<PAGE>
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

                          AMENDMENT NO. 1 TO FORM 10-K

(Mark One)
   /X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001

                                       OR

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

                        COMMISSION FILE NUMBER: 000-27817

                               EDISON SCHOOLS INC.

             (Exact name of registrant as specified in its charter)



        DELAWARE                                    13-3915075
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)

                521 FIFTH AVENUE, 11TH FLOOR, NEW YORK, NY 10175

               (Address of principal executive offices) (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER; INCLUDING AREA CODE: (212) 419-1600

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                      Class A Common Stock, $ .01 par value

                      Class B Common Stock, $ .01 par value

    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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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 ___

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

    The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed using the closing sale price of the registrant's Class A
Common Stock on September 25, 2001, as reported on the Nasdaq National Market,
was approximately $716,000,000.

    The number of shares of the registrant's Class A Common Stock outstanding on
September 25, 2001 was 50,857,335 and the number of shares of the registrant's
Class B Common Stock outstanding on September 25, 2001 was 2,424,876.

                       DOCUMENTS INCORPORATED BY REFERENCE

    Certain portions of the registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on December 6, 2001 are incorporated
by reference into Part III of this Form 10-K.

<PAGE>

                                EXPLANATORY NOTE

         The purpose of this Amendment No. 1 to the Annual Report on Form 10-K
of Edison Schools Inc. (the "Company") for the year ended June 30, 2001 is to
restate the Company's fiscal 1999, 2000 and 2001 consolidated balance sheets and
to correspondingly modify related disclosures. The restatement does not affect
revenues or operating results ("loss from operations and net loss") previously
reported in the Company's audited financial statements included in the Company's
Annual Report on Form 10-K for the year ended June 30, 2001. On May 14, 2002,
the Company concluded and resolved a confidential informal inquiry of its
accounting practices and policies undertaken by the staff of the Securities and
Exchange Commission (the "SEC"). In connection with the SEC inquiry, the Company
undertook a review of its accounting practices and policies and determined the
need to restate (i) certain items of its balance sheets, audited and unaudited,
to properly reflect certain liabilities and equity and to record compensation
earned in fiscal years ended on or prior to June 30, 1998 and (ii) the operating
results for the unaudited first and third quarters of fiscal 2001. This
restatement is described in detail in notes 2 and 16 of the notes to the
consolidated financial statements. On May 14, 2002, the Company issued a press
release that described the informal SEC inquiry and the Company's intention to
restate these financial statements. The Company filed the press release as an
exhibit to its Current Report on Form 8-K filed May 15, 2002.

         In addition to the restatement in the first and third quarters of
fiscal 2001 discussed above, the Company has made other reclassifications in the
quarters of fiscal 2001, including the second and fourth, to record certain
previously unrecorded adjustments; these reclassifications impacts the
classification of expenses within certain captions on the unaudited statements
of operations and have no impact on the net loss in any period. These
reclassifications are described in note 16 of the notes to the consolidated
financial statements. In connection with the restatement and reclassifications,
the Company has also revised the disclosure in note 3 of the notes to the
consolidated financial statements of certain of its accounting policies.

         The Company has amended and restated in its entirety each item of the
Company's Annual Report on Form 10-K for the year ended June 30, 2001that has
been affected by the restatement and reclassifications. This Amendment No. 1 to
Form 10-K does not reflect events occurring after the filing of the original
Form 10-K, or modify or update those disclosures (including disclosures relating
to risks, uncertainties and other factors that may affect the Company's future
performance) in any way, except as required to reflect the effects of the
restatement and reclassifications.

         For current information regarding risks, uncertainties and other
factors that may affect the Company's future performance, please see "Additional
Risk Factors That May Affect Future Results " included in Item 2 of Part I of
the Company's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2002. Please also see the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2002 for changes to the Company's revenue
recognition policy made as a result of recent accounting guidance.

                               EDISON SCHOOLS INC.

                           ANNUAL REPORT ON FORM 10-K

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001

   PART II

<TABLE>
<CAPTION>
                                                                                      PAGE
                                                                                      ----
<S>                                                                                   <C>
   Item 6.    Selected Financial Data...........................................        4
   Item 7.    Management's Discussion and Analysis of Financial Condition
               and Results of Operations........................................        5

</TABLE>

<TABLE>
<CAPTION>
   PART IV                                                                             PAGE
                                                                                       ----
<S>                                                                                    <C>
   Item 14.   Exhibits, Financial Statements and Reports on Form 8-K............        25

   SIGNATURES...................................................................        26
</TABLE>



                                       2
<PAGE>


    Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Annual
Report 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 have based these forward-looking statements on our current expectations and
projections about our ability to, among other things:

   - implement our business strategy;

   - expand our customer base and increase the number of students enrolled in
     schools managed by us;

   - control costs;

   - improve the academic achievement of students in our schools; and

   - finance and manage our rapid growth.

    In some cases, you can identify forward-looking statements by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of these and
other similar words.

    Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include those identified under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Additional Risk Factors That May Affect Future Results" and elsewhere in this
Annual Report. You should also carefully review the risks outlined in other
documents that we file from time to time with the Securities and Exchange
Commission, including our Quarterly Reports on form 10-Q that we file in fiscal
2002. All forward-looking statements included in this Annual Report are based on
information available to us up to and including the date of this document, and
we expressly disclaim any obligation to alter or update our forward-looking
statements, whether as a result of new information, future events or otherwise.

    We are a Delaware corporation, and our principal executive offices are
located at 521 Fifth Avenue, 11th Floor, New York, New York 10175 and our
telephone number is (212) 419-1600. Our web site address is
www.edisonschools.com. The information on our web site is not incorporated by
reference into this Annual Report and should not be considered to be a part of
this Annual Report. Our web site address is included in this Annual Report as an
inactive textual reference only.

                                       3
<PAGE>

                                     PART II

ITEM 6.    SELECTED FINANCIAL DATA

    The following selected financial data should be read in conjunction with our
financial statements and the related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Annual Report. The statement of operations data for the years ended June 30,
1999, 2000 and 2001, and the balance sheet data as of June 30, 2000 and 2001,
are derived from, and are qualified by reference to, audited financial
statements included in this Annual Report. The statement of operations data for
the years ended June 30, 1997 and 1998 and the balance sheet data as of June 30,
1997, 1998 and 1999, are derived from our audited financial statements that are
not included in this Annual Report. Please see note 3 of the notes to our
financial statements for (i) information on direct site expenses which are paid
by our clients on our behalf and (ii) information concerning the calculation of
basic and diluted net loss per share. Please see Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Overview" and
"Results of Operations" for information concerning the calculation of EBITDA,
net of other charges, gross site contribution and gross site margin.

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED JUNE 30
                                                   ----------------------------------------------------------------------------
                                                        1997            1998             1999            2000            2001*
                                                      ---------       ---------       ---------       ---------       ---------
                                                                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S>                                                   <C>             <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:

Revenue from educational services .............       $  38,559       $  69,407       $ 132,762       $ 224,578       $ 375,818
                                                      ---------       ---------       ---------       ---------       ---------
Education and operating expenses:
   Direct site expenses .......................          32,150          59,576         114,097         192,602         315,751
   Administration, curriculum and development .          12,755          18,258          49,984          40,643          58,104
   Depreciation and amortization ..............           3,552           7,232          12,526          20,906          34,355
   Pre-opening expenses .......................           1,487           2,486           5,457           8,372           8,641
   Design team compensation ...................              --           2,724              --              --              --
                                                      ---------       ---------       ---------       ---------       ---------
      Total education and operating expenses ..          49,944          90,276         182,064         262,523         416,851
                                                      ---------       ---------       ---------       ---------       ---------
Loss from operations ..........................         (11,385)        (20,869)        (49,302)        (37,945)        (41,033)
Other income (expense), net ...................             (37)         (1,046)           (131)          1,355           3,555
 ..............................................       ---------       ---------       ---------       ---------       ---------
Loss  before provision for taxes ..............         (11,422)        (21,915)        (49,433)        (36,590)        (37,478)
Provision for state and local taxes ...........              --              --              --             --             (603)
                                                      ---------       ---------       ---------       ---------       ---------
Net loss ......................................         (11,422)        (21,915)        (49,433)        (36,590)        (38,081)
Dividends on preferred stock ..................              --          (4,290)             --              --              --
Preferred stock accretion .....................              --            (278)         (1,027)              0               0
                                                      ---------       ---------       ---------       ---------       ---------
Net loss attributable to common
   Stockholders ...............................       $ (11,422)      $ (26,483)      $ (50,460)      $ (36,590)      $ (38,081)
                                                      =========       =========       =========       =========       =========
Basic and diluted net loss per share
   Attributable to common stockholders ........       $   (3.68)      $   (8.52)      $  (16.24)      $   (1.32)      $   (0.79)
                                                      =========       =========       =========       =========       =========
Weighted average number of common shares
   outstanding used in computing basic and
   diluted net loss per share attributable
   to common stockholders .....................       3,107,355       3,107,356       3,107,356       27,685,203      47,966,741
                                                      =========       =========       =========       =========       =========

STUDENT AND PER STUDENT DATA:

Student enrollment (1) ........................           7,150          12,600          23,900          37,500          57,000
Total revenue per student .....................       $   5,393       $   5,508       $   5,555       $   5,989       $   6,593
Net loss per student ..........................       $  (1,597)      $  (1,739)      $  (2,068)      $    (976)      $    (668)
EBITDA, net of other charges, per student .....       $  (1,089)      $    (820)      $    (603)      $    (349)      $     (84)
Cash used in operating activities per student .       $  (1,530)      $    (837)      $    (673)      $  (1,076)      $    (397)
Cash used in investing activities per student .       $  (1,822)      $  (1,594)      $  (1,269)      $  (2,405)      $  (1,420)
Cash provided by financing
  activities per student ......................       $   5,008       $   1,776       $   2,797       $   4,140       $   2,581

OTHER OPERATING DATA:

Capital expenditures ..........................       $  15,553       $  21,181       $  34,023       $  75,899       $  68,332
Gross site contribution .......................       $   6,409       $   9,831       $  18,665       $  31,976       $  60,068
Gross site margin .............................            16.6%           14.2%           14.1%           14.2%           16.0%
EBITDA, net of other charges ..................       $  (7,787)      $ (10,328)      $ (14,404)      $ (13,102)      $  (4,807)
Cash used in operating activities .............       $ (10,941)      $ (10,550)      $ (17,624)      $ (41,305)      $ (29,292)
Cash used in investing activities .............       $ (13,030)      $ (20,082)      $ (28,783)      $ (89,239)      $ (74,278)
Cash provided by financing activities .........       $  35,809       $  22,383       $  66,838       $ 155,266       $ 147,120
Total number of schools .......................              12              25              51              79             113
</TABLE>



   * Reflects reclassification of certain amounts. See note 16 to the notes to
 our consolidated financial statements.
   (1) Does not include students enrolled in our summer school program.


                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                                 AS OF JUNE 30,
                                          --------------------------------------------------------
                                           1997         1998        1999        2000        2001
                                          -------     -------      -------     -------     -------
                                                             (dollars in thousands)
                                                                   (restated)*
BALANCE SHEET DATA:

<S>                                       <C>         <C>          <C>         <C>         <C>
Cash and cash equivalents .............   $15,741     $ 7,492      $27,923     $52,644     $96,195
Working capital .......................    17,343      (2,316)      18,554      57,351     111,731
Total assets ..........................    48,472      58,294      106,870     251,030     401,014
Total debt, including current portion .     9,395      17,151       21,535      36,280      45,524
Total stockholders' equity ............    31,314      24,190       58,962     178,833     304,883
</TABLE>

*    As more fully described in notes 2 and 3 to the notes to our consolidated
     financial statements, the Company has restated certain balance sheet
     accounts which had the effect of reducing working capital and reducing
     stockholders' equity by approximately $2.5 million, $5.0 million, $4.0
     million, $3.7 million and $3.1 million at June 30, 1997, 1998, 1999, 2000
     and 2001, respectively.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The following discussion and analysis of the financial condition and
results of operations of Edison should be read in conjunction with "Selected
Financial Data" and our financial statements and the related notes included in
this Annual Report. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors that include, but are not limited to, those set forth
under " -- Additional Risk Factors That May Affect Future Results" and elsewhere
in this Annual Report.

OVERVIEW

     We are the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. We contract with local school
districts and public charter school boards to assume educational and operational
responsibility for individual schools in return for per-pupil funding that is
generally comparable to that spent on other public schools in the area. We
opened our first four schools in August 1995 and have grown rapidly in every
subsequent year. We served 57,000 students in 113 schools located in 21 states
across the country and the District of Columbia in the 2000-2001 school year.
Additionally, we served approximately 12,000 students in our summer school
program during the summer of 2001. For the 2001-2002 school year, we expect
enrollment of approximately 75,000 students in 136 schools located in 22 states
and the District of Columbia. Our total revenue has increased from $11.8 million
in fiscal 1996 to $375.8 million in fiscal 2001.

     From our formation in 1992 until opening our first schools in fiscal 1996,
we were a development stage company focused on research, development and
marketing of the Edison school design and curriculum and raising capital to
support our business plan. From 1992 until 1995, Edison's team of leading
educators and scholars developed an innovative, research-backed curriculum and
school design. We operated as a partnership prior to November 1996, when we
converted to a corporation. As of June 30, 2001, our accumulated deficit since
November 1996 was approximately $156.1 million. In addition, prior to November
1996, we incurred losses of approximately $61.8 million, which are reflected in
our additional paid-in capital. Because of our rapid growth, and in view of the
evolving nature of our business and our limited operating history, we believe
that period-to-period comparisons of our operating results may not be
meaningful.

     Edison's curriculum expenses include the ongoing costs to maintain and
support Edison's educational design. These expenses include the salaries and
wages of trained educators in our central office curriculum department, the
costs of providing professional training to our staff and teachers, including
materials, and the ongoing costs of maintaining and updating the teaching
methods and educational content of our program.

     We make a significant investment in each school we open. The investment
generally includes:

     - initial staff training and professional development;

     - technology equipment, including laptop computers for teachers;

     - books and other materials to support the Edison curriculum and school
       design; and

                                       5
<PAGE>

     - upgrades in facilities.

     On July 3, 2001, we acquired LearnNow, a privately-held school management
company, for consideration of 1,360,954 shares of our class A common stock. We
also loaned LearnNow $3.0 million prior to the acquisition. We will operate 11
schools under the LearnNow brand during fiscal 2002.

REVENUE FROM EDUCATIONAL SERVICES

            Revenues are principally earned from contractual agreements to
manage and operate contract and charter schools. The Company also earns revenue
from summer school and after-school program fees. The Company recognizes revenue
for each managed school over the period we perform our service, pro rata over
the typical school year, eleven months from August through June, in accordance
with Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements."

            Most of our management agreements provide that we earn a fee based
upon the number of children that attend our schools and, therefore, we only earn
revenue to the extent students attend our schools. In most instances, there is a
`base' fee per pupil and several `categorical' fee components paid only for
students in certain categories (e.g., low-income, English as a second language,
etc.). In some of our charter schools, our fee has a fixed component and
variable component. Even in contracts where we have fixed fee component, we have
generally agreed to forego or reduce our fee if there is a budget shortfall at
the charter school.

            The Company is generally responsible to its clients for all aspects
of the management of its schools including but not limited to the: academic
achievement of the students; selection, training and compensation of school
personnel; procurement of curriculum and equipment necessary for operations of
the school; and the safe operation of the school facilities. We often purchase
certain essential services, such as transportation, from third parties and/or
from our clients. In addition, teachers in schools generally remain employees of
our clients and are often paid through the clients' payroll systems. Where such
arrangements exist, the client deducts the amounts they have expended for staff
salaries and/or purchased services from the amount owed to us when remitting
payment. The Company follows the guidance of EITF 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent."

            The Company recognizes per-pupil funding from local, state and
federal sources, including Title I and special education funding. Significant
management estimates and assumptions are required to determine these funding
levels, particularly in interim periods. On a quarterly basis, the Company
records adjustments to revenue, if necessary, for enrollment fluctuations,
changes to per-pupil funding estimates, and changes to estimates for federal and
state categorical grant funding. Anticipated losses on contracts are charged to
earnings when identified.

DIRECT SITE EXPENSES

     Direct site expenses include most of the expenses incurred on-site at our
schools. The largest component of this expense is salaries and wages, primarily
for principals and teachers, which are often paid for by our clients on our
behalf (please see note 3, "-Revenue Recognition," to the notes to our
consolidated financial statements for more information on these direct site
expenses). The remaining direct site expenses include on-site administration,
facility maintenance, utilities and, in some cases, student transportation. Once
staffing levels for the school year are determined, most of these expenses are
fixed,and accordingly, variations in enrollment will generally not change the
overall cost structure of a school for that year. Direct site expenses do not
include teacher training and other pre-opening expenses associated with new
schools, financing costs or depreciation and amortization related to technology,
including computers for teachers and students, curriculum materials and capital
improvements to school buildings.

GROSS SITE CONTRIBUTION AND GROSS SITE MARGIN

     We define gross site contribution as revenue from educational services less
direct site expenses. Gross site margin is gross site contribution expressed as
a percentage of revenue from educational services. Gross site contribution is a
measurement of ongoing site-level operating performance of our schools. We
believe it serves as a useful operating measurement when evaluating our schools'
financial performance. Gross site contribution does not reflect all site-related
costs, such as depreciation and amortization or interest expense and principal
repayment related to site-level investments, or on-site pre-opening expenses,
and accordingly gross site contribution does not represent site-level
profitability.

                                       6
<PAGE>

ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES

     Support from our central office is important for the successful delivery of
our curriculum and school design. Administration, curriculum and development
expenses include those amounts related to the creation and enhancement of our
curriculum, and our general, administrative and sales and marketing functions.
These costs include costs for curriculum, assessment and training professionals,
sales and marketing personnel, financial reporting and legal and technological
support and travel expenses and other development activities.

PRE-OPENING EXPENSES

     Pre-opening expenses consist principally of various administrative and
personnel costs incurred prior to the opening of a new school or the expansion
of an existing school, particularly the costs for the initial training and
orientation of professional staff, recruitment and travel expenses and expenses
for temporary offices and staff. In connection with the establishment of a new
school, we seek to hire the school's principal several months in advance of the
school's opening. This allows the principal to hire staff, most of whom receive
substantial professional training in the Edison education design prior to the
first day of school. Pre-opening expenses generally are first incurred in the
fourth quarter of the fiscal year prior to the school's opening or expansion and
generally continue into the first or second quarter of the fiscal year in which
the school opens. These costs are expensed as incurred.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization relates primarily to the investments we make
in each school for books and other educational materials, including enrollment
fees for the Success for All program, computers and other technology, and
facility improvements. These investments support the Edison curriculum and
school design and relate directly to our provision of educational services. The
depreciation and amortization of investments in our central office is also
included.

ENROLLMENT

     Our annual budgeting process establishes site-specific revenue and expense
objectives, which include assumptions about enrollment and anticipated
per-student funding. While our budgets include desired enrollment levels, we do
not attempt to maximize enrollment based upon the physical capacity of our
facilities. Our budgets are designed to achieve both financial and academic
goals, both of which we believe are critical to the ongoing success of our
business. Therefore, our budgets are designed to achieve the proper balance
between financial performance and academic standards.

     We implement various strategies to achieve optimal enrollment, including
local recruiting, media advertising, and coordinating with our school district
partners and community groups. Since some site costs are partially fixed,
incremental enrollment can positively affect profitability. Further, due to the
closely correlated relationship of site revenue and expenses, school personnel
closely manage expenses based upon actual enrollment. Of the 113 schools we
operated during the 2000-2001 school year, 46 schools maintained waiting lists
or were oversubscribed. Over the last three years our schools have operated at
96.0% or higher of the enrollment levels assumed in our budget. As discussed
below under " -- Financial Performance," we do not believe that achieving 100%
of assumed enrollment at each school is necessary to achieve positive cash flow.

FINANCIAL PERFORMANCE

     We have incurred substantial net losses in every fiscal period since we
began operations and expect losses to continue into the future. For the fiscal
year ended June 30, 2001, our net loss was $38.1 million. As of June 30, 2001,
our accumulated deficit since November 1996, when we converted from a
partnership to a corporation, was approximately $156.1 million. In addition,
prior to November 1996, we incurred losses of approximately $61.8 million, which
are reflected in our additional paid-in capital.

                                       7
<PAGE>

     The following table sets forth various financial data expressed as a
percentage of total revenue for the periods indicated:

<TABLE>
<CAPTION>
                                                     FISCAL YEAR ENDED JUNE 30,
                                                    ------------------------------
                                                    1999        2000        2001*
                                                    -----       -----       -----
<S>                                                 <C>         <C>         <C>
Revenue from educational services ..............    100.0%      100.0%      100.0%
                                                    -----       -----       -----
Education and operating expenses:
   Direct site expenses ........................     86.0        85.8        84.0
   Administration, curriculum and development
      expenses .................................     37.6        18.1        15.5
   Depreciation and amortization ...............      9.4         9.3         9.1
   Pre-opening expenses ........................      4.1         3.7         2.3
                                                    -----       -----       -----
   Total education and operating expenses ......    137.1       116.9       110.9
                                                    -----       -----       -----
Loss from operations ...........................    (37.1)      (16.9)      (10.9)
                                                                            -----
Other income (expense), net ....................     (0.1)        0.6         1.0
                                                    -----       -----       -----
Loss from operations before provision
 for taxes ....................................     (37.2)      (16.3)       (9.9)
Provision for state and local taxes ............       --          --        (0.2)
                                                    -----       -----       -----
Net loss .......................................    (37.2)%     (16.3)%     (10.1)%
                                                    =====       =====       =====
</TABLE>

     * Reflects reclassification of certain amounts. See note 16 to our
consolidated financial statements.

     In order to achieve profitability, we believe it will be necessary both to
improve gross site margin while maintaining educational quality and to continue
to reduce central expenses as a percentage of total revenue from educational
services. The latter improvement is largely dependent on our ability to increase
our total revenue through expanded student enrollment while controlling central
costs.

     In general, we believe that reaching positive cash flow, like achieving
profitability, will be dependent on increasing our aggregate gross site
contribution without a proportionate increase in central expenses. Because gross
site contribution is the difference between site revenues and site expenditures,
positive gross site contribution can be achieved at a range of enrollment
levels. While higher enrollment tends to have a positive effect on gross site
contribution, our financial success does not depend on 100% enrollment at each
site.

CONTRACT SCHOOLS COMPARED TO CHARTER SCHOOLS

     We operate two types of schools: contract and charter. Contract schools are
public schools we operate under a management agreement with local school boards.
Charter schools are schools we operate under a management agreement with a
charter holder, which is typically a community group or non-profit entity that
has been granted a state-authorized charter to create a public school. The cost
of operating a contract school and a charter school is similar, except that, in
the case of a charter school, we are typically required to arrange for a
facility. In some cases, we operate charter schools under a charter granted by
the local school board, which provides the facility. In these cases, we
categorize these schools as contract schools because we do not provide the
facilities and therefore the economics of these arrangements closely resemble
those of a contract school. Charter school facilities that are not provided by a
local school board are financed in a variety of ways, including bank debt,
municipal bonds, sale/leaseback arrangements, third-party ownership by real
estate investment trusts and philanthropy. At times, we advance funds or
guarantee loans to our charter board clients to assist them in arranging for
facilities. As of June 30, 2001, we had lent or advanced $61.6 million and
guaranteed loans of $11.6 million to our charter board clients. Our facility
investment for a charter school will generally exceed our investment in
facilities for a contract school. Because of these higher costs, we generally
seek to establish charter schools in areas with higher per-pupil revenue.

STOCK-BASED AND OTHER NON-CASH COMPENSATION EXPENSES

            Beginning in 1995, we granted a number of stock options with four-
and five-year terms. In the fourth quarter of fiscal 1999, we decided to extend
the term of these options to ten years and to make other changes in their terms
that we believe are customary for options granted by public companies. As a
result, we were required to record compensation expense at that time
representing the difference between the exercise price of the options and the
deemed fair market value of the shares underlying the stock options. In this
regard, we recognized an expense of $17.4 million in the fourth quarter of
fiscal 1999. This is in addition to $5.0 million of stock-based compensation
expenses recorded in fiscal 1999 in connection with stock options that were
subject to variable accounting treatment. We have recognized, and expect to
continue to recognize, expenses related to the option amendments over the
vesting periods of the individual stock options. These additional expenses were
approximately $3.9 million for fiscal 2000 and $1.4


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million for fiscal 2001, and are expected to be $1.0 million for fiscal 2002 and
$700,000 for fiscal 2003.

            In addition, in accordance with Financial Accounting Standards Board
Interpretation 44, we recognized a $234,000 non-cash charge during fiscal 2001
resulting from modifications to previously issued employee stock options. Also,
in the same period, a charge to earnings of $181,000 was recognized for certain
former Edison employees. The employees were allowed to retain their stock
options and vesting rights beyond their separation dates.

            To the extent we discretionarily accelerate stock options or
otherwise modify the terms of stock options in the future, we could incur
additional non-cash charges. We may also, from time to time, grant options below
fair market value which could result in further charges at the time of grant.

INCOME TAXES

            We have not recorded any provision for federal income taxes because
we have incurred net losses from our inception through June 30, 2001. As of June
30, 2001, we had approximately $150 million of net operating loss carryforwards
for federal income tax purposes. Approximately $45 million are expected to
expire between fiscal 2010 and 2018, and approximately $105 million of which are
expected to expire between fiscal 2019 and 2021. Given our limited operating
history, losses incurred to date and the difficulty in accurately forecasting
our future results, we do not believe the realization of the related deferred
income tax assets meets the criteria required by generally accepted accounting
principles and, accordingly, we have recorded a full valuation allowance.

            For fiscal 2001, we have recorded a provision for taxes that
reflects state and local income taxes arising from our operations of several
sites.

SEASONALITY

            Because new schools are opened in the first fiscal quarter of each
year, trends in our business, whether favorable or unfavorable, will tend not to
be reflected in our quarterly financial results, but will be evident primarily
in year-to-year comparisons. The first quarter of our fiscal year has
historically reflected less revenue and lower expenses than the other three
quarters, and we expect this pattern to continue. We generally have lower gross
site margin in the first fiscal quarter than in the remaining fiscal quarters.
We also recognize pre-opening costs primarily in the first and fourth quarters.
Summer school revenues and expenses are also recognized in the first and fourth
fiscal quarters.

            Our financial results can vary among the quarters within any fiscal
year for other reasons, and our quarterly revenue and results of operations
could also fluctuate somewhat based on changes in school enrollment throughout
the fiscal year. For more information on the seasonality of our financial
results, see " -- Additional Risk Factors That May Affect Future Results - Our
financial results are subject to seasonal patterns and other fluctuations from
quarter to quarter."

RESULTS OF OPERATIONS

FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000

     REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $375.8 million for fiscal 2001 from $224.6 million for the prior
year, an increase of 67.3%. The increase was primarily due to a 52% increase in
student enrollment from 37,500 in the 1999-2000 school year to 57,000 in the
2000-2001 school year, reflecting both the opening of new schools and the
expansion of existing schools.

     DIRECT SITE EXPENSES. Our direct site expenses increased to $315.7 million
for fiscal 2001 from $192.6 million for the prior year, an increase of 63.9%.
Like the increase in revenue from educational services, the increase in direct
site expenses was primarily due to the 52% increase in student enrollment. The
largest element of direct site expenses is personnel costs. Personnel costs
included in direct site expenses increased to $250.7 million for fiscal 2001
from $155.0 million for the prior year.

     GROSS SITE MARGIN AND CONTRIBUTION. Our gross site contribution was $60.1
million for fiscal 2001 compared to $32.0 million for the prior year. The
corresponding gross site margin increased to 16.0% for fiscal 2001 compared to
14.2% for fiscal 2000. The increase in gross site contribution of $28.1 million
resulted from the increase in revenue and decreases in the cost of providing
services.

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     ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $58.1 million for fiscal 2001
from $40.6 million for fiscal 2000, an increase of 43.1%. The increase was
substantially due to greater personnel costs resulting from an increase of 80
new headquarters employees, which reflects a substantial increase in staff in
our school operations and curriculum and education divisions and an increase in
our central office administrative staff to enhance legal, contracting, and
financial reporting functions. In addition, we wrote down our curriculum
materials inventory by $3.9 million to reflect costs of returning and/or
reselling surplus materials.

     DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $34.4 million for fiscal 2001 from $20.9 million for fiscal 2000, an increase
of 64.6%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum materials, computers and related
technology, and facility improvements related to our enrollment and central
office growth.

     PRE-OPENING EXPENSES. Our pre-opening expenses increased to $8.6 million
for fiscal 2001 from $8.4 million for fiscal 2000, an increase of 2.4%. This
increase was associated primarily with opening new schools and expanding
existing schools for the 2000-2001 school year, with 19,500 new students
enrolled compared to approximately 13,600 new students enrolled one year
earlier.

     Excluding non-cash stock-based compensation charges of $1.9 million,
administration, curriculum and development and pre-opening expenses as a
percentage of revenues decreased to 17.3% for fiscal 2001 from 20.1% for the
prior year.

     EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue decreased to 110.9% for fiscal 2001
from 116.9% for fiscal 2000. This decrease primarily resulted from continued
revenue growth and increased operating leverage and a decrease in
administration, curriculum and development expenses as a percentage of total
revenue.

     EBITDA, NET OF OTHER CHARGES. EBITDA, net of other charges, means the net
loss we would have shown if we did not take into consideration our interest
expense, income tax expense, depreciation and amortization, and stock-based
compensation charges. These costs are discussed above. This amount for fiscal
2001 was a negative $4.8 million compared to a negative $13.1 million for fiscal
2000. The improved EBITDA resulted primarily from increased gross site margin
and decreased administration, curriculum and development, and pre-opening
expenses as a percentage of revenues. On a per-student basis, negative EBITDA
improved to $84 in fiscal 2001 compared to $349 for the prior year.

     LOSS FROM OPERATIONS. Our loss from operations increased to $41.0 million
for fiscal 2001 from $37.9 million for fiscal 2000, an increase of 8.1%. The
increase primarily resulted from higher administration, curriculum, and
development expenses as well as higher depreciation and amortization.

     OTHER INCOME AND EXPENSE. Other income, net was $3.6 million for fiscal
2001 compared to $1.4 million in fiscal 2000. The improvement was primarily due
to $10.3 million of interest income resulting from larger invested cash balances
and notes receivable, partially offset by interest expense from expanded
borrowings and a write-off of fixed assets at the schools that closed in fiscal
2001. Additionally, for fiscal 2001, we recognized $291,000 in losses as our
pro-rata share of the Ksixteen net loss for that period.

     NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $38.1 million for fiscal 2001 from $36.6 million for fiscal 2000,
an increase of 4.1%.

FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999

     REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $224.6 million fiscal 2000 from $132.8 million for the prior year,
an increase of 69.1%. The increase was primarily due to a 57% increase in
student enrollment from 23,900 in the 1998-1999 school year to 37,500 in the
1999-2000 school year, reflecting both the opening of new schools and the
expansion of existing schools.

     DIRECT SITE EXPENSES. Our direct site expenses increased to $192.6 million
for fiscal 2000 from $114.1 million for the prior year, an increase of 68.8%.
Like the increase in revenue from educational services, the increase in direct
site expenses was primarily due to the 57% increase in student enrollment. The
largest element of direct site expenses is personnel costs. Personnel costs
included in direct site expenses increased to $155.0 million for fiscal 2000
from $90.7 million for the prior year.

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<PAGE>
     GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin remained
relatively stable at 14.2% for fiscal 2000 compared to 14.1% for fiscal 1999.
Higher revenues resulted in an increase in gross site contribution to $32.0
million for fiscal 2000 from $18.7 million for fiscal 1999.

     ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses decreased to $40.6 million for fiscal 2000
from $50.0 million for fiscal 1999, a decrease of 18.8%. Our fiscal 1999
administration, curriculum and development expenses includes $22.4 million of
non-cash stock-based compensation compared to only $3.9 million for fiscal 2000.
Excluding the non-cash stock-based compensation, our administration, curriculum
and development expenses increased to $36.7 million for fiscal 2000 from $27.6
million for fiscal 1999. The resulting net increase was substantially due to
greater personnel costs resulting from the hiring of 66 new headquarters
employees, which reflects a substantial increase in staff in our school
operations and curriculum and education divisions and an increase in our central
office administrative staff to enhance legal, contracting, and financial
reporting functions. These expenses increased in part due to the additional
reporting and administrative obligations required of us in connection with
operating as a public company.

     DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $20.9 million for fiscal 2000 from $12.5 million for fiscal 1999, an increase
of 67.2%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum materials, computers and related
technology, and facility improvements related to our enrollment growth.

     PRE-OPENING EXPENSES. Our pre-opening expenses increased to $8.4 million
for fiscal 2000 from $5.5 million for fiscal 1999, an increase of 52.7%. This
increase was associated primarily with opening new schools and expanding
existing schools for the 1999-2000 school year, with 13,600 new students
enrolled compared to approximately 11,300 new students enrolled one year
earlier, as well as approximately $2.4 million of expenses incurred for new
schools opened in the fall of 2000.

     Excluding the non-cash compensation charges discussed above,
administration, curriculum and development and pre-opening expenses as a
percentage of revenues decreased to 20.1% for fiscal 2000 from 24.9% for the
same period of the prior year.

     EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue decreased to 116.9% for fiscal 2000
from 137.1% for fiscal 1999. Excluding stock-based, non-cash expenses amounts,
total education and operating expenses as a percentage of total revenue would
have decreased to 115.2% for fiscal 2000 from 120.2% for fiscal 1999. This
decrease primarily resulted from continued revenue growth and increased
operating leverage and a decrease in administration, curriculum and development
expenses as a percentage of total revenue.

     EBITDA, NET OF OTHER CHARGES. EBITDA, net of other charges, for fiscal 2000
was a negative $13.1 million compared to a negative $14.4 million for fiscal
1999. The improved negative EBITDA resulted primarily from relatively stable
gross site margin and decreased administration, curriculum and development, and
pre-opening expenses as a percentage of revenues. On a per-student basis,
negative EBITDA improved to $349 compared to $603 for the same period one year
ago.

     LOSS FROM OPERATIONS. Our loss from operations decreased to $37.9 million
for fiscal 2000 from $49.3 million for fiscal 1999, a decrease of 23.1%. The
improvement primarily results from substantially less non-cash stock-based
compensation expense, partially offset by increased administration, curriculum
and development costs.

     OTHER INCOME AND EXPENSE. Other income, net was $1.4 million for fiscal
2000 compared to other expense, net of $131,000 in fiscal 1999. The improvement
was primarily due to $6.8 million of interest income resulting from larger
invested cash balances, partially offset by interest expense from expanded
borrowings and the recording of our applicable share of the net losses of APEX
Online Learning. For fiscal 2000, we recognized $2.0 million of losses as our
pro rata share of APEX's net loss for that period.

     NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
decreased to $36.6 million for fiscal 2000 from $49.4 million for fiscal 1999, a
decrease of 25.9%. During fiscal 2000 and 1999, we recognized $0 and
approximately $1.1 million of preferred stock accretion, respectively. This
resulted in net loss attributable to common stockholders of $36.6 million and
$50.5 million for these periods, respectively.

                                       11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

             We have historically operated in a negative cash flow position. To
date, we have financed our cash needs through a combination of equity and debt
financing. Since our inception and through June 30, 2001, we had raised $507.2
million of equity capital. During the same period, we used $154.9 million of
cash for operating activities and $244.0 million of cash for investing
activities. We have also utilized debt and equipment leasing arrangements to
finance computers and other technology investments in our schools.

            At June 30, 2001, our cash available for operations was
approximately $96.2 million.

             We do not have a line of credit or similar arrangement to use for
seasonal working capital needs and other general corporate purposes. Although we
intend to obtain a line of credit for such uses, we cannot be certain that we
will be able to obtain such a financing arrangement on favorable terms, if at
all.

             We expect our cash on hand, together with borrowings under
financing arrangements to finance technology and facilities-related expenditures
and expected reimbursements of advances we have made to charter boards, will be
sufficient to meet our working capital needs to operate our existing schools
through fiscal 2002. Our near-term capital needs are generally growth related
and are dependent upon our rate of growth and our mix of charter schools and
contract schools, as charter schools usually require us to advance funds to help
charter boards obtain, renovate and complete school facilities. Our current
growth plans for the 2002-2003 school year will require us to obtain additional
funding. We anticipate using debt financing to fund such growth although we
cannot be certain we will be able to obtain such financing on favorable terms,
if any.

             Our longer term requirements are for capital to fund operating
losses, capital expenditures related to growth and for anticipated working
capital needs and general corporate purposes. We expect to fund such
expenditures and other longer term liquidity needs with cash generated from
operations, the proceeds from offerings of debt or equity securities and
expanded financing arrangements. Depending on the terms of any financing
arrangements, such funding may be dilutive to existing shareholders, and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all.

            In general, our ability to achieve positive cash flow will be
dependent on the volume of schools with positive gross site contribution to
offset central office and overhead expenses. Because gross site contribution is
the difference between site revenue and site expenditures, positive gross site
contribution can be achieved at a range of enrollment levels. While higher
enrollment tends to have a positive effect on gross site contribution, our
growth and cash flow do not depend on 100% enrollment.

CASH USED IN OPERATING ACTIVITIES

             For fiscal 2001, we used $29.3 million for operating activities.
This use primarily resulted from a $38.1 million net loss and a $31.4 million
net increase in working capital accounts, partially offset by depreciation and
amortization totaling $32.3 million, non-cash stock-based compensation expense
of $1.9 million, and $5.2 million of asset write-off and disposals.

             For fiscal 2000, we used $41.3 million for operating activities.
This use primarily resulted from a $36.6 million net loss and a $29.8 million
net increase in working capital accounts, partially offset by $19.3 million of
depreciation and amortization, $2.0 million in equity in loss of unconsolidated
entity and $3.9 million in non-cash stock-based compensation expense.

CASH USED IN INVESTING ACTIVITIES

             For fiscal 2001, we used $74.3 million in investing activities and
additionally there were non-cash transactions of $21.4 million. During this
period, we invested $46.9 million in our schools and central office. These
amounts include the investments we made in technology and curriculum in each of
the schools we opened. We have also advanced funds to our charter board clients
or their affiliates to help obtain, renovate and complete school facilities. The
amounts advanced for fiscal 2001 were $46.8 million. During this period, we also
received $14.8 million in repayments on advances previously made. Also, we
disposed of leasehold improvements totaling $10.7 million. During fiscal 2001,
we paid $7.0 million for the balance on the purchase price of a lot located in
the Harlem section in the borough of Manhattan in New York City. Additionally,
we lent LearnNow $3.0 million during the same period.

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<PAGE>

             For fiscal 2000, we used $89.2 million in investing activities and
additionally there were non-cash transactions of $18.4 million. During this
period, we invested $57.5 million in our schools and central office. The amounts
advanced during fiscal 2000 to our charter board clients or their affiliates
were $18.8 million. During this period, we also received $2.8 million in
repayments on advances previously made.

CASH FROM FINANCING ACTIVITIES

             For fiscal 2001, we received $147.1 million from our financing
activities. In August 2000, we completed a follow-on public offering in which we
sold 3,350,000 shares of class A common stock for net proceeds of approximately
$71.0 million. Also in August 2000, a philanthropic foundation exercised
warrants to purchase 600,000 shares of class A common stock and paid us $4.8
million. In March 2001, we completed another public offering of an additional
3,351,026 shares of class A common stock for net proceeds of approximately $81.0
million. In fiscal 2001, we received $4.2 million in proceeds from financing
arrangements for computers and other technology and $4.7 million from facilities
financings. These proceeds were partially offset by the repayments of notes
payable and capital lease obligations of approximately $18.5 million.

             For fiscal 2000, we received $155.3 million from our financing
activities. The amounts received were from issuances of preferred stock and
common stock, including our initial public offering, and the exercise of stock
options and warrants. In July 1999, we completed two private placement financing
transactions for total proceeds of $41.7 million. In November 1999, we completed
an initial public offering in which we sold 6,800,000 shares of class A common
stock for net proceeds of $109.7 million. For fiscal 2000, we received $13.0
million in proceeds from financing arrangements for computers and other
technology. These proceeds were partially offset by the repayments of notes
payable of $9.0 million.

PHILANTHROPY

            Philanthropic entities supported 19 of the 113 schools we operated
in the 2000-2001 school year. We tend to use philanthropy in those areas where
the per-pupil expenditures would otherwise make it difficult to achieve
satisfactory financial performance, such as California where all of our schools
have been supported by philanthropic entities. We currently expect that
philanthropic support will continue to be required in those 19 schools, as well
as in six of the new schools we opened for the 2001-2002 school year. These
philanthropic entities provide funds directly to our school board or charter
board clients, and not to Edison. Generally, the philanthropic support helps
fund the initial capital investment in curriculum, technology, and facilities
necessary to open a school and is not used for ongoing annual operations. The
D2F2 Foundation has supported some of our schools in California and has
indicated that it intends to provide support up to $22.5 million for schools
operated or to be operated by us, primarily in California; $9.1 million of this
amount has been used to date in schools operated by us. We issued a warrant to
the D2F2 Foundation to purchase up to 1,698,750 shares of class A common stock
and 188,750 shares of class B common stock at an exercise price of $7.96 per
share. Although some of our school district and charter board clients have used
philanthropic funds in the past and we expect some of them to use philanthropic
funds in the future, we do not rely on philanthropic support significantly for
our growth strategy. Our schools received approximately $11.2 million of
philanthropic support in the 1998-1999 school year, $3.8 million in the
1999-2000 school year and $7.8 million in fiscal 2001. In addition, we will be
required to donate approximately $12.5 million over the next two years to two
clients if we are not able to arrange for third party donations. There is no
guarantee that philanthropic support will be available to open new schools or
operate existing schools in the future.

CHARTER SCHOOL FACILITY FINANCINGS

            Significant real estate investments are often necessary when we
establish a charter school for a charter board and existing facilities are not
available. While the charter board is generally responsible for locating and
financing its own school building, they typically do not have the resources
required to obtain the financing necessary to secure and maintain the building.
For this reason, if we want to obtain a management agreement with the charter
board, we must often help the charter board arrange for appropriate facilities.
Innovative financing methods are often needed to compensate for the limited
amount of state and local funding available to develop charter school
facilities. We have employed a variety of approaches, including owning or
leasing the building, advancing funds for the building to the charter board
under various repayment terms, or having the charter board directly own or lease
the facility from a third party, sometimes assisted by a subordinated loan from
us. We also consider providing guarantees to lending institutions to allow the
charter board flexibility in obtaining financing. We determine the most
economically viable option available for each school, and we purchase real
estate only if we determine it is the best available financing option. In the
past, we have utilized a variety of third party financing, including bank debt,
municipal bonds, sale/lease-back arrangements and philanthropy.

                                       13
<PAGE>

            We expect to continue to advance funds to our charter board clients
as well as spend significantly on charter school facilities directly. We have
been successful in securing various financing arrangements in the past, but our
ability to obtain any such financing arrangements in the future cannot be
assured. As of June 30, 2001, we had guarantees totaling $11.6 million for
facility-related debt of three of our charter school clients, representing seven
schools in fiscal 2001. The underlying debt comes due in fiscal 2002 and fiscal
2006.

            We could have facility financing obligations for charter schools we
no longer operate, because the terms of our facility financing obligations for
some of our charter schools exceeds the term of the management agreement for
those schools. For nine of our charter schools, we have entered into a long-term
lease for the school facility that exceeds the current term of the management
agreement by as much as 15 years. If our management agreements were to be
terminated, or not renewed in these charter schools, our obligations to make
lease payments would continue, which could adversely affect our financial
results. As of June 30, 2001, our aggregate future lease obligations totaled
$52.5 million, with varying maturities over the next 20 years.

            In seven of our charter schools, we have provided some type of
permanent credit support for the school building, typically in the form of loan
guarantees, loans or cash advances. As of June 30, 2001, the amount of loans we
had guaranteed totaled $11.6 million. Although the term of these arrangements is
coterminous with the term of the corresponding management agreement, our
guarantee does not expire until the loan is repaid in full. The lenders under
these facilities are not committed to release us from our obligations unless
replacement credit support is provided. The default by any charter school under
a credit facility that we have guaranteed could result in a claim against us for
the full amount of the borrowings. Furthermore, in the event any charter board
becomes insolvent or has its charter revoked, our loans and advances to the
charter board may not be recoverable, which could adversely affect our financial
results. We have also set aside restricted cash as collateral, in the amount of
$2.7 million, for the loans we guarantee. As of June 30, 2001, we had advances
or loans to charter school boards totaling approximately $61.6 million to
finance the purchase or renovation of school facilities we manage. We often have
not charged interest on these loans and advances. Approximately $19.8 million of
these loans, representing 16 schools, are uncollateralized or subordinated to a
senior lender. We currently expect to make additional advances of at least $45.0
million during the 2002 fiscal year. If these advances or loans are not repaid
when due, our financial results could be adversely affected.

INVESTMENT IN APEX ONLINE LEARNING INC.

            In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company that provides interactive advanced placement courses
for high school students over the Internet. Concurrently, Vulcan Ventures
Incorporated, then the majority stockholder of APEX, invested $30.0 million in
Edison. We initially invested $5.0 million in APEX and were obligated to invest
up to an additional $5.0 million in the future, if any third party were to
invest in APEX. In December 1999, we invested all of the additional $5.0 million
in APEX, increasing our ownership interest at that time to 19.7%. Because of the
nature of our relationship with APEX through June 2000, we were required to
recognize a pro rata portion of APEX's losses based upon our ownership interest.
In the fiscal year ended June 30, 2000, we recognized $2.0 million of loss as
our share of APEX's net loss. We modified our relationship with APEX on June 30,
2000 and, as a result, we are no longer accounting for this investment on the
equity basis.

ANTICIPATED CAPITAL EXPENDITURES

            Capital expenditures for fiscal 2002 are expected to be
approximately $55.0 million, which includes approximately $27.0 million for
computers and other technology at our schools, approximately $16.0 million for
curriculum materials, approximately $5.0 million for the purchase and
improvement of property at our schools, and $7.0 million for technology,
leasehold improvements, and other capital items at our headquarters.
Additionally, we expect to make additional advances or loans approximating $45.0
million to new charter board clients to help secure and renovate school
properties during the 2001-2002 school year, a portion of which we expect will
be refinanced through third parties. In addition, we expect to make charitable
donations of approximately $4.0 million to benefit one of our clients.

ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

            Our business, operating results or financial condition could be
materially adversely affected by any of the following factors. You should also
refer to the information set forth in this Annual Report, including our
financial statements and the related notes.

                                       14
<PAGE>

            The Risk Factors contained in this Amendment No. 1 to Form 10-K are
substantially the Risk Factors contained in the original Form 10-K. For current
information regarding risks, uncertainties and other factors that may affect our
future performance, please see "Additional Risk Factors That May Affect Future
Results" included in Item 2 of Part I of our Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002.

WE ARE A YOUNG COMPANY, HAVING OPENED OUR FIRST SCHOOLS IN FISCAL 1996; THIS
MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS

            We opened our first schools and recorded our first revenue in fiscal
1996. As a result, we have only a limited operating history on which you can
base your evaluation of our business and prospects. Our business and prospects
must be considered in light of the risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies like us who operate in new and rapidly evolving markets. Our failure
to address these risks and uncertainties could cause our operating results to
suffer and result in the loss of all or part of your investment.

WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE

             We have incurred substantial net losses in every fiscal period
since we began operations. For fiscal 2001, our net loss was $38.0 million. As
of June 30, 2001, our accumulated deficit since November 1996, when we converted
from a partnership to a corporation, was approximately $156.1 million. In
addition, prior to November 1996, we incurred losses of approximately $61.8
million, which are reflected in our additional paid-in capital. We have not yet
demonstrated that public schools can be profitably managed by private companies
and we are not certain when we will become profitable, if at all. Our ability to
become profitable will depend upon our ability to generate and sustain higher
levels of both gross site contribution and total revenue to allow us to reduce
central expenses as a percentage of total revenue. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis. Failure to become and remain profitable may adversely affect the
market price of our class A common stock and our ability to raise capital and
continue operations.

THE PRIVATE, FOR-PROFIT MANAGEMENT OF PUBLIC SCHOOLS IS A RELATIVELY NEW AND
UNCERTAIN INDUSTRY, AND IT MAY NOT BECOME PUBLICLY ACCEPTED

             Our future is highly dependent upon the development, acceptance and
expansion of the market for private, for-profit management of public schools.
This market has only recently developed, and we are among the first companies to
provide these services on a for-profit basis. We believe the first meaningful
example of a school district contracting with a private company to provide core
instructional services was in 1992, and we opened our first schools in August
1995. The development of this market has been accompanied by significant press
coverage and public debate concerning for-profit management of public schools.
If this business model fails to gain acceptance among the general public,
educators, politicians and school boards, we may be unable to grow our business
and the market price of our class A common stock would be adversely affected.

THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS, AND WE MAY FACE
DIFFICULTIES IN DOING SO IN THE FUTURE

             We believe that our growth will be dependent upon our ability to
demonstrate general improvements in academic performance at our schools. Our
management agreements contain performance requirements related to test scores.
As average student performance at our schools increases, whether due to
improvements in achievement over time by individual students in our schools or
changes in the average performance levels of new students entering our schools,
aggregate absolute improvements in student performance will be more difficult to
achieve. If academic performance at our schools declines, is perceived to
decline, or simply fails to improve, we could lose business and our reputation
could be seriously damaged, which would impair our ability to gain new business
or renew existing school management agreements.

WE COULD INCUR LOSSES AT OUR SCHOOLS IF WE ARE UNABLE TO ENROLL ENOUGH STUDENTS

             Because the amount of revenue we earn for operating each school
primarily depends on the number of students enrolled, and because many facility
and on-site administrative costs are fixed, achieving site-specific enrollment
objectives is an important factor in our ability to achieve satisfactory
financial performance at a school. We may be unable to recruit enough students
to attend all grades in our new schools or maintain enrollment at all grades in
our existing schools. We sometimes do not have enough students to fill some
grades in some schools, particularly the higher


                                       15
<PAGE>
grades. It is sometimes more difficult to enroll students in the higher grades
because older students and their parents are reluctant to change schools. To the
extent we are unable to meet or maintain enrollment objectives at a school, the
school will be less financially successful and our financial performance will be
adversely affected.

WE ARE EXPERIENCING RAPID GROWTH, WHICH MAY STRAIN OUR RESOURCES AND MAY NOT BE
SUSTAINABLE

             We have grown rapidly since we opened our first four schools in
August 1995. We operated 113 schools during the 2000-2001 school year and are
operating 136 schools for the 2001-2002 school year. This rapid growth has
sometimes strained our managerial, operational and other resources, and we
expect that continued growth would strain these resources in the future. If we
are to manage our rapid growth successfully, we will need to continue to hire
and retain management personnel and other employees. We must also improve our
operational systems, procedures and controls on a timely basis. If we fail to
successfully manage our growth, we could experience client dissatisfaction, cost
inefficiencies and lost growth opportunities, which could harm our operating
results. We cannot guarantee that we will continue to grow at our historical
rate.

WE MAY EXPERIENCE DIFFICULTY IN INTEGRATING LEARNNOW INTO OUR OPERATIONS; IF WE
UNDERTAKE ADDITIONAL ACQUISITIONS, THEY MAY BE EXPENSIVE AND DISRUPTIVE TO OUR
BUSINESS AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND FUTURE OPERATIONS

             In July 2001, we acquired LearnNow, Inc. We could have difficulty
in integrating LearnNow's personnel and operations with our business, and the
key personnel of LearnNow may decide not to continue to work for us. We may have
to devote a significant amount of time and management and financial resources in
connection with the integration.

             In addition, we may in the future acquire other complementary
companies or businesses. We could face similar difficulties in integrating these
companies, and the acquisitions may not generate the desired revenue, earnings
or business synergies. We could face opposition from the charter boards, school
districts and teachers unions that work with an acquired company. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. In addition, acquisitions could involve
significant accounting charges that would adversely affect our reported
financial results. If we issue additional equity securities in connection with
an acquisition, our stockholders could experience dilution and the market price
of our class A common stock may decline.

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PRINCIPALS AND TEACHERS
IN THE NUMBERS REQUIRED TO GROW OUR BUSINESS

             Our success depends to a very high degree on our ability to attract
and retain highly skilled school principals and teachers. We expect to hire 31
new principals and approximately 1,700 new teachers to meet the needs of our new
and existing schools for the 2001-2002 school year. Currently, there is a
well-publicized nationwide shortage of teachers and other educators in the
United States. In addition, we may find it difficult to attract and retain
principals and teachers for a variety of reasons, including the following:

            -  we generally require our teachers to work a longer day and a
               longer year than most public schools;

            -  we tend to have a larger proportion of our schools in challenging
               locations, such as low-income urban areas, which may make
               attracting principals and teachers more difficult; and

            -  we believe we generally impose more accountability on principals
               and teachers than do public schools as a whole.

            These factors may increase the challenge we face in an already
difficult market for attracting principals and teachers. We have also
experienced higher levels of turnover among teachers than is generally found in
public schools nationally, which we attribute in part to these factors. If we
fail to attract and retain highly skilled principals and teachers in sufficient
numbers, we could experience client dissatisfaction and lost growth
opportunities, which would adversely affect our business.

WE ARE CURRENTLY IMPLEMENTING NEW INFORMATION SYSTEMS, WHICH COULD CAUSE
DISRUPTIONS TO OUR BUSINESS

             We are currently in the process of implementing a new student
information system, as well as a new accounting, financial reporting and
management information system. We may face difficulties in integrating these
systems with our existing information and other systems. If we fail to
successfully implement and integrate these new


                                       16
<PAGE>
systems, we may not have access on a timely basis to the information we need to
effectively manage our schools, our business and our growth.

WE ARE DEPENDENT UPON IBM TO A LARGE DEGREE TO MANAGE OUR TECHNOLOGY
INFRASTRUCTURE

             We have selected IBM to provide the computers and related software
for use in our schools and classrooms, as well as the networking hardware and
network management software necessary to connect our schools nationwide. IBM has
performed most of the installation, implementation and integration services
necessary for the deployment of this technology for the new schools we opened
for the 2000-2001 school year and is currently doing so for the new schools
opened for the 2001-2002 school year. Implementation and integration will
continue over time for older schools, with the result that we will operate some
schools using the new IBM platform at the same time we operate schools on our
existing platform, which is based largely on Apple and other non-IBM
technologies. We may face significant difficulties and delays in this complex
implementation, as well as difficulties in the transition from our existing
system to the new IBM system. Additionally, we may face unforeseen
implementation costs. We have also engaged the services of IBM to manage
significant portions of our technology function, and any unsatisfactory
performance on the part of IBM could seriously impair the operations of our
schools. If we experience implementation or transition difficulties or delays,
or unexpected costs, our financial performance could be harmed and our
reputation could be compromised.

WE MUST OPEN A LARGE NUMBER OF NEW SCHOOLS IN A SHORT PERIOD OF TIME AT THE
BEGINNING OF EACH SCHOOL YEAR AND, IF WE ENCOUNTER DIFFICULTIES IN THIS PROCESS,
OUR BUSINESS AND REPUTATION COULD SUFFER

             It is the nature of our business that virtually all of the new
schools we open in any year must be opened within a few weeks of each other at
the beginning of the school year. Each new school must be substantially
functional when students arrive on the first day of school. This is a difficult
logistical and management challenge, and the period of concentrated activity
preceding the opening of the school year places a significant strain on our
management and operational functions. We expect this strain will increase if we
are successful in securing larger numbers of school management agreements in the
future. If we fail to successfully open schools by the required date, we could
lose school management agreements, incur financial losses and our reputation
would be damaged. This could seriously compromise our ability to pursue our
growth strategy.

OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY EXECUTIVES

             Our future success depends upon the continued services of a number
of our key executive personnel, particularly Benno C. Schmidt, Jr., our Chairman
of the Board of Directors, and H. Christopher Whittle, our President and Chief
Executive Officer. Mr. Schmidt and Mr. Whittle have been instrumental in
determining our strategic direction and focus and in publicly promoting the
concept of private management of public schools. If we lose the services of
either Mr. Schmidt or Mr. Whittle, or any of our other executive officers or key
employees, our ability to grow our business would be seriously compromised and
the market price of our class A common stock may be adversely affected. Also, we
do not maintain any key man insurance on any of our executives.

WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS

            Union cooperation at the local level is often critical to us in
obtaining new management agreements and maintaining existing management
agreements. In those school districts where applicable, provisions of collective
bargaining agreements must typically be modified in areas such as length of
school day, length of school year, negotiated compensation policies and
prescribed methods of evaluation in order to implement the Edison design at a
contract school. We regularly encounter resistance from local teachers' unions
during school board debates over whether to enter into a management agreement
with us. In addition, local teachers' unions have occasionally initiated
litigation challenging our management agreements. If we fail to achieve and
maintain cooperative relationships with local teachers' unions, we could lose
business and our ability to grow could suffer, which could adversely affect the
market price of our class A common stock. In addition, at the national level,
the American Federation of Teachers and the National Education Association have
substantial financial and other resources that could be used to influence
legislation, local teachers' unions and public opinion in a way that would hurt
our business.

WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR SCHOOLS

             We could become liable for the actions of principals, teachers and
other personnel in our schools. In the event of on-site accidents, injuries or
other harm to students, we could face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for the injury. We
could also face allegations that teachers or other personnel committed child
abuse, sexual abuse or other criminal acts. In addition, if our students commit
acts of violence,


                                       17
<PAGE>
we could face allegations that we failed to provide adequate security or were
otherwise responsible for their actions, particularly in light of recent highly
publicized incidents of school violence. Although we maintain liability
insurance, this insurance coverage may not be adequate to fully protect us from
these kinds of claims. In addition, we may not be able to maintain our liability
insurance in the future at reasonable prices or at all. A successful liability
claim could injure our reputation and hurt our financial results. Even if
unsuccessful, such a claim could cause unfavorable publicity, entail substantial
expense and divert the time and attention of key management personnel, which
could cause our financial result to suffer.

OUR MANAGEMENT AGREEMENTS WITH SCHOOL DISTRICTS AND CHARTER BOARDS ARE
TERMINABLE UNDER SPECIFIED CIRCUMSTANCES AND GENERALLY EXPIRE AFTER A TERM OF
FIVE YEARS

             Our management agreements generally have a term of five years. When
we expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We have limited experience in renewing management agreements,
and we cannot be assured that any management agreements will be renewed at the
end of their term. A management agreement covering two schools expired after the
end of the 1999-2000 school year and was not renewed, and a management agreement
covering two schools expired after the end of the 2000-2001 school year and was
not renewed. A management agreement covering two schools and due to expire at
the end of the 2004-2005 school year was terminated early, at the end of the
2000-2001 school year. Management agreements representing 13 schools, accounting
for 11.0% of our total revenue for fiscal 2001, will expire at the end of the
2001-2002 school year, and agreements representing 29 schools, accounting for
21.1% of our total revenue for fiscal 2001, will expire at the end of the
2002-2003 school year. In addition, management agreements representing 17
schools, accounting for 13.6% of our total revenue for fiscal 2001, are
terminable by the school district or charter board at will, with or without good
reason, and all of our management agreements may be terminated for cause,
including in some cases a failure to meet specified educational standards, such
as academic performance based on standardized test scores. In addition, as a
result of payment disputes or changes within a school district, such as changes
in the political climate, we do from time to time face pressure to permit a
school district or charter board to terminate our management agreement even if
they do not have a legal right to do so. We may also seek the early termination
of, or not seek to renew, a limited number of management agreements in any year.
It is likely that each year some management agreements will expire unrenewed or
be terminated prior to expiration. If we do not renew a significant number of
management agreements at the end of their term, or if management agreements were
terminated prior to their expiration, our reputation and financial results would
be adversely affected.

OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK

             Under all of our management agreements, we agree to operate a
school in return for per-pupil funding that generally does not vary with our
actual costs. To the extent our actual costs under a management agreement exceed
our budgeted costs, or our actual revenue is less than planned because we are
unable to enroll as many students as we anticipated or for any other reason, we
could lose money at that school. In addition, from time to time, we have
disagreements with our clients as to the actual amount of, or the method of
calculating, the revenue owed to us under the terms of the management
agreements, resulting in lower revenue than planned. We are generally obligated
by our management agreements to continue operating a school for the duration of
the contract even if it becomes unprofitable to do so.

WE HAVE LIMITED EXPERIENCE OPERATING FOUR-YEAR HIGH SCHOOLS

             An element of our strategy is to increase our business with
existing customers by opening new schools in school districts with whom we have
an existing relationship. An important aspect of this strategy is to open Edison
high schools in districts in which we operate elementary and middle schools.
Because we have limited experience operating high schools, our complete high
school curriculum, school design and operating plan are not fully tested. In
addition, school districts typically spend more per pupil on high school
education than on elementary education. By contrast, some of our management
agreements provide that we recognize for each student, regardless of grade
level, the average per-pupil funding spent by the school district for all grade
levels. For this reason, in these schools we recognize less per high school
student than is spent by the school district for each of its high school
students. In these situations, our success depends upon our ability to deliver
our high school design for the same per-pupil spending as in our elementary
schools. If we are unable to successfully and profitably operate high schools,
our ability to pursue our growth strategy will be impaired, which could
adversely affect the market price of our class A common stock.

                                       18
<PAGE>

OUR LENGTHY SALES CYCLE AND UNCERTAINTIES INHERENT IN THE PROCESS THROUGH WHICH
WE DEVELOP NEW BUSINESS COULD DELAY NEW BUSINESS AND AFFECT OUR RATE OF GROWTH

             The time between initial contact with a potential contract or
charter client and the ultimate opening of a school, and related recognition of
revenue, typically ranges between 10 and 20 months. Our sales cycle for contract
schools is generally lengthy due to the approval process at the local school
board level, the political sensitivity of converting a public school to private
management and the need, in some circumstances, for cooperation from local
unions. We also have a lengthy sales cycle for charter schools for similar
reasons, as well as the need to arrange for facilities to house the school. In
addition, we are increasingly presented with potential opportunities to take
over the management of several schools in a single district or area at the same
time, which likewise have a lengthy sales cycle. The outcome of these
opportunities can have a meaningful effect on our rate of growth. As a result of
our lengthy sales cycle, we have only a limited ability to forecast the timing
of new management agreements. Any delay in completing, or failure to complete,
management agreements could hurt our financial performance. Press speculation
concerning the outcome of these processes may adversely affect our stock price.

WE COULD LOSE MONEY IF WE UNDERESTIMATE THE REAL ESTATE COSTS ASSOCIATED WITH
ACQUIRING OR RENOVATING A CHARTER SCHOOL

             If we incur unexpected real estate cost overruns in acquiring or
renovating a charter school, we could lose money in operating the school. Our
decision to enter into a management agreement for a charter school, and our
estimate of the financial performance of the charter school, is based, in part,
on the estimated facility financing cost associated with renovating an existing
facility or building a new facility to house the charter school. This cost
varies widely from minimal amounts for minor upgrades to larger amounts for a
new construction, which typically range from $4.0 million to $8.0 million. Each
charter school absorbs a portion of its facility financing costs each year
through its leasing and similar expenses. If these expenses exceed our estimates
for the charter school, the charter school could lose money and our financial
results would be adversely affected.

WE HAVE ADVANCED AND LOANED MONEY TO CHARTER SCHOOL BOARDS THAT MAY NOT BE
REPAID

             As of June 30, 2001, we have outstanding loans or advances to
charter boards of $61.6 million to finance the purchase or renovation of school
facilities we manage. Approximately $19.8 million of these loans, representing
16 schools, are uncollateralized or subordinated to a senior lender. In
addition, with respect to the loans that are collateralized, if we were required
to foreclose on the collateral securing those loans, we might not be able to
liquidate the collateral for proceeds sufficient to cover the loan amount. If
any of these advances or loans are not repaid when due, our financial results
could be adversely affected.

             Several of our charter schools recently obtained tax-exempt
financing to repay these loans and advances, but there can be no assurance that
our other charter schools will be able to obtain such tax-exempt financing.
While we are currently exploring a variety of other financing structures to
assist charter schools in repaying these loans and advances, there can be no
assurance that we will be able to implement any of these financing structures.

WE COULD BECOME LIABLE FOR FINANCIAL OBLIGATIONS OF CHARTER BOARDS

             We could have facility financing obligations for charter schools we
no longer operate, because the terms of our facility financing obligations for
some of our charter schools exceeds the term of the management agreement for
those schools. For nine of our charter schools, we have entered into a long-term
lease for the school facility that exceeds the current term of the management
agreement by as much as 15 years. If our management agreements were to be
terminated, or not renewed in these charter schools, our obligations to make
lease payments would continue, which could adversely affect our financial
results. As of June 30, 2001, our aggregate future lease obligations totaled
$52.5 million, with varying maturities over the next 20 years. In nine of our
charter schools, we have provided some type of permanent credit support for the
school building, typically in the form of loan guarantees or cash advances.
Although the term of these arrangements is coterminous with the term of the
corresponding management agreement, our guarantee does not expire until the loan
is repaid in full. The lenders under these facilities are not committed to
release us from our obligations unless replacement credit support is provided.
The default by any charter school under a credit facility that we have
guaranteed could result in a claim against us for the full amount of the
borrowings. Furthermore, in the event any charter board becomes insolvent or has
its charter revoked, our loans and advances to the charter board may not be
recoverable, which could adversely affect our financial results. As of June 30,
2001 the amount of loans we had guaranteed totaled $11.6 million. In addition,
we have generally indemnified our charter school and contract school partners
from any liability or damages occurring or allegedly occurring or arising out of
any environmental conditions at the school site, if such conditions were caused
or created by substances brought on the site by Edison. Effective


                                       19
<PAGE>
July 3, 2001 in connection with the acquisition of LearnNow, the Company assumed
an executed environmental indemnification agreement with a lender pursuant to
which LearnNow had agreed to indemnify the lender from any liability or
obligations related to the presence of any hazardous substance at the charter
school site.

OUR FINANCIAL RESULTS ARE SUBJECT TO SEASONAL PATTERNS AND OTHER FLUCTUATIONS
FROM QUARTER TO QUARTER

             We expect our results of operations to experience seasonal patterns
and other fluctuations from quarter to quarter. The factors that could
contribute to fluctuations, which could have the effect of masking or
exaggerating trends in our business and which could hurt the market price of our
class A common stock, include:

            -  Because new schools are opened in the first fiscal quarter of
               each year, increases in student enrollment and related revenue
               and expenses will first be reflected in that quarter. Subsequent
               to the first quarter, student enrollment is expected to remain
               relatively stable throughout a school year, and, accordingly,
               trends in our business, whether favorable or unfavorable, will
               tend not to be reflected in our quarterly financial results, but
               will be evident primarily in year-to-year comparisons.

            -  We recognize revenue for each school pro rata over the 11 months
               from August through June, and, except for revenue related to our
               summer school programs, we recognize no school revenue in July.
               Most of our site costs are recognized over the 11 months from
               August through June. For this reason, the first quarter of our
               fiscal year has historically reflected less revenue and lower
               expenses than the other three quarters, and we expect this
               pattern to continue.

            -  Our recognition of site-related expenses in the first fiscal
               quarter is proportionally greater than the revenue recognition
               because some site expenses are incurred in July and no revenue is
               recorded in July, with the exception of revenue related to our
               summer school programs. This results in lower gross site margin
               in the first fiscal quarter than in the remaining fiscal
               quarters. We also recognize pre-opening costs primarily in the
               first and fourth quarters.

            -  We recognize revenue from our summer school programs during the
               first and fourth fiscal quarters. To the extent our summer school
               program becomes a more significant part of our business, this
               could significantly alter seasonal patterns.

             Our financial results can vary among the quarters within any fiscal
year for other reasons, including unexpected enrollment changes, greater than
expected costs of opening schools or delays in opening new schools.

WE EXPECT OUR MARKET TO BECOME MORE COMPETITIVE

             We expect the market for providing private, for-profit management
of public schools will become increasingly competitive. Currently, we compete
with a relatively small number of companies which provide these services, and
they have to date primarily focused on the operation of charter schools. Some of
these companies have begun to compete with us for contract schools. In addition,
a variety of other types of companies and entities could enter the market,
including colleges and universities, private companies that operate higher
education or professional education schools and others. Our existing competitors
and these new market entrants could have financial, marketing and other
resources significantly greater than ours. We also compete for public school
funding with existing public schools, who may elect not to enter into management
agreements with private managers or who may pursue alternative reform
initiatives, such as magnet schools and inter-district choice programs. In
addition, in jurisdictions where voucher programs have been authorized, we will
begin to compete with existing private schools for public tuition funds. Voucher
programs provide for the issuance by local or other governmental bodies of
tuition vouchers to parents worth a certain amount of money that they can redeem
at any approved school of their choice, including private schools. If we are
unable to compete successfully against any of these existing or potential
competitors, our revenues could be reduced, resulting in increased losses.

FAILURE TO RAISE NECESSARY ADDITIONAL CAPITAL COULD RESTRICT OUR GROWTH AND
HINDER OUR ABILITY TO COMPETE

             We have had negative cash flow in every fiscal period since we
began operations and are not certain when we will have positive cash flow, if at
all. We have regularly needed to raise funds in order to operate our business
and fund our growth, including the construction and renovation of charter school
facilities, and may need to raise additional funds in the future. We cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all, or that our charter clients will be able to repay our loans and
advances to them. If we issue additional equity or convertible debt securities,
stockholders may experience dilution or the new equity or convertible debt
securities may have rights,


                                       20
<PAGE>
preferences or privileges senior to those of existing holders of class A common
stock. If we cannot raise funds on acceptable terms, if and when needed, or if
our charter clients are unable to repay our loans and advances to them, or if we
are required to repay any loans that we have guaranteed, we may not be able to
take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements, which could seriously harm
our business.

WE MAY INCUR SUBSTANTIAL COSTS IF WE ARE UNABLE TO COMPLETE OUR EDISON CORPORATE
HEADQUARTERS PROJECT

             We have purchased property in New York, New York for the purchase
price of $10 million, and have entered into an agreement with the Museum of
African Art to develop the property for a mixed use project consisting of our
new corporate headquarters, a charter school and a facility to house the Museum.
We have not yet received the necessary zoning approvals for this project, nor do
we have an agreement with any party to operate a charter school on that site. If
we are unable to obtain the necessary zoning approvals, and, as a result, must
terminate our agreement with the Museum, we may choose to sell the property,
potentially at a loss.

WE RELY ON GOVERNMENT FUNDS FOR SPECIFIC EDUCATION PROGRAMS, AND OUR BUSINESS
COULD SUFFER IF WE FAIL TO COMPLY WITH RULES CONCERNING THE RECEIPT AND USE OF
THE FUNDS

             We benefit from funds from federal and state programs to be used
for specific educational purposes. Funding from the federal government under
Title I of the Elementary and Secondary Education Act, which provides federal
funds for children from low-income families, accounted for approximately 4% of
our total revenue for fiscal 2001. During the same period, we estimate that
funding from other federal and state programs accounted for an additional 10% of
our total revenue. A number of factors relating to these government programs
could lead to adverse effects on our business:

            -  These programs have strict requirements as to eligible students
               and allowable activities. If we or our school district and
               charter board clients fail to comply with the regulations
               governing the programs, we or our clients could be required to
               repay the funds or be determined ineligible to receive these
               funds, which would harm our business.

            -  If the income demographics of a district's population were to
               change over the life of our management agreement for a school in
               the district, resulting in a decrease in Title I funding for the
               school, we would recognize less revenue for operating the school
               and our financial results could suffer.

            -  Funding from federal and state education programs is allocated
               through formulas. If federal or state legislatures or, in some
               case, agencies were to change the formulas, we could receive less
               funding and the growth and financial performance of our business
               would suffer.

            -  Federal, state and local education programs are subject to annual
               appropriations of funds. Federal or state legislatures or local
               officials could drastically reduce the funding amount of
               appropriation for any program, which would hurt our business and
               our ability to grow.

            -  The authorization for the Elementary and Secondary Education Act,
               including Title I, has expired and this act is being funded by
               Congress on an interim appropriation basis. If Congress does not
               reauthorize or continue to provide interim appropriation for the
               Elementary and Secondary Education Act, we would receive less
               funding and our growth and financial results would suffer.

            -  Most federal education funds are administered through state and
               local education agencies, which allot funds to school boards and
               charter boards. These state and local education agencies are
               subject to extensive government regulation concerning their
               eligibility for federal funds. If these agencies were declared
               ineligible to receive federal education funds, the receipt of
               federal education funds by our school board or charter board
               clients could be delayed, which could in turn delay our payment
               from our school board and charter board clients.

            -  We could become ineligible to receive these funds if any of our
               high-ranking employees commit serious crimes.

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<PAGE>

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION BECAUSE WE BENEFIT FROM
FEDERAL FUNDS, AND OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD
RESULT IN THE REDUCTION OR LOSS OF FEDERAL EDUCATION FUNDS

             Because we benefit from federal funds, we must also comply with a
variety of federal laws and regulations not directly related to any federal
education program, such as federal civil rights laws and laws relating to
lobbying. Our failure to comply with these federal laws and regulations could
result in the reduction or loss of federal education funds which would cause our
business to suffer. In addition, our management agreements are potentially
covered by federal procurement rules and regulations because our school district
and charter board clients pay us, in part, with funds received from federal
programs. Federal procurement rules and regulations generally require
competitive bidding, awarding contracts based on lowest cost and similar
requirements. If a court or federal agency determined that a management
agreement was covered by federal procurement rules and regulations and was
awarded without compliance with those rules and regulations, then the management
agreement could be voided and we could be required to repay any federal funds we
received under the management agreement, which would hurt our business.

FAILURE OF OUR CHARTER BOARD CLIENTS TO OBTAIN FEDERAL TAX-EXEMPT STATUS COULD
JEOPARDIZE THE SCHOOL'S CHARTER AND RESTRICT OUR ABILITY TO FINANCE THE SCHOOL

             Many of our charter school clients apply for federal tax-exempt
status. One state in which we currently operate seven charter schools and hope
to open additional charter schools in the future, and one other state, requires
charter schools to secure federal tax-exempt status. One of our charter school
clients in that first state has recently received notice from the Internal
Revenue Service of an appealable denial of its application for federal
tax-exempt status. While this charter school client is appealing the denial,
there can be no assurance that it will ultimately be successful in doing so. Any
failure to receive or delay in receiving federal tax-exempt status by a charter
school in this state could jeopardize the school's charter and its ability to
repay amounts owed to us. The failure to receive federal tax-exempt status by a
charter school in any state could, among other things, inhibit that charter
school's ability to solicit charitable contributions or participate in
tax-exempt financing.

WE EARN ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS

             All of our revenue is derived from public sources. If general
levels of funding for public education were to decline, the field of school
districts in which we could profitably operate schools would likewise diminish,
and our ability to grow by adding new schools would suffer. In addition, our
management agreements generally provide that we bear the risk of lower levels of
per-pupil funding, which would be directly reflected in lower revenue to us,
even if our costs do not decline accordingly.

RESTRICTIONS ON GOVERNMENT FUNDING OF FOR-PROFIT SCHOOL MANAGEMENT COMPANIES
COULD HURT OUR BUSINESS

             Any restriction on the use of federal or state government
educational funds by for-profit companies could hurt our business and our
ability to grow. From time to time, a variety of proposals have been introduced
in state legislatures to restrict or prohibit the management of public schools
by private, for-profit entities like us. For example, a bill filed in Minnesota
that would have prohibited for-profit entities from managing charter schools in
that state was defeated in both 1997 and 1998. A similar bill in Massachusetts
also failed, and legislation was recently introduced in Tennessee. Additionally,
Idaho's charter school law may, subject to interpretation, restrict our ability
to manage schools in that state. If states or the federal government were to
adopt legislation prohibiting for-profit entities from operating public schools,
the market for our services would decline and our business results could suffer.

THE OPERATION OF OUR CHARTER SCHOOLS DEPENDS ON THE MAINTENANCE OF THE
UNDERLYING CHARTER GRANT

             Our charter schools operate under a charter that is typically
granted by a state authority to a third-party charter holder, such as a
community group or established non-profit organization. Our management agreement
in turn is with the charter holder. If the state charter authority were to
revoke the charter, which could occur based on actions of the charter holder
outside of our control, we would lose the right to operate that school. In
addition, many state charter school statutes require periodic reauthorization.
Charter schools accounted for 34.3% of our total revenue in fiscal 2001, or
$129.0 million. If state charter school legislation were not reauthorized or
were substantially altered in a meaningful number of states, our business and
growth strategy would suffer and we could incur additional losses.

                                       22
<PAGE>

OUR OFFICERS AND DIRECTORS WILL EXERCISE SIGNIFICANT CONTROL OVER OUR AFFAIRS,
WHICH COULD RESULT IN THEIR TAKING ACTIONS OF WHICH OTHER STOCKHOLDERS DO NOT
APPROVE

             Based upon their holdings at June 30, 2001, our officers and
directors and entities affiliated with them together beneficially own 7,394,182
shares of class A common stock and 1,601,738 shares of class B common stock.
These shares represent approximately 16.6% of the voting power of the class A
common stock, including the ability to elect one of the seven class A directors;
approximately 70.5% of the voting power of the class B common stock, including
the ability to elect two of the four class B directors; and approximately 29.2%
of the combined voting power of the class A and class B common stock. Of the
shares beneficially owned by our officers and directors and others affiliated
with them, 3,251,228 shares of class A common stock and 347,796 shares of class
B common stock are subject to options exercisable within 60 days of June 30,
2001. These stockholders, if they act together, will be able to exercise
significant influence over all matters requiring approval by our stockholders,
including the approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in
control of our company and could prevent stockholders from receiving a premium
over the market price if a change of control is proposed.

            In addition, based upon his holdings as of June 30, 2001, H.
Christopher Whittle, our President and Chief Executive Officer and a director,
beneficially owns 3,692,697 shares of class A common stock and 1,237,539 shares
of class B common stock. These shares represent approximately 9.4% of the voting
power of the class A common stock; approximately 47.0% of the voting power of
the class B common stock, including the ability to elect two of the four class B
directors; and approximately 20.8% of the combined voting power of the class A
and class B common stock. Of the shares beneficially owned by Mr. Whittle and
his affiliates, 1,831,079 shares of class A common stock and 200,862 shares of
class B common stock are subject to options exercisable within 60 days of June
30, 2001. Mr. Whittle and his affiliates also own options not exercisable within
60 days of June 30, 2001 covering 2,611,737 shares of class A common stock and
281,675 shares of class B common stock. To the extent Mr. Whittle exercises
these options, his voting power will be increased. In addition, if the other
holders of class B common stock sell a significant portion of their class B
common stock, the voting power of Mr. Whittle's class B common stock will
further concentrate. Also, if the other holders of class B common stock reduce
their common stock holdings below a specified threshold, then their class B
common stock will automatically convert into class A common stock, further
increasing Mr. Whittle's voting power. The class B common stock generally
converts into class A common stock upon its transfer. However, shares of class B
common stock transferred to Mr. Whittle do not automatically convert into class
A common stock. Consequently, Mr. Whittle can also increase his voting power by
acquiring shares of class B common stock from other stockholders.

PLEDGES OF SHARES OF OUR COMMON STOCK BY MR. WHITTLE COULD RESULT IN VOTING
POWER SHIFTING TO THE HANDS OF HIS LENDERS


             Based upon their holdings as of June 30, 2001, Mr. Whittle and WSI
Inc., a corporation controlled by Mr. Whittle, directly or indirectly own
2,654,321 shares of class A common stock and 1,122,163 shares of class B common
stock, including an aggregate of 761,625 shares of class A common stock and
84,625 shares of class B common stock which represents WSI's interest in a
limited partnership and a limited liability company that hold Edison stock.
These figures include shares issuable upon the exercise of options within 60
days of June 30, 2001. Mr. Whittle and WSI have pledged to Morgan Guaranty Trust
Company of New York all of their direct and indirect interests in Edison to
secure personal obligations. These obligations become due in February 2003 and
interest on these obligations is payable monthly. In addition, Mr. Whittle may
not vote his class A common stock and class B common stock on any matter other
than the election or removal of directors without Morgan's prior written
consent. Of these shares, Morgan allowed WSI to pledge up to 400,000 shares to
other lenders. Upon satisfaction of WSI's obligations to the other lenders,
these shares would revert back to being pledged to Morgan. If Mr. Whittle and
WSI were to default on their obligations to Morgan and Morgan were to foreclose
on its pledge, the class B common stock transferred directly or indirectly to
Morgan would be converted into class A common stock. Thereafter, based on
holdings as of June 30, 2001, and assuming the shares pledged to the other
lenders revert to the Morgan pledge, Morgan, together with its affiliates who
are currently stockholders of Edison, would beneficially own 4,982,004 shares of
class A common stock, including shares subject to options exercisable within 60
days of June 30, 2001. The holdings of Morgan and its affiliates would then
represent 9.5% of the voting power of the class A common stock and 7.6% of the
combined voting power. This would enable Morgan to exercise greater influence
over corporate matters.

                                       23
<PAGE>

OUR STOCK PRICE MAY BE VOLATILE

             The market price of the class A common stock may fluctuate
significantly in response to the risks discussed above, as well as other
factors, some of which are beyond our control. These other factors include:

            -  variations in our quarterly operating results;

            -  changes in securities analysts' estimates of our financial
               performance;

            -  changes in the public perception of our schools' academic
               performance;

            -  termination or non-renewal of existing management agreements;

            -  changes in market valuations of similar companies;

            -  future sales of our class A common stock or other securities; and

            -  general stock market volatility.

             Since our class A common stock has been publicly traded, its market
price has fluctuated over a wide range and we expect it to continue to do so in
the future. In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price of
its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS COULD
PREVENT OR DELAY A CHANGE IN CONTROL

             Provisions of Delaware law, our charter and our bylaws could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of class A
common stock, and could have the effect of delaying, deferring or preventing a
change in control of Edison. These provisions include:

            -  the high-vote nature of the class B common stock;

            -  restrictions on removal of directors, which may only be effected
               for cause and only by a vote of the holders of 80% of the class
               of common stock that elected the director;

            -  Section 203 of the General Corporation Law of Delaware which
               could have the effect of delaying transactions with interested
               stockholders;

            -  a prohibition of stockholder action by written consent; and

            -  procedural and notice requirements for calling and bringing
               action before stockholder meetings.



                                       24
<PAGE>

                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORMS 8-K



(a)  The following documents are filed as part of this Form 10-K:

     1.   Financial Statements. The following consolidated financial statements
          of Edison Schools Inc. are filed as part of this Form 10-K on the
          pages indicated:

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                          <C>
Report of Independent Accountants                                            27
Consolidated Balance Sheets as of June 30, 2001 and 2000 (restated)          28
Consolidated Statements of Operations for the years ended June 30,1999,
   2000, and 2001                                                            29
Consolidated Statements of Changes in Stockholders' Equity for the years
   ended June 30, 1999, 2000 and 2001(restated)                              30
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
   2000 and 2001                                                             31
Notes to Consolidated Financial Statements )                                 32
</TABLE>

     2.   Schedules are omitted as the required information is inapplicable or
          the information is presented in the financial statements or related
          notes.

     3.   Exhibits. The exhibits listed in the Exhibits Index immediately
          preceding such exhibits are filed as part of this Annual Report on
          Form 10-K.

(b)   Reports on Form 8-K

            On April 5, 2001, we filed a report on Form 8-K announcing that on
      April 5, 2001 we issued a press release regarding a conference call with
      analysts and investors to provide a general corporate update. On June 4,
      2001, we filed a report on Form 8-K announcing that we issued a press
      release regarding our execution of a merger agreement to acquire LearnNow,
      Inc. On June 22, 2001, we filed a report on Form 8-K announcing that on
      June 20, 2001, we issued a press release regarding our guidance for fiscal
      2002. On July 17, 2001, we filed a report on Form 8-K announcing that on
      July 5, 2001, we issued a press release regarding our completion of the
      acquisition of LearnNow, Inc.


                                       25
<PAGE>

                                   SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Amendment
No. 1 to Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized on the day of June 20, 2002.

                                       EDISON SCHOOLS INC.

                                       BY: /s/ H. Christopher Whittle
                                           -------------------------------------
                                               H. Christopher Whittle
                                               President, Chief Executive
                                               Officer and Director

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on the day of June,
2002.


<TABLE>
<CAPTION>
  SIGNATURE                                             TITLE
  ---------                                             -----
<S>                                  <C>
  /s/ H. Christopher Whittle         President, Chief Executive Officer
--------------------------------     and Director (Principal Executive Officer)
    H. Christopher Whittle

   /s/ Benno C. Schmidt, Jr.         Chairman of the Board of Directors
--------------------------------
     Benno C. Schmidt, Jr.

        /s/ Adam Feild               Executive Vice President and Chief
--------------------------------     Financial Officer (Principal Accounting
          Adam Feild                 Officer)

    /s/ Christopher D. Cerf          Chief Operating Officer and Director
--------------------------------
      Christopher D. Cerf

  /s/ Reverend Floyd H. Flake        President of Edison Charter Schools and
--------------------------------     Director
    Reverend Floyd H. Flake

     /s/ Joan Ganz Cooney            Director
--------------------------------
        Joan Ganz Cooney

    /s/ Charles J. Delaney           Director
--------------------------------
      Charles J. Delaney

     /s/ Jeffery T. Leeds            Director
--------------------------------
       Jeffery T. Leeds

     /s/ Jonathan Newcomb            Director
--------------------------------
       Jonathan Newcomb

     /s/Timothy P. Shriver           Director
--------------------------------
       Timothy P. Shriver

      /s/ William F. Weld            Director
--------------------------------
          William F. Weld

</TABLE>

                                       26











<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of
Edison Schools Inc.:

               In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Edison Schools Inc. (the "Company") at June 30, 2000 and 2001, and
the results of its operations and its cash flows for each of the three years in
the period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

               As more fully discussed in Note 2, the Company has restated its
June 30, 2000 and 2001 balance sheets to properly reflect as liabilities the
severance arrangement with an executive and a warrant agreement with a
philanthropic organization entered into prior to June 30, 1998.


                                                     PricewaterhouseCoopers LLP


Melville, New York
August 22, 2001, except with respect to note 2 for which the date is May 14,
2002.

                                       27
<PAGE>
                               EDISON SCHOOLS INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                          JUNE 30
                                                                                               ---------------------------------
                                                                                               2000                  2001
                                                                                             (RESTATED)*           RESTATED)*
                                                                                           -------------       -------------
<S>                                                                                        <C>                 <C>
                             ASSETS
Current assets:
    Cash and cash equivalents .......................................................      $  52,644,204        $ 96,195,471
    Accounts receivable .............................................................         33,752,622          62,925,703
    Notes receivable ................................................................         12,290,420           7,761,724
    Other receivables ...............................................................          2,224,780           8,751,450
    Other current assets ............................................................          3,620,547           3,067,695
                                                                                           -------------       -------------
               Total current assets .................................................        104,532,573         178,702,043

Property and equipment, net .........................................................         98,133,719         119,231,169
Restricted cash .....................................................................          3,387,303           8,523,630
Notes receivable, less current portion ..............................................         15,748,739          53,811,652
Other receivables, less current portion .............................................            274,958           4,456,020
Stockholder notes receivable ........................................................          8,801,868           9,452,378
Investments .........................................................................          8,024,743           7,768,342
Other assets ........................................................................         12,126,519          19,068,868
                                                                                           -------------       -------------
               Total assets .........................................................      $ 251,030,422       $ 401,014,102
                                                                                           =============       =============

                             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of long term debt ...............................................      $  11,838,495       $  17,669,020
    Accounts payable ................................................................         15,452,660          19,498,283
    Accrued expenses ................................................................         19,890,580          29,803,715
                                                                                           -------------       -------------
               Total current liabilities ............................................         47,181,735          66,971,018

Long term debt, less current portion ................................................         17,830,687          21,244,179
Stockholders' notes payable .........................................................          6,610,594           6,610,594
Other liabilities ...................................................................            574,030             825,492
                                                                                           -------------       -------------
               Total liabilities ....................................................         72,197,046          95,651,283
                                                                                           =============       =============

Minority interest in subsidiary .....................................................                 --             479,460

Commitments and contingencies (Note 13)
Stockholders' Equity:
        Class A common, par value $.01; 150,000,000 shares authorized;
           39,558,746 and 49,249,005 shares issued and
           outstanding in 2000 and 2001, respectively ...............................            395,588             492,490
        Class B common, par value $.01; 5,000,000 shares
           authorized; 3,448,004 and 2,433,126 shares issued and
           outstanding in 2000 and 2001, respectively ...............................             34,480              24,331
    Additional paid-in capital ......................................................        301,881,242         465,341,071
    Unearned stock-based compensation ...............................................         (3,160,004)         (2,386,678)
    Accumulated deficit .............................................................       (118,018,323)       (156,098,963)
    Stockholder note receivable .....................................................         (2,299,607)         (2,488,892)
                                                                                           -------------       -------------
               Total stockholders' equity ...........................................        178,833,376         304,883,359
                                                                                           -------------       -------------

               Total liabilities and stockholders' equity ...........................      $ 251,030,422       $ 401,014,102
                                                                                           =============       =============
</TABLE>

* See note 2 to the consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       28
<PAGE>
                               EDISON SCHOOLS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                            YEAR ENDED JUNE 30
                                                           -------------------------------------------------------
                                                                1999              2000                2001*
                                                           -------------       -------------       -------------
<S>                                                        <C>                 <C>                 <C>
Net revenue from educational services ...............      $ 132,762,491       $ 224,577,591       $ 375,817,681

Education and operating expenses:
    Direct site expenses ............................        114,096,875         192,601,707         315,750,041
    Administration, curriculum and development ......         49,984,180          40,643,025          58,104,452
    Depreciation and amortization ...................         12,525,904          20,905,833          34,354,738
    Pre-opening expenses ............................          5,457,113           8,371,923           8,641,021
                                                           -------------       -------------       -------------
               Total education and operating expenses        182,064,072         262,522,488         416,850,252
                                                           =============       =============       =============

Loss from operations ................................        (49,301,581)        (37,944,897)        (41,032,571)

Other income (expense):
    Interest income .................................          3,481,682           6,768,261          10,342,739
    Interest expense ................................         (3,244,782)         (3,433,759)         (5,417,357)
    Equity in loss of unconsolidated entity .........                 --          (1,975,257)           (291,400)
    Loss on disposal of fixed assets ................                 --                  --          (1,149,263)
    Other ...........................................           (368,110)             (3,962)             70,540
                                                           -------------       -------------       -------------
               Total other ..........................           (131,210)          1,355,283           3,555,259
                                                           =============       =============       =============

Loss before provision for taxes .....................        (49,432,791)        (36,589,614)        (37,477,312)

Provision for state and local taxes .................                 --                  --            (603,328)
                                                           -------------       -------------       -------------

Net loss ............................................      $ (49,432,791)      $ (36,589,614)      $ (38,080,640)
                                                           =============       =============       =============

Net loss attributable to common stockholders:
    Net loss ........................................      $ (49,432,791)      $ (36,589,614)      $ (38,080,640)
    Preferred stock accretion .......................         (1,026,462)
                                                           =============
               Net loss attributable to common
                  stockholders ......................      $ (50,459,253)      $ (36,589,614)      $ (38,080,640)
                                                           =============       =============       =============
Per common share data:
    Basic and diluted net loss per share ............      $      (16.24)      $       (1.32)      $       (0.79)
                                                           =============       =============       =============
    Weighted average shares of common stock
        outstanding used in computing basic and
        diluted net loss per share ..................          3,107,356          27,685,203          47,966,741
                                                           =============       =============       =============
</TABLE>


     * Reflects reclassification of certain amounts. See note 16 to our
consolidated financial statements.

                                       29

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
<PAGE>
                               EDISON SCHOOLS INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 1999, 2000 AND 2001


<TABLE>
<CAPTION>
                                            PREFERRED STOCK
                                            ---------------
                                               SERIES A-G
                                               ----------
                                          SHARES          AMOUNT
                                          ------          ------
<S>                                     <C>             <C>
Balances, June 30, 1998                 21,724,147      $  494,937
Issuance of stock warrants
Issuance of Series D preferred
stock, net........................       4,108,288          41,083
Issuance of Series F preferred
stock, net........................       1,978,738          19,787
Issuance of Series G preferred
stock, net........................         400,000           4,000
Deferred compensation related to
stock options.....................
Stock-based compensation..........
Accretion of Series D preferred
PIK dividend......................                       1,026,462
Net loss for the year ended June
30, 1999..........................
                                        ------------    ------------
Balances, June 30, 1999...........      28,211,173      $1,586,269
Issuance of stock warrants
Issuance of Series F preferred
stock, net........................       3,393,619          33,936
Issuance of Series I common stock,
net...............................
Issuance of Class A common stock
in an initial  public offering....

Stock warrants exercised..........
Stock options exercised ..........
Deferred compensation related to
stock options.....................
Stock based compensation..........
Conversion of the Series A
through G Preferred Stock and
Series A through I common Stock to
Class A and Class B common stock..     (31,604,792)     (1,620,205)

Fractional Class A and Class B
common shares issued due to
rounding during conversion .......
Conversion of Class B  to
Class A)..........................
Stockholder notes receivable......
Interest on stockholder receivable

Net loss for the year ended June
30, 2000..........................
                                        ------------    ------------
Balances, June 30, 2000...........             --              --
Issuance of stock warrants........
Issuance of Class A common
Stock in secondary offerings......
Stock warrants exercised..........

Stock options exercised...........
To reclass Class B converted to
class A...........................
Deferred  compensation related to
stock options.....................
Stock based compensation.........
Interest on stockholder receivable
Net loss for the year ended June
30, 2001..........................
                                        ------------    ------------
Balances, June 30, 2001...........             --    $         --
                                        ============    ============
</TABLE>







<TABLE>
<CAPTION>
                                                                          COMMON STOCK
                                        -----------------------------------------------------------------------------
                                                 SERIES A-I                 CLASS A                CLASS B
                                                 ----------                 -------                -------
                                          SHARES          AMOUNT        SHARES     AMOUNT     SHARES        AMOUNT
                                          ------          ------        ------     ------     ------        ------
<S>                                    <C>             <C>           <C>          <C>        <C>          <C>
Balances, June 30, 1998                 3,107,356       $ 31,074
Issuance of stock warrants
Issuance of Series D preferred
stock, net........................
Issuance of Series F preferred
stock, net........................
Issuance of Series G preferred
stock, net........................
Deferred compensation related to
stock options.....................
Stock-based compensation..........
Accretion of Series D preferred
PIK dividend......................
Net loss for the year ended June
30, 1999..........................
                                       ------------    ----------    -----------  --------   -----------  ---------
Balances, June 30, 1999...........      3,107,356       $ 31,074
Issuance of stock warrants
Issuance of Series F preferred
stock, net........................
Issuance of Series I common stock,
net...............................              1              0
Issuance of Class A common stock
in an initial  public offering....
                                                                       6,800,000    68,000
Stock warrants exercised..........                                       597,528     5,976
Stock options exercised ..........                                       824,426     8,245      72,500        725
Deferred compensation related to
stock options.....................
Stock based compensation..........
Conversion of the Series A
through G Preferred Stock and
Series A through I common Stock to
Class A and Class B common stock..     (3,107,357)       (31,074)     31,240,934   312,409    3,471,215     34,712
Fractional Class A and Class B
common shares issued due to
rounding during conversion .......                                        15,319       153      (15,172)      (152)
Conversion of Class B  to
Class A)..........................                                        80,539       805      (80,539)      (805)
Stockholder notes receivable......
Interest on stockholder receivable

Net loss for the year ended June
30, 2000..........................
                                       ------------    ----------    -----------  --------   -----------  ---------
Balances, June 30, 2000...........              --             --     39,558,746  $395,588    3,448,004   $ 34,480
Issuance of stock warrants........
Issuance of Class A common
Stock in secondary offerings......                                     6,881,026    68,810
Stock warrants exercised..........                                       842,426     8,425          242          2

Stock options exercised...........                                       951,687     9,516
To reclass Class B converted to
class A...........................                                     1,015,120    10,151   (1,015,120)   (10,151)
Deferred  compensation related to
stock options.....................
Stock based compensation.........
Interest on stockholder receivable
Net loss for the year ended June
30, 2001..........................
                                       ------------    ----------    -----------  --------   -----------  ---------
Balances, June 30, 2001...........              --     $      --      49,249,005  $492,490    2,433,126   $ 24,331
                                       ============    ==========    ===========  ========   ===========  =========
</TABLE>

<TABLE>
<CAPTION>
                                         ADDITIONAL
                                          PAID-IN          UNEARNED        ACCUMULATED     STOCKHOLDER
                                          CAPITAL        STOCK-BASED        DEFICIT          NOTES          TOTAL
                                         (RESTATED)*     COMPENSATION      (RESTATED)*      RECEIVABLE    (RESTATED)*
                                         -----------     ------------     -----------       ----------    -----------
<S>                                      <C>            <C>             <C>             <C>             <C>
Balances, June 30, 1998...........      $ 56,535,198   $  (874,987)    $ (31,995,918)                     24,190,304
Issuance of stock warrants                   919,842                                                         919,842
Issuance of Series D preferred
stock, net........................        31,722,481                                                      31,763,564
Issuance of Series F preferred
stock, net........................        24,228,435                                                      24,248,222
Issuance of Series G preferred
stock, net........................         4,897,755                                                       4,901,755
Deferred compensation related to
stock options.....................        27,332,927     (27,332,927)                                             --
Stock-based compensation..........                        22,371,358                                      22,371,358
Accretion of Series D preferred
PIK dividend......................        (1,026,462)                                                             --
Net loss for the year ended June
30, 1999..........................                                       (49,432,791)                    (49,432,791)
                                         ------------   -------------   -------------   ------------    -------------
Balances, June 30, 1999...........      $144,610,176   $  (5,836,556)  $ (81,428,709)                  $  58,962,254
Issuance of stock warrants........           400,489                                                         400,489
Issuance of Series F preferred
stock, net........................        41,707,771                                                      41,741,707
Issuance of Series I common stock,
net...............................                                                                                --
Issuance of Class A common stock
in an initial  public offering....       109,632,298                                                     109,700,298

Stock warrants exercised..........            43,893                                                          49,869
Stock options exercised ..........        2,921,813                                                        2,930,783
Deferred compensation related to
stock options.....................        1,260,645       (1,260,645)                                             --
Stock based compensation..........                         3,937,197                                       3,937,197
Conversion of the Series A
through G Preferred Stock and
Series A through I common Stock to
Class A and Class B common stock..        1,304,158
Fractional Class A and Class B
common shares issued due to
rounding during conversion .......               (1)                                                               --
Conversion of Class B  to                                                                                          --
Class A)..........................
Stockholder notes receivable......                                                       (2,175,000)      (2,175,000)
Interest on stockholder receivable
                                                                                           (124,607)        (124,607)
Net loss for the year ended June
30, 2000..........................                                       (36,589,614)                    (36,589,614)
                                         ------------   -------------   -------------   ------------    -------------
Balances, June 30, 2000...........      $301,881,242   $  (3,160,004)  $(118,018,323)  $ (2,299,607)   $ 178,833,376
Issuance of stock warrants........           582,722                                                         582,722
Issuance of Class A common
Stock in secondary offerings......       151,661,865                                                     151,730,675
Stock warrants exercised..........         5,083,787                                                       5,092,214

Stock options exercised...........         5,033,677                                                       5,043,193
To reclass Class B converted to
class A...........................                                                                                --
Deferred  compensation related to
stock options.....................         1,097,778      (1,097,778)                                             --
Stock based compensation.........                          1,871,104                                       1,871,104
Interest on stockholder receivable                                                         (189,285)        (189,285)
Net loss for the year ended June
30, 2001..........................                                       (38,080,640)                    (38,080,640)
                                         ------------   -------------   -------------   ------------    -------------
Balances, June 30, 2001...........       $465,341,071   $  (2,386,678)  $(156,098,963)  $ (2,488,892)   $ 304,883,359
                                         ============   =============   =============   ============    =============
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

* See note 2 to the consolidated financial statements.

                                       30
<PAGE>
                               EDISON SCHOOLS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                 YEAR ENDED JUNE 30,
                                                                  ------------------------------------------------------
                                                                      1999               2000               2001*
                                                                  -------------       -------------       -------------
<S>                                                               <C>                 <C>                 <C>
  Cash flows from operating activities:
    Net loss ...............................................      $ (49,432,791)      $ (36,589,614)      $ (38,080,640)
    Adjustments to reconcile net loss to net cash
         used in operating activities:
           Depreciation and amortization of property and
               equipment ...................................         11,486,955          19,294,506          31,367,286
           Amortization of other costs .....................              5,000              16,133             954,417
           Amortization of deferred charter costs and
               original issue discount .....................            (68,688)           (184,193)             17,871
           Write-off of accounts receivable ................                 --                  --             769,643
           Stock-based compensation ........................         22,371,358           3,937,197           1,871,104
           Provision for fixed asset write-off .............            653,000            (153,000)           (154,115)
           Curriculum and equipment write-off ..............            437,768             309,741           4,187,079
           Loss (gain) on disposal of property and equipment            368,110                (268)          1,149,263
           Interest on stockholder note receivable .........                 --            (124,607)           (189,285)
           Equity in loss of unconsolidated entity .........                 --           1,975,257             291,400
           Minority interest in net loss of subsidiary .....                 --                  --             (70,540)
           Changes in operating assets and liabilities:
               Accounts and other receivables ..............         (4,671,023)        (28,996,467)        (41,300,966)
               Other current assets ........................           (623,756)         (2,180,627)            340,852
               Accounts payable and accrued expenses .......          2,563,812           1,294,561           9,303,690
               Other liabilities ...........................           (713,736)             95,902             251,462
                                                                  -------------       -------------       -------------
                   Cash used in operating activities .......        (17,623,991)        (41,305,479)        (29,291,479)
                                                                  -------------       -------------       -------------
Cash flows from investing activities:
    Additions to property and equipment ....................        (25,533,246)        (57,462,036)        (46,950,918)
    Proceeds from disposition of property and equipment, net         10,537,786           2,057,664          10,700,785
    Proceeds from notes receivable and advances due
        from charter schools ...............................            580,412           2,782,474          14,840,866
    Notes receivable and advances due from charter
        schools ............................................        (12,923,063)        (18,849,325)        (46,773,488)
    Investment in unconsolidated entity ....................                 --         (10,000,000)            (35,000)
    Cash from minority investee ............................                 --                  --             550,000
    Other assets ...........................................         (1,445,035)         (7,767,634)         (6,609,939)
                                                                  -------------       -------------       -------------
                   Cash used in investing activities .......        (28,783,146)        (89,238,857)        (74,277,694)
                                                                  -------------       -------------       -------------
Cash flows from financing activities:
    Proceeds from issuance of stock and warrants ...........         62,060,480         167,784,859         173,011,926
    Costs in connection with equity financing ..............         (1,146,939)        (13,362,202)        (11,145,844)
    Proceeds from stockholders' notes payable ..............            938,439                  --                  --
    Loan to stockholder ....................................                 --          (2,175,000)                 --
    Proceeds from notes payable ............................          9,624,131          13,001,328           8,898,445
    Payments on notes payable and capital leases ...........         (6,178,626)         (9,027,134)        (18,507,760)
    Restricted cash ........................................          1,540,584            (955,887)         (5,136,327)
                                                                  -------------       -------------       -------------
                   Cash provided by financing activities ...         66,838,069         155,265,964         147,120,440
                                                                  -------------       -------------       -------------

Increase in cash and cash equivalents ......................         20,430,932          24,721,628          43,551,267

Cash and cash equivalents at beginning of period ...........          7,491,644          27,922,576          52,644,204
                                                                  -------------       -------------       -------------
Cash and cash equivalents at end of period .................      $  27,922,576       $  52,644,204       $  96,195,471
                                                                  =============       =============       =============
Supplemental disclosure of cash flow information:
      Cash paid during the periods for: ....................
            Interest........................................      $   3,008,260       $   3,554,350       $   5,545,060
            Taxes...........................................                                              $     730,611
Supplemental disclosure of non-cash investing and
      financing activities:
      Accretion of Series D preferred PIK dividend..........      $   1,026,462
      Additions to other assets included in accounts payable                                              $   2,694,293
      Property and equipment acquired under
      capitalized lease obligations.........................                                              $  18,853,332
      Additions to property and equipment included
          in accounts payable...............................      $   8,489,460       $   7,666,235       $   2,543,497
      Additions to property and equipment financed by debt..                          $  10,770,375
</TABLE>

     * Reflects reclassification of certain amounts.

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       31
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

1.             DESCRIPTION OF BUSINESS

               Edison Schools Inc. (the "Company") (formerly known as The Edison
Project Inc. and Subsidiaries) manages elementary and secondary public schools
under contracts with school districts and charter schools located in 21 states
and Washington, D.C. The Company opened its first four schools in the fall of
1995, and, as of June 30, 2001 operated 113 schools with approximately 57,000
students.

               The Company provides the education program, recruits and manages
personnel, and maintains and operates the facilities at each school it manages.
The Company also assists charter schools in obtaining facilities and the related
financing. As compensation for its services, the Company earns revenues which
approximate, on a per pupil basis, the average per pupil spending of the school
district in which the school is located.

2.             RESTATEMENT

               On May 14, 2002, Edison Schools concluded and resolved a
confidential informal inquiry of its accounting practices and policies
undertaken by the staff of the Securities and Exchange Commission ("SEC"). The
SEC order agreed to by the Company in connection with the resolution of the
informal inquiry does not result in the restatement of any revenue or operating
results ("loss from operations and net loss") previously reported in the
Company's audited financial statements included in the Company's Annual Report
on Form 10-K for the year ended June 30, 2001. Additionally, in connection with
the SEC inquiry, the Company undertook a comprehensive review of its accounting
and determined the need to restate the operating results for the first and third
quarters of fiscal 2001 and to restate certain items of its balance sheet, to
properly reflect certain liabilities and equity and to record compensation
earned in fiscal years ended on or prior to June 30, 1998. The Company
additionally has made other reclassifications for fiscal 2001 to record certain
previously unrecorded adjustments; these reclassifications are to reclassify
expenses recorded within certain captions on the consolidated statements of
operations to more appropriate captions on the consolidated statements of
operations and have no impact to the net loss in any period (see note 16 for
information on fiscal 2001 quarters).

               As a result of the review of the Company's historical financial
statements by the Company, which concluded in May 2002, the Company determined
the need to restate the balance sheets for certain transactions first entered
into in periods prior to June 30, 1998. The restatement is the result of changes
to the accounting treatment for a severance arrangement with Benno C. Schmidt,
Jr., Chairman of the Board of Directors, and a warrant agreement with the D2F2
Foundation, a philanthropic organization as follows:

               In 1992, the Company entered into an initial severance
arrangement with Benno C. Schmidt, Jr. that required the Company to make a
severance payment in the event he terminated his employment with the Company for
any reason other than death. The Company has disclosed the material terms of the
severance arrangement, including the amount of the severance payment, in its
prior filings with the SEC. In the past, the Company accounted for this
arrangement as a contingent liability and disclosed the amount in the footnotes
to the Company's financial statements. The Company now believes that the full
amount of the severance should have been accrued upon execution of the
agreement. Accordingly, the net impact on prior periods balance sheets to
reflect this liability and decrease shareholders' equity was $2.5 million, $2.5
million, $3.2 million and $3.2 million at June 30, 1998, 1999, 2000, and 2001,
respectively. The Company has not paid any amounts pursuant to this severance
agreement and Mr. Schmidt remains employed by the Company. Subsequent to June
30, 2001, Mr. Schmidt waived the right to receive the severance amount unless
his employment is terminated without cause or he terminates his employment for
good reason. Accordingly, the Company expects to reduce liabilities and increase
additional paid-in capital by $3.2 million in the quarter ending June 30, 2002.

               In 1998, the Company sold to the D2F2 Foundation, in exchange for
aggregate cash proceeds of $2.5 million, a warrant to purchase approximately 1.9
million shares of Edison's common stock. The warrant proceeds were required to
be used by Edison to provide services to selected schools, as approved

                                       32
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

from time to time by the D2F2 Foundation during the five years following the
agreement's execution. The proceeds were properly recorded as restricted cash in
the Company's financial statements. Under the terms of the warrant, if the full
amount of the cash proceeds were not spent by Edison during the five-year
period, Edison would be required to return unexpended amounts, and a pro rata
portion of the warrant (or shares already issued under the warrant, if
applicable) could be canceled or redeemed at Edison's option at their issuance
price. The warrant was described in the Company's prior SEC filings. The Company
now believes that the warrant proceeds should have been accounted for as a
liability, rather than equity, on the Company's balance sheet in prior periods
until the purchase price was no longer subject to return. As of June 30, 2001,
the current liability related to the warrant is less than $600,000. Edison's
restated balance sheets reflect a liability of approximately $2.5 million, $1.6
million, $1.2 million and $600,000 at June 30, 1998, 1999, 2000, and 2001,
respectively. If the remaining $600,000 of restricted cash is used to provide
approved services as expected, the remaining liability will be reclassified to
equity.

               The table below details the effect on the June 30, 2000 and 2001
balance sheet for these items (dollars in thousands):

<TABLE>
<CAPTION>
                                                  June 30,
                                ---------------------------------------------------
                                         2000                        2001
                                ----------------------      -----------------------
                                  As            As           As             As
                                Reported      Restated      Reported       Restated
                                --------      --------      --------      --------
<S>                             <C>           <C>           <C>           <C>
Accrued expenses .........      $ 16,211      $ 19,891      $ 26,903      $ 29,804
Additional paid-in capital      $303,061      $301,881      $465,938      $465,341
Accumulated deficit ......      $115,518      $118,018      $153,599      $156,099
</TABLE>



3.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

               The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries after the elimination of
intercompany transactions.


CASH AND CASH EQUIVALENTS

               For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, time deposits, highly liquid debt securities and money
market accounts, generally all with original maturities of three months or less.
The Company maintains funds in accounts in excess of FDIC insurance limits;
however, management believes that it minimizes risk by maintaining deposits in
high quality financial institutions.

PROPERTY AND EQUIPMENT

               Property and equipment are stated at cost. Routine maintenance
and repairs are expensed as incurred. The cost of major additions, replacements,
and improvements are capitalized. Gains and losses from sales or retirements of
property and equipment are included in earnings for the period. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
respective assets (30 years for buildings, the remaining lease term or useful
life, which ever is shorter, for leasehold improvements and 3-5 years for all
other items).

               From time to time, the Company purchases or renovates existing
buildings to ready them for charter school use. It is the Company's intention to
recapture purchase or renovation costs through sale to a

                                       33
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

third party or through the sale or lease of the building to the charter school
board. Buildings or renovations completed and ready for charter school use are
depreciated on a straight line basis over the estimated useful life of the
building. The Company's policy is not to capitalize interest costs on charter
school renovation expenditures since the sale transaction does not provide for
recovery of interest expense.

LONG-LIVED ASSETS

               The carrying amount of assets is reviewed on a regular basis for
the existence of facts or circumstances, both internally and externally, that
suggest impairment. The Company determines if the carrying amount of a
long-lived asset is impaired based on anticipated undiscounted cash flows before
interest. In the event of impairment, a loss is recognized based on the amount
by which the carrying amount exceeds the fair value of the asset. Fair value is
determined primarily using the anticipated cash flows, discounted at a rate
commensurate with the risk involved. No impairments have been recognized to
date.

RESTRICTED CASH

               Restricted cash consists of cash held in escrow in compliance
with certain debt agreements, credit issued for the benefit of certain
technology suppliers, amounts for guarantee of contract performance in certain
states and certain amounts restricted for use in the start-up of future Edison
schools.

REVENUE RECOGNITION

               Revenues are principally earned from contractual agreements to
manage and operate contract and charter schools. The Company also earns revenue
from summer school and after-school program fees. The Company recognizes revenue
for each managed school over the period we perform our service, pro rata over
the typical school year, eleven months from August through June, in accordance
with Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements."

               Most of our management agreements provide that we earn a fee
based upon the number of children that attend our schools and, therefore, we
only earn revenue to the extent students attend our schools. In most instances,
there is a `base' fee per pupil and several `categorical' fee components paid
only for students in certain categories (e.g., low-income, English as a second
language, etc.). In some of our charter schools, our fee has a fixed component
and variable component. Even in contracts where we have fixed fee component, we
have generally agreed to forego or reduce our fee if there is a budget shortfall
at the charter school.

               The Company is generally responsible to its clients for all
aspects of the management of its schools including but not limited to the:
academic achievement of the students; selection, training and compensation of
school personnel; procurement of curriculum and equipment necessary for
operations of the school; and the safe operation of the school facilities. We
often purchase certain essential services, such as transportation, from third
parties and/or from our clients. In addition, teachers in schools generally
remain employees of our clients and are often paid through the clients' payroll
systems. Where such arrangements exist, the client deducts the amounts they have
expended for staff salaries and/or purchased services from the amount owed to us
when remitting payment. See table below for more detail of direct site expenses
that are paid for by our clients on our behalf ("Direct site expense - client
paid"). The Company follows the guidance of EITF 99-19, "Reporting Revenue Gross
as a Principal versus Net as an Agent."

<TABLE>
<CAPTION>
                                         June 30,
                            -----------------------------------
                              1999         2000          2001
                           --------      --------      --------
<S>                        <C>           <C>           <C>
Direct site expenses:
    Company paid ....      $ 50,046      $ 93,087      $162,028
    Client paid .....        64,051        99,515       153,723
                           --------      --------      --------
Total ...............      $114,097      $192,602      $315,751
                           ========      ========      ========
</TABLE>

                                       34
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

               The Company recognizes per-pupil funding from local, state and
federal sources, including Title I and special education funding. Significant
management estimates and assumptions are required to determine these funding
levels, particularly in interim periods. On a quarterly basis, the Company
records adjustments to revenue, if necessary, for enrollment fluctuations,
changes to per-pupil funding estimates, and changes to estimates for federal and
state categorical grant funding. Anticipated losses on contracts are charged to
earnings when identified.

PHILANTHROPY

               The Company recognizes a receivable from a philanthropic
foundation, included in other receivables, for curriculum and technology
purchased on behalf of district clients in California which have been granted
funds from the foundation.

               If the Company can not arrange for philanthropic entities to
donate approximately $12.5 million in total to two clients, the Company will be
required to make such donation itself.

               In 1998, the Company sold to the D2F2 Foundation, in exchange for
aggregate cash proceeds of $2.5 million , a warrant to purchase approximately
1.9 million shares of Edison's common stock , as discussed in note 2. This
amount was received and properly recorded as restricted cash in the Company's
financial statements. The Company has accounted for the proceeds in accordance
with EITF 96-13 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock."

POST-EMPLOYMENT BENEFITS

               In accordance with SFAS 112 " Employer's Accounting for
post-employment Benefits," the Company accrues the cost of post-employment
benefits rather than expensing the costs when paid. These benefits include a
severance arrangement as discussed in note 2.

PRE-OPENING COSTS

               The Company expenses certain pre-opening training, personnel and
other costs, which are incurred prior to the fiscal year in which operations
commence at new school sites.

NOTES RECEIVABLE

               Notes receivable are recorded at face value, less an original
issue discount if the note has a less than fair market value stated rate of
interest. The original issue discount is calculated using the difference between
the stated rate and the Company's rate of interest associated with the cost of
funds for the period in which the note is issued. It is management's policy to
recognize any note as uncollectible when, based on its assessment of events and
circumstances, the collection of the note is not reasonably assured. If
collection of a note was not deemed reasonably assured, the Company would
provide an allowance or write down the note to the present value of future cash
flows. No notes have been deemed uncollectible to date.

DEFERRED CHARTER COSTS

               Deferred charter costs arise when the Company provides cash to
certain charter schools, which issue non-interest bearing notes to the Company
in return. In accordance with APB No. 21, the Company discounts the non-interest
bearing notes and records the corresponding discount as deferred charter costs.
These costs represent the accounting recognition given to the Company's right to
operate the charter school. Deferred charter costs are included in other assets
and are amortized on a straight line basis over the same period as the life of
the related contract.

               Net deferred charter costs were $1,479,361and $317,864 and
accumulated amortization was $2,613,009 and $4,084,913 as of June 30, 2000 and
2001, respectively.

                                       35
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

STOCK-BASED COMPENSATION

               For financial reporting purposes, the Company accounts for
stock-based compensation in accordance with the intrinsic value method of
accounting prescribed by APB No. 25 "Accounting for Stock Issued to Employees."
In accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the company's stock,
as of the grant date, is not greater than the amount an employee must pay to
acquire the stock as defined. To the extent that stock options are granted to
employees with variable terms or if the fair value of the Company's stock as of
the measurement date is greater than the amount an employee must pay to acquire
the stock, then the Company will recognize compensation expense.

               In accordance with Financial Accounting Standards Board
Interpretation 44 ("Fin 44"), the Company recognized in the year ended June 30,
2001, a $234,000 non-cash charge resulting from a modification to a previously
issued employee stock option award. Also in the same period, in accordance with
Fin 44, a charge of $181,000 was recognized for certain former Edison employees.
The employees were allowed to retain their stock options and vesting rights
beyond their separation dates.

               Disclosures, including pro forma operating results had the
Company prepared its financial statements in accordance with the fair value
based method as stated in Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," have been included in Note
11.

ADVERTISING EXPENSES

               Advertising costs consist primarily of print media and brochures
and are expensed when the related advertising occurs. Total advertising expense
for the three years ended June 30, 1999, 2000, and 2001 amounted to
approximately $788,000, $1.7 million and $1.8 million respectively.

INCOME TAXES

               The Company recognizes deferred income taxes for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each reporting period based
on enacted tax laws and statutory tax rates. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense consists of the tax payable for the period
and the change during the period in deferred tax assets and liabilities. Prior
to the reorganization (Note 1), the entity structure consisted solely of a
partnership, which paid no federal income taxes. Any income or loss was included
in the tax returns of the partners.

FAIR VALUE OF FINANCIAL INSTRUMENTS

               The carrying amounts of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, notes receivable,
accounts payable and accrued liabilities, approximate fair value because of
their short maturities. The carrying amount of the Company's notes receivable,
capital leases and other equipment financing obligations approximates the fair
value of such instruments based upon management's best estimate of interest
rates that would be available to the Company for similar debt obligations at
June 30, 2001.

NET LOSS PER SHARE

               In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share", basic earnings per share is computed
using the weighted - average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted-average number
of common and common stock equivalent shares outstanding during the period.
Common stock equivalent

                                       36
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

shares, such as convertible preferred stock, stock options, and warrants, have
been excluded from the computation, as their effect is antidilutive for all
periods presented.

LOSS PER SHARE

               The pro forma basic and diluted net loss per share is computed by
dividing the net loss by the weighted average number of shares of common stock
assuming conversion of convertible preferred stock outstanding during the period
under the if-converted method. Each outstanding share of common and preferred
stock automatically converted into 0.45 shares of Class A Common Stock and 0.05
shares of Class B Common Stock in connection with the Company's initial public
offering. See note 10.

The calculation of basic and fully diluted net loss per share for the year ended
June 30, 2000 is as follows:

<TABLE>
<S>                                                                                   <C>
Net loss .......................................................................      $(36,589,614)
                                                                                      ============
Series A-1 Common outstanding at beginning of period, converted to Class A
         and B Common Stock ....................................................         3,107,356
Add:
Weighted average effect of issuance of Class A and Class B Common Stock
         through exercise of options and warrants ..............................           653,552
Weighted average effect of conversion of Series A-F Preferred and Non-Voting
         Series G Preferred outstanding at the beginning of period to
         Class A and B Common Stock ............................................        17,574,172
Weighted average effect of conversion of Series F Preferred issued during
         the period to Class A and B Common Stock ..............................         2,114,058
Weighted average effect of Class A and Class B Common Stock issued in
         conjunction with the Company's initial public offering ................         4,236,065
                                                                                      ------------
Weighted average shares of common stock outstanding used in computing basic
         and fully diluted net loss per share ..................................        27,685,203
                                                                                      ============
Basic and fully diluted net loss per share .....................................      $      (1.32)
                                                                                      ============

The calculation of basic and fully diluted net loss per share for the year ended
June 30, 2001 is as follows:

Net loss .......................................................................      $(38,080,604)
                                                                                      ============
Class A Common stock outstanding at beginning of period ........................        39,558,746
Class B Common stock outstanding at beginning of period ........................         3,448,004
Add:
Issuance of Class A Common stock (as if converted on a
    weighted average basis) ....................................................         5,974,982
Issuance (conversion) of Class B Common stock (as if
    converted on a weighted average basis) .....................................        (1,014,991)
                                                                                      ------------
 Weighted average number of shares outstanding,
    assuming conversion of convertible preferred stock used in
    computing basic and diluted net loss per share .............................        47,966,741
                                                                                      ============
                Basic and diluted net loss per share ...........................       $     (0.79)
                                                                                      ============
</TABLE>

MANAGEMENT ESTIMATES

               The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.

                                       37
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

Significant estimates include, among other things, revenues, certain school
expenses, useful lives, recoverability of equipment, notes and other financing
receivable, loss on school contracts, deferred income tax valuation allowance,
certain accrued expenses and expenses in connection with stock options and
warrants; actual results could differ from these estimates.

SEGMENTS

               Management evaluates its operating performance as a single
segment. The Company's Chief Operating Officer reviews school performance based
on a comprehensive, whole school approach. Real estate, after school programs,
summer school programs, food services and various other activities are not
evaluated on an individual basis.

RECENTLY ISSUED ACCOUNTING STANDARDS

               In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") 141, "Business
Combinations" and SFAS 142 (SFAS 142), "Goodwill and Other Intangible Assets."
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, establishes specific
criteria for the recognition of intangible assets separately from goodwill, and
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. Provisions of SFAS
141 will be effective for the Company's business acquisitions that are
consummated as of July 1, 2001. The Company adopted SFAS 141 as of July 1, 2001.

               SFAS 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets," and addresses accounting for goodwill and intangible assets
subsequent to their acquisition. In accordance with SFAS142, goodwill and
indefinite-lived intangibles need to be reviewed for impairment at least
annually. In addition, the amortization period of intangible assets with finite
lives will no longer be limited to forty years. The effective date of adoption
is the first fiscal year beginning after March 2001. The Company adopted SFAS
142 as of July 1, 2001.

RECLASSIFICATION

               As discussed in Note 2, the Company has reclassified certain
expenses recorded in the consolidated statement of operations for fiscal 2001.
In addition, certain reclassifications have been made to the 1999 and 2000
financial statements to conform to current year presentation.

4.             NOTES RECEIVABLE

               The Company provides financing in the form of interest and
non-interest bearing loans and advances to charter school boards to assist in
the purchase or renovation of charter school facilities. Certain of the loans
are evidenced by notes and other advances which are made in concert with a
management contract or without fixed repayment terms.

               Of the approximately $28.0 million of notes and other financing,
net at June 30, 2000, approximately $6.7 million was collateralized and the
$21.3 million balance was uncollateralized and in some cases subordinated to
other senior debt. Of the approximately $61.6 million in notes and other
financing, net at June 30, 2001, approximately $41.8 million was collateralized
and the $19.8 million balance was uncollateralized and in some cases
subordinated to other senior debt. Should the Company be required to foreclose
on the collateral securing these loans, it may not be able to liquidate the
collateral for proceeds sufficient to cover the loans.

               In order for the loans to be repaid, the Company generally
assists charter school boards in obtaining third party lender financing. Often
third party financing requires the company to guarantee loans on behalf of these
charter schools. A default by any charter school under a credit facility that is
guaranteed by the Company may result in a claim against the Company for the full
amount of the borrowings. (See

                                       38
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

Note 14).

               Notes receivable consist of the following:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                  ----------------------------
                                                     2000              2001
                                                  -----------      -----------
<S>                                               <C>              <C>
Notes receivable due from charter schools(a)      $16,366,552      $48,616,056
Other financing due from charter schools(b)        11,672,607       12,957,320
                                                  -----------      -----------
                                                   28,039,159       61,573,376
Less, current portion ......................       12,290,420        7,761,724
                                                  -----------      -----------
    Total notes receivable .................      $15,748,739      $53,811,652
                                                  ===========      ===========
</TABLE>


(a)            Notes receivable due from charter schools includes interest
               bearing notes at interest rates ranging from 8.5% to 12% per
               annum. Management believes that the stated rates are the fair
               market rate for these notes. The notes amounted to $3,163,722 and
               $43,287,620 at June 30, 2000 and 2001, respectively, and mature
               at various dates through the year 2005.

               Notes receivable due from charter schools also includes
               non-interest bearing notes with an aggregate face value of
               $4,030,464 and $5,648,025 at June 30, 2000 and 2001,
               respectively, less unamortized imputed discount of $827,635 and
               $319,590 at June 30, 2000 and 2001, respectively. Interest
               imputed on these notes ranges from 10% to 12% per annum. This
               imputed rate is management's estimate of the fair market interest
               rate for these loans based on the Company's estimated borrowing
               rate at time of the loan ranging from approximately 8.5% to 10%
               and management's assessment of the incremental risk associated
               with these loans. The notes mature at various dates through the
               year 2005.

(b)            Other financings due from charter schools were converted into a
               non-interest bearing note receivable. The advances have been
               discounted at a rate of 12% over the expected period of
               refinancing, consistent with the treatment of non-interest
               bearing notes receivable as discussed in (a) above. The face
               value of the advances at June 30, 2000 was $12,766,158, less
               unamortized imputed discount of $1,093,551. In November 2000, the
               Company received partial payment of $7,260,842 and $4,343,113 was
               converted into a 20 year term loan with interest at 10% per annum
               and regular amortization.

               For fiscal 2001, other financing due from charter schools have
               been discounted at a rate of 12% over the period of refinancing,
               consistent with the treatment of non-interest bearing notes
               receivable. The face value of borrowings under the revolving line
               of credit at June 30, 2001 was $12,957,320. The line of credit
               provides for borrowings up to $15,000,000. On July 1, 2001, this
               revolving line of credit was converted into a 20 year term loan
               with interest at 10% per annum and regular amortization.

               Aggregate maturities of notes receivable are as follows:

               For the fiscal year ending June 30,

<TABLE>
<S>                                                     <C>
2002 .............................................      $  7,761,725
2003 .............................................        19,218,528
2004 .............................................         3,599,235
2005 .............................................        12,078,153
2006 .............................................         7,304,934
Thereafter .......................................        11,930,391
                                                        ------------
                                                          61,892,966
Less: amount representing discount (see note 3(a))          (319,590)
                                                        ------------
Total notes receivable ...........................        61,573,376
Less: current portion ............................        (7,761,724)
                                                        ------------
Notes receivable, noncurrent .....................      $ 53,811,652
                                                        ============
</TABLE>

                                       39
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

The Company expects to make additional advances or loans approximating $45
million to its charter board clients during fiscal 2002. Additionally, the
Company expects to receive payment on certain outstanding loans as a result of
third party refinancing, though there is no guarantee that the charter boards
will be able to obtain refinancing.

5.             PROPERTY AND EQUIPMENT

               Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                               JUNE 30,
                                               ----------------------------------
                                                    2000                 2001
                                               -------------       -------------
<S>                                            <C>                 <C>
Land and buildings ......................      $   1,054,843       $   7,457,480
Leasehold improvements ..................         34,535,261          34,419,968
Furniture, fixtures and equipment .......         62,962,662          94,107,737
Software license ........................         11,658,986          11,694,133
Educational software and textbooks ......         28,717,566          37,350,776
                                               -------------       -------------
                                                 138,929,318         185,030,094
Accumulated depreciation and amortization        (40,795,599)        (65,798,925)
                                               -------------       -------------
    Property and equipment, net .........      $  98,133,719       $ 119,231,169
                                               =============       =============
</TABLE>

               Depreciation expense amounted to $9,948,811, $18,505,611, and
$28,363,286 for the years ended June 30, 1999, 2000, and 2001 respectively.
Capitalized interest of $521,593 was recorded for the year ended June 30, 2001,
in connection with the development of the Company's new computer system. The
Company wrote off approximately $310,000 of equipment and approximately
$4,187,000 consisting primarily of curriculum materials, during the years ended
June 30, 2000 and 2001, respectively.

               Assets under capital leases as of June 30, 2000 and 2001 totaled
$5,219,257 and $23,178,963, respectively, and related accumulated amortization
totaled $5,189,138 and $7,410,437, respectively. Amortization expense for each
of the three years ended June 30, 1999, 2000, and 2001 related to assets under
capital leases amounted to $1,543,144, $805,028 and $3,004,001, respectively.

               In March 1998, the Company purchased an office building in
Trenton, New Jersey for approximately $618,000 and made significant improvements
for use as a charter school. In December 1998, the Company sold the building to
a real estate investment trust, and simultaneously entered into an 18 year
operating lease for the building with future annual minimum rentals
approximating $1 million. Subsequent to the sale and leaseback, the Company is
expected to continue its operating lease with the charter school (the
"Sublease") on a month-to-month basis (see Note 7). The Company received
approximately $6,000,000 in cash and realized a gain of approximately $28,000 on
the sale of the building, which is included in the loss on disposal of property
and equipment in the statement of operations for the year ended June 30, 1999.
During the year ended June 30, 2000, the Company disposed of leasehold
improvements totaling approximately $2,058,000 for a gain of approximately
$7,000.

               Also during the year ended June 30, 2001, the Company disposed of
leasehold improvements totaling approximately $1,074,000 at net book value.

               In June 1998, the Company exercised an option to purchase a
charter school building in Detroit, Michigan for $2,500,000 which the Company
had been leasing under a capitalized lease. In September 1998, the Company,
which provides services at the site, sold the building to the charter school for
approximately $6,300,000 and incurred a loss of approximately $79,000, which is
included in the loss on disposal of property and equipment in the statement of
operations for the year ended June 30, 1999. The Company received approximately
$4,400,000 in cash and a non-interest bearing subordinated note approximating
$1,900,000 before discount. The note was paid in May 2001.

               In May 2001, two charter schools in Detroit, Michigan issued
tax-exempt bonds and used a portion of the proceeds to settle outstanding
obligations due the Company. The Company received from

                                       40
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

one school approximately $9,600,000 which is included in proceeds from
disposition of property and equipment in the statement of cash flows for the
year ended June 30, 2001. Additionally, the Company received from the second
school approximately $4,300,000 for notes receivable, including the $1,900,000
note discussed above.

ACQUISITION OF UNDEVELOPED PROPERTY

               During fiscal 2001, the Company purchased property in New York,
New York for $10 million and entered into an agreement with the Museum of
African Art to develop the property for a mixed use project consisting of a new
corporate headquarters, a charter school and a facility to house the Museum. The
Company has not yet received the necessary zoning approvals for this project,
nor does it have an agreement with any party to operate a charter school on that
site.

      As of June 30, 2001, other assets includes the $10.0 million purchase
price for the New York property.

6.             ACCRUED EXPENSES

               Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                               JUNE 30,
                                     -----------------------------
                                       2000              2001
                                     (RESTATED)*      (RESTATED)*
                                     -----------      -----------
<S>                                  <C>              <C>
Accrued payroll and benefits ..      $16,381,701      $24,985,920
Accrued taxes other than income        1,656,501        1,654,563
Accrued other .................        1,852,378        3,163,232
                                     -----------      -----------
        Total accrued expenses       $19,890,580      $29,803,715
                                     ===========      ===========
</TABLE>

* See note 2 to the consolidated financial statements

7.             LONG-TERM DEBT

               Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                             JUNE 30,
                                 ----------------------------------
                                     2000                2001
<S>                               <C>                <C>
Notes payable(a) ...........      $ 19,044,476       $ 15,083,546
Financing Agreement(b) .....        10,580,944          7,700,553
Capital leases (Note 7) ....            43,762         16,129,100
                                  ------------       ------------
                                    29,669,182         38,913,199
Current portion ............       (11,838,495)       (17,669,020)
                                  ------------       ------------
        Total long-term debt      $ 17,830,687       $ 21,244,179
                                  ============       ============
</TABLE>

(a)            Notes payable at June 30, 2000 and 2001 consist of notes with
five financing companies collateralized by computer equipment, furniture and
other assets of the Company. All notes are similarly structured and generally
provide for equal monthly installments, including interest and principal, over a
term of 30 to 48 months. Monthly payments to each noteholder range from
approximately $16,000 to $533,000. Certain notes also provide for a final
installment of up to 17.5% of the original principal amount. Interest rates are
fixed and range from 9.5% to 20.4% per annum.

(b)            In June 2000, the Company entered into a 36 month financing
agreement with the IBM Credit Corporation for the purchase of software. Such
software will be used to support the technology used in the Company's schools
throughout the United States. The finance agreement totals approximately $10.7
million and has an effective rate of 15.95%.

               In connection with amounts currently outstanding under the notes
payable and capital lease agreements (see Note 8), at June 30, 2000 and 2001,
the Company had outstanding stock purchase warrants to lenders that provide for
the purchase of up to 15,000 shares of common stock at a purchase price of

                                       41
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

$12.30 per share. The stock purchase warrants are exercisable 100% at the date
of grant. The stock purchase warrant outstanding expires in fiscal 2005. At the
time of issuance, the value of the warrants was not deemed significant pursuant
to a calculation using the Black Scholes option pricing model. Accordingly, no
value was assigned to the warrants.

               The Company is subject to certain reporting debt covenants under
several of its debt agreements. If the Company were to fail to maintain a
certain minimum cash balance it would be required to post additional cash
collateral.

Aggregate maturities of notes payable are as follows:

<TABLE>
For the fiscal year
ending June 30,
<S>                     <C>
2002 .................  $11,714,055
2003 .................   10,244,632
2004 .................      825,412
                        -----------
     Total .......      $22,784,099
                        ===========
</TABLE>

               In November 1999, the Company obtained a line of credit from
Imperial Bank (the "LOC") which provided for borrowings of up to $10.0 million.
No amounts were borrowed under the LOC and the Company terminated the LOC in
November 2000.

8.             LEASES

               The Company has entered into several lease agreements for school
site computers and equipment. The agreements, which are accounted for as capital
leases, provide that the Company will lease equipment for terms of 30 to 46
months with interest rates of 8.18% to 15.95%. Also, the Company has entered
into various non-cancelable operating leases for office space and currently
leases school sites. These leases expire at various dates through the year 2020.
At June 30, 2001, the present value of the minimum lease payments under the
capital leases and rental commitments under operating leases with terms in
excess of one year are as follows:

<TABLE>
<CAPTION>
                                            CAPITAL             OPERATING
                                            LEASES               LEASES
                                         --------------     ------------
<S>                                      <C>                <C>
For the fiscal year ending June 30,
2002 ..............................      $  7,732,564       $  6,055,872
2003 ..............................         7,662,595          6,212,328
2004 ..............................         3,261,168          6,136,753
2005 ..............................           409,997          5,959,537
2006 ..............................                --          6,523,083
Thereafter ........................                --         48,207,730
                                         --------------     ------------

Total commitments .................        19,066,324       $ 79,095,303
                                                            ============
Less amount representing interest .        (2,937,224)
                                         --------------
Present value of minimum
lease payments.....................         16,129,100
Less current installments of
capital lease obligation...........         (5,954,965)
                                         --------------
Capital lease obligations,
excluding current installments.          $   10,174,135
                                         ==============
</TABLE>

               Total rental expense for each of the three years ended June 30,
1999, 2000 and 2001 related to operating leases amounted to approximately
$3,388,000, $4,495,000, and $5,686,000 respectively.

9.             RELATED PARTY TRANSACTIONS

STOCKHOLDER NOTES RECEIVABLE

               The stockholder notes receivable consists of two recourse notes
from the Chairman of the Company, with principal amounts of $1.6 million and
$200,000, which arose in connection with his

                                       42
<PAGE>
                               EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED JUNE 30 1999, 2000 AND 2001

employment agreements. The note agreements, as amended October 15, 1999, bear
interest at prime rate per annum as defined by Chase Manhattan Bank and do not
require periodic interest or principal payments until maturity. The stockholder
receivable is collateralized by the assignment of the proceeds of a life
insurance policy and in the event of termination can be offset against the
severance pay obligation of the Company. The receivable is due on the earlier of
February 15, 2002, the date on which employment of the Chairman ceases or upon
the death of the Chairman.

               In November 1999 and April 2000, the Company loaned $6,620,700
and $1,248,500, respectively to its President and Chief Executive Officer
secured by two recourse notes. The loans bear interest at the greater of the
prime rate or the Company's actual borrowing rate, in effect from time to time,
with payment of the principal amount of $6,620,700 and accrued interest on the
November 1999 loan due in full in November 2004 and payment of the principal
amount of $1,248,500 and accrued interest on the April 2000 loan due in full in
April 2005.

               The proceeds from the loans were used by the President and Chief
Executive Officer to purchase an aggregate of 652,500 shares of Class A Common
Stock and 72,500 shares of Class B Common Stock for $3.00 per share through the
exercise of existing stock options, and to pay income tax obligations resulting
from the exercise of such options. The portion of the loan attributable to the
purchase of shares, amounting to $2,175,000 plus accrued interest, has been
recorded on the balance sheet at June 30, 2000 as a reduction of stockholders'
equity.

STOCKHOLDERS' NOTES PAYABLE

               Certain stockholders were issued promissory notes dated December
18, 1997 for $4,407,903 and January 1, 1998 for $592,097 (see Note 9). In
addition, as part of the private placement (see Note 9), the Company issued to
stockholders, promissory notes dated December 30, 1997 for $611,025, January 28,
1998 for $61,130, August 24, 1998 for $487,844 and December 14, 1998 for
$450,595. The principal for each of the notes is payable on the tenth
anniversary of the dates of issuance. Each note bears interest at 7% per annum,
of which 50% is payable at maturity and the balance payable each April 1,
starting in fiscal 1999 and thereafter. In fiscal 1999, 2000 and 2001, the
Company paid interest on the notes of $211,682, $238,780 and $247,137,
respectively.

PAYMENT ON BEHALF OF AN OFFICER

               The Company paid $200,000 to an unrelated corporation controlled
by an officer of the Company, as compensation for expenses incurred by such
corporation, as an inducement not to compete with the Company for five years and
to release the officer and two associates from obligations due to the
corporation. Payments of $100,000 each were made in May 2000 and August 2000.

INVESTMENT IN UNCONSOLIDATED ENTITY

               In July 1999, the Company entered into a preferred stock purchase
agreement with a corporation providing for the purchase of up to 2,000,000
shares of the corporation's preferred stock, par value $0.001 per share, for a
purchase price of $5.00 per share. The Company purchased 1,000,000 shares in
July 1999 for a total investment of $5,000,000, which represented approximately
16.5% ownership in the corporation. In December 1999, an additional $5,000,000
was invested in the corporation, increasing the Company's ownership to 19.7%.
Due to the nature of the Company's relationship with the corporation, the
investment was accounted for under the equity method. As of June 30, 2000, the
Company modified its relationship with the corporation such that the Company no
longer had significant influence through board representation and therefore the
investment has been accounted for prospectively under the cost method. As of
June 30, 2000, the Company's initial investment of $10 million is now shown net
of equity in losses of the unconsolidated entity of $1,975,257.

                                       43

<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001


INVESTMENT IN KSIXTEEN LLC

         Effective July 1, 2000, Edison invested $35,000 to obtain a 35%
interest in Ksixteen LLC ("Ksixteen"), a company organized to provide
construction management, real estate development and financial advisory services
to charter schools. The Company and Ksixteen also entered into a master
development agreement effective July 1, 2000 pursuant to which Ksixteen performs
(at the Company's direction) construction management, real estate development
and financing services on behalf of charter schools that have entered into
management agreements with the Company. The Company reports its investment in
Ksixteen under the equity method and, accordingly, recognizes its pro-rata share
of the net income or loss of Ksixteen based on its ownership interest. As of
July, 2001, the Company acquired the remaining 65% interest in Ksixteen (See
Note 16).

10.      COMMON AND PREFERRED STOCK

      Common and preferred stock consisted of the following:

<TABLE>
<CAPTION>
                                                                            JUNE 30, 2000                   JUNE 30, 2001
                                                                         --------------------------    -------------------------
                                           AUTHORIZED       PAR          OUTSTANDING                   OUTSTANDING
DESCRIPTION                                  SHARES         VALUE          SHARES          AMOUNT        SHARES          AMOUNT
                                           -----------    ----------     ----------        -------     ----------     ----------
<S>                                        <C>            <C>            <C>            <C>            <C>            <C>
Class A Common Stock .................     150,000,000    $      .01     39,558,746        395,588     49,249,005        492,490
Class B Common Stock .................      5,000,000     $      .01      3,448,004         34,480      2,433,126         24,331
Preferred Stock ......................      5,000,000     $      .01             --             --             --             --
                                                                         ----------     ----------     ----------     ----------
      Total common and preferred stock                                   43,006,750     $  430,068     51,682,131     $  516,821
                                                                         ==========     ==========     ==========     ==========
</TABLE>

           The Company's authorized capital stock consists of 150,000,000 shares
of Class A Common Stock, 5,000,000 shares of Class B Common Stock, and 5,000,000
shares of Preferred Stock.

           In general, holders of Class A Common Stock have the same rights as
the holders of Class B Common Stock, except that:

    -   holders of Class A Common stock have one vote per share and holders of
        Class B Common Stock have ten votes per share; and

    -   holders of Class B Common Stock elect , as a separate class, four of the
        11 members of the Company's Board of Directors and the holders of Class
        A Common Stock elect , as a separate class, the remaining seven
        directors.

           The holders of Class A Common Stock and Class B Common Stock have
cumulative voting rights in the election of their respective directors. On other
matters presented to the stockholders for their vote or approval, the holders of
Class A Common Stock and Class B Common Stock will vote together as a single
class, except as to matters affecting the rights of the two classes of common
stock or as may be required by Delaware law. Class B Common Stock may be
converted into Class A Common Stock at any time on a one-for-one basis. Each
share of Class B Common Stock will automatically convert into one share of Class
A Common Stock upon its transfer in most circumstances or upon the occurrence of
other specified events.

           WSI, a stockholder, holds two options to purchase shares of the
Company's common stock. Under the first option, WSI has the right to purchase up
to 382,500 shares of Class A Common Stock and 42,500 shares of Class B Common
Stock at $20 per share. Under the second option, WSI has the right to purchase
up to 450,000 shares of Class A Common Stock and 50,000 shares of Class B Common
Stock at $40 per share. The options expire in years 2003 through 2005. At the
time of the grant in March 1995, the options were accounted for pursuant to the
provision of APB No. 25 and, accordingly, the Company recorded no compensation
expense.

           In connection with a private placement that closed in December 1997,
August 1998 and December 1998, the Company sold units consisting of a share of
stock, three options for fractional shares of common stock, and a note payable
for 22.8 cents per share. The first option entitles the holder to .0086359 share
of


                                       44
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001


Class A Common Stock and .0009595 share of Class B Common Stock at an
exercise price of $20.00 per share. The option expires between years 2003 and
2005. The second option entitles the holder to .0086359 share of Class A Common
Stock and .0009595 share of Class B Common Stock at an exercise price of $3.00
per share. The option became vested upon the completion of the Company's initial
public offering ("IPO") and expires 10 years after vesting. The third option
entitles the holder to .0129537 share of Class A Common Stock and .0014393 share
of Class B Common Stock at an exercise price of $16.00 per share. However, this
option only vests if the Company is a public company and its closing price has
been $32.00 per share for more than 90 consecutive days. This option expires 10
years after vesting. As of June 30, 2001, stock options issued and outstanding
in conjunction with the private placement entitled the holders to purchase
399,104 shares of Class A Common Stock and 44,387 shares of Class B Common
Stock.

           In June 1998, the Company in exchange for $2,500,000, issued a
warrant to a philanthropic foundation which at June 30, 2001 represents the
right to purchase 716,104 shares of Class A Common Stock and 188,750 shares of
Class B Common Stock at a price of $7.96 per share. The warrant expires on June
1, 2005. Certain provisions of the warrant agreement require such funds to be
applied towards the pre-opening expenses and start-up investments with respect
to certain schools that the Company operates.

            In August 2000, the Company completed a secondary public offering in
which it sold 3,350,000 shares of Class A Common Stock for net proceeds of
approximately $71.0 million. Also in August 2000, a philanthropic foundation
exercised warrants to purchase 600,000 shares of Class A Common Stock and paid
the Company $4.8 million. In March 2001, the Company completed another secondary
offering of an additional 3,531,026 shares of Class A Common Stock for net
proceeds of approximately $81.0 million.

11.      STOCK OPTIONS

         A summary of the Company's employee stock option activity is as
         follows:

<TABLE>
<CAPTION>

                                                                           WEIGHTED             STOCK               WEIGHTED
                                                                           AVERAGE OF           OPTIONS             AVERAGE OF
                                                               SHARES   EXERCISE PRICES       EXERCISABLE         EXERCISE PRICES
                                                               ------   ---------------       -----------         ---------------
<S>                                                          <C>        <C>                   <C>                 <C>
Under option at June 30, 1998 .................              6,833,498      $20.52            1,253,459           $    2.56
Options granted in fiscal 1999 ................              1,236,109      $16.16              171,663           $   17.08
Options cancelled in fiscal 1999 ..............               (151,583)     $ 3.56
 ..............................................              ---------
Under option at June 30, 1999 .................              7,918,024      $20.44            2,608,990           $    4.02
Options granted in fiscal 2000 ................              2,178,169      $17.05              314,081           $   13.49
Options exercised in fiscal 2000 ..............               (920,014)     $ 3.30
Options cancelled in fiscal 2000 ..............               (189,380)     $ 8.60
                                                             ---------
Under option at June 30, 2000 .................              8,986,799      $21.52            3,460,134           $    8.58
Options granted in fiscal 2001 ................              1,358,811      $24.72               80,320           $   23.47
Options exercised in fiscal 2001 ..............               (957,059)     $ 5.47
Options cancelled in fiscal 2001 ..............               (138,733)     $10.75
                                                             ---------
Under option at June 30, 2001 ................               9,249,818      $23.88            3,244,094           $   11.08
                                                             =========
</TABLE>
            The Company granted options for a total of 1,477,820 shares under
three now closed employee option plans: the 1998 Site Option Plan, the 1999
Stock Option Plan and the 1999 Key Stock Incentive Plan.

            In October 1999, the board of directors approved the adoption of the
1999 Stock Incentive Plan (the "Incentive Plan") for employees and authorized
the compensation committee of the board of directors to administer the Incentive
Plan under which options, restricted stock, and other stock-based awards for a
maximum of 2,500,000 shares of Class A Common Stock could be issued. In October
2000, the board of directors approved an amendment to the Incentive Plan to
increase the number of shares reserved for issuance to 4,500,000 shares of Class
A Common Stock. The Company's stockholders approved this


                                       45
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001



amendment in November 2000. To the extent that all or part of a stock-based
award issued under the Incentive Plan is cancelled, the related shares are
available for future award grants. As of June 30, 2001 the Company has granted
options for 2,758,500 shares.

            During fiscal 2000, the Company granted options for 45,000 shares of
Class A Common Stock to certain non-employees which vest over a three year
period. The Company recorded approximately $62,000 and $77,000 of expenses
related to the issuance of these options at June 30, 2000 and 2001,
respectively.

            During fiscal 2001, the Company granted options for 10,000 shares of
Class A Common Stock to certain non-employees which vest over a three year
period. The Company will record approximately $120,000 of expense related to the
issuance of these options over the three year vesting period.

            In fiscal 2001, the Company modified a stock option award relating
to approximately 11,000 shares held by an employee and recognized a $234,000
non-cash charge resulting from this modification. An additional modification to
approximately 38,000 shares was made for certain former Edison employees who
were allowed to retain their stock options and vesting rights beyond their
separation date. A charge of $181,000 was recognized in fiscal 2001.

            The following table summarizes information about stock options
outstanding at June 30, 2001:


<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                             --------------------------------------------------  ----------------------
                                                 WEIGHTED
                                                 AVERAGE           WEIGHTED                     WEIGHTED
                                                REMAINING          AVERAGE OF                   AVERAGE OF
     RANGE OF                  SHARES           CONTRACTED         EXERCISE        SHARES       EXERCISE
  EXERCISE PRICES            OUTSTANDING          LIFE              PRICES       EXERCISABLE     PRICES
-----------------            -----------        ---------           ------       -----------     ------
<S>                        <C>                  <C>            <C>               <C>           <C>
$2.50                         909,203              3.87        $     2.50          901,314     $     2.50
$3.00 - $  8.00 .........     613,797              6.52        $     4.96          456,797     $     4.44
$12.30 ..................   1,267,306              8.08        $    12.30          530,690     $    12.30
$14.25 - $16.00 .........     794,056              6.68        $    15.90          772,225     $    15.95
$20.00 - $21.31 .........   1,336,045              9.06        $    20.81          182,547     $    20.75
$22.00 - $25.88 .........   1,612,220              9.11        $    24.27          397,884     $    22.51
$27.00 - $33.13 .........   1,317,191              6.75        $    31.87            2,637     $    29.90
$56.00 ..................  $1,400,000              6.46        $    56.00                0     $    56.00
                           ----------                                           ----------
                            9,249,818                                            3,244,094
                           ==========                                           ==========
</TABLE>

            During the twelve months ending June 30, 2001, the Company issued
options for approximately 1,358,811 shares under the Incentive Plan at prices
ranging from $12.30 to $33.125 per share.

            The Company, during the fourth quarter of fiscal 1999, made
amendments to existing options which resulted in a new measurement date. As a
result, stock-based compensation expense was recorded representing the
difference between the exercise price of the options and the deemed fair market
value of the underlying stock at that time. In this regard, the Company
recognized an expense of approximately $22.4 million during 1999 approximately
$3.6 million during fiscal 2000 and approximately $983,000 during fiscal 2001 in
connection with stock options subject to variable accounting.

            Had compensation cost for the Company's stock option issuances been
determined based on the fair value at the grant date for awards in each of the
three years ended June 30, 1999, 2000 and 2001 consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
attributable to common stockholders would have been adjusted to the pro forma
amounts indicated below:

                                       46
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001


<TABLE>
<CAPTION>
                                                                  YEAR ENDED JUNE 30,
                                                       --------------------------------------------
                                                          1999            2000            2001
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
Net loss attributable to common stockholders - as
    reported .....................................     $(50,459,253)   $(36,589,614)   $(38,080,640)
Net loss attributable to common stockholders - pro
    forma ........................................     $(28,334,780)   $(38,612,431)   $(38,486,252)
Basic and diluted net loss attributable to common
    stockholders per share - as reported .........     $   (16.24)     $    (1.32)     $    (0.79)
Basic net loss attributable to common stockholders
    per share - pro forma ........................     $    (9.12)     $    (1.39)     $    (0.80)
</TABLE>


            The fair value of each option grant is estimated on the date of the
grant using the "Black-Scholes Option-pricing Model" with the following weighted
average assumptions used for grants for each of the years ended June 30, 1999,
2000 and 2001: zero dividend yield; no volatility; a weighted average risk-free
interest rate of 5.40%, 6.18% and 5.50% respectively; and expected lives of 6.7,
8.86 and 9.46 years, respectively.

     The following table summarizes the weighted-average grant-date fair values
of options granted during fiscal 2001:


<TABLE>
<CAPTION>
                                          EXERCISE PRICE          EXERCISE PRICE              EXERCISE PRICE
                                            EQUALED FAIR          EXCEEDED FAIR               LESS THAN FAIR
                                          VALUE AT ISSUANCE     VALUE  AT ISSUANCE           VALUE AT ISSUANCE
                                          -----------------     ------------------           -----------------
<S>                                        <C>                   <C>                         <C>
Weighted average exercise price of
  options granted during the year ....     $   24.95                 NA                         $   12.30
Weighted average fair value of options
  granted during the year ............     $   24.95                 NA                         $   25.88

</TABLE>


12.      INCOME TAXES

     There is no provision for federal or state and local income taxes pro forma
or otherwise for the years ended June 30, 1999, 2000 and 2001, since the Company
has incurred net losses. Due to the uncertainty of the Company's ability to
realize the tax benefit of such losses, a valuation allowance has been
established to equal the total net deferred tax assets.

     The components of deferred tax assets and liabilities consist of the
following:

<TABLE>
<CAPTION>
                                                 JUNE 30,
                                        ------------------------------
                                           2000              2001
                                        ------------      ------------
<S>                                     <C>               <C>
Deferred tax assets:
    Net operating loss carryforward     $ 44,030,400      $ 57,340,999
    Accrued liabilities ...........        2,425,004         5,651,544
    Stock options .................        9,880,538        10,088,398
    Amortization ..................          951,596           197,600
    Organizational costs ..........            7,315             1,995
    Property and equipment ........        1,166,465           853,571
                                        ------------      ------------
      Total deferred tax assets ...       58,461,318        74,134,107
Valuation allowance ...............      (58,461,318)      (74,134,107)
                                        ------------      ------------
      Net deferred tax asset ......     $         --      $         --
                                        ============      ============
</TABLE>

     At June 30, 2001, the Company had approximately $150 million of net
operating loss carryforwards available to reduce its future taxable income.
Under current Federal income tax law, approximately $45 million of such
carryforwards will expire between 2010 and 2018, approximately $105 million will
expire between 2019 and 2021.

                                       47
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001



     The Company has provided approximately $603,000 in 2001 for state and local
tax incomes relating to jurisdictions that require taxes to be recorded on bases
other than income.

13.      EMPLOYEE BENEFIT PLANS

         The Company provides a 401(k) and a 403(b) Plan for substantially all
full-time employees and teachers. The Company matches each participant's
contribution up to 50% of the first $1,000. Participants become fully vested in
the match after one year. Contributions to the 401(k) and a 403(b) Plan made by
the Company for each of the three years ended June 30, 1999, 2000 and 2001
amounted to $62,876, $186,316, and $334,191, respectively.

14.      COMMITMENTS AND CONTINGENCIES

LONG TERM LEASE OBLIGATIONS

     The Company has entered into operating leases for five charter school
facilities with lease terms in excess of the initial term of the management
agreement for the schools operating in those facilities.

     The first facility, currently housing two schools, has been leased for an
18 year term expiring in December 2016. The management agreement to operate in
this facility expires in June 2002. The annual lease payment is approximately
$1,000,000 per year through fiscal 2016.

     The second facility, currently housing two schools, has been leased for a
15 year term expiring in September 2013. The management agreement to operate in
this facility expires in June 2002. The annual lease payment is $782,400 through
fiscal 2007 and increases to $932,400 for fiscal 2008 through fiscal 2013.

     The third facility, currently housing one school, has been leased for a 20
year term expiring in June 2020. The management agreement to operate in this
facility expires in June 2003. The annual lease payment is $36,000 through
fiscal 2020.

     The fourth facility, currently housing two schools, has been leased for a
20 year term expiring in November 2020. The management agreement to operate in
this facility expires in June 2005. The annual lease payment is $362,000 per
year and increases by 9% in fiscal 2006, 2011 and 2016 resulting in a final
year's annual rent of $468,800.

     The fifth facility, currently housing two schools, has been leased for a 20
year term expiring in June 2020. The management agreement to operate in this
facility expires in June 2005. The annual lease payment is $689,760 through
fiscal 2004 and increases to $877,860 for fiscal 2005 through fiscal 2010 and
increases to $1,065,960 for fiscal 2011 through fiscal 2020.

     The Company's lease obligations noted above all exceed the length of the
initial management agreement. In the event that the management agreements are
not renewed, the Company would be obligated to continue paying rent on the
facilities.

FUNDRAISING AGREEMENT

            Effective June 23, 2000, the Company entered into an agreement (the
"Fundraising Agreement") with Alliance Community Schools ("ACS"), an entity that
holds charters for the two schools managed by the Company in Ohio, pursuant to
which the Company agreed to work together with ACS to raise $4.0 million in
capital donations on behalf of ACS. Under the Fundraising Agreement, as amended,
the Company is required to transfer its interest in Alliance-Edison, $3.5
million included in other assets at June 30, 2000, to ACS for $1 if (i) ACS
raises $2.0 million by June 30, 2002 and (ii) if (a) the Company fails either to
raise or contribute $405,000 from sources outside of the Dayton, Ohio area by
December 31, 2001, or (b) the Company fails to raise or contribute a total of
$2.0 million by June 30, 2002.

                                       48
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001

LITIGATION

            The Company is subject to occasional lawsuits, investigations and
claims arising out of the normal conduct of its business. Management does not
believe the outcome of any pending claims will have a material adverse impact on
the Company's financial position or results of operations.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with certain of its
executives. Such agreements may be terminated by either the executive or the
Company at any time and provide, among other things, certain termination
benefits. As of June 30, 2001, the aggregate termination benefits of the
executives and certain other employees approximated $2.6 million. Additionally,
as of June 30, 2001, the Company has recognized non-cash charges of $3.2 million
related to post-employment benefits as noted in footnote 2.

GUARANTEES

            The Company has guaranteed certain debt obligations of charter
school boards with which it has management agreements. As of June 30, 2001, the
Company had provided guarantees totaling approximately $11.6 million. The debt
obligations mature from November 2001 to November 2005.

            As of June 30, 2001, the debt obligations of the charter school
boards are current. Under the guarantor agreements, the Company is also required
to maintain minimum cash balances that may increase under certain circumstances,
as well as to satisfy certain financial reporting covenants.

            For fiscal 1999, 2000 and 2001, all covenants as guarantor have been
met except that the Company received waivers for June 30, 1999 from one
financial institution as of June 30, 1999 due to non-compliance with a covenant
that requires maintenance of certain minimum cash balances aggregating to $1.5
million at fiscal year end. This instance of non-compliance was cured on July 5,
1999.

15.      CONCENTRATION OF CREDIT RISK

            Financial instruments which potentially subject the Company to
credit risk consist primarily of cash and cash equivalents, notes receivable and
advances to charter schools, and trade receivables. The Company manages its
credit risk by maintaining cash and cash equivalents with financial institutions
that it believes are financially sound and through the contractual arrangements
that it has entered into with each district and charter school.

            Trade receivables are primarily short-term receivables from various
district and charter schools. Credit risk is affected by changing conditions
within the economy of individual states and school districts in which the
Company operates. The Company establishes an allowance for doubtful accounts, if
necessary, based upon factors surrounding the credit risk of specific customers,
historical trends and other information.

            Notes receivable from charter schools are both short-term and
long-term. Credit risk associated with those amounts is affected not only by the
economy of individual states and school districts in which the charter school
operates, but on the continued existence of charter school laws. The Company
establishes an allowance of uncollectible amounts, if appropriate, based upon
factors surrounding the credit risk of the specific charter schools, historical
trends and other information.

16.      QUARTERLY FINANCIAL DATA (UNAUDITED)

            Summarized unaudited quarterly data for the years ended June 30,
2001 and 2000 are as follows (dollars in thousands, except for per share
amounts):



                                       49
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
                                                               QUARTER
                                       ------------------------------------------------------
                                        FIRST                          THIRD
2001                                  (RESTATED)*      SECOND**      (RESTATED)*     FOURTH**(a)
                                       ---------      ---------      ---------      -----------
<S>                                    <C>            <C>            <C>            <C>
Revenues from educational services     $  64,791      $ 102,295      $  99,604      $ 109,128
Gross site contribution ..........         3,374         17,173         18,274         21,247
Loss from operations .............       (20,808)        (4,067)        (6,616)        (9,541)
Net loss .........................       (20,108)        (3,191)        (5,982)        (8,799)
Loss per common share
         Basic and diluted .......         (0.44)         (0.07)         (0.13)         (0.17)
</TABLE>

*Amounts reflect restatement and reclassifications . See note 2 to the
consolidated financial statements for information on the restatement. Amounts
that have been reclassified are discussed below.
** Amounts which have been reclassified are discussed below.
(a) See note 5 to the consolidated financial statements regarding fourth
quarter 2001 inventory adjustment.


<TABLE>
<CAPTION>

                                                            QUARTER
                                       --------------------------------------------------
2000                                     FIRST        SECOND        THIRD        FOURTH
                                       --------      --------      --------      --------
<S>                                    <C>           <C>           <C>           <C>
Revenues from educational services     $ 41,151      $ 61,596      $ 61,531      $ 60,300
Gross site contribution ..........        2,156         9,903         9,981         9,936
Loss from operations .............      (15,472)       (6,208)       (6,571)       (9,694)
Net loss .........................      (15,669)       (6,044)       (6,138)       (8,739)
Loss per common share
         Basic and diluted .......        (0.46)        (0.16)        (0.14)        (0.20)
</TABLE>

         In fiscal 2001, the Company concluded that two of its client contracts
would lose money for the remainder of their contract terms. The Company, which
had been recognizing these losses as incurred, determined it was more
appropriate to recognize all of the estimated losses expected over the remainder
of the contracts' terms in the first quarter of 2001 when such estimated losses
first became reasonably estimable. Accordingly, the Company restated the first
quarter of fiscal 2001 primarily to record losses expected for the remainder of
their contract term on these two client contracts. In addition, the Company
included in the restated first quarter of fiscal 2001 certain reclassifications
and other previously unrecorded offsetting amounts incurred in the quarter; such
items primarily related to the reversal of excess accrued liabilities and fixed
asset costs that should have more properly been capitalized. The impact of these
net adjustments on the first and third quarters of fiscal 2001 was to increase
the net loss in the first fiscal quarter of 2001 by $600,000 and decrease the
net loss in the third quarter of fiscal 2001 by a similar amount.

         In addition, the Company has made other reclassifications in the
quarters, including the second and fourth, to record certain previously
unrecorded adjustments; these additional adjustments impact the classification
of expenses within the unaudited statements of operations and have no impact on
the net loss in any period. The captions on the statement of operations affected
and supporting explanations are as follows:

<TABLE>
<CAPTION>

                                                                       QUARTER
                            --------------------------------------------------------------------------------------------------------

2001                               FIRST(1)              SECOND(1)(2)              THIRD(1)                   FOURTH(1)(2)
                                   --------              ------------              --------                   ------------
                                         As                                               As
                            As          Reclassified   As         As            As        Reclassified    As            As
                            Reported    and restated   Reported   Reclassified  Reported  and restated    Reported      Reclassified
                            --------   ------------    --------   ------------  --------  ------------    --------      ------------
<S>                         <C>        <C>            <C>        <C>            <C>       <C>            <C>           <C>
Gross site contribution     $  4,260   $  3,374       $ 17,353   $ 17,173       $ 17,562  $ 18,274       $ 20,991      $ 21,247
Loss from operations ..      (20,136)   (20,808)        (3,964)    (4,067)        (7,185)   (6,616)        (9,437)       (9,541)
Net loss ..............      (19,539)   (20,108)        (3,191)    (3,191)        (6,551)   (5,982)        (8,799)       (8,799)
</TABLE>

                                       50
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001

(1) As discussed above, the Company has restated the first quarter of fiscal
2001 to record a contract loss of $2.4 million. The contract loss recognized in
this quarter affects the subsequent three quarters by reversing previously
reported losses of approximately $190,000, $600,000, and $35,000 in the second,
third and fourth quarters, respectively. The remainder of the contract loss will
offset losses incurred in subsequent periods. The contract loss of $2.4 million
in the first quarter was partially offset by the reversal of excess liabilities
accrued in the quarter (approximately $700,000) and fixed asset costs
(approximately $1.0 million) that should have more properly been capitalized. In
the aggregate, these items result in a reduction of gross site contribution in
the first quarter of fiscal 2001 of approximately $700,000. In addition, there
is a reduction to gross site contribution (approximately $170,000) resulting
primarily from recognition of rent expense on a straight-line basis rather than
as incurred. The increase in loss from operations is the result of the change in
gross site contribution partially offset by the reversal of excess amortization
on discounted notes previously recognized. The increase in net loss reflects the
above changes partially offset by a reduction in the tax provision for an amount
in excess of the required taxes to be accrued.

         The Company has also restated the third quarter of fiscal 2001 for the
contract loss now recognized in the first quarter of fiscal 2001; the Company
has made other reclassifications for previously unrecorded adjustments. The
increase in gross site contribution (approximately $700,000) is the net result
of recognition of additional rent expense on a straight-line basis rather than
as incurred, partially offset by the reversal of amounts in excess of amounts
required for certain liabilities and the reversal of contract losses as
described in the preceding paragraph. The reduction in loss from operations and
net loss (approximately $600,000) is the result of the change in gross site
contribution offset by the recognition of additional amortization on discounted
notes not previously recognized.

(2) In the second and fourth quarters of fiscal 2001 the Company has also
recorded previously unrecorded adjustments; the net impact of recording these
adjustments did not change the amount of net loss previously reported. The
changes in gross site contribution are the net result of reclassification of
certain technology costs as expense rather than capital, and the recognition of
rent expense on a straight-line basis rather than as incurred; these adjustments
were partially offset by the reversal of certain excess liabilities and the
reversal of contract losses as described in (1) above. The changes in loss from
operations are the result of the change in gross site contribution partially
offset by an adjustments to amortization on discounted notes. Net loss did not
change in either quarter due to the above changes being offset by a reduction in
excess taxes accrued in the periods.

17.      SUBSEQUENT EVENTS

INVESTMENT IN KSIXTEEN LLC

            Effective July 1, 2001, the Company acquired the remaining 65% of
the outstanding equity interest of Ksixteen, LLC that it did not own. The
purchase price is estimated to be $260,000. The acquisition will be accounted
for as a purchase; accordingly, the purchase price will be allocated to the
underlying assets and liabilities based on their respective fair values at the
date of acquisition.

ACQUISITION OF LEARNNOW, INC.

            Effective July 3, 2001 the Company acquired 100% of the outstanding
shares of LearnNow, Inc. for approximately $29 million in Company stock and $3
million in cash. The acquisition will be accounted for as a purchase and,
accordingly, the purchase price will be allocated to goodwill.

            LearnNow has guaranteed a certain debt obligation of a charter
board, with which it has a management agreement, for $2.4 million which matures
in May 2004. The charter board is in default as of June 30, 2001, due to
non-compliance with a covenant that requires the charter board to maintain all
bank accounts with the lender's bank. It is the lender's understanding that this
default will be cured by September 28, 2001 and that the loan default may be
waived through such date.

                                       51
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001

            Additionally, in connection with a refinancing by a charter board
with which it has a management agreement, LearnNow executed an environmental
indemnification agreement with the lender pursuant to which LearnNow agreed to
indemnify the lender from any liability or obligations related to the presence
of any hazardous substance at the charter school site.

SELF INSURANCE

            As of August 1, 2001, the Company is partially self insured for
general liability, educators' legal liability and workers' compensation. The
Company will accrue amounts equal to the actuarially determined liabilities. The
actuarial valuations are based on historical information along with certain
assumptions about future events. Changes in assumptions for such matters as
legal actions and changes in actual experience could cause estimates to change.



                                       52
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                          DESCRIPTION
      -------                         -----------
<S>                   <C>
      3.1*            Sixth Amended and Restated Certificate of Incorporation of
                      the Registrant

      3.2*            Second Amended and Restated By-Laws of the Registrant

      4.1**           Specimen common stock certificate

      4.2**           See Exhibits 3.1 and 3.2 for provisions of the Certificate
                      of Incorporation and By-Laws of the Registrant defining
                      the rights of holders of class A common stock of the
                      Registrant

      10.1**          1998 Site Option Plan

      10.2**#         1999 Stock Option Plan

      10.3**#         1999 Key Stock Incentive Plan

      10.4**#         1999 Stock Incentive Plan

      10.5**          Amended Warrant Purchase Agreement, dated as of June 1,
                      1998, between the Registrant and the D2F2 Foundation

      10.6**#         Letter Agreement, dated as of June 20, 2000, between the
                      Registrant and Benno C. Schmidt, Jr

      10.7**#         Letter Agreement, dated as of March 15, 1995, between the
                      Registrant and John E. Chubb

      10.8**          Preferred Stock Purchase Agreement, dated as of July 2,
                      1999, between the Registrant and Apex Online Learning Inc.

      10.9**          Amended and Restated Shareholders Agreement, dated as of
                      December 16, 1999, between the Registrant, Apex Online
                      Learning Inc. and other parties

      10.10**         Lease Agreement, dated as of April 4, 1995, between the
                      Registrant and 521 Fifth Avenue Associates, as amended on
                      June 6, 1996, December 8, 1997 and February 23, 2000

      10.11**         Office Lease dated as of March 19, 1999, between the
                      Registrant and 529 Fifth Company

      10.12**#        Management Agreement, dated as of March 14, 1995, between
                      the Registrant and WSI Inc., as amended on November 15,
                      1996, March 1, 1997 and December 31, 1997

      10.13**#        Promissory note, dated as of June 5, 1992, from Benno C.
                      Schmidt, Jr. to the Registrant

      10.14**#        Promissory note, dated as of January 23, 1996, from Benno
                      C. Schmidt to 'he Registrant

      10.15**#        Allonges, dated as of October 4, 1999, to promissory
                      notes, dated as of June 5, 1992 and January 23, 1996, from
                      Benno C. Schmidt, Jr. to the Registrant

      10.16**#        Form of Letter Agreement between the Registrant and H.
                      Christopher Whittle

      10.17**#        Letter Agreement, dated as of July 1, 1999, between the
                      Registrant and Christopher D. Cerf

      10.18**#        Loan Agreement between the Registrant and WSI Inc
</TABLE>


                                       53
<PAGE>
                              EDISON SCHOOLS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE YEAR ENDED JUNE 30, 1999, 2000 AND 2001


<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                          DESCRIPTION
      -------                         -----------
<S>                   <C>
      10.19**         Guaranty of Payment Agreement, dated as of September 3,
                      1998, between the Registrant and NCB Development
                      Corporation

      10.20**         Guaranty of Payment Agreement, dated as of November 25,
                      1997, between the Registrant and BankBoston, N.A

      10.21**         Stock Subscription Warrant, dated as of October 18, 1999,
                      issued to TBCC Funding Trust II

      10.22*          Preferred Stock Purchase Agreement, dated as of December
                      16, 1999, by and between Apex Online Learning Inc., the
                      Registrant and other parties

      10.23*#         Promissory note, dated April 13, 2000, from H. Christopher
                      Whittle to the Registrant

      10.24*          Contract of Sale, dated as of January 11, 2000, between
                      the Registrant and Castle Senior Living, LLC

      10.25*          Letter of Intent, dated as of June 8, 2000, between the
                      Registrant and IBM

      10.26*          License Agreement, dated as of June 12, 2000, between the
                      Registrant and IBM

      10.27*          Letter of Intent, dated as of April 10, 2000, between the
                      Registrant and the Museum of African Art

      10.28*          Term Lease Master Agreement, dated as of May 1, 2000,
                      between the Registrant and Global Lyceum, Inc

      10.29*#         Promissory Note dated as of June 9, 2000 from Manuel J.
                      Rivera to the Registrant

      10.30****       Agreement, dated as of June 29, 2000, between the
                      Registrant and IBM Credit Corporation

      10.31****       Fundraising Agreement, dated as of June 23, 2000, between
                      the Registrant and Alliance Facilities Management, Inc..

      10.32****       Master Development Agreement between the Registrant and
                      Ksixteen LLC

      10.33****       Master Agreement to Lease Equipment, dated as of June 30,
                      2000, between the Registrant and Cisco

      10.34****       Limited Liability Company Operating Agreement of Alliance
                      Edison LLC

      10.35****       Promissory Note, dated as of July 21, 2000, issued by the
                      Registrant in the name of Alliance Edison LLC

      10.36****       Payment Guaranty, dated as of July 21, 2000, between the
                      Registrant and Keybank National Association

      23.1            Consent of PricewaterhouseCoopers LLP
</TABLE>

*        Incorporated by reference to the Registrant's Registration Statement on
         Form S-1 (File No. 333-39516).
**       Incorporated by reference to the Registrant's Registration Statement on
         Form S-1 (File No. 333-
                                       54

<PAGE>
         84177).
***      Incorporated by reference to the Registrant's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1999 (File No. 000-27817).
****     Incorporated by reference for the Registrant's Annual Report on Form
         10-K for the year ended June 30, 2000 (File No. 000-27817)
#        Management contract or compensatory plan or arrangement filed in
         response to Item 14(a)(3) of the instructions to Form 10-K.


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