<PAGE>   1

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

                                   FORM 10-Q/A
                                 AMENDMENT NO. 1

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

                     For the period ended October 31, 2000

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

              For the transition period from ________ to ________

                          Commission File No. 000-29347

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


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

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

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


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

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

                                  COMMON STOCK
                              (Title of Each Class)

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


Number of shares of registrant's common stock outstanding as of November 30,
2000: 45,858,012


<PAGE>   2


                                INTRODUCTORY NOTE

        This Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q,
as filed by the Registrant on December 15, 2000, is being filed to amend the
stock-based compensation expense in Items 1 and 2 from ($424,000) to $378,000
and from $828,000 to $2,018,000 for the three and nine months ended October 31,
2000, respectively, increasing basic and diluted loss per share from ($0.34) to
($0.35) and from ($0.67) to ($0.70) for the three and nine months ended October
31, 2000, respectively. This Amendment No. 1 also amends the Registrant's
segment reporting. This Form 10-Q/A amends the Company's Form 10-Q as filed on
December 15, 2000 only to the extent of the additions and information included
in this report.















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

<TABLE>
<CAPTION>
                                                                               PAGE
                                                                               ----
<S>                                                                            <C>
PART I........................................................................  3
    Item 1.   Condensed Consolidated Financial Statements.....................  3
    Item 2.   Management's Discussion and Analysis of Financial Condition
              and Operating Results...........................................  11
Signatures....................................................................  21
</TABLE>















                                       2
<PAGE>   4




PART I. FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                     OCTOBER 31,       JANUARY 31,
                                                                                        2000              2000
                                                                                    ------------       ------------
                                                                                     (UNAUDITED)          (NOTE)
<S>                                                                                 <C>                <C>
ASSETS
Current assets:
  Cash and cash equivalents ..................................................      $     69,196       $      5,033
  Short-term investments .....................................................            25,302             16,132
  Accounts receivable, less allowance for doubtful accounts of
    $965 and $651 at October 31, 2000 and January 31, 2000, respectively .....            11,555             15,683
  Finished goods inventory ...................................................             2,497              1,116
  Deferred cost of revenue -- Lightspan Achieve Now ..........................                --              8,709
  Other current assets .......................................................             2,313              2,306
                                                                                    ------------       ------------
         Total current assets ................................................           110,863             48,979
Property and equipment, net ..................................................             4,295              3,254
Deposits and other assets ....................................................             1,116                591
Intangible assets, net .......................................................            52,234             49,608
                                                                                    ------------       ------------
         Total assets ........................................................      $    168,508       $    102,432
                                                                                    ============       ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ...........................................................      $      3,948       $      4,677
  Accrued liabilities ........................................................             6,888              9,139
  Acquisition consideration payable ..........................................             2,000              5,341
  Deferred revenue -- Lightspan Achieve Now ..................................                --             48,110
  Deferred revenue -- services and other .....................................             8,617              7,022
  Current portion of note payable and capital lease obligations ..............               398                684
                                                                                    ------------       ------------
         Total current liabilities ...........................................            21,851             74,973
Deferred revenue -- services and other, less current portion .................             1,436                 --
Deferred rent ................................................................               302                322
Capital lease obligations, less current portion ..............................               265                443
Commitments
Stockholders' equity:
  Preferred stock, par value $0.001:
    Authorized shares -- 20,000,000
    No shares issued and outstanding .........................................                --                 --
  Convertible preferred stock, par value $0.001:
    Authorized shares -- 0 and
      61,793,074 at October 31, 2000 and January 31, 2000, respectively
    Issued and outstanding shares -- 0 and
      52,230,915 at October 31, 2000 and January 31, 2000, respectively
    Aggregate liquidation preference -- $0 and
      $194,935 at October 31, 2000 and January 31, 2000, respectively ........                --                 52
  Common stock, par value $0.001:
    Authorized shares --250,000,000 and 75,000,000 at October 31, 2000 and
      January 31, 2000, respectively
    Issued and outstanding shares -- 45,809,020 and 4,764,167 at
      October 31, 2000 and January 31, 2000, respectively ....................                46                  5
  Additional paid-in capital .................................................           354,004            209,740
  Deferred advertising expense ...............................................                --               (400)
  Deferred compensation ......................................................            (2,097)            (5,211)
  Accumulated other comprehensive loss .......................................                (3)                --
  Accumulated deficit ........................................................          (207,296)          (177,492)
                                                                                    ------------       ------------
         Total stockholders' equity ..........................................           144,654             26,694
                                                                                    ------------       ------------
         Total liabilities and stockholders' equity ..........................      $    168,508       $    102,432
                                                                                    ============       ============
</TABLE>


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

                             See accompanying notes.


                                       3
<PAGE>   5



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

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED OCTOBER 31,    NINE MONTHS ENDED OCTOBER 31,
                                                           ------------------------------    -----------------------------
                                                               2000             1999             2000             1999
                                                            ----------       ----------       ----------       ----------
<S>                                                        <C>               <C>              <C>              <C>
Revenues:
  Software licenses ..................................      $    5,258              $--       $   69,520              $--
  Internet licenses ..................................           2,218              894            5,869            1,735
  Services ...........................................           2,467            1,929            6,800            4,718
  Hardware ...........................................           1,000            1,658            3,897            4,829
  Other ..............................................             162               --              552               --
                                                            ----------       ----------       ----------       ----------
          Total revenues .............................          11,105            4,481           86,638           11,282
Cost of revenues:
  Software licenses ..................................             903               --           12,936               --
  Internet licenses ..................................             620              266            1,483              523
  Services ...........................................           1,281              859            3,387            2,226
  Hardware ...........................................             702            1,259            2,732            3,984
  Other ..............................................              12               --               37               --
                                                            ----------       ----------       ----------       ----------
          Total cost of revenues .....................           3,518            2,384           20,575            6,733
                                                            ----------       ----------       ----------       ----------
Gross profit .........................................           7,587            2,097           66,063            4,549

Operating expenses:
  Technology and development .........................           6,246            3,068           18,280            7,526
  Sales and marketing ................................          11,355            9,755           43,995           23,820
  General and administrative .........................           2,807            1,959            7,234            4,083
  Stock-based compensation ...........................             378            1,541            2,018            2,503
  Amortization of intangible assets ..................           4,521            1,616           11,475            1,616
  Restructuring charge ...............................              --               --            1,600               --
                                                            ----------       ----------       ----------       ----------
          Total operating expenses ...................          25,307           17,939           84,602           39,548
                                                            ----------       ----------       ----------       ----------
Loss from operations .................................         (17,720)         (15,842)         (18,539)         (34,999)
Interest income ......................................           1,622              266            4,938              372
Interest expense .....................................             (53)             (42)             (85)            (141)
                                                            ----------       ----------       ----------       ----------
  Net loss ...........................................      $  (16,151)      $  (15,618)      $  (13,686)      $  (34,768)
Preferred stock dividend .............................              --               --          (16,506)              --
                                                            ----------       ----------       ----------       ----------
  Net loss attributable to common stockholders .......      $  (16,151)      $  (15,618)      $  (30,192)      $  (34,768)
                                                            ==========       ==========       ==========       ==========
Net loss per share:
  Basic and diluted ..................................      $    (0.35)      $    (3.80)      $    (0.70)      $    (8.93)
                                                            ==========       ==========       ==========       ==========

  Weighted average shares -- basic and diluted .......          45,704            4,106           43,404            3,892
                                                            ==========       ==========       ==========       ==========
</TABLE>



                             See accompanying notes.


                                       4
<PAGE>   6



                                 LIGHTSPAN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                            NINE MONTHS ENDED OCTOBER  31,
                                                                                                2000             1999
                                                                                             ----------       ----------
<S>                                                                                         <C>               <C>
  OPERATING ACTIVITIES:
      Net loss ........................................................................      $  (13,686)      $  (34,768)
      Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation and amortization ...............................................           1,230              865
          Gain on disposal of assets ..................................................              --               (1)
          Provision for doubtful accounts .............................................             313              364
          Amortization of intangible assets ...........................................          11,475            1,616
          Amortization of deferred stock-based compensation ...........................           2,018            2,503
          Change in deferred advertising expense ......................................             400               --
          Restructuring charge, non-cash portion ......................................           1,038               --
          Changes in operating assets and liabilities:
              Accounts receivable .....................................................           4,573           (1,391)
              Inventory ...............................................................          (1,381)            (160)
              Deferred cost of revenue ................................................           8,709           (3,537)
              Deposits and other assets ...............................................            (516)            (639)
              Accounts payable ........................................................            (877)           1,557
              Deferred revenue ........................................................         (45,497)          20,583
              Accrued liabilities .....................................................          (3,750)           1,182
                                                                                             ----------       ----------
               Net cash flows used in operating activities ............................         (35,951)         (11,826)
  INVESTING ACTIVITIES:
      Purchase of short-term investments ..............................................         (21,085)              --
      Maturities of short-term investments ............................................          11,912               --
      Purchase of property and equipment ..............................................          (2,067)          (1,336)
      Proceeds from sale of fixed assets ..............................................              --                5
      Net cash paid for the acquisition of Edutest ....................................          (2,645)              --
      Net cash paid for the acquisition of LearningPlanet.com .........................            (200)              --
      Net cash paid for the acquisition of Academic ...................................              --             (802)
      Net cash paid for the acquisition of GlobalSchoolhouse ..........................              --           (2,500)
      Net cash paid for the acquisition of StudyWeb ...................................              --           (1,000)
                                                                                             ----------       ----------
               Net cash flows used in investing activities ............................         (14,085)          (5,633)
  FINANCING ACTIVITIES:
      Proceeds from issuance of preferred stock .......................................              --           33,025
      Proceeds from issuance of common stock ..........................................         113,634               --
      Proceeds from  capital leases ...................................................              --              588
      Principal repayments on capital leases ..........................................            (369)            (887)
      Principal repayments on notes payable ...........................................            (172)              --
      Net proceeds from exercise of stock options .....................................           1,106              262
                                                                                             ----------       ----------
               Net cash flows provided by financing activities ........................         114,199           32,988
                                                                                             ----------       ----------
      Increase in cash and cash equivalents ...........................................          64,163           15,529
      Cash and cash equivalents at beginning of period ................................           5,033            7,143
                                                                                             ----------       ----------
      Cash and cash equivalents at end of period ......................................      $   69,196       $   22,672
                                                                                             ==========       ==========
  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Interest paid ...................................................................      $       85       $      140
                                                                                             ==========       ==========
  SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
      Deferred stock-based compensation ...............................................      $   (1,096)      $    8,547
                                                                                             ==========       ==========
      Conversion of convertible preferred stock into common stock .....................      $       52       $       --
                                                                                             ==========       ==========
      Issuance of common stock related to the acquisition of Academic .................      $    5,340       $    4,711
                                                                                             ==========       ==========
      Issuance of common stock as preferred stock dividend ............................      $   16,506       $       --
                                                                                             ==========       ==========
      Issuance of common stock related to the acquisition of Edutest ..................      $    9,000       $       --
                                                                                             ==========       ==========
      Additional consideration related to the acquisition of Edutest ..................      $    2,000       $       --
                                                                                             ==========       ==========
      Issuance of common stock related to the acquisition of LearningPlanet.com .......      $      150       $       --
                                                                                             ==========       ==========
      Series E preferred stock issued in connection with the purchase of Academic .....      $       --       $   35,959
                                                                                             ==========       ==========
      Valuation of options and warrants issued in connection with the purchase of
         Academic .....................................................................      $       --       $    1,818
                                                                                             ==========       ==========
      Additional consideration related to the acquisition of Academic .................      $       --       $    5,341
                                                                                             ==========       ==========
      Series E preferred stock issued for future advertising ..........................      $       --       $      400
                                                                                             ==========       ==========
      Series E preferred stock issued for subscription receivable .....................      $       --       $   13,000
                                                                                             ==========       ==========
      Series E preferred stock issued in connection with the purchase of StudyWeb .....      $       --       $    1,085
                                                                                             ==========       ==========
</TABLE>

                             See accompanying notes.


                                       5
<PAGE>   7



                                 LIGHTSPAN, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

ORGANIZATION AND BUSINESS ACTIVITY

     Lightspan was founded in 1993. Lightspan was incorporated as The Lightspan
Partnership, Inc., completed a reincorporation in Delaware in January 2000 and
changed its name to Lightspan, Inc. on April 10, 2000. Lightspan provides
curriculum-based educational software and Internet products and services to
schools and school districts that are used both in school and at home. Lightspan
Achieve Now is an interactive CD-ROM-based software product for kindergarten
through eighth grade, or K-8, that covers the core curriculum of language arts,
reading and math. The Lightspan Achieve Now program typically includes the
Lightspan Achieve Now software and a PlayStation(R) game console that the
student uses to run the program at home throughout the school year. 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 RECOGNITION

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

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



                                       6
<PAGE>   8


     Lightspan sells its Lightspan Achieve Now licenses in three distinct grade
clusters -- grades K through 2; grades 3 through 4; and grades 5 through 8. Each
grade cluster includes 32 to 36 separate Lightspan Achieve Now titles, with each
title consisting of one distinct CD-ROM. There are a total of 77 separate
titles, some of which are included in more than one grade cluster. From fiscal
1997 through fiscal 2000, a number of these titles were 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 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 $46,447,000 of revenue previously deferred, and the recognition
of $8,408,000 of previously deferred expenses as cost of revenue, pursuant to
SOP 97-2 as discussed below. During the three months ended April 30, 2000, the
Company also deferred revenue of $380,000 relating to the shipment of Lightspan
Achieve Now licenses in the as-yet uncompleted grades 3 through 4 and grades 5
through 8 grade clusters used on a PC platform. In July 2000, the Company
completed and shipped the remaining titles in grade clusters 3 through 4 and 5
through 8 used on a PC platform. This resulted in the recognition of the
remaining deferred revenue balance of $2,048,000 and the related cost of revenue
balance of $370,000.

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

    In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. The Company will adopt SAB 101 in the fourth quarter of fiscal 2001.
SAB 101 requires, among other things, that license and other up-front fees be
recognized over the term of the agreement, unless the fees are in exchange for
products delivered or services performed that represent the culmination of a
separate earnings process. The Company currently recognizes revenue in
compliance with SAB 101 and does not expect the adoption will have a material
effect on the Company's financial position and results of operation.

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

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

2. BUSINESS COMBINATIONS

     ACQUISITION OF EDUTEST, INC.

     On May 24, 2000, Lightspan entered into a merger agreement with Edutest,
which offers a combination of online assessment products and proprietary test
questions covering language arts, mathematics, history and science,


                                       7
<PAGE>   9

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

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

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

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

     ACQUISITION OF LEARNINGPLANET.COM

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

3. STOCKHOLDERS' EQUITY

    Upon the completion of Lightspan's initial public offering of common stock
in February 2000, warrants to purchase up to 2,760,160 shares of Series D
preferred stock at $0.02 per share (the "Springing Warrants") converted into
warrants to purchase up to 1,380,080 shares of common stock and were
automatically exercised, resulting in the issuance of 1,377,762 shares of common
stock (after application of certain "net exercise" provisions that permitted
exercise without additional cash payment combined with the issuance of a reduced
number of shares). As a result, on February 15, 2000, Lightspan accounted for
the intrinsic value of the Springing Warrants as a preferred stock dividend of
$16,506,000.

4. COMPREHENSIVE LOSS

    For the three months ended October 31, 2000 and 1999, comprehensive loss was
$16,142,000 and $15,618,000, respectively. For the nine months ended October 31,
2000 and 1999, comprehensive loss was $13,689,000 and $34,768,000, respectively.
The difference between net loss and comprehensive loss for the three and nine
months ended October 31, 2000 was due to net unrealized gains (losses) on
available-for-sale securities of $9,000 and ($3,000), respectively. There were
no net unrealized holding losses for the three and nine months ended October 31,
1999.



                                       8
<PAGE>   10

5. REPORTABLE SEGMENTS

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

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

     Lightspan has two reportable segments: K-12 and Higher Education. Revenues
derived from the K-12 segment include the sale of Lightspan Achieve Now software
licenses, subscription fees for The Lightspan Network and Edutest products,
implementation, training and support services and hardware and related
accessories. Revenues derived from the Higher Education segment, comprised
solely of Academic which was acquired in September 1999, include the sale of
curriculum products licensed to colleges and then sold by the licensing colleges
to students on a student-by-student basis for use with each class.

MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

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

FACTORS MANAGEMENT USED TO IDENTIFY LIGHTSPAN'S REPORTABLE SEGMENTS

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

FINANCIAL INFORMATION FOR LIGHTSPAN'S SEGMENTS

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED OCTOBER 31, 2000
                                                        --------------------------------------------------
                                                                              HIGHER
                                                            K-12            EDUCATION          CONSOLIDATED
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Revenues from external customers .................      $      9,417       $      1,688       $     11,105
Interest income, net .............................             1,569                 --              1,569
Depreciation and amortization ....................               351                107                458
Segment loss from operations .....................           (11,922)            (5,798)           (17,720)
Segment assets ...................................           138,533             29,975            168,508
Other significant non cash items:
  Deferred stock compensation ....................              (665)               (25)              (690)
  Amortization of deferred stock compensation ....               374                  4                378
  Amortization of intangible assets ..............             1,607              2,914              4,521
</TABLE>



                                       9
<PAGE>   11


<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED OCTOBER 31, 1999
                                                        --------------------------------------------------
                                                                              HIGHER
                                                            K-12            EDUCATION          CONSOLIDATED
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Revenues from external customers .................      $      3,992       $        489       $      4,481
Interest income (expense), net ...................               227                 (3)               224
Depreciation and amortization ....................               246                 25                271
Segment loss from operations .....................           (13,689)            (2,153)           (15,842)
Segment assets ...................................            47,763             51,004             98,767
Other significant non cash items:
  Deferred stock compensation ....................               562                204                766
  Amortization of deferred stock compensation ....             1,529                 12              1,541
</TABLE>


<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED OCTOBER 31, 2000
                                                        --------------------------------------------------
                                                                              HIGHER
                                                            K-12            EDUCATION          CONSOLIDATED
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Revenues from external customers .................      $     79,994       $      6,644       $     86,638
Interest income (expense), net ...................             4,854                 (1)             4,853
Depreciation and amortization ....................               970                260              1,230
Restructuring charge .............................             1,600                 --              1,600
Segment income (loss) from operations ............            (3,217)           (15,322)           (18,539)
Segment assets ...................................           138,533             29,975            168,508
Other significant non cash items:
  Deferred stock compensation ....................            (1,050)               (46)            (1,096)
  Amortization of deferred stock compensation ....             1,968                 50              2,018
  Amortization of intangible assets ..............             2,780              8,695             11,475
</TABLE>


<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED OCTOBER 31, 1999
                                                        --------------------------------------------------
                                                                              HIGHER
                                                            K-12            EDUCATION          CONSOLIDATED
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Revenues from external customers .................      $     10,793       $        489       $     11,282
Interest income (expense), net ...................               234                 (3)               231
Depreciation and amortization ....................               840                 25                865
Segment loss from operations .....................           (32,846)            (2,153)           (34,999)
Segment assets ...................................            47,763             51,004             98,767
Other significant non cash items:
  Deferred stock compensation ....................             8,344                204              8,548
  Amortization of deferred stock compensation ....             2,491                 12              2,503
  Amortization of intangible assets ..............               137              1,479              1,616
</TABLE>

6. RESTRUCTURING

    In July 2000, the Company completed a restructuring plan designed to refocus
its sales and marketing efforts away from its free Internet products and toward
its subscription-based Internet products such as The Lightspan Network,
eduTest@School and eduTest@School Plus, which resulted in a $1.6 million charge.
The restructuring charge included $1.2 million in involuntary termination
benefits relating to the termination of 14 employees in August 2000. The Company
also accrued exit costs of $0.4 million relating to contractual obligations for
services associated with its free Internet site that will no longer be used to
generate revenue for the Company. As of October 31, 2000, the Company had paid
$0.5 million in involuntary termination benefits and exit costs and anticipates
paying the remaining costs through the first quarter of fiscal 2003.





                                       10
<PAGE>   12


7. RECENT PRONOUNCEMENTS

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

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

      This information should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended January 31,
2000 contained in our Annual Report on Form 10-K/A filed May 11, 2000 with the
SEC.

      Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our future results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include risks
detailed in this Item 2 and in our Annual Report on Form 10-K/A filed May 11,
2000 with the SEC.

OVERVIEW

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

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

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

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

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

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

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

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


                                       11
<PAGE>   13


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

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

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

     -  selected additional content for teachers, parents and students.

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

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

REVENUE RECOGNITION

     Effective February 1, 1998, we adopted SOP 97-2, as described in Note 1 of
the "Notes to Consolidated Financial Statements", which caused a substantial
change in our revenue recognition for Lightspan Achieve Now licenses. Under SOP
97-2, we were unable to recognize any Lightspan Achieve Now license fees as
revenue until we shipped the final title which we planned to provide to all
existing customers for no additional charge. Therefore, we deferred revenue
recognition for all Lightspan Achieve Now licenses shipped in the years ended
January 31, 2000 and 1999. Through July 31, 2000, we completed and shipped all
Lightspan Achieve Now titles resulting in the recognition, during the first two
quarters of fiscal year 2001 (ended July 31, 2000), of $48.1 million of revenue
previously deferred. As we have completed and shipped all Lightspan Achieve Now
titles, we are now able to recognize revenue from Lightspan Achieve Now licenses
upon shipment.

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





                                       12
<PAGE>   14


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


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                OCTOBER 31,                    OCTOBER 31,
                                                       --------------------------      ---------------------------
                                                          2000            1999            2000             1999
                                                       ----------      ----------      ----------       ----------
<S>                                                    <C>             <C>             <C>              <C>
DEFERRED LICENSE REVENUE- ACHIEVE NOW
  Beginning balance .............................             $--      $   33,058      $   48,110       $   20,717
  Deferred during the period ....................              --           7,149             384           19,490
  Recognized during the period ..................              --              --         (48,494)              --
                                                       ----------      ----------      ----------       ----------
    Ending balance ..............................             $--      $   40,207             $--       $   40,207
                                                       ==========      ==========      ==========       ==========
DEFERRED COST OF LICENSE REVENUE- ACHIEVE NOW
  Beginning balance .............................             $--      $    5,863      $    8,709       $    3,555
  Deferred during the period ....................              --           1,230              70            3,538
  Recognized during the period ..................              --              --          (8,779)              --
                                                       ----------      ----------      ----------       ----------
    Ending balance ..............................             $--      $    7,093             $--       $    7,093
                                                       ==========      ==========      ==========       ==========
</TABLE>


RESULTS OF OPERATIONS

     Operating Losses. We have incurred significant losses since our inception
and, as of October 31, 2000, have an accumulated deficit of approximately $206.5
million. We expect to continue to incur operating losses for the foreseeable
future. In July 2000, we recorded a $1.6 million restructuring charge related to
a refocus of our sales and marketing efforts away from our free Internet
products and toward our subscription-based Internet products such as The
Lightspan Network, eduTest@School and eduTest@School Plus. Also, in July 2000,
we completed and shipped the remaining Lightspan Achieve Now titles used on a PC
platform and the PlayStation game console, recognizing $48.1 million during the
first two quarters of fiscal year 2001 (ended July 31, 2000) in previously
deferred revenue pursuant to SOP 97-2, resulting in an operating loss of $18.5
million for the nine months ended October 31, 2000. The operating results in the
first three quarters of fiscal 2001 are not indicative of our underlying
business in these quarters, and will not be indicative of results that may be
expected for any subsequent quarter, for the full year ending January 31, 2001
or for any future periods.

COMPARISON OF THREE AND NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999

REVENUES

    We generate software and Internet license revenue, service revenue, hardware
revenue and other revenue. Our total revenues increased to $11.1 million for the
three months ended October 31, 2000 from $4.5 million for the three months ended
October 31, 1999. The increase of $6.6 million was a result of a $6.4 million
increase in license revenues and increases of $0.5 million in service revenue
and $0.2 million in other revenue, offset by a $0.5 million decrease in hardware
revenue, as described below. Our total revenues increased to $86.6 million for
the nine months ended October 31, 2000 from $11.3 million for the nine months
ended October 31, 1999. The increase of $75.3 million was a result of the
recognition of $48.1 million in revenue previously deferred, $25.4 million in
additional software license revenue for licenses sold during the period, and
increases of $2.1 million in service revenue and $0.6 million in other revenue,
offset by a $0.9 million decrease in hardware revenue, as described below.

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



                                       13
<PAGE>   15


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

     Our total license revenues grew to $7.5 million for the three months ended
October 31, 2000 from $0.9 million for the three months ended October 31, 1999.
The $6.6 million increase related to the shipment of $4.4 million in Lightspan
Achieve Now licenses, $1.1 million from sales of Academic software and Internet
licenses, $0.9 million from sales of subscriptions for The Lightspan Network and
$0.2 million from sales of eduTest.com licenses.

     Our total license revenue grew to $75.4 million for the nine months ended
October 31, 2000 from $1.7 million for the nine months ended October 31, 1999.
The $73.7 million increase related to our recognition of $48.1 million of
Lightspan Achieve Now revenue previously deferred pursuant to SOP 97-2, the
shipment of $17.7 million in Lightspan Achieve Now licenses, $6.0 million from
sales of Academic licenses, $1.6 million from sales of subscriptions for The
Lightspan Network and $0.3 million from sales of eduTest.com licenses.

     Due to our adoption of SOP 97-2 on February 1, 1998, we did not record any
license revenues related to Lightspan Achieve Now in fiscal 2000 or 1999. In the
six months ended July 31, 2000, we completed and shipped the remaining Lightspan
Achieve Now titles in all grade clusters used on both the PlayStation game
console and on a PC platform, resulting in the recognition of the total
Lightspan Achieve Now revenue previously deferred, pursuant to SOP 97-2. During
the three months ended October 31, 2000, we shipped and recognized Lightspan
Achieve Now licenses in the amount of $4.4 million. This represented a 38%
decrease over $7.1 million in shipments which were entirely deferred for the
three months ended October 31, 1999. This decrease was due to delays in
distribution of Federal Title I funding to schools and greater than expected
sales of Internet subscriptions. During the nine months ended October 31, 2000,
we recognized Lightspan Achieve Now license revenue in the amount of $17.7
million. This represented a 9% decrease in revenue over $19.5 million in revenue
which was entirely deferred for the nine months ended October 31, 1999. This
decrease was due to lost sales attributable to customer concerns over possible
delivery delays of PlayStation game console, greater than expected sales of
Internet subscriptions and delays in distribution of Federal Title I funding to
schools.

      Our license revenue also increased $1.1 million for the three months ended
October 31, 2000 from $0.5 million for the three months ended October 31, 1999
and increased $6.0 million for the nine months ended October 31, 2000, from $0.5
million for the nine months ended October 31, 1999, due to Academic software and
Internet license revenue. Revenue for the three and nine months ended October
31, 1999 represents revenue since September 20, 1999, the date the acquisition
of Academic was consummated. Academic curriculum products are licensed to
colleges and then sold by the licensing colleges to students on a
student-by-student basis for use with each class, instead of a textbook. As we
are not contractually obligated to provide further service after delivery of the
license, we recognize the full sales value of Academic license revenue upon
completion of the criteria defined in SOP 97-2.

     Our revenues from subscription fees for The Lightspan Network increased
218% to $1.3 million for the three months ended October 31, 2000 from $0.4
million for the three months ended October 31, 1999 and increased 125% to $2.8
million for the nine months ended October 31, 2000 from $1.2 million for the
nine months ended October 31, 1999. This was due primarily to an increase in the
number of subscribers to The Lightspan Network resulting in part from the
increased focus of our sales force on promoting The Lightspan Network. We
recognize revenue from subscriptions to The Lightspan Network ratably over the
term of the subscription agreement. Subscription licenses are for a one-year
term, and are paid in advance.

     Our revenues from sales of eduTest.com licenses were $0.2 million for the
three months ended October 31, 2000 and $0.3 million from the period beginning
June 23, 2000, the date of our acquisition of Edutest, through


                                       14
<PAGE>   16

October 31, 2000. We recognize revenue from eduTest.com licenses ratably over
the term of the license agreement. Licenses are for a one-year term, and are
paid in advance.

     Service Revenues. Our service revenues increased 28% to $2.5 million for
the three months ended October 31, 2000 from $1.9 million for the three months
ended October 31, 1999 due primarily to an increase in the hourly service
billing rates and an increased focus on sales of additional services, partially
offset by the decrease in sales of Lightspan Achieve Now licenses and the
related decrease in services. Our service revenues increased 44% to $6.8 million
for the nine months ended October 31, 2000 from $4.7 million for the nine months
ended October 31, 1999 due primarily to the above increases, partially offset by
the decrease in sales of Lightspan Achieve Now licenses and the related decrease
in services. We derive service revenues from implementation services and
training for our Lightspan Achieve Now curriculum that is provided by our
professional development team and, to a lesser extent, from telephone support
and maintenance. All customers that purchase our Lightspan Achieve Now
curriculum also purchase service and support. This service and support are paid
for in advance and initially recorded as deferred revenues. Service revenues are
recognized when services are performed, in accordance with the standard
implementation, training, service, and evaluation plans that we establish for
the customer. Revenues from telephone support and maintenance arrangements are
recognized ratably over the one-year term of the support and maintenance
agreements.

     Hardware Revenues. Our hardware revenues decreased 40% to $1.0 million for
the three months ended October 31, 2000 from $1.7 million for three months ended
October 31, 1999 due primarily to a decrease in sales of Lightspan Achieve Now
licenses. Our hardware revenues decreased 19% to $3.9 million for the nine
months ended October 31, 2000 from $4.8 million for the nine months ended
October 31, 1999, due primarily to a decrease in the sales of Lightspan Achieve
Now licenses. Additionally, in the three and nine months ended October 31, 2000,
under our refurbish program, for a limited time we sold refurbished PlayStation
game consoles at a discount from the original price and included related
accessories at no additional charge, which contributed to the decrease in
hardware revenues. We derive hardware revenues from the sale of the PlayStation
game console and accessories. We recognize hardware revenues after a definitive
purchase order has been received, the product has been shipped and collection of
the sales price is considered probable. Substantially all of our Lightspan
Achieve Now customers also purchase the PlayStation game console.

      Other Revenues. Other revenue for the three and nine months ended October
31, 2000 was $0.2 million and $0.6 million, respectively. Beginning in February
2000, we derived other revenues from site sponsorship agreements, whereby we
provide certain online exposure by promoting the products and services of site
sponsors on our Lightspan.com Web site. We also provide other offline promotions
such as providing name or logo placement on selected Lightspan.com consumer and
trade advertising and giving site sponsorship credits at technology and
education trade shows we participate in throughout the terms of the site
sponsorship agreements. We recognize site sponsorship revenue over the term the
services are provided.

COST OF REVENUES

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

     Our cost of revenues increased to $3.5 million for the three months ended
October 31, 2000 from $2.4 million for the three months ended October 31, 1999.
The $1.1 million increase was due to $1.3 million in cost of license revenues
and $0.4 million in cost of service revenue, offset by a decrease of $0.6
million in cost of hardware revenue, as described below. Gross margin as a
percentage of total revenues was 68% and 47% for the three months ended October
31, 2000 and 1999, respectively, as described below.

     Our cost of revenues increased to $20.6 million for the nine months ended
October 31, 2000 from $6.7 million for the nine months ended October 31, 1999.
The $13.4 million increase was due to $13.9 million in cost of license


                                       15
<PAGE>   17

revenues and an $1.1 million in cost of service revenue, offset by a decrease of
$1.3 million in cost of hardware revenue, as described below. Gross margin as a
percentage of total revenues was 76% and 40% for the nine months ended October
31, 2000 and 1999, respectively. This increase in gross margin was due to the
higher gross margin on revenue derived from sales of Lightspan Achieve Now
licenses, which was entirely deferred for the three and nine months ended
October 31, 1999.

     Cost of License Revenues. Our cost of license revenues increased to $1.5
million for the three months ended October 31, 2000 from $0.2 million for the
three months ended October 31, 1999. This $1.3 million increase was due to $0.7
million in Lightspan Achieve Now cost of license revenues, $0.3 million in
Academic cost of license revenues and $0.2 million in cost of license revenues
for subscriptions to The Lightspan Network. Our cost of license revenues
increased to $14.4 million for the nine months ended October 31, 2000 from $0.5
million for the nine months ended October 31, 1999. The $13.9 million increase
was due to the recognition of $9.0 million of Lightspan Achieve Now cost of
licenses previously deferred pursuant to SOP 97-2, the shipment of $3.0 million
in Lightspan Achieve Now cost of license revenues, $1.2 million in Academic cost
of license revenues, $0.6 million in cost of license revenues for subscriptions
to The Lightspan Network and $0.1 million in cost of license revenues for
eduTest.com licenses.

     Because we deferred all revenue related to shipments of Lightspan Achieve
Now in both fiscal 2000 and 1999, we also deferred the related cost of revenue.
In the nine months ended October 31, 2000, we completed and shipped the
remaining Lightspan Achieve Now titles in all grade clusters used on both the
PlayStation game console and on a PC platform, resulting in the recognition of
the total cost of licenses previously deferred, pursuant to SOP 97-2. During the
three months ended October 31, 2000, we sold Lightspan Achieve Now licenses,
representing $0.7 million in cost of revenue. This represents a 39% decrease
over $1.2 million in shipments which were entirely deferred for the three months
ended October 31, 1999. Gross margin on Lightspan Achieve Now license revenues
and cost of license revenues shipped and recognized for the three months ended
October 31, 2000 remained consistent at 83% compared to Lightspan Achieve Now
license revenues and cost of license revenues shipped and not recognized for the
three months ended October 31, 1999. During the nine months ended October 31,
2000, we sold Lightspan Achieve Now licenses representing $3.0 million in cost
of revenue. This represents a 15% decrease over $3.5 million in Lightspan
Achieve Now cost of licenses sold, which were entirely deferred for the nine
months ended October 31, 1999. Gross margin on Lightspan Achieve Now license
revenues and cost of license revenues recognized for the nine months ended
October 31, 2000 and on license revenues and cost of license revenues which were
entirely deferred pursuant to SOP 97-2 for the nine months ended October 31,
1999 remained relatively consistent.

     Our cost of license revenue also increased by $0.3 million for the three
months ended October 31, 2000 from $0.1 million for the three months ended
October 31, 1999 and increased $1.2 million for the nine months ended October
31, 2000, from $0.1 million for the nine months ended October 31, 1999 due to
Academic software and Internet cost of license revenue. Cost of revenue for the
three and nine months ended October 31, 1999 represents cost of revenue since
September 20, 1999, the date the acquisition of Academic was consummated. Gross
margin for Academic as a percentage of license revenues was 75% and 80% for the
three and nine months ended October 31, 2000, respectively compared to 70% for
the three and nine months ended October 31, 1999 which represents costs of
revenue since September 20, 2000, the date the acquisition of Academic was
consummated, due to the higher gross margins associated with Academic Internet
licenses that we offered beginning in the quarter ended July 31, 2000.

     Our cost of revenues for subscriptions to The Lightspan Network increased
152% to $0.3 million for the three months ended October 31, 2000 from $0.1
million for the three months ended October 31, 1999 and increased 164% to $1.0
million for the nine months ended October 31, 2000 from $0.4 million for the
nine months ended October 31, 1999. This growth was due primarily to an increase
in the number of subscriptions and an increase in server costs. Gross margin as
a percentage of subscription fee revenues from The Lightspan Network increased
to 76% for the three months ended October 31, 2000 from 70% for the three months
ended October 31, 1999. This increase was primarily due to an increase in the
selling price of The Lightspan Network subscription from $2,500 in the three
months ended October 31, 1999 to $3,000 the three months ended October 31, 2000.
Gross margin as a percentage of subscription fee revenues from The Lightspan
Network decreased to 64% for the nine months ended


                                       16
<PAGE>   18

October 31, 2000 from 70% for the nine months ended October 31, 1999. This
decrease was primarily due to us offering volume discounts for customers
purchasing multiple subscriptions and increased server costs, partially offset
by the above increase in gross margin during the three months ended October 31,
2000.

     Cost of Service Revenues. Our cost of service revenues increased 49% to
$1.3 million for the three months ended October 31, 2000 from $0.9 million for
three months ended October 31, 1999 and increased 52% to $3.4 million for the
nine months ended October 31, 2000 from $2.2 million for nine months ended
October 31, 1999. The increases were primarily due to an increase in
professional services and support personnel to accommodate the growth in sales
of Lightspan Achieve Now licenses and related services. Gross margin as a
percentage of service revenues decreased to 48% for the three months ended
October 31, 2000 from 55% for the three months ended October 31, 1999 and
decreased to 50% for the nine months ended October 31, 2000 from 53% for the
nine months ended October 31, 1999 due primarily to increased expenses
associated with delivering the service.

     Cost of Hardware Revenues. Our cost of hardware revenues decreased 44% to
$0.7 million for the three months ended October 31, 2000 from $1.3 million for
three months ended October 31, 1999 and decreased 31% to $2.7 million for the
nine months ended October 31, 2000 from $4.0 million for nine months ended
October 31, 1999 primarily due to a decrease in the sales of our Lightspan
Achieve Now licenses. Additionally, in the three and nine months ended October
31, 2000, under our refurbish program, we purchased refurbished PlayStation game
consoles at a discount from the original PlayStation game console, contributing
to the decrease in cost of hardware revenues for the three and nine months ended
October 31, 2000. Gross margin as a percentage of hardware revenues increased to
30% for the three months ended October 31, 2000 from 24% for the three months
ended October 31, 1999 and increased to 30% for the nine months ended October
31, 2000 from 17% for the nine months ended October 31, 1999. The increases in
gross margin were due to a decrease in the cost of the PlayStation game console
and related accessories, partially offset by our refurbish program, whereby for
a limited time we sold the refurbished PlayStation game consoles at a discount
from the original price and included related accessories at no additional
charge.

EXPENSES

     Technology and Development. Our technology and development expenses
increased 104% to $6.2 million for the three months ended October 31, 2000 from
$3.1 million for three months ended October 31, 1999 and increased 143% to $18.3
million for the nine months ended October 31, 2000 from $7.5 million for nine
months ended October 31, 1999. This was due to our hiring of additional
personnel, temporary consulting, and related costs for Web site design and
development of our Internet business as we expand our product offerings, and the
addition of Academic's technology and development expense of $1.6 million and
$4.5 million for the three and nine months ended October 31, 2000, respectively.

     Our technology and development costs consist primarily of payroll and
related costs for design, art, production, development, maintenance and testing
of our Lightspan Achieve Now curriculum and for performing Web site design,
development, enhancement, and testing which are properly expensed as incurred
pursuant to FAS 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed and EITF 00-2, Accounting for Web Site Development
Costs. We regularly evaluate these expenses under FAS 86 and EITF 00-2 in order
to determine their proper treatment. We believe that continued investment in
fee-based subscription Internet product development is critical to attaining our
strategic objectives and, therefore, anticipate that current levels of fee-based
subscription Internet product development expenses will continue in future
periods.

     Sales and Marketing. Our sales and marketing expenses increased 16% to
$11.4 million for the three months ended October 31, 2000 from $9.8 million for
the three months ended October 31, 1999, and increased 85% to $44.0 million for
the nine months ended October 31, 2000 from $23.8 million for the nine months
ended October 31, 1999. This was due to an increase in sales and marketing
personnel and promotional activities connected to the launch of Lightspan.com
and the related $5.0 million television campaign in the first quarter of fiscal
2001, the continued promotion of Lightspan Achieve Now and the addition of
Academic sales and marketing expense of $1.9 million and $6.0 million for the
three and nine months ended October 31, 2000, respectively.


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

     General and Administrative. Our general and administrative expenses
increased 43% to $2.8 million for the three months ended October 31, 2000 from
$2.0 million for the three months ended October 31, 1999, and increased 77% to
$7.2 million for the nine months ended October 31, 2000 from $4.1 million for
the nine months ended October 31, 1999. This was due primarily to personnel and
related costs resulting from our increased infrastructure, system support,
corporate expenses associated with being a public company including legal and
accounting fees and $0.3 million and $1.0 million in expenses from Academic for
the three and nine months ended October 31, 2000, respectively.

     Our general and administrative expenses consist primarily of payroll and
related costs for executive and administrative personnel, professional services
expenses and other general corporate expenses. We expect that general and
administrative expenses may increase as our business expands.

     Stock-Based Compensation. During the three months ended October 31, 2000
and 1999, we recorded $0 and $0.8 million, respectively, in deferred stock
stock-based compensation and during the nine months ended October 31, 2000 and
1999, we recorded $0.1 million and $8.5 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. The amortization
of deferred stock-based compensation expense was approximately $0.4 million and
$1.5 million for the three months ended October 31, 2000 and 1999, respectively
and approximately $2.0 million and $2.5 million for the nine months ended
October 31, 2000 and 1999, respectively. As of October 31, 2000, there was
approximately $2.1 million to be amortized in future periods.

     Amortization of Intangible Assets. In connection with the acquisitions of
Academic, Global Schoolhouse and StudyWeb in the third quarter of fiscal 2000,
and LearningPlanet.com and Edutest in the second quarter of fiscal 2001, we
recorded intangible assets totaling an aggregate of approximately $68.9 million.
We amortize these intangible assets over their respective useful lives, ranging
from three to ten years. Our amortization of intangible assets totaled $4.5
million and $1.6 million for the three months ended October 31, 2000 and 1999,
respectively, and $11.5 million and $1.6 million for the nine months ended
October 31, 2000 and 1999, respectively. We expect to record annual amortization
expense related to our acquisitions of approximately $16.0 million for fiscal
2001, $18.3 million for fiscal 2002, $17.8 million for fiscal 2003, $9.7 million
for fiscal 2004, $0.5 million for fiscal 2005, $0.4 million for fiscal 2006,
$0.3 million for each fiscal years 2007 through 2009, and $0.2 million for
fiscal 2010.

    Restructuring. In July 2000, we completed a restructuring plan designed to
refocus our sales and marketing efforts away from our free Internet products and
toward our subscription-based Internet products such as The Lightspan Network,
eduTest@School and eduTest@School Plus, which resulted in a $1.6 million charge.
The restructuring charge included $1.2 million of involuntary termination
benefits relating to the termination of 14 employees in August 2000. We also
accrued exit costs of $0.4 million in expenses relating to contractual
obligations for services associated with our free Internet site that will no
longer be used to generate revenue for us. Through October 31, 2000, we have
paid $0.5 million in involuntary termination benefits and exit costs. We
anticipate paying the remaining involuntary termination benefits and exit costs
through the first quarter of fiscal 2003.

     As we have experienced significant customer interest and acceptance of our
subscription Internet products, with many schools looking for web content to
deliver on newly-installed infrastructures, we decided to emphasize the


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subscription part of our K-12 Internet business and reduce the heavy promotional
spending necessary to generate consumer traffic for our free site,
Lightspan.com. These changes should allow us to reduce our cost structure in
future periods.

     Interest Income (Expense). Our net interest income was $1.6 million for the
three months ended October 31, 2000 and $4.9 million for the nine months ended
October 31, 2000 as a result of investing the proceeds from our initial public
offering in short term, interest-bearing, investment grade securities.

SPRINGING WARRANTS

     Upon the completion of our initial public offering of common stock in
February 2000, warrants to purchase up to 2,760,160 shares of Series D preferred
stock at $0.02 per share (the "Springing Warrants") converted into warrants to
purchase up to 1,380,080 shares of common stock and were automatically
exercised, resulting in the issuance of 1,377,762 shares of common stock (after
application of certain "net exercise" provisions that permitted exercise without
additional cash payment combined with the issuance of a reduced number of
shares). As a result, on February 15, 2000, we accounted for the intrinsic value
of the Springing Warrants as a preferred stock dividend of $16.5 million. Such
amount also increased the net loss per share applicable to common stockholders
for the nine months ended October 31, 2000 and will increase the net loss or
decrease the net income applicable to common stockholders for periods including
February 15, 2000.

LEGAL MATTERS

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

LIQUIDITY AND CAPITAL RESOURCES

     From inception through January 2000, we financed our operations and met our
capital expenditure requirements primarily with the net proceeds from private
sales of equity securities totaling approximately $143.6 million. On February
15, 2000, we completed our initial public offering of 7,500,000 shares of common
stock at an initial offering price of $12.00 per share. We also completed
private placement offerings concurrently with our initial public offering with
CINAR, Cox Communications and Gateway Companies, Inc. for 833,333, 1,041,667 and
250,000 shares, respectively. The proceeds from these offerings after deducting
the underwriting discount and commissions and offering expenses and payment of
financial advisory fees relating to our private placements was approximately
$106.0 million. In March 2000, the underwriters exercised 655,150 shares of
their overallotment option for total proceeds, net of discounts and commissions,
of $7.3 million. At October 31, 2000, we had $69.2 million of cash and cash
equivalents and $25.3 million in short-term investments. The expansion of our
business will require significant additional capital to fund operating losses,
capital expenditures and working capital needs. We have incurred significant
losses since our inception and expect to continue to incur losses for the
foreseeable future.

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

     Net cash used in operating activities was $36.0 million for the nine months
ended October 31, 2000 and $11.8 million for the nine months ended October 31,
1999. Net cash used during these periods was primarily to fund technology and
development, sales and marketing, including promotion of Lightspan.com, and
general and


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administrative costs associated with the development and deployment of our
Lightspan Achieve Now and Academic curriculum and Internet products and
services. We expect our negative operating cash flow to continue for the
foreseeable future.

     Net cash used in investing activities was $14.1 million for the nine months
ended October 31, 2000 relating primarily to the purchases, offset by
maturities, of short-term investments purchased with proceeds from our initial
public offering, $2.1 million in purchases of property and equipment and $2.8
million related to the acquisitions of Edutest and LearningPlanet.com . Net cash
used in investing activities for the nine months ended October 31, 1999 was $5.6
million relating primarily to $4.3 million in cash paid for the acquisitions of
Academic, GlobalSchoolhouse and StudyWeb and $1.3 million in purchases of
property and equipment.

     Net cash provided by financing activities was $114.2 million for the nine
months ended October 31, 2000, relating primarily to the proceeds from our
initial public offering, private placements and the underwriter's exercise of
their overallotment option. Net cash provided by financing activities was $33.0
million for the nine months ended October 31, 1999 related primarily to proceeds
from the issuance of preferred stock.

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

     In April 1999, we entered into a $1.0 million capital lease line with a
financial institution to finance the purchase of capital equipment at an 8.8%
interest rate over a 42-month period with a purchase option. In September 2000,
the capital lease line expired.

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

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

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

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

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


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                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 26th day of
April, 2001.

                                              Lightspan, Inc.



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


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