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

                                    FORM 10-K

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

                   For the fiscal year ended JANUARY 31, 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 [ ] NO [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. [ ]

As of March 31, 2000 the aggregate market value of registrant's voting and
non-voting stock held by non-affiliates, based upon the closing sales price for
the registrant's common stock, as reported on the Nasdaq National Market, was
approximately $379.4 million (calculated by excluding shares owned beneficially
by affiliates).

Number of shares of registrant's common stock outstanding as of March 31, 2000:
44,220,515

                       DOCUMENTS INCORPORATED BY REFERENCE

Registrant's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission on or before May 30, 2000 in connection with the
Registrant's Annual Meeting of Shareholders to be held on June 29, 2000, is
incorporated by reference into Part III of this Report.


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                                 LIGHTSPAN, INC.
                         2000 ANNUAL REPORT ON FORM 10-K
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                      PAGE
<S>                                                                                                   <C>
PART I..............................................................................................   2
       Item 1.   Business...........................................................................   2
       Item 2.   Properties.........................................................................   19
       Item 3.   Legal Proceedings..................................................................   19
       Item 4.   Submission of Matters to a Vote of Security Holders................................   19
PART II.............................................................................................   20
       Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters..............   20
       Item 6.   Selected Financial Data............................................................   22
       Item 7.   Management's Discussion and Analysis of Financial Condition and Operating Results..   23
       Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........................   33
       Item 8.   Financial Statements and Supplementary Data........................................   33
       Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  33
PART III............................................................................................   34
       Item 10.  Directors and Executive Officers of the Registrant.................................   34
       Item 11.  Executive Compensation.............................................................   34
       Item 12.  Security Ownership of Certain Beneficial Owners and Management.....................   34
       Item 13.  Certain Relationships and Related Transactions.....................................   34
PART IV.............................................................................................   34
       Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................   34
SIGNATURES..........................................................................................   37

</TABLE>

        The following are trademarks or service marks of Lightspan, Inc.:

<TABLE>
<CAPTION>

<S>                                    <C>                                  <C>
   -  The Lightspan Network(R)         -  Lightspan                         -  Lightspan PageOne
   -  Global Schoolhouse(R)            -  Lightspan Achieve Now             -  Lightspan Adventures
   -  StudyWeb(R)                      -  Your Class Online                 -  Learning Search
   -  Lightspan Partnership            -  Your School Online
</TABLE>



All other trade names, trademarks and service marks appearing in this 10-K are
the property of their holders.

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                                     PART 1

ITEM 1.  BUSINESS

   Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Lightspan, Inc.'s ("Lightspan" or the "Company") future results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not specifically limited to
risks detailed in this Form 10-K. We assume no obligation to update any
forward-looking statements.

INTRODUCTION

   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. The Lightspan Achieve Now curriculum has already been purchased by over
890 school districts in 46 states and implemented in 2,375 schools and 12,300
classrooms, representing a total of 135,000 student and teacher licenses. Our
Academic Systems products provide a series of curriculum-based software that
addresses the math and writing needs of under-prepared college students. These
products are currently used in over 250 colleges and universities across the
United States. Our Internet K-12 products and services are used in over 7,600
schools, of which over 1,200 schools are using the Lightspan Network.
Lightspan.com is currently being used by over 400,000 unique users monthly.

   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;

   -  Your Class Online, a 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 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;

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

   -  selected additional content for teachers, parents and students.

   Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. To achieve this objective, we expect to
draw on the educational technology and Internet experience of our management,
sales and marketing and Internet teams to pursue the following strategies:

   -  capitalize on our current market position;


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   -  continue to develop and enhance Lightspan.com;

   -  enhance our Lightspan Achieve Now curriculum with content delivery
      available through new Internet and broadband technologies;

   -  create additional Internet-based revenue streams; and

   -  pursue strategic acquisitions and relationships.

    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 Systems
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.

PRODUCTS

   Our products and services are technology-based educational tools and
resources that can be used by teachers, students and families to increase
student performance.

   Over 400 studies by schools that use our products and services show that our
products improve student performance in reading or mathematics or in both
subjects. A composite analysis of studies conducted by schools at 36 sites and
covering 4,650 students shows that, on average, 24% more Lightspan Achieve Now
students were successful in reading and 46% more Lightspan Achieve Now students
were successful in mathematics than their peers who did not use the Lightspan
Achieve Now curriculum, as measured by performance on standardized tests. In
part because of its demonstrated impact on student achievement, our Lightspan
Achieve Now curriculum has been included as a skill-and-content-based reform
model eligible for funding by the U.S. Department of Education's Comprehensive
School Reform Demonstration program. Several independent studies conducted by
colleges that use our Academic Systems products have shown that these products,
compared to traditional lecture taught courses, increase pass rates, keep more
students enrolled in the courses covered and increase students' performance in
follow-on course work.

   K-8

   Lightspan Achieve Now is a series of media-rich, interactive software
programs that covers the core curriculum of language arts, reading and math, and
is designed to enhance learning in both the classroom and at home. Lightspan
Achieve Now is a supplement to textbooks and other materials used in K-8 schools
and covers more than 80% of the typical K-8 reading, language arts and
mathematics curricula. Lightspan Achieve Now incorporates a variety of
interactive formats and varying levels of difficulty to cover a specific set of
educational objectives and to address a diverse range of learning styles, making
it possible to reach each student in a class more effectively. The Lightspan
Achieve Now curriculum features stories and original characters designed around
an active learning approach, which is intended to provide the learner with
essential components of an effective learning environment including motivation
to master a skill or concept, learning by doing, practice and application of the
skill or concept to another situation.

   We deliver our reading and language arts and mathematics curricula in
imaginary "worlds" -- episodic, interactive series with a consistent set of
characters that are designed to cover a broad range of curriculum objectives.
Generally, each world is contained on a series of CD-ROMs, or titles, which are
divided into multiple "Adventures." Our Adventures are developed with the
assistance of an advisory board of reading, language arts and mathematics
educators, an advisory board of video game developers, television writers and
commercial animators. The Lightspan Achieve Now curriculum was developed using
entertainment industry production techniques and features full motion digital
video and 3-D animation.

   Our Lightspan Achieve Now language arts and reading curriculum provides a
variety of learning paths, all with a single objective -- improving literacy and
communication -- and is designed to ensure that all students succeed in
listening, speaking, reading, writing, viewing and producing. The Adventures
that comprise our Lightspan Achieve Now reading and language arts curriculum
address vocabulary comprehension, critical thinking skills, study skills, the
writing process, print and text recognition, phonics, decoding, and many other
areas covered by the typical K-8 reading and language arts curriculum.


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   Our Lightspan Achieve Now math curriculum is designed to provide a set of
experiences that increase student confidence and encourage students to solve
problems, think mathematically and apply and communicate their thinking. The
Adventures that comprise our Lightspan Achieve Now mathematics curriculum
address number sense, critical thinking, number theory, estimation, geometry and
many other areas covered by the typical K-8 mathematics curriculum.

   Lightspan Achieve Now licenses are sold on a perpetual license basis for
approximately $600 per student license including the teacher license and
materials. A complete Lightspan Achieve Now program consists of teacher licenses
containing approximately 35 CD-ROM titles appropriate to each grade level,
instructional materials, student licenses for each student containing the same
CD-ROM titles as those included with the teacher licenses, student pre-tests,
post-tests and progress checks, parenting and other materials, professional
development visits, and evaluation criteria to meet accountability standards.

   Lightspan Achieve Now's curriculum runs on both Sony PlayStation(R) game
consoles and MPEG-capable, Windows-based personal computers, though use at home
is currently almost always on Sony PlayStation game consoles. We plan to
continue development of new titles to meet changing education trends and to
refresh the product over time.

   K-12 INTERNET

   Our family of Internet products and services provides teachers, students and
parents with a wide array of online learning resources.

Lightspan.com

   All of our Internet products and services can be found at www.lightspan.com,
including Your Class Online and its predecessor, Lightspan PageOne, Your School
Online, Global Schoolhouse, The Lightspan Network, The Lightspan Learning Store,
Lightspan Learning Search and StudyWeb. We plan to continually expand and
enhance the products and services offered through Lightspan.com.

Your Class Online

   Your Class Online helps teachers quickly and easily build customized
classroom home pages and assemble the best educational resources available on
the Internet to support their classroom instruction and allows teachers to:

   -  access a database of over 115,000 educational Web sites, activities and
      lesson plans which have been reviewed by educators;

   -  bookmark favorite sites;

   -  post homework assignments;

   -  create class albums, like collections of student artwork or projects;

   -  access on-line reference resources such as a dictionary, thesaurus, and
      encyclopedia;

   -  use a variety of curriculum-based interactive learning activities in their
      classrooms; and

   -  share these features in a password-protected environment with students'
      families.

Your School Online

   Your School Online is a free home page builder for schools. Your School
Online allows teachers to automatically integrate their classrooms' Your Class
Online home pages with their school's home page. We also expect that Your School
Online will work with many other Web publishing tools that a school might have
in place. Its features include:

   -  the ability to organize and compile Web links;

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   -  a calendar of events that makes it easy for parents and students to find
      out what events or activities are happening at school;

   -  a simple way for users to connect to Your Class Online home pages for
      particular classrooms within a given school;

   -  a site for teachers to post notes and announcements and receive feedback;

   -  a school contact page which allows parents to easily send e-mail to a
      school representative; and

   -  easy access to Web site usage statistics to help administrators understand
      what is popular on their site.

Global Schoolhouse

   In September 1999, we acquired Global Schoolhouse, a Web site with over
28,900 registered users. It enables classroom to classroom collaboration by
allowing educators to share ideas and create projects together online. Global
Schoolhouse began as a pilot project of the National Science Foundation. Global
Schoolhouse has teamed with individuals, schools, businesses, and community
organizations to design, develop and manage hundreds of collaborative online
learning projects each year. Global Schoolhouse offers:

   -  Cyberfair, an annual global Internet competition for children in grades
      K-12, who showcase their local communities by designing their own Web
      sites;

   -  CU-Schools Videoconferencing, a real-time, community-building conferencing
      system that lets students and their teachers learn and collaborate online;
      and

   -  Internet Projects Registry, a registry of classroom projects from teachers
      all over the world.

The Lightspan Network

   The Lightspan Network is our premium online subscription service for
classroom and home use. It provides a rich array of curriculum-based K-8 content
correlated to state academic standards in an advertising-free environment. We
charge a subscription fee of approximately $2,500 annually to each subscribing
school for The Lightspan Network. The Lightspan Network:

   -  provides Internet activities and lesson plans;

   -  offers approximately 100 interactive, adventure-filled learning activities
      developed by educators that cover reading, mathematics, writing,
      vocabulary development, and Web literacy;

   -  provides access to a database of over 115,000 educational Web sites,
      activities and lesson plans that have been reviewed by educators and
      correlated to state standards;

   -  offers teachers and students Ed-mail, a personal e-mail account featuring
      special security measures created specifically for use in schools;

   -  provides tools to enhance Internet research and student learning with a
      subscription to Compton's Encyclopedia Online, a leading online reference
      tool for K-12 schools; and

   -  offers customer support through our professional development staff and
      access to our telephone help line.

The Lightspan Learning Store

   We developed The Lightspan Learning Store in partnership with SmarterKids.com
to offer educational products online to teachers and families. As we expand and
enhance Lightspan.com, we plan to include links from products that
SmarterKids.com recommends to specific Lightspan learning activities found on
Lightspan.com. We also expect that our Lightspan learning activities will be
linked to the Lightspan Learning Store, allowing users to make an immediate
purchase of educational products related to the learning activity.

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Lightspan Learning Search

   We developed the Lightspan Learning Search as a resource compiler for
collecting the best of educational Web sites, lesson plans and activities from
the Internet, and guiding the user to expert-selected Web sites and online
educational content on Lightspan.com and the World Wide Web. Lightspan Learning
Search also sorts the educational content by grade and subject for easy access
for teachers, students and parents.

StudyWeb

   In October 1999, we acquired StudyWeb, a "homework helper" Web site. StudyWeb
was started approximately four years ago to specifically address one of the
needs most frequently cited by parents, teachers and students seeking to use the
Web for educational purposes -- finding research resources as easily as possible
on the Web without encountering inappropriate materials. StudyWeb has developed
a sophisticated system for identifying and reviewing Web sites, and has built a
database with more than 115,000 Web site reviews. Reviews are categorized by
subject matter and include grade level recommendations, content descriptions and
other useful information. StudyWeb serves as the basis for Lightspan Learning
Search.

   HIGHER EDUCATION

   Academic Systems, our higher education division, has products that address
the needs of under-prepared college students, and consist of:

   -  Interactive Mathematics -- Elementary Algebra, which covers whole numbers,
      proportional reasoning, signed numbers and introductory geometry and
      algebra;

   -  Interactive Mathematics -- Algebra, which covers polynomials, rational
      expressions, linear equations and graphing;

   -  Interactive Mathematics -- Intermediate Algebra, which covers rational
      exponents, quadratic equations, functions, exponential and logarithmic
      functions, and non-linear equations and inequalities;

   -  Interactive Mathematics -- College Algebra, which includes non-linear
      functions, equations, conic sections, matrices, determinants, induction,
      sequences and counting; and

   -  Interactive English, which prepares students for academic writing,
      including narrative writing, data analysis, text interpretation, and
      persuasive writing, and contains concise grammar instructions on common
      college writing errors and related reading and comprehension activities.

   Academic Systems' products are media-rich with extensive graphics and video
components and are grounded in teaching techniques that focus on students as
individuals. Students take the courses in a computer lab or on a Windows-based
personal computer in their residence, at their own pace. Students review lessons
and then practice the concepts learned. Depending upon the student's performance
in the practice session, the program prompts further review or moves the student
onto the next lesson. Wrong answers will prompt an explanation of how to solve
the question. In the Elementary Algebra course, there is a special help function
featuring video characters. Each character represents a different learning style
and offers multiple approaches to solving the problem, ranging from showing the
method that can be used to solve the problem, to explaining the solution with a
picture or graph, to providing the solution from a theoretical perspective. This
often provides the help that under-prepared college students need to pass the
course and succeed in school. Academic Systems also offers printed practice
materials.

   Academic Systems provides management services to educators who use its
curriculum, typically by compiling and communicating information about student
time-on-task and performance while using the curriculum. These management
services can be accessed on the Internet at academic.com or a college's Web
site, and also on a college's local area network.

   Academic Systems 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. The licensing fee to colleges of $60 to $80
per student is approximately equal to an equivalent textbook.



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   Financial information about our Lightspan Achieve now educational software
and our Internet and Academic Systems products and services is included in Note
10 to the Lightspan consolidated financial statements included elsewhere in this
10-K.

PRODUCT DESIGN AND DEVELOPMENT

   We consider successful product development to be essential to maintaining and
growing our market position. We expect to continue enhancing our Lightspan
Achieve Now and Academic Systems curricula while significantly increasing our
efforts to further develop our Internet products and services.

   Lightspan Achieve Now products include a diverse mix of media, formats, and
visual presentations. Every Lightspan Adventure is built according to the
following fundamental design principles, which we believe differentiate our
products from competitive products:

   -  we correlate each title to state and national academic standards;

   -  we create interesting characters in engaging stories that unfold with the
      help of full-screen, full-motion video and music, and with sophisticated
      interactivity representing many of the techniques of the latest video
      games; and

   -  we develop assessment components for the teacher to monitor students'
      progress for each of the titles.

   All Lightspan Achieve Now programs are designed so they can be used on a
television as well as on a computer screen. Text elements are rendered on the
screen for clear visibility from across the room. Live action video and
animation segments are converted from original footage to the MPEG software
format, and then digitally optimized for a sharp television picture. We believe
these design features offer a unique opportunity to move our Lightspan Achieve
Now curriculum to a digital set-top box once broadband technology becomes widely
available to cable television subscribers. We also believe that our competitors
who have designed their educational technology for use only on a computer screen
will experience difficulties in converting their computer interfaces to
television interfaces, and that we are better positioned to move our products to
a digital set-top box platform.

   We are pursuing a broad range of product development efforts to expand and
enhance our Lightspan.com Web site. These product development efforts include
developing new collaborative learning applications for Global Schoolhouse and
enhancing its existing content, developing new content for teachers, parents and
students on Lightspan.com, and expanding our electronic commerce offerings.

   Academic Systems' math and writing products combine media-rich video and
graphics with teaching techniques that focus on students as individuals and
offer extensive help and reinforcement examples. The Academic Systems curriculum
is reviewed each school year based on input from user groups made up of faculty
from across the country, and updated when appropriate.

SALES AND MARKETING

   We sell our Lightspan Achieve Now curriculum and The Lightspan Network
directly to school districts. We have identified and are targeting school
districts that routinely implement new and innovative programs. Our programs are
generally sold "top down," with the first presentations made to a school
district's key decision maker, who is often the superintendent or assistant
superintendent in charge of curriculum or technology. Schools are becoming more
involved in the decision process as site-based management is implemented within
school districts. The sales cycle for the initial purchase of our Lightspan
Achieve Now curriculum is typically six to twelve months, with shorter periods
for The Lightspan Network.

   A school district will typically purchase the Lightspan Achieve Now
curriculum for a few classrooms in one school. Upon the successful
implementation of the Lightspan Achieve Now curriculum, the school district will
typically add the curriculum in other schools within the district. The product
is also often sold deeper into individual schools, either in additional
classrooms in a given grade or in additional grade levels.

   Our force of direct salespeople for grades K-12 is supported by a
professional development team that provides pre- and post-sales support and
works with current Lightspan schools to identify additional sales opportunities.
While our sales force and professional


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development team are focused on selling into new accounts and increasing our
presence in current accounts, they also act as partners with implementing
schools in identifying funding sources. Each member of our sales force has
substantial experience in educational technology sales, is generally working in
his or her home territory and has extensive contacts in school districts within
their territory.

   Our marketing efforts include:

   -  hosting policy forums for education policy makers at industry events;

   -  giving keynote speeches and presentations at major education conventions;

   -  participating on the advisory boards of key organizations in education;

   -  presenting at education trade shows and customer conferences; and

   -  pursuing focused media relations activities in the education trade press
      and in local media in communities that are implementing our Lightspan
      Achieve Now curriculum.

   Sales of our Internet products and services are supported by our Lightspan
field sales force, including a dedicated team of ten Internet sales people that
focus on driving state-wide sales of our Internet products and services. We
offer customized versions of The Lightspan Network to states having large
contracts, and currently have contracts with the states of Illinois, North
Carolina, Pennsylvania, Oklahoma, Texas, Delaware, Hawaii and other large school
districts. To date, most of the marketing focus for our Internet products and
services has been on the educational community.

   In the future, our focus will expand to include marketing directly to
families. Print, radio and television advertising will be supplemented with a
variety of online strategies. A series of promotions will be directed at
encouraging usage and may include sweepstakes, user points affinity programs,
and referral programs. Public relations efforts will focus on educational,
consumer and business press. We have formed an advisory board of educators to
assist us with the design and development of our Internet products and services.
Direct marketing will concentrate on teachers and parents. We expect the results
of these marketing efforts will be an increase in the number of teachers,
students and parents accessing the content and tools provided by Lightspan.com.
We believe that the marketing of Lightspan.com and our Internet products and
services will contribute to sales of The Lightspan Network and sales of our
Lightspan Achieve Now curriculum.

   As of January 31, 2000 Academic Systems employed 20 direct sales people in a
separate sales organization. Academic Systems' sales and marketing efforts focus
on statewide, system-wide and district sales, and specifically target potential
purchasers that offer opportunities for sales of the Academic Systems curriculum
to multiple college class sections. A typical initial sale of the Academic
Systems curriculum will be for several sections in a college course. As the
faculty becomes familiar with the Academic Systems curriculum and witnesses
improved results from sections that are using the curriculum, Academic Systems'
contracts tend to be renewed and increased. Over 90% of the institutions that
have installed any portion of the Academic Systems curriculum since it was first
offered remain as installed users. In addition, over 70% of institutions that
have renewed their contracts with Academic Systems over its last four fiscal
years have signed larger contracts. Academic Systems' marketing efforts include
print advertising in periodicals directed at the higher education market, direct
marketing, participation at trade shows, and user conferences.

PROFESSIONAL DEVELOPMENT AND SUPPORT SERVICES

   We believe that successfully implementing our products and services in
schools and extending them to the home is necessary to realize potential
improvements in student achievement. We also believe that improvements in
student achievement differentiate the Lightspan Achieve Now curriculum from
products offered by our competitors and generate further support at the school
level for expanded sales. Our goal is to become the partner of schools that
implement our products and services. Given the comprehensive nature of the
Lightspan Achieve Now curriculum, its connection of schools to homes, the rapid
technological changes brought about by the Internet, and educators' needs for
ongoing technical training and mentoring, we commit substantial resources to
train educators in the use of our products and services.

   As of January 31, 2000, we maintained a staff of 90 trained professionals,
most of whom are former educators, to provide pre-sale planning and post-sale
implementation, customer support, training services and motivation for teachers,
administrators and parents in

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Lightspan schools. We also operate a toll-free, five-day per week technical and
curriculum support telephone help line called Partner Line that is accessible to
both teachers and parents. We include professional development and Partner Line
services with the initial purchase of Lightspan Achieve Now. Schools may
purchase additional professional development or support services. We believe
that the on-site training provided by our professional development staff is a
key factor in encouraging school districts to implement Lightspan products in
more schools within the district and in additional classrooms within an
individual school.

   We provide pre-sale and post-sale support for college campuses that use our
Academic Systems curriculum in a manner similar to that provided for our
Lightspan Achieve Now curriculum, with a greater emphasis on technical support
and installation related to the

   Web-based or local area networked student management system. Installation and
support are included with the software license and additional services may be
purchased.

RIGHTS TO CONTENT

   We rely principally upon a combination of copyright, trademark and trade
secret laws and contractual restrictions to protect our proprietary rights.

   We developed and own the rights to nearly all of the content within the
Lightspan Achieve Now curriculum, including the worlds, characters, stories,
educational content, and games. We hold trademarks to all of our Lightspan
Achieve Now worlds, our individual CD-ROM titles, and many of our characters.

SEASONALITY

   Our operating results are expected to vary significantly from quarter to
quarter because of seasonal influences on demand for our Lightspan Achieve Now
and Academic Systems curricula and our services based on school calendars,
budget cycles and timing of school districts' funding sources. Our Lightspan
Achieve Now license transactions have historically been highest in our second
fiscal quarter, and lowest in our first fiscal quarter. In the first half of
fiscal 2001, we expect to recognize the Achieve Now deferred software license
revenue as the remaining five titles are expected to be completed during the
first and second quarters, which will not be indicative of our underlying
business in those periods. See Change in Revenue Recognition Policy in Item 7.
Management's Discussion and Analysis of Financial Condition and Operating
Results for further discussion.

COMPETITION

   The market for educational technology content and services is highly
fragmented and competitive, with no company having significant market
penetration. We generally compete for school instructional dollars with textbook
publishers, software publishers, supplemental print publishers, Internet content
and service providers, and training services, among others. We believe our
solution is unique and competes favorably with existing products in these
categories on a price and performance basis.

   In the instructional technology segment of this market, we believe our
existing and prospective competitors may be divided into the following groups:

   -  comprehensive curriculum software publishers which offer various
      school-based computer-based learning systems, including Compass Learning,
      formerly Jostens Learning Corporation, and Computer Curriculum
      Corporation;

   -  "edutainment" software vendors, which principally target the consumer
      market but also sell to schools;

   -  education-oriented Internet services and the educational segments of
      general on-line service providers;

   -  distance learning providers; and

   -  programs that take over management of the school or provide substantial
      tutoring help, such as those provided by Edison Schools, Inc. and Sylvan
      Learning Systems, Inc.

   As Internet and broadband services become more widely deployed in K-12 and
colleges, we believe new and as yet unidentified competition will enter the
market. Traditional media companies and rapidly expanding Internet companies are
likely to present new


                                       9
<PAGE>   11

competition. 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. In
addition, many of these current and potential competitors can devote
substantially greater resources to product development, marketing and
promotional campaigns and Web site and systems development than we can.

CONCENTRATION RISK

   During the fiscal year ended January 31, 2000, no one customer accounted for
more than 10% of total revenues for Lightspan.

EMPLOYEES

   As of January 31, 2000, we employed 470 persons, including 153 in technology
and development, 54 in general and administrative, 168 in sales and marketing
and 95 in professional development. We expect that our headcount will increase,
particularly in sales and professional development and Internet marketing and
product development. None of our employees is represented by a labor union and
we consider our employee relations to be excellent.

EXECUTIVE OFFICERS AND KEY EMPLOYEES

   The following table sets forth certain information about our executive
officers and key employees as of March 31, 2000:

<TABLE>
<CAPTION>

NAME                                     AGE                            POSITION
----                                     ---  ---------------------------------------------------------
EXECUTIVE OFFICERS
<S>                                      <C>  <C>
John T. Kernan.........................   54  Chief Executive Officer and Chairman
Carl Zeiger............................   57  President, Chief Operating Officer and Director
Kathleen R. McElwee....................   45  Vice President of Finance and Chief Financial Officer
John H. Brandon........................   44  Executive Vice President, President of Academic Systems
                                              and Director
Winifred B. Wechsler...................   43  Executive Vice President and General Manager of Internet
                                              and Broadband Services
KEY EMPLOYEES
Merritt D. Farren......................   39  Senior Vice President of Corporate Development
Sandra K. Fivecoat.....................   51  Senior Vice President of Sales
Bernice Stafford.......................   58  Vice President of School Marketing and Evaluation
Dr. Larry R. Vaughn....................   61  Senior Vice President of School Reform
Debbie Myers...........................   45  Vice President of Sponsorship Sales
</TABLE>

   John T. Kernan co-founded Lightspan and has served as our Chairman and Chief
Executive Officer since September 1993. Prior to founding Lightspan, Mr. Kernan
served as Chairman and Chief Executive Officer of Jostens Learning Corporation
(now Compass Learning), an educational software company. Mr. Kernan developed
Jostens Learning from a start-up company in 1985 (then named Education Systems
Technology Corporation) to one of the largest educational software businesses in
the United States. Under Mr. Kernan's leadership, Jostens Learning was a leading
supplier of pre-kindergarten through adult educational software. Prior to
founding Jostens Learning, Mr. Kernan was an executive with Gill Cable
Corporation, a Northern California cable TV operator. He also was Vice President
of Product Development for DELTAK, Inc. (now NETg), then the nation's largest
provider of video-based training for technical professionals. Mr. Kernan was the
President of the Software Publishers Association, has been named "Educator of
the Decade" by Electronic Learning Magazine and regional "Entrepreneur of the
Year" by Inc. Magazine, among other distinctions. Mr. Kernan helped found
Academic Systems, which has since been acquired by Lightspan, and Elemental
Software, which has since been acquired by Macromedia. Mr. Kernan sits on the
boards of Teach.com and TechNet. Mr. Kernan holds a Bachelor of Science from
Loyola College.

   Carl Zeiger co-founded Lightspan and has served as our President and Chief
Operating Officer and as one of our directors since September 1993. Prior to
founding Lightspan, Mr. Zeiger served as the President and Chief Operating
Officer of Jostens Learning Corporation. Along with Mr. Kernan, Mr. Zeiger
developed Jostens Learning into a leading supplier of pre-kindergarten through
adult educational software. Prior to joining Jostens Learning, Mr. Zeiger served
as Senior Vice President of Finance for Integrated Software Systems Corporation,
a leading provider of presentation graphics software, and managed its initial
and secondary public offerings and

                                       10
<PAGE>   12

its eventual sale to Computer Associates. Mr. Zeiger is a certified public
accountant in the State of California and holds a Bachelor of Science from the
University of Denver.

   Kathleen R. McElwee has served as our Vice President of Finance and Chief
Financial Officer since January 1999. From November 1997 to January 1999, she
served as Vice President of Finance and Chief Financial Officer of Galoob Toys,
Inc., a developer and marketer of toys. From December 1995 to November 1997, she
served as Vice President of Planning for Galoob. From September 1993 to December
1995, she served as Assistant Controller of Nissan Motor Corporation in USA, an
automobile company. Ms. McElwee holds a Bachelor in Business Administration from
Pennsylvania State University and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.

   John H. Brandon has served as our Executive Vice President and President of
Academic Systems since we acquired Academic Systems in September 1999. From June
1997 to September 1999, he served as President and Chief Executive Officer of
Academic Systems. From 1987 to May 1997, Mr. Brandon held various management
positions at Adobe Systems, a provider of Web and print publishing software, and
most recently was Vice President and General Manager of Adobe North America. Mr.
Brandon holds a Bachelor of Arts from the University of California at Davis.

   Winifred B. Wechsler joined Lightspan in February 1999 and is our Executive
Vice President and General Manager of Internet and Broadband Services. From 1985
to January 1999, Ms. Wechsler served in various management positions at The Walt
Disney Company, a media and entertainment company, and most recently as Senior
Vice President of Buena Vista Internet Group, or BVIG. One of the founders of
Disney Online, Ms. Wechsler launched and managed Disney.com, directing all
operations, including design, production, electronic commerce, advertising and
marketing. In addition, Ms. Wechsler oversaw Disney's investment in Infoseek and
the launch of Go Network and set policy and direction for BVIG. Prior to joining
BVIG, Ms. Wechsler held a variety of positions at the Disney Channel, including
Senior Vice President of New Business Development. Ms. Wechsler holds a Bachelor
of Arts from Wellesley College and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.

   Merritt D. Farren has served as our Senior Vice President of Corporate
Development since April 1999. From May 1988 to April 1999, Mr. Farren held
various management positions at The Walt Disney Company, a media and
entertainment company, and most recently was Senior Vice President and General
Counsel of The Disneyland Resort, Anaheim, California. Mr. Farren holds a
Bachelor of Arts from Stanford University and a Juris Doctor from the University
of California at Berkeley.

   Sandra K. Fivecoat has served as our Senior Vice President of Sales since
February 1999. From April 1998 to January 1999, she served as Regional Vice
President for our South Central Region. From 1987 to April 1998, Ms. Fivecoat
held various sales management positions at Apple Computer, a manufacturer of
computers and software. Ms. Fivecoat holds a Bachelor of Science and a Masters
in Education from the University of Texas at Austin.

   Bernice Stafford co-founded Lightspan and has served as our Vice President of
School Marketing and Evaluation since October 1993. From 1989 to 1993, she
served as Director of Sales Programs at Jostens Learning Corporation. Ms.
Stafford holds a Bachelor of Arts and a Master of Arts from the University of
California at Berkeley.

   Dr. Larry R. Vaughn, Ed.D. has served as our Senior Vice President of School
Reform since January 1999. From January 1993 to July 1998, he served as
superintendent of Wichita Public Schools in Wichita, Kansas. Dr. Vaughn holds a
Bachelor of Arts from Mississippi State University and a Doctorate in Education
from the University of Houston.

   Debbie Myers has served as our Vice President of Sponsorship Sales since
February 2000. From February 1988 to February 2000, she served as Senior Vice
President, Western Sales and Special Programming at Fox Broadcasting Company.
Ms. Myers holds a Bachelor of Arts from Wheaton College in Norton,
Massachusetts.

RISK FACTORS

   Except for the historical information contained or incorporated by reference,
this annual report on form 10-K and the information incorporated by reference
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those discussed here. Factors that
could cause or contribute to differences in our actual results include those
discussed in the following section, as wee as those discussed in Part II, Item 7
entitled "Management's Discussion and Analysis of


                                       11
<PAGE>   13

Financial Condition and Operating Results" and elsewhere throughout this annual
report and in any other documents incorporated by reference into this annual
report. We assume no obligation to update any forward-looking statements.

   You should consider carefully the following risk factors, together with all
of the other information included in this annual report on Form 10-K. Each of
these risk factors could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an investment in
our common stock.

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 Systems 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 1998 and 1997 we recognized license revenue for our Lightspan Achieve Now
product of $14.8 million and $5.6 million, respectively, in accordance with the
accounting rules in effect at that time. In fiscal years 2000 and 1999, we did
not recognize any Lightspan Achieve Now license revenue, in accordance with new
accounting rules adopted February 1, 1998. We expect to recognize license
revenue during the first two quarters of fiscal year 2001 for cumulative
Lightspan Achieve Now shipments since February 1, 1998. This may result in an
operating profit for one or more quarters, which will not be indicative of our
underlying business in that period, and will not be indicative of results that
may be expected for any subsequent quarters or for the full fiscal year ending
January 31, 2001.

   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.

THE SUCCESS OF OUR BUSINESS MODEL REQUIRES US TO INCREASE OUR REVENUES FROM OUR
INTERNET BUSINESSES, 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 Internet businesses, including
sponsorship of our Web sites, subscriptions to The Lightspan Network and
electronic commerce. Some of these methods of generating revenues are relatively
new to us and largely untested. Our ability to increase revenues from these
sources depends on:

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

   -  development of Web sites that are sufficiently engaging to increase and
      retain our number of teacher, student and parent visitors;

   -  purchase by parents and teachers of the products being offered at our
      electronic commerce Web sites;

   -  initiation and growth of sponsorships and banner advertisement sales; and

   -  our ability to increase the subscriber base of The Lightspan Network while
      maintaining a subscription fee.

                                       12
<PAGE>   14

   If we are unable to substantially increase our revenues from our Internet
businesses, we will be unable to execute our current business model and we may
never become profitable.

WE ARE HEAVILY DEPENDENT UPON OUR RELATIONSHIP WITH SONY COMPUTER ENTERTAINMENT,
AND TERMINATION OF THAT RELATIONSHIP, SUPPLY SHORTAGES OF SONY PLAYSTATION GAME
CONSOLES FROM SONY COMPUTER ENTERTAINMENT 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, which supplies the Sony PlayStation game console used by the
students who use our Lightspan Achieve Now educational software at home. 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
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
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 game console, 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 game console, 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 afford the PlayStation 2 game console if it is priced
significantly higher than the original PlayStation game console. While we expect
Lightspan Achieve Now to run on the PlayStation 2 game console, we may have to
adapt our software to any changes in or new versions of the PlayStation game
console 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 Sony PlayStation as Sony balances its
manufacturing capability between the original and PlayStation 2 game consoles.
If we are unable to acquire PlayStations, 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 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.

                                       13
<PAGE>   15

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
Academic Systems, Global Schoolhouse and StudyWeb, all of which we acquired in
the second half of 1999. 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.

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 January 31,
2000, we had an accumulated deficit of $177.5 million. We incurred net losses of
$55.7 million for the year ended January 31, 2000 and $33.6 million for the
fiscal year ended January 31, 1999. 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, 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;

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

   -  amortization of intangible assets and goodwill recorded in connection with
      our acquisitions of Academic Systems, 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 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 currently anticipate that the net proceeds of
our initial public offering, together with our available funds, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures through at least the next 15 months. However, we may need to raise
additional funds prior to or after that period. 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.


                                       14
<PAGE>   16


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 Internet businesses continues to require increased sales, marketing and
promotion 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;

   -  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.

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 10-K,
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 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:

                                       15
<PAGE>   17

   -  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 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


                                       16
<PAGE>   18

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.

THE OPERATIONS OF ACADEMIC SYSTEMS WILL BE SUBSTANTIALLY IMPACTED IF DATABASE
SOFTWARE WE LICENSE FROM ORACLE CORPORATION CEASES TO BE AVAILABLE TO ACADEMIC
SYSTEMS FOR ANY REASON.

   Academic Systems is heavily dependent upon its relationship with Oracle
Corporation, which provides a database that Academic Systems uses to accumulate
data on students' progress in its math and writing courses. If Oracle
Corporation terminates its relationship with Academic Systems or its database
fails to function properly for any reason, a portion of our operations could be
interrupted and we could lose revenues.

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 Systems' 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 Sony 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 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 Systems 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 Systems 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

                                       17
<PAGE>   19

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 online sponsors, subscribers and users and to
promote and maintain the Lightspan brand, we have spent and intend to continue
spending significant amounts on an aggressive brand-enhancement strategy, which
includes advertising, 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
Systems 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 announced 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 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. 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 MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.

   The stock market in general has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our stock.

                                       18
<PAGE>   20

OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS CONTROL 52% OF OUR
COMMON STOCK.

   As of March 31, 2000, executive officers, directors and holders of 5% or more
of our outstanding common stock, in the aggregate, beneficially own 52% 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.

ITEM 2.  PROPERTIES

   Our headquarters are located in San Diego, California, where we currently
lease approximately 47,000 square feet under a lease expiring in 2003 and
approximately 10,000 square feet under a lease expiring in 2002. Warehouse
facilities are located in Carlsbad, California, where we currently lease
approximately 9,000 square feet under a lease expiring in 2002. Additional
facilities for the Internet group are located in Santa Monica, California, where
approximately 6,900 square feet are under a lease expiring in 2002, and, for
Academic Systems, in Mountain View, California, where approximately 15,500
square feet are under a lease expiring in 2001. While we consider our current
facilities adequate for our current operations, we expect that we will need to
lease additional facilities as our operations expand.

ITEM 3.  LEGAL PROCEEDINGS

   We are not currently involved in any material legal proceedings.

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

   The stockholders of Lightspan acted by written consent on occasion during the
fourth quarter of the fiscal year ended January 31, 2000, as follows:

   On January 28, 2000, in an action by written consent, stockholders approved
the reincorporation of Lightspan into the state of Delaware, including a 1 for 2
reverse stock spit of Lightspan's common stock. On that day the stockholders
also approved a form of indemnity agreement to be entered into between Lightspan
and its directors and executive officers, approved changes to Lightspan's equity
incentive plans, and approved the creation of Lightspan's employee stock
purchase plan. Stockholders holding 5,524,336 shares of common stock and
35,494,183 shares of preferred stock (on an as-converted-to-common basis)
consented to this action.

                                       19
<PAGE>   21

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

    Lightspan's Common Stock began publicly trading on the Nasdaq National
Market under the symbol "LSPN" on February 10, 2000 at an initial public
offering price of $12 per share.

  The high and low sales price of Lightspan's Common Stock on the Nasdaq
National Market during the period from February 10, 2000 to March 31, 2000 was
$25 3/8 and $10 3/4, respectively. The closing sales price of our common stock
on March 31, 2000 was $17 3/4.

HOLDERS

   As of March 31, 2000, there were approximately 420 record holders of our
common stock.

DIVIDENDS

   We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.

RECENT SALES OF UNREGISTERED SECURITIES

   Since February 1, 1997, we have sold and issued the following unregistered
securities:

(a)     On March 24, 1997, we issued a warrant to purchase 70,000 shares of our
        Series C preferred stock to Silicon Valley Bank, an accredited investor,
        at an exercise price of $6.00 per share. On February 15, 2000, this
        became a warrant to purchase 55,850 shares of common stock at an
        exercise price of $12.00 per share. We relied on the exemption provided
        by Section 4(2) of the Securities Act of 1933.

(b)     In March, May and June 1997, we issued warrants to purchase an aggregate
        of 156,510 shares of Series D preferred stock to twelve accredited
        investors at an exercise price of $3.76 per share. On February 15, 2000,
        these became warrants to purchase an aggregate of 78,255 shares of
        common stock at an exercise price of $7.52 per share. We relied on the
        exemption provided by Section 4(2) of the Securities Act of 1933.

(c)     On June 24, 1997, we issued and sold an aggregate of 6,985,833 shares of
        our Series D preferred stock (which converted on February 15, 2000 into
        3,492,917 shares of common stock) to twenty-one accredited investors for
        an aggregate purchase price of $26,266,732. We relied on the exemption
        provided by Section 4(2) of the Securities Act of 1933.

(d)     On November 14, 1997, we issued and sold an aggregate of 132,978 shares
        of our Series D preferred stock (which converted on February 15, 2000
        into 66,489 shares of common stock) to Anderson Lightspan Partners, an
        accredited investor, for an aggregate purchase price of $499,997. We
        relied on the exemption provided by Section 4(2) of the Securities Act
        of 1933.

(e)     On December 15, 1997, we issued and sold an aggregate of 531,915 shares
        of our Series D preferred stock (which converted on February 15, 2000
        into 265,958 shares of common stock) to three accredited investors for
        an aggregate purchase price of $2,000,000. We relied on the exemption
        provided by Section 4(2) of the Securities Act of 1933.

                                       20
<PAGE>   22

(f)     On March 10, 1998, we issued and sold an aggregate of 5,478,717 shares
        of our Series D preferred stock (which converted on February 15, 2000
        into 2,739,359 shares of common stock) to twenty-five accredited
        investors for an aggregate purchase price of $20,599,976. We relied on
        the exemption provided by Section 4(2) of the Securities Act of 1933.

(g)     On March 10, 1998, we issued warrants to purchase up to 3,326,112 shares
        of our Series D Preferred Stock to 33 accredited investors at an
        exercise price of $0.01 per share. On February 15, 2000 these warrants
        became warrants to purchase up to 1,380,080 shares of common stock. For
        the issuance of the warrant, we relied on the exemption provided by
        Section 4(2) of the Securities Act of 1933.

(h)     On June 24, 1998, we issued a warrant to purchase 127,659 shares of
        Series D preferred stock to Montgomery Securities, an accredited
        investor, at an exercise price of $4.70 per share. On February 15, 2000
        this became a warrant to purchase 63,830 shares of common stock at an
        exercise price of $9.40 per share. We relied on the exemption provided
        by Section 4(2) of the Securities Act of 1933.

(i)     On July 8, 1999 we issued and sold an aggregate of 4,294,183 shares of
        our Series E preferred stock (which converted on February 15, 2000 into
        2,147,092 shares of common stock) to eight accredited investors for an
        aggregate purchase price of $21,470,923. We relied on the exemption
        provided by Section 4(2) of the Securities Act of 1933.

(j)     On July 27, 1999, we issued and sold an aggregate of 1,000,000 shares of
        our Series E preferred stock (which converted on February 15, 2000 into
        500,000 shares of common stock) to Comcast Interactive Investments,
        Inc., an accredited investor, for an aggregate purchase price of
        $5,000,000. We relied on the exemption provided by Section 4(2) of the
        Securities Act of 1933.

(k)     On August 16, 1998, we issued and sold an aggregate of 1,150,000 shares
        of our Series E preferred stock (which converted on February 15, 2000
        into 575,000 shares of common stock) to thirteen accredited investors
        for an aggregate purchase price of $5,750,000. We relied on the
        exemption provided by Section 4(2) of the Securities Act of 1933.

(l)     In September 1999, in connection with our acquisition of Academic
        Systems, we issued shares of our Series E preferred stock and shares of
        our common stock to the former preferred and common shareholders of
        Academic Systems. We relied on the exemption provided by 3(a)(10) of the
        Securities Act of 1933.

(m)     On October 29, 1999, we sold an aggregate of 250,000 shares of our
        Series E preferred stock (which converted on February 15, 2000 into
        125,000 shares of common stock) to three accredited investors for an
        aggregate purchase price of $1,250,000. We relied on the exemption
        provided by Section 4(2) of the Securities Act of 1933 and Regulation D
        promulgated thereunder.

(n)     On October 29, 1999 we issued and sold 217,000 shares of our Series E
        preferred stock (which converted on February 15, 2000 into 108,500
        shares of common stock) as partial consideration for assets we purchased
        from American Computer Resources, Inc., an accredited investor. We
        relied on the exemption provided by Section 4(2) of the Securities Act
        of 1933 and Regulation D promulgated thereunder.

(o)     On November 1, 1999, we sold and issued 2,500,000 shares of our Series E
        preferred stock (which converted on February 15, 2000 into 1,250,000
        shares of common stock) and a warrant to purchase up to 500,000 shares
        of our Series E preferred stock (which converted on February 15, 2000
        into 250,000 shares of common stock at an exercise price of $12.00 per
        share) to CINAR Corporation, an accredited investor, in connection with
        a strategic relationship. We relied on the exemption provided by Section
        4(2) of the Securities Act of 1933 and Regulation D promulgated
        thereunder.

(p)     On November 15, 1999 we issued and sold 100,000 shares of our Series E
        preferred stock (which converted on February 15, 2000 into 50,000 shares
        of common stock) to an accredited investor for an aggregate purchase
        price of $500,000. We relied on the exemption provided by Section 4(2)
        of the Securities Act of 1933 and Regulation D promulgated thereunder.

(q)     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.

                                       21
<PAGE>   23

(r)     On February 15, 2000 we 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.

(s)     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.

USE OF PROCEEDS

   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 the Company's 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 the Company were $88.8 million. From the time of receipt through
January 31, 2000, $172,000 of the net proceeds were applied to repay debt, $5.0
million were used to promote the launch of our Lightspan.com Web site, and the
remaining proceeds were invested in short term, interest-bearing, investment
grade securities.

ITEM 6.  SELECTED FINANCIAL DATA

                      SELECTED CONSOLIDATED 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, which are included elsewhere in this 10-K for the years ended
January 31, 2000, 1999 and 1998 and as of January 31, 2000 and 1999. The
following financial information is in thousands, except per share data.

<TABLE>
<CAPTION>

                                                                      YEARS ENDED JANUARY 31,
                                                                      -----------------------
                                               2000              1999           1998           1997          1996
                                             --------          --------       --------       --------       --------
<S>                                          <C>               <C>            <C>            <C>             <C>
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
Total revenues ........................      $ 16,916          $ 10,870       $ 22,309       $  8,565        $    --
Total cost of revenues ................         9,734             7,660         11,433          5,842             --
                                             --------          --------       --------       --------       --------
Gross profit ..........................         7,182             3,210         10,876          2,723             --
 Total operating expenses .............        63,382            37,194         37,827         35,199         20,443
                                             --------          --------       --------       --------       --------
Loss from operations ..................       (56,200)          (33,984)       (26,951)       (32,476)       (20,443)
Interest income (expense), net ........           479               417           (527)          (113)           876
                                             --------          --------       --------       --------       --------
Net loss ..............................       (55,721)         $(33,567)      $(27,478)      $(32,589)      $(19,567)
                                             ========          ========       ========       ========       ========
Historical net loss per
 share(1) -- basic and diluted ........      $ (13.61)         $  (9.91)      $  (8.65)      $ (10.72)      $  (6.47)
                                             ========          ========       ========       ========       ========
Historical weighted average
 shares -- basic and diluted ..........         4,094             3,388          3,177          3,039          3,024
                                             ========          ========       ========       ========       ========
Pro forma net loss per
 share -- basic and  diluted ..........      $  (2.12)(2)
                                             ========
Pro forma weighted average
 shares -- basic and diluted ..........        26,294(2)
                                             ========
</TABLE>

                                       22
<PAGE>   24

<TABLE>
<CAPTION>

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

(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 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.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS

OVERVIEW

    Lightspan, Inc. was 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 Systems 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 Systems 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.

                                       23
<PAGE>   25

   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 Sony 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 Systems 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 in February 2000, Your School Online and Your Class
Online, the successor to Lightspan PageOne.

CHANGE IN REVENUE RECOGNITION POLICY

   We sell our Lightspan Achieve Now licenses 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. From the
time we commenced sales of the Lightspan Achieve Now product line, a number of
these titles were not available on the date of the sale, but were under
development at various stages in the development cycle. We consider titles that
have completed the development cycle and have been released for shipment to
customers to be "completed," and we consider titles still in the development
cycle to be "as-yet uncompleted." As of January 31, 2000, 72 of the 77 planned
titles had been completed. The remaining five titles are expected to be
completed during the first and second quarters of the fiscal year ending January
31, 2001.

   At the time we began selling Lightspan Achieve Now licenses in 1996, the
compilation of titles which were then complete and available was fully
functional, met the academic objectives which we had committed to our customers,
and contained sufficient content to cover a complete school year's curriculum.
At that time it was our intention to subsequently develop additional titles that
would expand the overall curriculum, and we have continued efforts to do so.
Since the first shipment of Lightspan Achieve Now in 1996, we have established a
practice of providing these additional titles, when completed, to all existing
customers for no additional charge on a when and if available basis, although we
are not contractually obligated to do so. We plan to continue this practice
until we have delivered the last of the 77 planned titles, expected to be prior
to July 31, 2000. We plan to offer any new titles developed after that time to
our existing customers for a separate license fee. Prior to December 31, 1997,
our plans regarding the final collection of titles to be provided to customers
was evolving, and therefore customers were not provided with specific
information regarding the content of as-yet undelivered titles on the estimated
delivery schedule for these titles. In January 1998, we began providing a
specific list of titles which we planned to eventually deliver to our customers,
as well as the projected delivery dates for these titles.

   When a customer enters into a Lightspan Achieve Now license, we ship them the
compilation of titles which is then available. The customer is able to begin
using our product immediately and is obligated to pay the entire non-refundable
license fee at that time. Neither the license fee collected from the customer,
nor the customer's ability to use our product, is contingent or dependent upon
our delivery of any additional titles.

   Through January 31, 1998, our revenue recognition for Lightspan Achieve Now
licenses was in accordance with AICPA Statement of Position 91-1. Under AICPA
Statement of Position 91-1, we recognized the entire Lightspan Achieve Now
license fee upon the initial shipment of titles.

   Effective February 1, 1998, we adopted AICPA Statement of Position 97-2,
which caused a substantial change in our revenue recognition for Lightspan
Achieve Now licenses. Under AICPA Statement of Position 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 and
will do the same for any subsequent quarter until we have shipped the final
title to be provided for that grade cluster. By July 31, 2000, we expect to ship
the final title to be provided to all existing customers for no additional
charge. At that time we expect to recognize all of the revenue related to
shipments of Lightspan Achieve Now for that quarter as well as all prior
quarters since the adoption of AICPA Statement of Position 97-2. This will
result in the recognition of the entire deferred revenue balance, and the
related deferred cost of revenue, at that time. This impact could all occur in a
single quarter, if the final title for each grade cluster is completed in the
same quarter, or it could occur over two quarters, if the final title for one or
two grade clusters is completed in one quarter and the final title for the other
one or two grade clusters is completed in a subsequent quarter.

                                       24
<PAGE>   26

   Since we defer all of the Lightspan Achieve Now license revenue pursuant to
AICPA Statement of Position 97-2, we also defer all of the costs of duplicating
the product and packaging it for distribution. We will recognize these amounts
as cost of license revenue when we recognize the related revenue.

   The following table shows the amount of license revenue and the amount of
cost of license revenue we have deferred since the adoption of AICPA Statement
of Position 97-2:

<TABLE>
<CAPTION>
                                                                                                           TOTAL
                                                                                                           AMOUNTS
                                                                               YEARS  ENDED JANUARY 31,  DEFERRED AT
                                                                                  2000         1999      JAN.31, 2000
                                                                               ----------   -----------  -----------
<S>                                                                              <C>          <C>          <C>
                License revenue deferred during the year .................       $27,393      $20,717      $48,110
                Cost of license revenue deferred during the year .........       $ 5,154      $ 3,555      $ 8,709

</TABLE>


   We expect to recognize the cumulative deferred license revenue of $48.1
million and deferred cost of license revenue of $8.7 million in the quarters
ending April 30 and July 31, 2000. We will incur additional marginal costs in
those quarters to reproduce and distribute the as-yet uncompleted titles at
January 31, 2000.

RESULTS OF OPERATIONS

   Operating Losses. We have incurred significant losses since our inception
and, as of January 31, 2000, have an accumulated deficit of approximately $177.5
million. We expect to continue to incur substantial operating losses for the
foreseeable future. However, in the quarters in which we ship the final
Lightspan Achieve Now titles, we may have an operating profit. We expect this
will occur in the quarters ending April 30, 2000 and July 31, 2000. However,
because we may complete the final titles for one or two grade clusters in one
quarter and complete the final titles for the remaining grade clusters in the
next quarter, the impact could be spread over multiple quarters. The operating
results in that period or periods will not be indicative of our underlying
business in that period or periods, and will not be indicative of results that
may be expected for any subsequent quarters or for the full year ending January
31, 2001.

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. We derive license revenues from the sale of Lightspan
Achieve Now licenses and subscriptions for The Lightspan Network. We recognize
revenue from Lightspan Achieve Now 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.

   In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, Lightspan allocates the total fee to each component of
the arrangement based on objective evidence of its fair value, which is specific
to Lightspan. The objective evidence for each element is based on the respective
list prices of each element when sold or offered for sale separately.
Historically, Lightspan has 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 license revenues, as described above in
"Change in Revenue Recognition Policy".

                                       25
<PAGE>   27

   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.

   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 $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 Systems 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. 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. 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. We derive hardware revenues from the sale of Sony
PlayStation game consoles 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 Sony PlayStation game consoles.
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 Sony
PlayStation game console.

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 Sony PlayStation game consoles and
related accessories.

   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
Systems licenses was $0.7 million. Gross margin for Academic Systems 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.

                                       26
<PAGE>   28

   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 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 and are properly expensed as
incurred under AICPA Statement of Position ("SOP") 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. Lightspan
regularly evaluates 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.

   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 existing development personnel and related costs to our
Internet business as we expanded our Internet offerings and the addition of
Academic Systems 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 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 most of these activities will be directed toward the target users
and markets for our Internet products and services.

   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 Systems sales and
marketing expense of $2.0 million.

   General and Administrative. 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.

   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
Systems.

   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.

                                       27
<PAGE>   29

   Amortization of Intangible Assets. In connection with the acquisitions of
Academic Systems, 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
Systems 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 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 Sony 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 Sony 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 Sony
PlayStation game console platform.

                                       28
<PAGE>   30

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 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 ACQUISITION

   We acquired Academic Systems in September 1999. Academic Systems develops,
markets and sells curriculum-based educational software to colleges and
universities for use by under-prepared college students. Academic Systems offers
five course programs -- four in mathematics covering elementary algebra to
college algebra, and one in English covering remedial writing and freshman
composition. Academic Systems' 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 Systems' software, customer training, books and materials, upgrades and
support. Academic Systems 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.

BUSINESS COMBINATIONS AND PURCHASE ACCOUNTING

   The acquisition of Academic Systems, 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.

   The purchase price of Academic Systems was allocated to the assets acquired,
consisting principally of goodwill and intangible assets which are being
amortized over useful lives ranging from 4 to 10 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 assets and operations of 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 three
acquired businesses,

                                       29
<PAGE>   31

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. We expect to record annual amortization expense related to
these acquisitions of approximately $13.4 million for each of fiscal years 2001
and 2002, $12.8 million for fiscal 2003, $7.5 million for fiscal 2004, and
approximately $0.3 million for each fiscal year from 2005 through 2009.

SPRINGING WARRANTS

   Upon the sale of Lightspan's common stock in our initial public offering,
which closed on February 15, 2000, warrants to purchase up to 2,760,160 shares
of Series D preferred stock at $.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 retained earnings an
additional $16,506,000 and increasing the carrying amount of common stock by a
corresponding amount. Such amount will also increase the net loss or decrease
the net income applicable to common stockholders in periods including February
15, 2000.

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 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 1.25 million 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 warrants
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) 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.

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 their 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 upon satisfaction of
several conditions. We also granted to Cox Communications a


                                       30
<PAGE>   32

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 on February 15, 2000
and subsequently resigned on March 31, 2000.

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. This investment by Gateway was
subject to the satisfaction of several conditions, including our jointly
entering into an Internet sponsorship agreement (the "Site Sponsorship
Agreement") whereby Gateway became a sponsor of Lightspan.com. Gateway, a
manufacturer of personal computers, is Lightspan's preferred provider of
personal computers.

   In February 2000, Lightspan entered into the Site Sponsorship Agreement with
Gateway, a one year agreement that expires January 31, 2001, whereby Lightspan
will promote the products and 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 Site Sponsorship Agreement is extended beyond one
year if certain online exposure requirements are not met and is renewable for an
additional year by Gateway.

LEGAL MATTERS

   In July 1996, a former Lightspan 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 set forth in the agreement.

   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.
During the year ended January 31, 2000, we recorded an additional charge of
approximately $467,000 to cover additional costs related to the settlement.

   As of January 31, 2000, we had paid approximately $958,000 in legal and
settlement costs related to this case. We paid remaining settlement costs of
$513,000 following the closing date of our initial public offering. We expect to
pay the remaining legal costs within the first quarter of fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

   From inception through January 31, 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. At
January 31, 2000, we had $5.0 million of cash and cash equivalents and $16.1
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 our operating losses to continue and
increase for the foreseeable future.

   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.

    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 Lightspan Achieve Now, as well as receipt of cash from our preferred stock
and other financings. We expect that our working capital requirements and cash
position will

                                       31
<PAGE>   33

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 $25.3 million for fiscal 2000,
$16.5 million for fiscal 1999 and $22.5 million for fiscal 1998. Net cash used
during these periods was primarily to fund technology and development, sales and
marketing and general and administrative costs associated with the development
and deployment of our Lightspan Achieve Now curriculum and Internet products and
services. We expect our negative operating cash flow to continue and increase
for the foreseeable future.

   Net cash used in investing activities was $22.8 million for fiscal 2000, $0.7
million for fiscal 1999 and insignificant in fiscal 1998. The increase in cash
used in fiscal 2000 relates primarily to the $16.1 million increase in
short-term investments, $4.3 million net cash paid for the acquisitions of
Academic Systems, Global Schoolhouse and StudyWeb, and $2.4 million for the
acquisition of property and equipment.

   Net cash provided by financing activities was $46.0 million for fiscal 2000,
$19.9 million for fiscal 1999 and $25.4 million for fiscal 1998. Issuing our
Series C, D and E preferred stock to various strategic and financial investors
raised our cash provided by financing activities during these periods.

   In February 1999, we extended our line of credit with a financial
institution. The line of credit bears interest at the bank's prime rate plus
1.5% and expires in April 2000, after which time we expect to renegotiate the
terms. The amount available under the line of credit was increased to the lesser
of $10.0 million or 75% of eligible accounts receivable, and is collateralized
by substantially all of our assets. As of January 31, 2000, there were no
amounts outstanding under the line of credit.

   We entered into a $1.0 million capital leasing 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 January 31, 2000, $504,000 was
available for future borrowing under this agreement.

   We have also entered into various purchase order commitments with a number of
vendors, primarily for the purchase of hardware, marketing services, promotional
activities and development activities. As of January 31, 2000, our outstanding
purchase order commitments were approximately $1.0 million.

   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

   -  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 Systems, 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 Systems. However, we believed a small number of former
Academic Systems stockholders had rights to additional shares of our stock. As a
result, in March 2000, we issued 534,008 shares of common stock to those
stockholders.

   As of March 31, 2000, we believe that our cash and cash equivalents and the
net proceeds from our initial public offering will be sufficient to fund our
operations for at least the next 15 months. Despite our expectations, we may
need to raise additional capital before the end of the next 15 months.


                                       32
<PAGE>   34

RECENT ACCOUNTING PRONOUNCEMENTS

   In June 1998, the FASB issued Statement of Financial Accounting Standards
("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.

IMPACT OF YEAR 2000

   In late 1999 we completed our remediation and testing systems consisting
primarily of upgrading our PC's, which was in the ordinary course of business.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-informational technology systems and believe those systems successfully
responded to the Year 2000 date change. We expensed approximately $126,500
during fiscal 2000 in connection with remediating our systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.

ITEM 7A.  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 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.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Company's consolidated financial statements at January 31, 2000 and 1999
and the Report of Ernst & Young LLP, Independent Auditors, are included in this
report on Form 10-K on pages F-1 through F-21.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no disagreements with accountants on any matter of accounting
principles and practices or financial disclosure.


                                       33
<PAGE>   35

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   Information regarding our directors is incorporated by reference to the
section entitled "Election of Directors" in the Lightspan, Inc. definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of Stockholders to be held on June 29, 2000 (the "Proxy
Statement"). Information regarding our executive officers is set forth in Item 1
of Part I of this Report under the caption "Executive Officers and Key
Employees".

ITEM 11.  EXECUTIVE COMPENSATION

  The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation".

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management".

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions".


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Financial Statements and Schedules

        Documents filed as part of the report:
<TABLE>
<CAPTION>

                                                                                                      PAGE
<S>                                                                                                   <C>
Report of Ernst & Young LLP, Independent Auditors ...............................................      F-2
Consolidated Balance Sheets as of January 31, 2000 and 1999 .....................................      F-3
Consolidated Statements of Operations for the years ended January 31, 2000, 1999 and 1998 .......      F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended January 31,
2000, 1999 and 1998 .............................................................................      F-5
Consolidated Statements of Cash Flows for the years ended January 31, 2000, 1999 and 1998 .......      F-6
Notes to Consolidated Financial Statements ......................................................      F-7
</TABLE>

        Financial statement schedules other than those listed above have been
        omitted because they are either not required, not applicable or the
        information is otherwise included.

(b)  Current Reports on Form 8-K

    We did not file any current reports on Form 8-K for the quarter ended
January 31, 2000.

(c) Exhibits

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

                                       34
<PAGE>   36

<TABLE>
<CAPTION>

   Footnote   Exhibit
     No.        No.                                       Description
------------------------------------------------------------------------------------------------------------------------------------
<S>           <C>      <C>
     1          2.1    Agreement and Plan of Merger.
     3          3.1    Amended and Restated Certificate of Incorporation, as currently in effect.
     1          3.2    Bylaws, as currently in effect.
                4.1    Reference is made to Exhibits 3.1 and 3.2.
     1          4.2    Specimen Stock Certificate.
     1         10.1    1992 Stock Option Plan.
     1         10.2    Forms of Incentive and Nonstatutory Stock Option Agreement under the 1992 Stock Option Plan.
     1         10.3    2000 Equity Incentive Plan.
     1         10.4    Form of Stock Option Agreement pursuant to the 2000 Equity Incentive Plan.
     1         10.5    2000 Employee Stock Purchase Plan and related offering documents.
   1, 2        10.6    Office Lease by and between the Company and Insurance Company of the West dated as of May 28, 1996.
     1         10.7    Lease by and between the Travelers Insurance Company and Academic Systems Corporation dated as of July 1,
                       1996 and amended December 3, 1996.
   1, 2        10.8    Office Sublease by and between the Company and Qualcomm Incorporated dated as of December 1, 1997 and amended
                       September 21, 1998.
     1         10.9    Office Lease by and between the Company and McWin Corporation dated as of May 1, 1997.
     1         10.10   Office Lease by and between the Company and Auerbach Plaza Limited Partnership and Goliac, Inc., dated as of
                       June 4, 1999.
     1         10.11   Loan and Security Agreement by and between the Company and Silicon Valley Bank dated as of February 25, 1997
                       and amended December 31, 1997, March 31, 1998 and March 26, 1999.
     1         10.12   Master Lease Agreement by and between the Company and Transamerica Business Credit Corporation dated as of
                       August 14, 1997, including Schedules 1, 2, 3, 4 and 5 thereto.
     1         10.13   Master Equipment Lease by and between the Company and Pentech Financial Services, Inc. dated as of July 25,
                       1999, including supplements 1, 2 and 3 thereto.
     1         10.14   Equipment Financing Agreement by and between the Company and Pentech Financial Services, Inc. dated as of
                       July 1, 1999.
     1         10.15   Amended and Restated Investor Rights Agreement by and among the Company and certain stockholders of the
                       Company dated July 8, 1999.
     1         10.16   Amendment and Waiver dated October 28, 1999.
     1         10.17   Amendment to Investor Rights Agreement dated October 29, 1999.
     1         10.18   Form of Indemnity Agreement between the Company and its directors and officers.
     1         10.19   Developer Agreement by and between the Company and Sony Computer Entertainment America dated as of
                       January 26, 1996.
   1, 2        10.20   Sale and License Agreement by and between the Company and Sony Computer Entertainment America dated as of
                       January 26, 1996.
   1, 2        10.21   Letter Agreement by and between the Company and SmarterKids.com, Inc. dated as of July 12, 1999.
     1         10.22   Academic Systems Fulfillment Agreement by and between Academic Systems Corporation and FGI Print Management
                       dated as of June 12, 1998.
     1         10.23   Series E Stock Purchase Agreement by and between the Company and CINAR Corporation dated as of October 29,
                       1999.
     1         10.24   Warrant Agreement to purchase Series A preferred stock by and between the Company and Comdisco, Inc. dated
                       as of March 15, 1994.
     1         10.25   Warrant Agreement to purchase Series B preferred stock by and between the Company and Comdisco, Inc. dated
                       as of May 30, 1995.
     1         10.26   Warrant Agreement to purchase Series B preferred stock by and between the Company and Comdisco, Inc. dated
                       as of April 26, 1996.
     1         10.27   Warrant to purchase Series C preferred stock by and between the Company and Silicon Valley Bank dated as of
                       March 24, 1997.
</TABLE>

                                       35
<PAGE>   37

<TABLE>
<CAPTION>
<S>            <C>     <C>
     1         10.28   Warrant Agreement to purchase Series C preferred stock by and between the Company and Comdisco, Inc. dated
                       as of April 26, 1996.
     1         10.29   Warrant to purchase Series D preferred stock by and between the Company and Montgomery Securities.
     1         10.30   Form of Warrant to purchase Series D preferred stock.
     1         10.31   Form of Warrant to purchase Series D preferred stock.
     1         10.32   Letter Agreement regarding strategic initiatives by and between the Company and CINAR Corporation dated as
                       of October 29, 1999.
     1         10.33   Amendment and Waiver dated October 28, 1999.
     1         10.34   Warrant to purchase Series E preferred stock by and between the Company and Comdisco, Inc.
     1         10.35   Form of Warrant to purchase Series E preferred stock.
     1         10.36   Warrant to purchase Series D preferred stock by and between the Company and SZ Investments L.L.C. dated as
                       of June 6, 1997.
     1         10.37   Oracle Reseller agreement, dated as of August 9, 1994, including Addendums.
     1         10.38   Form of Warrant to purchase common stock by and between the Company and Cox Communications Holdings, Inc.
                       issued concurrent with the closing of our initial public offering.
     1         10.39   Stock Purchase Agreement by and between the Company and Cox Communications Holdings, Inc. dated as of
                       January 11, 2000.
     1         10.40   Stock Purchase Agreement by and between the Company and Gateway Companies, Inc. dated as of January 12, 2000.
     3         10.41   Amendment to Warrant to purchase Series E preferred stock by and between the Company and CINAR Corporation
                       dated as of January 25, 2000.
     3         10.42   Office Lease by and between the Company and Lyon & Lyon LLP dated as of March 31, 2000.
     1         21.1    Subsidiaries of the Registrant.
     3         27      Financial Data Schedule.
</TABLE>


---------------------
1       Filed as an exhibit to the Company's Registration Statement on Form S-1,
        Registration Statement No. 333-90103, or amendments thereto, and
        incorporated herein by reference.

2       Confidential treatment has been requested with respect to certain
        portions of this exhibit. Omitted portions have been filed separately
        with the Securities and Exchange Commission.

3       Filed with this report.

                                       36
<PAGE>   38


                                   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 24 day of April,
2000.

                                          Lightspan, Inc.

                                          By: /s/ CARL ZEIGER
                                             ----------------------------------
                                             Carl Zeiger,
                                             President, Chief Operating Officer
 April 24, 2000                              and Director


                                POWER OF ATTORNEY

   Know all persons by these presents, that each person whose signature appears
below constitutes and appoints John T. Kernan and Carl Zeiger, and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue thereof.

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 24th day of April, 2000.

<TABLE>
<CAPTION>

        SIGNATURE                                         TITLE                                   DATE
        ---------                                         -----                                   ----
<S>                                         <C>                                               <C>
/s/ JOHN T. KERNAN                          Chief Executive Officer and Chairman              April 24, 2000
-----------------------------------         (Principal Executive Officer)
John T. Kernan

/s/ CARL ZEIGER                             President, Chief Operating                        April 24, 2000
-----------------------------------         Officer and Director
Carl Zeiger

 /s/ KATHLEEN R. McELWEE                    Vice President of Finance                         April 24, 2000
-----------------------------------         and Chief Financial Officer
 Kathleen R. McElwee                        (Principal Financial and Accounting Officer)


/s/ JOHN H. BRANDON                         Executive Vice President, President of            April 24, 2000
-----------------------------------         Academic Systems and Director
John H. Brandon

/s/ JAMES W. BREYER                         Director                                          April 24, 2000
-----------------------------------
James W. Breyer

                                            Director                                          April   , 2000
-----------------------------------
L. John Doerr

/s/ JEFFREY P. SANDERSON                    Director                                          April 24, 2000
-----------------------------------
Jeffrey P. Sanderson

/s/ DAVID D. HILLER                         Director                                          April 24, 2000
-----------------------------------
David D. Hiller
</TABLE>


                                       37
<PAGE>   39

<TABLE>
<CAPTION>

<S>                                         <C>                                               <C>
/s/ BRUCE W. RAVENEL                        Director                                          April 24, 2000
-----------------------------------
Bruce W. Ravenel

/s/ BARRY J. SCHIFFMAN                      Director                                          April 24, 2000
-----------------------------------
Barry J. Schiffman

                                            Director                                          April   , 2000
-----------------------------------
Ronald A. Weinberg

</TABLE>


                                       38
<PAGE>   40

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                                PAGE
<S>                                                                                                                              <C>
Report of Ernst & Young LLP, Independent Auditors..............................................................................  F-2
Consolidated Balance Sheets as of January 31, 2000 and 1999....................................................................  F-3
Consolidated Statements of Operations for the years ended January 31, 2000, 1999 and  1998 ....................................  F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended January 31, 2000, 1999 and  1998.................  F-5
Consolidated Statements of Cash Flows for the years ended January 31, 2000, 1999 and  1998.....................................  F-6
Notes to Consolidated Financial Statements.....................................................................................  F-7
</TABLE>

                                      F-1
<PAGE>   41




                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Lightspan, Inc.

   We have audited the accompanying consolidated balance sheets of Lightspan,
Inc. as of January 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended January 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lightspan,
Inc. at January 31, 2000 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 2000, in
conformity with accounting principles generally accepted in the United States.




/s/ ERNST & YOUNG LLP

San Diego, California
March 9, 2000

                                      F-2
<PAGE>   42




                                 LIGHTSPAN, INC.

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>


                                                                                          JANUARY 31,
                                                                                    -------------------------
                                                                                      2000            1999
                                                                                    ---------       ---------
<S>                                                                                 <C>             <C>
     ASSETS
     Current assets:
       Cash and cash equivalents .............................................      $   5,033       $   7,143
       Short-term investments ................................................         16,132              --
       Accounts receivable, less allowance for doubtful accounts of
         $651 and $400 at January 31, 2000 and 1999, respectively ............         15,683           7,795
       Finished goods inventory ..............................................          1,116           1,267
       Deferred cost of revenue ..............................................          8,709           3,555
       Other current assets ..................................................          2,306           1,046
                                                                                    ---------       ---------
              Total current assets ...........................................         48,979          20,806
     Property and equipment, net .............................................          3,254           1,639
     Deposits and other assets ...............................................            591             121
     Intangible assets, net ..................................................         49,608              --
                                                                                    ---------       ---------
              Total assets ...................................................      $ 102,432       $  22,566
                                                                                    =========       =========

     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
     Current liabilities:
       Accounts payable ......................................................      $   4,677       $   3,069
       Accrued liabilities ...................................................          9,139           4,879
       Acquisition consideration payable .....................................          5,341              --
       Deferred revenue -- Achieve Now .......................................         48,110          20,717
       Deferred revenue -- services and other ................................          7,022           3,444
       Current portion of note payable and capital lease obligations .........            684             930
                                                                                    ---------       ---------
              Total current liabilities ......................................         74,973          33,039
     Deferred rent ...........................................................            322             382
     Capital lease obligations, less current portion .........................            443             394
     Commitments
     Stockholders' equity (deficit):
       Convertible preferred stock, par value $0.001:
         Authorized shares -- 61,793,074
         Issued and outstanding shares -- 52,230,915 and
           35,527,893 at January 31, 2000 and 1999, respectively
         Aggregate liquidation preference -- $194,935 and
           $111,420 at January 31, 2000 and 1999, respectively ...............             52              35
       Common stock, par value $0.001:
         Authorized shares -- 75,000,000
         Issued and outstanding shares -- 4,764,167 and
           3,540,578 at January 31, 2000 and 1999, respectively ..............              5               4
       Additional paid-in capital ............................................        209,740         110,675
       Deferred advertising expense ..........................................           (400)             --
       Deferred compensation .................................................         (5,211)           (192)
       Accumulated deficit ...................................................       (177,492)       (121,771)
                                                                                    ---------       ---------
              Total stockholders' equity (deficit) ...........................         26,694         (11,249)
                                                                                    ---------       ---------
              Total liabilities and stockholders' equity (deficit) ...........      $ 102,432       $  22,566
                                                                                    =========       =========
</TABLE>

                            See accompanying notes.

                                      F-3

<PAGE>   43


                                 LIGHTSPAN, INC.

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

<TABLE>
<CAPTION>

                                                                              YEARS ENDED JANUARY 31,
                                                                  --------------------------------------------
                                                                     2000             1999             1998
                                                                  ----------       ----------       ----------
<S>                                                               <C>              <C>              <C>
          Revenues:
            Software licenses ..............................      $    2,210       $       --       $   14,753
            Internet licenses ..............................           1,791            1,024              289
            Services .......................................           6,546            3,742            1,973
            Hardware .......................................           6,369            6,104            5,294
                                                                  ----------       ----------       ----------
                    Total revenues .........................          16,916           10,870           22,309
          Cost of revenues:
            Software licenses ..............................             676               --            4,835
            Internet licenses ..............................             548              302               99
            Services .......................................           3,142            2,385            1,754
            Hardware .......................................           5,368            4,973            4,745
                                                                  ----------       ----------       ----------
                    Total cost of revenues .................           9,734            7,660           11,433
                                                                  ----------       ----------       ----------
          Gross profit .....................................           7,182            3,210           10,876

          Operating expenses:
            Technology and development .....................          12,400           10,594           14,816
            Sales and marketing ............................          35,643           22,990           20,296
            General and administrative .....................           6,660            3,590            2,715
            Stock-based compensation .......................           3,704               20               --
            Amortization of intangible assets ..............           4,975               --               --
                                                                  ----------       ----------       ----------
                    Total operating expenses ...............          63,382           37,194           37,827
                                                                  ----------       ----------       ----------
          Loss from operations .............................         (56,200)         (33,984)         (26,951)
          Interest income ..................................             747              638              262
          Interest expense .................................            (268)            (221)            (789)
                                                                  ----------       ----------       ----------
          Net loss .........................................      $  (55,721)      $  (33,567)      $  (27,478)
                                                                  ==========       ==========       ==========
          Historical net loss per share:
            Basic and diluted ..............................      $   (13.61)      $    (9.91)      $    (8.65)
                                                                  ==========       ==========       ==========

            Weighted average shares -- basic and diluted ...           4,094            3,388            3,177
                                                                  ==========       ==========       ==========
          Pro forma net loss per share:
            Basic and diluted ..............................      $    (2.12)
                                                                  ==========

            Weighted average shares -- basic and diluted ...          26,294
                                                                  ==========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>   44


                                 LIGHTSPAN, INC.

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                       THREE YEARS ENDED JANUARY 31, 2000
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                     CONVERTIBLE
                                                                   PREFERRED STOCK               COMMON STOCK            ADDITIONAL
                                                              -----------------------        ----------------------        PAID-IN
                                                                SHARES        AMOUNT         SHARES         AMOUNT         CAPITAL
                                                              ----------    ---------        -------       --------       ----------
<S>                                                           <C>           <C>              <C>           <C>            <C>
     Balance at February 1, 1997 ......................         22,398      $      22          3,069       $       3      $  62,315
       Issuance of Series D convertible
         preferred stock ..............................          5,984              6             --              --         21,089
       Issuance of Series D convertible
         preferred stock in exchange for bridge
         loans from shareholders ......................          1,667              2             --              --          6,265
       Issuance of warrants to purchase
         convertible preferred stock ..................             --             --             --              --            102
       Exercise of stock options ......................             --             --            245              --             83
       Repurchase of common stock for cash ............             --             --            (38)             --             (1)
       Net loss .......................................             --             --             --              --             --
                                                             ---------      ---------      ---------       ---------      ---------
     Balance at January 31, 1998 ......................         30,049             30          3,276               3         89,853
       Issuance of Series D convertible preferred stock          5,479              5             --              --         20,467
       Exercise of stock options ......................             --             --            265               1            143
       Deferred compensation related to stock options .             --             --             --              --            212
       Amortization of deferred compensation ..........             --             --             --              --             --
       Net loss .......................................             --             --             --              --             --
                                                             ---------      ---------      ---------       ---------      ---------
     Balance at January 31, 1999 ......................         35,528             35          3,541               4        110,675
       Issuance of Series E convertible preferred
         stock ........................................          6,614              7             --              --         33,018
       Issuance of Series E convertible preferred
         stock in exchange for future advertising .....             80             --             --              --            400
       Series E convertible preferred stock issued
         in connection with the
         acquisition of Academic Systems ..............          7,192              7             --              --         35,952
       Series E convertible preferred stock issued
         in connection with the acquisition of StudyWeb            217             --             --              --          1,085
       Issuance of common stock in connection with the
         acquisition of Academic Systems ..............             --             --            570              --          4,711
       Issuance of options and warrants in connection .             --
         with the acquisition of Academic Systems .....             --             --             --              --          1,818
       Issuance of Series E preferred stock ...........          2,600              3             --              --         12,997
       Exercise of stock options ......................             --             --            653               1            361
       Deferred compensation related to stock options .             --             --             --              --          8,723
       Amortization of deferred compensation ..........             --             --             --              --             --
       Net loss .......................................             --             --             --              --             --
                                                             ---------      ---------      ---------       ---------      ---------
     Balance at January 31, 2000 ......................         52,231      $      52          4,764       $       5      $ 209,740
                                                             =========      =========      =========       =========      =========

<CAPTION>

                                                               DEFERRED                                       TOTAL
                                                              ADVERTISING    DEFERRED        ACCUMULATED   STOCKHOLDERS'
                                                                EXPENSE    COMPENSATION        DEFICIT    EQUITY (DEFICIT)
                                                              -----------  ------------      -----------  ----------------
<S>                                                           <C>          <C>               <C>          <C>
     Balance at February 1, 1997 ......................          $  --     $        --       $ (60,726)      $   1,614

         preferred stock ..............................             --              --              --          21,095


         loans from shareholders ......................             --              --              --           6,267

         convertible preferred stock ..................             --              --              --             102
       Exercise of stock options ......................             --              --              --              83
       Repurchase of common stock for cash ............             --              --              --              (1)
       Net loss .......................................             --              --         (27,478)        (27,478)
                                                             ---------       ---------       ---------       ---------
     Balance at January 31, 1998 ......................             --              --         (88,204)          1,682
       Issuance of Series D convertible preferred stock             --              --              --          20,472
       Exercise of stock options ......................             --              --              --             144
       Deferred compensation related to stock options .             --            (212)             --              --
       Amortization of deferred compensation ..........             --              20              --              20
       Net loss .......................................             --              --         (33,567)        (33,567)
                                                             ---------       ---------       ---------       ---------
     Balance at January 31, 1999 ......................             --            (192)       (121,771)        (11,249)

         stock ........................................             --              --              --          33,025

         stock in exchange for future advertising .....           (400)             --              --              --


         acquisition of Academic Systems ..............             --              --              --          35,959

         in connection with the acquisition of StudyWeb             --              --              --           1,085

         acquisition of Academic Systems ..............             --              --              --           4,711

         with the acquisition of Academic Systems .....             --              --              --           1,818
       Issuance of Series E preferred stock ...........             --              --              --          13,000
       Exercise of stock options ......................             --              --              --             362
       Deferred compensation related to stock options .             --          (8,723)             --              --
       Amortization of deferred compensation ..........             --           3,704              --           3,704
       Net loss .......................................             --              --         (55,721)        (55,721)
                                                             ---------       ---------       ---------       ---------
     Balance at January 31, 2000 ......................      $    (400)      $  (5,211)      $(177,492)      $  26,694
                                                             =========       =========       =========       =========

</TABLE>



                             See accompanying notes.


                                      F-5
<PAGE>   45


                                 LIGHTSPAN, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                 YEARS ENDED JANUARY 31,
                                                                                         --------------------------------------
                                                                                           2000           1999           1998
                                                                                         --------       --------       --------
<S>                                                                                      <C>            <C>            <C>
     OPERATING ACTIVITIES:
     Net loss .....................................................................      $(55,721)      $(33,567)      $(27,478)
     Adjustments to reconcile net loss to net cash used in operating activities:
         Depreciation and amortization ............................................         1,194          1,310          1,637
         (Gain) loss on disposal of assets ........................................            (1)            (5)            38
         Provision for doubtful accounts ..........................................           188           (133)           297
         Amortization of intangible assets ........................................         4,975             --             --
         Amortization of deferred stock-based compensation ........................         3,704             20             --
         Amortization of interest expense issued in connection with debt ..........            --             --            140
         Changes in operating assets and liabilities:
             Accounts receivable ..................................................        (7,099)        (2,418)          (157)
             Inventory ............................................................           434           (348)           175
             Deferred cost of revenue .............................................        (5,154)        (3,555)            --
             Deposits and other assets ............................................        (1,670)            86           (288)
             Accounts payable .....................................................         1,216           (216)          (149)
             Deferred revenue .....................................................        29,485         21,667            725
             Accrued liabilities ..................................................         3,167            652          2,581
                                                                                         --------       --------       --------
     Net cash flows used in operating activities ..................................       (25,282)       (16,507)       (22,479)
     INVESTING ACTIVITIES:
     Decrease (increase) in short-term investments ................................       (16,132)            --            414
     Purchase of property and equipment ...........................................        (2,353)          (726)          (423)
     Proceeds from sale of property and equipment .................................             5             24             31
     Net cash paid for the acquisition of Academic Systems ........................          (802)            --             --
     Net cash paid for the acquisition of Global Schoolhouse ......................        (2,500)            --             --
     Net cash paid for the acquisition of StudyWeb ................................        (1,000)            --             --
                                                                                         --------       --------       --------
     Net cash flows provided by (used in) investing activities ....................       (22,782)          (702)            22
     FINANCING ACTIVITIES:
     Proceeds from issuance of preferred stock ....................................        46,025         20,472         21,095
     Proceeds from convertible bridge notes .......................................            --             --          6,267
     Proceeds from  capital leases ................................................           683            699            337
     Principal repayments on capital leases .......................................        (1,064)        (1,385)        (1,528)
     Principal repayments on notes payable ........................................           (52)            --           (845)
     Net proceeds from exercise of stock options ..................................           362            144             82
                                                                                         --------       --------       --------
     Net cash flows provided by financing activities ..............................        45,954         19,930         25,408
     Increase (decrease) in cash and cash equivalents .............................        (2,110)         2,721          2,951
     Cash and cash equivalents at beginning of year ...............................         7,143          4,422          1,471
                                                                                         --------       --------       --------
     Cash and cash equivalents at end of year .....................................      $  5,033       $  7,143       $  4,422
                                                                                         ========       ========       ========
     SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Interest paid ................................................................      $    173       $    193       $    584
                                                                                         ========       ========       ========
     SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
     Conversion of bridge notes into Series D convertible  preferred stock ........      $      --      $     --       $  6,267
                                                                                         ========       ========       ========
     Deferred stock-based compensation ............................................      $  8,723       $    212       $     --
                                                                                         ========       ========       ========
     Series E preferred stock issued in connection with the
      acquisition of Academic Systems .............................................      $ 35,959       $     --       $     --
                                                                                         ========       ========       ========
     Common stock issued in connection with the acquisition of
       Academic Systems ...........................................................      $  4,711       $     --       $     --
                                                                                         ========       ========       ========
     Valuation of options and warrants issued in connection with
       the acquisition of Academic Systems ........................................      $  1,818       $     --       $     --
                                                                                         ========       ========       ========
     Additional consideration payable related to the acquisition of
       Academic Systems ...........................................................      $  5,341       $     --       $     --
                                                                                         ========       ========       ========
     Series E preferred stock issued for future advertising .......................      $    400       $     --       $     --
                                                                                         ========       ========       ========
     Series E preferred stock issued in connection with the acquisition of
       StudyWeb ...................................................................      $  1,085       $     --       $     --
                                                                                         ========       ========       ========
</TABLE>

                             See accompanying notes.

                                      F-6


<PAGE>   46




                                 LIGHTSPAN, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

   Lightspan, Inc. ("Lightspan") was founded in 1993. Lightspan was incorporated
as The Lightspan Partnership, Inc. 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 Sony
PlayStation(R) game console that the student uses to run the program at home
throughout the school year. The Lightspan Network is an online subscription
service that provides curriculum-based content for classroom and home use.

   The consolidated financial statements include the accounts of Lightspan and
its wholly owned subsidiary, Academic Systems ("Academic"). All intercompany
accounts and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

   Cash and cash equivalents consist of cash and highly liquid investments which
include debt securities with remaining maturities when acquired of three months
or less.

SHORT-TERM INVESTMENTS

     Short-term investments consist primarily of corporate fixed income
securities and commercial paper that mature within one year. Such assets are
carried at fair value, which is based on quoted market prices for such
securities. While it is Lightspan's general intent to hold such securities until
maturity, management will occasionally sell particular securities for cash flow
purposes. Therefore, Lightspan's investments are classified as
available-for-sale and are carried at fair value. Net unrealized holding losses
at January 31, 2000 were immaterial. There were no net unrealized holding losses
for the years ended January 31, 1999 and 1998.

CONCENTRATION OF CREDIT RISK

   Substantially all of Lightspan's accounts receivable are from school
districts located throughout the United States and Puerto Rico. Lightspan
provides for estimated losses from uncollectible accounts and such losses have
historically not exceeded management's expectations.

INVENTORY

   Inventory consists primarily of hardware and software and is stated at the
lower of cost (first in, first out method) or market.

DEFERRED COST OF REVENUES

   Deferred cost of revenue consists of costs incurred to duplicate and package
titles shipped for which revenue has been deferred. The deferral of these costs
commenced February 1, 1998, when Lightspan adopted AICPA Statement of Position
("SOP") 97-2, Software Revenue Recognition.

PROPERTY AND EQUIPMENT

   Property and equipment is stated at cost and depreciated or amortized over
the shorter of the estimated useful life of the related asset (two to five
years) or the term of the lease, using the straight-line method.


                                      F-7
<PAGE>   47

AMORTIZATION OF INTANGIBLE ASSETS

   Intangible assets consist of customer base, core technology, trademark and
trade name, assembled workforce and goodwill and are amortized over useful lives
ranging from three to ten years.

IMPAIRMENT OF LONG-LIVED ASSETS

   In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Lightspan regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. Lightspan has not identified any such impairment
losses to date.

FAIR VALUE OF FINANCIAL INSTRUMENTS

   Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and capital lease
obligations, are carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments. Short-term
investments, consisting primarily of corporate fixed income securities and
commercial paper that mature within one year, are carried at fair value which is
based on quoted market prices for such securities.

DEFERRED RENT

   Rent expense is recorded on a straight-line basis over the term of the lease.
The difference between rent expense accrued and amounts paid under the lease
agreements is recorded as deferred rent in the accompanying balance sheet.

REVENUE RECOGNITION

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

   In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, Lightspan allocates the total fee to each component of
the arrangement based on objective evidence of its fair value, which is specific
to Lightspan. The objective evidence for each element is based on the sale price
of each element when sold or offered for sale separately.

Software Licenses

   Lightspan sells its Lightspan Achieve Now licenses 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. From fiscal
1997 through fiscal 2000, a number of these titles were still under development
at various stages in the development cycle. 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 January 31, 2000, 72 of the 77 planned titles had
been completed and five of the 77 planned titles were still under development.

   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 January 31, 2000, these titles
are expected to be delivered by July 31, 2001.

   Prior to fiscal year 1999, Lightspan recognized revenue under AICPA Statement
of Position, or 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


                                       F-8
<PAGE>   48

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 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.

   Academic Systems 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. The licensing fee to colleges of $60 to $80
per student is approximately equal to an equivalent textbook. As Lightspan is
not contractually obligated to provide further service after delivery of the
license, Lightspan recognizes the full sales value of Academic Systems 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.

Customer Support

   Revenue derived from telephone support and maintenance arrangements provided
by the professional development organization is recognized ratably over the
one-year term of the support and maintenance period.

Product Implementation and Training Services

   Revenue derived from product implementation and customer training provided by
the professional development organization is recognized when services are
performed, in accordance with the standard implementation, training, service,
and evaluation plans that Lightspan establishes for its customers.

Internet Subscriptions

   Revenue derived from Internet subscriptions is recognized on a straight-line
basis over the term of the agreement (generally one year).

PlayStation Game Consoles and Related Accessories

   Revenue derived from the sale of PlayStation game consoles and related
accessories is recognized upon delivery of the console and the related software
product.

                                       F-9
<PAGE>   49

Deferred Revenue

   Payments received in advance of amounts earned are recorded as deferred
revenue in the accompanying financial statements.

ADVERTISING COSTS

   Advertising costs are expensed as incurred and were $449,000, $141,000 and
$170,000 for the years ended January 31, 2000, 1999 and 1998, respectively.

SOFTWARE DEVELOPMENT COSTS

   Software development costs are expensed as incurred until technological
feasibility has been established and a definitive decision has been made to
proceed with the commercial launch of the title. To date, these factors have not
been met until substantial completion of the title, and therefore software
development costs subsequent to technological feasibility have been
insignificant.

STOCK-BASED COMPENSATION

   As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Lightspan has elected to follow Accounting Principles Board Opinion, or APB, No.
25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for stock-based employee compensation. Under APB No. 25, if the
exercise price of Lightspan's employee and director stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expense is recognized. When the exercise price of the employee or
director stock options is less than the fair value of the underlying stock on
the grant date, Lightspan records deferred stock compensation for the difference
and amortizes this amount to expense in accordance with FASB Interpretation No.
28, or FIN 28, over the vesting period of the options. Options or stock awards
issued to non-employees are recorded at their fair value as determined in
accordance with SFAS No. 123 and EITF 96-18, and recognized over the related
service period.

COMPREHENSIVE INCOME

   In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, are reported net of their related tax effect, to arrive at
comprehensive income (loss). Net unrealized holding losses at January 31, 2000
were immaterial. There were no net unrealized holding losses for the years ended
January 31, 1999 and 1998.

SEGMENT REPORTING

    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. Lightspan adopted this new
standard as of January 31, 1999. See Note 10.

USE OF ESTIMATES

   The preparation of financial statements in conformity with generally accepted
accounting principles requires Lightspan management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.

RECLASSIFICATIONS

   Certain amounts in prior year financial statements have been reclassified to
conform with the current period presentation.


                                      F-10
<PAGE>   50

NET LOSS PER SHARE

   Lightspan computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98. Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Potentially dilutive securities composed of incremental common shares
issuable upon the exercise of stock options and warrants, and common shares
issuable on conversion of preferred stock, were excluded from historical diluted
loss per share because of their anti-dilutive effect.

   Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.

2. BALANCE SHEET DETAILS (IN THOUSANDS)

   Cash and cash equivalents consist of the following:

<TABLE>
<CAPTION>

                                                             JANUARY 31,
                                                        ------------------
                                                         2000        1999
                                                        ------      ------
<S>                                                     <C>         <C>
     Cash ........................................      $1,780      $  723
     U.S. Corporate master notes .................          --       3,425
     U.S. Corporate repurchase agreements ........          --       1,741
     Money market accounts .......................          71          28
     Commercial paper ............................       3,142          --
     U.S. Government repurchase
     agreements ..................................          --       1,226
     Certificates of deposit .....................          40          --
                                                        ------      ------
                                                        $5,033      $7,143
                                                        ======      ======
</TABLE>

   Short-term investments that mature in less than one year consist of the
following:

<TABLE>
<CAPTION>

                                         JANUARY 31,
                                    --------------------
                                      2000         1999
                                    -------        -----
<S>                                 <C>            <C>
     U.S. Corporate bonds ....      $ 2,265        $  --
     Commercial paper ........       13,867           --
                                    -------        -----
                                    $16,132        $  --
                                    =======        =====
</TABLE>



   Intangible assets consist of the following:

<TABLE>
<CAPTION>

                                               JANUARY 31,
                                        -------------------------
                                           2000            1999
                                        ---------       ---------
<S>                                     <C>             <C>
     Customer base ...............      $  16,200       $      --
     Core technology .............          5,600              --
     Trademark and trade name ....          3,000              --
     Assembled workforce .........          1,000              --
     Goodwill ....................         28,783              --
                                        ---------       ---------
                                           54,583              --
     Less accumulated
     amortization.................         (4,975)             --
                                        ---------       ---------
                                        $  49,608       $      --
                                        =========       =========
</TABLE>

   Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                                                    JANUARY 31,
                                                                                ---------------------
                                                                                 2000          1999
                                                                                -------       -------
<S>                                                                             <C>           <C>
                     Machinery and equipment .............................      $ 6,095       $ 4,340
                     Software ............................................          904           245
                     Office furniture and equipment ......................        1,532         1,186
                                                                                -------       -------
                                                                                  8,531         5,771
                     Less accumulated depreciation and amortization ......       (5,277)       (4,132)
                                                                                -------       -------
                                                                                $ 3,254       $ 1,639
                                                                                =======       =======
</TABLE>


                                      F-11

<PAGE>   51




   Accrued liabilities consist of the following:

<TABLE>
<CAPTION>

                                                       JANUARY 31,
                                                   ------------------
                                                    2000        1999
                                                   ------      ------
<S>                                                <C>         <C>
     Accrued bonuses and commissions ........      $4,604      $1,670
     Other accrued liabilities ..............       3,429       2,342
     Accrued vacation .......................       1,084         533
     Accrued cost of revenues ...............          22         334
                                                   ------      ------
                                                   $9,139      $4,879
                                                   ======      ======
</TABLE>


3. 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 our
private placements was approximately $113.4 million.

   Upon completion of the Offering, all of our outstanding preferred stock
converted into 27,087,826 shares of common stock and all of our outstanding
warrants to purchase preferred stock converted into warrants to purchase shares
of common stock.

4. BUSINESS COMBINATIONS

ACQUISITION OF ACADEMIC SYSTEMS CORPORATION

   On May 10, 1999, Lightspan entered into a merger agreement with Academic,
which sells and supports interactive multimedia learning systems, principally to
colleges and universities. In connection with the merger agreement which was
consummated on September 20, 1999, Lightspan issued 7,191,839 shares of Series E
convertible preferred stock, 570,356 shares of common stock, options to purchase
263,404 shares of common stock, and warrants to purchase 42,216 shares of Series
E convertible preferred stock, (which became warrants to purchase 21,108 shares
of common stock upon closing of the Offering) and agreed to pay $1,735,840 cash,
in exchange for all of the outstanding common and preferred shares of Academic
and all outstanding Academic options and warrants. The acquisition was accounted
for as a purchase.

   The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 per share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right"). The 263,404 options to purchase Lightspan common stock that were issued
to Academic optionholders were recorded at their fair value of $6.82 per share
in accordance with APB 16 with the fair value determined by the minimum value
method.

   Subsequent to September 20, 1999, the date the acquisition was consummated,
Lightspan determined that it will 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)
in early 2000 to certain Academic stockholders and recorded this amount as a
liability at year end. In March, Lightspan issued these shares to such
stockholders.

                                      F-12
<PAGE>   52

   The aggregate purchase price totaled $49,933,078, as follows:

<TABLE>
<CAPTION>

<S>                                                                           <C>
   Valuation of Series E convertible preferred stock issued..............     $  35,959,195
   Valuation of common stock issued......................................         4,711,141
   Issuance of cash pursuant to exercise of "put right"..................         1,734,306
   Valuation of options and warrants exchanged for Academic                       1,817,707
     options and warrants................................................
   Acquisition costs.....................................................           369,120
   Additional consideration issuable in Series E convertible
     preferred stock (common stock upon completion of the Offering)......         5,341,609
                                                                              -------------
   Aggregate purchase price..............................................     $  49,933,078
                                                                              =============
</TABLE>

   The purchase price was allocated to the assets acquired, consisting
principally of intangible assets and goodwill, which are being amortized over
useful lives ranging from four to ten years.

   The accompanying consolidated financial statements include the results of
operations of Academic since September 20, 1999, the date the acquisition was
consummated.

ACQUISITION OF GLOBAL SCHOOLHOUSE

   On September 2, 1999, Lightspan acquired certain assets of The Global
SchoolNet Foundation, principally consisting of the Web site
GlobalSchoolhouse.com, an education Web site designed to help teachers develop
and manage collaborative learning projects online, and related intellectual
property, for $2.5 million in cash. The acquisition was accounted for as a
purchase. The purchase price was allocated to the assets acquired, principally
intangible assets related to the Web site, which are being amortized over a
three-year useful life. The accompanying consolidated financial statements
include the results of operations of Global Schoolhouse since September 2, 1999.

ACQUISITION OF STUDYWEB

   On October 28, 1999, Lightspan acquired certain assets of American Computer
Resource, principally consisting of the Web site StudyWeb.com, a research
website designed to help parents, teachers and students find online educational
resources, and related intellectual property, for consideration of $1,000,000 in
cash and 217,000 shares of Series E convertible preferred stock, valued at $5.00
per share. The aggregate purchase price was $2,085,000. The acquisition was
accounted for as a purchase. The purchase price was allocated to the assets
acquired, principally intangible assets related to the Web site, which are being
amortized over a three-year useful life.

PRO FORMA FINANCIAL INFORMATION

   The following unaudited pro forma financial information assumes the
acquisitions of Academic, Global Schoolhouse and StudyWeb were consummated on
February 1, 1999 and 1998 (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                    YEARS ENDED JANUARY 31,
                                                                  ---------------------------
                                                                     2000             1999
                                                                  ----------       ----------
<S>                                                               <C>              <C>
      Revenues .............................................      $   22,644       $   17,246
      Net loss .............................................      $  (67,786)      $  (55,459)
      Historical net loss per share, basic and diluted .....      $   (16.56)      $   (16.37)
                                                                  ==========       ==========

      Pro forma net loss per share, basic and diluted ......      $    (2.34)      $    (2.13)
                                                                  ==========       ==========
</TABLE>


5. LINE OF CREDIT AND LEASE FINANCING

   Lightspan has a revolving line of credit with a bank which allows Lightspan
to borrow up to a maximum of the lesser of (a) 75% of eligible accounts
receivable (as defined) or (b) $10,000,000. The line of credit was renewed in
February 1999 and expires in April 2000, after which time we expect to
renegotiate the terms, and bears interest at the bank's prime rate plus 1.5%
(10.0% at January 31, 2000), payable monthly. The line of credit is
collateralized by substantially all of Lightspan's assets. The loan agreement
with the bank contains various covenants. As of January 31, 2000 and 1999, there
were no amounts outstanding under the line of credit.


                                      F-13
<PAGE>   53

   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 January 31, 2000, $504,000 was
available for future borrowing under this agreement.

   In connection with the acquisition of Academic Systems, Lightspan assumed a
note payable under a loan agreement with a bank. The note bears interest at the
bank's prime rate plus 0.5%. The principal balance due under the agreement at
January 31, 2000 was $172,000, which Lightspan paid in full with the proceeds
from the Offering in February 2000.

6. COMMITMENTS

   Lightspan leases its facilities under an operating lease agreement. The
facilities lease is subject to annual escalation provisions based upon the
Consumer Price Index.

   Cost of equipment acquired under capital leases totaled $1,779,000,
$3,697,000 and $4,615,000 and (and accumulated amortization totaled $1,100,000,
$2,648,000 and $2,657,000) at January 31, 2000, 1999 and 1998, respectively.
Facilities rent and operating lease expenses were $1,202,000, $1,303,000 and
$1,062,000 for the years ended January 31, 2000, 1999 and 1998, respectively.

   In addition, Lightspan subleases a portion of their facility for a period of
one year subject to one-year renewal options. Sublease income was $358,000,
$213,000 and $125,000 and for the years ended January 31, 2000, 1999 and 1998,
respectively.

   At January 31, 2000, future minimum lease payments for all leases with
initial terms of one year or more are as follows for each fiscal year ending
January 31 (in thousands):

<TABLE>
<CAPTION>

                                                               OPERATING        CAPITAL
                                                                 LEASES         LEASES
                                                               ---------      ---------
<S>                                                            <C>            <C>
   2001 .................................................      $   1,781      $     576
   2002 .................................................          1,721            307
   2003 .................................................          1,460            165
   2004 .................................................          1,013              8
                                                               ---------      ---------
   Total minimum lease payments .........................      $   5,975          1,056
                                                               =========
   Less amounts representing interest ...................                          (101)
                                                                              ---------
   Present value of future minimum lease payments .......                           955
   Less current portion of capital lease obligations ....                           512
                                                                              ---------
   Long-term capital lease obligations ..................                     $     443
                                                                              =========
</TABLE>



   In March 2000, Lightspan entered into a two-year lease of approximately
10,000 square feet for a portion of it operations at a monthly base rent of
$26,000.

7. STOCKHOLDERS' EQUITY (DEFICIT)

CONVERTIBLE PREFERRED STOCK

   At January 31, 2000, convertible preferred stock outstanding is as follows:

<TABLE>
<CAPTION>

               DATE ISSUED                SERIES  PRICE PER SHARE   NUMBER OF SHARES    LIQUIDATION VALUE
               -----------                ------  ---------------   ----------------    -----------------
<S>                                       <C>     <C>               <C>                 <C>
               December 1993..............  A         $ 1.00           7,135,000          $  7,135,000
               March 1994.................  A         $ 1.00             332,500               332,500
               February 1995..............  B         $ 3.00           5,833,336            17,500,008
               June 1995..................  B         $ 3.00           5,833,328            17,499,984
               September 1996.............  C         $ 6.00           3,264,285            19,585,710
               June 1997..................  D         $ 3.76           5,984,038            22,499,983
               March 1997.................  D         $ 3.76           1,666,689             6,266,751
               March 1998.................  D         $ 3.76           5,478,717            20,599,976
               July 1999..................  E         $ 5.00           5,294,183            26,470,915
               September 1999.............  E         $ 5.00           7,191,839            35,959,220
               October 1999...............  E         $ 5.00           4,217,000            21,085,000
                                                                      ----------          ------------
                                                                      52,230,915          $194,935,047
                                                                      ==========          ============
</TABLE>

                                      F-14
<PAGE>   54

   All series of preferred stock automatically converted into shares of common
stock at the then effective conversion price upon the closing of the Offering on
February 15, 2000.

   Upon the sale of Lightspan's common stock in the Offering, which closed on
February 15, 2000, warrants to purchase up to 2,760,160 shares of Series D
preferred stock at $.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 retained earnings an additional
$16,506,000 and increasing the carrying amount of common stock by a
corresponding amount. Such amount will also increase the net loss per share or
decrease the net income per share applicable to common stockholders in periods
including February 15, 2000.

STOCK OPTION PLAN

   In 1993, Lightspan adopted its 1993 Stock Option Plan, which was renamed the
2000 Equity Incentive Plan (the "Plan") upon the close of the Offering. Options
for common stock may be incentive stock options or non-statutory stock options
and are granted at the discretion of the Board of Directors. The Plan permits
immediate exercise of options with the unvested portion subject to repurchase by
Lightspan at the original exercise price, in the event of termination of
employment. Non-statutory stock options may be granted to employees, directors
and consultants whereas incentive stock options may be granted to employees and
directors only. The option price for incentive stock options shall not be less
than 100% of the fair value on the date of grant, and the option price of
non-statutory options shall not be less than 85% of the fair value on the date
of grant. The maximum term of options granted under the Plan is ten years.
Incentive stock options granted under the Plan are immediately exercisable in
full and generally vest at the rate of 25% after one year from the vesting
commencement date and 1/36 of the remaining shares every month thereafter.
Non-statutory stock options are immediately exercisable in full and generally
vest at the rate of 50% after one year from the vesting commencement date and
the remaining 50% after two years from such date.

   At January 31, 2000, Lightspan was authorized to issue 6,403,941 shares of
common stock to eligible employees, officers, directors and consultants under
the Plan, of which options to purchase 159,252 shares were available for future
grant at January 31, 2000.

ACADEMIC SYSTEMS 1992 STOCK OPTION PLAN

   Upon the closing of its acquisition of Academic Systems, Lightspan assumed
Academic Systems' 1992 Stock Option Plan. All options outstanding under the 1992
Stock Option Plan at the date of acquisition were converted into options to
purchase shares of Lightspan common stock, and are included in the summary
below. Lightspan no longer grants options under this plan.

   A summary of Lightspan's stock option activity and related information is as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                       YEARS ENDED JANUARY 31,
                                      ---------------------------------------------------------
                                            2000                1999                1998
                                      -----------------   -----------------   -----------------
                                               WEIGHTED            WEIGHTED            WEIGHTED
                                                AVERAGE             AVERAGE             AVERAGE
                                               EXERCISE            EXERCISE            EXERCISE
                                      OPTIONS    PRICE    OPTIONS    PRICE    OPTIONS    PRICE
                                      -------  --------   -------  --------   -------  --------
<S>                                   <C>      <C>        <C>      <C>        <C>       <C>
Outstanding -- beginning of year.....  1,783    $  .78     1,951    $  .60     1,859     $.54
  Granted............................  2,986    $ 5.48       518    $ 1.36       858     $.86
  Exercised..........................   (653)   $  .54      (265)   $  .54      (245)    $.34
  Forfeited..........................   (334)   $ 2.09      (421)   $  .80      (521)    $.94
                                      ------              ------              ------
Outstanding -- end of year...........  3,782    $ 4.16     1,783    $  .78     1,951     $.60
                                      ======              ======              ======
Exercisable at end of year...........    896               1,031                 968
                                      ======              ======              ======
Weighted average fair value of
  Options granted during the year...  $ 3.96              $  .30              $  .20
                                      ======              ======              ======

</TABLE>

                                      F-15


<PAGE>   55

   The following table summarizes information about stock options outstanding as
of January 31, 2000 (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                       OPTIONS OUTSTANDING
                                        -----------------------------------------------------       OPTIONS EXERCISABLE
                                                         WEIGHTED                               ----------------------------
                     RANGE OF                        AVERAGE REMAINING      WEIGHTED AVERAGE             WEIGHTED AVERAGE
                  EXERCISE PRICE        NUMBER        CONTRACTUAL LIFE       EXERCISE PRICE     NUMBER    EXERCISE PRICE
             -------------------        ------       -----------------      -----------------   ------   -------------------
<S>          <C>                        <C>          <C>                    <C>                 <C>      <C>
             $  .0000--  $1.0000           691              2.1               $    .7271           511       $    .7060
             $ 1.0001--  $2.0000           948              3.5               $   1.8960           320       $   1.8168
             $ 2.0001--  $3.0000           243              4.3               $   3.0000             4       $   3.0000
             $ 3.0001--  $4.0000           882              6.5               $   4.0000             8       $   4.0000
             $ 8.0001--  $9.0000           583              5.0               $   8.2600            51       $   8.2600
             $ 9.0001--  $10.0000          435              5.1               $  10.0000             2       $  10.0000
                                         -----                                                     ---
                                         3,782              4.4               $   4.1573           896       $   1.5911
                                         =====                                                     ===
</TABLE>

   Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if Lightspan had accounted for its employee stock options
under the fair value method of that statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing model
with the following weighted average assumptions for each of the years ended
January 31, 2000, 1999 and 1998, respectively: risk-free interest rates of
5.75%, 5.00% and 5.13%, respectively; dividend yields of 0%; and a
weighted-average expected life of the options of four to five years.

   The minimum value option pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because Lightspan's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options.
Lightspan's pro forma information is as follows (in thousands, except per share
data):

<TABLE>
<CAPTION>

                                                           YEARS ENDED JANUARY 31,
                                           -----------------------------------------------------
                                                2000                1999               1998
                                           --------------      --------------     --------------
<S>                                        <C>                 <C>                <C>
   Pro forma net loss..................    $      (57,236)     $      (33,626)    $      (27,547)
                                           ==============      ==============     ==============
   Pro forma historical net loss per
     share, basic and diluted..........    $       (13.98)     $        (9.93)    $        (8.67)
                                           ==============      ==============     ==============
</TABLE>


2000 EMPLOYEE STOCK PURCHASE PLAN

   In October 1999, we adopted the 2000 Employee Stock Purchase Plan (the
"Purchase Plan") whereby a total of 500,000 shares of common stock has been
reserved for issuance under the Purchase Plan. This share reserve shall
automatically increase each year, based upon a formula, by an amount not to
exceed 1% of our total outstanding common stock at the time of the automatic
increases. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
Under the Purchase Plan, the board may authorize participation by eligible
employees, including officers, in periodic offerings following the commencement
of the Purchase Plan.

   Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by Lightspan for at
least 20 hours per week and are customarily employed by Lightspan for at least 5
months per calendar year. Employees who participate in an offering may have up
to 15% of their earnings withheld pursuant to the Purchase Plan. The amount
withheld is then used to purchase shares of common stock equal to 85% of the
lower of the fair market value of the common stock at the commencement date or
the end of each offering period. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment.

   In the event of a merger, reorganization, consolidation or liquidation, the
board has discretion to provide that each right to purchase common stock will be
assumed or an equivalent right substituted by the successor corporation or the
board may provide for all sums collected by payroll deductions to be applied to
purchase stock immediately prior to such merger or other transaction. The

                                      F-16
<PAGE>   56
board has the authority to amend or terminate the Purchase Plan, provided,
however, that no such action may adversely affect any outstanding rights to
purchase common stock.

WARRANTS

   In connection with debt and equipment lease financing agreements entered into
at various dates, Lightspan issued a total of 749,605 warrants to purchase: up
to 150,000 shares of Series A preferred stock at $1.00 per share, up to 150,000
shares of Series B preferred stock at $3.00 per share, up to 96,625 shares and
57,564 shares of Series C preferred stock at $6.00 per share and $0.01 per
share, respectively, up to 183,105 shares and 127,659 shares of Series D
preferred stock at $3.76 and $4.70 per share, respectively, and up to 42,216
shares of Series E preferred stock at $5.00 per share. The warrants expire on
various dates commencing in 2002 through 2006.

   The warrants to purchase Series A through D preferred stock were valued at an
aggregate of $201,660, which was recorded as debt discounts and accreted into
interest expense over the life of the applicable financing agreements. The fair
value of the warrants were estimated at the dates of grant using the minimum
value method with the following assumptions: risk free interest rate of 6.00%;
an expected warrant life of two years; and no annual dividends. Interest expense
related to the accretion of the debt discounts totaled $140,151 for the year
ended January 31, 1998. There were no such amounts included in interest expense
for the years ended January 31, 1999 and 2000.

   In connection with the acquisition of Academic Systems Corporation
("Academic"), Lightspan converted 50,000 warrants to purchase Academic Series C
preferred stock originally issued in connection with lease financing into 8,000
warrants to purchase Lightspan Series E preferred stock; and 34,216 warrants to
purchase Academic Series F preferred stock originally issued in connection with
debt financing into 34,216 warrants to purchase Lightspan Series E preferred
stock. These warrants were valued at $1.25 per share and $.33 per share,
respectively, in accordance with APB 16, using the minimum value method, and
were accounted for as a part of the purchase price of Academic.

   Upon completion of the Offering, and taking into effect the reverse split in
January 2000, these 749,605 warrants to purchase Series A through E preferred
stock were converted, at their respective conversion rates, into warrants to
purchase 403,591 shares of common stock.

AGREEMENT WITH CINAR CORPORATION

   On October 29, 1999, Lightspan entered into an agreement with CINAR
Corporation ("CINAR") pursuant to which CINAR purchased 2.5 million shares of
Lightspan's Series E preferred stock, which converted into 1.25 million shares
of common stock upon completion of the Offering, at $5.00 per share and agreed
to purchase $10 million of Lightspan common stock, or 833,333 shares, in a
private placement that occurred concurrently with the Offering, at $12.00 per
share. Lightspan also granted CINAR a warrant to purchase 500,000 shares of
Lightspan's 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) that will vest upon the achievement of
various agreed-to strategic goals.

   Lightspan has accounted for the warrants in accordance with EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services. Specifically, the
shares that could be issued pursuant to the warrant will be valued the earlier
of a) the date at which a commitment for performance is reached or b) the date
at which CINAR's performance is complete (the "measurement date").

   Lightspan believes that it is unlikely that a performance commitment, as
described in EITF 96-18, will be reached until performance is complete.
Therefore, the measurement date will be the date of completion of performance
and accordingly, no expense had been recorded through January 31, 2000.

DEFERRED ADVERTISING EXPENSE

   On October 29, 1999, Lightspan issued 160,000 shares of Series E convertible
preferred stock to Liberty Digital Corporation in exchange for $400,000 in cash
and $800,000 in future Internet advertising credits. Lightspan determined that
the fair value of the shares issued ($5.00 per share) was more readily
determinable than the fair value of the advertising credits.

                                      F-17
<PAGE>   57

   As a result, Lightspan recorded the 160,000 shares issued at $800,000 and
recorded deferred advertising expense of $400,000. Lightspan will remeasure, and
expense, such amount as the advertising credits are utilized, in accordance with
EITF 96-18. As of January 31, 2000, the advertising credits have not been
utilized.

STOCK-BASED COMPENSATION

   Lightspan has recorded deferred compensation of $8,723,000 and $212,000 for
the years ended January 31, 2000 and 1999, respectively, in connection with the
grants of certain stock options to employees and consultants. Amortization of
deferred stock compensation was $3,704,000 and $20,000 and during the years
ended January 31, 2000 and 1999, respectively. In February, Lightspan recorded
an additional $56,000 in deferred compensation.

COMMON SHARES RESERVED FOR FUTURE ISSUANCE

   The following table summarizes common shares reserved for future issuance at
January 31, 2000:

<TABLE>
<CAPTION>

<S>                                                          <C>
     Convertible preferred stock...........................  27,087,826
     Convertible preferred stock warrants..................     403,591
     Common stock options..................................   5,203,715
     Employee stock purchase plan..........................     500,000
                                                             ----------
     Total common shares reserved for issuance.............  33,195,132
                                                             ==========
</TABLE>

   Upon completion of the Offering, all of our outstanding preferred stock
converted into 27,087,826 shares of common stock.

REVERSE STOCK SPLIT

   In January 2000, the Company completed a reincorporation in Delaware and a
one for two reverse stock split of its common stock. In addition, immediately
following the closing of the initial public offering, the certificate of
incorporation was amended to authorize the issuance of up to 250,000,000 shares
of common stock and 20,000,000 shares of preferred stock. Consequently, the
common stock and stock option data throughout the financial statements and notes
to the financial statements have been restated to reflect the stock split.

8. INCOME TAXES

   Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of
Lightspan's deferred tax assets are shown below (in thousands):

<TABLE>
<CAPTION>

                                                                         JANUARY 31,
                                                                  -----------------------
                                                                    2000           1999
                                                                  --------       --------
<S>                                                               <C>            <C>
     Deferred tax assets:
       Net operating loss carryforwards ....................      $ 51,574       $ 44,925
       Capitalized research expenses .......................         2,753          2,119
       Research and development credits ....................         4,247          3,257
       Other ...............................................         3,979          1,467
                                                                  --------       --------
     Total deferred tax assets .............................        62,553         51,768
       Valuation allowance for deferred tax assets .........       (52,346)       (51,768)
                                                                  --------       --------
     Net deferred tax assets ...............................        10,207             --
                                                                  --------       --------
     Deferred tax liabilities:
       Acquired intangibles ................................       (10,207)            --
                                                                  --------       --------
     Net deferred tax assets ...............................      $     --       $     --
                                                                  ========       ========
</TABLE>


                                      F-18
<PAGE>   58

   A reconciliation of income taxes at the statutory federal income tax rate to
the provision for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>

                                                                           YEARS ENDED JANUARY 31,
                                                                    --------------------------------------
                                                                      2000           1999           1998
                                                                    --------       --------       --------
<S>                                                                 <C>            <C>            <C>
     U.S. federal taxes at statutory rate ....................      $(18,945)      $(11,413)      $ (9,343)
                                                                      (3,843)        (2,014)        (1,649)
     State taxes, net of federal benefit
     Change in valuation allowance ...........................           578         12,543         12,164
     Other nondeductible expenses and
     expiration of net operating loss carryforwards, net .....        22,210            884         (1,172)
                                                                    --------       --------       --------
                                                                    $     --       $     --       $     --
                                                                    ========       ========       ========
</TABLE>


   A valuation allowance has been recognized to offset the deferred tax assets
because management cannot conclude that it is more likely than not that the
deferred tax assets will be realized.

   At January 31, 2000, Lightspan had federal and California net operating loss
carryforwards of approximately $141,741,000 and $34,171,000, respectively. The
difference between the federal and California tax loss carryforwards is
primarily attributable to capitalization of research expenses and limitations on
net operating losses for California tax purposes. The federal tax loss
carryforwards will begin expiring in 2008 unless previously utilized. Through
January 31, 2000, California tax loss carryforwards of $2,150,000 have expired,
and additional loss carryforwards will continue to expire in fiscal 2000.
Lightspan also has federal and California research and development tax credit
carryforwards of $3,263,000 and $1,515,000, respectively, which will begin
expiring in 2008 unless previously utilized.

   Pursuant to Internal Revenue Code Section 382 and 383, the use of Lightspan's
net operating loss and credit carryforwards could be limited in the event of a
cumulative change in ownership of more than 50%.

9. RETIREMENT PLAN

   Lightspan has a 401(k) defined contribution savings and retirement plan (the
"Retirement Plan"). The Retirement Plan is for the benefit of all qualifying
employees and permits employees voluntary contributions up to 20% of base salary
limited by the IRS imposed maximum. On January 1, 1999, Lightspan began matching
10% of employee contributions up to 4% of eligible compensation. Employer
contributions were $44,000 and $3,000 for the years ended January 31, 2000 and
1999, respectively.

10. REPORTABLE SEGMENTS

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, Sony
PlayStation game consoles and related accessories, and implementation, training
and support services. Revenues derived from the K-12 Internet segment primarily
include subscription fees for The Lightspan Network.

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.

FACTORS MANAGEMENT USED TO IDENTIFY LIGHTSPAN'S REPORTABLE SEGMENTS

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

                                      F-19
<PAGE>   59

FINANCIAL INFORMATION FOR LIGHTSPAN'S SEGMENTS

   Upon the purchase of Academic, Lightspan created a new Higher Education
segment, which is comprised solely of Academic. 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>

                                                                                 YEAR ENDED JANUARY 31, 1998
                                                             --------------------------------------------------------------------
                                                               LIGHTSPAN
                                                                ACHIEVE
                                                                  NEW           K-12 INTERNET      ELIMINATIONS      CONSOLIDATED
                                                             ------------       -------------      ------------      ------------
<S>                                                          <C>                <C>                <C>               <C>
     Revenues from external customers .................      $     22,020       $         289      $         --      $     22,309
     Inter segment revenues ...........................                --                  --                --                --
     Interest income (expense), net ...................              (503)                (24)               --              (527)
     Depreciation and amortization ....................             1,629                   8                --             1,637
     Segment loss from operations .....................           (25,681)             (1,270)               --           (26,951)
     Segment assets ...................................            13,926                 154                --            14,080
     Other significant non cash items:
       Deferred stock compensation ....................                --                  --                --                --
       Amortization of deferred stock compensation ....                --                  --                --                --
</TABLE>



<TABLE>
<CAPTION>


                                                                                 YEAR ENDED JANUARY 31, 1999
                                                             --------------------------------------------------------------------
                                                               LIGHTSPAN
                                                                ACHIEVE
                                                                  NEW           K-12 INTERNET      ELIMINATIONS      CONSOLIDATED
                                                             ------------       -------------      ------------      ------------
<S>                                                          <C>                <C>                <C>               <C>
     Revenues from external customers .................      $      9,846       $       1,024      $         --      $     10,870
     Inter segment revenues ...........................                --                  --                --                --
     Interest income (expense), net ...................               359                  58                --               417
     Depreciation and amortization ....................             1,297                  13                --             1,310
     Segment loss from operations .....................           (31,629)             (2,355)               --           (33,984)
     Segment assets ...................................            22,097                 469                --            22,566
     Other significant non cash items:
       Deferred stock compensation ....................               212                  --                --               212
       Amortization of deferred stock compensation ....                20                  --                --                20

</TABLE>

<TABLE>
<CAPTION>

                                                                                YEAR ENDED JANUARY 31, 2000
                                                        ---------------------------------------------------------------------------
                                                        LIGHTSPAN
                                                         ACHIEVE         K-12           HIGHER
                                                           NOW         INTERNET       EDUCATION      ELIMINATIONS     CONSOLIDATED
                                                        ---------      --------       ---------      ------------     ------------
<S>                                                     <C>          <C>              <C>            <C>               <C>
     Revenues from external customers ............      $  12,915      $  1,791       $   2,210      $         --      $  16,916
     Inter segment revenues ......................             --            --              --                --             --
     Interest income (expense), net ..............            200           293             (14)               --            479
     Depreciation and amortization ...............          1,062            32             100                --          1,194
     Segment loss from operations ................        (34,628)      (14,487)         (7,085)               --        (56,200)
     Segment assets ..............................         53,758           776          47,898                --        102,432
     Other significant non cash items:
       Deferred stock compensation ...............          5,361         3,138             224                --          8,723
       Amortization of deferred stock compensation          2,299         1,350              55                --          3,704
       Amortization of intangible assets .........             --           538           4,437                --          4,975

</TABLE>

11. 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, as defined by the agreement.

   During the year ended January 31, 1999, Lightspan recorded a charge of
approximately $1.1 million for anticipated settlement and legal costs related to
this case. During the year ended January 31, 2000, Lightspan recorded an
additional charge of approximately $467,000 to cover the remaining additional
costs pursuant to the settlement terms.

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<PAGE>   60

   As of January 31, 2000, Lightspan had paid approximately $958,000 in cash for
legal and settlement costs related to this case. Lightspan paid the remaining
settlement costs of $513,000 in February 2000. We expect to pay the remaining
legal costs of $107,000 within the first quarter of fiscal 2001.

12.   OTHER BUSINESS DEVELOPMENTS

   In December 1999, Lightspan entered into a 50-month agreement with a platform
provider expiring in February 2004. Based on the terms of the agreement,
Lightspan uses the platform provider's software and service standard platform to
enhance its own higher education programs. The terms of the agreement provide
for an initial platform fee of $450,000, additional license fees, service fees
and commissions on qualifying link sales. The initial fee of $450,000 relates to
the amount of the required fees, based on 10% of qualifying revenues over the
term of the agreement, beginning March 1, 2001. Lightspan is expensing the
initial platform fee over the term of the agreement as qualifying revenues are
recorded. To the extent that in any one year, certain qualifying revenues exceed
$150,000, Lightspan is obligated to pay additional license fees of 10% of
applicable revenues and expense such fees accordingly. Upon expiration, the
agreement is subject to annual renewals.

   In January 2000, Lightspan 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 their cable communities through its "Cable in the Classroom"
initiative which provides public schools with free basic cable service and
learning guides. As part of the agreement, Cox Communications purchased $12.5
million of Lightspan common stock, or 1,041,667 shares, in a private placement
that occurred concurrently with the Offering. Lightspan also granted Cox
Communications a warrant to purchase 750,000 shares of common stock. 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.

   Lightspan has accounted for the warrants in accordance with EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services. Specifically, the
shares that could be issued pursuant to the warrant will be valued the earlier
of a) the date at which a commitment for performance is reached or b) the date
at which Cox Communication's performance is complete (the "measurement date").

   Lightspan believes that it is unlikely that a performance commitment, as
described in EITF 96-18, will be reached until performance is complete.
Therefore, the measurement date will be the date of completion of performance
and accordingly, no expense has been recorded through January 31, 2000.

   Also, in January 2000, Gateway Companies, Inc. agreed to purchase $3.0
million of Lightspan common stock, or 250,000 shares, in a private placement
that occurred concurrently with the Offering. This investment by Gateway was
subject to the satisfaction of several conditions, including Lightspan jointly
entering into an Internet sponsorship agreement (the "Site Sponsorship
Agreement") whereby Gateway became a sponsor of Lightspan.com.

   In February 2000, Lightspan entered into the Site Sponsorship Agreement with
Gateway, a one year agreement whereby Lightspan will promote the products and
services of Gateway by providing certain online and offline exposure. In return,
Gateway will pay an annual fee of $500,000; $125,000 paid within 30 days of
execution of the agreement and the remaining paid thereafter in equal quarterly
installments. The Site Sponsorship Agreement is extended beyond one year if
certain online exposure requirements are not met and is renewable for an
additional year by Gateway.


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