PLATO LEARNING INC
EX-10.42
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<P align="center" style="font-size: 10pt"><FONT style="font-size: 20pt"><B><I>Executive Annual Incentive Plan</I></B></FONT>



<P align="center" style="font-size: 20pt"><FONT style="font-size: 14pt"><B><I>Fiscal Year 2006 Plan Summary</I></B></FONT>



<P align="left" style="font-size: 14pt"><FONT style="font-size: 11pt"><B>Objectives: </B>The Fiscal 2006 Executive Annual Incentive Plan is a reward program that directly
supports the achievement of financial goals, key strategic operational goals and individual
operational goals.
</FONT>

<P align="left" style="font-size: 11pt"><B>Eligibility: </B>Employees in the named jobs are eligible to be considered for participation in the
Plan: Executive Chairman, President &#038; CEO; Chief Financial Officer; Chief Technology Officer; Sr.
Vice President Operations; Vice President, Human Resources; Vice President, Product Management;
Vice President, Methods and Tools; Director, Marketing Communications; and Vice President, School
Market and Evaluation. The Company reserves the right to determine whether an executive will
actually participate in the Plan. Eligible employees will receive a notification letter indicating
they are eligible to participate in the Plan.


<P align="left" style="font-size: 11pt"><B>Performance Measures: </B>Payment will be based on the level of achievement of the financial goals,
operational goals, and individual goals as demonstrated in the table below. Achievement of the
individual operational goals for each executive will be reflected on the performance development
process for each executive.

<DIV align="center">
<TABLE style="font-size: 11pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="8%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="87%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="font-size: 11pt">
    <TD colspan="3" valign="top" align="left"><B>Financial Goals (65% Weighting):</B><BR></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Operating Profit &#150; Target &#091;x&#093;</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 11pt"><B>Company Operational Goals (20% Weighting):</B>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Sales Productivity &#150; achieve order rate of &#091;x&#093; per account manager and a minimum
monthly average of &#091;x&#093; account managers. (4%)</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Professional Services Productivity &#150; achieve &#091;x&#093; days of billings per education
consultant and an average price of &#091;x&#093; per day. (4%)</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Product Development Productivity &#150; develop and release the following new products at
a cost of &#091;x&#093; (capitalized and expensed): a) &#091;x&#093;, and b) &#091;x&#093;. (4%)</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Employee &#150; increase diversity percentages over 2005<sup> 1</sup>; use the talent
management process to identify successors for each ELT member and high potential
employees at all levels of the company. (4%)</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Customers &#150; implement monthly satisfaction survey process and begin reporting
results and trends at the March 2<sup>nd</sup> board meeting. (4%)</TD>
</TR>

</TABLE>

<DIV align="center">
<TABLE style="font-size: 11pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="8%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="87%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="font-size: 11pt">
    <TD colspan="3" valign="top" align="left"><B>Individual Operational Goals</B><sup><B>2 </B></sup><B>(15% Weighting):</B><BR></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="6%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">&#149;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Performance Development Process</TD>
</TR>

</TABLE>


<P align="left" style="font-size: 11pt"><FONT style="font-size: 9pt"><sup><I>1</I></sup><I> 2005 diversity measure was &#091;x&#093; on September&nbsp;30, 2005.</I>
</FONT>

<P align="left" style="font-size: 9pt"><sup><I>2 </I></sup><I>Achievement of the individual goals can generally be substantiated. The level of
achievement is somewhat subjective in the case of near achievement or over achievement of operation
goals therefore, achievement is to be determined by the CEO.</I>


<P align="center" style="font-size: 10pt; display: none">1
<!-- PAGEBREAK -->

<P align="left" style="margin-right:1%; font-size: 9pt"><FONT style="font-size: 11pt"><B>Target Incentive: </B>Each executive&#146;s payment will be based on their Annual Base Salary,
effective on October&nbsp;31, 2006, their Target Incentive percent, and the level of achievement of
the performance measures. Each executive&#146;s Target Incentive is expressed as a percent of their
Annual Base Salary and shown in this table.
</FONT>
<DIV align="center">
<TABLE style="font-size: 11pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="84%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 11pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Executive Job Title</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Target</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">President &#038; CEO</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">75</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Executive Chairman</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">60</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Chief Financial Officer</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">50</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Chief Technology Officer</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">50</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Sr. Vice President, Operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">35</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Vice President, Product Management</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">35</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Vice President, Methods and Tools</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">30</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Vice President, Human Resources</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">30</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Vice President, School Market and Evaluation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">30</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="font-size: 11pt">
    <TD><DIV style="margin-left:10px; text-indent:-10px">Director, Marketing Communications</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">30</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 11pt"><B>Actual Payment: </B>The plan rewards executives for achievement of goals and also encourages
performance that substantially exceeds goals. This chart shows how the actual payment will
increase (as a percent of the Target Incentive) as performance is increased. A threshold or
minimum level of performance has been established. <B><I>*</I></B>Straight-line interpolation will be used
starting at 100% of goal achievement to determine the payment for any level of achievement falling
above 100% and between the stated levels of performance. This is illustrated in the chart below.

<DIV align="center">
<TABLE style="font-size: 11pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="42%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="28%">&nbsp;</TD>
</TR>
<TR style="font-size: 11pt" valign="bottom">
    <TD nowrap align="left"><B>Financial Performance</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Resulting</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Actual Payment</B></TD>
</TR>
<TR style="font-size: 11pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>% of Goal Achievement</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Operating Profit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>% of Target Incentive</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="font-size: 11pt">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&#060;5%<BR>
5% &#151; 99%<BR>
*100%<BR>
115%<BR>
130%<BR>
145%<BR>
175%
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&#091;x&#093;<BR>
&#091;x&#093;<BR>
&#091;x&#093;<BR>
&#091;x&#093;<BR>
&#091;x&#093;<BR>
&#091;x&#093;<BR>
&#091;x&#093;
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">0%<BR>
50%<BR>
100%<BR>
125%<BR>
150%<BR>
175%<BR>
200%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="left" style="font-size: 11pt"><FONT style="font-size: 12pt"><B><I>General Provisions:</I></B>
</FONT><BR>
<FONT style="font-size: 11pt">The obligations of the Company, as set forth in this document shall be subject to modification
in such manner and to such extent as the CEO and the Board of Directors deems necessary by
agreement, or as may be necessary to comply with any law, regulation or governmental order
pertaining to compensation. The Compensation Committee will receive the recommendations of the CEO
for the cash payment amount, and any actions related to termination of employment and/or change in
control, and after due deliberation determine the payment amount.
</FONT>

<P align="left" style="font-size: 11pt">This Plan shall be cancelled in the event of termination of employment with the company. To remain
eligible for a cash payment amount from the Plan, a participant must be continuously employed by
the Company from date of hire or November&nbsp;1, 2005, whichever is later, through the end date of the
Plan (October&nbsp;31, 2006), except for the following circumstances:


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">(1)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><U>Death or Disability</U>. If a Participant dies or becomes disabled before October&nbsp;31,
2006, his/her cash payment amount will be prorated for the number of days the Participant was
an active PLATO employee. For the purposes of this Plan &#147;Disability&#148; means that as a result
of physical or mental incapacity Executive is unable for a period of 120 consecutive days
during any consecutive 180-day period to perform his duties hereunder on a full-time basis.
In the case of death, the payment amount will be given to the Participant&#146;s estate according
to current law and established guidelines and practices.</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">(2)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><U>Unpaid Leave of Absence.</U> If a Participant is on an unpaid leave of absence anytime
between November 1 2005 and October&nbsp;31, 2006 his/her cash payment amount will be prorated on a
daily basis to exclude the time he/she was on such leave.</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">(3)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><U>Termination with Cause or without Good Reason.</U> In the event a Participant&#146;s
employment with the Company is terminated with Cause or without Good Reason (as defined in
Section&nbsp;6 of their employment agreement) after November&nbsp;1, 2005 and before the plan end date
(October&nbsp;31, 2006) his/her cash payment amount will be prorated for the number of days the
Participant was an active PLATO employee.</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">(4)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><U>Termination without Cause or with Good Reason.</U> In the event a Participant&#146;s
employment with the Company is terminated without Cause or with Good Reason (as defined in
Section&nbsp;6 of their employment agreement) after November&nbsp;1, 2005 and before the plan end date
(October&nbsp;31, 2006) his/her cash payment amount will be prorated for the number of days the
Participant was an active PLATO employee.</TD>
</TR>

</TABLE>


<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 11pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="1%" nowrap align="right">(5)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD><U>Change in Control.</U> If at any time during fiscal year 2006 there is a Change in
Control event the incentive payment will be pro-rated through the end date of the Change in
Control. The payment amount will be based on 100% of the Target Incentive.</TD>
</TR>

</TABLE>



<P align="center" style="font-size: 10pt; display: none">2


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