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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

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

For the quarterly period ended July 31, 2003

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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
(State or other jurisdiction of
incorporation or organization)                |  | 33-0585210
(I.R.S. Employer Identification No.)
|                                                                                       |  |                                                
|10140 Campus Point Drive
San Diego, California
(Address of principal executive office) |  | 92121-1520
(Zip Code)                          

(858) 824-8000

(Registrants telephone number, including area code)


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 þ   NO o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

Number of shares of registrants common stock outstanding as of August 31,
2003: 4,768,016 (Note: one-for-ten stock split was effective August 25, 2003)



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TABLE OF CONTENTS



|                           |                                                                                           |                                            |  |  |  |  |  | 
|-------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                           | PART I. FINANCIAL INFORMATION                                                            
|                           | Item 1. Consolidated Financial Statements                                                
|                           |                                                                                           | CONSOLIDATED BALANCE SHEETS               
|                           |                                                                                           | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                           |                                                                                           | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                           |                                                                                           | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                           | Item 2. Managements Discussion and Analysis of Financial Condition and Operating Results
|                           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                       
|                           | Item 4. Controls And Procedures                                                          
|Part II. OTHER INFORMATION
|                           | Item 1. Legal Proceedings                                                                
|                           | Item 2. Changes in Securities and Use of Proceeds                                        
|                           | Item 3. Defaults Upon Senior Securities                                                  
|                           | Item 4. Submission of Matters to a Vote of Security Holders                              
|                           | Item 5. Other Information                                                                
|                           | Item 6. Exhibits and Reports on Form 8-K                                                 
|SIGNATURES                
|EXHIBIT 31.1              
|EXHIBIT 31.2              
|EXHIBIT 32.1              
|EXHIBIT 32.2              



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##### Table of Contents



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

|                                                    |                                                                                               |                                                                                                                    |    |      |   | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | -- | ---- | - | 
|                                                    |                                                                                               |                                                                                                                    |    | Page
|                                                    |                                                                                               |                                                                                                                    |    |     
|PART I  FINANCIAL INFORMATION                      |                                                                                               |                                                                                                                    | 3  |     
|                                                    | Item 1. Consolidated Financial Statements                                                     |                                                                                                                    |    | 3    |  
|                                                    |                                                                                               | Consolidated Balance Sheets as of July 31, 2003 (unaudited) and January 31, 2003                                   |    |      | 3 | 
|                                                    |                                                                                               | Consolidated Statements of Operations for the three months and six months ended July 31, 2003 and 2002
(unaudited) |    |      | 4 | 
|                                                    |                                                                                               | Consolidated Statements of Cash Flows for the six months ended July 31, 2003 and 2002 (unaudited)                  |    |      | 5 | 
|                                                    |                                                                                               | Notes to Consolidated Financial Statements (unaudited)                                                             |    |      | 6 | 
|                                                    | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                    |    | 11   |  
|                                                    | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                    |    | 25   |  
|                                                    | Item 4. Controls and Procedures                                                               |                                                                                                                    |    | 25   |  
|PART II  OTHER INFORMATION                         |                                                                                               |                                                                                                                    | 25 |     
|                                                    | Item 1. Legal Proceedings                                                                     |                                                                                                                    |    | 25   |  
|                                                    | Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                                    |    | 26   |  
|                                                    | Item 3. Defaults Upon Senior Securities                                                       |                                                                                                                    |    | 26   |  
|                                                    | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                    |    | 26   |  
|                                                    | Item 5. Other Information                                                                     |                                                                                                                    |    | 26   |  
|                                                    | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                    |    | 27   |  
|Signatures                                          |                                                                                               |                                                                                                                    | 28 |     
|EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2 |                                                                                               |                                                                                                                    |    |     

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




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

|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |             |          |        |        | 
|------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ----------- | ------ | ----------- | -------- | ------ | ------ | 
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          | July 31,    |        | January 31,
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          | 2003        |        | 2003       
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          | (Unaudited) |        |             |          |       
|Assets                                                                                                             |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|Current assets:
Cash and cash equivalents                                                                          |                                                | $                                                                                                                 | 12,601                                                                                                    |                                            |          | $           | 18,497 |            
|                                                                                                                   |                                                | Short-term investments available for sale                                                                         |                                                                                                           |                                            |         |             |        |             | 5,055    |       
|                                                                                                                   |                                                | Accounts receivable, less allowance for doubtful accounts of $1,645 (July 31, 2003)
and $1,652 (January 31, 2003) |                                                                                                           |                                            | 14,065   |             |        |             | 9,135    |       
|                                                                                                                   |                                                | Finished goods inventory                                                                                          |                                                                                                           |                                            | 2,113    |             |        |             | 1,829    |       
|                                                                                                                   |                                                | Other current assets                                                                                              |                                                                                                           |                                            | 1,090    |             |        |             | 1,075    |       
|                                                                                                                   |                                                | Restricted cash                                                                                                   |                                                                                                           |                                            | 827      |             |        |             | 827      |       
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                |                                                                                                                   | Total current assets                                                                                      |                                            |          | 30,696      |        |             |          | 36,418 |       
|Property and equipment, net                                                                                        |                                                |                                                                                                                   | 3,001                                                                                                     |                                            |          |             | 4,060  |            
|Goodwill, net of accumulated amortization of $22,280 (July 31, 2003) and $22,280
(January 31, 2003)                |                                                |                                                                                                                   | 11,741                                                                                                    |                                            |          |             | 11,741 |            
|Other intangible assets, net of accumulated amortization of $29,058 (July 31, 2003)
and $25,226 (January 31, 2003) |                                                |                                                                                                                   | 2,942                                                                                                     |                                            |          |             | 6,774  |            
|Deposits and other assets                                                                                          |                                                |                                                                                                                   | 587                                                                                                       |                                            |          |             | 553    |            
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                |                                                                                                                   | Total assets                                                                                              |                                            | $        | 48,967      |        |             | $        | 59,546 |       
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|Liabilities and Stockholders Equity                                                                               |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|Current liabilities:                                                                                               |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                | Accounts payable                                                                                                  |                                                                                                           | $                                          | 2,193    |             |        | $           | 3,836    |       
|                                                                                                                   |                                                | Accrued liabilities                                                                                               |                                                                                                           |                                            | 8,876    |             |        |             | 10,278   |       
|                                                                                                                   |                                                | Deferred revenue                                                                                                  |                                                                                                           |                                            | 13,711   |             |        |             | 11,642   |       
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                |                                                                                                                   | Total current liabilities                                                                                 |                                            |          | 24,780      |        |             |          | 25,756 |       
|Deferred revenue, less current portion                                                                             |                                                |                                                                                                                   | 934                                                                                                       |                                            |          |             | 682    |            
|Other liabilities                                                                                                  |                                                |                                                                                                                   | 72                                                                                                        |                                            |          |             | 129    |            
|Stockholders equity:                                                                                              |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   | Convertible preferred stock, par value $0.001: |                                                                                                                   |                                                                                                           |                                            |          |             |        |             |         
|                                                                                                                   |                                                |                                                                                                                   | Authorized shares - 20,000 No shares issued and outstanding                                               |                                            |          |            |        |             |          |       |       
|                                                                                                                   |                                                | Common stock, par value $0.001:                                                                                   |                                                                                                           |                                            |          |             |        |             |          |       
|                                                                                                                   |                                                |                                                                                                                   | Authorized shares  250,000 Issued and outstanding  47,684 (July 31, 2003) and 47,676
(January 31, 2003) |                                            |          | 48          |        |             |          | 48     |       
|                                                                                                                   |                                                | Additional paid-in capital                                                                                        |                                                                                                           |                                            | 357,608  |             |        |             | 357,460  |       
|                                                                                                                   |                                                | Deferred compensation                                                                                             |                                                                                                           |                                            |         |             |        |             | (27      | )     
|                                                                                                                   |                                                | Accumulated deficit                                                                                               |                                                                                                           |                                            | (334,475 | )           |        |             | (324,502 | )     
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           | Total stockholders equity                 |          |             | 23,181 |             |          |        | 32,979 | 
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           | Total liabilities and stockholders equity |          | $           | 48,967 |             |          | $      | 59,546 | 
|                                                                                                                   |                                                |                                                                                                                   |                                                                                                           |                                            |          |             |        |            

See accompanying notes.

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

|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |         |        | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------ | ------ | --------------------------- | ------ | ------------------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ |  | ------- | ------- | ------ | 
|                                                                |                                                                                             |                          |        | Three Months Ended July 31, |        | Six Months Ended July 31,
|                                                                |                                                                                             |                          |        |                             |        |                          
|                                                                |                                                                                             |                          |        | 2003                        |        | 2002                      |        | 2003   |        | 2002
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |     
|Revenues:                                                       |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Software licenses                                                                           |                          | $      | 8,875                       |        |                           | $      | 8,901  |        |      | $       | 13,739 |        |  | $       | 13,457  |       
|                                                                | On-line subscriptions                                                                       |                          |        | 2,957                       |        |                           |        | 2,245  |        |      |         | 5,822  |        |  |         | 4,816   |       
|                                                                | Professional services                                                                       |                          |        | 2,411                       |        |                           |        | 2,308  |        |      |         | 4,600  |        |  |         | 4,764   |       
|                                                                | Hardware and other                                                                          |                          |        | 1,135                       |        |                           |        | 661    |        |      |         | 1,848  |        |  |         | 1,348   |       
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                |                                                                                             | Total revenues           |        |                             | 15,378 |                           |        |        | 14,115 |      |         |        | 26,009 |  |         |         | 24,385 | 
|Cost of revenues:                                               |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Software licenses                                                                           |                          |        | 1,333                       |        |                           |        | 1,588  |        |      |         | 2,334  |        |  |         | 2,445   |       
|                                                                | On-line subscriptions                                                                       |                          |        | 483                         |        |                           |        | 380    |        |      |         | 937    |        |  |         | 954     |       
|                                                                | Professional services                                                                       |                          |        | 1,185                       |        |                           |        | 1,271  |        |      |         | 2,269  |        |  |         | 2,541   |       
|                                                                | Hardware and other                                                                          |                          |        | 966                         |        |                           |        | 535    |        |      |         | 1,583  |        |  |         | 1,050   |       
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                |                                                                                             | Total cost of revenues   |        |                             | 3,967  |                           |        |        | 3,774  |      |         |        | 7,123  |  |         |         | 6,990  | 
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|Gross profit                                                    |                                                                                             |                          | 11,411 |                             |        |                           | 10,341 |        |        |      | 18,886  |        |        |  | 17,395  |        
|Operating expenses:                                             |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Sales and marketing                                                                         |                          |        | 8,614                       |        |                           |        | 10,131 |        |      |         | 17,073 |        |  |         | 20,352  |       
|                                                                | Technology and development                                                                  |                          |        | 2,153                       |        |                           |        | 3,448  |        |      |         | 4,535  |        |  |         | 7,236   |       
|                                                                | General and administrative                                                                  |                          |        | 1,335                       |        |                           |        | 2,814  |        |      |         | 3,455  |        |  |         | 6,314   |       
|                                                                | Stock-based compensation                                                                    |                          |        | 8                           |        |                           |        | 64     |        |      |         | 26     |        |  |         | 148     |       
|                                                                | Amortization of intangible assets                                                           |                          |        | 1,831                       |        |                           |        | 2,001  |        |      |         | 3,832  |        |  |         | 4,002   |       
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                |                                                                                             | Total operating expenses |        |                             | 13,941 |                           |        |        | 18,458 |      |         |        | 28,921 |  |         |         | 38,052 | 
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|Loss from operations                                            |                                                                                             |                          | (2,530 | )                           |        |                           | (8,117 | )      |        |      | (10,035 | )      |        |  | (20,657 | )      
|Interest income, net                                            |                                                                                             |                          | 31     |                             |        |                           | 133    |        |        |      | 62      |        |        |  | 267     |        
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|Loss before cumulative effect of change in
accounting principle |                                                                                             |                          | (2,499 | )                           |        |                           | (7,984 | )      |        |      | (9,973  | )      |        |  | (20,390 | )      
|Cumulative effect of a change in accounting
principle           |                                                                                             |                          |       |                             |        |                           |       |        |        |      |        |        |        |  | (3,000  | )      
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Net loss                                                                                    |                          | $      | (2,499                      | )      |                           | $      | (7,984 | )      |      | $       | (9,973 | )      |  | $       | (23,390 | )     
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|Net loss per share:                                             |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Basic and diluted loss per share before
cumulative effect of change in accounting
principle |                          | $      | (0.53                       | )      |                           | $      | (1.69  | )      |      | $       | (2.10  | )      |  | $       | (4.33   | )     
|                                                                | Cumulative effect of a change in
accounting principle                                       |                          |        |                            |        |                           |        |       |        |      |         |       |        |  |         | (.64    | )     
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Basic and diluted (see Note 3)                                                              |                          | $      | (0.53                       | )      |                           | $      | (1.69  | )      |      | $       | (2.10  | )      |  | $       | (4.97   | )     
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        
|                                                                | Weighted average shares  basic and diluted                                                 |                          |        | 4,751                       |        |                           |        | 4,716  |        |      |         | 4,759  |        |  |         | 4,710   |       
|                                                                |                                                                                             |                          |        |                             |        |                           |        |        |        |      |         |        |        |  |         |        

See accompanying notes.

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

|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |      |         |       |         |  
|-------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------------- | ------ | ---------------- | ------- | ---- | ------- | ----- | ------- | -
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        | Six Months Ended
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        | July 31,        
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                 
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        | 2003             |         | 2002
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|Operating activities:                                                |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          | Net loss                                                                    |                                                         | $                                                         | (9,973 | )                |         | $    | (23,390 | )    
|                                                                     |                                                                          | Adjustments to reconcile net loss to net cash used in operating activities: |                                                         |                                                           |        |                  |         |      |         |      
|                                                                     |                                                                          |                                                                             | Depreciation and amortization of property and equipment |                                                           |        | 1,073            |         |      |         | 1,270 |        
|                                                                     |                                                                          |                                                                             | Amortization of intangible assets                       |                                                           |        | 3,832            |         |      |         | 4,002 |        
|                                                                     |                                                                          |                                                                             | Amortization of deferred stock-based compensation       |                                                           |        | 26               |         |      |         | 148   |        
|                                                                     |                                                                          |                                                                             | Loss on disposal of assets                              |                                                           |        | 4                |         |      |         | 598   |        
|                                                                     |                                                                          |                                                                             | Cumulative effect of a change in accounting principle   |                                                           |        |                 |         |      |         | 3,000 |        
|                                                                     |                                                                          |                                                                             | Changes in operating assets and liabilities:            |                                                           |        |                  |         |      |         |       |        
|                                                                     |                                                                          |                                                                             |                                                         | Accounts receivable                                       |        |                  | (4,930  | )    |         |       | (6,404  | )
|                                                                     |                                                                          |                                                                             |                                                         | Finished goods inventory                                  |        |                  | (284    | )    |         |       | (279    | )
|                                                                     |                                                                          |                                                                             |                                                         | Deposits and other assets                                 |        |                  | (49     | )    |         |       | (186    | )
|                                                                     |                                                                          |                                                                             |                                                         | Accounts payable                                          |        |                  | (1,643  | )    |         |       | (1,173  | )
|                                                                     |                                                                          |                                                                             |                                                         | Deferred revenue                                          |        |                  | 2,321   |      |         |       | 2,728   |  
|                                                                     |                                                                          |                                                                             |                                                         | Accrued and other liabilities                             |        |                  | (1,439  | )    |         |       | (694    | )
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          |                                                                             |                                                         | Net cash flows used in operating activities               |        |                  | (11,062 | )    |         |       | (20,380 | )
|Investing activities:                                                |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          | Purchase of short-term investments                                          |                                                         |                                                           |       |                  |         |      | (5,078  | )    
|                                                                     |                                                                          | Maturities of short-term investments                                        |                                                         |                                                           | 5,055  |                  |         |      | 1,276   |      
|                                                                     |                                                                          | Purchase of property and equipment                                          |                                                         |                                                           | (17    | )                |         |      | (144    | )    
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          |                                                                             |                                                         | Net cash flows provided by (used in) investing activities |        |                  | 5,038   |      |         |       | (3,946  | )
|Financing activities:                                                |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     | Net proceeds from issuance of common stock and exercise of stock options |                                                                             |                                                         | 148                                                       |        |                  |         | 283  |        
|                                                                     | Principal repayments on capital leases                                   |                                                                             |                                                         | (20                                                       | )      |                  |         | (121 | )      
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          |                                                                             |                                                         | Net cash flows provided by financing activities           |        |                  | 128     |      |         |       | 162     |  
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          | Decrease in cash and cash equivalents                                       |                                                         |                                                           | (5,896 | )                |         |      | (24,164 | )    
|                                                                     |                                                                          | Cash and cash equivalents at beginning of period                            |                                                         |                                                           | 18,497 |                  |         |      | 35,033  |      
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          | Cash and cash equivalents at end of period                                  |                                                         | $                                                         | 12,601 |                  |         | $    | 10,869  |      
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|Supplemental disclosure of cash flow information:                    |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          | Interest paid                                                               |                                                         | $                                                         | 34     |                  |         | $    | 45      |      
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|Supplemental schedule of noncash investing and financing activities: |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     
|                                                                     |                                                                          | Deferred stock-based compensation                                           |                                                         | $                                                         | (2     | )                |         | $    | (23     | )    
|                                                                     |                                                                          |                                                                             |                                                         |                                                           |        |                  |         |     

See accompanying notes.

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LIGHTSPAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of Lightspan,
Inc., which include the accounts of its wholly owned subsidiary, Academic
Systems Corporation (Academic), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring items considered necessary for a fair presentation, have
been included in the accompanying unaudited consolidated financial statements.
All significant intercompany transactions and balances have been eliminated in
consolidation. Historically, the operating results for Lightspan, Inc.,
Academic and eduTest (collectively Lightspan or the Company) have varied
significantly from quarter to quarter because of seasonal influences on demand
for its Lightspan Achieve Now, fee-based subscription online and Academic
curriculum products and services based on school calendars, budget cycles, the
sources and the timing of school districts funding. The Companys operating
results are expected to continue to vary significantly from quarter to quarter
as a result of the same influences. Operating results for the three and six
months ended July 31, 2003, or for any other interim period are not necessarily
indicative of the results that may be expected for the full year ending January
31, 2004. 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, 2003.

Organization and Business Activity

Lightspan, Inc. (Lightspan) was founded in 1993. Lightspan was
incorporated as The Lightspan Partnership, Inc. and changed its name to
Lightspan, Inc. on April 10, 2000. Lightspan provides curriculum-based
educational software and online 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
schools, or K-8, that covers the core curriculum of language arts, reading and
math. The Lightspan Achieve Now program typically includes the Lightspan
Achieve Now software and a PlayStation® game console that the student uses to
operate the program at home throughout the school year. The Lightspan Network
is an online subscription service that provides curriculum-based content for
classroom and home use. The Lightspan Reading Center is a complete online
reading program that supports student achievement and helps educators make more
informed instructional decisions. Lightspan eduTest Assessment is a
comprehensive accountability and assessment online subscription program that
allows educators to quickly identify district, school, class and student
strengths and needs relating to state and national standards. 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.
Web-enhanced versions of Academics Interactive Mathematics and Interactive
English allow colleges to implement the programs using client workstations that
are located solely within an intranet, on the Internet in a distance learning
configuration, or with a combination of intranet and Internet-based
workstations.

Revenue

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

Software Licenses

Lightspan recognizes revenue from license agreements when a
non-cancelable, non-contingent license agreement has been signed, the software
product has been delivered, no uncertainties exist surrounding product
acceptance, fees from the agreement are fixed and determinable, and collection
is probable. 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. Lightspan uses the residual method to recognize revenue when a
license agreement includes one or more elements to be delivered at a future
date if evidence of the fair value of all undelivered elements exists. If
evidence of
6Table of Contents

the fair value of the undelivered elements does not exist, all revenue is
deferred until sufficient evidence exists or all elements have been delivered.

The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,
the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101) and The American
Institute of Certified Public Accountants (AICPA). We believe that our
revenue recognition policy is consistent with this guidance and in accordance
with generally accepted accounting principles. However, the accounting
profession continues to discuss various provisions of these guidelines with the
objective of providing additional guidance on their future application. These
discussions and the issuance of new interpretations, once finalized, could lead
to unanticipated changes in recognized revenue. They could also drive
significant adjustments to our business practices that could result in
increased administrative costs, lengthened sales cycles and other changes that
could affect our results of operations.

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

Historically, Lightspan has experienced minimal customer cancellations,
forfeitures or discontinuations of licenses.

Online Subscriptions

Revenue derived from fee-based online subscriptions is recognized on a
straight-line basis over the term of the agreement, generally one year.

Professional Services

Revenue derived from professional services, including product
implementation and customer training provided by our professional development
organization, is recognized as the services are performed in accordance with
the standard implementation, training, service, and evaluation plans that
Lightspan establishes for its customers. Revenue derived from telephone support
and maintenance arrangements provided by the professional development
organization is recognized ratably over the term of the support and maintenance
period, generally one year.

Hardware

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

2. Goodwill and Other Intangible Assets

On February 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets
which required us to cease amortizing goodwill, and instead perform a
transitional review for impairment as of February 1, 2002 and an annual review
for impairment during the fourth quarter of fiscal 2003. Goodwill is
considered to be potentially impaired if we determine the carrying value of the
reporting unit exceeds its fair value. During the second quarter of fiscal
2003, we performed the transitional test by completing the first step of this
review and determined that there was a potential impairment of goodwill
relating to our higher education division, Academic Systems. As a result, as
required by SFAS 142, we performed a second step utilizing an independent
appraisal firm combined with internal analyses and other market and company
information to measure the amount of the potential impairment. As a part of
this second step, SFAS 142 required the fair value of the reporting unit be
allocated to its assets and liabilities in the same manner used in accounting
for business combinations. These analyses were judgmental in nature and
included significant estimates and assumptions in forecasting revenues,
expenses, growth rates and other relevant information in a discounted cash flow
model with discount rates reflecting the appropriate inherent risk.

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This transitional impairment review from the second step of SFAS 142 resulted in a noncash charge of $3.0 million in the first quarter of fiscal 2003 to
reduce the carrying value of the goodwill associated with our higher education
division, Academic Systems. This charge is reflected as the cumulative effect
of a change in accounting principle in the first quarter of fiscal 2003 as
required by SFAS 142. Also in connection with the adoption of SFAS 142 we
reclassified $1.2 million and $0.5 million of assembled workforce intangibles
and related accumulated amortization respectively as required by the
pronouncement.

We cannot assure you that when we complete our future annual or other
periodic reviews for impairment of goodwill that a material impairment charge
will not be recorded. Goodwill totaled $11.7 million at July 31, 2003.

Detail of intangible assets subject to amortization at July 31, 2003 was
as follows:

|                         |  |          |        |              |  |          |        |     |  |   |       | 
|------------------------ |  | -------- | ------ | ------------ |  | -------- | ------ | --- |  | - | ----- | 
|                         |  | Gross    |        |              |  |          |        | Net
|                         |  | Carrying |        | Accumulated  |  | Carrying
|                         |  | Value    |        | Amortization |  | Value   
|                         |  |          |        |              |  |         
|Customer base            |  | $        | 17,500 |              |  | $        | 16,992 |     |  | $ | 508   | 
|Core technology          |  |          | 10,400 |              |  |          | 10,225 |     |  |   | 175   | 
|Trademark and trade name |  |          | 4,100  |              |  |          | 1,841  |     |  |   | 2,259 | 
|                         |  |          |        |              |  |          |        |     |  |   |       | 
|                         |  | $        | 32,000 |              |  | $        | 29,058 |     |  | $ | 2,942 | 
|                         |  |          |        |              |  |          |        |     |  |   |       | 

Comparison of intangible assets between years:

|                              |  |          |         |      |  |   |         |  
|----------------------------- |  | -------- | ------- | ---- |  | - | ------- | -
|                              |  | July 31,
|                              |  |         
|                              |  | 2003     |         | 2002
|                              |  |          |         |     
|Customer base                 |  | $        | 17,500  |      |  | $ | 17,500  |  
|Core technology               |  |          | 10,400  |      |  |   | 10,400  |  
|Trademark and trade name      |  |          | 4,100   |      |  |   | 4,100   |  
|                              |  |          |         |      |  |   |         |  
|                              |  |          | 32,000  |      |  |   | 32,000  |  
|Less accumulated amortization |  |          | (29,058 | )    |  |   | (21,224 | )
|                              |  |          |         |      |  |   |         |  
|                              |  | $        | 2,942   |      |  | $ | 10,776  |  
|                              |  |          |         |      |  |   |         |  

Amortization expense for intangible assets was $1.8 million and $2.0
million for the three months ended July 31, 2003 and July 31, 2002,
respectively; and $3.8 million and $4.0 million for the six months ended July
31, 2003 and July 31, 2002, respectively.

The estimated annual amortization expense for amortized intangible assets
owned as of January 31, 2003 for each of the five succeeding fiscal years is as
follows:

|                              |  |   |       | 
|----------------------------- |  | - | ----- | 
|Years Ending January 31,
2004 |  | $ | 4,774 | 
|2005                          |  |   | 520   | 
|2006                          |  |   | 392   | 
|2007                          |  |   | 300   | 
|2008                          |  |   | 300   | 
|Thereafter                    |  |   | 488   | 
|                              |  |   |       | 
|                              |  | $ | 6,774 | 
|                              |  |   |       | 

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3. Computation of Net Loss per Share

Lightspan computes net loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Potentially dilutive securities composed of incremental
common shares issuable upon the exercise of stock options and warrants were
excluded from diluted loss per share for the three and six month periods ended
July 31, 2003 and the three and six month periods ended July 31, 2002 because
the Company had a net loss for the period and the inclusion of outstanding
stock options and warrants would be anti-dilutive. Basic and diluted loss per
share, including the weighted average shares, have been adjusted to reflect the
1:10 reverse stock split which became effective at 5:00 P.M. on August 25,
2003.

4. Stock-based Compensation

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

Pro forma information regarding net loss is required by SFAS No. 123, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure, and has been determined as if Lightspan had accounted for its
employee stock options under the fair value method of that statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model for options subsequent to Lightspans
initial public offering and using the minimum value method for nonpublic
entities for options prior to Lightspans initial public offering.

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

|                                                                                         |  |                             |        |                           |  |      |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                         |  | Three Months Ended July 31, |        | Six Months Ended July 31,
|                                                                                         |  |                             |        |                          
|                                                                                         |  | 2003                        |        | 2002                      |  | 2003 |        | 2002
|                                                                                         |  |                             |        |                           |  |      |        |     
|Net loss, as reported                                                                    |  | $                           | (2,499 | )                         |  | $    | (7,984 | )    |  | $ | (9,973  | ) |  | $ | (23,390 | )
|Add: Stock-based compensation expense included
in reported net loss                      |  |                             | 8      |                           |  |      | 64     |      |  |   | 26      |   |  |   | 148     |  
|Deduct: Total stock-based compensation expense
determined under fair value based methods |  | $                           | (223   | )                         |  | $    | (699   | )    |  | $ | (502    | ) |  | $ | (1,332  | )
|                                                                                         |  |                             |        |                           |  |      |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                       |  | $                           | (2,714 | )                         |  | $    | (8,619 | )    |  | $ | (10,449 | ) |  | $ | (24,574 | )
|                                                                                         |  |                             |        |                           |  |      |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share, as reported                                        |  | $                           | (0.53  | )                         |  | $    | (1.69  | )    |  | $ | (2.10   | ) |  | $ | (4.97   | )
|                                                                                         |  |                             |        |                           |  |      |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss per share, basic and diluted                                          |  | $                           | (0.57  | )                         |  | $    | (1.83  | )    |  | $ | (2.20   | ) |  | $ | (5.22   | )
|                                                                                         |  |                             |        |                           |  |      |        |      |  |   |         |   |  |   |         |  

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5. Comprehensive Income (Loss)

For the three and six months ended July 31, 2003 and July 31, 2002,
comprehensive loss was equal to reported net loss.

6. Reportable Segments

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 Lightspan
eduTest Assessment 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, which are 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.

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):

|                                                        |                                          |   |                                  |     |           |   |              |       |  |   |        |       | 
|------------------------------------------------------- | ---------------------------------------- | - | -------------------------------- | --- | --------- | - | ------------ | ----- |  | - | ------ | ----- | 
|                                                        |                                          |   | Three Months Ended July 31, 2003
|                                                        |                                          |   |                                 
|                                                        |                                          |   |                                  |     |           |   | Higher       |       |  |   |       
|                                                        |                                          |   | K-12                             |     | Education |   | Consolidated
|                                                        |                                          |   |                                  |     |           |   |             
|Revenues from external customers                        |                                          | $ | 11,391                           |     |           | $ | 3,987        |       |  | $ | 15,378 |      
|Interest income, net                                    |                                          |   | 31                               |     |           |   |             |       |  |   | 31     |      
|Depreciation and amortization of property and equipment |                                          |   | 431                              |     |           |   | 73           |       |  |   | 504    |      
|Loss from operations                                    |                                          |   | (2,679                           | )   |           |   | 149          |       |  |   | (2,530 | )    
|Assets                                                  |                                          |   | 33,427                           |     |           |   | 15,540       |       |  |   | 48,967 |      
|Other significant non cash items:                       |                                          |   |                                  |     |           |   |              |       |  |   |        |      
|                                                        | Amortization of stock based compensation |   |                                  | 8   |           |   |              |      |  |   |        | 8     | 
|                                                        | Amortization of intangible assets        |   |                                  | 393 |           |   |              | 1,438 |  |   |        | 1,831 | 

|                                                        |                                          |   |                                  |     |           |   |              |       |  |   |        |       | 
|------------------------------------------------------- | ---------------------------------------- | - | -------------------------------- | --- | --------- | - | ------------ | ----- |  | - | ------ | ----- | 
|                                                        |                                          |   | Three Months Ended July 31, 2003
|                                                        |                                          |   |                                 
|                                                        |                                          |   |                                  |     |           |   | Higher       |       |  |   |       
|                                                        |                                          |   | K-12                             |     | Education |   | Consolidated
|                                                        |                                          |   |                                  |     |           |   |             
|Revenues from external customers                        |                                          | $ | 11,027                           |     |           | $ | 3,088        |       |  | $ | 14,115 |      
|Interest income, net                                    |                                          |   | 133                              |     |           |   |             |       |  |   | 133    |      
|Depreciation and amortization of property and equipment |                                          |   | 502                              |     |           |   | 108          |       |  |   | 610    |      
|Loss from operations                                    |                                          |   | (6,778                           | )   |           |   | (1,339       | )     |  |   | (8,117 | )    
|Assets                                                  |                                          |   | 53,984                           |     |           |   | 24,218       |       |  |   | 78,202 |      
|Other significant non cash items:                       |                                          |   |                                  |     |           |   |              |       |  |   |        |      
|                                                        | Amortization of stock based compensation |   |                                  | 64  |           |   |              |      |  |   |        | 64    | 
|                                                        | Amortization of intangible assets        |   |                                  | 563 |           |   |              | 1,438 |  |   |        | 2,001 | 

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|                                                        |                                          |   |                                |     |           |   |              |       |  |   |         |       | 
|------------------------------------------------------- | ---------------------------------------- | - | ------------------------------ | --- | --------- | - | ------------ | ----- |  | - | ------- | ----- | 
|                                                        |                                          |   | Six Months Ended July 31, 2003
|                                                        |                                          |   |                               
|                                                        |                                          |   |                                |     |           |   | Higher       |       |  |   |        
|                                                        |                                          |   | K-12                           |     | Education |   | Consolidated
|                                                        |                                          |   |                                |     |           |   |             
|Revenues from external customers                        |                                          | $ | 20,237                         |     |           | $ | 5,772        |       |  | $ | 26,009  |      
|Interest income, net                                    |                                          |   | 62                             |     |           |   |             |       |  |   | 62      |      
|Depreciation and amortization of property and equipment |                                          |   | 917                            |     |           |   | 156          |       |  |   | 1,073   |      
|Loss from operations                                    |                                          |   | (7,703                         | )   |           |   | (2,332       | )     |  |   | (10,035 | )    
|Assets                                                  |                                          |   | 33,427                         |     |           |   | 15,540       |       |  |   | 48,967  |      
|                                                        |                                          |   |                                |     |           |   |              |       |  |   |         |      
|Other significant non cash items:                       |                                          |   |                                |     |           |   |              |       |  |   |         |      
|                                                        | Amortization of stock based compensation |   |                                | 26  |           |   |              |      |  |   |         | 26    | 
|                                                        | Amortization of intangible assets        |   |                                | 956 |           |   |              | 2,876 |  |   |         | 3,832 | 

|                                                        |                                          |   |                                |       |           |              |        |       |  |   |         |       | 
|------------------------------------------------------- | ---------------------------------------- | - | ------------------------------ | ----- | --------- | ------------ | ------ | ----- |  | - | ------- | ----- | 
|                                                        |                                          |   | Six Months Ended July 31, 2003
|                                                        |                                          |   |                               
|                                                        |                                          |   |                                |       |           |              | Higher |       |  |   |        
|                                                        |                                          |   | K-12                           |       | Education | Consolidated
|                                                        |                                          |   |                                |       |           |             
|Revenues from external customers                        |                                          | $ | 20,051                         |       |           | $            | 4,334  |       |  | $ | 24,385  |      
|Interest income, net                                    |                                          |   | 267                            |       |           |              |       |       |  |   | 267     |      
|Depreciation and amortization of property and equipment |                                          |   | 1,105                          |       |           |              | 165    |       |  |   | 1,270   |      
|Loss from operations                                    |                                          |   | (15,918                        | )     |           |              | (4,739 | )     |  |   | (20,657 | )    
|Assets                                                  |                                          |   | 53,984                         |       |           |              | 24,218 |       |  |   | 78,202  |      
|Other significant non cash items:                       |                                          |   |                                |       |           |              |        |       |  |   |         |      
|                                                        | Amortization of stock based compensation |   |                                | 148   |           |              |        |      |  |   |         | 148   | 
|                                                        | Amortization of intangible assets        |   |                                | 1,127 |           |              |        | 2,875 |  |   |         | 4,002 | 

7. Subsequent Events

Reverse Stock Split

At the Companys Annual Meeting of Stockholders, on August 21, 2003, the
stockholders of the Company approved a series of alternative amendments to the
Companys Amended and Restated Certificate of Incorporation, as amended, to
effect at the discretion of the Board of Directors a reverse stock split of the
Common Stock, with the effectiveness of one of such amendments to be determined
by the Board of Directors. On August 22, 2003 the Board of Directors
authorized the Company to effect a reverse split whereby each outstanding 10
shares was combined, converted and changed into one share of Common Stock. The
reverse split became effective at 5:00 P.M. EDT on August 25, 2003. The
Companys trading symbol on NASDAQ will temporarily be LSPND for 20 trading
days then revert back to LSPN. Computershare Trust Company of New York is
the Companys exchange agent for the reverse split.

Merger Agreement Signed

On
September 9, 2003, the Company announced the signing of an
Agreement and Plan of Merger with Plato Learning, Inc. Plato Learning will
acquire all of the shares of the Company for approximately 6.5 million shares
of Plato Learning common stock, based on an exchange ratio of 1.330 shares of
Plato common stock for each share of the Companys common stock. The value
could change based on the price movement of Platos common stock, which is
publicly traded on NASDAQ, as outlined in an 8-K filed on September 9, 2003
with the U.S. Securities and Exchange Commission.




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

Statements in this document, other than the statements of historical
information, are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We may identify these statements by the use of words such as will,
may, might, could, should, believe, expect, anticipate, intend,
plan, predict, project, estimate, potential, continue and similar
expressions. These statements are only predictions. Actual events or results
may differ materially. Such forward-looking statements involve known and
unknown risks and other factors which may cause our actual results in future
periods to differ materially from those expressed in any forward-looking
statements. These risks and factors include those discussed below under the
headings Liquidity and Capital Resources and Risks and Uncertainties. You
should also carefully review the risks described in

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other documents we file from time to time with the Securities and Exchange
Commission. We caution that the risks and factors discussed below and in such
filings are not exclusive. We do not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
You should carefully review and consider the various disclosures in this report
and in our other reports filed with the Securities and Exchange Commission that
attempt to advise you of certain risks and factors that may affect our
business. You are cautioned not to place undue reliance on these
forward-looking statements to reflect events or circumstances occurring after
the date hereof.

The following should be read in conjunction with our consolidated
financial statements and notes to these consolidated financial statements.

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 fee-based online
subscription 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 schools in kindergarten through eighth
grade that covers the core curriculum of language arts, reading and math. Our
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 college students. Our
fee-based online subscription products consist of The Lightspan Network, which
provides curriculum based content correlated to state academic standards, and
the Lightspan Reading Center, which is a complete online reading program that
supports student achievement and helps educators make more informed
instructional decisions. Assessment products are offered through Lightspan
eduTest Assessment, with proprietary test questions, covering language arts,
mathematics and science, allowing educators to assess their students progress
in the classroom. The results can be analyzed at the school district and school
levels, and the classroom.

Our products and services are sold to school districts primarily by a
direct field sales force, an internal sales organization and supported by our
professional development team who assist in implementing our curricula in
schools.

On
September 9, 2003, the Company announced the signing of an
Agreement and Plan of Merger with Plato Learning, Inc. Plato Learning will
acquire all of the shares of the Company for approximately 6.5 million shares
of Plato Learning common stock, based on an exchange ratio of 1.330 shares of
Plato common stock for each share of the Companys common stock. The value
could change based on the price movement of Platos common stock, which is
publicly traded on NASDAQ, as outlined in an 8-K filed on September 9, 2003
with the U.S. Securities and Exchange Commission.

Critical Accounting Policies

The preparation of financial statements in conformity with generally
accepted accounting principles requires us to utilize accounting policies and
make estimates and assumptions that affect our reported amounts. Our
significant accounting policies are described below and in Note 1 of the Notes
to Consolidated Financial Statements included elsewhere in this quarterly
report. We believe policies and estimates related to revenue recognition,
goodwill valuation, intangible assets and allowance for doubtful accounts
represent our critical accounting policies. Future results may differ from
these estimates under different assumptions or conditions.

Revenue Recognition

Software License Revenue. We recognize revenue from license agreements
when a non-cancelable, non-contingent license agreement has been signed, the
software product has been delivered, no uncertainties exist surrounding product
acceptance, fees from the agreement are fixed and determinable, and collection
is probable. 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. We use the residual method to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date if
evidence of the fair value of all undelivered elements exists.
If

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evidence of the fair value of the undelivered elements does not exist, all
revenue is deferred until sufficient evidence exists or all elements have been
delivered.

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

Online Subscriptions.Revenue derived from fee-based online subscriptions
is recognized on a straight-line basis over the term of the agreement,
generally one year.

Professional Services. Revenue derived from professional services,
including product implementation and customer training is recognized as the
services are performed. Revenue derived from telephone support and maintenance
arrangements provided by the professional development organization is
recognized ratably over the term of the support and maintenance period,
generally one year.

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

The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,
the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101) and The American
Institute of Certified Public Accountants (AICPA). We believe that our
revenue recognition policy is consistent with this guidance and in accordance
with generally accepted accounting principles. However, the accounting
profession continues to discuss various provisions of these guidelines with the
objective of providing additional guidance on their future application. These
discussions and the issuance of new interpretations, once finalized, could lead
to unanticipated changes in recognized revenue. They could also drive
significant adjustments to our business practices that could result in
increased administrative costs, lengthened sales cycles and other changes that
could affect our results of operations.

Use of Estimates

Valuation of Goodwill.On February 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other
Intangible Assets which required us to cease amortizing goodwill, and instead
perform a transitional review for impairment as of February 1, 2002 and an
annual review for impairment during the fourth quarter of fiscal 2003.
Goodwill is considered to be potentially impaired if we determine the carrying
value of the reporting unit exceeds its fair value. During the second quarter
of fiscal 2003, we performed the transitional test by completing the first step
of this review and determined that there was a potential impairment of goodwill
relating to our higher education division, Academic Systems. As a result, as
required by SFAS 142, we performed a second step utilizing an independent
appraisal firm combined with internal analyses and other market and company
information to measure the amount of the potential impairment. As a part of
this second step, SFAS 142 requires the fair value of the reporting unit be
allocated to its assets and liabilities in the same manner used in accounting
for business combinations. These analyses were judgmental in nature and
included significant estimates and assumptions in forecasting revenues,
expenses, growth rates and other relevant information in a discounted cash flow
model with discount rates reflecting the appropriate inherent risk.

In addition to the annual review, an interim review is required if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. Examples of such
events or circumstances include:



| |  |  | a significant adverse change in legal factors or in the business climate;       
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | a decline in our stock price or the stock price of comparable companies;        
|
| |  |  | a significant decline in our projected revenue or earnings growth or cash flows;
|
| |  |  | an adverse action or assessment by a regulator;                                 
|
| |  |  | unanticipated competition or the loss of key personnel                          

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| |  |  | a more-likely-than-not expectation that a reporting unit or a
significant portion of a reporting unit will be sold or otherwise
disposed of;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the testing of recoverability under Statement 144 of a significant
asset group within a reporting unit                                      

Valuation of Intangible Assets.Our intangible assets were acquired as a
result of our acquisitions of Academic and Global Schoolhouse in September
1999, StudyWeb in October 1999 and eduTest in June 2000, and represent customer
base, acquired technology, trademarks and trade names. These intangibles are
amortized on a straight-line basis over the estimated economic life of the
assets. We periodically assess the impairment of intangible assets which
requires us to make assumptions and judgments regarding the carrying value of
these assets. Lightspan continually evaluates the recoverability of the
intangible assets and considers any events or changes in circumstances that
would indicate that the carrying amount of an asset may not be recoverable. The
determination of the value of such intangible assets requires management to
make estimates and assumptions that affect our consolidated financial
statements. Any material changes in circumstances could require future
write-downs of our intangible assets and could have a material adverse impact
on our operating results for the periods in which such write-downs occur. At
July 31, 2003, the net book value of intangible assets that are subject to
amortization totaled $ 2.9 million.

Allowance for Doubtful Accounts.We maintain an allowance for doubtful
accounts that we estimate to be sufficient to provide adequate protection
against losses resulting from collecting less than full payment on our
receivables. A considerable amount of judgment is required when we assess the
realization of receivables, including assessing the probability of collection
and the current credit-worthiness of each customer. We determine the amount of
the reserve by analyzing known uncollectible accounts, aged receivables,
historical losses and our customers credit-worthiness. Amounts later
determined and specifically identified to be uncollectible are charged or
written off against this reserve. If a customers account becomes past due, we
generally place a hold on the account and discontinue further shipments to that
customer, minimizing further risk of loss. Additionally, our policy is to fully
reserve for all accounts with aged balances greater than one year. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, an additional provision for
doubtful accounts may be required. As of July 31, 2003, we have not incurred a
material write-off of accounts receivable since our inception.

Results of Operations

We have incurred significant losses since our inception and, as of July
31, 2003, have accumulated losses of approximately $318.0 million which
excludes the $16.5 million preferred stock dividend from fiscal 2001. We expect
to continue to incur operating losses for the foreseeable future.

Comparison of Three Months Ended July 31, 2003 and 2002

Revenues

We generate revenues from the sale of software licenses, on-line
subscriptions, professional services and hardware. Our total revenues increased
nine percent to $15.4 million in the three months ended July 31, 2003 from
$14.1 million in the three months ended July 31, 2002 primarily due to an
increase of $0.7 million in revenue recognized from our online subscription
products, a $0.5 million increase in hardware sales and a $0.1 million increase
in professional services revenue, as described below.

Software Licenses. Total software license revenue of $8.9 million in the
three months ended July 31, 2003 was similar to the same period in the prior
year. An increase of $0.8 million in sales of Academic Systems software was
offset by a decrease in sales of Lightspan Achieve Now licenses in the three
months ended July 31, 2003 compared to the same period in the prior year.

Online Subscriptions. Our online subscription revenues increased 32
percent to $3.0 million in the three months ended July 31, 2003 from $2.3
million in the three months ended July 31, 2002 primarily due to an increase in
the base of customers subscribing to our fee-based online subscription
products. The number of schools subscribing to our K-12, online subscription
products increased 27 percent in the current quarter as compared to the same
period in the prior year.

Professional Services.Our professional service revenues were $2.4 million
in the three months ended July 31, 2003 comparable to the $2.3 million in the
three months ended July 31, 2002.

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Hardware and Other.Our hardware revenues increased 72 percent to $1.1
million in the three months ended July 31, 2003 from $0.7 million in the three
months ended July 31, 2002, primarily due to sales of the higher priced Sony
PlayStation console/LCD combo and sales of the new Mobile Learning Center.

Cost of Revenues

Our total cost of revenues was $4.0 million and $3.8 million for the three
month periods ended July 31, 2003 and July 31, 2002, respectively. The $0.2
million increase in cost of revenues was a result of higher hardware sales,
partially offset by lower cost of software license revenue in the current
quarter as compared to the same period in the prior year. Our gross margin
increased nearly one percentage point to 74.2 percent in the three months ended
July 31, 2003 from 73.3 percent in the three months ended July 31, 2002
primarily reflecting a lower overall cost structure.

Expenses

Sales and Marketing.Our sales and marketing expenses decreased 15 percent
to $8.6 million for the three months ended July 31, 2003 from $10.1 million for
the three months ended July 31, 2002 reflecting a decrease in staff and related
organizational cost reductions made at the end of the last fiscal year.

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. The company has focused its marketing resources
on more targeted, cost-effective marketing campaigns designed to attract new
customers, retain and increase sales to current customers and broaden the
markets for our Lightspan Achieve Now curriculum, fee-based subscription
on-line products and Academic products.

Technology and Development.Our technology and development expenses
decreased 38 percent to $2.2 million for the three months ended July 31, 2003
from $3.4 million for the three months ended July 31, 2002 primarily due to a
decrease in personnel and consulting costs associated with both the completion
of various development activities and organizational cost reductions made at
the end of the last fiscal year.

Our development costs consist primarily of compensation and benefits of
personnel for design, art, production, enhancement, maintenance and testing of
our Lightspan Achieve Now curriculum, fee-based subscription on-line products
and Academic products, which we expense as incurred.

General and Administrative.Our general and administrative expenses
decreased 53 percent to $1.3 million for the three months ended July 31, 2003
from $2.8 million for the three months ended July 31, 2002 primarily as a
result of lower bad debt expense and professional service costs during the
current quarter than in the prior year period.

Our general and administrative expenses consist primarily of compensation
and benefits for executive and administrative personnel, professional service
expenses and other general corporate expenses.

Amortization of Intangible Assets.Amortization expense was $1.8 million
and $2.0 million in the three month periods ended July 31, 2003 and July 31,
2002, respectively, and represents the amortization of intangible assets, other
than goodwill, from our previous acquisitions.

Goodwill.Effective February 1, 2002, we adopted SFAS 142. Under SFAS
142, goodwill is no longer amortized to expense and must be periodically
reviewed for impairment with any related losses recognized when incurred. This
transitional impairment review from the second step of SFAS 142 resulted in a
noncash charge of $3.0 million in the first quarter of fiscal 2003 to reduce
the carrying value of the goodwill associated with our higher education
division, Academic Systems. This charge is reflected as the cumulative effect
of a change in accounting principle in the first quarter of fiscal 2003 as
required by SFAS 142. Also in connection with the adoption of SFAS 142 we
reclassified $1.2 million and $0.5 million of assembled workforce intangibles
and related accumulated amortization respectively as required by the
pronouncement. We cannot assure you that when we complete our annual or other
periodic reviews for impairment of goodwill that a material impairment charge
will not be recorded. Goodwill totaled $11.7 million at July 31, 2003.

Interest Income.Our net interest income decreased from $0.1 million for
the three months ended July 31, 2002 to a

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negligible amount for the three months ended July 31, 2003 as a result of
lower cash balances and a reduction in the market yield on such investments.

Comparison of Six Months Ended July 31, 2003 and 2002

Revenues

Our total revenues increased seven percent to $26.0 million in the six
months ended July 31, 2003 from $24.4 million in the six months ended July 31,
2002 primarily due to the increase in revenue recognized from our on-line
subscription products, software licenses and hardware revenue, offset in part
by a $0.2 million decrease in revenue from professional services, as described
below.

Software Licenses.Our software license revenues increased two percent to
$13.7 million in the six months ended July 31, 2003 from $13.5 million in the
six months ended July 31, 2002 primarily due to a 33 percent increase in
Academic Systems software sales, offset by a 11 percent decrease in sales of
Lightspan Achieve Now licenses in this period as compared to the same period in
the prior year.

On-line Subscriptions. Our on-line subscription revenues increased 21
percent to $5.8 million in the six months ended July 31, 2003 from $4.8 million
in the six months ended July 31, 2002 primarily due to an increase in the base
of customers subscribing to our fee-based on-line subscription products.

Professional Services.Our professional service revenues decreased three
percent to $4.6 million in the six months ended July 31, 2003 from $4.8 million
in the six months ended July 31, 2002 primarily due to fewer days delivered
during the first quarter of this year as compared to the same period in the
prior year.

Hardware and Other.Our hardware revenues increased 37 percent to $1.8
million in the six months ended July 31, 2003 from $1.3 million in the six
months ended July 31, 2002 primarily due to an increase in the sales of the
higher priced Sony PlayStation console/LCD combo and the new Mobile Learning
Center during the second quarter of the current year.

Cost of Revenues

Our total cost of revenues increased two percent to $7.1 million for the
six months ended July 31, 2003 from $7.0 million for the six months ended July
31, 2002 primarily reflecting the increase in hardware sales, partially offset
by lower software license cost of revenue. Gross margin as a percentage of
total revenues increased more than one percentage point to 72.6 percent in the
six months ended July 31, 2003 from 71.3 percent in the six months ended July
31, 2002 due primarily to a lower overall cost structure.

Expenses

Sales and Marketing.Our sales and marketing expenses decreased 16 percent
to $17.1 million for the six months ended July 31, 2003 from $20.4 million for
the six months ended July 31, 2002 primarily due to reductions in personnel
costs, travel and related selling expenses and in marketing expenses as our
marketing emphasis changed from a product branding focus to a supporting role
of the existing sales organization.

Technology and Development.Our technology and development expenses
decreased 37 percent to $4.5 million for the six months ended July 31, 2003
from $7.2 million for the six months ended July 31, 2002 primarily due to a
decrease in personnel and consulting costs associated with the completion of
various development activities.

General and Administrative.Our general and administrative expenses
decreased 45 percent to $3.5 million for the six months ended July 31, 2003
from $6.3 million for the six months ended July 31, 2002 mainly reflecting
certain non-recurring severance costs, and other expenses relating to staff
reductions, and one-time facility shut down costs which were incurred in the
prior year period, as well as, lower professional service fees in the current
year period.

Amortization of Intangible Assets.Expense for the six months ended July
31, 2003, $3.8 million, represented amortization of intangible assets, other
than goodwill, from our previous acquisitions. Effective February 1, 2002, we
adopted SFAS 142. Under SFAS 142, goodwill is no longer amortized to expense
and must be periodically reviewed for impairment with any

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related losses recognized when incurred. The effect of any future
impairment on our consolidated financial statements is unknown. Expense for the
same period in 2002 included $4.0 million of amortization of intangibles.

Interest Income (Expense).Our net interest income decreased to $0.1
million for the six months ended July 31, 2003 from $0.3 million for the six
months ended July 31, 2002 as a result of lower cash balances and a reduction
in the market yield on such investments.

Liquidity and Capital Resources

From inception through July 2003, we have financed our operations and met
our capital expenditure requirements primarily from the net proceeds from
private sales of equity securities, net proceeds from our initial public
offering and the collection of revenues from the sales of our products and
services. We are currently not generating sufficient revenue to consistently
fund our operations. We expect our operating losses and net operating cash
outflows to continue if we are unable to increase sales. If we are unable to
sufficiently increase our revenues, our ability to service and maintain our
products or fund our operations could be significantly impaired. At July 31,
2003, we had $12.6 million of unrestricted cash and cash equivalents and $0.8
million in restricted cash for a total of $13.4 million. Our business will
require the use of our capital to fund operating losses, capital expenditures
and working capital needs. We have incurred significant losses since our
inception and may continue to incur losses. If we are unable to increase our
revenues, we would expect to continue to incur operating losses for the
foreseeable future.

Our working capital has fluctuated significantly since our inception. This
is primarily due to the timing of cash payments to vendors, cash collections
from customers, varying resources required for development efforts on our
product offerings, as well as receipt of cash from our preferred stock
financings, initial public offering, private placements and other equity
offerings. We expect our working capital requirements and cash position to
fluctuate significantly from period to period for the foreseeable future for
the same reasons.

The amount of net cash used in operating activities decreased $9.3 million
in the six months ended July 31, 2003 as compared to the same period in the
prior year primarily due to our overall cost reduction initiatives. Net cash
provided by investing activities increased $9.0 million in the six months ended
July 31, 2003 as compared to the six months ended July 31, 2002 as short-term
investments were sold to fund operations during the six months ended July 31,
2003. Historically we have experienced and expect to experience a high degree
of seasonality in our business operations related to the funding and purchasing
cycles of our education customers. During the previous two fiscal years we had
negative cash flows in the first, second and fourth quarters and generated cash
from operations in the third quarter.

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, selling, marketing and supporting our products. We expect
to devote capital resources in connection with selling, marketing and
maintaining our existing products and services, and continued development,
expansion and maintenance of our existing software and on-line product
offerings and content. In addition, we may expand our business through
strategic partnerships, acquisitions and other similar relationships which may
require the issuance of debt or equity securities.

As of July 31, 2003, we believe that our cash and cash equivalents will be
sufficient to fund our operations and capital requirements through at least the
next 12 months. However, the actual amount of funds that we will need during or
after the next 12 months will be determined by many factors, some of which are
beyond our control, and we may need funds sooner than currently anticipated.

Risks and Uncertainties

Additional risks not presently known to us, or that we currently deem
immaterial, may also impair our business operations. Our business, financial
condition or results of operations may be seriously harmed by any of these
risks. You should carefully read these risks and uncertainties in evaluating
our business.

We have a limited operating history that makes an evaluation of our business
difficult.

We began selling our Lightspan Achieve Now educational software in January
1996 and entered the online market by launching The Lightspan Network in
January 1997. Academic began selling its educational software in April 1994.
Since

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early 1999, we have significantly increased our efforts to expand our
fee-based online subscription businesses. As a result, our businesses have only
a limited operating history on which you can base your evaluation of our
business and prospects. In considering an investment in our stock, you should
evaluate the risks, uncertainties, expenses and difficulties frequently
encountered by early stage companies.

Our quarterly results are volatile and difficult to forecast, which could cause
the price of our common stock to decline.

Our quarterly results have fluctuated significantly since our inception,
for various reasons. Our quarterly results have ranged from a net loss of $21.0
million to a net income of $17.7 million over the thirty quarters ended July
31, 2003. In addition, in fiscal year 1997 and 1998 we recognized license
revenue for our Lightspan Achieve Now product of $5.6 million and $14.8
million, respectively, in accordance with the accounting rules in effect at
that time; while in fiscal years 1999 and 2000, we did not recognize any
Lightspan Achieve Now license revenue, in accordance with new accounting rules
adopted February 1, 1998. In the quarter ended April 30, 2000, we recognized
$46.4 million in previously deferred revenue, resulting in an operating profit
of $16.2 million. In the quarter ended July 31, 2000, we recognized the
remaining $2.0 million of revenue previously deferred. The operating results
for these quarters 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, 2004 or for any future
years.

We expect significant fluctuations in our quarterly revenues and operating
results to continue. Demand for our products and services is subject to
seasonal influences based on school calendars, budget cycles, and the sources
and timing of school districts funding. Moreover, our sales could be delayed
from quarter to quarter due partly to our need to assist school district
decision makers regarding the uses and benefits of our software, and the
lengthy multiple approval process that typically accompanies significant
expenditures by school districts. If a significant sale that we expect to occur
in a particular quarter is delayed until a future quarter, or does not occur at
all, our quarterly performance may be adversely affected to a greater degree
than expected. Further, our fee-based online subscription efforts may
contribute to fluctuations in our quarterly operating results because the sales
cycles and our ability to recognize revenues derived from sales of our
fee-based online subscription products are different than the sales cycles and
our ability to recognize revenues derived from sales of our educational
software. Also, our quarterly results may be impacted to the extent that
outstanding warrants held by CINAR Corporation become exercisable upon
completion of certain performance criteria and we are required to record a
corresponding expense. If our financial results for one or more quarters fall
below the expectations of analysts and investors, the trading price of our
common stock may decline.

If we are unable to increase our revenues, we would expect net losses to
continue for the foreseeable future and may never achieve or sustain
profitability, which may cause our stock price to decline.

Since our inception, we have incurred significant net losses. As of July
31, 2003 we have accumulated net losses of $318.0 million. We incurred net
losses of $36.1 million for the fiscal year ended January 31, 2003; net losses
of $62.2 million for the fiscal year ended January 31, 2002; and $32.1 million
in net losses for the fiscal year ended January 31, 2001, including the
recognition of $48.1 million in revenue previously deferred in fiscal years
1999 and 2000. Our operating losses and negative cash flow could continue as we
incur costs and expenses related to, among other things:



| |  |  | marketing and promotional activities;                                                                                                                                               
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | continued development and expansion of our fee-based online subscription offerings and content; and                                                                                 
|
| |  |  | amortization or impairment of intangible assets and goodwill recorded
in connection with our acquisitions of eduTest, LearningPlanet.com,
Academic, Global Schoolhouse and StudyWeb.

Our ability to become profitable and maintain profitability depends on our
ability to generate and sustain substantially higher revenues while maintaining
reasonable expense levels. Although we may continue our spending on the
activities listed above, these efforts may not result in increased revenues. We
conduct operations using estimates as to future expense levels based on our
expectations of future revenues. We cannot guarantee that we will be able to
predict our future revenues accurately or that we will be able to adjust
spending to compensate for any unexpected revenue shortfall. If we achieve
profitability, we may not be able to sustain or increase profitability.

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From time to time, we receive inquiries from investors and other parties
as to whether Lightspan will remain an independent organization. In May 2002,
we engaged U.S. Bancorp Piper Jaffray to evaluate those inquiries and strategic
alternatives for our business and to assist management and the Board of
Directors in maximizing shareholder value.

Changes in funding for public school systems could reduce our revenues and
impede the growth of our business.

We derive a substantial portion of our revenues from public school
funding, which is heavily dependent on support from federal, state and local
governments. Government budget deficits may adversely affect the availability
of this funding. In addition, the government appropriations process is often
slow, unpredictable and subject to factors outside of our control.
Curtailments, delays or reductions in the funding of schools or colleges, for
example a reduction of funds allocated to schools under Title I of the
Elementary and Secondary Education Act of 1965, could delay or reduce our
revenues, in part because schools may not have sufficient capital to purchase
our products or services. Funding difficulties experienced by schools or
colleges could also cause those institutions to be more resistant to price
increases in our products, compared to other businesses that might better be
able to pass on price increases to their customers. The growth of our business
depends on continued investment by public school systems in interactive
educational technology and products. Changes to funding of public school
systems could slow this type of investment.

We are heavily dependent upon our relationship with Sony Computer Entertainment
Inc. and termination of that relationship, potential supply shortages of the
PlayStation game consoles or unanticipated changes in the game consoles could
significantly reduce our Lightspan Achieve Now sales or increase related
expenses.

We are heavily dependent upon our relationship with Sony Computer
Entertainment Inc., which supplies the PlayStation game console used by the
students who use our Lightspan Achieve Now educational software at home.
Historically, and for the foreseeable future, sales of Lightspan Achieve Now
and PlayStation game consoles have accounted for a majority of our revenue.
Without incurring significant additional expense, there currently is no readily
available operating platform for broad implementation of Lightspan Achieve Now
in the home other than the PlayStation game console. Sony Computer
Entertainment Inc. has rights to terminate their agreement with us in various
circumstances, including if it elects to stop producing the PlayStation game
console. If our agreement is terminated, if the PlayStation game console loses
popular appeal or if we are unable to obtain an adequate supply of PlayStation
game consoles on a timely basis, our ability to sell our Lightspan Achieve Now
curriculum will be significantly reduced and we could incur significant
additional expenses or lose substantial revenues.

We may also experience disruption of supply of the original PlayStation
game console as Sony Computer Entertainment Inc. balances its manufacturing
capability between the PlayStation game console and the PlayStation®2 computer
entertainment system. If we are unable to acquire PlayStation game consoles,
our software license revenue may be deferred, as our revenue recognition policy
requires that delivery of hardware along with the software is required before
we can fully recognize software license revenue.

Note: PlayStation and the PS Family logo are registered trademarks of Sony
Computer Entertainment Inc.

We may need additional financing to meet our strategic business objectives,
which may not be available and, if available, might adversely impact our
existing stockholders.

We may need to raise additional funds to continue to meet operating
demands or other strategic business objectives. In addition, if we enter into
new areas of business, or expand our business through strategic partnerships,
acquisitions or other similar relationships, we may incur substantially
increased expenses for which we do not expect investment returns for months or
years in the future. If we raise additional funds through the issuance of
equity or debt securities that have rights senior to those of our current
stockholders, these stockholders may experience additional dilution or may lose
other rights. We cannot be certain that additional financing will be available
to us on favorable terms when required, if at all. Such capital raising may be
made more difficult if we are no longer listed on the NASDAQ National Market as
a result of our failure to continue to meet the listing requirements required
by NASDAQ, which is a risk we face. If we cannot raise funds on acceptable
terms, if and when needed, we may not be able to take advantage of future
opportunities, to continue to operate or grow our business or respond to
competitive pressures or unanticipated developments.

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Our acquisitions of other businesses and involvement in strategic relationships
may not be successful, which could distract our management or cause us to incur
additional expenses.

We have acquired businesses and may continue to do so in the future. Our
integration of these acquisitions or any future acquisitions could distract our
management or cause us to incur additional expenses, and could cause our
business and operations to be adversely impacted. We also may or expand our
business through strategic partnerships, acquisitions or other similar
relationships.

Our continued growth will utilize our resources, and failure to manage this
growth effectively could disrupt our operations and prevent us from generating
the revenues we expect.

We expect that expansion of our customer and revenue base will be required
to successfully implement our business strategy. For example, the development
of our business continues to require sales and marketing expenditures as well
as increased development efforts of certain products. This expansion may strain
our management, operational, financial and technological resources, as well as
the infrastructure for our Web sites and services. The growth of our Lightspan
Achieve Now educational software business may strain the resources of our
professional development staff during periods of heavy implementation in
purchasing school districts. Our growth depends on our ability to attract and
retain qualified employees (including employees of businesses that we acquire),
particularly sales and marketing and product development personnel. Our failure
to manage our growth in a manner that minimizes these strains on our resources
could disrupt our operations and ultimately prevent us from generating the
revenues we expect.

Our curriculum-based educational software may be unable to achieve or maintain
broader market acceptance, which would cause our future revenue growth and
profitability to be adversely impacted.

We expect to continue to generate a substantial portion of our revenues
from our curriculum-based educational software products such as Lightspan
Achieve Now software licenses, and will need to increase these revenues in
order to more effectively grow other areas of our business. Revenues from
licenses will depend principally on broadening market acceptance of that
software, which may not occur due to a number of factors, including:



| |  |  | teacher, parent and student preferences for interactive educational
technology are subject to changes in popular entertainment and
educational theory;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | some teachers may be reluctant to use interactive educational
technology to supplement their customary teaching practices;                            
|
| |  |  | we may be unable to continue to demonstrate improvements in academic
performance at schools or colleges that use our educational software;
and        
|
| |  |  | our failure to detect bugs in our software could result in product
failures or poor product performance.                                              

If market acceptance of our curriculum-based educational software is not
broadened, our future revenue growth will be adversely impacted and we may
never become profitable.

The success of our business model requires us to increase our revenues from our
fee-based online subscription business, and we may never become profitable if
we are unable to do so.

To achieve our operating goals and objectives, we will need to derive an
increasing portion of our revenues from our fee-based online subscription
business. Our ability to increase revenues from our fee-based online
subscription business depends on:



| |  |  | our ability to increase the subscriber base of our fee-based online
subscription products while maintaining a subscription fee; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | improvement of the accessibility and ease of use of our Web sites.                                                                 

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The future success of our fee-based online subscription business is highly
dependent on an increase in the number of users who are willing to subscribe to
The Lightspan Network, Lightspan Reading Center, Lightspan eduTest Assessment
and Lightspan Assessment Builder subscription products. The number of users
willing to pay for online educational products may not continue to increase. If
the market for subscription-based online educational products develops more
slowly than we expect, or if our efforts to attract new subscribers are not
successful or cost effective our operating results and financial condition may
be materially and adversely affected.

If we are unable to substantially increase our revenues from our online
subscription businesses, we will be unable to execute our current business
model. As a result, we may need to reevaluate that business model, or we may
never become profitable.

We rely on statistical studies to demonstrate the effectiveness of our
products, and our reputation and sales and marketing efforts could be adversely
impacted if the results of these studies are not representative or if their
integrity is questioned, which could lead to lower than expected revenues.

We rely heavily on statistical studies, including those cited in our
Annual Report on Form 10-K, to demonstrate that our curriculum-based
educational software increase student achievement. We believe that these
studies accurately reflect the performance of our products. However, these
studies involve the following risks:



| |  |  | the limited sample sizes used in our studies may yield results that
are not representative of the general population of students who use our
products;                                                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the methods used to gather the information upon which these studies
are based depend on cooperation from students and other participants and
inaccurate or incomplete responses could distort results; and                                                                                                         
|
| |  |  | schools studying the effectiveness of our Lightspan Achieve Now
curriculum administer different tests, and colleges and universities
studying the effectiveness of our Academic Systems curriculum apply
different methodologies and data collection techniques, making results
difficult to aggregate and compare.

We are involved in the Lightspan Achieve Now studies in the following
ways:



| |  |  | we facilitate the collection and analysis of data for these studies;
and                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we select and pay researchers to aggregate and present the results of
these studies and, in some cases, to conduct the studies.

Our sales and marketing efforts, as well as our reputation, could be
adversely impacted if the public, including our existing and potential
customers, perceives these studies to be biased due to our involvement, or if
the results of these studies are not representative, which could lead to lower
than expected revenues.

If we fail to enhance our fee-based online subscription products and services
without systems interruptions and adapt those products and services to changes
in technology, our future revenue growth and profitability could be less than
we expect.

We believe that a component of our future revenue growth will depend on
whether we are able to enhance and improve our fee-based online subscription
products and services as planned. Enhancements and improvements to our
fee-based online subscription products are currently scheduled, but we cannot
assure you that those enhancements and improvements will gain market acceptance
or be launched on schedule and without systems interruptions. In addition, the
Internet is rapidly changing, and we expect that we will continually need to
adapt our fee-based online subscription products and their related technology
to emerging Internet standards and practices, technological advances developed
by our competition, and changing subscriber and user preferences. Ongoing
adaptation of our fee-based online subscription products and their related
technology will entail significant expense and technical risk, and we may use
new technologies ineffectively or fail to adapt our fee-based online
subscription products and their related technology on a timely and
cost-effective basis. If our enhancements, improvements and adaptations of our
fee-based online subscription products and their related technologies are

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delayed, result in systems interruptions or do not gain market acceptance,
our future revenue growth will be adversely impacted and we may never become
profitable.

We expect competition to increase significantly in the future, which could
prevent us from successfully implementing our business strategy.

The educational technology market is intensely competitive and subject to
increasing commercial attention. Barriers to entering Internet markets are
relatively low, and we expect competition to intensify in the future, as more
businesses use the Internet to enter the student, parent and teacher markets
for education-oriented products and services. We also may be adversely affected
by pricing and other operational decisions. For example, the decision of
several of our competitors that offer educational content on the Internet to
offer a free service rather than charge a fee, which could adversely impact our
subscription revenues.

Our competitors include:



| |  |  | comprehensive curriculum software publishers which offer various school-based computer-based learning systems;
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | edutainment software vendors, which principally target the consumer market but also sell to schools;        
|
| |  |  | education-oriented Internet services and the educational segments of general online service providers;        
|
| |  |  | distance learning providers; and                                                                              
|
| |  |  | programs that take over management of the school or provide substantial tutoring help.                        

Many of our current and potential competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources. Many of these
current and potential competitors can devote substantially greater resources
than we can to product development, marketing and promotional campaigns and Web
site and systems development.

If we do not successfully anticipate and adapt to changes in computer platforms
and other evolving technologies, our operating results relating to sales of our
software products could be adversely impacted.

We must manage our software development efforts to anticipate and adapt to
changes in popular computer operating environments and other evolving
technologies. For example, we have improved the existing Academic CD-ROM-based
educational software product with Internet-based enhancements. Our Lightspan
Achieve Now curriculum-based educational software is currently delivered in
CD-ROM format on PlayStation game consoles and on Windows-based personal
computers. We may continue to evaluate other operating environments and
computer platforms for our software products as they become available.

We may decide from time to time to make our software products available in
other operating environments or on other computer platforms and our efforts to
do so may involve substantial costs without the realization of expected
additional revenue from these activities. Market acceptance of our software
products and our operating results relating to their sale could also be lower
than we expect if we are unable to anticipate and adapt to changes in computer
platforms and other evolving technologies in a timely and cost-effective
manner.

We will not be able to grow our online subscription businesses if the market
for those businesses does not develop.

The success of our fee-based online subscription businesses will depend in
large part on the continued emergence and growth of a market for Internet-based
educational technology products. The market for educational technology is
characterized by rapid change and product innovation, unpredictable product
life cycles and unpredictable preferences among students, teachers and parents.
Internet commercial businesses and services are evolving markets as well, and
it is difficult to estimate how and when growth or other changes in those
markets will occur. We therefore cannot predict that the market for
Internet-based educational technology products will continue to expand.

Our business may not succeed without the continued development and maintenance
of the Internet.
22Table of Contents

Without the continued development and maintenance of the Internet
infrastructure, we could fail to generate the revenues necessary for our
fee-based online subscription business to succeed. In addition, our Lightspan
Achieve Now curriculum is very media-rich and is not currently delivered over
the Internet, due to bandwidth and other limitations. The continued development
of the Internet includes maintenance of a reliable network with the necessary
speed, data capacity and security, as well as timely development of
complementary products for providing reliable Internet access and services.
Because the online exchange of information and global commerce on the Internet
is new and evolving, we cannot predict whether the Internet will prove to be an
effective vehicle for delivering commercial content or will provide a viable
marketplace for electronic commerce in the long term.

As the number of Internet users continues to increase, and as these users
increase their frequency of use and bandwidth requirements, the Internet
infrastructure may be unable to support the demands. In addition, increased
users or bandwidth requirements may adversely impact the performance of the
Internet.

Unless we maintain a strong brand identity, our business may not grow and our
financial results may be adversely impacted.

We believe that maintaining and enhancing the value of our Lightspan and
Academic brands is critical to attracting purchasers for our curriculum-based
educational software and subscribers and users of our fee-based online
subscription businesses. Our success in maintaining brand awareness will depend
on our ability to continuously provide educational technology that students
enjoy using and teachers and parents consider beneficial to the learning
process. We cannot assure you that we will be successful in maintaining our
brand equity. In addition, to attract and retain subscribers and users and to
promote and maintain the Lightspan and Academic brands, we have spent, and may
need to continue spending significant resources on a brand-enhancement
strategy, which includes promotional programs and efforts by our field sales
team and professional development staffs. Revenues from these activities may
not be sufficient to offset associated costs.

Claims relating to data collection from our user base and content available on
or accessible from our Web sites may subject us to liabilities and additional
expense.

We currently utilize the names of teachers and students who are
registering for our online subscription products for purposes of accessing our
websites. However, we may in the future collect other personal information
relating to students, teachers and parents, and may sell our user information
on an aggregated, non-individual basis; though we do not intend to sell
information relating to children under the age of thirteen. We could be subject
to liability claims for misuses of information collected from our users, such
as for unauthorized marketing purposes, and could face additional expenses to
analyze and comply with increasing regulation in this area. The Federal Trade
Commission, for example, has enacted regulations governing collection of
personal information from children under the age of thirteen and is expected to
issue and enforce additional regulations in this area. We could also be subject
to liability based on claims relating to content that is published on our Web
sites or that is accessible from our network through links to other Web sites.
In addition to subjecting us to potential liability, claims of this type could
require us to change our Web sites in a manner that could be less attractive to
our customers and divert our financial and development resources.

Our business operations could be significantly disrupted if we lose members of
our management team.

Our success depends on the continued contributions of the principal
members of our sales and marketing, product development, online services, and
management departments. The loss of the services of any of our officers or
senior managers could disrupt operations in their respective departments and
could cause our overall financial results to be adversely impacted. We do not
maintain any key person life insurance policies other than on John T. Kernan,
our Chairman and Chief Executive Officer, and Carl E. Zeiger, our President and
Chief Operating Officer.

We may not be able to prevent others from using our trademarks, copyrights,
software, characters and other intellectual property assets. If others do use
these assets, their value to us, and our ability to use them to generate
revenues, may decrease.

Our intellectual property includes our trademarks and copyrights,
proprietary software, characters and other proprietary rights. We believe that
our intellectual property is important to our success and our competitive
position, and we try to protect it. However, our efforts may be inadequate. In
addition, our ability to conduct our business may be adversely impacted if

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others claim we violate their intellectual property rights. If successful,
claims of this nature could adversely impact our business by requiring us to
cease using important intellectual property or pay monetary damages. Even if
unsuccessful, these claims could adversely impact our business by damaging our
reputation, requiring us to incur legal costs and diverting managements
attention away from our business.

Our stock price is highly volatile.

The market price of our common stock is likely to continue to be highly
volatile due to risks and uncertainties described in this section of the Annual
Report, as well as other factors, including:



| |  |  | conditions and publicity regarding the Internet or educational software industries generally;                   
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | sales of substantial amounts of our stock by existing stockholders;                                             
|
| |  |  | price and volume fluctuations in the stock market at large which do not relate to our operating performance; and
|
| |  |  | comments by securities analysts, or our failure to meet analysts or investor expectations.                     

Furthermore, the stock market has from time to time experienced extreme
price and volume fluctuations that may be unrelated to the operating
performance of particular companies. In addition, class action lawsuits have
historically been initiated against Internet and software companies following
periods of volatility in the market prices of these companies stock. In
general, decreases in our stock price would reduce the value of our
stockholders investments and could limit our ability to raise necessary
capital or make potential acquisitions of assets or businesses. Moreover, as
of March 20, 2003, our common stock had closed at less than $1.00 for thirty
consecutive trading days. We have received notification from NASDAQ of our
non-compliance with the exchanges minimum-price requirement; however we have a
grace period of 180 days to regain compliance with this requirement. If we are
unable to regain compliance, or if appeals to NASDAQ for relief from compliance
are unsuccessful, then we could be delisted from the NASDAQ National Market,
which could adversely affect our stock price and the ability of our
stockholders and investors to buy and sell our common stock. As of August 26,
2003 and through September 10, 2003, our stock had a closing
price ranging from $7.78 to
$10.40, effected for the reverse split. We expect to regain compliance with
the minimum price requirements in the near future.

If litigation were instituted on the basis of volatility or liquidity in
our stock price, it could result in substantial costs and would divert
managements attention and resources. This could have a material adverse effect
on our business, financial condition and results of operations.

Our executive officers, directors and major stockholders control approximately
47.3% of our common stock.

As of August 31, 2003, executive officers, directors and holders of 5% or
more of our outstanding common stock, in the aggregate, owned or controlled
approximately 47.3% of our outstanding common stock. These stockholders are
able to influence all matters requiring approval by our stockholders, including
the election of directors and the approval of corporate transactions. This
concentration of ownership may also delay, deter or prevent a change in control
of our company and may make some transactions more difficult or impossible to
complete without the support of these stockholders.

It may be difficult for a third party to acquire our company, and this could
adversely impact our stock price.

Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of
our company or our management. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect
directors and take other corporate actions. As a result, these

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provisions could limit the price that investors are willing to pay in the
future for shares of our common stock. These provisions:



| |  |  | authorize us to issue preferred stock that can be created and issued
by the board of directors without prior stockholder approval, with
rights senior to those of common stock;       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide for a staggered board of directors, so that it would take
three successive annual meetings to replace all directors;                                                          
|
| |  |  | prohibit stockholder action by written consent; and                                                                                                                                   
|
| |  |  | establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.

Additionally, in February 2002 we adopted a Share Purchase Rights Plan.
Pursuant this plan, each share of our outstanding common stock has an
associated preferred share purchase right. These rights will not trade
separately from our common stock until, and are exercisable only upon, the
acquisition or potential acquisition by a person or group of, or the tender
offer for, fifteen percent or more of our common stock.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the amount
of interest expense we must pay with respect to our various outstanding debt
instruments. Our risk associated with fluctuating interest expense is limited,
however, to the interest rates which are tied to market rates, and our
investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes and do not expect to in the future. We ensure the
safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We mitigate default risk by investing
in securities rated AA or better. A hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial
instruments at July 31, 2003. Declines in interest rates over time will,
however, reduce our interest income.




Item 4. Controls And Procedures

The Companys chief executive officer and chief financial officer
performed an evaluation of the Companys disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) as of July 31, 2003. Based on that
evaluation, the chief executive officer and chief financial officer concluded
that, as of such date, the Companys disclosure controls and procedures were
effective and sufficient to ensure that information required to be disclosed by
the Company in the reports that it files under the Securities Exchange Act of
1934 is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms.

There has been no change in the Companys internal control over financial
reporting during the quarter ended July 31, 2003 that has materially affected,
or is reasonably likely to materially affect, the Companys internal control
over financial reporting.




Part II. OTHER INFORMATION




Item 1.Legal Proceedings

On June 19, 2003, Credit Suisse First Boston Corporation and approximately
12 of its clients, including Lightspan, Inc., were named as defendants in a
securities class action lawsuit filed in United States District Court for the
Southern District of Florida. The complaint asserts wrongdoing relating to
various initial public offerings in which Credit Suisse First Boston was
involved between 1999 and 2001. Among other things, the complaint alleges that
Lightspan, Inc. violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended.

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After Lightspan secured an enlargement of time within which to answer, the
United States Judicial Panel on Multi-District Litigation transferred the case
to the United States District Court for the Southern District of New York,
centralizing and consolidating it with the present initial public offering
actions pending in such court.

Although we believe this lawsuit against Lightspan, Inc. is without merit, no
assurance can be given about its outcome, and an unfavorable outcome could have
a material adverse effect on Lightspans operating results.




Item 2.Changes in Securities and Use of Proceeds

On August 22, 2003 the Board of Directors authorized the Company to effect
a 1-for-10 reverse split of the Companys Common stock, whereby each
outstanding 10 shares was combined, converted and changed into one share of
Common Stock. The reverse split, which was previously approved by the
stockholders at the Companys August 21, 2003 Annual Stockholders Meeting,
became effective at 5:00 P.M. EDT on August 25, 2003. Adjustments were
automatically made to the Companys outstanding options and warrants to reflect
the reverse split as reflected above.




Item 3.Defaults Upon Senior Securities

None.




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

We held our Annual Meeting of Stockholders on August 21, 2003. At the
meeting the stockholders of the Company approved a series of alternative
amendments to the Companys Amended and Restates Certificate of Incorporation,
as amended, to effect at the discretion of the Board of Directors a reverse
stock split of the Common Stock whereby each outstanding 7, 9, or 10 shares
would be combined, converted and changed into one share of Common Stock, with
the effectiveness of one of such amendments and the abandonment of the other
amendments, or the abandonment of all amendments to be determined by the Board
of Directors prior to the 2004 Annual Meeting of Stockholders of the Company,
as permitted under Section 242(c) of the Delaware General Corporate Law. The
voting for the proposal was as follows:

|        |   |           
|------- | - | ----------
|For     |  | 38,166,388
|Against |  | 339,115   
|Abstain |  | 78,492    

Also at the meeting, the following nominees were elected as directors to
hold office until the 2006 Annual Meeting of Stockholders or until their
successors are elected and qualified:

|                       |  |           |            |                |  |  |           | 
|---------------------- |  | --------- | ---------- | -------------- |  |  | --------- | 
|Nominee                |  | Votes For |            | Votes Withheld
|                       |  |           |            |               
|Barry J. Schiffman     |  |           | 38,380,976 |                |  |  | 203,019   | 
|Elizabeth R. Coppinger |  |           | 35,248,754 |                |  |  | 3,335,241 | 
|Lois Harrison-Jones    |  |           | 38,370,476 |                |  |  | 213,519   | 

The following individuals terms of office as a director continued after
the meeting: Carl E. Zeiger, Douglas M. Holtby, John T. Kernan, Jeffrey W.
Brown and Hugh M. Tietjen.

Also at the meeting, the appointment of Ernst & Young LLP as the Companys
independent public accountants for the fiscal year ending January 31, 2004 was
ratified. The voting for the proposal was as follows:

|        |   |           
|------- | - | ----------
|For     |  | 38,476,983
|Against |  | 78,395    
|Abstain |  | 28,617    




Item 5.Other Information

None.

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Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits

|         |  |         |      |             |  |                                                                                                                                                                                                                
|-------- |  | ------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Footnote |  | Exhibit |      |            
|Number   |  | Number  |      | Description
|         |  |         |      |            
|(4)      |  |         | 2.1  |             |  | Agreement and Plan
of Merger, dated as of September 9, 2003, by and among PLATO
Learning, Inc., a Delaware corporation, LSPN Merger Corp., a Delaware
corporation, and Lightspan, Inc., a Delaware corporation.
|(1)      |  |         | 3.1  |             |  | Certificate of Incorporation (including Certificate of Designation of Series A
Junior Participating Preferred Stock) as currently in effect.                                                                   
|(2)      |  |         | 3.2  |             |  | Bylaws, as currently in effect.                                                                                                                                                                                
|(3)      |  |         | 3.3  |             |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation                                                                                                                                  
|         |  |         | 4.1  |             |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                     
|(2)      |  |         | 4.2  |             |  | Specimen Stock Certificate.                                                                                                                                                                                    
|(2)      |  |         | 4.3  |             |  | Rights Agreement dated as of February 14, 2002 among Lightspan, Inc. and
Computershare Investor Services, LLC.                                                                                                 
|(2)      |  |         | 4.4  |             |  | Form of Rights Certificate.                                                                                                                                                                                    
|(4)      |  |         | 4.5  |             |  | First Amendment,
dated September 9, 2003, to the Rights Agreement, dated as of
February 14, 2002, between Lightspan, Inc., a Delaware
corporation, and Computershare Investors Services, L.L.C.                
|(4)      |  |         | 10.1 |             |  | Form of Consulting
Agreement, dated September 9, 2003 by and between John T. Keman
and PLATO Learning, Inc., a Delaware corporation.                                                                           
|(4)      |  |         | 10.2 |             |  | Form of
Lock-up Agreement, dated September 9, 2003, by and between John T. Keman
and PLATO Learning, Inc., a Delaware corporation.                                                                             
|(4)      |  |         | 10.3 |             |  | Form of Voting
Agreement, dated as of September 9, 2003, by and between Lightspan,
Inc., a Delaware corporation and an officer of PLATO Learning, Inc., a Delaware corporation.                                
|(4)      |  |         | 10.4 |             |  | Form of Voting
Agreement, dated as of September 9, 2003, by and between PLATO Learning, Inc.,
a Delaware corporation, and certain officers of Lightspan, Inc., a
Delaware corporation.                         
|         |  |         | 31.1 |             |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.                                                                                                 
|         |  |         | 31.2 |             |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.                                                                                                 
|         |  |         | 32.1 |             |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 and
Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934.                                                          
|         |  |         | 32.2 |             |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and
Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934.                                                          



| | (1) |  | Filed as Exhibit 4.1 to the Current Report on Form 8-K filed by the
Company on March 1, 2002, and incorporated herein by reference.                                        
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Filed as an exhibit to the Companys Registration Statement on Form
S-1, Registration Statement No. 333-90103, or amendments thereto, and
incorporated herein by reference.
|
| | (3) |  | Filed as Exhibit 3.1 to the Current Report on Form 8-K filed by the
Company on August 25, 2003 (File No. 000-29347), and incorporated herein
by reference.                 
|
| | (4) |  | Filed as an Exhibit to the Current
Report on Form 8-K filed by the Company on September 10,
2003 (File No. 000-29347), and incorporated herein by reference.               

(b)  Current Reports on Form 8-K

On May 20, 2003, the Company filed a report on Form 8-K to furnish our earnings
release for the first quarter ended April 30, 2003.

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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 12th day of
September 2003.

| |     |                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |     | Lightspan, Inc.                                                                                                                                     
|
| | By: | /s/ Michael A. Sicuro                                                                                                                               
| |     |                                                                                                                                                     
| |     | Michael A. Sicuro,
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
(Duly Authorized Officer and Principal Financial Officer)

September 12, 2003

28