LIGHTSPAN INC, 10-Q, 2000-06-14

LIGHTSPAN INC
10-Q, 2000-06-14
BUSINESS SERVICES, NEC

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================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the period ended APRIL 30, 2000

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

For the transition period from ________ to ________

Commission File No. 000-29347

LIGHTSPAN, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 33-0585210
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

10140 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121-1520
(Address of principal executive office) (Zip Code)

(888) 425-5543
(Registrant's telephone number, including area code)

THE LIGHTSPAN PARTNERSHIP, INC.
(Former name of registrant)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK
(Title of Each Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

Number of shares of registrant's common stock outstanding as of May 31, 2000:
44,243,785

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LIGHTSPAN, INC
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I...................................................................... 2
Item 1. Consolidated Financial Statements............................. 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Operating Results......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 18
PART II..................................................................... 18
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities and Use of Proceeds.................... 18
Item 3. Defaults Upon Senior Securities............................... 19
Item 4. Submission of Matters to a Vote of Security Holders........... 19
Item 5. Other Information............................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures.................................................................. 20
</TABLE>

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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

LIGHTSPAN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
2000 2000
------------ ---------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 101,510 $ 5,033
Short-term investments ......................................................... 14,306 16,132
Accounts receivable, less allowance for doubtful accounts of
$678 and $651 at April 30, 2000 and January 31, 2000, respectively............. 12,134 15,683
Finished goods inventory ....................................................... 1,810 1,116
Deferred cost of revenue ....................................................... 371 8,709
Other current assets ........................................................... 1,699 2,306
--------- ---------
Total current assets .................................................... 131,830 48,979
Property and equipment, net ...................................................... 3,639 3,254
Deposits and other assets ........................................................ 865 591
Intangible assets, net ........................................................... 45,865 49,608
--------- ---------
Total assets ............................................................ $ 182,199 $ 102,432
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 2,407 $ 4,677
Accrued liabilities ............................................................ 5,073 9,139
Acquisition consideration payable .............................................. -- 5,341
Deferred revenue -- Achieve Now ................................................ 2,048 48,110
Deferred revenue -- services and other ......................................... 6,897 7,022
Current portion of note payable and capital lease obligations .................. 500 684
--------- ---------
Total current liabilities ............................................... 16,925 74,973
Deferred rent .................................................................... 318 322
Capital lease obligations, less current portion .................................. 333 443
Commitments
Stockholders' equity:
Preferred stock, par value $0.001:
Authorized shares -- 20,000,000
No shares issued and outstanding ............................................. -- --
Convertible preferred stock, par value $0.001:
Authorized shares -- 0 and 61,793,074 at April 30, 2000 and January 31,
2000, respectively
Issued and outstanding shares -- 0 and 52,230,915 at April 30, 2000 and
January 31, 2000, respectively
Aggregate liquidation preference -- $0 and
$194,935 at April 30, 2000 and January 31, 2000, respectively ............ -- 52
Common stock, par value $0.001:
Authorized shares -- 250,000,000
Issued and outstanding shares -- 44,239,389 and
4,764,167 at April 30, 2000 and January 31, 2000, respectively ............. 44 5
Additional paid-in capital ..................................................... 345,532 209,740
Deferred advertising expense ................................................... (400) (400)
Deferred compensation .......................................................... (4,231) (5,211)
Accumulated other comprehensive loss ........................................... (22) --
Accumulated deficit ............................................................ (176,300) (177,492)
--------- ---------
Total stockholders' equity .............................................. 164,623 26,694
--------- ---------
Total liabilities and stockholders' equity .............................. $ 182,199 $ 102,432
========= =========
</TABLE>

Note: The balance sheet at January 31, 2000, was derived from the audited
financial statements at that date but does not include all the footnotes and
other disclosure requirements required by generally accepted accounting
principles.

See accompanying notes.

2
<PAGE> 4
LIGHTSPAN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
2000 1999
-------- -------
<S> <C> <C>
Revenues:
Software licenses ...................................... $ 52,200 $ --
Internet licenses ...................................... 723 410
Services ............................................... 2,174 1,222
Hardware ............................................... 1,153 1,003
Other .................................................. 159 --
-------- -------
Total revenues ................................. 56,409 2,635
Cost of revenues:
Software licenses ...................................... 9,525 --
Internet licenses ...................................... 305 137
Services ............................................... 909 604
Hardware ............................................... 902 833
-------- -------
Total cost of revenues ......................... 11,641 1,574
-------- -------
Gross profit ............................................. 44,768 1,061

Operating expenses:
Technology and development ............................. 5,134 2,078
Sales and marketing .................................... 17,004 6,148
General and administrative ............................. 2,230 904
Stock-based compensation ............................... 901 397
Amortization of intangible assets ...................... 3,339 --
-------- -------
Total operating expenses ....................... 28,608 9,527
-------- -------
Income (loss) from operations ............................ 16,160 (8,466)
Interest income .......................................... 1,553 42
Interest expense ......................................... (15) (38)
-------- -------
Net income (loss) ........................................ $ 17,698 $(8,462)
Preferred stock dividend ................................. 16,506 --
-------- -------
Net income (loss) attributable to common stockholders .... $ 1,192 $(8,462)
======== =======
Net income (loss) per share:
Basic and diluted ...................................... $ 0.03 $ (2.32)
======== =======

Weighted average shares -- basic ....................... 39,527 3,646
======== =======

Weighted average shares -- diluted ..................... 45,466 3,646
======== =======
</TABLE>

See accompanying notes.

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LIGHTSPAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
2000 1999
--------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 17,698 $(8,462)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ................................... 361 289
Provision for doubtful accounts ................................. 27 25
Amortization of intangible assets ............................... 3,339 --
Amortization of deferred stock-based compensation ............... 901 397
Changes in operating assets and liabilities:
Accounts receivable ......................................... 3,926 1,566
Inventory ................................................... (694) 215
Deferred cost of revenue .................................... 8,338 (651)
Deposits and other assets ................................... 333 (30)
Accounts payable ............................................ (2,270) (327)
Deferred revenue ............................................ (46,187) 3,351
Accrued liabilities ......................................... (4,071) (559)
--------- -------
Net cash flows used in operating activities ................... (18,299) (4,186)
INVESTING ACTIVITIES:
Purchase of short-term investments .................................. (7,965) --
Maturities of short-term investments ................................ 9,769 --
Purchase of property and equipment .................................. (746) (233)
--------- -------
Net cash flows provided by (used in) investing activities ..... 1,058 (233)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................. 113,400 --
Proceeds from capital leases ....................................... -- 87
Principal repayments on capital leases .............................. (122) (233)
Principal repayments on notes payable ............................... (172) --
Net proceeds from exercise of stock options ......................... 612 49
--------- -------
Net cash flows provided by (used in) financing activities ..... 113,718 (97)
--------- -------
Increase (decrease) in cash and cash equivalents .................... 96,477 (4,516)
Cash and cash equivalents at beginning of period .................... 5,033 7,143
--------- -------
Cash and cash equivalents at end of period .......................... $ 101,510 $ 2,627
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ....................................................... $ 15 $ 38
========= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Deferred stock-based compensation ................................... $ (79) $ 2,247
========= =======

Conversion of convertible preferred stock into common stock ......... $ 52
=========

Issuance of common stock related to the acquisition of
Academic ......................................................... $ 5,340
=========

Issuance of common stock as preferred stock dividend ................ $ 16,506
=========
</TABLE>

See accompanying notes.

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LIGHTSPAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements, which include
the accounts of Lightspan, Inc. ("Lightspan" or the "Company") and its wholly
owned subsidiary, Academic Systems Corporation ("Academic"), have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals considered necessary for a fair presentation,
have been included in the accompanying unaudited consolidated financial
statements. All significant intercompany transactions and balances have been
eliminated in consolidation. Operating results for the three months ended April
30, 2000 or for any other interim period are not necessarily indicative of the
results that may be expected for the full year ending January 31, 2001. For
further information, refer to the consolidated financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 2000.

ORGANIZATION AND BUSINESS ACTIVITY

Lightspan was founded in 1993. Lightspan was incorporated as The Lightspan
Partnership, Inc., completed a reincorporation in Delaware in January 2000 and
changed its name to Lightspan, Inc. on April 10, 2000. Lightspan provides
curriculum-based educational software and Internet products and services to
schools and school districts that are used both in school and at home. Lightspan
Achieve Now is an interactive CD-ROM-based software product for kindergarten
through eighth grade, or K-8, that covers the core curriculum of language arts,
reading and math. The Lightspan Achieve Now program typically includes the
Lightspan Achieve Now software and a PlayStation(R) game console that the
student uses to run the program at home throughout the school year. Academic
software is a CD-ROM-based product that serves the college market with an
English and mathematics curriculum designed to meet the needs of under-prepared
students. The Lightspan Network is an online subscription service that provides
curriculum-based content for classroom and home use.

REVENUE RECOGNITION

Lightspan derives its revenues from the licensing of software, product
implementation and training services, customer support services, Internet
subscriptions, the sale of the PlayStation game console and accessories, and
site sponsorships.

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<PAGE> 7
Software Licenses

Lightspan sells its Lightspan Achieve Now licenses for use on both the
PlayStation game console and MPEG-capable, Windows-based personal computers (a
"PC platform") -- and in three distinct grade clusters -- grades K through 2;
grades 3 through 4; and grades 5 through 8. Each grade cluster includes 32 to 36
separate Lightspan Achieve Now titles, with each title consisting of one
distinct CD-ROM. There are a total of 77 separate titles planned, some of which
are included in more than one grade cluster. Lightspan considers titles that
have completed the development cycle and have been released for shipment to
customers to be "completed", and considers titles still in the development cycle
to be "as-yet uncompleted". As of April 30, 2000, all 77 Lightspan Achieve Now
titles used on the PlayStation game console for each grade cluster and all
titles used on a PC platform in the K through 2 grade cluster had been completed
and shipped. For the grades 3 through 4 and grades 5 through 8 grade clusters
used on a PC platform, 69 of the 77 planned titles had been completed and
shipped, with eight of the planned titles as-yet uncompleted.

While Lightspan is under no contractual obligation to deliver any as-yet
uncompleted titles to its customers, it does intend to deliver the remaining
titles on a when-and-if available basis. As of April 30, 2000, these remaining
titles are expected to be delivered by July 31, 2000.

Prior to fiscal year 1999, Lightspan recognized revenue under AICPA Statement
of Position, ("SOP"), 91-1, Software Revenue Recognition. Under SOP 91-1,
Lightspan recognized the full sales value of Lightspan Achieve Now software
licenses, including both completed and as-yet uncompleted titles, upon shipment
of the then-completed titles provided that there were no contractual performance
obligations to deliver the uncompleted titles and the collection of the related
receivable was deemed probable. While Lightspan had an intention to eventually
deliver a number of as-yet uncompleted titles to its customers, the final
composition of such titles was evolving and therefore customers were not
provided with specific information as to the final collection or delivery
schedule of titles to be provided. Lightspan accrued the production costs
associated with the as-yet uncompleted titles in the period in which the revenue
was recognized, and included these costs in the cost of software license
revenues and on the balance sheet as accrued cost of revenues.

Prior to fiscal year 1999, when the number of titles to be eventually
completed and delivered had not yet been finalized, Lightspan considered its
plan to deliver as-yet uncompleted titles as a post-contract customer support,
or PCS, obligation. In accordance with the provisions of SOP 91-1, Lightspan
recognized the revenue from the PCS obligation along with the initial license
fee, based on the following five criteria: (i) the PCS fee was bundled with the
initial licensing fee; (ii) the substantial portion of additional titles was
expected to be completed and delivered within one year; (iii) the estimated cost
of providing the PCS, primarily assembly, packaging and delivery costs, were
insignificant; (iv) enhancements offered during the initial period of the PCS
arrangements were historically minimal; and, (v) collectibility of the fee was
probable.

On February 1, 1998, Lightspan adopted the provisions of SOP 97-2, Software
Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of
Certain Provisions of SOP 97-2. Under SOP 97-2, Lightspan recognizes software
license revenue when (i) an agreement has been executed or a definitive purchase
order has been received; (ii) the product has been shipped or services have been
performed; (iii) the fee has become fixed and determinable; (iv) the collection
of the fee is considered probable; (v) the related hardware, if applicable, has
been shipped and (vi) when all titles for a given grade cluster have been
delivered to its customers. In early 1998, Lightspan began providing customers
with a specific list of titles which were planned to be eventually provided to
the customers, as well as the projected delivery dates for these titles. Under
SOP 97-2, Lightspan defers all revenue recognition for Lightspan Achieve Now
licenses, since objective fair values of individual as-yet uncompleted titles
cannot be determined and used to allocate the license fee to the individual
titles as they are shipped.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. The Company is required to adopt SAB 101 for 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. The Company currently recognizes revenue in compliance with
SAB 101 and does not expect the adoption to have a material effect on the
Company's financial position and results of operation.

As of April 30, 2000, the Company 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
$46,447,000 of revenue previously deferred, pursuant to SOP 97-2. During the
three months ended April 30, 2000, the Company also deferred revenue of $380,000
relating to the shipment of Lightspan Achieve Now

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licenses in the as-yet uncompleted grades 3 through 4 and grades 5 through 8
grade clusters used on a PC platform. The Company will do the same for any
subsequent quarter until shipment of the final planned titles in the license to
be provided for that grade cluster has occurred. The Company expects to ship the
final planned titles to be provided to all existing customers for no additional
charge by July 31, 2000.

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 Lightspan is not contractually obligated to
provide further service after delivery of the license, Lightspan recognizes the
full sales value of Academic license revenue upon completion of the above
criteria defined by SOP 97-2.

Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.

2. INITIAL PUBLIC OFFERING

On February 15, 2000, Lightspan completed its initial public offering (the
"Offering") of 7,500,000 shares of common stock at $12 per share. Lightspan also
issued 2,125,000 shares at the same price in private placements that occurred
concurrently with the Offering. In March 2000, the underwriters exercised a
portion of their overallotment option and purchased 655,150 additional shares at
the Offering price. Total proceeds as a result of the Offering, private
placements and overallotment exercise after deducting the underwriting discount
and commissions, offering expenses and financial advisory fees relating to the
private placements was approximately $113.4 million.

Upon completion of the Offering, all outstanding preferred stock converted,
at the then effective conversion price, into 27,087,810 shares of common stock
and all outstanding warrants to purchase preferred stock converted into warrants
to purchase shares of common stock.

3. STOCKHOLDERS' EQUITY

Upon the sale of Lightspan's common stock in the Offering, warrants to
purchase up to 2,760,160 shares of Series D preferred stock at $0.02 per share
(the "Springing Warrants") 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,
Lightspan accounted for the intrinsic value of the Springing Warrants by
charging accumulated deficit an additional $16,506,000 and increasing the
carrying amount of common stock by a corresponding amount.

Basic earnings (loss) per common share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common share ("diluted EPS") reflect the
potential dilutive effect, calculated using the treasury stock method, of
additional common shares that are issuable upon exercise of outstanding stock
options and warrants and the common shares issuable upon conversion of preferred
stock upon Lightspan's initial public offering, determined on an if-converted
basis, as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
2000 1999
----- ----
<S> <C> <C>
Employee stock options ............ 2,556 --
Warrants .......................... 189 --
Convertible preferred stock ....... 3,194 --
----- ----
Total dilutive shares ........... 5,939 --
===== ====
</TABLE>

Options outstanding during the three months ended April 30, 2000 to purchase
approximately 109,000 shares of common stock were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common stock during the period and, therefore,
the effect would be anti-dilutive. Diluted shares issuable upon exercise of
outstanding stock options and inclusion of additional common

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shares assuming the conversion of the convertible preferred stock for the three
months ended April 30, 1999 were excluded as they were anti-dilutive because of
the net loss during that period.

Subsequent to September 20, 1999, the date the Academic acquisition was
consummated, Lightspan agreed to issue additional consideration in the amount of
$5,340,075, representing 1,068,015 shares of Series E preferred stock (which
converted into 534,008 shares of common stock upon completion of the Offering),
to certain Academic stockholders. Lightspan recorded this amount as a liability
at January 31, 2000. In March 2000, Lightspan issued these shares to such
stockholders.

4. COMPREHENSIVE INCOME (LOSS)

For the three months ended April 30, 2000 and 1999, comprehensive income
(loss) was $1,170,000 and ($8,462,000), respectively. The difference between net
income and comprehensive income for the three months ended April 30, 2000 was
due to net unrealized losses on available-for-sale securities of $22,000. There
were no net unrealized holding losses for the three months ended April 30, 1999.

5. LINE OF CREDIT AND LEASE FINANCING

Lightspan had a revolving line of credit with a bank which allowed Lightspan
to borrow up to a maximum of the lesser of (a) 75% of eligible accounts
receivable (as defined) or (b) $10,000,000 with interest at the bank's prime
rate plus 1.5%. The line of credit was collateralized by substantially all of
Lightspan's assets and expired in April 2000. Lightspan is currently evaluating
future lines of credit.

In April 1999, Lightspan entered into a $1.0 million capital lease with a
financial institution. Under the agreement, which expires September 2000,
Lightspan finances the purchase of substantially all capital equipment at an
8.8% interest rate, with payments due over a 42-month period and a purchase
option at the end of the lease term. As of April 30, 2000, $736,000 was
available for future borrowing under this agreement.

In connection with the acquisition of Academic, Lightspan assumed a note
payable bearing interest at the bank's prime rate plus 0.5%. Lightspan paid in
full the remaining principal balance of $172,000 with the proceeds from the
Offering in February 2000.

6. REPORTABLE SEGMENTS

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for disclosure about operating segments in
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers.

DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES

Lightspan has three reportable segments: Lightspan Achieve Now, K-12 Internet
and Higher Education. Revenues derived from the Lightspan Achieve Now segment
typically include the sale of Lightspan Achieve Now software licenses, the
PlayStation game console and related accessories, and implementation, training
and support services. Revenues derived from the K-12 Internet segment include
subscription fees for The Lightspan Network and sponsorship revenue from
Lightspan.com. Revenues derived from the Higher Education segment, comprised
solely of Academic which was acquired in September 2000, include the sale of
curriculum products licensed to colleges and then sold by the licensing colleges
to students on a student-by-student basis for use with each class.

MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

Lightspan evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies in the Company's 2000 Annual Report on Form
10-K.

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<PAGE> 10

FACTORS MANAGEMENT USED TO IDENTIFY LIGHTSPAN'S REPORTABLE SEGMENTS

Lightspan's reportable segments are business units that offer different
products and services.

FINANCIAL INFORMATION FOR LIGHTSPAN'S SEGMENTS

The assets and results of operations of Global Schoolhouse and Study Web,
including the related amortization of intangible assets, are included in the
K-12 Internet segment. The following information is for the Lightspan Achieve
Now, K-12 Internet, and Higher Education segments (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 1999
--------------------------------------------------------------------
LIGHTSPAN
ACHIEVE K-12 HIGHER
NOW INTERNET EDUCATION ELIMINATIONS CONSOLIDATED
--------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers ................... $ 2,225 $ 410 $-- $-- $ 2,635
Inter segment revenues ............................. -- -- -- -- --
Interest income, net ............................... 3 1 -- -- 4
Depreciation and amortization ...................... 288 1 -- -- 289
Segment loss from operations ....................... (6,959) (1,507) -- -- (8,466)
Segment assets ..................................... 16,223 559 -- -- 16,782
Other significant non cash items:
Deferred stock compensation ...................... 1,257 990 -- -- 2,247
Amortization of deferred stock compensation ...... 247 150 -- -- 397
Amortization of intangible assets ................ -- -- -- -- --
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 2000
------------------------------------------------------------------
LIGHTSPAN
ACHIEVE K-12 HIGHER
NOW INTERNET EDUCATION ELIMINATIONS CONSOLIDATED
---------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers ................... $ 54,400 $ 882 $1,127 $-- $ 56,409
Inter segment revenues ............................. -- -- -- -- --
Interest income (expense), net ..................... 1,372 169 (3) -- 1,538
Depreciation and amortization ...................... 266 18 77 -- 361
Segment income (loss) from operations .............. 32,983 (11,126) (5,697) -- 16,160
Segment assets ..................................... 137,417 5,140 39,642 -- 182,199
Other significant non cash items:
Deferred stock compensation ...................... (89) 16 (6) -- (79)
Amortization of deferred stock compensation ...... 531 341 29 -- 901
Amortization of intangible assets ................ -- 381 2,958 -- 3,339
</TABLE>

7. LEGAL MATTERS

In July 1996, a former employee (the "Plaintiff") commenced legal action
against Lightspan, alleging causes of action for fraud, breach of contract,
negligent misrepresentation and conversion. On August 26, 1999, the Plaintiff
and Lightspan entered into a settlement agreement and release, the terms of
which are subject to confidentiality provisions. In the three months ended April
30, 2000, Lightspan paid the remaining settlement costs and legal fees of
approximately $620,000 for a total of $1,578,000 in legal and settlement costs
related to this case.

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<PAGE> 11
8. SUBSEQUENT EVENT

On May 24, 2000, Lightspan entered into an agreement to acquire Edutest,
Inc., a provider of Internet-based educational testing and assessment products.
The acquisition is expected to add valuable products to Lightspan's line of
Internet-based solutions for the K-12 market and to further Lightspan's
commitment to improve achievement for all students.

Edutest offers 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. The
results can be analyzed at the school district level, the school level, and the
classroom level for teachers and students.

Under the terms of the agreement, shareholders of Edutest could receive a
combination of cash and common shares of Lightspan with a value of up to $15.7
million. The aggregate value to be received by Edutest shareholders at closing
will be approximately $2.2 million in cash and $9.0 million in stock, with a
potential for up to an additional $4.5 million in stock over the subsequent 18
months. The transaction will be accounted for under the purchase method.

On May 26, 2000, Lightspan 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 Lightspan's 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. The transaction was structured as an asset purchase, with Lightspan
acquiring the LearningPlanet.com Web site and related technology and assets in
exchange for a combination of up to $450,000 in Lightspan common stock and cash.

9. RECENT PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board, ("FASB"), issued
FASB Interpretation No. 44, ("FIN 44"), Accounting for Certain Transactions
involving Stock Compensation, which contains rules designed to clarify the
application of APB 25. FIN 44 will be effective on July 1, 2000 and the Company
will adopt it at that time. The Company believes the anticipated impact of
adoption of FIN 44 will not be material to the results of operations or
financial position of the Company.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS

This information should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended January 31,
2000 contained in the our 2000 Annual Report on Form 10-K.

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 this section, "Liquidity and Capital Resources," and in our 2000
Annual Report on Form 10-K.

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

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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, an online subscription service marketed to schools
for classroom and home use;

- Your Class Online, an online service that enables teachers to easily
create customized home 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;

- Global Schoolhouse, a leading education Web site that helps teachers
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 on the Web the educational information and resources they
want;

- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents; and

- selected additional content for teachers, parents and students.

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.

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. We will do the same for any subsequent quarter until we have
shipped the final titles in the license to be provided for that grade cluster.
By July 31, 2000, we expect to ship the final title to

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<PAGE> 13

be provided to all existing customers for no additional charge. This will result
in the recognition of the remaining deferred revenue balance, and the related
deferred cost of revenue, at that time.

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.

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

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

We expect to recognize 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. We will incur additional marginal costs in those quarters 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 current quarter, 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, resulting in an
operating profit of $16.2 million. The operating results in this quarter are not
indicative of our underlying business in this 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 that matter any future years.

COMPARISON OF THREE MONTHS ENDED APRIL 30, 2000 AND 1999

REVENUES

We generate software and Internet license revenue, service revenue, hardware
revenue and other revenue. 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

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<PAGE> 14

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.

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 which were
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 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

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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.

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 include 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 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.

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

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<PAGE> 16

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. We expect that sales and marketing expenses will increase
significantly in future periods and 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. We expect that many
of these activities will be directed toward the target users and markets for our
Internet products and services.

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 the three months ended 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

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<PAGE> 17

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.

SPRINGING WARRANTS

Upon the sale of our common stock in the Offering, warrants to purchase up to
2,760,160 shares of Series D preferred stock at $0.02 per share (the "Springing
Warrants") 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 the Springing 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 (the "Plaintiff") 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 Plaintiff, the terms of which are
subject to confidentiality provisions. 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 was approximately
$106.1 million. In March 2000, the underwriters exercised 655,150 shares of
their overallotment option for total proceeds, 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.

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<PAGE> 18

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.

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 the 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.

On May 24, 2000, we entered into an agreement to acquire 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 value to be received by Edutest shareholders at closing
will be approximately $2.2 million in cash and $9.0 million in stock, with a
potential for up to an additional $4.5 million in stock over the subsequent 18
months.

On May 26, 2000, we acquired LearningPlanet.com, a popular education Web
destination for kids and their 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.

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;

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

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- acquiring additional office space and other necessary facilities.

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

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.

As of April 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 April 30, 2000 or 1999 due to the
short-term nature of our investments. Declines in interest rates over time will,
however, reduce our interest income while increases in interest rates over time
will increase our interest expense.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently involved in any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 15, 2000 all of our outstanding shares of convertible preferred
stock were converted into shares of common stock.

On February 25, 2000 we amended our certificate of incorporation to increase
the number of authorized shares to 270,000,000 which is comprised of 250,000,000
shares of common stock and 20,000,000 shares of preferred stock, each with a par
value of $0.001.

RECENT SALES OF UNREGISTERED SECURITIES

Since February 1, 2000, we have sold and issued the following unregistered
securities:

(a) On February 15, 2000 we issued and sold 2,125,000 shares of common stock
to three accredited investors for an aggregate purchase price of $25.5
million. We relied on the exception provided by Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.

18
<PAGE> 20

(b) On February 15, 2000 we also issued a warrant to Cox Communications
Holdings, Inc. to purchase 750,000 shares of common stock at an exercise
price of $10.00 per share. We relied on the exception provided by
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.

(c) On March 3, 2000 we issued 534,008 shares of common stock to nine
accredited investors in exchange for claims valued at $5,340,075. We
relied on the exception provided by Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder.

The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about us.

The effective date of our registration statement on Form S-1 (No. 333-90103)
relating to our initial public offering was February 9, 2000. A total of
8,155,150 shares of our common stock in the aggregate were sold at a price of
$12.00 per share to an underwriting syndicate led by Credit Suisse First Boston,
Thomas Weisel Partners LLC, and U.S. Bancorp Piper Jaffray Inc. The offering
commenced on February 9, 2000, and closed on March 7, 2000. The initial public
offering resulted in gross proceeds of approximately $97.9 million, of which
$6.9 million was applied toward the underwriting discount. Expenses related to
the offering totaled approximately $2.2 million. Net proceeds to us were $88.8
million. From the time of receipt through April 30, 2000, we applied $172,000 of
the net proceeds to repay debt and we used $18.3 million of the proceeds in
operating activities including $5.0 million to promote the launch of our
Lightspan.com Web site. We invested the remaining proceeds in short-term,
interest-bearing, investment grade securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER MATTERS

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Current Reports on Form 8-K

We did not file any current reports on Form 8-K for the quarter ended April
30, 2000.

(b) Exhibits

The following exhibits are incorporated herein by reference or are filed
with this report as indicated below.

<TABLE>
<CAPTION>
Footnote Exhibit
No. No. Description
--------------------------------------------------------------------------------
<S> <C> <C>

1 10.43 Licensed Developer Agreement by and between the
Company and Sony Computer Entertainment America
dated as of January 26, 2000.
1 10.44 PlayStation(R)2 Development System Agreement by and
between the Company and Sony Computer Entertainment
America dated as of March 7, 2000.
1 10.45 Master Equipment Lease Extension Letter by and
between the Company and Pentech Financial Services,
Inc. dated as of March 29, 2000.
1 27 Financial Data Schedule.

</TABLE>
----------
1 Filed with this report.

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<PAGE> 21
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 12th day of
June, 2000.

Lightspan, Inc.

By: /s/ KATHLEEN R. McELWEE
-------------------------------------
Kathleen R. McElwee,
Vice President of Finance
June 12, 2000 and Chief Financial Officer