato’s ~~(“Blackboard”). Pursuant~~obligation to close the ~~Agreement~~Merger, ~~Archipelago~~the ~~Learning,~~Company ~~LLC~~must ~~sold~~deliver ~~656,882~~payoff ~~shares~~letters ofwith ~~Series A~~respect ~~Preferred~~to its ~~Stock~~current incredit ~~Edline~~agreement ~~for~~and areleases ~~total~~ of ~~approximately~~all ~~$12.2 million~~liens ~~(the~~thereunder, ~~“Edline~~subject ~~Sale”).~~only Into ~~addition,~~ the ~~Company~~ ~~received~~payment ~~approximately~~of ~~$2.1 million~~the ~~for~~amounts aset ~~notes~~forth ~~receivable and a dividend of approximately $0.6 million~~ in ~~connection with~~ the ~~Edline~~payoff ~~Sale~~letters.

Cash ~~Flow~~ Flows

Our net consolidated cash flows consist of the following, for the ~~nine~~three months ended ~~September 30~~March 31 (in thousands):

	2011			2010
	2012			2011
Provided by (used in):
Operating activities	$	17(3,~~664~~268	)	$	152,~~373~~085
Investing activities		(31,~~971~~469	)		(611,~~781~~020	)
Financing activities		~~(598~~—	)		~~12,139~~(192	)

29 Cash Flows from Operating Activities

Net cash used in operating activities was $3.3 million for the three months ended March 31, 2012, compared to net cash provided by operating activities of $2.1 million during the three months ended March 31, 2011. This $5.4 million decrease was primarily due to a decrease in deferred revenue of $3.7 million resulting from more revenue recognized in the first quarter than invoice sales booked and an increase in accounts receivable balances because a large portion of the quarterly sales were booked in late March. Also, the Company paid $1.0 million in income taxes in 2012, primarily due to the gain on the sale of Edline in 2011.

Cash ~~Flow~~Flows from ~~Operating~~Investing Activities

Net cash ~~provided~~used byfor ~~operating~~investing activities ~~was $17.8 million~~ for the ~~nine~~three months ended ~~September~~ March 3031, ~~2011~~2012 ~~compared~~included to $151.4 0 million ~~during~~for the ~~nine~~purchase ~~months~~of ~~ended~~property and ~~September 30,~~equipment ~~2010.~~and ~~This~~ $20.~~3 million~~5 ~~increase~~for ~~was~~the ~~primarily~~acquisition ~~due~~of toan ~~increased~~intangible asset used in the Company’s science related products. Net cash ~~generated~~used ~~from~~for ~~our~~investing ~~invoiced~~activities ~~sales~~for ~~and~~the ~~reduced~~three ~~transaction~~months ~~costs~~ended March 31, ~~offset~~2011 bywas $1.0 million for the purchase of ~~increased~~property ~~operating~~and ~~costs~~equipment.

Cash ~~Flow~~Flows from ~~Investing~~Financing Activities

~~Net~~No cash was provided nor used ~~for~~in ~~investing~~financing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2011 included $2~~2012.~~0 million~~ for the purchase of Alloy, $2.1 million for the purchase of property and equipment, and $0.5 million for the purchase of intangible assets, offset by $0.6 million for the receipt of the remaining proceeds from escrow for the sale of TeacherWeb. Net cash used ~~for~~in ~~investing~~financing activities for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 ~~was~~included $610.~~5 million~~2 ~~for the purchase of EducationCity, $1.0~~ million ~~for~~in ~~the~~principal ~~purchase~~payments ofon ~~property and equipment, and $0.6 million for receipt of part of the escrow from~~ our ~~sale~~term ~~of TeacherWeb~~loan.

Cash Flow from Financing Activities

Net cash used in financing activities in the nine months ended September 30, 2011 primarily related to $0.6 million in principal payments on our term loan. Net cash provided by financing activities in the nine months ended September 30, 2010 included $15.0 million of additional term note, less $0.8 million paid in additional financing costs, in order to finance the acquisition of EducationCity, $1.5 million for the payment of offering costs accrued at December 31, 2009 and $0.6 million in principal payments on our term loan.

Credit Facility

~~The~~Our ~~Company’s~~ wholly-owned subsidiary, Archipelago Learning, LLC (formerly Study Island, LLC) (“the Borrower”) is the ~~borrower~~ borrower under a credit facility with General Electric Capital Corporation, as agent, composed of a term loan, of which, $7074.~~0 million~~9 ~~term~~was ~~loan~~outstanding as of March 31, 2012, and a $10.0 million revolving credit facility, ~~and~~of ~~the~~which ~~Company’s~~no amount was outstanding as of March 31,2012. Our wholly owned subsidiary, AL Midco, LLC (“AL Midco”), is the guarantor under such credit facility. The term loan bears interest rates based upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin (3.75% as of ~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011, in each case for a LIBOR-based term loan) determined based on the Borrower’s leverage ratio. Amounts under the revolving credit facility can be borrowed and repaid, from time to time, at the Borrower’s option, subject to the pro forma compliance with certain financial covenants. If amounts are borrowed against the revolving credit facility in the future, those amounts would bear interest based upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin determined based on the Borrower’s leverage ratio. The credit facility also provides for a letter of credit sublimit of $2.0 million.

The Credit Agreement has been amended from time to time, most recently in ~~June 2010~~March 2012, to permit ~~the~~ ~~acquisition~~a ofcapital ~~EducationCity~~contribution ~~and~~ to ~~add~~Archipelago Learning aHoldings ~~$15~~UK, Ltd.~~0 million~~ ~~supplemental~~of ~~term~~inter-company ~~loan~~loans ~~and~~previously ~~an additional~~made ~~$10~~by Archipelago International Holdings, Inc.~~0 million~~, as lender, to ~~the~~Archipelago ~~revolving~~Learning ~~credit~~Holdings ~~facility~~UK, ~~both~~Ltd., ofas ~~which~~borrower. ~~were~~This ~~drawn~~amendment inis ~~order~~between ~~to finance~~Archipelago ~~the~~Learning, ~~acquisition.~~LLC ~~The~~as ~~Borrower~~borrower, ~~subsequently~~AL Midco, ~~repaid~~LLC, ~~the~~Archipelago ~~$10.0 million~~International ~~revolving~~Holdings ~~credit facility~~and ~~during~~Education City Inc. as the ~~quarter~~other ~~ended~~credit ~~September 30~~parties, ~~2010~~and the Company’s lenders.

The Credit Agreement is secured on a first-priority basis by security interests (subject to permitted liens) in substantially all tangible and intangible assets owned by the Borrower and AL Midco. In addition, any future domestic subsidiaries of the Borrower will be required (subject to certain exceptions) to guarantee the Credit Agreement and grant liens on substantially all of its assets to secure such guarantee.

The Credit Agreement requires the Borrower to maintain certain financial ratios, including a leverage ratio (based on the ratio of consolidated indebtedness, net of cash and cash equivalents subject to control agreements, to consolidated EBITDA, defined in the Credit Agreement as consolidated net income adjusted by adding back interest expense, taxes, depreciation expenses, amortization expenses and certain other non-recurring or otherwise permitted fees and charges), an interest coverage ratio (based on the ratio of consolidated EBITDA to consolidated interest expense, as defined in the Credit Agreement) and a fixed charge coverage ratio (based on the ratio of consolidated EBITDA to consolidated fixed charges, as defined in the Credit Agreement).

The Credit Agreement contains certain affirmative and negative covenants applicable to AL Midco, the Borrower and the Borrower’s subsidiaries that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, merger or consolidation, asset sales, acquisitions, dividends, transactions with affiliates, prepayments of ~~additional~~subordinated indebtedness, modifications of the Borrower’s organizational documents and restrictions on the Borrower’s subsidiaries. The Credit Agreement contains events of default that are customary for similar credit facilities, including a cross-default provision with respect to any other indebtedness and an event of default that would be triggered by a change of control, as defined in the Credit Agreement. As of March 31, 2012, the Borrower was in compliance with all covenants. The Credit Agreement is secured on a first-priority basis by security interests (subject to permitted liens) in substantially all of the assets of the Borrower and AL Midco.

30 27

~~liens~~The onBorrower ~~property,~~has ~~sale~~the ~~and~~right ~~leaseback~~to ~~transactions,~~optionally ~~investments,~~prepay ~~loans~~its ~~and~~borrowings ~~advances,~~under ~~merger~~the ~~or consolidation~~Credit Agreement, subject ~~asset~~to ~~sales,~~the ~~acquisitions,~~procedures ~~dividends,~~set ~~transactions~~forth ~~with~~in ~~affiliates,~~the ~~prepayments~~Credit ~~of subordinated~~Agreement. ~~indebtedness,~~The ~~modifications~~Borrower ofmay ~~the~~be ~~Borrower’s~~required ~~organizational~~to ~~documents~~make ~~and restrictions~~prepayments on ~~the~~its ~~Borrower’s~~borrowings ~~subsidiaries.~~under ~~The~~the Credit Agreement ~~contains~~if ~~events~~it ofreceives ~~default~~proceeds ~~that are~~as ~~customary~~a ~~for~~result ~~similar~~of ~~credit~~certain ~~facilities~~asset sales, ~~including~~debt issuances, or events of loss. In addition, a ~~cross-default~~mandatory ~~provision~~prepayment ~~with~~of ~~respect~~borrowings ~~to any~~under ~~other~~the ~~indebtedness~~Credit ~~and~~Agreement anis ~~event~~required ofeach ~~default~~fiscal ~~that~~year ~~would~~in bean ~~triggered~~amount byequal ato ~~change~~(i) 75% of ~~control,~~excess cash flow (as defined inby the Credit Agreement.) Asif the leverage ratio as of ~~September 30,~~the ~~2011,~~last day of the fiscal ~~Borrower~~year ~~was~~is ingreater ~~compliance~~than ~~with~~4.00 ~~all covenants~~to 1.00, ~~The~~(ii) 50% ~~Credit~~of ~~Agreement~~excess cash flow if the leverage ratio as of the last day of the fiscal year is ~~secured~~less onthan aor ~~first-priority~~equal ~~basis~~to by4.00 ~~security~~to ~~interests~~1.00 ~~(subject~~ but greater than 3.25 to ~~permitted~~1.00, ~~liens~~or (iii) 25% inof ~~substantially~~excess ~~all~~cash flow if the leverage ratio as of the ~~assets~~last day of the ~~Borrower~~fiscal ~~and~~year ALis ~~Midco~~less than or equal to 3.25 to 1.00. No mandatory prepayment is required if the leverage ratio is less than or equal to 2.50 to 1.00 on the last day of the fiscal year. The Borrower was not required to make a mandatory prepayment related to the year ended December 31, 2011.

~~The~~As ~~Borrower~~of ~~has~~March 31, ~~the~~2012, ~~right~~$74.9 million toof ~~optionally~~borrowings ~~prepay~~were ~~its~~outstanding ~~borrowings~~ under the ~~Credit~~term ~~Agreement, subject~~loans toand ~~the~~no ~~procedures~~amounts ~~set~~were ~~forth~~outstanding ~~in the Credit Agreement. The Borrower may be required to make prepayments on its borrowings~~ under the ~~Credit~~revolving ~~Agreement~~credit iffacility. itAs ~~receives proceeds as a result~~ of ~~certain~~ ~~asset sales~~December 31, ~~additional debt issuances~~2011, ~~or events of loss~~$74.9 Inmillion ~~addition, a mandatory prepayment~~ of borrowings ~~under~~were ~~the~~outstanding ~~Credit~~under ~~Agreement is required each fiscal year in an amount equal to (i) 75% of excess cash flow (as defined by~~ the ~~Credit~~term ~~Agreement)~~loans ifand ~~the~~no ~~leverage~~amounts ~~ratio as of the~~were ~~last~~outstanding ~~day~~under of the ~~fiscal~~revolving ~~year~~credit ~~is greater than 4~~facility.00 toFor ~~1.00, (ii) 50% of excess cash flow if~~ the ~~leverage~~ ~~ratio~~three asmonths ofended ~~the~~March 31, ~~last~~2012 ~~day~~and ~~of the fiscal year is less than or equal to 4.00 to 1.00 but greater than 3.25 to 1.00~~2011, ~~or (iii) 25% of excess cash flow if~~ the ~~leverage~~weighted ~~ratio~~average asinterest ofrate ~~the~~under ~~last day of~~ the ~~fiscal~~term ~~year~~loans iswas ~~less than or equal to 3~~5.~~25 to 1.~~00%. No mandatory prepayment is required if the leverage ratio is less than or equal to 2.50 to 1.00 on the last day of the fiscal year. The Borrower was not required to make a mandatory prepayment related to the year ended December 31, 2010.

AsPursuant ofto ~~September 30, 2011, $75.1 million of borrowings were outstanding under~~ the ~~term~~Merger ~~loans and~~Agreement nowith ~~amounts~~Plato, ~~were~~this ~~outstanding under the revolving~~ credit facility. Asis ofexpected ~~December 31,~~to ~~2010,~~be ~~$75.8 million~~terminated ofand ~~borrowings were~~ outstanding ~~under~~borrowings ~~the~~thereunder ~~term~~to ~~loans~~be ~~and~~repaid noupon ~~amounts~~closing ~~were~~of ~~outstanding under~~ the ~~revolving credit facility~~Merger. ~~For~~As ~~the~~a ~~three~~condition ~~months~~to ~~ended September 30, 2011 and 2010, the weighted~~Plato’s ~~average~~obligation ~~interest~~to ~~rate~~close ~~under~~ the ~~term loans was 5.0% and 5.0%~~Merger, ~~respectively, and for~~ the ~~nine~~Company ~~months ended~~must ~~September 30,~~deliver ~~2011~~payoff ~~and~~letters ~~2010,~~with ~~the~~respect ~~weighted~~to ~~average~~its ~~interest~~current ~~rate~~credit ~~under~~agreement ~~the~~and ~~term~~releases ~~loans~~of ~~was~~all ~~5.0% and~~liens ~~4.62%~~thereunder, ~~before~~subject ~~giving~~only ~~effect~~ to the ~~Borrower’s~~payment ~~interest~~of ~~rate swap. The rate on~~ the ~~interest~~amounts ~~rate swap~~set isforth ~~the~~in ~~difference between~~ the ~~Borrower’s~~payoff ~~fixed rate of 4~~letters.~~035%~~ ~~and the floating rate of three-month LIBOR.~~

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our consolidated financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates including those related to long-lived intangible and tangible assets, goodwill and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. All intercompany balances and transactions have been eliminated in consolidation.

The accounting policies we believe to be most critical to understanding our results of operations and financial condition and that require complex and subjective management judgments are discussed in our annual report on Form 10-K. We have not adopted any changes to such policies during the three months ended ~~September~~ March 3031, ~~2011~~2012 except as described below.

Recently Issued Accounting Standards

31In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements and related disclosures between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The Company adopted this standard effective January 1, 2012, which did not have a significant impact on our consolidated financial statements.

In June 2011, the FASB issued updated guidance on the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single, continuous statement of comprehensive income or as two separate but consecutive statements. The Company adopted this standard effective in the first quarter of 2012. Previously, the Company had reported other comprehensive income in the statement of stockholders’ equity, however beginning in the first quarter of 2012, the Company began to present other comprehensive income in two separate but consecutive statements in accordance with the new standard.

~~Company~~Issued ~~on January 1, 2012. We do not expect this standard to have a significant impact on our consolidated financial statements.~~

In June 2011, the FASB issued updated guidance on the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single, continuous statement of comprehensive income or as two separate but consecutive statements. This amendment will be effective for the Company for the first quarter 2012. We currently report other comprehensive income in the statement of stockholders’ equity and comprehensive income and will be required to update the presentation of comprehensive income to be in compliance with the new standard.

In September 2011, the FASB issued an update to its authoritative guidance regarding goodwill impairment testing that grants an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The updated guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not expect this standard to have a significant impact on our consolidated financial statements.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

We are exposed to market risks in the normal course of business due to changes in interest rates and foreign currency exchange rates. Our exposures to market risk have not changed materially ~~since~~ since December 31, ~~2010~~2011. For quantitative and qualitative disclosures about market risk, see item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of our annual report on Form 10-K for the year ended December 31, ~~2010~~2011.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this quarterly report, we have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation.

Changes in Internal Control over Financial Reporting

During the quarter ended ~~September~~March 3031, ~~2011~~2012, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

32 29

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

WeShortly ~~currently~~after ~~are~~the ~~not~~announcement ~~subject~~of the Merger, Stephen Bushansky v. Archipelago Learning, Inc., et al., a putative stockholder class action lawsuit for which no class has yet been certified, was filed on March 7, 2012 in the County Court At Law No. 3 of Dallas County, Texas against the Company (“Parent”), Merger Sub, and the individual members of the Company’s Board at the time of entry into the Merger Agreement. The plaintiffs then filed an amended petition and application for temporary injunctive relief on April 10, 2012. The Bushansky Suit alleges that the individual defendants breached their fiduciary duties by failing to ~~any~~maximize stockholder value in negotiating and approving the Merger Agreement. Specifically, plaintiffs allege, among other things, (i) breaches of fiduciary duties by members of the Board in connection with the proposed Merger, (ii) a claim for aiding and abetting the breach of fiduciary duty against all defendants, (iii) that the proposed Merger is inadequate, unfair and unreasonable, (iv) that the Merger Agreement unfairly deters competitive offers, (v) improper conflicts of interest, (vi) that the Board conducted an insufficient sales process, (vii) that the Company failed to disclose all material ~~litigation~~information orin ~~regulatory~~its ~~proceedings~~preliminary proxy statement filed on March 27, 2012, and (viii) that the Board agreed to lock-up the acquisition with preclusive deal protection devices. The plaintiffs sought to enjoin the proposed Merger, to recover damages in the event that the proposed Merger is consummated and to award the named plaintiff in such suit its fees and expenses, including reasonable attorneys’ and experts’ fees and expenses. On April 10, 2012, the Company received a demand letter from the plaintiffs in the Bushansky Suit requesting certain modifications to the Merger Agreement and supplemental disclosure in the proxy statement.

Another complaint, captioned Len Gostkowski v. Archipelago Learning, Inc., et al., was filed on March 28, 2012, by individual stockholders seeking class certification in the Court of Chancery of the State of Delaware, against the Company, Parent, Merger Sub, and the individual members of the Company’s Board at the time of entry into the Merger Agreement. The Gostkowski Suit alleges, among other things, (i) breaches of fiduciary duties by members of the Board in connection with the proposed Merger, (ii) a claim for aiding and abetting the breach of fiduciary duties against Parent and Merger Sub, (iii) prior improper related party transactions, (iv) that the Merger Consideration is unfair and inadequate, (v) improper conflicts of interest, (vi) that the Board conducted an insufficient sales process, and (vii) that the Board agreed to lock-up the acquisition with preclusive deal protection devices. Like the Bushansky Suit, the plaintiffs in the Gostkowski Suit sought to enjoin the proposed Merger, to recover damages in the event that the proposed Merger is consummated and to award the named plaintiff in such suit its fees and expenses, including reasonable attorneys’ and experts’ fees. On April 10, 2012, the Company received a demand letter from the plaintiffs in the Gostkowski Suit requesting certain modifications to the Merger Agreement and supplemental disclosure in the proxy statement.

Item 1A. Risk Factors

There have been no material changes from the Risk Factors disclosed in Part I, Item 1A of our Annual Report on Form ~~10K~~ 10-K for the year ended December 31, ~~2010~~2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We have not sold any unregistered securities or purchased any of our equity securities during the three months ended ~~September~~March 3031, ~~2011~~2012.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None.

Item 6. Exhibits

See Index to Exhibits following the signature page of this Quarterly Report on Form 10-Q.

33 31

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, in the City of Dallas, State of Texas, on the ~~9th~~10th day of ~~November~~May, ~~2011~~2012.


ARCHIPELAGO LEARNING, INC.

By:		/s/ Tim McEwen
		Tim McEwen Chairman, President and Chief Executive Officer

By:		/s/ Mark S. Dubrow
		Mark S. Dubrow Executive Vice President, Chief Financial Officer and Secretary

34 32

EXHIBIT INDEX

Exhibit
Exhibit Number		Description of Exhibits
Number		Description of Exhibits
11.1*		Statement re computation of per share earnings (incorporated by reference to Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report).
10.1		Securities Purchase Agreement dated as of October 4, 2011, by and between Bulldog Super Holdco, Inc. and the sellers set forth in Schedule I thereto (filed as Exhibit 10.1 to Current Report on Form 8-K (File No. 001-34555) filed on October 6, 2011).
11.1		Statement re computation of per share earnings (incorporated by reference to Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report).
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith. ** Furnished herewith

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Filing Compare · Archipelago Learning, Inc.