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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q



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

For the period ended April 30, 2002



|[   ] | 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)

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

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

Common Stock
(Title of Each Class)

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

Number of shares of registrants common stock outstanding as of May 31, 2002:
47,056,135





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TABLE OF CONTENTS



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



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

|           |                                                                                                        |  |      |    | 
|---------- | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|           |                                                                                                        |  | Page
|           |                                                                                                        |  |     
|PART I     |                                                                                                        |  | 2    |   
|           | Item 1.   Consolidated Financial Statements and Notes to Consolidated Financial Statements (Unaudited) |  |      | 2  | 
|           | Item 2.   Managements Discussion and Analysis of Financial Condition and Operating Results            |  |      | 8  | 
|           | Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                   |  |      | 20 | 
|PART II    |                                                                                                        |  | 22   |   
|           | Item 1.   Legal Proceedings                                                                            |  |      | 22 | 
|           | Item 2.   Changes in Securities and Use of Proceeds                                                    |  |      | 22 | 
|           | Item 3.   Defaults Upon Senior Securities                                                              |  |      | 22 | 
|           | Item 4.   Submission of Matters to a Vote of Security Holders                                          |  |      | 22 | 
|           | Item 5.   Other Information                                                                            |  |      | 22 | 
|           | Item 6.   Exhibits and Reports on Form 8-K                                                             |  |      | 22 | 
|Signatures |                                                                                                        |  | 24   |   

1



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PART I. FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements

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

|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |          |    |        | 
|------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ----------- | ------ | ----------- | -------- | -- | ------ | 
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          | April 30,   |        | January 31,
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          | 2002        |        | 2002       
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |            
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          | (Unaudited) |        |             |          |   
|Assets                                                                                                              |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|Current assets:                                                                                                     |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    | Cash and cash equivalents                                                                                      |                                                                                       | $                                          | 20,645   |             |        | $           | 35,033   |   
|                                                                                                                    | Short-term investments                                                                                         |                                                                                       |                                            | 13,391   |             |        |             | 8,333    |   
|                                                                                                                    | Accounts receivable, less allowance for doubtful accounts of
$871 (April 30, 2002) and $930 (January 31, 2002) |                                                                                       |                                            | 8,823    |             |        |             | 11,477   |   
|                                                                                                                    | Finished goods inventory                                                                                       |                                                                                       |                                            | 2,048    |             |        |             | 2,432    |   
|                                                                                                                    | Other current assets                                                                                           |                                                                                       |                                            | 1,498    |             |        |             | 1,449    |   
|                                                                                                                    | Restricted cash                                                                                                |                                                                                       |                                            | 826      |             |        |             | 826      |   
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    |                                                                                                                |                                                                                       | Total current assets                       |          |             | 47,231 |             |          |    | 59,550 | 
|Restricted cash                                                                                                     |                                                                                                                |                                                                                       | 827                                        |          |             |        | 827         |         
|Property and equipment, net                                                                                         |                                                                                                                |                                                                                       | 5,603                                      |          |             |        | 6,839       |         
|Goodwill, net of accumulated amortization of $22,283 (April
30, 2002) and $21,583 (January 31, 2002)                |                                                                                                                |                                                                                       | 14,741                                     |          |             |        | 14,241      |         
|Other intangible assets, net of accumulated amortization of
$19,223 (April 30, 2002) and $17,222 (January 31, 2002) |                                                                                                                |                                                                                       | 12,777                                     |          |             |        | 15,278      |         
|Deposits and other assets                                                                                           |                                                                                                                |                                                                                       | 634                                        |          |             |        | 685         |         
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    |                                                                                                                |                                                                                       | Total assets                               |          | $           | 81,813 |             |          | $  | 97,420 | 
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|Liabilities and Stockholders Equity                                                                                |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|Current liabilities:                                                                                                |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    | Accounts payable                                                                                               |                                                                                       | $                                          | 5,404    |             |        | $           | 4,421    |   
|                                                                                                                    | Accrued liabilities                                                                                            |                                                                                       |                                            | 9,979    |             |        |             | 12,242   |   
|                                                                                                                    | Deferred revenue                                                                                               |                                                                                       |                                            | 8,807    |             |        |             | 10,682   |   
|                                                                                                                    | Other current liabilities                                                                                      |                                                                                       |                                            | 197      |             |        |             | 227      |   
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    |                                                                                                                |                                                                                       | Total current liabilities                  |          |             | 24,387 |             |          |    | 27,572 | 
|Deferred revenue, less current portion                                                                              |                                                                                                                |                                                                                       | 1,210                                      |          |             |        | 1,282       |         
|Other liabilities                                                                                                   |                                                                                                                |                                                                                       | 213                                        |          |             |        | 271         |         
|Stockholders equity:                                                                                               |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    | 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 shares - 47,056 (April 30, 2002) and
47,029 (January 31, 2002) |                                            |          | 47          |        |             |          | 47 |       
|                                                                                                                    | Additional paid-in capital                                                                                     |                                                                                       |                                            | 356,896  |             |        |             | 356,887  |   
|                                                                                                                    | Deferred compensation                                                                                          |                                                                                       |                                            | (173     | )           |        |             | (278     | ) 
|                                                                                                                    | Accumulated deficit                                                                                            |                                                                                       |                                            | (300,767 | )           |        |             | (288,361 | ) 
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    |                                                                                                                |                                                                                       | Total stockholders equity                 |          |             | 56,003 |             |          |    | 68,295 | 
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         
|                                                                                                                    |                                                                                                                |                                                                                       | Total liabilities and stockholders equity |          | $           | 81,813 |             |          | $  | 97,420 | 
|                                                                                                                    |                                                                                                                |                                                                                       |                                            |          |             |        |             |         

See accompanying notes.

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

|                     |                                             |                          |         |                              |        |      |         |         |        | 
|-------------------- | ------------------------------------------- | ------------------------ | ------- | ---------------------------- | ------ | ---- | ------- | ------- | ------ | 
|                     |                                             |                          |         | Three Months Ended April 30,
|                     |                                             |                          |         |                             
|                     |                                             |                          |         | 2002                         |        | 2001
|                     |                                             |                          |         |                              |        |     
|Revenues:            |                                             |                          |         |                              |        |      |         |        
|                     | Software licenses                           |                          | $       | 4,556                        |        |      | $       | 6,357   |       
|                     | Internet subscriptions                      |                          |         | 2,571                        |        |      |         | 1,560   |       
|                     | Professional services                       |                          |         | 2,456                        |        |      |         | 1,867   |       
|                     | Hardware and other                          |                          |         | 687                          |        |      |         | 873     |       
|                     |                                             |                          |         |                              |        |      |         |        
|                     |                                             | Total revenues           |         |                              | 10,270 |      |         |         | 10,657 | 
|Cost of revenues:    |                                             |                          |         |                              |        |      |         |        
|                     | Software licenses                           |                          |         | 857                          |        |      |         | 1,456   |       
|                     | Internet subscriptions                      |                          |         | 574                          |        |      |         | 591     |       
|                     | Professional services                       |                          |         | 1,270                        |        |      |         | 1,236   |       
|                     | Hardware and other                          |                          |         | 515                          |        |      |         | 655     |       
|                     |                                             |                          |         |                              |        |      |         |        
|                     |                                             | Total cost of revenues   |         |                              | 3,216  |      |         |         | 3,938  | 
|                     |                                             |                          |         |                              |        |      |         |        
|Gross profit         |                                             |                          | 7,054   |                              |        |      | 6,719   |        
|Operating expenses:  |                                             |                          |         |                              |        |      |         |        
|                     | Sales and marketing                         |                          |         | 10,221                       |        |      |         | 11,964  |       
|                     | Technology and development                  |                          |         | 3,788                        |        |      |         | 6,758   |       
|                     | General and administrative                  |                          |         | 3,500                        |        |      |         | 2,020   |       
|                     | Stock-based compensation                    |                          |         | 84                           |        |      |         | 273     |       
|                     | Amortization of intangible assets           |                          |         | 2,001                        |        |      |         | 4,568   |       
|                     |                                             |                          |         |                              |        |      |         |        
|                     |                                             | Total operating expenses |         |                              | 19,594 |      |         |         | 25,583 | 
|                     |                                             |                          |         |                              |        |      |         |        
|Loss from operations |                                             |                          | (12,540 | )                            |        |      | (18,864 | )      
|Interest
income, net |                                             |                          | 134     |                              |        |      | 1,071   |        
|                     |                                             |                          |         |                              |        |      |         |        
|                     | Net loss                                    |                          | $       | (12,406                      | )      |      | $       | (17,793 | )     
|                     |                                             |                          |         |                              |        |      |         |        
|Net loss per share:  |                                             |                          |         |                              |        |      |         |        
|                     | Basic and diluted                           |                          | $       | (0.26                        | )      |      | $       | (0.39   | )     
|                     |                                             |                          |         |                              |        |      |         |        
|                     | Weighted average shares  basic and diluted |                          |         | 47,040                       |        |      |         | 46,104  |       
|                     |                                             |                          |         |                              |        |      |         |        

See accompanying notes.

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

|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |         |       |        |         |  
|-------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------- | --------------------------------------------------------- | ----- | ---------------------------- | ------ | ------- | ----- | ------ | ------- | -
|                                                                     |                                                                             |                                                         |                               |                                                           |       | Three Months Ended April 30,
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                             
|                                                                     |                                                                             |                                                         |                               |                                                           |       | 2002                         |        | 2001   
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|Operating activities:                                                |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Net loss                                                                    |                                                         | $                             | (12,406                                                   | )     |                              | $      | (17,793 | )    
|                                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                         |                               |                                                           |       |                              |        |         |      
|                                                                     |                                                                             | Depreciation and amortization of property and equipment |                               |                                                           | 660   |                              |        |         | 656   |       
|                                                                     |                                                                             | Amortization of intangible assets                       |                               |                                                           | 2,001 |                              |        |         | 4,568 |       
|                                                                     |                                                                             | Amortization of deferred stock-based compensation       |                               |                                                           | 84    |                              |        |         | 273   |       
|                                                                     |                                                                             | Loss on disposal of assets                              |                               |                                                           | 588   |                              |        |         |      |       
|                                                                     |                                                                             | Changes in operating assets and liabilities:            |                               |                                                           |       |                              |        |         |       |       
|                                                                     |                                                                             |                                                         | Accounts receivable           |                                                           |       | 2,654                        |        |         |       | (112   | )      
|                                                                     |                                                                             |                                                         | Inventory                     |                                                           |       | 384                          |        |         |       | 437    |        
|                                                                     |                                                                             |                                                         | Restricted cash               |                                                           |       |                             |        |         |       | 2,289  |        
|                                                                     |                                                                             |                                                         | Deposits and other assets     |                                                           |       | 2                            |        |         |       | 975    |        
|                                                                     |                                                                             |                                                         | Accounts payable              |                                                           |       | 983                          |        |         |       | (1,047 | )      
|                                                                     |                                                                             |                                                         | Deferred revenue              |                                                           |       | (1,947                       | )      |         |       | 1,206  |        
|                                                                     |                                                                             |                                                         | Accrued and other liabilities |                                                           |       | (2,267                       | )      |         |       | (2,651 | )      
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     |                                                                             |                                                         |                               | Net cash flows used in operating activities               |       |                              | (9,264 | )       |       |        | (11,199 | )
|Investing activities:                                                |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Purchase of short-term investments                                          |                                                         |                               | (5,058                                                    | )     |                              |        | (7,149  | )    
|                                                                     | Maturities of short-term investments                                        |                                                         |                               |                                                          |       |                              |        | 16,864  |      
|                                                                     | Purchase of property and equipment                                          |                                                         |                               | (12                                                       | )     |                              |        | (1,768  | )    
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     |                                                                             |                                                         |                               | Net cash flows provided by (used in) investing activities |       |                              | (5,070 | )       |       |        | 7,947   |  
|Financing activities:                                                |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Net proceeds from exercise of stock options                                 |                                                         |                               | 9                                                         |       |                              |        | 81      |      
|                                                                     | Principal repayments on capital leases                                      |                                                         |                               | (63                                                       | )     |                              |        | (139    | )    
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     |                                                                             |                                                         |                               | Net cash flows used in financing activities               |       |                              | (54    | )       |       |        | (58     | )
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Decrease in cash and cash equivalents                                       |                                                         |                               | (14,388                                                   | )     |                              |        | (3,310  | )    
|                                                                     | Cash and cash equivalents at beginning of period                            |                                                         |                               | 35,033                                                    |       |                              |        | 45,566  |      
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Cash and cash equivalents at end of period                                  |                                                         | $                             | 20,645                                                    |       |                              | $      | 42,256  |      
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|Supplemental disclosure of cash flow information:                    |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Interest paid                                                               |                                                         | $                             | 19                                                        |       |                              | $      | 16      |      
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|Supplemental schedule of noncash investing and financing activities: |                                                                             |                                                         |                               |                                                           |       |                              |        |        
|                                                                     | Deferred stock-based compensation                                           |                                                         | $                             | (21                                                       | )     |                              | $      | (175    | )    
|                                                                     |                                                                             |                                                         |                               |                                                           |       |                              |        |        

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 subsidiaries, Academic
Systems Corporation (Academic) and Edutest, Inc. (eduTest or
eduTest.com), have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, 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 Internet and Academic curricula 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 months ended April 30,
2002, or for any other interim period are not necessarily indicative of the
results that may be expected for the full year ending January 31, 2003. 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, 2002.

Organization and Business Activity

Lightspan, Inc. (Lightspan) was founded in 1993. Lightspan was
incorporated as The Lightspan Partnership, Inc. and changed its name to
Lightspan, Inc. on April 10, 2000. Lightspan provides curriculum-based
educational software and Internet products and services to schools and school
districts that are used both in school and at home. Lightspan Achieve Now is an
interactive CD-ROM-based software product for kindergarten through eighth grade
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 series of CD-ROM-based products that serve 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 products 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

We recognize revenue in accordance with the provisions of Statement of
Position No. 97-2, Software Revenue Recognition, as amended and modified, and
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements. The Company derives its revenues from the licensing of software,
Internet subscriptions, product implementation, materials, training services,
customer support services and the sale of PlayStation game consoles and
accessories.

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Software Licenses

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 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.

Internet Subscriptions

Revenue derived from fee-based Internet 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.

2. Goodwill and Other Intangible Assets

Effective February 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142).

Goodwill

Under SFAS 142, goodwill is no longer amortized to expense and must be
assessed on a periodic basis for impairment at the reporting unit level by
applying a fair value based test with related losses, if any, recognized when
incurred. We expect to complete our initial review for impairment of goodwill
during the second quarter of fiscal 2003. We cannot assure you that at the
time the review is completed a material impairment charge will not be recorded.

The value assigned to our assembled workforce
intangible asset and related accumulated amortization which totaled
$1.2 million and $0.7 million, respectively at
January 31, 2002, has been reclassified and
reported as goodwill and is no longer amortized beginning February 1, 2002.

The following table presents a reconciliation of net income and per share
data to what would have been reported had the new rules been in effect during
the three month period ended April 30, 2001 (in thousands, except per share
data):

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|                                                       |  |                              |         |      |  |   |         |  
|------------------------------------------------------ |  | ---------------------------- | ------- | ---- |  | - | ------- | -
|                                                       |  | Three Months Ended April 30,
|                                                       |  |                             
|                                                       |  | 2002                         |         | 2001
|                                                       |  |                              |         |     
|Reported net loss                                      |  | $                            | (12,406 | )    |  | $ | (17,793 | )
|Add back goodwill and assembled workforce amortization |  |                              |        |      |  |   | 2,567   |  
|                                                       |  |                              |         |      |  |   |         |  
|Adjusted net loss                                      |  | $                            | (12,406 | )    |  | $ | (15,226 | )
|                                                       |  |                              |         |      |  |   |         |  
|Basic and diluted net loss per share:                  |  |                              |         |      |  |   |         |  
|Reported net loss                                      |  | $                            | (0.26   | )    |  | $ | (0.39   | )
|Goodwill amortization                                  |  |                              |        |      |  |   | 0.06    |  
|                                                       |  |                              |         |      |  |   |         |  
|Adjusted net loss                                      |  | $                            | (0.26   | )    |  | $ | (0.33   | )
|                                                       |  |                              |         |      |  |   |         |  

Other Intangible Assets

Acquired intangible assets subject to amortization at April 30, 2002 were
as follows (in thousands):

|                         |  |          |        |              |  |          |        |     |  |   |        | 
|------------------------ |  | -------- | ------ | ------------ |  | -------- | ------ | --- |  | - | ------ | 
|                         |  | Gross    |        |              |  |          |        | Net
|                         |  | Carrying |        | Accumulated  |  | Carrying
|                         |  | Value    |        | Amortization |  | Value   
|                         |  |          |        |              |  |         
|Customer base            |  | $        | 17,500 |              |  | $        | 11,424 |     |  | $ | 6,076  | 
|Core technology          |  |          | 10,400 |              |  |          | 6,608  |     |  |   | 3,792  | 
|Trademark and trade name |  |          | 4,100  |              |  |          | 1,191  |     |  |   | 2,909  | 
|                         |  |          |        |              |  |          |        |     |  |   |        | 
|                         |  | $        | 32,000 |              |  | $        | 19,223 |     |  | $ | 12,777 | 
|                         |  |          |        |              |  |          |        |     |  |   |        | 

Amortization expense for intangible assets was $2,001 for both the three months ended
April 30, 2002 and 2001.

The estimated annual amortization expense for amortized intangible assets
owned as of January 31, 2002 for each of the five fiscal years is as follows (in
thousands):

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Years Ending January 31, |  |   |        | 
|2003                     |  | $ | 8,004  | 
|2004                     |  |   | 4,774  | 
|2005                     |  |   | 520    | 
|2006                     |  |   | 392    | 
|2007                     |  |   | 300    | 
|Thereafter               |  |   | 788    | 
|                         |  |   |        | 
|                         |  | $ | 14,778 | 
|                         |  |   |        | 

3. Stockholders Equity

Lightspan computes net loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Potentially dilutive securities composed of incremental
common shares issuable upon the exercise of stock options and warrants were
excluded from diluted loss per share for the three months ended April 30, 2002
and 2001 because the Company had a net loss for the period and the inclusion of
outstanding stock options and warrants would be anti-dilutive.

4. Comprehensive Income (Loss)

For the three months ended April 30, 2002 and 2001, comprehensive loss was
equal to reported net loss.

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5. Reportable Segments

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

Measurement of Segment Profit or Loss and Segment Assets

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

Financial Information for Lightspans Segments

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

|                                  |                                          |   |                                   |     |           |   |              |       |  |   |         |       | 
|--------------------------------- | ---------------------------------------- | - | --------------------------------- | --- | --------- | - | ------------ | ----- |  | - | ------- | ----- | 
|                                  |                                          |   | Three Months Ended April 30, 2002
|                                  |                                          |   |                                  
|                                  |                                          |   |                                   |     |           |   | Higher       |       |  |   |        
|                                  |                                          |   | K-12                              |     | Education |   | Consolidated
|                                  |                                          |   |                                   |     |           |   |             
|Revenues from external customers  |                                          | $ | 9,024                             |     |           | $ | 1,245        |       |  | $ | 10,270  |      
|Interest income, net              |                                          |   | 138                               |     |           |   | (4           | )     |  |   | 134     |      
|Depreciation and amortization     |                                          |   | 603                               |     |           |   | 57           |       |  |   | 660     |      
|Segment loss from operations      |                                          |   | (9,140                            | )   |           |   | (3,400       | )     |  |   | (12,540 | )    
|Segment assets                    |                                          |   | 58,869                            |     |           |   | 22,944       |       |  |   | 81,813  |      
|Other significant non cash items: |                                          |   |                                   |     |           |   |              |       |  |   |         |      
|                                  | Amortization of stock based compensation |   |                                   | 84  |           |   |              |      |  |   |         | 84    | 
|                                  | Amortization of intangible assets        |   |                                   | 563 |           |   |              | 1,438 |  |   |         | 2,001 | 

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




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

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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 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.

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 in Note 1 of the Notes to
Consolidated Financial Statements. We believe policies and estimates related
to revenue recognition, 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 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.

Internet Subscriptions.Revenue derived from fee-based Internet
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.

We recognize our revenue in accordance with 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) Statement of Position (SOP) 97-2, Software
Revenue

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Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. 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.Effective February 1, 2002, we assess the
potential for impairment of our goodwill based on the provisions of SFAS 142.
As required by SFAS 142 we ceased amortization of goodwill effective February
1, 2002. In lieu of amortization, we are required to perform an annual review
for impairment. Goodwill is considered to be impaired if we determine that the
carrying value of the reporting unit exceeds its fair value. 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. Factors that would influence the
likelihood of a material change include, a significant adverse change in legal
factors or in the business climate, an adverse action or assessment by a
regulatory agency, unanticipated competition and 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. If a change were to occur in any of the
above-mentioned factors or estimates, the likelihood of a material change in
our reported results would increase. Assessing the impairment of goodwill
requires us to make assumptions and judgments regarding the fair value of the
net assets of our reporting units and future cash flows of those reporting
units.

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. We periodically
assess the impairment of intangible and other long-lived assets which require
us to make assumptions and judgments regarding the carrying value of these
assets. The assets are considered to be impaired if we determine that the
carrying value may not be recoverable based upon our assessment of various
events or changes in circumstances. Factors that would influence the
likelihood of a material change include, loss of legal ownership or title to
the asset, a significant decline in the economic and competitive environment on
which the asset depends, significant changes in our strategic business
objectives, utilization of the asset or a significant change in the economic
conditions. If the assets are considered to be impaired, the impairment charge
we recognize is the amount by which the carrying value of the assets exceeds
the fair value of the assets. In addition, we base the useful lives and related
amortization expense on our estimate of the period that the assets will
generate revenues or otherwise be used by us. If a change were to occur in any
of the above-mentioned factors or estimates, the likelihood of a material
change in our reported results would increase.

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. Should a customers account become 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.

Results of Operations

We have incurred significant losses since our inception and, as of April
30, 2002, have accumulated losses of approximately
$284.3 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.

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Comparison of Three Months Ended April 30, 2002 and 2001

Revenues

We generate revenues from fees from the sale of software licenses,
Internet subscriptions, professional services and hardware. Our total revenues
decreased 4 percent to $10.3 million in the three months ended April 30, 2002
from $10.7 million in the three months ended April 30, 2001 primarily due to
the decrease in software licenses revenue, offset in part by a $1.0 million
increase in revenue recognized from our Internet subscription revenue and a
$0.6 million increase in revenue from Professional Services, as described
below.

Software Licenses.Our software license revenues decreased 28 percent to
$4.6 million in the three months ended April 30, 2002 from $6.4 million in the
three months ended April 30, 2001 primarily due to a decrease in Lightspan
Achieve Now licenses sold which decreased 27 percent in this quarter as
compared to the same period in the prior year.

Internet Subscriptions. Our Internet subscription revenues increased 65
percent to $2.6 million in the three months ended April 30, 2002 from $1.6
million in the three months ended April 30, 2001 primarily due to a recognition
of $0.4 million in milestone payments received from a customer and due to an
increase in the base of customers subscribing to our fee-based Internet
subscription products. Customers subscribing to our Internet subscription
products increased 4 percent to approximately 3,200 at April 30, 2002 from
approximately 3,000 at April 30, 2001.

Professional Services.Our professional service revenues increased 32
percent to $2.5 million in the three months ended April 30, 2002 from $1.9
million in the three months ended April 30, 2001 primarily due to an
approximate 6% price increase and an increase in the billable hours for
professional services.

Cost of Revenues

Our total cost of revenues decreased 18 percent to $3.2 million for the
three months ended April 30, 2002 from $3.9 million for the three months ended
April 30, 2001 due primarily to the decrease in software license revenues and
the corresponding decrease in the related costs such as CD costs, royalties,
etc. Gross margin as a percentage of total revenues increased 6 percentage
points to 69 percent in the three months ended April 30, 2002 from 63 percent
in the three months ended April 30, 2001 primarily due to a lower overall cost
structure and due to the increase in Internet subscription revenues, which have
relatively fixed costs associated with providing these products.

Expenses

Sales and Marketing.Our sales and marketing expenses decreased 15 percent
to $10.2 million for the three months ended April 30, 2002 from $12.0 million
for the three months ended April 30, 2001 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.

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. We continue to pursue 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 Internet products, and Academic products.

Technology and Development.Our technology and development expenses
decreased 44 percent to $3.8 million for the three months ended April 30, 2002
from $6.8 million for the three months ended April 30, 2001 primarily due to a
decrease in personnel and consulting costs associated with the completion of
various development activities.

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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 Internet products
and Academic products, which we expense as incurred.

General and Administrative.Our general and administrative expenses
increased 73 percent to $3.5 million for the three months ended April 30, 2002
from $2.0 million for the three months ended April 30, 2001 primarily due to
certain non recurring severance costs and other expenses relating to
staff reductions.

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

Stock-Based Compensation.Stock-based compensation expense was $0.1
million and $0.3 million for the three months ended April 30, 2002 and 2001,
respectively. Stock-based compensation is the result of our granting of stock
options to employees with exercise prices per share below the fair values per
share for our common stock on the dates those options were granted prior to our
initial public offering. The deferred stock-based compensation is being
amortized to expense on an accelerated basis over the vesting period of the
individual options, generally four years.

Amortization of Intangible Assets.Expense for the three months ended
April 30, 2002 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 related losses
recognized when incurred. The effect of any future impairment on our
consolidated financial statements is unknown. Expense for the same period in
2001 included $2.5 million of goodwill amortization and $0.1 million of
intangible amortization.

Interest Income (Expense).Our net interest income decreased 87 percent
to $0.1 million for the three months ended April 30, 2002 from $1.1 million for
the three months ended April 30, 2001 as a result of lower cash balances and a
significant reduction in the market yield on such investments.

Liquidity and Capital Resources

From inception through April 2002, 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. Currently, we are not generating sufficient revenue to 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 April 30, 2002, we had $20.6
million of unrestricted cash and cash equivalents, $13.4 million in short-term investments
and $1.7 million in restricted cash for a total of $35.7 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. We 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.

Net cash used in operating activities decreased $1.9 million in the three
months ended April 30, 2002 as compared to the three months ended April 30,
2001 primarily due to the decrease in technology and development expenses
related to decreases in personnel and consulting costs and to a decrease in
sales and marketing expenses relating to reductions in personnel costs, travel
and related selling expenses and the changing of our marketing focus from a
product branding focus to a supporting role of the existing sales organization.
Net cash provided by investing activities decreased $13.0 million in the three
months ended April 30, 2002 as compared to the three months ended

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April 30, 2001 primarily due to a decrease in the maturities of our
short-term investments used to fund operations during these periods.
We expect to begin to generate cash from operations in our third
fiscal quarter of fiscal 2003, however, our negative operating cash
flow may continue if we are unable to increase our sales.

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 Internet product
offerings and content. In addition, we may devote capital resources to
strategic partnerships, acquisitions and relationships.

As of April 30, 2002, we believe that our cash and cash equivalents and
short-term investments 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 Internet market by launching The Lightspan Network in
January 1997 and through our purchase of eduTest in July 2000. Academic began
selling its educational software in April 1994. Since early 1999, we have
significantly increased our efforts to expand our fee-based subscription
Internet businesses. As a result, our businesses have only a limited operating
history on which you can base your evaluation of our business and prospects.

Our quarterly operating results are volatile and difficult to predict, and if
we fail to meet the expectations of investors or security analysts, the market
price of our common stock would likely 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 twenty-five quarters ended
April 30, 2002. In addition, in fiscal years 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, 2003 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. In addition, the tragedies of September 11
have caused school districts to carefully balance their focus on academics with
concerns about health and security. If a significant sale that we expect to
occur in a particular quarter is delayed and does not occur until a future
quarter, or does not occur at all, our quarterly performance may be adversely
affected to a greater degree than expected. Further, our fee-based subscription
Internet 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 subscription Internet 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 become exercisable upon
completion of certain performance criteria and we

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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.

We expect net losses to continue for the foreseeable future and may never
achieve or sustain profitability, which may cause our stock price to fall.

Since our inception, we have incurred significant losses. As of April 30,
2002 we have accumulated net losses of $284.3 million. We incurred net losses
of $62.2 million for the fiscal year ended January 31, 2002; $32.1 million
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; and $55.7
million in net losses for the fiscal year ended January 31, 2000. We expect our
operating losses to continue for the foreseeable future as we incur costs and
expenses related to:



| |  | selling costs;                                                                                                                                                                          
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | continued development, expansion and maintenance of our existing
software and Internet product offerings and content;                                                                   
| 
| |  | amortization or impairment of intangible assets and goodwill recorded
in connection with our acquisitions of eduTest, LearningPlanet.com,
Academic, Global Schoolhouse and StudyWeb; and
| 
| |  | marketing and promotional activities.                                                                                                                                                   

Our ability to become profitable and maintain profitability depends on our
ability to generate and sustain substantially higher revenues while maintaining
lower 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.

From time to time, we receive inquiries from investors and other parties
as to whether Lightspan will remain an independent organization. We consider
those inquiries, along with our ongoing operations of the company, in
determining how to best maximize stockholder 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
reduce our Lightspan Achieve Now revenues 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

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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 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.
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, 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. The Company has received notification that at the present time, it is
in compliance with these requirements. 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.

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 Internet systems, sales and marketing and product development
personnel. Our failure to manage our growth in a manner that minimizes these
strains on our resources could disrupt our operations and ultimately prevent us
from generating the revenues we expect.

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

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| |  | 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 may 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 subscription Internet 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 subscription Internet
business. Our ability to increase revenues from our fee-based subscription
Internet business depends on:



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

The future success of our fee-based subscription Internet business is
highly dependent on an increase in the number of Internet users who are willing
to subscribe to The Lightspan Network, eduTest.com and Academic.com
subscription products. The number of Internet 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 Internet
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 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                                                                                                                                                                                                                                           

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| |  | 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 subscription Internet products and services
without systems interruptions and adapt those products and services to changes
in technology, our future revenue growth and profitability could be less than
we expect.

We believe that a component of our future revenue growth will depend on
whether we are able to enhance and improve our fee-based subscription Internet
products and services as planned. Enhancements and improvements to our
fee-based subscription Internet 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 subscription Internet 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 subscription Internet 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 subscription
Internet products and their related technology on a timely and cost-effective
basis. If our enhancements, improvements and adaptations of our fee-based
subscription Internet products and their related technologies are 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 on-line 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 than we do. Many
of these current and potential competitors can devote substantially greater
resources than we can to product development, marketing and promotional
campaigns and Web site and systems development.

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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 enter into
strategic relationships with complementary businesses.

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 will continue to evaluate other operating environments and
computer platforms for our software products as they become available.

We may decide from time to time to make our software products available in
other operating environments or on other computer platforms and our efforts to
do so may involve substantial costs 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 worse
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 Internet businesses if the market for those
businesses does not develop.

The success of our fee-based subscription Internet businesses will depend
in large part on the continued emergence and growth of a market for
Internet-based educational technology products. The market for educational
technology is characterized by rapid 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.

Without the continued development and maintenance of the Internet
infrastructure, we could fail to generate the revenues necessary for our
fee-based subscription Internet 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,
Academic and eduTest brands is critical to attracting purchasers for our
curriculum-based educational software and subscribers and users of our
fee-based subscription Internet businesses. Our success in maintaining brand
awareness will depend on our ability to

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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, Academic and eduTest 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 collect only the names of teachers who are registering for
our Internet products. However, we may in the future collect names and other
personal information relating to students, teachers and parents, and may sell
our user information on an aggregated, non-individual basis; though we do not
intend to sell information relating to children under 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,
or fail to properly integrate, our management team.

Our success depends on the continued contributions of the principal
members of our sales and marketing, product development, Internet services, and
management departments. The loss of the services of any of our officers or
senior managers could disrupt operations in their respective departments and
could cause our overall financial results to be adversely impacted. In the
past we have experienced greater than average turnover among our senior
management. 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.

Several of our existing senior management personnel joined us during
fiscal 2001. Some of these individuals have not previously worked together as a
management team. If our senior managers are unable to work effectively as a
team, our business operations could be significantly disrupted.

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

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

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| |  | 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.

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
44.4% of our common stock.

As of April 30, 2002, executive officers, directors and holders of 5% or
more of our outstanding common stock, in the aggregate, owned or controlled
approximately 44.4% 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 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

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Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the amount
of interest expense we must pay with respect to our various outstanding debt
instruments. Our risk associated with fluctuating interest expense is limited,
however, to the interest rates which are tied to market rates, and our
investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes and do not expect to in the future. We ensure the
safety and preservation of our invested principal funds by limiting default
risks, market risk and reinvestment risk. We mitigate default risk by investing
in securities rated AA or better. A hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial
instruments at April 30, 2002. Declines in interest rates over time will,
however, reduce our interest income.

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Part II. OTHER INFORMATION




Item 1.Legal Proceedings

None.




Item 2.Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None.

Use of Proceeds

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




Item 3.Defaults Upon Senior Securities

None.




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

None.




Item 5.Other Information

None.




Item 6.Exhibits and Reports on Form 8-K



|(a) |  | Current Reports on Form 8-K
|--- |  | ---------------------------

On February 14, 2002 the Board of Directors of Lightspan, Inc. approved
the adoption of a share purchase rights plan. Terms of the plan provide for a
dividend distribution of one preferred share purchase right for each
outstanding share of common stock of the Company. The dividend was payable on
March 8, 2002 to the stockholders of record on that date. Each right entitles
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $0.001 per share
(the Preferred Shares), at a price of $10.00 per one one-hundredth of a
Preferred Share, subject to adjustment. Each one one-hundredth of a share of
Preferred Shares has designations and powers, preferences and rights, and the
qualifications, limitations and restrictions which make its value approximately
equal to the value of a common share. The description and terms of the rights
are set forth in the rights agreement.



|(b) |  | Exhibits
|--- |  | --------

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|         |  |         |     |             |  |                                                                           
|-------- |  | ------- | --- | ----------- |  | --------------------------------------------------------------------------
|Footnote |  | Exhibit |     |            
|Number   |  | Number  |     | Description
|         |  |         |     |            
|(1)      |  |         | 3.1 |             |  | Amended and Restated Certificate of Incorporation, as currently in effect.
|(2)      |  |         | 3.2 |             |  | Bylaws, as currently in effect.                                           
|         |  |         | 4.1 |             |  | Reference is made to Exhibits 3.1 and 3.2.                                
|(2)      |  |         | 4.2 |             |  | Specimen Stock Certificate.                                               



|(1) |  | Filed as an exhibit to the Companys 2000 Annual Report on
Form 10-K, or amendments thereto, 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.

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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 14th day of
June, 2002.

|              |                                            |                      
|------------- | ------------------------------------------ | ---------------------
|              |                                            | Lightspan, Inc.      
|             
|              | By:                                        | /s/ Michael A. Sicuro
|              |                                           
|June 14, 2002 | Michael A. Sicuro,
Chief Financial Officer



24