<PAGE>   1
================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

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

                       For the period ended July 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)

                                 (858) 824-8000
              (Registrant's telephone number, including area code)


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

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

                                  COMMON STOCK
                              (Title of Each Class)

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


Number of shares of registrant's common stock outstanding as of August 31, 2000:
45,709,914



<PAGE>   2

                                INTRODUCTORY NOTE

      This Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q, as
filed by the Registrant on September 14, 2000, is being filed to amend the stock
based compensation expense in Items 1 and 2 from $351,000 to $704,000 and from
$1,252,000 to $1,640,000 for the three and six months ended July 31, 2000,
respectively, increasing basic and diluted loss per share from ($0.33) to
($0.34) and from ($0.32) to ($0.33) for the three and six months ended July 31,
2000, respectively. This Amendment No. 1 also amends the Registrant's segment
reporting. This Form 10-Q/A amends the Company's Form 10-Q as filed on September
14, 2000 only to the extent of the additions and information included in this
report.



                                       1

<PAGE>   3


                                 LIGHTSPAN, INC
                          QUARTERLY REPORT ON FORM 10-Q

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                                   PAGE
                                                                                                                   ----
<S>                                                                                                                <C>
PART I...........................................................................................................   3
       Item 1.   Condensed Consolidated Financial Statements.....................................................   3
       Item 2.   Management's Discussion and Analysis of Financial Condition and Operating Results...............   11
Signatures.......................................................................................................   22
</TABLE>

                                       2
<PAGE>   4
PART I. FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>

                                                                                                        JULY 31,      JANUARY 31,
                                                                                                         2000            2000
                                                                                                      -----------     ------------
                                                                                                      (UNAUDITED)        (NOTE)
      <S>                                                                                             <C>             <C>
      ASSETS
      Current assets:
        Cash and cash equivalents ...............................................................      $  83,129       $   5,033
        Short-term investments ..................................................................         18,374          16,132
        Accounts receivable, less allowance for doubtful accounts of
           $724 and $651 at July 31, 2000 and January 31, 2000, respectively ....................         18,984          15,683
        Finished goods inventory ................................................................          1,114           1,116
        Deferred cost of revenue -- Lightspan Achieve Now .......................................             --           8,709
        Other current assets ....................................................................          2,308           2,306
                                                                                                       ---------       ---------
               Total current assets .............................................................        123,909          48,979

      Property and equipment, net ...............................................................          4,014           3,254
      Deposits and other assets .................................................................            865             591
      Intangible assets, net ....................................................................         56,849          49,608
                                                                                                       ---------       ---------
               Total assets .....................................................................      $ 185,637       $ 102,432
                                                                                                       =========       =========
      LIABILITIES AND STOCKHOLDERS' EQUITY
      Current liabilities:
        Accounts payable ........................................................................      $   3,175       $   4,677
        Accrued liabilities .....................................................................          7,866           9,139
        Acquisition consideration payable .......................................................          2,000           5,341
        Deferred revenue -- Lightspan Achieve Now ...............................................             --          48,110
        Deferred revenue -- services and other ..................................................         11,323           7,022
        Current portion of note payable and capital lease obligations ...........................            499             684
                                                                                                       ---------       ---------
               Total current liabilities ........................................................         24,863          74,973
      Deferred rent .............................................................................            315             322
      Capital lease obligations, less current portion ...........................................            264             443
      Commitments
      Stockholders' equity:
        Preferred stock, par value $0.001:
          Authorized shares -- 20,000,000
          No shares issued and outstanding ......................................................             --              --
        Convertible preferred stock, par value $0.001:
          Authorized shares -- 0 and
            61,793,074 at July 31, 2000 and January 31,  2000, respectively
          Issued and outstanding shares -- 0 and
            52,230,915 at July 31, 2000 and January 31, 2000, respectively
          Aggregate liquidation preference -- $0 and
            $194,935 at July 31, 2000 and January 31, 2000, respectively ........................             --              52
        Common stock, par value $0.001:
          Authorized shares -- 250,000,000
          Issued and outstanding shares -- 45,599,187 and
            4,764,167 at July 31, 2000 and January 31, 2000, respectively .......................             46               5
        Additional paid-in capital ..............................................................        354,824         209,740
        Deferred advertising expense ............................................................             --            (400)
        Deferred compensation ...................................................................         (3,165)         (5,211)
        Accumulated other comprehensive loss ....................................................            (12)             --
        Accumulated deficit .....................................................................       (191,498)       (177,492)
                                                                                                       ---------       ---------
               Total stockholders' equity .......................................................        160,195          26,694
                                                                                                       ---------       ---------
               Total liabilities and stockholders' equity .......................................      $ 185,637       $ 102,432
                                                                                                       =========       =========
</TABLE>


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

                             See accompanying notes.


                                       3
<PAGE>   5


                                 LIGHTSPAN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                                              THREE MONTHS ENDED JULY 31,          SIX MONTHS ENDED JULY 31,
                                                             -----------------------------       -----------------------------
                                                                 2000              1999              2000              1999
                                                             -----------       -----------       -----------       -----------
  <S>                                                        <C>               <C>               <C>               <C>
  Revenues:
    Software licenses .................................      $    12,062       $        --       $    64,262       $        --
    Internet licenses .................................            2,928               431             3,651               841
    Services ..........................................            2,159             1,567             4,333             2,789
    Hardware ..........................................            1,744             2,168             2,897             3,171
    Other .............................................              231                --               390                --
                                                             -----------       -----------       -----------       -----------
            Total revenues ............................           19,124             4,166            75,533             6,801
  Cost of revenues:
    Software licenses .................................            2,508                --            12,033                --
    Internet licenses .................................              558               120               863               257
    Services ..........................................            1,197               763             2,106             1,367
    Hardware ..........................................            1,128             1,892             2,030             2,725
    Other .............................................               25                --                25                --
                                                             -----------       -----------       -----------       -----------
            Total cost of revenues ....................            5,416             2,775            17,057             4,349
                                                             -----------       -----------       -----------       -----------
  Gross profit ........................................           13,708             1,391            58,476             2,452

  Operating expenses:
    Technology and development ........................            6,900             2,380            12,034             4,458
    Sales and marketing ...............................           15,636             7,918            32,640            14,066
    General and administrative ........................            2,197             1,220             4,427             2,124
    Stock-based compensation ..........................              704               565             1,640               962
    Amortization of intangible assets .................            3,615                --             6,954                --
    Restructuring charge ..............................            1,600                --             1,600                --
                                                             -----------       -----------       -----------       -----------
            Total operating expenses ..................           30,652            12,083            59,295            21,610
                                                             -----------       -----------       -----------       -----------
  Loss from operations ................................          (16,944)          (10,692)             (819)          (19,158)
  Interest income .....................................            1,763                64             3,316               106
  Interest expense ....................................              (17)              (60)              (32)              (98)
                                                             -----------       -----------       -----------       -----------
    Net income (loss) .................................      $   (15,198)      $   (10,688)      $     2,465       $   (19,150)
  Preferred stock dividend ............................               --                --           (16,506)               --
                                                             -----------       -----------       -----------       -----------
    Net loss attributable to common stockholders ......      $   (15,198)      $   (10,688)      $   (14,041)      $   (19,150)
                                                             ===========       ===========       ===========       ===========
  Net loss per share:
    Basic and diluted .................................      $     (0.34)      $     (2.83)      $     (0.33)      $     (5.13)
                                                             ===========       ===========       ===========       ===========

    Weighted average shares -- basic and diluted ......           44,828             3,781            42,207             3,734
                                                             ===========       ===========       ===========       ===========
</TABLE>


                             See accompanying notes.

                                       4
<PAGE>   6
                                 LIGHTSPAN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                                      SIX MONTHS ENDED JULY 31,
                                                                                    -----------------------------
                                                                                       2000              1999
                                                                                    -----------       -----------
  <S>                                                                               <C>               <C>
  OPERATING ACTIVITIES:
      Net income (loss) ......................................................      $     2,465       $   (19,150)
      Adjustments to reconcile net  income (loss) to net cash used in
         operating activities:
          Depreciation and amortization ......................................              772               594
          Provision for doubtful accounts ....................................               73               250
          Amortization of intangible assets ..................................            6,954                --
          Amortization of deferred stock-based compensation ..................            1,640               962
          Change in deferred advertising expense .............................              300                --
          Restructuring charge, non-cash portion .............................            1,600                --
          Changes in operating assets and liabilities:
              Accounts receivable ............................................           (2,698)           (3,964)
              Inventory ......................................................                2               789
              Deferred cost of revenue .......................................            8,709            (2,308)
              Deposits and other assets ......................................             (260)              245
              Accounts payable ...............................................           (3,150)              275
              Deferred revenue ...............................................          (44,227)           13,679
              Accrued liabilities ............................................           (1,733)            1,178
                                                                                    -----------       -----------
                 Net cash flows used in operating activities .................          (29,553)           (7,450)
  INVESTING ACTIVITIES:
      Purchase of short-term investments .....................................          (13,946)               --
      Maturities of short-term investments ...................................           11,692                --
      Purchase of property and equipment .....................................           (1,328)             (649)
      Net cash paid for the acquisition of Edutest ...........................           (2,645)               --
      Net cash paid for the acquisition of LearningPlanet.com ................             (200)               --
                                                                                    -----------       -----------
                 Net cash flows used in investing activities .................           (6,427)             (649)
  FINANCING ACTIVITIES:
      Proceeds from issuance of preferred stock ..............................               --            26,385
      Proceeds from issuance of common stock .................................          113,694                --
      Proceeds from  capital leases ..........................................               --               266
      Principal repayments on capital leases .................................             (269)             (279)
      Principal repayments on notes payable ..................................             (172)               --
      Net proceeds from exercise of stock options ............................              823               154
                                                                                    -----------       -----------
                 Net cash flows provided by financing activities .............          114,076            26,526
                                                                                    -----------       -----------
      Increase in cash and cash equivalents ..................................           78,096            18,427
      Cash and cash equivalents at beginning of period .......................            5,033             7,143
                                                                                    -----------       -----------
      Cash and cash equivalents at end of period .............................      $    83,129       $    25,570
                                                                                    ===========       ===========
  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Interest paid ..........................................................      $        32       $        98
                                                                                    ===========       ===========
  SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
      Deferred stock-based compensation ......................................      $      (406)      $     7,782
                                                                                    ===========       ===========

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

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

      Issuance of common stock as preferred stock dividend ...................      $    16,506
                                                                                    ===========

      Issuance of common stock related to the acquisition of Edutest .........      $     9,000
                                                                                    ===========

      Additional consideration related to the acquisition of Edutest .........      $     2,000
                                                                                    ===========

      Issuance of common stock related to the acquisition of
        LearningPlanet.com ...................................................      $       150
                                                                                    ===========
</TABLE>

                             See accompanying notes.

                                       5

<PAGE>   7


                                 LIGHTSPAN, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

ORGANIZATION AND BUSINESS ACTIVITY

    Lightspan was founded in 1993. Lightspan was incorporated as The Lightspan
Partnership, Inc., completed a reincorporation in Delaware in January 2000 and
changed its name to Lightspan, Inc. on April 10, 2000. Lightspan provides
curriculum-based educational software and Internet products and services to
schools and school districts that are used both in school and at home. Lightspan
Achieve Now is an interactive CD-ROM-based software product for kindergarten
through eighth grade, or K-8, that covers the core curriculum of language arts,
reading and math. The Lightspan Achieve Now program typically includes the
Lightspan Achieve Now software and a PlayStation(R) game console that the
student uses to run the program at home throughout the school year. Academic
software is a CD-ROM-based product that serves the college market with an
English and mathematics curriculum designed to meet the needs of under-prepared
students. AcademicOnline 2000 is the Web-enhanced Interactive Mathematics and
Interactive English product line which colleges may implement using client
workstations that are located solely within an intranet, solely on the Internet
(a distance learning configuration), or with a combination of intranet and
Internet-based workstations. Academic.com is a complete Internet-based product
offering that helps faculty create, manage and teach courses online and offers a
complete suite of Internet-based instructional tools, content and services. The
Lightspan Network is an online subscription service that provides
curriculum-based content for classroom and home use. Edutest offers a
combination of online assessment products and proprietary test questions,
eduTest@School and eduTest@School Plus, covering language arts, mathematics,
history and science, allowing educators to assess their students' progress in
the classroom. The results can be analyzed at the school district level, the
school level, and the classroom level.

REVENUE RECOGNITION

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

    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.

                                        6
<PAGE>   8

    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, 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 titles had been
completed and five of the 77 titles were still under development.

    As of April 30, 2000, the Company completed and shipped all Lightspan
Achieve Now titles in all grade clusters used on the PlayStation game console,
and grade cluster K through 2 used on a PC platform, resulting in the
recognition of $46,447,000 of revenue previously deferred pursuant to SOP 97-2
as discussed below. During the three months ended April 30, 2000, the Company
also deferred revenue of $380,000 relating to the shipment of Lightspan Achieve
Now licenses in the as-yet uncompleted grades 3 through 4 and grades 5 through 8
grade clusters used on a PC platform. In July 2000, the Company completed and
shipped the remaining titles in grade clusters 3 through 4 and 5 through 8 used
on a PC platform. This resulted in the recognition of the remaining deferred
revenue balance of $2,048,000 and the related cost of revenue balance of
$370,000.

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

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

    On February 1, 1998, Lightspan adopted the provisions of SOP 97-2, Software
Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of
Certain Provisions of SOP 97-2. Under SOP 97-2, Lightspan recognizes software
license revenue when (i) an agreement has been executed or a definitive purchase
order has been received; (ii) the product has been shipped or services have been
performed; (iii) the fee has become fixed and determinable; (iv) the collection
of the fee is considered probable; (v) the related hardware, if applicable, has
been shipped, and (vi) when all titles for a given grade cluster have been
delivered to its customers. In early 1998, Lightspan began providing customers
with a specific list of titles which were planned to be eventually provided to
the customers, as well as the projected delivery dates for these titles. Prior
to April 30, 2000, Lightspan deferred all revenue recognition for Achieve Now
licenses, since objective fair values of individual as-yet uncompleted titles
could not be determined and used to allocate the license fee to the individual
titles as they were shipped.

    In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. Currently, the Company anticipates adopting SAB 101 in the fourth
quarter of fiscal 2001. SAB 101 requires, among other things, that license and
other up-front fees be


                                       7
<PAGE>   9

recognized over the term of the agreement, unless the fees are in exchange for
products delivered or services performed that represent the culmination of a
separate earnings process. The Company currently recognizes revenue in
compliance with SAB 101 and does not expect the adoption to have a material
effect on the Company's financial position and results of operation.

    Academic curriculum products are licensed to colleges and then sold by the
licensing colleges to students on a student-by-student basis for use with each
class, instead of a textbook. As Lightspan is not contractually obligated to
provide further service after delivery of the license, Lightspan recognizes the
full sales value of Academic software license revenue upon completion of the
above criteria defined by SOP 97-2.

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


2.  BUSINESS COMBINATIONS

    ACQUISITION OF EDUTEST, INC.

    On May 24, 2000, Lightspan entered into a merger agreement with Edutest,
which offers a combination of online assessment products and proprietary test
questions covering language arts, mathematics, history and science, allowing
educators to assess their students' progress in the classroom. In connection
with the merger agreement, which was consummated on June 23, 2000, Lightspan
paid $2.4 million in cash, $1,308,946 of which was paid to Edutest common
shareholders and the remaining $1,053,554 of which was paid in satisfaction of
various obligations of Edutest. Lightspan also issued 1,028,543 shares of common
stock valued at $9.0 million, with a potential for up to an additional 228,561
hold-back shares valued at $2.0 million over the next 18 months and up to an
additional $2.0 million in stock over the subsequent 12 months based upon
certain revenue based performance criteria, in exchange for all of the
outstanding common and preferred shares of Edutest. The acquisition was
accounted for as a purchase.

     The aggregate purchase price, including the 228,561 hold-back shares valued
at $2.0 million and excluding the $2.0 million in earnout payments, totaled
$13,649,835 as follows:

<TABLE>
<CAPTION>

<S>                                                           <C>
Valuation of common stock issued .......................      $ 9,000,000
Valuation of hold-back shares ..........................        2,000,000
Acquisition costs ......................................          287,335
Cash paid to Edutest shareholders ......................        1,308,946
Cash paid in satisfaction of certain Edutest liabilities        1,053,554
                                                              -----------
Aggregate purchase price ...............................      $13,649,835
                                                              ===========
</TABLE>

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

    ACQUISITION OF LEARNINGPLANET.COM

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


                                       8
<PAGE>   10

PRO FORMA FINANCIAL INFORMATION

     The following unaudited pro forma financial information assumes the
acquisitions of Edutest and LearningPlanet.com were consummated on February 1,
2000 and 1999 (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                       THREE MONTHS ENDED JULY 31,           SIX MONTHS ENDED JULY 31,
                                                     --------------------------------      -----------------------------
                                                          2000               1999               2000            1999
                                                     -------------      -------------      -------------   -------------
<S>                                                  <C>                <C>                <C>             <C>
Revenues ......................................      $      19,334      $       4,286      $      76,066   $       7,038
Net loss ......................................      $     (16,326)     $     (12,197)     $     (17,072)  $     (22,105)
Net loss per share, basic and diluted .........      $       (0.36)     $       (2.54)     $       (0.40)  $       (4.65)
                                                     =============      =============      =============   =============
</TABLE>

3.  STOCKHOLDERS' EQUITY

    Upon the completion of Lightspan's initial public offering of common stock
in February 2000, warrants to purchase up to 2,760,160 shares of Series D
preferred stock at $0.02 per share (the "Springing Warrants") converted into
warrants to purchase up to 1,380,080 shares of common stock and were
automatically exercised, resulting in the issuance of 1,377,762 shares of common
stock. As a result, on February 15, 2000, Lightspan accounted for the intrinsic
value of the Springing Warrants as a preferred stock dividend of $16,506,000.

DEFERRED ADVERTISING EXPENSE

    On October 29, 1999, Lightspan issued 160,000 shares of Series E convertible
preferred stock (which converted into 80,000 shares of common stock upon the
completion of the Company's initial public offering) 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.

    As a result, Lightspan recorded the 160,000 shares issued at $800,000 and
recorded deferred advertising expense of $400,000. During the three months ended
July 31, 2000, Lightspan remeasured the value of the shares in accordance with
EITF 96-18 and expensed $300,000, as the advertising credits were utilized. The
remaining $100,000 of deferred advertising credits were expensed as a part of
the Company's restructuring (See Note 6).

4.  COMPREHENSIVE INCOME (LOSS)

    For the three months ended July 31, 2000 and 1999, comprehensive loss was
$15,188,000 and $10,688,000, respectively. For the six months ended July 31,
2000 and 1999, comprehensive income (loss) was $2,454,000 and ($19,150,000),
respectively. The difference between net income (loss) and comprehensive income
(loss) for the three and six months ended July 31, 2000 was due to net
unrealized gains (losses) on available-for-sale securities of $10,000 and
($12,000), respectively. There were no net unrealized holding losses for the
three and six months ended July 31, 1999.

5.  REPORTABLE SEGMENTS

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

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

    Lightspan has two reportable segments: K-12 and Higher Education. Revenues
derived from the K-12 segment include the sale of Lightspan Achieve Now software
licenses, subscription fees for The Lightspan Network and Edutest products,
implementation, training and support services and hardware and related
accessories. Revenues

                                       9
<PAGE>   11

derived from the Higher Education segment, comprised solely of Academic which
was acquired in September 1999, include the sale of curriculum products licensed
to colleges and then sold by the licensing colleges to students on a
student-by-student basis for use with each class.

MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

    Lightspan evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.

FACTORS MANAGEMENT USED TO IDENTIFY LIGHTSPAN'S REPORTABLE SEGMENTS

    Lightspan's reportable segments are business units that offer different
products and services. Prior to the end of fiscal year 2001, and due to the
Company's restructuring in July 2000 and as the Company has focused on selling
its software and fee-based subscription Internet products and services together,
Lightspan re-evaluated its reportable segments and combined the Achieve Now and
K-12 Internet segments, previously reported as separate segments, into the K-12
segment.

FINANCIAL INFORMATION FOR LIGHTSPAN'S SEGMENTS

    The Company's Higher Education segment remains solely comprised of Academic.
The following information is for the K-12 and Higher Education segments (in
thousands):

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED JULY 31, 2000
                                                         -------------------------------------------
                                                                          HIGHER
                                                            K-12         EDUCATION      CONSOLIDATED
                                                         ---------       ---------      ------------
<S>                                                      <C>             <C>             <C>
Revenues from external customers ..................      $  15,295       $   3,829       $  19,124
Inter segment revenues ............................             --              --              --
Interest income (expense), net ....................          1,744               2           1,746
Depreciation and amortization .....................            335              76             411
Restructuring charge ..............................          1,600              --           1,600
Segment  (loss) from operations ...................        (13,117)         (3,827)        (16,944)
Segment assets ....................................        149,535          36,102         185,637
Other significant non cash items:
  Deferred stock compensation .....................           (347)            (15)           (362)
  Amortization of deferred stock compensation .....            686              18             704
  Amortization of intangible assets ...............            792           2,823           3,615
</TABLE>


<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED JULY 31, 1999
                                                         -----------------------------------
                                                                      HIGHER
                                                           K-12      EDUCATION  CONSOLIDATED
                                                         --------    ---------  ------------
<S>                                                      <C>         <C>        <C>
Revenues from external customers ..................      $  4,166       $--      $  4,166
Inter segment revenues ............................            --        --            --
Interest income, net ..............................             4        --             4
Depreciation and amortization .....................           305        --           305
Segment loss from operations ......................       (10,692)       --       (10,692)
Segment assets ....................................        45,770        --        45,770
Other significant non cash items:
  Deferred stock compensation .....................         5,535        --         5,535
  Amortization of deferred stock compensation .....           565        --           565
  Amortization of intangible assets ...............            --        --            --
</TABLE>


                                       10
<PAGE>   12

<TABLE>
<CAPTION>
                                                             SIX MONTHS ENDED JULY 31, 2000
                                                        -------------------------------------------
                                                                         HIGHER
                                                           K-12         EDUCATION      CONSOLIDATED
                                                        ---------       ---------      ------------
<S>                                                     <C>             <C>             <C>
Revenues from external customers .................      $  70,577       $   4,956       $  75,533
Inter segment revenues ...........................             --              --              --
Interest income (expense), net ...................          3,285              (1)          3,284
Depreciation and amortization ....................            619             153             772
Restructuring charge .............................             --              --           1,600
Segment income (loss) from operations ............          8,705          (9,524)           (819)
Segment assets ...................................        149,535          36,102         185,637
Other significant non cash items:
  Deferred stock compensation ....................           (385)            (21)           (406)
  Amortization of deferred stock compensation ....          1,593              47           1,640
  Amortization of intangible assets ..............          1,173           5,781           6,954
</TABLE>


<TABLE>
<CAPTION>
                                                          SIX MONTHS ENDED JULY 31, 1999
                                                        -----------------------------------
                                                                    HIGHER
                                                          K-12     EDUCATION   CONSOLIDATED
                                                        --------   ---------   ------------
<S>                                                     <C>        <C>         <C>
Revenues from external customers .................      $  6,801       $--      $  6,801
Inter segment revenues ...........................            --        --            --
Interest income, net .............................             8        --             8
Depreciation and amortization ....................           594        --           594
Segment loss from operations .....................       (19,158)       --       (19,158)
Segment assets ...................................        45,770        --        45,770
Other significant non cash items:
  Deferred stock compensation ....................         7,782        --         7,782
  Amortization of deferred stock compensation ....           962        --           962
  Amortization of intangible assets ..............            --        --            --
</TABLE>


6.  RESTRUCTURING

    In July 2000, the Company completed a restructuring plan designed to refocus
its sales and marketing efforts away from its free Internet products and toward
its subscription-based Internet products such as The Lightspan Network,
eduTest@School and eduTest@School Plus, which resulted in a $1.6 million charge.
The restructuring charge included $1.2 million in involuntary termination
benefits relating to a planned termination of 14 employees. As of August 31,
2000, the Company terminated the 14 employees. The Company also accrued exit
costs of $0.4 million in expenses relating to contractual obligations for
services associated with its free Internet site that will no longer be used to
generate revenue for the Company. The Company anticipates paying the remaining
involuntary termination benefits and exit costs through the first quarter of
fiscal 2003.

7.  RECENT PRONOUNCEMENTS

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


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

    This information should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements


                                       11
<PAGE>   13

and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended January 31, 2000
contained in our Annual Report on Form 10-K/A filed May 11, 2000 with the SEC.


    Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our future results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include risks
detailed in this section, "Liquidity and Capital Resources," and in our Annual
Report on Form 10-K/A filed May 11, 2000 with the SEC.

OVERVIEW

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

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

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

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

    -   Global Schoolhouse, a 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;

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

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

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

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

    -   selected additional content for teachers, parents and students.


                                       12
<PAGE>   14

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

    We commenced operations in September 1993, and through June 1996 our
activities consisted primarily of designing and developing Lightspan Achieve
Now. In January 1996, we released our Lightspan Achieve Now curriculum for use
on Windows-based personal computers. In the fall of that year, we released the
product for use on the PlayStation game console. To supplement our product
offerings, we introduced The Lightspan Network in January 1997 and we launched
Lightspan PageOne in June 1999. We acquired Academic and Global Schoolhouse in
September 1999, and StudyWeb in October 1999. We also introduced Lightspan.com
in September 1999, and enhanced it in October 1999 with the Lightspan Learning
Store and in February 2000, with Your School Online and Your Class Online, the
successor to Lightspan PageOne. In May 2000, we acquired LearningPlanet.com, and
in June 2000, we acquired Edutest. In August 2000, we introduced Lightspan
Achieve Now version 2.0.

REVENUE RECOGNITION

    Effective February 1, 1998, we adopted SOP 97-2, as described in Note 1 of
the "Notes to Consolidated Financial Statements", which caused a substantial
change in our revenue recognition for Lightspan Achieve Now licenses. Under SOP
97-2, we were unable to recognize any Lightspan Achieve Now license fees as
revenue until we shipped the final title which we planned to provide to all
existing customers for no additional charge. Therefore, we have deferred revenue
recognition for all Lightspan Achieve Now licenses shipped in the years ended
January 31, 2000 and 1999. Through July 31, 2000, we completed and shipped all
Lightspan Achieve Now titles resulting in the recognition of $48.1 million of
revenue previously deferred. As we have completed and shipped all Lightspan
Achieve Now titles, we are now able to recognize revenue from Lightspan Achieve
Now licenses upon shipment.

    To the extent that we deferred the Lightspan Achieve Now license revenue
until delivery of final titles, pursuant to SOP 97-2, we also deferred the costs
of duplicating the product and packaging it for distribution. In the six months
ended July 31, 2000, we recognized $8.7 million in cost of license revenue when
we recognized the related $48.1 million in revenue.

    The following table shows the activity in license revenue and cost of
license revenue deferred pursuant to SOP 97-2 for the three and six months ended
July 31, 2000 and 1999, respectively, (in thousands):


<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED JULY 31,    SIX MONTHS ENDED JULY 31,
                                                     ---------------------------    -------------------------
                                                        2000           1999            2000           1999
                                                      --------       --------        --------       --------
<S>                                                   <C>            <C>             <C>            <C>
DEFERRED LICENSE REVENUE- ACHIEVE NOW
  Beginning balance ............................      $  2,048       $ 24,295        $ 48,110       $ 20,717
  Deferred during the period ...................            --          8,763             384         12,341
  Recognized during the period .................        (2,048)            --         (48,494)            --
                                                      --------       --------        --------       --------
    Ending balance .............................      $      0       $ 33,058        $      0       $ 33,058
                                                      ========       ========        ========       ========
DEFERRED COST OF LICENSE REVENUE- ACHIEVE NOW
  Beginning balance ............................      $    371       $  4,206        $  8,709       $  3,555
  Deferred during the period ...................            --          1,657              70          2,308
  Recognized during the period .................          (371)            --          (8,779)            --
                                                      --------       --------        --------       --------
    Ending balance .............................      $      0       $  5,863        $      0       $  5,863
                                                      ========       ========        ========       ========
</TABLE>


RESULTS OF OPERATIONS

    Operating Losses. We have incurred significant losses since our inception
and, as of July 31, 2000, have an accumulated deficit of approximately $191.1
million. We expect to continue to incur operating losses for the foreseeable
future. In July 2000, we recorded a $1.6 million restructuring charge related to
a refocus of our sales and marketing efforts away from our free Internet
products and toward our subscription-based Internet products


                                       13
<PAGE>   15

such as The Lightspan Network, eduTest@School and eduTest@School Plus. Also, in
the six months ended July 31, 2000, we completed and shipped the remaining
Lightspan Achieve Now titles used on a PC platform and the PlayStation game
console, recognizing $48.1 million in previously deferred revenue pursuant to
SOP 97-2, resulting in an operating loss of $0.8 million. The operating results
in the first two quarters of fiscal 2001 are not indicative of our underlying
business in these quarters, and will not be indicative of results that may be
expected for any subsequent quarter, for the full year ending January 31, 2001
or for any future periods.

COMPARISON OF THREE AND SIX MONTHS ENDED JULY 31, 2000 AND 1999

REVENUES

    We generate software and Internet license revenue, service revenue, hardware
revenue and other revenue. Our total revenues increased to $19.1 million for the
three months ended July 31, 2000 from $4.2 million for the three months ended
July 31, 1999. The increase of $15.0 million was a result of a $14.6 million
increase in license revenues ($2.0 million of which was due to the recognition
of revenue previously deferred), and increases of $0.6 million in service
revenue and $0.2 million in other revenue, offset by a $0.4 million decrease in
hardware revenue, as described below. Our total revenues increased to $75.5
million for the six months ended July 31, 2000 from $6.8 million for the six
months ended July 31, 1999. The increase of $68.7 million was a result of the
recognition of $48.1 million in revenue previously deferred, an additional $19.0
million increase in additional software license revenue for licenses sold during
the period, and increases of $1.5 million in service revenue and $0.4 million in
other revenue, offset by a $0.3 million decrease in hardware revenue, as
described below.

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

    In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, we allocate the total fee to each component of the
arrangement based on objective evidence of its fair value, which is specific to
us. The objective evidence for each element is based on the respective list
prices of each element when sold or offered for sale separately. Historically,
we have not experienced customer cancellations, forfeitures or discontinuations
of licenses. Our revenues from sales of Lightspan Achieve Now consist of
license, service and hardware revenues, although from February 1, 1998 through
July 31, 2000, we had deferred recognition of certain license revenues, as
described above in "Revenue Recognition".

    Our total license revenues grew to $15.0 million for the three months ended
July 31, 2000 from $0.4 million for the three months ended July 31, 1999. The
$14.6 million increase related to the recognition of $8.3 million in Lightspan
Achieve Now licenses shipped in the three months ended July 31, 2000, our
recognition of $2.0 million in revenue from the sale of Lightspan Achieve Now
revenue previously deferred pursuant to SOP 97-2, $3.8 million in revenue from
sales of Academic software and Internet licenses, $0.4 million increase in
revenues from sales of subscriptions for The Lightspan Network and $0.1 million
in revenues from sales of eduTest.com licenses.

    Our total license revenue grew to $67.9 million for the six months ended
July 31, 2000 from $0.8 million for the six months ended July 31, 1999. The
$67.1 million increase related to our recognition of $48.1 million of Lightspan
Achieve Now revenue previously deferred pursuant to SOP 97-2, the recognition of
$13.2 million in revenue from the sale of Lightspan Achieve Now licenses shipped
in the six months ended July 31, 2000, $4.9 million in revenue from sales of
Academic licenses, $0.8 million increase in revenues from sales of subscriptions
for The Lightspan Network and $0.1 million in revenues from sales of eduTest.com
licenses.

    Due to our adoption of SOP 97-2 on February 1, 1998, we did not record any
license revenues related to Lightspan Achieve Now in fiscal 2000 or 1999. In the
three months ended July 31, 2000, we completed and shipped the remaining
Lightspan Achieve Now titles in all grade clusters used on both the PlayStation
game console


                                       14
<PAGE>   16

and on a PC platform, resulting in the recognition of $2.0 million of revenue
previously deferred, pursuant to SOP 97-2. During the three months ended July
31, 2000, we also shipped and recognized Lightspan Achieve Now licenses in the
amount of $8.3 million. This represented a 6% decrease over $8.8 million in
shipments which were entirely deferred for the three months ended July 31, 1999.
This decrease was due to lost sales attributable to customer concerns over
possible delivery delays of PlayStation game consoles and greater than expected
sales of Internet subscriptions. During the six months ended July 31, 2000, we
recognized Lightspan Achieve Now license revenue in the amount of $13.2 million.
This represented an 8% increase in revenue over $12.3 million in revenue which
was entirely deferred for the six months ended July 31, 1999. This increase was
due to increased sales and marketing efforts, continued market acceptance of our
products and expansion of our existing customer base, offset in part by lost
sales due to customer concerns described above.

    Our total license revenues also increased due to $3.8 million and $4.9
million in revenue from Academic licenses for the three and six months ended
July 31, 2000, respectively. Academic license revenue consists of software
license revenue and Internet license revenue. Academic software license revenue
was $1.8 million and $2.9 million for the three and six months ended July 31,
2000, respectively. Academic Internet license revenue was $2.0 million for the
three and six months ended July 31, 2000. Academic software curriculum products
are licensed to colleges and then sold by the licensing colleges to students on
a student-by-student basis for use with each class, instead of a textbook. As we
are not contractually obligated to provide further service after delivery of the
license, we recognize the full sales value of Academic license revenue upon
completion of the criteria defined in SOP 97-2. In the quarter ended July 31,
2000, we began selling Academic's Web-enhanced product line, AcademicOnline
2000, and began delivering Academic licenses over the Blackboard platform,
Academic.com. For AcademicOnline 2000 and Academic.com licenses, as we are not
contractually obligated to provide further service after delivery of the
license, we recognize the sales value of license revenue upon completion of the
above criteria defined by SOP 97-2. If customers choose not to host
Academic.com, we also charge a hosting fee and recognize the hosting revenue
over the term of the agreement.

    Our revenues from subscription fees for The Lightspan Network increased 107%
to $0.9 million for the three months ended July 31, 2000 from $0.5 million for
the three months ended July 31, 1999 and increased 92% to $1.6 million for the
six months ended July 31, 2000 from $0.8 million for the six months ended July
31, 1999. This was due primarily to an increase in the number of subscribers to
The Lightspan Network resulting from the increased focus of our sales force on
promoting The Lightspan Network. We recognize revenue from subscriptions to The
Lightspan Network ratably over the term of the subscription agreement.
Subscription licenses are for a one-year term, and are paid in advance. Amounts
received in excess of revenue that is recognized are recorded as deferred
revenue.

    Our revenues from sales of eduTest.com licenses were $0.1 million from June
23, 2000, the date of our acquisition of Edutest, through July 31, 2000. We
recognize revenue from eduTest.com licenses ratably over the term of the license
agreement. Licenses are for a one-year term, and are paid in advance. Amounts
received in excess of revenue that is recognized are recorded as deferred
revenue.

    Service Revenues. Our service revenues increased 38% to $2.2 million for the
three months ended July 31, 2000 from $1.6 million for the three months ended
July 31, 1999 due primarily to an hourly increase in the service billing rate
and an increased focus on sales of additional services, partially offset by a 6%
decrease in sales of Lightspan Achieve Now licenses shipped and the related
decrease in services. Our service revenues increased 55% to $4.3 million for the
six months ended July 31, 2000 from $2.8 million for the six months ended July
31, 1999 due primarily to the above increases and an 8% increase in Lightspan
Achieve Now licenses shipped and the related increase in services. 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 agreements.


                                       15
<PAGE>   17

    Hardware Revenues. Our hardware revenues decreased 20% to $1.7 million for
the three months ended July 31, 2000 from $2.1 million for three months ended
July 31, 1999 and decreased 9% to $2.9 million for the six months ended July 31,
2000 from $3.2 million for six months ended July 31, 1999. This was due to a
decrease in our Lightspan Achieve Now curriculum licenses shipped in the three
months ended July 31, 2000 and related hardware, due to lost sales attributable
to customer concerns over possible delivery delays of PlayStation game consoles.
Additionally, in the three months ended July 31, 2000, under our refurbish
program, we sold refurbished PlayStation game consoles at a discount from the
original price and included related accessories at no additional charge,
contributing to the decrease in hardware revenues. We derive hardware revenues
from the sale of the PlayStation game console and accessories. We recognize
hardware revenues after a definitive purchase order has been received, the
product has been shipped and collection of the sales price is considered
probable. Substantially all of our Lightspan Achieve Now customers also purchase
the PlayStation game console.

    Other Revenues. Other revenue for the three and six months ended July 31,
2000 was $0.2 million and $0.4 million, respectively. We derive other revenues
from site sponsorship agreements, beginning in February 2000, whereby we provide
certain online exposure by promoting the products and services of site sponsors
on our Lightspan.com Web site. We also provide other offline exposure such as
providing name or logo placement on selected Lightspan.com consumer and trade
advertising and giving site sponsorship credits at technology and education
trade shows we participate in throughout the terms of the site sponsorship
agreements. We recognize site sponsorship revenue over the term the services are
provided.

COST OF REVENUES

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

    Our cost of revenues increased to $5.4 million for the three months ended
July 31, 2000 from $2.8 million for the three months ended July 31, 1999. The
$2.6 million increase was due to an increase of $2.6 million in cost of license
revenues shipped in the six months ended July 31, 2000, an increase of $0.4
million in cost of revenue previously deferred, and an increase of $0.4 million
in cost of service revenue, offset by a decrease of $0.8 million in cost of
hardware revenue, as described below. Gross margin as a percentage of total
revenues was 72% and 33% for the three months ended July 31, 2000 and 1999,
respectively, as described below.

    Our cost of revenues increased to $17.0 million for the six months ended
July 31, 2000 from $4.3 million for the six months ended July 31, 1999. The
$12.7 million increase was due to an increase of $8.7 million in cost of revenue
previously deferred, a $4.0 million increase in cost of license revenues shipped
in the six months ended July 31, 2000, and an increase of $0.7 million in cost
of service revenue, offset by a decrease of $0.7 million in cost of hardware
revenue, as described below. Gross margin as a percentage of total revenues was
77% and 36% for the six months ended July 31, 2000 and 1999, respectively. This
increase in gross margin was due to the higher gross margin on revenue derived
from sales of Lightspan Achieve Now licenses, which was entirely deferred for
the three and six months ended July 31, 1999.

    Cost of License Revenues. Our cost of license revenues increased to $3.1
million for the three months ended July 31, 2000 from $0.1 million for the three
months ended July 31, 1999. This $3.0 million increase was due to an increase of
$1.7 million in Lightspan Achieve Now cost of licenses shipped in the three
months ended July 31, 2000, the recognition of $0.4 million in cost of Lightspan
Achieve Now license revenue previously deferred, a $0.5 million increase in
Academic cost of revenue and a $0.4 million increase in cost of revenues for
subscriptions to The Lightspan Network. Our cost of license revenues increased
to $12.9 million for the six months ended July 31, 2000 from $0.3 million for
the six months ended July 31, 1999. The $12.6 million increase was due to the
recognition of $8.7 million in cost of Lightspan Achieve Now license revenue
previously deferred, an increase of $2.5 million in Lightspan Achieve Now cost
of licenses shipped in the six months ended July 31, 2000, a $0.9


                                       16
<PAGE>   18

million increase due to Academic cost of revenue and a $0.5 million increase in
cost of revenues for subscriptions to The Lightspan Network.

    Because we deferred all revenue related to shipments of Lightspan Achieve
Now in both fiscal 2000 and 1999, we also deferred the related cost of revenue.
In the three months ended July 31, 2000, we completed and shipped the remaining
Lightspan Achieve Now titles in all grade clusters used on both the PlayStation
game console and on a PC platform, resulting in the recognition of $0.4 million
in cost of licenses previously deferred, pursuant to SOP 97-2. During the three
months ended July 31, 2000, we also sold Lightspan Achieve Now licenses,
representing $1.7 million in cost of revenue. This represents a 4% increase over
$1.6 million in shipments which were entirely deferred for the three months
ended July 31, 1999. Gross margin on Lightspan Achieve Now license revenues and
cost of license revenues shipped and recognized for the six months ended July
31, 2000 remained relatively consistent compared to Lightspan Achieve Now
license revenues and cost of license revenues shipped and not recognized for the
six months ended July 31, 1999. During the six months ended July 31, 2000, we
sold Lightspan Achieve Now licenses representing $2.5 million in cost of
revenue. This represents a 7% increase over $2.3 million in Lightspan Achieve
Now cost of licenses sold, which were entirely deferred for the six months ended
July 31, 1999. Gross margin on Lightspan Achieve Now license revenues and cost
of license revenues recognized for the six months ended July 31, 2000 and on
license revenues and cost of license revenues which were entirely deferred
pursuant to SOP 97-2 for the six months ended July 31, 1999 remained consistent
at 81%.

    Our cost of revenues for Academic licenses was $0.5 million and $0.9 million
for the three and six months ended July 31, 2000, respectively. Gross margin for
Academic as a percentage of license revenues was 86% and 81% for the three and
six months ended July 31, 2000, respectively. Academic software cost of license
revenue was $0.4 million and $0.8 million for the three and six months ended
July 31, 2000, respectively. Gross margin for Academic software as a percentage
of software license revenues was 77% and 71% for the three and six months ended
July 31, 2000, respectively. Academic Internet cost of license revenue was $0.1
million for the three and six months ended July 31, 2000. Gross margin for
Academic Internet as a percentage of Internet license revenues was 94% for the
three and six months ended July 31, 2000. Academic cost of license revenue
consists of software cost of license revenue and Internet cost of license
revenue derived from Academic's Web-enhanced product line, AcademicOnline 2000
and Academic.com, which we offered beginning in the quarter ended July 31, 2000.

    Our cost of revenues for subscriptions to The Lightspan Network increased
270% to $0.5 million for the three months ended July 31, 2000 from $0.1 million
for the three months ended July 31, 1999 and increased 192% to $0.8 million for
the six months ended July 31, 2000 from $0.3 million for the six months ended
July 31, 1999. This growth was due primarily to an increase in the number of
subscriptions and an increase in server costs. Gross margin as a percentage of
subscription fee revenues from The Lightspan Network decreased to 50% for the
three months ended July 31, 2000 from 72% for the three months ended July 31,
1999 and decreased to 53% for the six months ended July 31, 2000 from 69% for
the six months ended July 31, 1999. This decrease was primarily due to us
offering volume discounts for customers purchasing multiple subscriptions and
increased server costs.

    Cost of Service Revenues. Our cost of service revenues increased 57% to $1.2
million for the three months ended July 31, 2000 from $0.8 million for three
months ended July 31, 1999 and increased 54% to $2.1 million for the six months
ended July 31, 2000 from $1.4 million for six months ended July 31, 1999. The
increases were 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 decreased
to 45% for the three months ended July 31, 2000 from 51% for the three months
ended July 31, 1999 due primarily to increased expenses associated with
delivering the service. Gross margin for the six months ended July 31, 2000 and
1999 remained consistent at 51%.

    Cost of Hardware Revenues. Our cost of hardware revenues decreased 40% to
$1.1 million for the three months ended July 31, 2000 from $1.9 million for
three months ended July 31, 1999 and decreased 25% to $2.0 million for the six
months ended July 31, 2000 from $2.7 million for six months ended July 31, 1999.
The decreases for the three and six months ended July 31, 2000, were primarily
due to a decrease in the sales of our Lightspan Achieve Now curriculum and
related hardware in the three months ended July 31, 2000, due to lost sales
attributable to customer concerns over possible delivery delays of PlayStation
game consoles. Additionally, in the three months


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ended July 31, 2000, under our refurbish program, we purchased refurbished
PlayStation game consoles at a discount from the original PlayStation game
console, contributing to the decrease in cost of hardware revenues for the three
and six months ended July 31, 2000. Gross margin as a percentage of hardware
revenues increased to 35% for the three months ended July 31, 2000 from 13% for
the three months ended July 31, 1999 and increased to 30% for the six months
ended July 31, 2000 from 14% for the six months ended July 31, 1999. The
increases in gross margin were due to a decrease in the cost of the PlayStation
game console and related accessories, partially offset by our refurbish program,
whereby we sold the refurbished PlayStation game consoles at a discount from the
original price and included related accessories at no additional charge.

EXPENSES

    Technology and Development. Our technology and development expenses
increased 190% to $6.9 million for the three months ended July 31, 2000 from
$2.4 million for three months ended July 31, 1999 and increased 170% to $12.0
million for the six months ended July 31, 2000 from $4.5 million for six months
ended July 31, 1999. This was due to our hiring of additional personnel,
temporary consulting, and related costs for Web site design and development of
our Internet business as we expanded our Internet offerings, and the addition of
Academic technology and development expense of $1.9 million and $2.9 million for
the three and six months ended July 31, 2000, respectively. This increase also
resulted from a reduction in development personnel and related costs that
occurred throughout the three and six months ended July 31, 1999 following
completion of initial design and development of substantially all of our
Lightspan Achieve Now titles.

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

    Sales and Marketing. Our sales and marketing expenses increased 97% to $15.6
million for the three months ended July 31, 2000 from $7.9 million for the three
months ended July 31, 1999, and increased 132% to $32.6 million for the six
months ended July 31, 2000 from $14.1 million for the six months ended July 31,
1999. This was due to an increase in sales and marketing personnel and
promotional activities connected to the launch of Lightspan.com and the related
$5.0 million television campaign in the first quarter of fiscal 2001, the
continued promotion of Lightspan Achieve Now and the addition of Academic sales
and marketing expense of $2.0 million and $4.2 million for the three and six
months ended July 31, 2000, respectively.

    Our sales and marketing expenses consist primarily of compensation and
related benefits, commissions, bonuses, travel, advertising, promotional
activities, customer incentive programs and research and evaluation of our
current customers and markets. In July 2000, we recorded a $1.6 million
restructuring charge related to a refocus of our sales and marketing efforts
from our free Internet products towards our subscription Internet products.
Although we have reduced our sales and marketing expenses related to our free
Internet products, we continue to pursue branding and marketing campaigns to
retain and increase sales to current customers, attract new customers, and
broaden our markets for our subscription Internet products, Lightspan Achieve
Now curriculum and Academic products.

    General and Administrative. Our general and administrative expenses
increased 80% to $2.2 million for the three months ended July 31, 2000 from $1.2
million for the three months ended July 31, 1999, and increased 108% to $4.4
million for the six months ended July 31, 2000 from $2.1 million for the six
months ended July 31, 1999. This was due primarily to increased personnel and
related costs resulting from our increased infrastructure, system support,
increased corporate expenses associated with being a public company including
legal and accounting fees and $0.4 million and $0.7 million in expenses from
Academic for the three and six months ended July 31, 2000, respectively.


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    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 may increase as our business expands.

    Stock-Based Compensation. During the three months ended July 31, 2000 and
1999, we had recorded $0 and $5.5 million, respectively, in deferred stock
stock-based compensation and during the six months ended July 31, 2000 and 1999,
we had recorded $0.1 million and $7.7 million, respectively, in deferred
stock-based compensation as a result of our granting of stock options to
employees with exercise prices per share deemed to be below the fair values per
share for our common stock on the dates those options were granted. The deferred
stock-based compensation is being amortized to expense on an accelerated basis
over the vesting period of the individual options, generally four years. The
amortization of deferred stock-based compensation expense was approximately $0.7
million and $0.6 million for the three months ended July 31, 2000 and 1999,
respectively and approximately $1.6 million and $1.0 million for the six months
ended July 31, 2000 and 1999, respectively. As of July 31, 2000, there was
approximately $3.2 million to be amortized in future periods.

    Amortization of Intangible Assets. In connection with the acquisitions of
Academic, Global Schoolhouse and StudyWeb in the third quarter of fiscal 2000,
and LearningPlanet.com and Edutest in the second quarter of fiscal 2001, we
recorded intangible assets totaling an aggregate of approximately $68.9 million.
We amortize these intangible assets over their respective useful lives, ranging
from three to ten years. Our amortization of intangible assets totaled $3.6
million for the three months ended July 31, 2000 and $7.0 million for the six
months ended July 31, 2000. We expect to record annual amortization expense
related to our acquisitions of approximately $16.0 million for fiscal 2001,
$18.3 million for fiscal 2002, $17.8 million for fiscal 2003, $9.7 million for
fiscal 2004, $0.5 million for fiscal 2005, $0.4 million for fiscal 2006, $0.3
million for each fiscal years 2007 through 2009, and $0.2 million for fiscal
2010.

    Restructuring. In July 2000, we completed a restructuring plan designed to
refocus our sales and marketing efforts away from our free Internet products and
toward our subscription-based Internet products such as The Lightspan Network,
eduTest@School and eduTest@School Plus, which resulted in a $1.6 million charge.
The restructuring charge included $1.2 million of involuntary termination
benefits relating to a planned termination of 14 employees. As of August 31,
2000, we terminated the 14 employees. We also accrued exit costs of $0.4 million
in expenses relating to contractual obligations for services associated with our
free Internet site that will no longer be used to generate revenue for us. We
anticipate paying the remaining involuntary termination benefits and exit costs
through the first quarter of fiscal 2003.

    As we have experienced significant customer interest and acceptance of our
subscription Internet products, with many schools looking for web content to
deliver on newly-installed infrastructures, we decided to emphasize the
subscription part of our K-12 Internet business and reduce the heavy promotional
spending necessary to generate consumer traffic for our free site,
Lightspan.com. These changes should allow us to reduce our cost structure in
future periods.

    Interest Income (Expense). Our net interest income was $1.7 million for the
three months ended July 31, 2000 and $3.3 million for the six months ended July
31, 2000 as a result of investing the proceeds from our initial public offering
in short term, interest-bearing, investment grade securities.

SPRINGING WARRANTS

    Upon the completion of our initial public offering of common stock in
February 2000, warrants to purchase up to 2,760,160 shares of Series D preferred
stock at $0.02 per share (the "Springing Warrants") converted into warrants to
purchase up to 1,380,080 shares of common stock and were automatically
exercised, resulting in the issuance of 1,377,762 shares of common stock. As a
result, on February 15, 2000, we accounted for the intrinsic value of the
Springing Warrants as a preferred stock dividend of $16.5 million. Such amount
also increased the net loss per share applicable to common stockholders for the
six months ended July 31, 2000 and will increase the net loss or decrease the
net income applicable to common stockholders for periods including February 15,
2000.


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<PAGE>   21

LEGAL MATTERS

    In July 1996, a former employee commenced legal action against us, alleging
causes of action for fraud, breach of contract, negligent misrepresentation and
conversion. On August 26, 1999, we entered into a settlement agreement and
release with the plaintiff, the terms of which are subject to confidentiality
provisions. In the six months ended July 31, 2000, we paid the remaining
settlement costs and legal fees of approximately $0.6 million for a total of
$1.6 million in legal and settlement costs related to this case.

LIQUIDITY AND CAPITAL RESOURCES

    From inception through January 2000, we financed our operations and met our
capital expenditure requirements primarily with the net proceeds from private
sales of equity securities totaling approximately $143.6 million. On February
15, 2000, we completed our initial public offering of 7,500,000 shares of common
stock at an initial offering price of $12.00 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
$106.0 million. In March 2000, the underwriters exercised 655,150 shares of
their overallotment option for total proceeds, net of discounts and commissions,
of $7.3 million. At July 31, 2000, we had $83.1 million of cash and cash
equivalents and $18.4 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 have incurred significant
losses since our inception and expect to continue to incur losses for the
foreseeable future.

    Our working capital has fluctuated significantly since our inception. This
is due, in large part, to the timing of cash payments to vendors, cash
collections from customers, varying resources required for development efforts
on our product offerings, as well as receipt of cash from our preferred stock
financings, initial public offering, private placements and other equity
offerings. We expect that our working capital requirements and cash position
will fluctuate significantly from period to period for the foreseeable future.
These fluctuations may be caused by increased spending to support our growth in
operations, strategic investments, or acquisitions.

    Net cash used in operating activities was $29.6 million for the six months
ended July 31, 2000 and $7.5 million for the six months ended July 31, 1999. Net
cash used during these periods was primarily to fund technology and development,
sales and marketing, including promotion of Lightspan.com, and general and
administrative costs associated with the development and deployment of our
Lightspan Achieve Now and Academic curriculum and Internet products and
services. We expect our negative operating cash flow to continue for the
foreseeable future.

    Net cash used in investing activities was $6.4 million for the six months
ended July 31, 2000 relating primarily to the purchases, offset by maturities,
of short-term investments purchased with proceeds from our initial public
offering and $1.3 million in purchases of property and equipment. Net cash used
in investing activities for the six months ended July 31, 1999 was $0.6 million
related primarily to the purchase of property and equipment.

    Net cash provided by financing activities was $114.1 million for the six
months ended July 31, 2000, relating primarily to the proceeds from our initial
public offering, private placements and the underwriter's exercise of their
overallotment option. Net cash provided by financing activities was $26.5
million for the six months ended July 31, 1999 related primarily to proceeds
from the issuance of preferred stock.

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

    We entered into a $1.0 million capital lease line with a financial
institution in April 1999. Under the agreement, which expires in September 2000,
we finance the purchase of capital equipment at an 8.8% interest rate over a
42-


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month period with a purchase option. As of July 31, 2000, $504,000 was available
for future borrowing under this agreement.

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

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

    On June 23, 2000, we acquired Edutest, Inc., a provider of Internet-based
educational testing and assessment products, for a combination of cash and
shares of our common stock with a value of up to $15.9 million. The aggregate
consideration received by Edutest's shareholders at closing was $2.4 million in
cash, $1.3 million of which was paid to common shareholders, and the remaining
$1.1 million of which was paid in satisfaction of various obligations of
Edutest, and 1,028,543 shares of our common stock which had a value of $9.0
million assuming a per share price of $8.75. In addition, we may issue (i) up to
228,561 shares of our common stock eighteen months from June 23, 2000 and (ii)
up to $2.0 million in stock shortly after July 31, 2001 if Edutest meets certain
revenue based performance criteria. The acquisition was accounted for as a
purchase.

    Our future capital requirements will depend on a variety of factors,
including market acceptance of our products and services and the resources we
devote to developing, marketing, selling and supporting our products. We expect
to devote substantial capital resources in connection with brand maintenance,
marketing, promotional activities, maintaining and selling our existing products
and services, and continued development and expansion of our fee-based
subscription Internet offerings and content. In addition, we may devote
substantial capital resources to strategic acquisitions and relationships.

    As of July 31, 2000, we believe that our cash and cash equivalents and the
net proceeds from our initial public offering and private placements will be
sufficient to fund our operations for at least the next 12 months.



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                                   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 26th day of
April, 2001.

                                                    Lightspan, Inc.



                                              By: /s/ MICHAEL A. SICURO
                                                 ------------------------------
                                                      Michael A. Sicuro,
April 26, 2001                                     Chief Financial Officer




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