LIGHTSPAN INC, S-1/A, 2000-08-09

LIGHTSPAN INC
S-1/A, 2000-08-09
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 2000

REGISTRATION NO. 333-42288

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LIGHTSPAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 8299 33-0585210
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>

10140 CAMPUS POINT DRIVE
SAN DIEGO, CA 92121
(858) 824-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

JOHN T. KERNAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
LIGHTSPAN, INC.
10140 CAMPUS POINT DRIVE
SAN DIEGO, CA 92121
(858) 824-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPY TO:
CHRISTOPHER J. KEARNS, ESQ.

COOLEY GODWARD LLP

4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CA 92121
(858) 550-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
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Common Stock (no par value)..... $1,872,513 $7 9/32 $13,634,235 $3,599.44
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</TABLE>

(1) Proposed Maximum Offering Price Per Unit is calculated pursuant to Rule
457(c) under the Securities Act of 1933, as amended (the "Securities Act")
and is the average of the high and low prices reported on the Nasdaq Stock
Market's National Market for July 24, 2000.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial number of the earlier effective
registration statement for the same offering. [ ] ____________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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1,872,513 Shares

LIGHTSPAN LOGO

Common Stock

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THE SELLING STOCKHOLDERS IDENTIFIED IN THIS PROSPECTUS ARE SELLING UP TO
1,872,513 SHARES OF OUR COMMON STOCK. THESE SHARES MAY BE OFFERED FROM TIME TO
TIME BY THE SELLING STOCKHOLDERS THROUGH PUBLIC OR PRIVATE TRANSACTIONS, ON OR
OFF THE NASDAQ NATIONAL MARKET, AT PREVAILING MARKET PRICES OR AT PRIVATELY
NEGOTIATED PRICES. THE SELLING STOCKHOLDERS WILL RECEIVE ALL OF THE PROCEEDS
FROM THE SALE OF THE SHARES AND WILL PAY ALL UNDERWRITING DISCOUNTS AND SELLING
COMMISSIONS, IF ANY, APPLICABLE TO THE SALE OF THE SHARES. WE WILL PAY THE
EXPENSES OF REGISTRATION OF THE SALE OF THE SHARES.

-------------------------

OUR COMMON STOCK IS LISTED ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET
UNDER THE SYMBOL "LSPN." ON AUGUST 8, 2000, THE LAST SALE PRICE OF ONE SHARE OF
OUR COMMON STOCK ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET WAS $3.8125 PER
SHARE. SEE "PRICE RANGE OF COMMON STOCK."

-------------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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August 9, 2000

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TABLE OF CONTENTS

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PAGE
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Prospectus Summary.......................................... 1
Summary Consolidated Financial Data......................... 3
Risk Factors................................................ 4
Forward-Looking Statements.................................. 13
Selling Stockholders........................................ 14
Plan of Distribution........................................ 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Price Range of Common Stock................................. 18
Capitalization.............................................. 18
Selected Consolidated Historical and Pro Forma Financial
Data...................................................... 19
Management's Discussion and Analysis of Financial Condition
and Operating Results..................................... 21
Business.................................................... 37
Management.................................................. 48
Executive Compensation...................................... 53
Related-Party Transactions.................................. 59
Principal Stockholders...................................... 61
Description of Capital Stock................................ 64
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Find More Information......................... 66
Index to Financial Statements............................... F-1
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, "LIGHTSPAN,"
"WE," "US" AND "OUR" REFER TO LIGHTSPAN, INC. AND ITS SUBSIDIARIES, TAKEN AS A
WHOLE, UNLESS THE CONTEXT OTHERWISE REQUIRES.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. You should read the entire prospectus carefully,
including "Risk Factors" and our financial statements, before making an
investment decision.

LIGHTSPAN, INC.

Lightspan, Inc. provides curriculum-based educational software and Internet
products and services used both in school and at home. We were founded in 1993
on the philosophy of using technology to increase student achievement by
connecting the school to the home. Our technology, delivery systems and content
help increase student interest in learning, parental involvement in their
children's education, and productive interaction among teachers, parents and
students. Over 400 studies by schools that use our products and services show
that our products improve overall student performance.

Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts for use in both the classroom and at
home. As of June 30, 2000, the Lightspan Achieve Now curriculum has already been
purchased by over 950 school districts in 46 states and implemented in 2,714
schools and 13,600 classrooms, representing a total of 151,200 student and
teacher licenses. Our Academic products provide a series of curriculum-based
software that addresses the math and writing needs of under-prepared college
students. As of June 30, 2000, these products are in use in over 270 colleges
and universities across the United States. Also as of June 30, 2000, our
Internet preK-12 products and services are used in over 18,200 schools, of which
over 1,600 schools are using the Lightspan Network. In June 2000, Lightspan.com
was used by over 425,000 unique users.

We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:

- The Lightspan Network, a curriculum-based online subscription service
marketed to schools for classroom and home use;

- eduTest@School and eduTest@School Plus, services that offer a combination
of online assessment products and proprietary test questions covering
language arts, mathematics, history and science, allowing educators to
assess their students' progress in the classroom;

- Lightspan Early Learning, a subscription-based online education service
for preschoolers;

- Global Schoolhouse, a Web site where teachers can develop and manage
collaborative learning projects online;

- Lightspan Learning Search, a service that sorts the most valuable
educational Web sites, lesson plans and activities from the Internet by
grade and subject for easy access for teachers, students and parents;

- StudyWeb, a leading research Web site that helps parents, teachers and
students find educational information and resources on the Web;

- LearningPlanet.com, a popular education Web site for students and parents
that features creative and instructional learning activities in
mathematics and language arts;

- Your Class Online, a service that enables teachers to easily create
customized Web pages for their classrooms;
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- Your School Online, a school Web site builder that easily integrates with
Your Class Online and with existing school or district Web sites;

- e-commerce affiliate relationships including our partnership with
SmarterKids.com, a Web site that sells educational products online; and

- Selected additional content for teachers, parents and students.

Through June 1996, our activities consisted primarily of designing and
developing Lightspan Achieve Now. To supplement our product offerings, we
introduced The Lightspan Network in January 1997 and launched Lightspan PageOne,
the predecessor to Your Class Online, in June 1999. We acquired Academic and
Global Schoolhouse in September 1999 and StudyWeb in October 1999. We also
introduced Lightspan.com in September 1999, and enhanced it with the Lightspan
Learning Store in October 1999 and Your School Online and Your Class Online in
February 2000. We changed our name to Lightspan, Inc. in April 2000. In May 2000
we acquired LearningPlanet.com and in June 2000 we acquired Edutest, Inc. Our
principal executive offices are located at 10140 Campus Point Drive, San Diego,
CA 92121, where our telephone number is (858) 824-8000.

On February 15, 2000, we completed our initial public offering of 7,500,000
shares of common stock at an initial offering price of $12 per share. We also
completed private placement sales concurrently with our initial public offering
to CINAR, Cox Communications and Gateway Companies, Inc. of 833,333, 1,041,667
and 250,000 shares, respectively. The proceeds from the public offering and the
private sales after deducting the underwriting discount and commissions and
offering expenses, and payment of financial advisory fees relating to our
private placements, was approximately $106.1 million. In March 2000, the
underwriters exercised 655,150 shares of their overallotment option, for total
proceeds to us, net of discounts and commissions, of $7.3 million.
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THE OFFERING

Common stock to be offered
by the selling
stockholders............. 1,872,513 shares(1)

Common stock outstanding as
of June 30, 2000......... 45,597,135 shares

Use of proceeds............ We will not receive any proceeds from the sale of
shares of common stock covered by this prospectus.

Nasdaq National Market
symbol................... LSPN
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(1) Includes 1,855,726 shares issued on June 23, 2000, 228,561 shares that may
be issued on or about December 23, 2001 and 624,977 shares that may be
issued shortly after July 31, 2001, all in connection with our acquisition
of Edutest, Inc., and 16,783 shares issued in connection with our May 2000
acquisition of LearningPlanet.com. See "Selling Stockholders."

SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS)

The following financial information should be read together with the
"Selected Consolidated Historical and Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this prospectus.

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YEAR ENDED THREE MONTHS
JANUARY 31, ENDED APRIL 30,
2000 2000
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 16,916 $ 56,409
Gross profit....................................... 7,182 44,768
Income (loss) from operations...................... (56,200) 16,160
Net income (loss) attributable to common
stockholders..................................... (55,721) 1,192
</TABLE>

<TABLE>
<CAPTION>
AT JANUARY 31, AT APRIL 30,
2000 2000
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(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 5,033 $101,510
Working capital (deficit).......................... (25,994) 114,905
Total assets..................................... 102,432 182,199
Capital lease obligations, less current portion.... 443 333
Total stockholders' equity....................... 26,694 164,623
</TABLE>

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RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks described below before making a decision to buy our common stock. If
any of the following risks actually occurs, our business could be harmed. In
that case, the trading price of our common stock could decline, and you may lose
all or part of your investment. You should also refer to the other information
in this prospectus, including our financial statements and the related notes.
Except for historical information, the information contained in this prospectus
and in our SEC reports are "forward-looking' statements about our expected
future business and performance. Our actual operating results and financial
performance may prove to be very different from what we might have predicted as
of the date of this prospectus. The risks described below address some of the
factors that may affect our future operating results and financial performance.

WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.

We began selling our Lightspan Achieve Now educational software in January
1996 and entered the Internet market by launching The Lightspan Network in
January 1997. Academic began selling its educational software in April 1994.
Since early 1999, we have significantly increased our efforts to expand our
Internet businesses. As a result, both our curriculum-based educational software
and Internet businesses have only a limited operating history on which you can
base your evaluation of our business and prospects.

OUR QUARTERLY RESULTS ARE VOLATILE AND DIFFICULT TO FORECAST, WHICH COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE.

Our quarterly results have fluctuated greatly since our inception, for
various reasons. Our quarterly net loss ranged between $8.5 million and $21.0
million over the four quarters ended January 31, 2000. In addition, in fiscal
year 1997 and 1998 we recognized license revenue for our Lightspan Achieve Now
product of $5.6 million and $14.8 million, respectively, in accordance with the
accounting rules in effect at that time; while in fiscal years 1999 and 2000, we
did not recognize any Lightspan Achieve Now license revenue, in accordance with
new accounting rules adopted February 1, 1998. In the quarter ended April 30,
2000, we completed and shipped all Lightspan Achieve Now titles in all grade
clusters used on the PlayStation game console, and grade cluster K through 2
used on a PC platform, recognizing $46.4 million in previously deferred revenue,
resulting in an operating profit of $16.2 million. The operating results for
that quarter are not indicative of our underlying business in the quarter, and
will not be indicative of results that may be expected for any subsequent
quarter, for the full year ending January 31, 2001 or for any future years.

We expect significant fluctuations in our quarterly revenues and operating
results to continue. Demand for our products and services is subject to seasonal
influences based on school calendars, budget cycles and the timing of school
districts' funding sources. Moreover, our sales could be delayed from quarter to
quarter due partly to our need to educate school district decision makers
regarding the uses and benefits of our software, and the lengthy multiple
approval process that typically accompanies significant capital expenditures by
school districts. If a significant sale that we expect to occur in a particular
quarter is delayed and does not occur until a future quarter, or does not occur
at all, our quarterly performance may be worse than expected. Further, our
recently expanded Internet efforts may contribute to fluctuations in our
quarterly operating results because the sales cycles of our Internet businesses
are different than those of our curriculum-based educational software. If our
financial results for one or more quarters fall below the expectations of
analysts and investors, the trading price of our common stock may decline.

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WE EXPECT A SUBSTANTIAL INCREASE IN EXPENSES AND NET LOSSES IN THE FUTURE AND
MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY, WHICH MAY CAUSE OUR STOCK PRICE TO
FALL.

Since our inception, we have incurred significant losses. As of April 30,
2000, we had an accumulated deficit of $176.3 million. We incurred net losses of
$55.7 million for the fiscal year ended January 31, 2000 and $33.6 million for
the fiscal year ended January 31, 1999. For the three months ended April 30,
2000, we incurred net income attributable to common stockholders of $1.2 million
due to the recognition of revenue previously deferred in fiscal years 1999 and
2000. Except as may otherwise occur due to revenue recognition for past
Lightspan Achieve Now shipments, as described above, we expect our operating
losses and negative cash flow to continue and increase for the foreseeable
future as we incur additional costs and expenses related to:

- brand maintenance, marketing and promotional activities;

- continued development and expansion of our Internet offerings and
content;

- hiring personnel;

- acquisition of additional office space and other necessary facilities;
and

- amortization of intangible assets and goodwill recorded in connection
with our acquisitions of Edutest, LearningPlanet.com, Academic, Global
Schoolhouse and StudyWeb.

Our ability to become profitable and maintain profitability depends on our
ability to generate and sustain substantially higher revenues while maintaining
reasonable expense levels. Although we intend to increase our spending on the
activities listed above, these efforts may not result in increased revenues. We
conduct operations using estimates as to future expense levels based on our
expectations of future revenues. We cannot guarantee that we will be able to
predict our future revenues accurately or that we will be able to adjust
spending to compensate for any unexpected revenue shortfall. If we achieve
profitability, we cannot be certain that we will be able to sustain or increase
profitability in the future.

WE ARE HEAVILY DEPENDENT UPON OUR RELATIONSHIP WITH SONY COMPUTER ENTERTAINMENT
INC. AND TERMINATION OF THAT RELATIONSHIP, SUPPLY SHORTAGES OF THE PLAYSTATION
GAME CONSOLES FROM SONY COMPUTER ENTERTAINMENT INC. OR UNANTICIPATED CHANGES IN
THE GAME CONSOLES COULD REDUCE OUR LIGHTSPAN ACHIEVE NOW SALES OR INCREASE
RELATED EXPENSES.

We are heavily dependent upon our relationship with Sony Computer
Entertainment Inc., which supplies the PlayStation game console used by the
students who use our Lightspan Achieve Now educational software at home.
Historically, and for the foreseeable future, sales of Lightspan Achieve Now and
PlayStation game consoles have accounted for a substantial majority of our
revenue. Without incurring significant additional expense, there currently is no
readily available operating platform for broad implementation of Lightspan
Achieve Now in the home other than the PlayStation game console. Sony Computer
Entertainment Inc. has rights to terminate their agreement with us in various
circumstances, including if it elects to stop producing the PlayStation game
console. If our agreement is terminated, if the PlayStation game console loses
popular appeal or if we are unable to obtain an adequate supply of PlayStation
game consoles on a timely basis, our ability to sell our Lightspan Achieve Now
curriculum will be significantly reduced and we could incur significant
additional expenses or lose substantial revenues.

The next version of the PlayStation game console, the recently-announced
PlayStation(R)2 computer entertainment system, is expected to be available in
the United States in late 2000. If we are unable to enter into agreements to
distribute the PlayStation 2 system, our Lightspan Achieve Now operations will
be disrupted and we could lose substantial revenues. Certain schools that are
potential purchasers of Lightspan Achieve Now educational software may not want
or be able to

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afford the PlayStation 2 system if it is priced significantly higher than the
original PlayStation game console. While we expect Lightspan Achieve Now to run
on the PlayStation 2 system, we may have to adapt our software to any changes in
or new versions of the PlayStation game console or PlayStation 2 system that
occur, which may require us to redirect significant financial and personnel
resources from other development efforts.

We may also experience disruption of supply of the original PlayStation
game console as Sony Computer Entertainment Inc. balances its manufacturing
capability between the PlayStation game console and the PlayStation 2 system. If
we are unable to acquire PlayStation game consoles, our software license revenue
may be deferred, as our revenue recognition policy requires that delivery of
hardware along with the software is required before we can fully recognize
software license revenue.

WE MAY NEED ADDITIONAL FINANCING TO MEET OUR STRATEGIC BUSINESS OBJECTIVES,
WHICH MAY NOT BE AVAILABLE AND, IF AVAILABLE, MIGHT HURT OUR EXISTING
STOCKHOLDERS.

As we enter into new areas of business, like Internet businesses, we will
incur substantially increased expenses for which we do not expect returns for
months or years in the future. We may need to raise additional funds to continue
to meet operating demands. If we raise additional funds through the issuance of
equity or debt securities that have rights senior to those of our stockholders,
our stockholders may experience additional dilution or may lose other rights. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. If we cannot raise funds on acceptable terms, if
and when needed, we may not be able to take advantage of future opportunities,
grow our business or respond to competitive pressures or unanticipated
developments.

OUR CONTINUED GROWTH WILL STRAIN OUR RESOURCES, AND FAILURE TO MANAGE THIS
GROWTH EFFECTIVELY COULD DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING
THE REVENUES WE EXPECT.

We expect that significant expansion of our operations will be required to
successfully implement our business strategy. For example, the development of
our business continues to require increased sales and marketing expenditures as
well as increased development efforts. This expansion will strain our
management, operational, financial and technological resources, as well as the
infrastructure for our Web sites and services. The growth of our Lightspan
Achieve Now educational software business may strain the resources of our
professional development staff during periods of heavy implementation in
purchasing school districts. Our growth depends on our ability to attract and
retain qualified employees (including employees of businesses that we acquire),
particularly Internet systems, sales and marketing, and product development
personnel. Our failure to manage our growth in a manner that minimizes these
strains on our resources could disrupt our operations and ultimately prevent us
from generating the revenues we expect.

OUR CURRICULUM-BASED EDUCATIONAL SOFTWARE MAY BE UNABLE TO ACHIEVE OR MAINTAIN
BROADER MARKET ACCEPTANCE, WHICH WOULD CAUSE OUR FUTURE REVENUE GROWTH AND
PROFITABILITY TO SUFFER.

We expect to generate a substantial portion of our revenues from Lightspan
Achieve Now software licenses, and will need to increase these revenues in order
to more effectively grow in other areas of our business. Revenues from licenses
of our curriculum-based educational software will depend principally on
broadening market acceptance of that software, which may not occur due to a
number of factors, including:

- teacher, parent and student preferences for interactive educational
technology are subject to changes in popular entertainment and
educational theory;

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- some teachers may be reluctant to use interactive educational technology
to supplement their customary teaching practices;

- we may be unable to continue to demonstrate improvements in academic
performance at schools or colleges that use our educational software; and

- our failure to detect bugs in our software could result in product
failures or poor product performance.

If market acceptance of our curriculum-based educational software is not
broadened, our future revenue growth will suffer and we may never become
profitable.

THE SUCCESS OF OUR BUSINESS MODEL REQUIRES US TO INCREASE OUR REVENUES FROM OUR
SUBSCRIPTION INTERNET BUSINESS, AND WE MAY NEVER BECOME PROFITABLE IF WE ARE
UNABLE TO DO SO.

In order to grow as currently contemplated, we will need to derive an
increasing portion of our revenues from our subscription Internet business. Our
ability to increase revenues from our subscription Internet business depends on:

- our ability to increase the subscriber base of our subscription Internet
products while maintaining a subscription fee; and

- improvement of the accessibility and ease of use of our Web sites.

The future success of our Internet business is highly dependent on an
increase in the number of Internet users who are willing to subscribe to The
Lightspan Network, eduTest@School, eduTest@school Plus and Lightspan Early
Learning subscription products. The number of Internet users willing to pay for
online educational products may not continue to increase. If the market for
subscription-based online educational products develops more slowly than we
expect, or if our efforts to attract new subscribers are not successful or cost
effective our operating results and financial condition may be materially and
adversely affected.

If we are unable to substantially increase our revenues from our Internet
businesses, we will be unable to execute our current business model. As a
result, we may need to reevaluate that business model, or we may never become
profitable.

WE RELY ON STATISTICAL STUDIES TO DEMONSTRATE THE EFFECTIVENESS OF OUR PRODUCTS,
AND OUR REPUTATION AND SALES AND MARKETING EFFORTS COULD BE HARMED IF THE
RESULTS OF THESE STUDIES ARE NOT REPRESENTATIVE OR IF THEIR INTEGRITY IS
QUESTIONED, WHICH COULD LEAD TO LOWER THAN EXPECTED REVENUES.

We rely heavily on statistical studies, including those cited in this
prospectus, to demonstrate that our curriculum-based educational software
increases student achievement. We believe that these studies accurately reflect
the performance of our products. However, these studies involve the following
risks:

- the limited sample sizes used in our studies may yield results that are
not representative of the general population of students who use our
products;

- the methods used to gather the information upon which these studies are
based depend on cooperation from students and other participants and
inaccurate or incomplete responses could distort results; and

- schools studying the effectiveness of our Lightspan Achieve Now
curriculum administer different tests, and colleges and universities
studying the effectiveness of our Academic

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Systems curriculum apply different methodologies and data collection
techniques, making results difficult to aggregate and compare.

We are involved in the Lightspan Achieve Now studies in the following ways:

- we facilitate the collection and analysis of data for these studies; and

- we select and pay researchers to aggregate and present the results of
these studies and, in some cases, to conduct the studies.

Our sales and marketing efforts, as well as our reputation, could be harmed
if the public, including our existing and potential customers, perceives these
studies to be biased due to our involvement, or if the results of these studies
are not representative, which could lead to lower than expected revenues.

CHANGES IN FUNDING FOR PUBLIC SCHOOL SYSTEMS COULD REDUCE OUR REVENUES AND
IMPEDE THE GROWTH OF OUR INTERNET BUSINESSES.

We derive a substantial portion of our revenues from public school funding,
which is heavily dependent on support from federal, state and local governments.
Government budget deficits may adversely affect the availability of this
funding. In addition, the government appropriations process is often slow,
unpredictable and subject to factors outside of our control. Curtailments,
delays or reductions in the funding of schools or colleges, for example a
reduction of funds allocated to schools under Title I of the Elementary and
Secondary Education Act of 1965, could delay or reduce our revenues, in part
because schools may not have sufficient capital to purchase our products or
services. Funding difficulties experienced by schools or colleges could also
cause those institutions to be more resistant to price increases in our
products, compared to other businesses that might better be able to pass on
price increases to their customers. The growth of our Internet businesses
depends on continued investment by public school systems in interactive
educational technology and products. Changes to funding of public school systems
could slow this kind of investment.

IF WE FAIL TO ENHANCE OUR INTERNET PRODUCTS AND SERVICES WITHOUT SYSTEMS
INTERRUPTIONS AND ADAPT THOSE PRODUCTS AND SERVICES TO CHANGES IN TECHNOLOGY,
OUR FUTURE REVENUE GROWTH AND PROFITABILITY COULD BE LESS THAN WE EXPECT.

We believe that our future revenue growth will depend in large part on
whether we are able to enhance and improve our Web sites and services as
planned. Enhancements and improvements to our Web sites are currently scheduled
for commercial launch, but we cannot assure you that those enhancements and
improvements will gain market acceptance or be launched on schedule and without
systems interruptions. In addition, the Internet is rapidly changing, and we
expect that we will continually need to adapt our Web sites and their related
technology to emerging Internet standards and practices, technological advances
developed by our competition, and changing subscriber, user and sponsor
preferences. Ongoing adaptation of our Web sites and their related technology
will entail significant expense and technical risk, and we may use new
technologies ineffectively or fail to adapt our Web sites and their related
technology on a timely and cost-effective basis. If our enhancements,
improvements and adaptations of our Web sites and their related technology are
delayed or result in systems interruptions or do not gain market acceptance, our
future revenue growth will suffer and we may never become profitable.

WE MAY NOT BE ABLE TO EXECUTE PART OF OUR BUSINESS STRATEGY IF BROADBAND
TECHNOLOGY DOES NOT BECOME MORE PREVALENT OR IF WE CANNOT REACH AGREEMENTS TO
DISTRIBUTE OUR PRODUCTS AND SERVICES USING BROADBAND TECHNOLOGY.

We intend to offer Lightspan Achieve Now and our Internet products and
services as educational channels on a digital set-top box once broadband
technology becomes widely available to cable

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television subscribers. We cannot predict that it will ever be economically
practical or technologically feasible for either ourselves or cable television
operators to deliver these products using broadband technology to cable
television subscribers. In addition, we may not be able to reach commercially
acceptable agreements with cable operators to distribute our products and
services using broadband technology. If we are unable to offer Lightspan Achieve
Now and our Internet products and services as educational channels on a digital
set-top box, whether because of economic or technological limitations or a
failure to reach commercially acceptable agreements with cable television
operators, we will not be able to execute part of our business strategy and our
growth and revenues will suffer.

OUR SPONSORSHIP REVENUES MAY BE LESS THAN WE EXPECT BECAUSE ADVERTISING OVER THE
INTERNET IN EDUCATIONAL SETTINGS MAY BE UNPOPULAR WITH SPONSORS, THE PUBLIC OR
GOVERNMENT ENTITIES.

We expect to generate revenues from the sale of sponsorships and banner
advertisements on our Web sites. Advertisements in educational settings may not
be accepted by the educational community or by parents and others. Sales of
sponsorships on our Web sites may therefore prove controversial and lead to
negative publicity and action by the government or private interests to
discourage companies from advertising on our Web sites. Third parties that
oppose corporate sponsorships in schools have engaged in publicity campaigns to
encourage boycotts of businesses that advertise in schools, and have sought
legislation to curb advertising in schools. If government or private action
discourages or prevents businesses from advertising in schools or we are not
able to offer potential sponsors access to our Web sites that are primarily
intended for school use, our sponsorship revenues will be significantly less
than we expect and our revenues could suffer.

WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE, WHICH COULD
PREVENT US FROM SUCCESSFULLY IMPLEMENTING OUR BUSINESS STRATEGY.

The educational technology market is intensely competitive and subject to
increasing commercial attention. Barriers to entering Internet markets are
relatively low, and we expect competition to intensify in the future, as more
businesses use the Internet to enter the student, parent and teacher markets for
education-oriented products and services. Competition among Internet companies
is also intensifying for Web site sponsorships. We also may be adversely
affected by pricing and other operational decisions, like the recent decision of
several of our competitors that offer educational content on the Internet to
offer a free service rather than charge a fee, which could hurt our subscription
revenues.

Our competitors include:

- software publishers that market educational curriculum products to
schools and homes;

- on-line education-related content and electronic commerce providers
(including Internet content providers that license education-oriented
content from third parties and Internet retailers that may enter the
education electronic commerce market); and

- programs that enable remote learning, assume management of schools, or
provide concentrated tutoring services.

Many of our current and potential competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these current and potential competitors can devote substantially greater
resources than we can to product development, marketing and promotional
campaigns and Web site and systems development.

9
<PAGE> 13

OUR ACQUISITIONS OF OTHER BUSINESSES AND INVOLVEMENT IN STRATEGIC RELATIONSHIPS
MAY NOT BE SUCCESSFUL, WHICH COULD DISTRACT OUR MANAGEMENT OR CAUSE US TO INCUR
ADDITIONAL EXPENSES.

We have acquired businesses and may continue to do so in the future. We are
currently in the process of integrating the operations, systems and personnel of
Edutest, Academic, Global Schoolhouse and StudyWeb, all of which we acquired in
the past twelve months. Our integration of these acquisitions or any future
acquisitions could distract our management or cause us to incur additional
expenses, and could cause our business and operations to suffer. We also may
enter into strategic relationships with complementary businesses.

For example, we have agreed to pursue several potential strategic
initiatives with CINAR Corporation, and we hope to participate in a digital
set-top box trial with Cox Communications. We cannot assure you that we will
implement these initiatives and other activities and arrangements, particularly
because we still need to negotiate some terms of the arrangements with each of
them. If implemented, they, or any other strategic relationships we may enter
into, may increase our expenses or divert efforts of our management and may not
be successful.

THE OPERATIONS OF ACADEMIC WILL BE SUBSTANTIALLY IMPACTED IF THE AUTHORING
PLATFORM SOFTWARE WE LICENSE FROM BLACKBOARD, INC. CEASES TO BE AVAILABLE TO
ACADEMIC FOR ANY REASON.

Academic's Web-based offering, Academic.com, is heavily dependent upon an
authoring platform that is licensed from Blackboard, Inc. All of the course
creation and access to content through courses is served by this platform. If
Blackboard, Inc. terminates its relationship with Academic or its platform fails
to function properly for any reason, a portion of our operations could be
interrupted and we could lose revenue.

IF WE DO NOT SUCCESSFULLY ANTICIPATE AND ADAPT TO CHANGES IN COMPUTER PLATFORMS
AND OTHER EVOLVING TECHNOLOGIES, OUR OPERATING RESULTS RELATING TO SALES OF OUR
SOFTWARE PRODUCTS COULD SUFFER.

We must manage our software development efforts to anticipate and adapt to
changes in popular computer operating environments and other evolving
technologies. For example, we are currently reviewing possibilities for
migrating Academic's CD-ROM-based educational software to an Internet-based
product, and expect to devote significant financial resources to do so. Our
curriculum-based educational software is currently delivered in CD-ROM format on
PlayStation game consoles and on Windows-based personal computers. We will
continue to evaluate other operating environments and computer platforms for our
software products as they become available. We may decide from time to time to
make our software products available in other operating environments or on other
computer platforms and our efforts to do so may involve substantial costs that
may not be offset by additional revenues or may delay our realization of
revenues from these activities. Market acceptance of our software products and
our operating results relating to their sale could also be worse than we expect
if we are unable to anticipate and adapt to changes in computer platforms and
other evolving technologies on a timely and cost-effective basis.

WE WILL NOT BE ABLE TO GROW OUR INTERNET BUSINESSES IF THE MARKET FOR THOSE
BUSINESSES DOES NOT DEVELOP.

The success of our Internet businesses will depend in large part on the
continued emergence and growth of a market for Internet-based educational
technology products. The market for educational technology is characterized by
rapid technological change and product innovation, unpredictable product life
cycles and unpredictable preferences among students, teachers and parents.
Internet

10
<PAGE> 14

commercial businesses and services are evolving markets as well, and it is
difficult to estimate how and when growth or other changes in those markets will
occur. We therefore cannot predict that the market for Internet-based
educational technology products will continue to grow.

OUR BUSINESS MAY NOT SUCCEED WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE
OF THE INTERNET.

Without the continued development and maintenance of the Internet
infrastructure, we could fail to generate the Internet traffic and revenues we
need for our business to succeed. In addition, our Lightspan Achieve Now and
Academic curricula are very media-rich and are not currently delivered over the
Internet, given bandwidth limitations. The continued development of the Internet
includes maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of complementary products
for providing reliable Internet access and services. Because the online exchange
of information and global commerce on the Internet is new and evolving, we
cannot predict whether the Internet will prove to be an effective vehicle for
delivering commercial content or will provide a viable marketplace for
electronic commerce in the long term.

As the Internet continues to experience increased numbers of users,
increased frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increased users or bandwidth requirements may harm the performance of the
Internet.

UNLESS WE MAINTAIN A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT GROW AND OUR
FINANCIAL RESULTS MAY SUFFER.

We believe that maintaining and enhancing the value of our Lightspan and
Academic brands is critical to attracting purchasers for our curriculum-based
educational software and sponsors, subscribers and users of our Internet
businesses. Our success in maintaining brand awareness will depend on our
ability to continuously provide educational technology that students enjoy using
and teachers and parents consider beneficial to the learning process. We cannot
assure you that we will be successful in maintaining our brand equity. In
addition, to attract and retain subscribers and users and to promote and
maintain the Lightspan brand, we have spent and intend to continue spending
significant amounts on a brand-enhancement strategy, which includes promotional
programs and efforts by our field sales force and professional development
staffs. We may also need to spend significant amounts in the future to maintain
the value of our Lightspan and Academic brands as they relate to our
curriculum-based educational software business. Revenues from these activities
may not be sufficient to offset associated costs.

CLAIMS RELATING TO DATA COLLECTION FROM OUR USER BASE AND CONTENT AVAILABLE ON
OR ACCESSIBLE FROM OUR WEB SITES MAY SUBJECT US TO LIABILITIES AND ADDITIONAL
EXPENSE AND DECREASE TRAFFIC TO OUR WEB SITES.

We currently collect only the names of teachers who are registering for our
Internet products. However, we may in the future collect names and other
personal information relating to students, teachers and parents, and may sell
our user information on an aggregated, non-individual basis; though we do not
intend to sell information relating to children under 13. We could be subject to
liability claims for misuses of information collected from our users, such as
for unauthorized marketing purposes, and could face additional expenses to
analyze and comply with increasing regulation in this area. The Federal Trade
Commission, for example, has enacted regulations governing collection of
personal information from children under 13 and is expected to issue and enforce
additional regulations in this area. We could also be subject to liability based
on claims relating to content that is published on our Web sites or that is
accessible from our network through links to other Web sites. In addition to
subjecting us to potential liability, claims of this type could
11
<PAGE> 15

require us to change our Web sites in a manner that could be less attractive to
our customers and divert our financial and development resources.

OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO PROPERLY INTEGRATE, OUR MANAGEMENT TEAM.

Our success depends on the continued contributions of the principal members
of our sales and marketing, product development, Internet services, and
management departments. The loss of the services of any of our officers or
senior managers would disrupt operations in their respective departments and
could cause our overall financial results to suffer. Our Chief Financial
Officer, and our Executive Vice President and General Manager of Internet and
Broadband Services, recently left Lightspan, and our business might suffer as a
result and we might face difficulty finding people appropriate to assume their
duties going forward. We do not maintain any "key person" life insurance
policies other than on John T. Kernan, our Chairman and Chief Executive Officer,
and Carl Zeiger, our President and Chief Operating Officer.

Many of our existing senior management personnel joined us during 1999,
including critical members of our Internet team. Some of these individuals have
not previously worked together and are currently being integrated as a
management team. If our senior managers are unable to work effectively as a
team, our business operations could be significantly disrupted.

WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TRADEMARKS, COPYRIGHTS,
SOFTWARE, CHARACTERS AND OTHER INTELLECTUAL PROPERTY ASSETS. IF OTHERS DO USE
THESE ASSETS, THEIR VALUE TO US, AND OUR ABILITY TO USE THEM TO GENERATE
REVENUES, MAY DECREASE.

Our intellectual property includes our trademarks and copyrights,
proprietary software, characters and other proprietary rights. We believe that
our intellectual property is important to our success and our competitive
position, and we try to protect it. However, our efforts may be inadequate. In
addition, our ability to conduct our business may be harmed if others claim we
violate their intellectual property rights. If successful, claims of this nature
could seriously harm our business by requiring us to cease using important
intellectual property or pay monetary damages. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to incur
legal costs and diverting management's attention away from our business.

OUR STOCK PRICE IS HIGHLY VOLATILE.

The market price of our common stock is likely to continue to be highly
volatile due to risks and uncertainties described in this section of the
prospectus, as well as other factors, including:

- conditions and publicity regarding the Internet or educational software
industries generally;

- sales of substantial amounts of our stock by existing stockholders
including sales pursuant to this prospectus;

- price and volume fluctuations in the stock market at large which do not
relate to our operating performance; and

- comments by securities analysts, or our failure to meet analysts'
expectations.

Furthermore, the stock market has from time to time experienced extreme
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. In addition, in the past, class action lawsuits have
been initiated against Internet and software companies following periods of
volatility in the market prices of these companies' stock. In general, decreases
in our stock price would reduce the value of our stockholders' investments and
could limit our ability to raise necessary capital or make acquisitions of
assets or businesses. If litigation were instituted on this

12
<PAGE> 16

basis, it could result in substantial costs and would divert management's
attention and resources. This could have a material adverse effect on our
business, financial condition and results of operations.

OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS CONTROL 54.5% OF OUR
COMMON STOCK.

As of June 30, 2000, executive officers, directors and holders of 5% or
more of our outstanding common stock, in the aggregate, beneficially owned 54.5%
of our outstanding common stock. These stockholders are able to influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of corporate transactions. This concentration of
ownership may also delay, deter or prevent a change in control of our company
and may make some transactions more difficult or impossible to complete without
the support of these stockholders.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.

Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions:

- authorize us to issue preferred stock that can be created and issued by
the board of directors without prior stockholder approval, with rights
senior to those of common stock;

- provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;

- prohibit stockholder action by written consent; and

- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue"
or "opportunity," the negative of these terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement. We cannot guarantee future results, levels of
activity, performance or achievements.

13
<PAGE> 17

SELLING STOCKHOLDERS

We are registering for resale 1,872,513 shares of our common stock, of
which 1,855,726 shares were or may be issued in connection with our acquisition
of Edutest and 16,783 were issued in connection with our acquisition of
LearningPlanet.com. The following table sets forth the names of the selling
stockholders and the number of shares of our common stock that each selling
stockholder owned as of July 26, 2000, prior to the offering for resale of any
of the shares of our common stock being registered hereby. The table also sets
forth the number of shares of our common stock that each selling stockholder may
acquire under the terms of our acquisition of Edutest as described in footnotes
(1) and (2) below.

We are registering for resale all of the shares of our common stock held
and to be held by the selling stockholders in connection with the Edutest
acquisition described above. As a result, the selling stockholders can, but are
not obligated to, sell all or virtually all of the shares they own. The
information in the table below is based in part upon information provided by
selling stockholders. The term "selling stockholders" includes the stockholders
listed below and their transferees, pledgees, donees or other successors but
does not include persons who purchase shares of our stock pursuant to this
registration statement.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
LIGHTSPAN COMMON NUMBER OF SHARES OF PERCENTAGE OF
NUMBER OF SHARES OF STOCK ISSUABLE ON LIGHTSPAN COMMON COMMON STOCK
LIGHTSPAN COMMON DECEMBER 23, STOCK ISSUABLE AS OUTSTANDING AFTER
SELLING SECURITYHOLDERS STOCK OWNED 2001(1) EARN-OUT SHARES(2) THE OFFERING(3)
----------------------- ------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Airborne Research & Services,
Inc. ......................... 1,109 239 656 --%
Bill and Alice Aldridge Family
Trust......................... 448 97 265 --
BTG, Inc........................ 23,022 4,988 13,639 --
Carl Jon Larsen(4).............. 9,195 4,860 13,290 --
Core Learning Group, L.L.C...... 5,383 1,166 3,189 --
Edward H. Bersoff............... 62,650 14,115 38,596 *
Gary L. Jones(4)................ 58,528 11,552 31,591 *
Howard R. Mitchell, III......... 643 139 381 --
John M. Cahill.................. 12,617 2,299 6,289 *
Laura Ann Gussett Kump(4)....... 980 486 1,329 --
Lynda B. Knowles................ 18,665 4,043 11,058 --
Next Generation Fund, L.L.C..... 286,654 62,112 169,826 --
Parchman, Vaughn & Company,
L.L.C......................... -- 5,714 15,625 --
Rebecca Howanietz(4)............ 93 48 132 --
Richweb, Inc.................... 1,923 416 1,139 --
Robert J. Smith................. 5,159 1,117 3,056 --
Steven D. Hoy(3)................ 69,337 15,398 42,107 --
Susan B. Hardwicke,
Ph.D.(4)(5)................... 417,884 91,289 249,604 --
Susan Elizabeth Morey(4)........ 115 48 132 --
Temecca Green(4)................ 93 48 132 --
Thomas J. Slivinski, Ph.D....... 31,987 6,929 18,950 --
Thomas W. Flecke(4)............. 5,921 486 1,329 *
William C. Needham.............. 4,486 972 2,658 --
Michael Schipper................ 16,783(6) -- -- --
--------- ------- ------- --
Total......................... 1,033,675 228,561 624,977 *%
========= ======= ======= ==
</TABLE>

14
<PAGE> 18

-------------------------
* Represents less than 1% of the shares of common stock outstanding after the
offering.

(1) Pursuant to an Agreement and Plan of Merger and Reorganization among
Lightspan, Inc., Educator Acquisition, Inc., Edutest, Inc. and certain
shareholders of Edutest dated as of May 24, 2000, Lightspan acquired all of
the outstanding stock of Edutest. As part of the merger consideration
Lightspan agreed to issue to Edutest's shareholders on or about December 23,
2001 approximately 228,561 shares of its common stock minus the dollar
value, if any, of any indemnification obligations owed by such Edutest
shareholders to Lightspan. All the share numbers in this column assume that
the Edutest shareholders shall not have any such indemnification
obligations.

(2) Pursuant to the terms of the Merger Agreement described in footnote (1)
above, Lightspan agreed that if Edutest were to meet certain performance
milestones, Lightspan would issue up to an additional $2,500,000 worth of
Lightspan stock to the Edutest shareholders. All the share numbers in this
column assume that Edutest will meet all of the performance criteria
described in the Merger Agreement and that Lightspan will issue $2,500,000
worth of its stock at a price per share of four dollars, which is the
52-week low sales price of our common stock, rounded down to the nearest
dollar.

(3) Percentage of shares of common stock outstanding after the offering assumes
that the selling stockholders sell all shares of our common stock that they
own, except for the following shares owned as of July 26, 2000 by the
following individuals that were acquired on the open market: Edward H.
Bersoff, 3,000 shares; Gary L. Jones, 7,700 shares; John M. Cahill, 2,000
shares; and Thomas W. Flecke, 5,000 shares.

(4) Employee or independent contractor of Edutest, Inc., which is now our
wholly-owned subsidiary.

(5) President of Edutest, Inc.

(6) These shares were acquired by Michael Schipper in connection with
Lightspan's May 2000 acquisition of the LearningPlanet.com Web site from
Planet Interactive, Inc.

15
<PAGE> 19

PLAN OF DISTRIBUTION

The 1,872,513 shares of common stock to which this prospectus relates may
be sold from time to time by the selling stockholders in one or more
transactions at fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The selling
stockholders may offer these shares of common stock in one or more of the
following transactions:

- on any national securities exchange or quotation service at which the
common stock may be listed or quoted at the time of sale, including the
Nasdaq Stock Market's National Market;

- in the over-the-counter market;

- in private transactions;

- through options; and

- by pledge to secure debts and other obligations, or a combination of any
of the above transactions.

If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.

The shares of common stock described in this prospectus may be sold from
time to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933. Any profits on the resale of shares of our common
stock and any compensation received by any underwriter, broker/dealer or agent
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.

Any shares covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders do not have to sell all of
the shares they own pursuant to this prospectus. The selling stockholders may
transfer, devise or gift such shares by other means not described in this
prospectus.

To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the shares of common stock may
not be offered or sold unless the shares of common stock have been registered or
qualified for sale or an exemption is available and complied with.

Under the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock may not simultaneously engage in market-making
activities with respect to the shares of common stock for nine business days
prior to the start of the distribution. In addition, each selling stockholder
and any other person participating in a distribution will be subject to the
Securities Exchange Act of 1934 which may limit the timing of purchases and
sales of shares of common stock by the selling stockholders or any such other
person. These factors may affect the marketability of the shares of common stock
and the ability of brokers or dealers to engage in market-making activities.

We will pay all expenses of this registration. These expenses include the
SEC's filing fees and fees under state securities or "blue sky" laws. We
estimate that our expenses in connection with this registration will be
approximately $201,000. All expenses for the issuance of a supplement to this
prospectus, when requested by selling stockholder(s), will also be paid by us.

16
<PAGE> 20

USE OF PROCEEDS

We will not receive any of the proceeds from the sale by the selling
stockholders of any of the shares of common stock covered by this prospectus.
All proceeds from the resale of shares of our common stock described in this
prospectus will be for the accounts of the selling stockholders.

DIVIDEND POLICY

We have not declared or paid any dividends on our common stock since our
inception. Our directors expect that while we are unprofitable, earnings will
not be distributed to stockholders by way of dividend. The declaration of
dividends on our common stock will depend upon the directors' assessment of,
among other factors, earnings, capital requirements and our operating and
financial condition.

17
<PAGE> 21

PRICE RANGE OF COMMON STOCK

Our outstanding common stock has been listed on the Nasdaq Stock Market's
National Market since February 10, 2000 under the symbol "LSPN." The following
table sets forth, for the periods indicated, the high and low sales price
information for our common stock as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
COMMON STOCK PRICE
-------------------
HIGH LOW
-------- -------
<S> <C> <C>
Fiscal year ended January 31, 2001:
First Quarter (from February 10, 2000).................... $ 25.375 $ 8
Second Quarter............................................ 10 4.875
</TABLE>

CAPITALIZATION

The following table sets forth on an unaudited basis our capitalization as
of April 30, 2000 (in thousands, except share data):

- on an actual basis; and

- on a pro forma basis after giving effect to our issuance of 1,028,543
shares of common stock to Edutest stockholders on June 23, 2000, and
assuming issuance of 228,561 shares of common stock constituting the
hold-back shares, but excluding shares, if any, that may be issued to
Edutest stockholders as a result of earnout payments based on revenues
through July 2001.

You should read this table in conjunction with the consolidated financial
statements and notes incorporated by reference herein and "Selected Consolidated
Historical and Pro Forma Financial Data" included elsewhere in this prospectus.

<TABLE>
<CAPTION>
APRIL 30, 2000
----------------------
ACTUAL PRO FORMA
--------- ---------
<S> <C> <C>
Capital lease obligations, less current portion............. $ 333 $ 333
Stockholders' equity(1):
Common Stock, $.001 par value; 250,000,000 shares
authorized and 44,239,389 shares issued and
outstanding, actual; 45,496,493 shares issued and
outstanding, pro forma (unaudited)..................... 44 45
Additional paid-in capital................................ 345,532 356,531
Deferred advertising expense.............................. (400) (400)
Deferred compensation..................................... (4,231) (4,231)
Accumulated other comprehensive loss...................... (22) (22)
Accumulated deficit....................................... (176,300) (176,300)
--------- ---------
Total stockholders' equity............................. 164,623 175,623
--------- ---------
Total capitalization................................... $ 164,956 $ 175,956
========= =========
</TABLE>

-------------------------
(1) Other than as indicated in the introduction to the table, share numbers in
the table do not include issuances subsequent to April 30, 2000, or the
following shares:

- as of April 30, 2000, 6,903,941 shares of common stock reserved for
issuance under our stock benefit plans, of which 3,859,067 shares were
covered by outstanding options with a weighted average exercise price of
$4.97 per share and 1,131,057 shares remain available for grant; and

- as of April 30, 2000, 1,391,091 shares of common stock issuable upon
exercise of outstanding warrants at exercise prices between $2.00 and
$12.00 per share.

18
<PAGE> 22

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Lightspan consolidated financial statements and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Operating Results." Our statement of operations data for the years ended
January 31, 2000, 1999, 1998, 1997 and 1996 and balance sheet data as of January
31, 2000, 1999, 1998, 1997 and 1996 are derived from our audited financial
statements. Our audited financial statements for the years ended January 31,
2000, 1999 and 1998 and as of January 31, 2000 and 1999 are included elsewhere
in this prospectus. Our statement of operations data for the three months ended
April 30, 2000 and 1999 and balance sheet data as of April 30, 2000 are derived
from our unaudited financial statements, which are included elsewhere in this
prospectus. The following financial information is in thousands, except per
share data.

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED JANUARY 31, ENDED APRIL 30,
-------------------------------------------------------- ------------------
1996 1997 1998 1999 2000 1999 2000
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues................. $ -- $ 8,565 $ 22,309 $ 10,870 $ 16,916 $ 2,635 $56,409
Total cost of revenues......... -- 5,842 11,433 7,660 9,734 1,574 11,641
-------- -------- -------- -------- -------- ------- -------
Gross profit................... -- 2,723 10,876 3,210 7,182 1,061 44,768
Total operating expenses....... 20,443 35,199 37,827 37,194 63,382 9,527 28,608
-------- -------- -------- -------- -------- ------- -------
Income (loss) from
operations................... (20,443) (32,476) (26,951) (33,984) (56,200) (8,466) 16,160
Interest income (expense),
net.......................... 876 (113) (527) 417 479 4 1,538
-------- -------- -------- -------- -------- ------- -------
Net income (loss).............. (19,567) (32,589) (27,478) (33,567) (55,721) (8,462) 17,698
Preferred stock dividend....... -- -- -- -- -- -- 16,506
-------- -------- -------- -------- -------- ------- -------
Net income (loss) attributable
to common stockholders....... $(19,567) $(32,589) $(27,478) $(33,567) $(55,721) $(8,462) $ 1,192
======== ======== ======== ======== ======== ======= =======
Net income (loss) per
share(1) -- basic and
diluted...................... $ (6.47) $ (10.72) $ (8.65) $ (9.91) $ (13.61) $ (2.32) $ 0.03
======== ======== ======== ======== ======== ======= =======
Weighted average
shares -- basic.............. 3,024 3,039 3,177 3,388 4,094 3,646 39,527
======== ======== ======== ======== ======== ======= =======
Weighted average
shares -- diluted............ 3,024 3,039 3,177 3,388 4,094 3,646 45,466
======== ======== ======== ======== ======== ======= =======
Pro forma net loss per share --
basic and diluted............ $ (2.12)(2)
========
Pro forma weighted average
shares -- basic and
diluted...................... 26,294(2)
========
</TABLE>

<TABLE>
<CAPTION>
AT JANUARY 31, AT APRIL 30,
----------------------------------------------------- ------------
1996 1997 1998 1999 2000 2000
------- ------- ------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $14,733 $ 1,884 $ 4,422 $ 7,143 $ 5,033 $101,510
Deferred cost of revenue -- Achieve Now.... -- -- -- 3,555 8,709 371
Working capital (deficit).................. 14,037 (287) 454 (12,233) (25,994) 114,905
Total assets............................... 18,259 12,852 14,080 22,566 102,432 182,199
Deferred revenue -- Achieve Now............ -- -- -- 20,717 48,110 2,048
Capital lease obligations, less current
portion.................................. 1,460 1,702 775 394 443 333
Total stockholders' equity (deficit)....... $14,537 $ 1,614 $ 1,682 $(11,249) $ 26,694 $164,623
</TABLE>

19
<PAGE> 23

-------------------------
(1) See Note 1 to the Lightspan consolidated financial statements for a
description of the computation of the historical net loss per share and the
number of shares used in the historical per share calculation.

(2) Takes into account the common equivalent shares arising from preferred stock
that automatically converted upon the closing of Lightspan's initial public
offering that was completed on February 15, 2000 (using the as-if converted
method from the original date of issuance) and assumes the conversion of all
of our outstanding preferred stock as of their original dates of issuance.

20
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS

This information should be read in conjunction with the unaudited
consolidated financial and the audited consolidated financial statements and
notes thereto contained herein. Except for the historical information contained
herein, the following discussion contains forward-looking statements that
involve risks and uncertainties. Our future results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include risks detailed in "Risk Factors."

OVERVIEW

We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. We develop, market and
sell curriculum-based educational software and Internet products and services
used both in school and at home. Our curriculum-based educational software
consists of our Lightspan Achieve Now and Academic software. Lightspan Achieve
Now is our media-rich, interactive CD-ROM-based software for students in
kindergarten through eighth grade that covers the core curriculum of language
arts, reading and math. Its technology, delivery system and content help
increase student interest in learning, parental involvement in their children's
education, and productive interaction among teachers, parents and students. Our
Academic software is also CD-ROM-based and serves the college market with an
English and mathematics curriculum designed to meet the needs of under-prepared
students. We offer the following integrated family of Internet products and
services through our Web site, Lightspan.com:

- The Lightspan Network, a curriculum-based online subscription service
marketed to schools for classroom and home use;

- Lightspan Early Learning, a subscription-based online education service
for preschoolers;

- Global Schoolhouse, a leading education Web site where teachers can
develop and manage collaborative learning projects online;

- StudyWeb, a leading research Web site that helps parents, teachers and
students find educational information and resources on the Web;

- LearningPlanet.com, a popular education Web site for students and parents
that features creative and instructional learning activities in
mathematics and language arts;

- Your Class Online, a service that enables teachers to easily create
customized Web pages for their classrooms;

- Your School Online, a school Web site builder that easily integrates with
Your Class Online and with existing school or district Web sites;

- e-commerce affiliate relationships including our partnership with
SmarterKids.com, a Web site that sells educational products online; and

- selected additional content for teachers, parents and students.

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<PAGE> 25

Our products and services are sold to school districts by a direct field
sales force and supported by our professional development team who assists in
implementing our curricula in schools.

We commenced operations in September 1993, and through June 1996 our
activities consisted primarily of designing and developing Lightspan Achieve
Now. In January 1996, we released our Lightspan Achieve Now curriculum for use
on Windows-based personal computers. In the fall of that year, we released the
product for use on the PlayStation game console. To supplement our product
offerings, we introduced The Lightspan Network in January 1997 and we launched
Lightspan PageOne in June 1999. We acquired Academic and Global Schoolhouse in
September 1999, and StudyWeb in October 1999. We also introduced Lightspan.com
in September 1999, and enhanced it in October 1999 with the Lightspan Learning
Store and in February 2000, with Your School Online and Your Class Online, the
successor to Lightspan PageOne. In May 2000, we acquired LearningPlanet.com, and
in June 2000 we acquired Edutest.

REVENUE RECOGNITION

Effective February 1, 1998, we adopted SOP 97-2, as described in Note 1 of
the "Notes to Consolidated Financial Statements," which caused a substantial
change in our revenue recognition for Lightspan Achieve Now licenses. Under SOP
97-2, we are unable to recognize any Lightspan Achieve Now license fees as
revenue until we ship the final title which we plan to provide to all existing
customers for no additional charge. Therefore, we have deferred revenue
recognition for all Lightspan Achieve Now licenses shipped in the years ended
January 31, 2000 and 1999. Through April 30, 2000, we completed and shipped all
Lightspan Achieve Now titles in all grade clusters used on the PlayStation game
console, and grade cluster K through 2 used on a PC platform, resulting in the
recognition of $46.4 million of revenue previously deferred.

During the three months ended April 30, 2000, we also deferred $0.4 million
of revenue related to the shipment of Lightspan Achieve Now licenses in the
as-yet uncompleted grades 3 through 4 and grades 5 through 8 grade clusters used
on a PC platform. In July 2000, we completed and shipped the remaining titles in
grade clusters 3 through 4 and 5 through 8 used on a CD platform to all existing
customers for no additional charge. This resulted in the recognition of the
remaining deferred revenue balance, and the related deferred cost of revenue.

To the extent that we deferred the Lightspan Achieve Now license revenue
until delivery of final titles, pursuant to SOP 97-2, we also deferred the costs
of duplicating the product and packaging it for distribution. In the quarter
ended April 30, 2000, we recognized $8.4 million in cost of license revenue when
we recognized the related $46.4 million in revenue.

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<PAGE> 26

The following table shows the activity in license revenue and cost of
license revenue deferred pursuant to SOP 97-2 as of April 30, 1999 and 2000 (in
thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
-------------------
1999 2000
------- --------
<S> <C> <C>
DEFERRED LICENSE REVENUE -- ACHIEVE NOW
Beginning balance........................................ $20,717 $ 48,110
Deferred during the period............................... 3,578 384
Recognized during the period............................. -- (46,446)
------- --------
Ending balance........................................ $24,295 $ 2,048
======= ========
DEFERRED COST OF LICENSE REVENUE -- ACHIEVE NOW
Beginning balance........................................ $ 3,555 $ 8,709
Deferred during the period............................... 651 70
Recognized during the period............................. -- (8,408)
------- --------
Ending balance........................................ $ 4,206 $ 371
======= ========
</TABLE>

We recognized the remaining deferred license revenue of $2.0 million and
deferred cost of license revenue of $0.4 million in the quarter ending July 31,
2000 and incurred additional marginal costs to reproduce and distribute the
as-yet uncompleted titles at April 30, 2000.

RESULTS OF OPERATIONS

Operating Losses. We have incurred significant losses since our inception
and, as of April 30, 2000, have an accumulated deficit of approximately $176.3
million. We expect to continue to incur substantial operating losses for the
foreseeable future. In the quarter ended April 30, 2000, we completed and
shipped all Lightspan Achieve Now titles in all grade clusters used on the
PlayStation game console, and grade cluster K through 2 used on a PC platform,
recognizing $46.4 million in previously deferred revenue pursuant to SOP 97-2,
as well as $8.4 million in previously deferred cost of revenues. These amounts,
which will not recur in subsequent quarters, resulted in an operating profit for
the three-month period ended April 30, 2000 of $16.2 million. The operating
results for the three-month period ended April 30, 2000 are not indicative of
our underlying business in such period, and will not be indicative of results
that may be expected for any subsequent quarter, for the full year ending
January 31, 2001 or for that matter any future years.

COMPARISON OF THREE MONTHS ENDED APRIL 30, 2000 AND 1999

REVENUES

Our total revenues increased to $56.4 million for the three months ended
April 30, 2000 from $2.6 million for the three months ended April 30, 1999. This
was due to an increase of $52.5 million primarily as a result of the recognition
of $46.4 million in revenue previously deferred, and increases of $1.0 million
in service revenue, $0.1 million in hardware revenue and $0.2 million in other
revenue, as described below.

License Revenues. We derive license revenues from the sale of Lightspan
Achieve Now licenses, Academic licenses and subscriptions for The Lightspan
Network. We recognize revenue from Lightspan Achieve Now licenses and Academic
licenses after: a license agreement has been executed or a definitive purchase
order has been received; the product has been shipped; the license fee has
become fixed and determinable; the collection of the fee is considered probable;
and the related hardware, if applicable, has been shipped.

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<PAGE> 27

In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, we allocate the total fee to each component of the
arrangement based on objective evidence of its fair value, which is specific to
us. The objective evidence for each element is based on the respective list
prices of each element when sold or offered for sale separately. Historically,
we have not experienced customer cancellations, forfeitures or discontinuations
of licenses. Our revenues from sales of Lightspan Achieve Now consist of
license, service and hardware revenues, although since February 1, 1998 we have
deferred recognition of certain license revenues, as described above in "Revenue
Recognition."

Our total license revenues grew to $52.9 million for the three months ended
April 30, 2000 from $0.4 million for the three months ended April 30, 1999. The
majority of the increase related to our recognition of $46.4 million of
Lightspan Achieve Now revenue previously deferred pursuant to SOP 97-2, the
recognition of $4.6 million in Lightspan Achieve Now licenses shipped in the
three months ended April 30, 2000 and $1.1 million in revenue from Academic
licenses.

Due to our adoption of SOP 97-2 on February 1, 1998, we did not record any
license revenues related to Lightspan Achieve Now in fiscal 2000 or 1999. In the
quarter ended April 30, 2000, we completed and shipped all Lightspan Achieve Now
titles in all grade clusters used on the PlayStation game console, and grade
cluster K through 2 used on a PC platform, resulting in the recognition of $46.4
million of revenue previously deferred, pursuant to SOP 97-2. During the three
months ended April 30, 2000, we also shipped Lightspan Achieve Now licenses in
the amount of $5.0 million, $0.4 million of which we deferred pursuant to SOP
97-2. This represented a 40% increase over $3.6 million in shipments, for which
revenue was entirely deferred, for the three months ended April 30, 1999. This
increase was due to increased sales and marketing efforts, continued market
acceptance of our products and expansion of our existing customer base.

License revenues also increased due to $1.1 million in revenue from
Academic licenses. Academic curriculum products are licensed to colleges and
then sold by the licensing colleges to students on a student-by-student basis
for use with each class, instead of a textbook. As we are not contractually
obligated to provide further service after delivery of the license, we recognize
the full sales value of Academic license revenue upon completion of the above
criteria defined by SOP 97-2.

Our revenues from subscription fees for The Lightspan Network increased to
$0.7 million from $0.4 million, an increase of 76% due primarily to an increase
in the number of subscribers to The Lightspan Network. We recognize revenue from
subscriptions to The Lightspan Network ratably over the term of the subscription
agreement. Subscription licenses are for a one-year term, and are paid in
advance. Amounts received in excess of revenue that is recognized are recorded
as deferred revenue.

Service Revenues. Our service revenues increased 78% to $2.2 million for
the three months ended April 30, 2000 from $1.2 million for the three months
ended April 30, 1999 due primarily to an increase in sales of Lightspan Achieve
Now licenses. We derive service revenues from implementation services and
training for our Lightspan Achieve Now curriculum that is provided by our
professional development team and, to a lesser extent, from telephone support
and maintenance. All customers that purchase our Lightspan Achieve Now
curriculum also purchase service and support. This service and support are paid
for in advance and initially recorded as deferred revenues. Service revenues are
recognized when services are performed, in accordance with the standard
implementation, training, service, and evaluation plans that we establish for
the customer. Revenues from telephone support and maintenance arrangements are
recognized ratably over the one-year term of the support and maintenance
agreement.

Hardware Revenues. Our hardware revenues increased 15% to $1.2 million for
the three months ended April 30, 2000 from $1.0 million for three months ended
April 30, 1999. This was due to an

24
<PAGE> 28

increase in the number of units we shipped, offset in part by a decrease in the
average selling price of the PlayStation game console. We derive hardware
revenues from the sale of the PlayStation game console and accessories. We
recognize hardware revenues after a definitive purchase order has been received,
the product has been shipped and collection of the sales price is considered
probable. Substantially all of our Lightspan Achieve Now customers also purchase
the PlayStation game console. To the extent that we begin selling PlayStation 2
systems, revenue from these sales will be included in hardware revenue. In order
to begin selling the PlayStation 2 system, however, we will have to enter into a
new agreement with Sony Computer Entertainment Inc. We may not be able to enter
into an agreement with Sony Computer Entertainment Inc. for the PlayStation 2
system on favorable terms or in a timely manner, if at all.

Other Revenues. Other revenue for the three months ended April 30, 2000 was
$0.2 million. We derive other revenues primarily from site sponsorship
agreements, which began in February 2000, whereby we provide certain online
exposure by promoting the products and services of site sponsors on our
Lightspan.com Web site. We also provide other offline exposure such as providing
name or logo placement on selected Lightspan.com consumer and trade advertising
and giving site sponsorship credits at technology and education trade shows we
participate in throughout the term of the agreement. We recognize site
sponsorship revenue over the term the services are provided.

COST OF REVENUES

Our cost of revenues includes license costs, service costs and hardware
costs. License costs represent costs for assembly, distribution and materials
for CD-ROMs, packaging and print material costs, costs for third-party royalties
and third-party content and costs for server and network fees. Service costs
represent labor costs and overhead related to professional development
personnel. Hardware costs represent costs for the PlayStation game console and
related accessories.

Our cost of revenues increased to $11.6 million for the three months ended
April 30, 2000 from $1.6 million for the three months ended April 30, 1999. This
was due to an increase of $9.7 million in cost of license revenue resulting
primarily from recognition of $8.4 million in cost of revenue previously
deferred, an increase of $0.3 million in cost of service revenue and an increase
of $0.1 million in cost of hardware revenue. Gross margin as a percentage of
total revenues was 79% and 40% for the three months ended April 30, 2000 and
1999, respectively.

Cost of License Revenues. Our cost of license revenues increased to $9.8
million for the three months ended April 30, 2000 from $0.1 million for the
three months ended April 30, 1999. This was due primarily to the recognition of
$8.4 million in cost of Lightspan Achieve Now license revenue previously
deferred, an increase of $0.7 million in Lightspan Achieve Now cost of licenses
shipped in the three months ended April 30, 2000, a $0.4 million increase due to
Academic cost of revenue and a $0.2 million increase in cost of revenues for
subscriptions to The Lightspan Network.

Because we deferred all revenue related to shipments of Lightspan Achieve
Now in both fiscal 2000 and 1999, we also deferred the related cost of revenue.
In the quarter ended April 30, 2000, we completed and shipped all Lightspan
Achieve Now titles in all grade clusters used on the PlayStation game console,
and grade cluster K through 2 used on a PC platform, resulting in the
recognition of $8.4 million in cost of licenses previously deferred, pursuant to
SOP 97-2. During the three months ended April 30, 2000, we also shipped
Lightspan Achieve Now licenses, representing $0.8 million in cost of revenue,
prior to deferral of $0.1 million related to the as-yet uncompleted titles. This
represents a 19% increase over $0.7 million in shipments which were entirely
deferred for the three months ended April 30, 1999. Gross margin on deferred and
recognized Lightspan Achieve Now license revenues and cost of license revenues
increased to 84% from 82% due to a decrease in the cost of materials for CD-ROMs
for the three months ended April 30, 2000 compared to the three months ended
April 30, 1999.

25
<PAGE> 29

Our cost of revenues for Academic licenses was $0.4 million. Gross margin
for Academic as a percentage of license revenues was 64%. Our cost of revenues
for subscriptions to The Lightspan Network increased to $0.3 million from $0.1
million, an increase of 123%. This growth was due primarily to an increase in
third-party content fees driven by an increase in subscriptions. Gross margin as
a percentage of subscription fee revenues from The Lightspan Network decreased
to 58% from 66%. This decrease was primarily due to additional network and
server costs.

Cost of Service Revenues. Our cost of service revenues increased 50% to
$0.9 million for the three months ended April 30, 2000 from $0.6 million for the
three months ended April 30, 1999. This increase was primarily due to an
increase in professional services and support personnel to accommodate the
growth in sales of Lightspan Achieve Now licenses and related services. Gross
margin as a percentage of service revenues increased to 58% from 51% due
primarily to our service revenues increasing at a greater rate than our fixed
professional development costs.

Cost of Hardware Revenues. Our cost of hardware revenues increased to $0.9
million for the three months ended April 30, 2000 from $0.8 million for the
three months ended April 30, 1999 due primarily to an increase in hardware
revenue. Gross margin as a percentage of hardware revenues increased to 22% from
17% due to a decrease in the cost of the PlayStation game console accessories
for the three months ended April 30, 2000 compared to the three months ended
April 30, 1999.

EXPENSES

Technology and Development. Our technology and development expenses
increased to $5.1 million for the three months ended April 30, 2000 from $2.1
million for the three months ended April 30, 1999, an increase of 147%. This was
due to our hiring of additional personnel and related costs for Web site design
and development of our Internet business as we expanded our Internet offerings,
and the addition of Academic technology and development expense of $1.0 million.
This increase also resulted from a reduction in development personnel and
related costs that occurred throughout the three months ended April 30, 1999
following completion of initial design and development of substantially all of
our Lightspan Achieve Now titles.

Our technology and development costs consist primarily of payroll and
related costs for design, art, production, development, maintenance and testing
of our Lightspan Achieve Now curriculum and for performing Web site design,
development and testing which are properly expensed as incurred pursuant to SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. We regularly evaluate these expenses under SOP 98-1 in order to
determine their proper treatment. We believe that continued investment in Web
site development is critical to attain our strategic objectives and therefore
anticipate that Web site development expenses will increase significantly in
future periods.

Sales and Marketing. Our sales and marketing expenses increased to $17.0
million for the three months ended April 30, 2000 from $6.1 million for the
three months ended April 30, 1999, an increase of 177%. This was due to an
increase in marketing personnel and marketing and promotional activities
particularly in connection with the launch of Lightspan.com and the related $5.0
million television campaign, the continued promotion of Lightspan Achieve Now
and the addition of Academic sales and marketing expense of $2.2 million.

Our sales and marketing expenses consist primarily of salaries,
commissions, bonuses, related payroll and travel costs, advertising, promotional
activities, customer incentive programs and research and evaluation of our
current customers and markets. In addition, sales and marketing expenses related
to our free Internet products have recently accounted for a large part of our
overall sales and marketing expenses. We therefore expect that overall sales and
marketing expenses will decrease in the third quarter of fiscal year 2001 as we
refocus our sales and marketing efforts away from our free

26
<PAGE> 30

Internet products and toward our subscription-based Internet products such as
The Lightspan Network, Lightspan Early Learning and eduTest@School and
eduTest@School Plus. Although we believe that our overall sales and marketing
expenses will decrease in the short term, we intend to continue to pursue
aggressive branding and marketing campaigns to retain and increase sales to
current customers, attract new customers, and broaden our markets for our
subscription Internet products, and we believe our sales and marketing expenses
for these products will increase following the third quarter of fiscal 2001.

General and Administrative. Our general and administrative expenses
increased to $2.2 million for the three months ended April 30, 2000 from $0.9
million for the three months ended April 30, 1999, an increase of 147%. This
increase was due primarily to increased personnel and related costs resulting
from our increased infrastructure, increased corporate expenses associated with
being a public company including legal and accounting fees and $0.3 million in
expenses from Academic.

Our general and administrative expenses consist primarily of payroll and
related costs for executive and administrative personnel, professional services
expenses and other general corporate expenses. We expect that general and
administrative expenses will increase as our business grows and we expand our
staff, increase our infrastructure and incur costs associated with being a
public company.

Stock-Based Compensation. By April 30, 2000 and 1999, we had recorded $8.9
million and $2.5 million, respectively, in deferred stock-based compensation as
a result of our granting of stock options to employees with exercise prices per
share deemed to be below the fair values per share for our common stock on the
dates those options were granted. The deferred stock-based compensation is being
amortized to expense on an accelerated basis over the vesting period of the
individual options, generally four years. The amortization of deferred
stock-based compensation expense was approximately $0.9 million and $0.4 million
for the three months ended April 30, 2000 and 1999, respectively. As of April
30, 2000, there was approximately $4.2 million to be amortized in future
periods.

Amortization of Intangible Assets. In connection with the acquisitions of
Academic, Global Schoolhouse and StudyWeb in the third quarter of fiscal 2000,
we recorded intangible assets totaling an aggregate of approximately $54.2
million, including goodwill of $28.4 million. We amortize these intangible
assets over their respective useful lives, ranging from three to ten years. Our
amortization of intangible assets totaled $3.3 million for the three months
ended April 30, 2000. We expect to record annual amortization expense related to
these acquisitions of approximately $13.5 million for each of fiscal years 2001
and 2002, $13.0 million for fiscal 2003, $7.6 million for fiscal 2004, $0.3
million for each fiscal year from 2005 through 2009 and approximately $0.2
million for fiscal 2010.

Interest Income (Expense). Our net interest income was $1.5 million for the
three months ended April 30, 2000 as a result of investing the proceeds from our
initial public offering in short term, interest-bearing, investment grade
securities.

COMPARISON OF FISCAL 2000 AND 1999

REVENUES

We generate software and internet license revenue, service revenue and
hardware revenue. Our total revenues increased to $16.9 million in fiscal 2000
from $10.9 million for fiscal 1999, an increase of 56% due primarily to an
increase of $3.0 million in license revenue, $2.8 million in service revenue and
$0.2 million in hardware revenue.

License Revenues. Our license revenues grew to $4.0 million from $1.0
million, an increase of 300%. Our revenues from subscription fees for The
Lightspan Network increased to $1.8 million from

27
<PAGE> 31

$1.0 million, an increase of 80% due primarily to an increase in the number of
subscribers to The Lightspan Network. The remaining $2.2 million increase
related to revenue from Academic licenses.

Due to our adoption of AICPA Statement of Position 97-2 on February 1,
1998, we did not record any license revenues related to Lightspan Achieve Now in
fiscal 2000 or 1999. We recorded deferred revenue of $27.4 million in fiscal
2000, an increase of 32% from $20.7 million in fiscal 1999. This increase was
due to increased shipments of Lightspan Achieve Now licenses in fiscal 2000,
which resulted from increased sales and marketing efforts, continued market
acceptance of our products and expansion of our customer base.

Service Revenues. Our service revenues increased 75% to $6.5 million in
fiscal 2000 from $3.7 million in fiscal 1999 due primarily to an increase in
sales of Lightspan Achieve Now licenses, an increase in service rates and an
increase in the number of service days for first classroom licenses.

Hardware Revenues. Our hardware revenues increased 4% to $6.3 million in
fiscal 2000 from $6.1 million in fiscal 1999 due to an increase in the number of
units we shipped, offset in part by a decrease in the average selling price of
the PlayStation game console.

COST OF REVENUES

Our cost of revenues increased 27% to $9.7 million for fiscal 2000 from
$7.7 million for fiscal 1999. Gross margin as a percentage of total revenues was
42% and 30% for the years ended January 31, 2000 and 1999, respectively.

Cost of License Revenues. Our cost of license revenues increased to $1.2
million from $0.3 million, an increase of 305%.

Our cost of revenues for subscriptions to The Lightspan Network increased
to $0.5 million from $0.3 million, an increase of 81%. This growth was due
primarily to an increase in third-party content fees driven by an increase in
subscriptions. Gross margin as a percentage of subscription fee revenues from
The Lightspan Network decreased to 69% from 70%. This decrease was primarily due
to additional network and server costs. Our cost of revenues for Academic
licenses was $0.7 million. Gross margin for Academic as a percentage of license
revenues was 69%.

Because we deferred all revenue related to shipments of Lightspan Achieve
Now in both fiscal 2000 and 1999, we also deferred the related cost of revenue.
Our deferred cost of license revenues for Lightspan Achieve Now licenses was
$5.2 million in fiscal 2000, compared to $3.6 million in fiscal 1999, a 45%
increase. Gross margin related to deferred Lightspan Achieve Now revenues and
deferred cost of revenue was 81% in fiscal 2000 compared to 83% in fiscal 1999.

Cost of Service Revenues. Our cost of service revenues increased to $3.1
million from $2.4 million, an increase of 32%. This increase was primarily due
to an increase in professional services and support personnel to accommodate the
growth in sales of Lightspan Achieve Now licenses and related services. Gross
margin as a percentage of service revenues increased to 52% from 36%. This
increase was primarily due to our service revenues increasing at a greater rate
than our fixed professional development costs.

Cost of Hardware Revenues. Our cost of hardware revenues increased to $5.4
million from $5.0 million due primarily to an increase in hardware revenue.
Gross margin as a percentage of hardware revenues remained relatively constant.

EXPENSES

Technology and Development. Our technology and development expenses
increased to $12.4 million for fiscal 2000 from $10.6 million for fiscal 1999,
an increase of 17%. This increase was due to our hiring of additional personnel
for Web site design and development and a shift of some

28
<PAGE> 32

existing development personnel and related costs to our Internet business as we
expanded our Internet offerings and the addition of Academic technology and
development expense of $0.8 million. These increases were partially offset by a
reduction in development personnel and related costs that occurred in the second
half of the prior fiscal year and continued throughout this year following
completion of initial design and development of substantially all of our
Lightspan Achieve Now titles.

Sales and Marketing. Our sales and marketing expenses increased to $35.6
million for fiscal 2000 from $23.0 million for fiscal 1999, an increase of 55%.
This increase was attributable to an increase in marketing personnel and
marketing and promotional activities, particularly in connection with the launch
of Lightspan.com and the continued promotion of Lightspan Achieve Now and
Academic sales and marketing expense of $2.0 million.

General and Administrative. Our general and administrative expenses
increased to $6.7 million for fiscal 2000 from $3.6 million for fiscal 1999, an
increase of 86%. This increase was due primarily to increased personnel and
related costs, particularly in our finance and management information systems
departments, additional legal fees and settlement costs accrued in the current
year associated with a lawsuit brought by a former employee, which was settled
in August 1999, an increase in our allowance for doubtful accounts and $1.3
million in expenses from Academic.

Stock-Based Compensation. In fiscals 2000 and 1999, we have recorded $8.7
million and $0.2 million, respectively, in deferred stock-based compensation as
a result of our granting of stock options to employees with exercise prices per
share deemed to be below the fair values per share for our common stock on the
dates those options were granted. The deferred stock-based compensation is being
amortized to expense on an accelerated basis over the vesting period of the
individual options, generally four years. The deferred stock-based compensation
expense was approximately $3.7 million for fiscal 2000. As of January 31, 2000,
there was approximately $5.2 million to be amortized in future periods.

Amortization of Intangible Assets. In connection with the acquisitions of
Academic, Global Schoolhouse and StudyWeb, we recorded intangible assets
totaling an aggregate of approximately $54.6 million, including goodwill of
$28.8 million. We amortize intangible assets over their respective useful lives,
ranging from three to ten years. Our amortization of intangible assets totaled
$5.0 million for fiscal 2000 and represents amortization related to Academic
since September 20, 1999, Global Schoolhouse since September 2, 1999, and
StudyWeb since October 28, 1999.

Interest Income (Expense). Our net interest income increased to $0.5
million for fiscal 2000 from $0.4 million for fiscal 1999, an increase of 15%.
This increase was due to higher average cash balances available for investment
in fiscal 2000.

COMPARISON OF FISCAL 1999 AND 1998

REVENUES

Our total revenues decreased 51% to $10.9 million during fiscal 1999, from
$22.3 million during fiscal 1998.

License Revenues. Our license revenues decreased to $1.0 million in fiscal
1999 from $15.0 million in fiscal 1998. The decrease in 1999 was due to the
adoption of AICPA Statement of Position 97-2, under which we were required to
defer $20.7 million of revenue related to shipments of Lightspan Achieve Now
licenses made in 1999 which would otherwise have been recognized under AICPA
Statement of Position 91-1. The decrease in 1999 was offset, to a lesser extent,
by increases in the number of subscriptions to The Lightspan Network.

Service Revenues. Our service revenues increased to $3.7 million in fiscal
1999 from $2.0 million in fiscal 1998. This 90% increase was due primarily to
increases in sales of Lightspan

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Achieve Now licenses. All customers that purchase our Lightspan Achieve Now
curriculum also purchase professional service and support.

Hardware Revenues. Our hardware revenues increased to $6.1 million in
fiscal 1999 from $5.3 million in fiscal 1998. This 15% increase was due to
increased sales of Lightspan Achieve Now licenses and hardware, partially offset
by reductions in the cost of PlayStation game consoles to us that we passed
through to our customers.

COST OF REVENUES

Our cost of revenues decreased to $7.7 million, or 33% in fiscal 1999 from
$11.4 million in fiscal 1998. Gross margin as a percentage of revenues decreased
to 30% in fiscal 1999 from 49% in fiscal 1998.

Cost of License Revenues. Our cost of license revenues decreased to $0.3
million in fiscal 1999 from $4.9 million in fiscal 1998, a decrease of 94%, due
to the deferral of cost of revenue related to Lightspan Achieve Now license
revenue deferred as a result of the adoption of AICPA Statement of Position
97-2. Gross margin as a percentage of license revenues increased to 70% in
fiscal 1999 from 67% in fiscal 1998.

Cost of Service Revenues. Our cost of service revenues grew to $2.4 million
in fiscal 1999 from $1.8 million in fiscal 1998. This increase was due to
increases in professional development services and support personnel to
accommodate the growth in sales of Lightspan Achieve Now licenses and related
services. Gross margin as a percentage of service revenue increased to 36% in
fiscal 1999 from 11% in fiscal 1998. This increase was due to increased
utilization of our professional development staff, an increase in the average
number of days of service sold per license, improved billing of customers for
services provided beyond the scope of the original license agreement, and, in
general, our service revenues increasing at a greater rate than our fixed
professional development costs.

Cost of Hardware Revenues. Our cost of hardware revenues increased to $5.0
million in fiscal 1999 from $4.7 million in fiscal 1998. This increase was due
to increased Lightspan Achieve Now license sales, offset in large part by our
transition to the PlayStation game console, a less expensive hardware platform
than the hardware platforms that we had previously provided to our Lightspan
Achieve Now customers, often at low or negative margins. Gross margin as a
percentage of hardware revenues increased to 19% in fiscal 1999 from 10% in
fiscal 1998. This increase was due to the transition to the higher-margin
PlayStation game console platform.

EXPENSES

Technology and Development. Our technology and development expenses
decreased to $10.6 million in fiscal 1999 from $14.8 million in fiscal 1998, a
28% decrease. This decrease was due to reductions in development personnel and
related costs associated with completion of most of our Lightspan Achieve Now
titles. By the end of fiscal 1999, substantially all design, development and
testing had been completed on our Lightspan Achieve Now product line.

Sales and Marketing. Our sales and marketing expenses increased 13% to
$23.0 million in fiscal 1999 from $20.3 million in fiscal 1998 as a result of
increased personnel in marketing, increased commissions and bonuses as the
result of growing sales, and additional marketing and promotional activities.
The increase was partially offset by a decrease in personnel and related costs
in the sales and professional development organizations due to a reduction in
headcount during the last half of fiscal 1999.

General and Administrative. Our general and administrative expenses
increased 32% to $3.6 million in fiscal 1999 from $2.7 million in fiscal 1998
primarily due to $1.1 million in legal and settlement costs associated with a
lawsuit brought by a former employee, which was settled in

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August 1999, and an increase in personnel and other costs related to our growth,
partially offset by decreases in bad debt expense in fiscal 1999 as compared to
fiscal 1998.

Interest Income (Expense). We earned net interest income of $0.4 million in
fiscal 1999, as compared to net interest expense of $0.5 million in fiscal 1998.
Our net interest income in fiscal 1999 compared to our net interest expense in
fiscal 1998 was due to higher average cash balances in the six months ended July
31, 1998, when we received proceeds of a Series D preferred stock financing. Our
interest expense for fiscal 1999 and fiscal 1998 is attributable to the
utilization of our equipment lease lines and borrowings against our revolving
line of credit.

ACADEMIC SYSTEMS CORPORATION ACQUISITION

We acquired Academic Systems Corporation in September 1999. Academic
develops, markets and sells curriculum-based educational software to colleges
and universities for use by under-prepared college students. Academic offers
five course programs -- four in mathematics covering elementary algebra to
college algebra, and one in English covering remedial writing and freshman
composition. Academic's products also include a student management system that
can be run on the Internet or the college's own network.

Revenues consist primarily of fees for licenses and implementation of
Academic's software, customer training, books and materials, upgrades and
support. Academic enters into license agreements under which software, support
and other services are provided to a customer for a fixed fee for a specified
period of time. License revenues are recognized upon contract signing and
delivery of the software, provided the related fee is fixed and determinable and
collection of the fee is probable. The revenues associated with books and
materials are recognized upon shipment and revenues for services are recognized
when the services are performed.

The cost of license revenues consists of costs related to materials for
CD-ROMs, assembly and distribution of CD-ROMs, print materials and third-party
royalties.

LEARNINGPLANET.COM ACQUISITION

On May 26, 2000, we acquired LearningPlanet.com, a popular education Web
destination for kids and their parents. The acquisition will augment the
extensive collection of preschool through high school curriculum-based learning
activities already available in our Internet products and services.
LearningPlanet.com features creative and instructional learning activities in
mathematics and language arts. Launched in June 1999, LearningPlanet.com has
focused on creating activities for kids that are both entertaining and
educational. We acquired the LearningPlanet.com Web site and related technology
and assets in exchange for a combination of approximately $450,000 in our common
stock and cash. The acquisition was accounted for as a purchase.

EDUTEST ACQUISITION

We acquired Edutest, Inc. in June 2000. Edutest is a provider of
Internet-based educational testing and assessment products. Edutest offers a
combination of online assessment products and proprietary test questions
covering language arts, mathematics, history and science which allow educators
to assess their students' progress in the classroom. Test results can be
analyzed at the school district level, the school level and the classroom level.

In connection with our acquisition of Edutest, we issued 1,028,543 shares
of our common stock and paid approximately $2.2 million in cash, $1.3 million of
which was paid to common shareholders, and the remaining $0.9 million of which
was paid in satisfaction of various obligations of Edutest, in exchange for all
of the outstanding shares of capital stock of Edutest. In addition, we may issue
(i) up to 228,561 shares of our common stock eighteen months from June 23, 2000
and (ii) up to

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$2.5 million in stock shortly after July 31, 2001 if Edutest meets certain
revenue based performance criteria. The acquisition was accounted for as a
purchase.

Edutest revenues consist primarily of license fees, and fees paid for
customer training and support. Edutest enters into license agreements under
which Internet-based assessment instruments, which are delivered on-line, and
other services are provided to a customer for a fixed fee for a specified period
of time. License revenues are recognized over the term of the agreement,
provided the contract is signed, delivery of the assessment instruments is
complete, the related fee is fixed and determinable and collection of the fee is
probable. The revenues associated with customer training and support are
recognized when the services are performed.

The cost of Edutest license revenues consists of costs related to server
and network fees and cost of service revenues consist of labor costs and
overhead related to professional development personnel.

BUSINESS COMBINATIONS AND PURCHASE ACCOUNTING

The acquisitions of Academic, Global Schoolhouse and StudyWeb were
accounted for as purchases. During the year ended January 31, 2000, we paid net
cash of $4.3 million for these acquisitions. Subsequent to April 30, 2000, we
acquired Edutest, Inc. and LearningPlanet.com, both accounted for as purchases,
for a net cash amount of $2.3 million.

The purchase price for the acquisitions of Academic was allocated to the
assets acquired, consisting principally of goodwill and intangible assets which
are being amortized over useful lives ranging from four to ten years. The
purchase prices of Global Schoolhouse and StudyWeb were allocated to the assets
acquired, primarily intangibles related to the Web sites acquired, which are
being amortized over useful lives of three years. The purchase price for the
acquisitions of Edutest and LearningPlanet.com was allocated to the assets
acquired, consisting principally of goodwill and intangible assets which are
being amortized over useful lives of three years.

The assets and operations of Edutest, LearningPlanet.com Global Schoolhouse
and Study Web are included in the Internet K-12 segment. The assets, liabilities
and operations of Academic comprise the Higher Education segment. The results of
operations for all four acquired businesses, including the related amortization
of intangible assets, have been included in our consolidated results of
operations from the dates of acquisition.

Amortization of intangibles and goodwill for the year ended January 31,
2000 was $5.0 million and for the three months ended April 30, 2000 was $3.3
million. As of April 30, 2000, we expect to record annual amortization expense
related to the acquisitions of Academic, Global Schoolhouse and StudyWeb of
approximately $13.5 million for each of fiscal years 2001 and 2002, $13.0
million for fiscal year 2003, $7.6 million for fiscal 2004, $0.3 million for
each fiscal year from 2005 through 2009, and $0.2 million for fiscal year 2010.

OTHER RELATIONSHIPS

CINAR Corporation

In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators. CINAR markets and distributes its animated and live-action children's
and family programming to broadcast, cable and other media outlets worldwide.
CINAR's productions include the two-time Emmy award-winning Arthur,the top-rated
children's television program in the United States, as well as Are You Afraid of
the Dark?, Wimzie's House, Lassie, The Busy World of Richard Scarry and The
Adventures of Paddington Bear. CINAR also publishes and distributes
approximately 2,000 supplemental education products for pre-kindergarten through
eighth grade that

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enhance classroom curricula and foster continued learning in the home. CINAR's
products are sold each year to more than 1.6 million teachers and 370,000
daycare providers in North America.

As part of our agreement, CINAR purchased 2,500,000 shares of our Series E
preferred stock at $5.00 per share, which converted into 1,250,000 shares of
common stock upon completion of our initial public offering. CINAR also
purchased $10 million of our common stock, or 833,333 shares, in a private
placement that occurred concurrently with our initial public offering at the
initial public offering price of $12 per share. We also granted CINAR a warrant
to purchase 500,000 shares of our Series E preferred stock at an exercise price
of $5.00 per share (which became a warrant to purchase 250,000 shares of common
stock at an exercise price of $10.00 per share upon completion of our initial
public offering) that will vest upon the achievement of various agreed-to
strategic goals. The planned strategic initiatives include such projects as

- a convergence educational television series, combining broadband
interactive offerings and standard television;

- the co-development of a pre-kindergarten educational portal featuring
CINAR's subsidiary HighReach Learning; and

- a series of other co-marketing and distribution arrangements such as the
international distribution of Lightspan products.

As part of our agreement with CINAR, Ronald A. Weinberg, a CINAR board
member, joined our board. On May 16, 2000, Mr. Weinberg resigned from our board
and Mr. Barrie Usher, CINAR's Chief Executive Officer, was appointed in his
place.

Cox Communications

In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in its cable communities through its "Cable in the Classroom"
initiative, which provides public schools with free basic cable service and
learning guides. As part of our agreement, Cox Communications purchased $12.5
million of our common stock, or 1,041,667 shares, in a private placement that
occurred concurrently with our initial public offering. We also granted to Cox
Communications a warrant to purchase 750,000 shares of our common stock at an
exercise price of $12.00 per share upon the closing of our initial public
offering. The warrant will vest upon the achievement of various agreed-to
strategic goals related to the proposed use of Lightspan Achieve Now and
Lightspan.com products in trials by Cox Communications of cable offerings over
digital set-top boxes.

As part of our agreement with Cox Communications Holdings, Inc., Thomas F.
Nagel, Cox Communications Inc.'s Vice President of Business Development, joined
our board as of the close of our initial public offering. Mr. Nagel subsequently
resigned on March 31, 2000 and in May 2000, Mr. David M. Woodrow, Executive Vice
President of Business Development for Cox Communications, Inc., joined our
board.

Gateway

In January 2000, Gateway Companies, Inc. agreed to purchase $3.0 million of
our common stock, or 250,000 shares, in a private placement that occurred
concurrently with our initial public offering. Gateway, a manufacturer of
personal computers, is Lightspan's preferred provider of personal computers.

In February 2000, Lightspan entered into an Internet sponsorship agreement
with Gateway, a one year agreement that expires January 31, 2001, whereby
Lightspan will promote the products and

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services of Gateway by providing certain online and offline exposure. In return,
Gateway will pay an annual fee of $500,000; $125,000 within 30 days of execution
of the agreement and thereafter in equal quarterly installments. The sponsorship
agreement will be extended beyond one year if certain online exposure
requirements are not met and is renewable for an additional year by Gateway.

SPRINGING WARRANTS

Upon the sale of our common stock in our initial public offering, warrants
to purchase up to 2,760,160 shares of Series D preferred stock at $0.02 per
share converted into warrants to purchase up to 1,380,080 shares of common stock
and were automatically exercised, resulting in the issuance of 1,377,762 shares
of common stock. As a result, on February 15, 2000, we accounted for the
intrinsic value of these warrants by charging accumulated deficit an additional
$16.5 million and increasing the carrying amount of common stock by a
corresponding amount. Such amount also decreased the net income per share
applicable to common stockholders for the three months ended April 30, 2000 and
will increase the net loss or decrease the net income applicable to common
stockholders for periods including February 15, 2000.

LEGAL MATTERS

In July 1996, a former employee commenced legal action against us, alleging
causes of action for fraud, breach of contract, negligent misrepresentation and
conversion. On August 26, 1999, we entered into a settlement agreement and
release with the former employee, the terms of which are subject to
confidentiality provisions. During the year ended January 31, 1999, we recorded
a charge of approximately $1.1 million for anticipated settlement and legal
costs related to this case and during the year ended January 31, 2000, we
recorded an additional charge of approximately $467,000 to cover additional
costs related to the settlement. In the three months ended April 30, 2000, we
paid the remaining settlement costs and legal fees of approximately $0.6 million
for a total of $1.6 million in legal and settlement costs related to this case.

LIQUIDITY AND CAPITAL RESOURCES

From inception through January 2000, we financed our operations and met our
capital expenditure requirements primarily with the net proceeds from private
sales of equity securities totaling approximately $143.6 million. On February
15, 2000, we completed our initial public offering of 7,500,000 shares of common
stock at an initial offering price of $12 per share. We also completed private
placement offerings concurrently with our initial public offering with CINAR,
Cox Communications and Gateway Companies, Inc. for 833,333, 1,041,667 and
250,000 shares, respectively. The proceeds from these offerings, after deducting
the underwriting discount and commissions and offering expenses and payment of
financial advisory fees relating to our private placements, were approximately
$106.1 million. In March 2000, the underwriters exercised 655,150 shares of
their overallotment option for total proceeds to us, net of discounts and
commissions, of $7.3 million. At April 30, 2000, we had $101.5 million of cash
and cash equivalents and $14.3 million in short-term investments. The expansion
of our business will require significant additional capital to fund operating
losses, capital expenditures and working capital needs. We expect operating
losses to continue and increase for the foreseeable future.

Our working capital has fluctuated significantly since our inception. This
is due, in large part, to the timing of cash payments to vendors, cash
collections from customers, varying resources required for development efforts
on our product offerings, as well as receipt of cash from our preferred stock
financings, initial public offering, private placements and other equity
offerings. We expect that our working capital requirements and cash position
will fluctuate significantly from period to period for the foreseeable future.
These fluctuations may be caused by increased spending to support our growth in
operations, strategic investments, or acquisitions.
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Net cash used in operating activities was $18.3 million for the three
months ended April 30, 2000 and $4.2 million for the three months ended April
30, 1999. Net cash used during these periods was primarily to fund technology
and development, sales and marketing, including promotion of Lightspan.com and
general and administrative costs associated with the development and deployment
of our Lightspan Achieve Now and Academic curriculum and Internet products and
services. We expect our negative operating cash flow to continue and increase
for the foreseeable future.

Net cash provided by investing activities was $1.1 million for the three
months ended April 30, 2000, relating primarily to the maturity, offset by
purchases, of short-term investments purchased with proceeds from our initial
public offering. Net cash used in investing activities for the three months
ended April 30, 1999 was $0.2 million related primarily to the purchase of
property and equipment.

Net cash provided by financing activities was $113.7 million for the three
months ended April 30, 2000, relating primarily to the proceeds from our initial
public offering, private placements and the underwriter's exercise of their
overallotment option. Net cash used in financing activities was $0.1 million for
the three months ended April 30, 1999, related primarily to net principal
repayments on capital leases.

In April 2000, our line of credit with a financial institution, of $10.0
million or 75% of eligible accounts receivable with interest at the bank's prime
rate plus 1.5% and collateralized by substantially all of our assets, expired
without renewal. We did not renew the line of credit as a result of the cash
reserves provided by the proceeds from our initial public offering. We are
currently evaluating future lines of credit.

We entered into a $1.0 million capital lease line with a financial
institution in April 1999. Under the agreement, which expires in September 2000,
we finance the purchase of capital equipment at an 8.8% interest rate over a
42-month period with a purchase option. As of April 30, 2000, $736,000 was
available for future borrowing under this agreement.

In September 1999 we completed our acquisition of Academic, pursuant to
which we issued 7,191,839 shares of our Series E preferred stock pursuant to
various exchange ratios applied to the various classes and series of capital
stock of Academic. However, we believed a small number of former Academic
stockholders had rights to additional shares of our stock. As a result, on March
3, 2000, we issued 534,008 shares of common stock to those stockholders.

On May 26, 2000, we acquired LearningPlanet.com, an education Web
destination for students and parents, including the LearningPlanet.com Web site
and related technology and assets in exchange for up to $450,000 in our common
stock and cash.

On June 23, 2000, we acquired Edutest, Inc., a provider of Internet-based
educational testing and assessment products, for a combination of cash and
shares of our common stock with a value of up to $15.7 million. The aggregate
consideration received by Edutest's shareholders at closing was $2.2 million in
cash, $1.3 million of which was paid to common shareholders, and the remaining
$0.9 million of which was paid in satisfaction of various obligations of
Edutest, and 1,028,543 shares of our common stock which had a value of $9.0
million assuming a per share price of $8.75. In addition, we may issue (i) up to
228,561 shares of our common stock eighteen months from June 23, 2000 and (ii)
up to $2.5 million in stock shortly after July 31, 2001 if Edutest meets certain
revenue based performance criteria. The acquisition was accounted for as a
purchase.

Our future capital requirements will depend on a variety of factors,
including market acceptance of our products and services and the resources we
devote to developing, marketing, selling and supporting our products. We expect
to devote substantial capital resources in connection with:

- brand maintenance, advertising, marketing and promotional activities;

- continued development and expansion of our Internet offerings and
content;

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- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel; and

- acquiring additional office space and other necessary facilities.

In addition, we may devote substantial capital resources to strategic
acquisitions and relationships.

As of June 30, 2000, we believe that our cash and cash equivalents and the
net proceeds from our initial public offering and private placements will be
sufficient to fund our operations for at least the next 12 months. Despite our
expectations, we may need to raise additional capital before the end of the next
12 months.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and hedging Activities-Deferral of the Effective Date of
FASB Statement 133. The statement defers the effective date of SFAS No. 133 and
will become effective for us for the year ending January 31, 2002. We are
currently in the process of reviewing the impact of this standard on our current
reporting and disclosures.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements. Currently, we believe that we may have to adopt SAB 101 in the
fourth quarter of fiscal 2001. SAB 101 requires, among other things, that
license and other up-front fees be recognized over the term of the agreement,
unless the fees are in exchange for products delivered or services performed
that represent the culmination of a separate earnings process. We currently
recognize revenue in compliance with SAB 101 and do not expect the adoption to
have a material effect on our financial position and results of operation.

In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44,
Accounting for Certain Transactions involving Stock Compensation, which contains
rules designed to clarify the application of Accounting Principles Board 25. We
have adopted FIN 44 effective on July 1, 2000 with no material impact on our
results of operations or financial position.

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our line of credit, the interest rates under which are tied to market rates, and
our investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments at January 31 or January 31, 2000 or
1999. Declines in interest rates over time will, however, reduce our interest
income while increases in interest rates over time will increase our interest
expense.

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BUSINESS

INTRODUCTION