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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------
|    | For the period ended April 30, 2001                                                    



|[   ] | 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
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|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 May 31, 2001:
46,156,554



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TABLE OF CONTENTS



|                              |                                                                                           |  |  |  |  |  |  | 
|----------------------------- | ----------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Consolidated Financial Statements                                                
|                              | Item 2. Management's Discussion and Analysis of Financial Condition and
Operating Results
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                       
|Part II OTHER INFORMATION    
|                              | Item 1. Legal Proceedings                                                                
|                              | Item 2. Changes in Securities and Use of Proceeds                                        
|                              | Item 3. Defaults Upon Senior Securities                                                  
|                              | Item 4. Submission of Matters to a Vote of Security Holders                              
|                              | Item 5. Other Information                                                                
|                              | Item 6. Exhibits and Reports on Form 8-K                                                 
|SIGNATURES                   
|EXHIBIT 10.51                



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##### Table of Contents



Lightspan, Inc
Quarterly Report on Form 10-Q
Table of Contents

|           |         |                                                                                   |    |      |    | 
|---------- | ------- | --------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |         |                                                                                   |    | Page
|           |         |                                                                                   |    |     
|PART I     |         |                                                                                   | 2  |     
|          
|          
|          
|          
|           | Item 1. | Consolidated Financial Statements and Notes to Consolidated Financial Statements  |    |      | 2  | 
|          
|          
|          
|          
|           | Item 2. | Managements Discussion and Analysis of Financial Condition and Operating Results |    |      | 9  | 
|          
|          
|          
|          
|           | Item 3. | Quantitative and Qualitative Disclosures About Market Risk                        |    |      | 12 | 
|          
|          
|          
|          
|PART II    |         |                                                                                   | 13 |     
|          
|          
|          
|          
|           | Item 1. | Legal Proceedings                                                                 |    |      | 13 | 
|          
|          
|          
|          
|           | Item 2. | Changes in Securities and Use of Proceeds                                         |    |      | 13 | 
|          
|          
|          
|          
|           | Item 3. | Defaults Upon Senior Securities                                                   |    |      | 13 | 
|          
|          
|          
|          
|           | Item 4. | Submission of Matters to a Vote of Security Holders                               |    |      | 13 | 
|          
|          
|          
|          
|           | Item 5. | Other Information                                                                 |    |      | 13 | 
|          
|          
|          
|          
|           | Item 6. | Exhibits and Reports on Form 8-K                                                  |    |      | 13 | 
|          
|          
|          
|          
|Signatures |         |                                                                                   | 14 |     



1





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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements


LIGHTSPAN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |          |    |         | 
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ----------- | ------- | ----------- | -------- | -- | ------- | 
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          | April 30,   |         | January 31,
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          | 2001        |         | 2001       
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |            
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          | (Unaudited) |         |            
|Assets                                                                                              
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Current assets:                                                                                     
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Cash and cash equivalents                                                                                      |                                                                                               | $                                          | 42,256   |             |         | $           | 45,566   |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Short-term investments                                                                                         |                                                                                               |                                            | 23,726   |             |         |             | 32,683   |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accounts receivable, less allowance for doubtful accounts of
$546 (April 30, 2001) and $573 (January 31, 2001) |                                                                                               |                                            | 11,365   |             |         |             | 11,253   |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Finished goods inventory                                                                                       |                                                                                               |                                            | 2,130    |             |         |             | 2,567    |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Other current assets                                                                                           |                                                                                               |                                            | 1,437    |             |         |             | 2,379    |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Restricted cash                                                                                                |                                                                                               |                                            | 826      |             |         |             | 1,115    |   
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         
|                                                                                                     |                                                                                                                |                                                                                               | Total current assets                       |          |             | 81,740  |             |          |    | 95,563  | 
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Restricted cash                                                                                      |                                                                                                                |                                                                                               | 1,653                                      |          |             |         | 3,653       |         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Property and equipment, net                                                                          |                                                                                                                |                                                                                               | 6,996                                      |          |             |         | 5,886       |         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Goodwill, net of accumulated amortization of $14,091 (April 30,
2001) and $11,603 (January 31, 2001) |                                                                                                                |                                                                                               | 21,651                                     |          |             |         | 24,139      |         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Other intangible assets                                                                              |                                                                                                                |                                                                                               | 21,518                                     |          |             |         | 23,596      |         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Deposits and other assets                                                                            |                                                                                                                |                                                                                               | 1,028                                      |          |             |         | 1,061       |         
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         
|                                                                                                     |                                                                                                                |                                                                                               | Total assets                               |          | $           | 134,586 |             |          | $  | 153,898 | 
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         
|Liabilities and Stockholders Equity                                                                
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Current liabilities:                                                                                
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accounts payable                                                                                               |                                                                                               | $                                          | 4,943    |             |         | $           | 5,990    |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accrued liabilities                                                                                            |                                                                                               |                                            | 6,644    |             |         |             | 9,295    |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Acquisition consideration payable                                                                              |                                                                                               |                                            | 2,000    |             |         |             | 2,000    |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Deferred revenue  services and other                                                                          |                                                                                               |                                            | 9,113    |             |         |             | 8,122    |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Other current liabilities                                                                                      |                                                                                               |                                            | 298      |             |         |             | 373      |   
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         
|                                                                                                     |                                                                                                                |                                                                                               | Total current liabilities                  |          |             | 22,998  |             |          |    | 25,780  | 
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Deferred revenue  services and other, less current portion                                          |                                                                                                                |                                                                                               | 1,455                                      |          |             |         | 1,240       |         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Other liabilities                                                                                    |                                                                                                                |                                                                                               | 499                                        |          |             |         | 563         |         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Stockholders equity:                                                                               
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Preferred stock, par value $0.001:                                                                            
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                                                | Authorized shares  20,000,000                                                               
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                                                | No shares issued and outstanding                                                              |                                            |          |            |         |             |          |   |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Common stock, par value $0.001:                                                                               
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                                                | Authorized shares  250,000,000                                                              
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     |                                                                                                                | Issued and outstanding shares  46,155,054 (April 30, 2001) and
46,044,033 (January 31, 2001) |                                            |          | 46          |         |             |          | 46 |        
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Additional paid-in capital                                                                                     |                                                                                               |                                            | 354,321  |             |         |             | 354,415  |   
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Deferred compensation                                                                                          |                                                                                               |                                            | (866     | )           |         |             | (1,314   | ) 
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accumulated other comprehensive income (loss)                                                                  |                                                                                               |                                            | 44       |             |         |             | (714     | ) 
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                     | Accumulated deficit                                                                                            |                                                                                               |                                            | (243,911 | )           |         |             | (226,118 | ) 
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         
|                                                                                                     |                                                                                                                |                                                                                               | Total stockholders equity                 |          |             | 109,634 |             |          |    | 126,315 | 
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         
|                                                                                                     |                                                                                                                |                                                                                               | Total liabilities and stockholders equity |          | $           | 134,586 |             |          | $  | 153,898 | 
|                                                                                                     |                                                                                                                |                                                                                               |                                            |          |             |         |             |         

See accompanying notes.



2





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##### Table of Contents



LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

|                                                      |                                              |                          |         |                              |        |      |         |        |        | 
|----------------------------------------------------- | -------------------------------------------- | ------------------------ | ------- | ---------------------------- | ------ | ---- | ------- | ------ | ------ | 
|                                                      |                                              |                          |         | Three Months Ended April 30,
|                                                      |                                              |                          |         |                             
|                                                      |                                              |                          |         | 2001                         |        | 2000
|                                                      |                                              |                          |         |                              |        |     
|Revenues:                                            
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Software licenses                            |                          | $       | 6,357                        |        |      | $       | 52,200 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Internet subscriptions                       |                          |         | 1,560                        |        |      |         | 723    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Professional services                        |                          |         | 1,867                        |        |      |         | 2,174  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Hardware                                     |                          |         | 873                          |        |      |         | 1,153  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Other                                        |                          |         |                             |        |      |         | 159    |       
|                                                      |                                              |                          |         |                              |        |      |         |       
|                                                      |                                              | Total revenues           |         |                              | 10,657 |      |         |        | 56,409 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of revenues:                                    
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Software licenses                            |                          |         | 1,456                        |        |      |         | 9,525  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Internet subscriptions                       |                          |         | 591                          |        |      |         | 305    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Professional services                        |                          |         | 1,236                        |        |      |         | 909    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Hardware                                     |                          |         | 655                          |        |      |         | 902    |       
|                                                      |                                              |                          |         |                              |        |      |         |       
|                                                      |                                              | Total cost of revenues   |         |                              | 3,938  |      |         |        | 11,641 | 
|                                                      |                                              |                          |         |                              |        |      |         |       
|Gross profit                                          |                                              |                          | 6,719   |                              |        |      | 44,768  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Operating expenses:                                  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Sales and marketing                          |                          |         | 11,964                       |        |      |         | 17,004 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Technology and development                   |                          |         | 6,758                        |        |      |         | 5,134  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | General and administrative                   |                          |         | 2,020                        |        |      |         | 2,230  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Stock-based compensation                     |                          |         | 273                          |        |      |         | 936    |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Amortization of intangible assets            |                          |         | 4,568                        |        |      |         | 3,339  |       
|                                                      |                                              |                          |         |                              |        |      |         |       
|                                                      |                                              | Total operating expenses |         |                              | 25,583 |      |         |        | 28,643 | 
|                                                      |                                              |                          |         |                              |        |      |         |       
|Income (loss) from operations                         |                                              |                          | (18,864 | )                            |        |      | 16,125  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |                                              |                          | 1,087   |                              |        |      | 1,553   |       
|                                                     
|                                                     
|                                                     
|                                                     
|Interest expense                                      |                                              |                          | (16     | )                            |        |      | (15     | )     
|                                                      |                                              |                          |         |                              |        |      |         |       
|Net income (loss)                                     |                                              | $                        | (17,793 | )                            |        | $    | 17,663  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Preferred stock dividend                              |                                              |                          |        |                              |        |      | (16,506 | )     
|                                                      |                                              |                          |         |                              |        |      |         |       
|Net income (loss) attributable to common stockholders |                                              | $                        | (17,793 | )                            |        | $    | 1,157   |       
|                                                      |                                              |                          |         |                              |        |      |         |       
|Net income (loss) per share:                         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Basic and diluted                            |                          | $       | (0.39                        | )      |      | $       | 0.03   |       
|                                                      |                                              |                          |         |                              |        |      |         |       
|                                                      | Weighted average shares outstanding  basic  |                          |         | 46,104                       |        |      |         | 39,527 |       
|                                                      |                                              |                          |         |                              |        |      |         |       
|                                                      | Weighted average shares outstanding diluted |                          |         | 46,104                       |        |      |         | 45,466 |       
|                                                      |                                              |                          |         |                              |        |      |         |       

See accompanying notes.



3





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##### Table of Contents



LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |         |       |         |         |  
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------- | ------------------------- | --------------------------------------------------------- | ----- | ---------------------------- | ------- | ------- | ----- | ------- | ------- | -
|                                                                     |                                                                                      |                                                   |                           |                                                           |       | Three Months Ended April 30,
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                             
|                                                                     |                                                                                      |                                                   |                           |                                                           |       | 2001                         |         | 2000   
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|Operating activities:                                               
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Net income (loss)                                                                    |                                                   | $                         | (17,793                                                   | )     |                              | $       | 17,663  |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      | Depreciation and amortization                     |                           |                                                           | 656   |                              |         |         | 361   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      | Amortization of intangible assets                 |                           |                                                           | 4,568 |                              |         |         | 3,339 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      | Amortization of deferred stock-based compensation |                           |                                                           | 273   |                              |         |         | 936   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      | Changes in operating assets and liabilities:     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Accounts receivable       |                                                           |       | (112                         | )       |         |       | 3,953   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Inventory                 |                                                           |       | 437                          |         |         |       | (694    | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Deferred cost of revenue  |                                                           |       |                             |         |         |       | 8,338   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Deposits and other assets |                                                           |       | 975                          |         |         |       | 333     |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Accounts payable          |                                                           |       | (1,047                       | )       |         |       | (2,270  | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Deferred revenue          |                                                           |       | 1,206                        |         |         |       | (46,187 | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                      |                                                   | Accrued liabilities       |                                                           |       | (2,651                       | )       |         |       | (4,071  | )      
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|                                                                     |                                                                                      |                                                   |                           | Net cash flows used in operating activities               |       |                              | (13,488 | )       |       |         | (18,299 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Investing activities:                                               
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Purchase of short-term investments                                                   |                                                   |                           | (7,149                                                    | )     |                              |         | (7,965  | )    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Maturities of short-term investments                                                 |                                                   |                           | 16,864                                                    |       |                              |         | 9,769   |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Restricted cash                                                                      |                                                   |                           | 2,289                                                     |       |                              |         |        |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Purchase of property and equipment                                                   |                                                   |                           | (1,768                                                    | )     |                              |         | (746    | )    
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|                                                                     |                                                                                      |                                                   |                           | Net cash flows provided by investing activities           |       |                              | 10,236  |         |       |         | 1,058   |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Financing activities:                                               
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds from issuance of common stock                                               |                                                   |                           |                                                          |       |                              |         | 113,400 |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Principal repayments on capital leases                                               |                                                   |                           | (139                                                      | )     |                              |         | (122    | )    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Principal repayments on notes payable                                                |                                                   |                           |                                                          |       |                              |         | (172    | )    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Net proceeds from exercise of stock options                                          |                                                   |                           | 81                                                        |       |                              |         | 612     |      
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|                                                                     |                                                                                      |                                                   |                           | Net cash flows provided by (used in) financing activities |       |                              | (58     | )       |       |         | 113,718 |  
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|                                                                     | Increase (decrease) in cash and cash equivalents                                     |                                                   |                           | (3,310                                                    | )     |                              |         | 96,477  |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cash and cash equivalents at beginning of period                                     |                                                   |                           | 45,566                                                    |       |                              |         | 5,033   |      
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|                                                                     | Cash and cash equivalents at end of period                                           |                                                   | $                         | 42,256                                                    |       |                              | $       | 101,510 |      
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|Supplemental disclosure of cash flow information:                   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Interest paid                                                                        |                                                   | $                         | 16                                                        |       |                              | $       | 15      |      
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|Supplemental schedule of noncash investing and financing activities:
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Deferred stock-based compensation                                                    |                                                   | $                         | (175                                                      | )     |                              | $       | (79     | )    
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        
|                                                                     | 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  |      
|                                                                     |                                                                                      |                                                   |                           |                                                           |       |                              |         |        

See accompanying notes.



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LIGHTSPAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements, which include the
accounts of Lightspan, Inc. (Lightspan or the Company) and its wholly owned
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 of normal recurring items
considered necessary for a fair presentation, have been included in the
accompanying unaudited consolidated financial statements. All significant
intercompany transactions and balances have been eliminated in consolidation.
Historically, the Company's operating results have been highest in its
second fiscal quarter, and lowest in its first fiscal quarter and are expected to vary significantly
from quarter to
quarter because of seasonal influences on demand for its Lightspan Achieve Now,
fee-based subscription Internet and Academic Systems curricula products and
services based on school calendars, budget cycles, source and timing of school
districts funding. Operating results for the three months ended April 30, 2001 or
for any other interim period are not necessarily indicative of the results that
may be expected for the full year ending January 31, 2002. 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, 2001.

Organization and Business Activity

Lightspan was founded in 1993, incorporated as The
Lightspan Partnership, Inc. and changed its name to Lightspan, Inc. on April
10, 2000. Lightspan provides curriculum-based educational software and Internet
products and services to schools and school districts that are used both in the
school and at home. Lightspan Achieve Now is an interactive CD-ROM-based
software product for kindergarten through eighth grade schools, 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® game console that the student uses to operate the
program at home throughout the school year. The Lightspan Network is an online
subscription service that provides curriculum-based content for classroom and
home use. 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, 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 instructional tools, content and services. 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,
the individual school and the classroom levels.

Revenue

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

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



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##### Table of Contents



Software Licenses

Lightspan sells its Lightspan Achieve Now licenses in three distinct grade
clusters  grades K through 2; grades 3 through 4; and grades 5 through 8. Each
grade cluster includes 32 to 35 separate Lightspan Achieve Now titles, with
each title consisting of one distinct CD-ROM. As of January 31, 2000, there
were a total of 77 separate titles, some of which were included in more than
one grade cluster. From fiscal 1997 through fiscal 2000, certain titles were
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 as-yet uncompleted.

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 $46.4 million of revenue previously deferred and the recognition
of $8.4 million of previously deferred expenses as cost of revenue, pursuant to
AICPA Statement of Position (SOP) 97-2 as discussed below. As of July 31,
2000, the Company had completed and shipped all remaining Lightspan Achieve Now
titles used on a PC platform, resulting in the recognition in the second
quarter of fiscal 2001 of the remaining $1.7 million of revenue previously
deferred. Subsequent to July 31, 2000, the Company did not defer revenue
relating to Lightspan Achieve Now licenses that were shipped as the Company had
completed the development of all Lightspan Achieve Now titles.

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
the recognition of all revenue 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.

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

Internet Subscriptions

Revenue derived from fee-based Internet subscriptions including The
Lightspan Network and Academic.com is recognized on a straight-line basis over
the term of the agreement, generally one year.

Professional Services

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



6





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##### Table of Contents



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

Hardware

Hardware revenue derived from the sale of PlayStation game consoles and
related accessories is recognized upon shipment of the console and the related
software product.

2. Stockholders Equity

Lightspan computes net loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Potentially dilutive securities composed of incremental
common shares issuable upon the exercise of stock options and warrants were
excluded from diluted loss per share for the three months ended April 30, 2001
because the Company had a net loss for the period and the inclusion of
outstanding stock options and warrants would be anti-dilutive. Dilutive common
stock equivalents for the three months ended April 30, 2000 were as follows (in
thousands):

|                            |                       |  |                              |   |      |  |       |       | 
|--------------------------- | --------------------- |  | ---------------------------- | - | ---- |  | ----- | ----- | 
|                            |                       |  | Three Months Ended April 30,
|                            |                       |  |                             
|                            |                       |  | 2001                         |   | 2000
|                            |                       |  |                              |   |     
|Employee stock options      |                       |  |                             |   |      |  | 2,556 |      
|                           
|                           
|                           
|                           
|Warrants                    |                       |  |                             |   |      |  | 189   |      
|                           
|                           
|                           
|                           
|Convertible preferred stock |                       |  |                             |   |      |  | 3,194 |      
|                            |                       |  |                              |   |      |  |       |      
|                            | Total dilutive shares |  |                              |  |      |  |       | 5,939 | 
|                            |                       |  |                              |   |      |  |       |      

3. Comprehensive Income (Loss)

Included in the Companys cash equivalents for the year ended January 31,
2001 was an investment in short-term commercial paper of Pacific Gas and
Electric, who filed for Chapter 11 bankruptcy in April 2001. Accordingly, the
Company recorded an unrealized loss related to this investment in other
comprehensive loss in the statement of stockholders equity for the year ended
January 31, 2001. During April 2001, the Companys third-party investment
manager repurchased this security at par value. As a result, the Company
adjusted the unrealized loss included in comprehensive income (loss) in April
2001.

For the three months ended April 30, 2001 and 2000, comprehensive income
(loss) was ($17.0) million and $1.1 million, respectively. The difference
between net income (loss) and comprehensive income (loss) for the three months
ended April 30, 2001 and 2000 was due to net unrealized income (losses) on
available-for-sale securities of $0.8 million and $0,
respectively.

4. Reportable Segments

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



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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.com products, implementation, training and support services and
hardware and related accessories. Revenues derived from the Higher Education
segment, comprised solely of Academic, 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.

Financial Information for Lightspans Segments

The following information is for the K-12 and Higher Education segments
(in thousands):

|                                  |                                             |   |                                   |       |           |   |              |       |   |   |         |       |  
|--------------------------------- | ------------------------------------------- | - | --------------------------------- | ----- | --------- | - | ------------ | ----- | - | - | ------- | ----- | -
|                                  |                                             |   | Three Months Ended April 30, 2001
|                                  |                                             |   |                                  
|                                  |                                             |   |                                   |       |           |   | Higher      
|                                  |                                             |   | K-12                              |       | Education |   | Consolidated
|                                  |                                             |   |                                   |       |           |   |             
|Revenues from external customers  |                                             | $ | 8,925                             |       |           | $ | 1,732        |       |   | $ | 10,657  |      
|                                 
|                                 
|                                 
|                                 
|Interest income, net              |                                             |   | 1,068                             |       |           |   | 3            |       |   |   | 1,071   |      
|                                 
|                                 
|                                 
|                                 
|Depreciation and amortization     |                                             |   | 574                               |       |           |   | 82           |       |   |   | 656     |      
|                                 
|                                 
|                                 
|                                 
|Segment loss from operations      |                                             |   | (12,900                           | )     |           |   | (5,964       | )     |   |   | (18,864 | )    
|                                 
|                                 
|                                 
|                                 
|Segment assets                    |                                             |   | 100,776                           |       |           |   | 33,810       |       |   |   | 134,586 |      
|                                 
|                                 
|                                 
|                                 
|Other significant non cash items:
|                                 
|                                 
|                                 
|                                 
|                                  | Deferred stock compensation                 |   |                                   | (165  | )         |   |              | (10   | ) |   |         | (175  | )
|                                 
|                                 
|                                 
|                                 
|                                  | Amortization of deferred stock
compensation |   |                                   | 263   |           |   |              | 10    |   |   |         | 273   |  
|                                 
|                                 
|                                 
|                                 
|                                  | Amortization of intangible assets           |   |                                   | 1,573 |           |   |              | 2,995 |   |   |         | 4,568 |  

|                                      |                                             |   |                                   |     |           |   |              |       |   |   |         |       |  
|------------------------------------- | ------------------------------------------- | - | --------------------------------- | --- | --------- | - | ------------ | ----- | - | - | ------- | ----- | -
|                                      |                                             |   | Three Months Ended April 30, 2000
|                                      |                                             |   |                                  
|                                      |                                             |   |                                   |     |           |   | Higher      
|                                      |                                             |   | K-12                              |     | Education |   | Consolidated
|                                      |                                             |   |                                   |     |           |   |             
|Revenues from external customers      |                                             | $ | 55,282                            |     |           | $ | 1,127        |       |   | $ | 56,409  |      
|                                     
|                                     
|                                     
|                                     
|Interest income (expense), net        |                                             |   | 1,541                             |     |           |   | (3           | )     |   |   | 1,538   |      
|                                     
|                                     
|                                     
|                                     
|Depreciation and amortization         |                                             |   | 284                               |     |           |   | 77           |       |   |   | 361     |      
|                                     
|                                     
|                                     
|                                     
|Segment income (loss) from operations |                                             |   | 21,822                            |     |           |   | (5,697       | )     |   |   | 16,125  |      
|                                     
|                                     
|                                     
|                                     
|Segment assets                        |                                             |   | 142,557                           |     |           |   | 39,642       |       |   |   | 182,199 |      
|                                     
|                                     
|                                     
|                                     
|Other significant non cash items:    
|                                     
|                                     
|                                     
|                                     
|                                      | Deferred stock compensation                 |   |                                   | (38 | )         |   |              | (6    | ) |   |         | (44   | )
|                                     
|                                     
|                                     
|                                     
|                                      | Amortization of deferred stock
compensation |   |                                   | 907 |           |   |              | 29    |   |   |         | 936   |  
|                                     
|                                     
|                                     
|                                     
|                                      | Amortization of intangible assets           |   |                                   | 381 |           |   |              | 2,958 |   |   |         | 3,339 |  

5. Recently Issued Accounting Pronouncements

In June 1999, the Financial Accounting Standards Board (FASB) issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement 133. The statement
defers the effective date of SFAS No. 133, which establishes accounting and
reporting standards for derivative instruments on the Companys balance sheet
at fair value. The Company adopted SFAS 133 in February 2001.



8





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As of April 30,
2001, the Company did not hold any derivative instruments or conduct any
hedging activities. The adoption of SFAS No.s 137 and 133 did not impact the
Companys financial position or results of operations.




|        |                                                                                  
|------- | ---------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial Condition and
Operating Results

This information should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements
and notes thereto and Managements Discussion and Analysis of Financial
Condition and Results of Operations for the year ended January 31, 2001
contained in our Annual Report on Form 10-K filed April 30, 2001 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, in Liquidity and Capital Resources, and in our Annual
Report on Form 10-K filed April 30, 2001 with the SEC.

Results of Operations

Operating Losses. We have incurred significant losses since our inception
and, as of April 30, 2001, have accumulated losses of approximately $227.4
million. We expect to continue to incur operating losses for the foreseeable
future. In the three months ended April 30, 2000 we had 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 in the first quarter of fiscal 2001 of $46.4 million of revenue
previously deferred pursuant to SOP 97-2 as described below. The operating
results in the first quarter of fiscal 2001 are not indicative of our
underlying business in that quarter, and are not indicative of results that may
be expected for any subsequent quarter.

Revenue

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 the timing of when revenue was recognized 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
deferred the recognition of revenue for all Lightspan Achieve Now licenses
shipped in the years ended January 31, 2000 and 1999. By April 30, 2000, we
had 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 in the first quarter of
fiscal 2001 of $46.4 million of revenue previously deferred. By July 31, 2000,
we had completed and shipped all remaining Lightspan Achieve Now titles used on
a PC platform, resulting in the recognition in the second quarter of fiscal
2001 of the remaining $1.7 million of revenue previously deferred. Subsequent
to July 31, 2000, we did not defer revenue relating to Lightspan Achieve Now
licenses that were shipped as we had completed the development of all Lightspan
Achieve Now titles.

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
three months ended April 30, 2000, we recognized $8.4 million in cost of
license revenue when we recognized the related $46.4 million in revenue.



9





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##### Table of Contents



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

|                                              |                              |                |   |                    |       | 
|--------------------------------------------- | ---------------------------- | -------------- | - | ------------------ | ----- | 
|                                              |                              |                |   | Three Months Ended
|                                              |                              |                |   | April 30, 2000    
|                                              |                              |                |   |                   
|Deferred license revenue- Achieve Now        
|                                             
|                                             
|                                             
|                                             
|                                              | Beginning balance            |                | $ | 48,110             |      
|                                             
|                                             
|                                             
|                                             
|                                              | Deferred during the period   |                |   | 384                |      
|                                             
|                                             
|                                             
|                                             
|                                              | Recognized during the period |                |   | (46,446            | )    
|                                              |                              |                |   |                   
|                                              |                              | Ending balance |   | $                  | 2,048 | 
|                                              |                              |                |   |                   
|Deferred cost of license revenue- Achieve Now
|                                             
|                                             
|                                             
|                                             
|                                              | Beginning balance            |                | $ | 8,709              |      
|                                             
|                                             
|                                             
|                                             
|                                              | Deferred during the period   |                |   | 70                 |      
|                                             
|                                             
|                                             
|                                             
|                                              | Recognized during the period |                |   | (8,408             | )    
|                                              |                              |                |   |                   
|                                              |                              | Ending balance |   | $                  | 371   | 
|                                              |                              |                |   |                   

Comparison of Three Months Ended April 30, 2001 vs. 2000

Revenues

We generate revenues from fees from the sale of software licenses,
Internet subscriptions, professional services and hardware. Our total revenues
decreased 81 percent to $10.7 million in the three months ended April 30, 2001 from
$56.4 million in the three months ended April 30, 2000 primarily due to the
recognition in the three months ended April 30, 2000 of previously deferred
software license revenue, as described in Revenue above, resulting in a $45.8
million decrease in software license revenues. Total revenues also decreased
due to a $0.3 million decrease in professional services revenues and a $0.3
million decrease in hardware revenues, offset in part by a $0.8 million
increase in Internet subscription revenue, as described below.

Software Licenses.Our software license revenues decreased $45.8 million
to $6.4 million in the three months ended April 30, 2001 from $52.2 million in
the three months ended April 30, 2000 primarily due to the recognition of $46.4
million in Lightspan Achieve Now revenue previously deferred in fiscal years
2000 and 1999, see Revenue above.

Internet
Subscriptions. Our Internet subscription revenues increased 116
percent to $1.6 million in the three months ended April 30, 2001 from $0.7 million in
the three months ended April 30, 2000 primarily due to an increase in the
revenue recognized from the annuity base relating to Internet
subscription fees for The Lightspan Network and eduTest.com. Customers
subscribing to the Companys Internet subscription products, The Lightspan
Network and eduTest.com, increased 101 percent to approximately 3,000 at April 30,
2001 from approximately 1,500 at April 30, 2000, resulting from an increased
demand by customers for our Internet subscription products.

Professional
Services.Our professional service revenues decreased 14 percent to
$1.9 million in the three months ended April 30, 2001 from $2.2 million in the
three months ended April 30, 2000 primarily due to a decrease in the billable
hours for professional services.

Hardware.Our hardware revenues decreased 24 percent to $0.9 million in the
three months ended April 30, 2001 from $1.2 million in the three months ended
April 30, 2000 primarily due to an increase in the sales of our PC version of
Lightspan Achieve Now licenses which are sold without hardware.

Cost of Revenues

Our total cost
of revenues decreased 66 percent to $3.9 million for the three
months ended April 30, 2001 from $11.6 million for the three months ended April
30, 2000 primarily due to an $8.4 million decrease in software license cost of
revenues related to the sale of Lightspan Achieve Now licenses previously
deferred in fiscal years 2000 and 1999, see Revenue above.



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Gross margin as a
percentage of total revenues decreased 16 percentage points to 63 percent in the three months ended
April 30, 2001 from 79 percent in the three months ended April 30, 2000 primarily due
to the higher gross margin on revenues derived from sales of Lightspan Achieve
Now licenses, which were entirely deferred for fiscal years 2000 and 1999 and
recognized in the three months ended April 30, 2000.

Expenses

Sales and
Marketing.Our sales and marketing expenses decreased 30 percent to
$12.0 million for the three months ended April 30, 2001 from $17.0 million for
the three months ended April 30, 2000. This was primarily due to a decrease in
promotional activities connected to the launch of Lightspan.com in the first
quarter of fiscal 2001, and a refocus of our sales and marketing efforts from
our free Internet products towards our fee-based subscription Internet
products.

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. 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 Lightspan Achieve Now curriculum, fee-based subscription
Internet products, and Academic products.

Technology and Development.Our technology and development expenses
increased 32 percent to $6.8 million for the three months ended April 30, 2001 from
$5.1 million for the three months ended April 30, 2000. This was primarily due
to the inclusion of additional expenses associated with our acquisition of
eduTest.com in the second quarter of fiscal 2001.

Our development costs consist primarily of compensation and benefits for
design, art, production, enhancement, maintenance and testing of our Lightspan
Achieve Now curriculum, fee-based subscription Internet products including The
Lightspan Network, eduTest.com and Academic Internet products, which we expense
as incurred. We believe that continued investment in fee-based subscription
Internet product development is critical to attaining our strategic objectives.

General and Administrative.Our general and administrative expenses
decreased 9 percent to $2.0 million for the three months ended April 30, 2001 from
$2.2 million for the three months ended April 30, 2000. This was due primarily
to continued efforts in controlling overhead expenses.

Our general and administrative expenses consist primarily of compensation
and benefits for executive and administrative personnel, professional service
expenses and other general corporate expenses. We expect that general and
administrative expenses may increase as our business expands.

Stock-Based Compensation.Stock-based compensation expense was $0.3
million and $0.9 million for the three months ended April 30, 2001 and 2000,
respectively. During the three months ended April 30, 2001 and 2000, we
recorded $0 and $8.9 million, respectively, in deferred stock-based
compensation as a result of our granting of stock options to employees with
exercise prices per share 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. As of April 30, 2001, there
was approximately $0.9 million to be amortized in future periods.

Amortization of Intangible Assets.We recorded intangible assets related
to our acquisitions in prior periods totaling an aggregate of approximately
$68.9 million, including goodwill of $35.7 million and amortize them over their
respective useful lives, ranging from three to ten years. Amortization expense
of goodwill and intangible assets was $4.6 million and $3.3 million for the
three months ended April 30, 2001 and 2000, respectively.



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Interest
Income (Expense).Our net interest income decreased 30 percent to $1.1
million for the three months ended April 30, 2001 from $1.5 million for the
three months ended April 30, 2000 as a result of lower cash balances.

Liquidity and Capital Resources

From inception through April 2001, we have financed our operations and met
our capital expenditure requirements primarily from the net proceeds from
private sales of equity securities, net proceeds from our initial public
offering and the collection of revenues from the sales of our products and
services. At April 30, 2001, we had $42.3 million of cash
and cash equivalents, $23.7 million in short-term investments
and $2.5 million in restricted cash for a total of $68.5 million. The
expansion of our business will require the use of our 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 our working capital
requirements and cash position to fluctuate significantly from period to period
for the foreseeable future.

Net cash used in operating activities decreased $4.8 million in the three
months ended April 30, 2001 as compared to the three months ended April 30,
2000 primarily due to a decrease in sales and marketing expenses, and general
and administrative costs associated with the development and deployment of our
Lightspan Achieve Now, Academic curriculum and fee-based subscription Internet
products and services. Net cash provided by investing activities
increased $9.2 million in the three months ended April 30, 2001 as compared to
the three months ended April 30, 2000 primarily due to an increase in the
maturities of our short-term investments. Net cash provided by financing
activities decreased $113.7 million in the three months ended April 30, 2001
compared to the three months ended April 30, 2000 primarily due to the receipt
of net proceeds related to our initial public offering, underwriters exercise
of their overallotment option and private placements in the first quarter of
fiscal 2001.

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
April 30, 2001, we believe that our cash and cash equivalents
and short-term investments will
be sufficient to fund our operations for at least the next 12 months.




|        |                                                           
|------- | ----------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the amount
of interest expense we must pay with respect to our various outstanding debt
instruments. Our risk associated with fluctuating interest expense is limited,
however, to the interest rates which are tied to market rates, and our
investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes and do not expect to in the future. We ensure the
safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We mitigate default risk by investing
in securities rated AA or better. A hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial
instruments at April 30, 2001. Declines in interest rates over time will,
however, reduce our interest income.



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Part II OTHER INFORMATION




Item 1.Legal Proceedings

We are not currently involved in any material legal proceedings.




Item 2.Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Use of Proceeds

The effective date of our registration statement on Form S-1 (No.
333-90103) relating to our initial public offering was February 9, 2000. A
total of 8,155,150 shares of the Companys common stock in the aggregate were
sold at a price of $12.00 per share to an underwriting syndicate led by
Credit Suisse First Boston, U.S. Bancorp Piper Jaffray Inc. and Thomas Weisel
Partners LLC. The offering commenced on February 9, 2000, and closed on
March 7, 2000. The initial public offering resulted in gross proceeds of
approximately $97.9 million, of which $6.9 million was applied toward the
underwriting discount. Expenses related to the offering totaled approximately
$2.2 million. Net proceeds to the Company were $88.8 million. From the time of
receipt through April 31, 2001, $0.2 million of the net proceeds were applied
to repay debt, $2.6 million were used to purchase Edutest, $5.0 million were
used to promote our Lightspan.com Web site and the remaining proceeds were
used to fund operations or invested in short term, interest-bearing securities rated AA or better.




Item 3.Defaults Upon Senior Securities

None.




Item 4.Submission of Matters to a Vote of Security Holders

None.




Item 5.Other Information

None.




Item 6.Exhibits and Reports on Form 8-K

(a) Current Reports on Form 8-K

We did not file any current reports on Form 8-K for the quarter ended
April 30, 2001.

(b) Exhibits

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

|                     |  |                     |       |             |  |                                                    
|-------------------- |  | ------------------- | ----- | ----------- |  | ---------------------------------------------------
|Footnote
        No. |  | Exhibit
        No. |       | Description
|                     |  |                     |       |            
|1                    |  |                     | 10.51 |             |  | Employment Agreement  Tier I for Michael A. Sicuro



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| | 1 | Filed with this report.
| | - | -----------------------



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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 13th day of
June, 2001.

|              |                 |                                           
|------------- | --------------- | ------------------------------------------
|              | Lightspan, Inc.
|             
|              | By:             | /s/ MICHAEL A. SICURO                     
|              |                
|June 13, 2001 |                 | Michael A. Sicuro,
Chief Financial Officer



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